In Episode 3 of the Islamic Finance Podcast Series, Ali Mohammed delves into the necessary criteria that need to be fulfilled in order to make an investment Islamically acceptable.
The Islamic religion encourages financial investments and increase of wealth. Individual are allowed to take positions in a wide array of investments products, provided that they are Shariah-compliant. The investment is required to respect God’s rights in the invested transaction. In addition to this, an investment must serve not only individual interest, but public interest as well. The investments must also be backed by goods and services that are considered Halal (permissible) under the Shariah law.
Some of the haram goods and services include conventional banking and insurance products, alcohol, pork, gambling, adult entertainment, weapons and arms. Before Islamic investors take part in an investment, they are required to take two steps of screening: (1) the industry screening and (2) the financial screening. Under industry screening, the investor checks if the goods or services are considered halal. Under financial screening, the investor checks if certain financial ratios have been met: the conventional debt to asset ratio must be less than 30 percent; non-permissible (interest) income should be less than 5 percent; cash and cash equivalents to total asset ratio should be less than 30 percent. In addition to these, investors are also required to conduct proper due diligence before taking any position in an investment.
Previous Podcast Series Series on Islamic Finance;
- Islamic Finance Podcast Series with Ali Mohamed – Episode 1
- Islamic Finance: Common Misconceptions About Islamic Finance – Episode 2
In Episode 4, we will look at the structure and features of mortgage products in Islamic finance.