What are Islamic halal investments and why are they becoming increasingly popular?

The global Islamic halal economy is expected to reach a market value of $7.7 trillion by 2025, which is double the $3.2 trillion achieved in 2015 and significantly higher than the $5.7 trillion it was valued at less than three years ago, in 2021, according to industry experts.

The report from the Council of International Islamic Banks and Financial Institutions, published last year, showed that the global market for Islamic funds has grown by more than 300 percent over the past decade, and is now managing nearly $200 billion worldwide. The statistics depict a rise in both the demand for halal - or "Sharia-compliant" - investments and the opportunities for them.

Investing is permitted in Islam; however, certain aspects of investment practices, such as the establishment or receipt of interest, are prohibited. Traditionally, this has meant a lack of opportunities for Muslim savings accounts and investors in the past.

What are halal investments?

Halal is an Arabic term meaning "permissible," indicating that:

• Transactions cannot include "fish" (interest).
• Investments should not be made in "haram" (illegal) assets or goods, such as pork, alcoholic products, or military equipment, among others.
• Investments cannot be based on "gharar," which is described as "transactions with a high degree of uncertainty or transactions that contradict the idea of certainty and transparency in business."

“Halal investments primarily involve managing your money and finances in accordance with your faith,” said Omar Sheikh, director of the UK Islamic Finance Council (UKIFC), in an interview with Al Jazeera. “Muslims believe that earning money in a halal way is better than earning money (even if it’s more) in a way that harms society and violates the morals of the religion.”

Umar Munshi, co-founder and managing director of the Islamic finance group Ethis, also noted that Sharia compliance is a key factor, but institutions and investors seeking ethical investments should go further and ensure the company's overall ethical standing. "Business actions should not have a negative impact on society or the environment," Munshi said. "Therefore, business should not only be compliant but also refrain from negative impacts. Investing in a tobacco company, for example, may be Sharia-compliant, but it does not contribute to societal development."

How do halal investments work?

One example of halal investments is Islamic entrepreneurship, which operates using new profit-sharing models, Sharia-compliant insurance, and sukuk, an Islamic financial certificate representing ownership shares. Unlike conventional bonds—forms of debt securities that investors can buy to receive interest payments—sukuk holders acquire partial ownership in a business and receive profit payments generated over time. These payments are made instead of interest to ensure compliance with Sharia law.

“Islamic finance as an industry has only existed for about 30 years, and the most significant development has occurred in the last 15 years,” said the Sheikh from UKIFC. “It takes time for education and awareness to build, and as this happens, more banks are starting to meet the demand for halal investments. This, in turn, leads to the creation of more products, which generates even greater demand.”

Stock markets used to be traditional ways of investing for many [Marcin Nowak/Anadolu via Getty Images]

Why are halal investments becoming increasingly popular?

Goldman Sachs' report published in December 2022 predicts that by 2075, five of the world's ten largest economies—India, Indonesia, Nigeria, Pakistan, and Egypt—will have a Muslim population exceeding 850 million people. As the population grows, so does the demand for financial products. According to the "State of the Global Islamic Economy 2023" report published by the research group DinarStandard, approximately $25.9 billion was invested in Sharia-compliant investments in the fiscal year 2022-2023, marking a 128 percent increase compared to the previous year.

“Overall, [halal investments] are trending. People have become much more educated and aware of how their dollar impacts the socio-economic landscape around the world,” said Evan Lawson, co-founder of SmartCrowd, a real estate investment platform based in Dubai. “People have become more cautious, which has led to more ethical investments, of which halal investments are a significant component. They are trending, especially among the younger generation. Millennials are much more socially aware.

The growth of opportunities for halal investments and their increased accessibility are also cited as reasons for the rising demand. The impact of the war between Israel and Gaza has recently given an additional boost to the demand for halal investments, as consumers began to boycott brands they believe support Israel and its war in Gaza. The war, which has resulted in approximately 32,000 Palestinians being killed by Israeli attacks in Gaza, has changed the mindset of these investors.

“Halal investments have been steadily growing, and in the last six months, demand for them has accelerated, mainly among millennials and people under 40,” he said. “But before, it was more about just finding something halal. As long as it’s not haram, everything is fine. Now there is more awareness not only about halal but also about halal that aligns with values and faith. All these boycott movements have led to a more informed mindset that something can be halal, but you might not want to use it, engage with it, or invest in it.”

The "Boycott, Divestment, Sanctions" (BDS) movement is prompting many to think about where their money is going before they spend or invest it, experts note.

How do technologies contribute to the development of halal investments?

The FinTech magazine reports that, despite Muslims making up nearly a quarter of the world's population, less than one percent of financial assets comply with Sharia requirements. This is expected to change with the advent of so-called "fintech" - financial technologies that make investing much more accessible to ordinary consumers and private investors.

“Muslims are generally not as well-informed about investment issues, and this is partly due to the lack of available options for them as Muslims. Even basic information regarding Islamic investments is often not accessible to the majority of the Muslim population,” said Ibrahim Khan, co-founder of the online financial platform Islamic Finance Guru, in an interview with FinTech magazine.

However, the growth of social networks has contributed to increased awareness and significant growth in Sharia-compliant financial services. Additionally, fintech has made halal investments, which are often more convenient and easier to use via a smartphone or laptop, more accessible.

In January of this year, the consulting group McKinsey & Company published a study indicating that "revenue in the fintech industry is expected to grow nearly three times faster than in the traditional banking sector between 2023 and 2028." "The phone is often the physically closest thing to you. Fintech companies can start from this paradigm and create effective solutions that enhance transparency and choice for retail customers. A lot of action happens at this coding hub. Many banks are now creating Sharia-compliant fintech solutions or acquiring fintech players," said Sheikh from UKIFC. Munshi added that the age of the audience is an attractive feature for fintech companies. "The younger generation is more open to online investments," said Munshi, whose company operates on an online platform and community for alternative financial opportunities and investments.

The same study by McKinsey & Company states that the second half of the 2010s was a period of growth for the fintech industry. Venture capital funding increased from $19.4 billion in 2015 to $33.3 billion in 2020, marking a 17 percent increase compared to the previous year. By July 2023, the market capitalization of public fintech companies reached $550 billion, which is double that of 2019.