A 2024 survey conducted by Hong Leong Bank revealed that 65% of Malaysian Muslims will exclusively choose Shariah-compliant investment and banking products. This statistic reflects a strong preference and growing awareness among Malaysian Muslims to ensure their financial activities align with Islamic principles. Do you count yourself among them?
However, before making any investment, it is essential to understand how Shariah-compliant investments truly work. By understanding their principles and mechanisms, investors can make informed decisions, avoid uncertainty, and ultimately reap the full benefits of their investment journey without compromising their beliefs.
What Is Shariah-Compliant Investment?
So, what exactly is Shariah-compliant investment? Essentially, it is an investment approach that adheres to Islamic law, or Shariah. This law guides Muslims in all aspects of life, including finance. In Shariah-compliant investing, the goal is to gain profit while ensuring that the money is invested ethically and lawfully, in accordance to Islamic teachings.
This is based on several key principles: the prohibition of interest (riba), the avoidance of excessive risk or speculation (gharar), and the exclusion of haram industries. Investments must also be backed by tangible assets and avoid transactions that are considered exploitative or deceitful. Generally, these principles promote fairness, transparency, and a balanced approach between risk and reward.
Difference Between Shariah-Compliant and Conventional Investment
How does Shariah-compliant investment differ from the traditional investment we all know? Here’s a breakdown:
1. Profit-and-loss vs. profit sharing
The first difference lies in how returns are generated. In conventional finance, investors often seek guaranteed returns, commonly through interest-bearing instruments.
In contrast, Shariah-compliant investments emphasise profit sharing and risk-sharing. For example, in a partnership-based investment, profits will be distributed based on a pre-agreed ratio, while losses will be shared according to each party’s capital contribution. This approach encourages accountability, risk-sharing, and mutual trust.
2. Permissible industries
Another key difference is the focus on permissible industries. Conventional investments can span any legal industry, including those like alcohol, tobacco, gambling, and others that may conflict with Islamic values. However, Shariah-compliant investments strictly avoid industries that are deemed haram or forbidden. This restriction ensures that the investor’s money does not support businesses that go against Islamic values.
3. Risk and speculation
While all investments involve some level of risk, Shariah law prohibits excessive uncertainty or speculative transactions. Instruments such as derivatives, futures, and short-selling are generally not permissible, as they often involve high risk and are not always backed by tangible assets. Shariah-compliant investments must be based on tangible assets or services, creating a more stable and grounded financial environment.
4. Interest in finances
Interest, or riba, is another key dividing factor. Earning or paying interest is strictly prohibited in Islamic finance. In other words, savings accounts, bonds, or loans based on fixed interest payments are unacceptable. Instead, Islamic finance uses contracts such as Murabaha (cost-plus financing) or Mudarabah (profit-sharing) that generate returns in a permissible way.
5. Contractual structure
Shariah-compliant contracts must clearly define the roles, responsibilities, and expectations of each party, avoiding ambiguity and deception. The emphasis is on fairness, transparency, and mutual consent. Contracts such as Ijara (leasing), Istisna (manufacturing), and Salam (forward sale of goods) are examples of how Islamic finance structures deals in a Shariah-compliant manner.
6. Regulatory oversight
In Malaysia, Shariah-compliant investments must be approved by the Shariah Advisory Council of the Securities Commission Malaysia. This provides investors with assurance that the products meet Islamic legal and ethical standards. Conventional investments, meanwhile, are only overseen by financial regulators like the Securities Commission Malaysia or Bank Negara Malaysia without religious considerations.
Types of Shariah-Compliant Investments in Malaysia
Malaysia has made significant progress in developing a robust ecosystem for Shariah-compliant investment, as evidenced by the availability of these options:
1. Islamic Unit Trusts & Mutual Funds
These collective investment schemes pool money from many investors to invest in a portfolio of Shariah-compliant assets. For example, Amanah Saham Bumiputera (ASB) and Islamic Private Retirement Scheme (PRS) offer investors a chance to diversify their portfolios while earning halal returns. These funds are managed by professional fund managers who ensure ongoing compliance with Shariah principles.
2. Sukuk (Islamic Bonds)
Unlike conventional bonds that involve interest (riba), sukuk represent ownership in an underlying asset, project, or business. Investors receive returns in the form of profit generated from these assets rather than interest payments.. The Malaysian government and private corporations regularly issue sukuk, making it a well-established option for both institutional and retail investors. Sukuk are seen as relatively lower-risk instruments, making them suitable for conservative investors seeking capital preservation and steady returns.
Examples include Government Investment Issues (GII) and corporate sukuks from companies like Telekom Malaysia and Tenaga Nasional.
3. Shariah-Compliant Stocks
Investors can directly invest in Shariah-compliant companies listed on Bursa Malaysia, such as Petronas Chemicals Group, Sime Darby Plantation, and Telekom Malaysia. The Securities Commission Malaysia maintains a list of approved Shariah-compliant companies that are reviewed biannually. These companies must meet specific criteria, such as low debt ratios and the absence of haram business activities. This enables Muslim investors to pursue capital growth and dividends without compromising their values.
4. Islamic Exchange Traded Funds (ETFs)
ETFs are like mutual funds but are traded on the stock exchange just like regular shares. Islamic ETFs track a Shariah-compliant index, such as the FTSE Bursa Malaysia Hijrah Shariah Index. They offer liquidity, diversification, and cost-efficiency. They’re perfect for young investors or those wanting an easy entry into halal investing without managing a full portfolio.
Some examples of Islamic ETFs in Malaysia include the MyETF Dow Jones Islamic Market Malaysia Titans 25 and the TradePlus Shariah Gold Tracker.
5. Peer-to-Peer (P2P) Financing
Another innovative option is Shariah-compliant peer-to-peer (P2P) financing. This model allows individuals to invest in small businesses or projects via an online platform. As a result, it creates a personal connection between you and the borrower, which aligns with the Islamic values of fairness and partnership.
One of the P2P financing platforms in Malaysia is Funding Societies, which offers Shariah-compliant investment notes, such as the Guaranteed Islamic Investment Note. With a minimum investment of only RM100, it’s perfect for beginners. It provides flexible tenures of up to 24 months and guarantees principal and returns, ideal for low-risk investors who still want solid returns.
How to Invest in Shariah-Compliant Funds
Are you interested in investing your money in Shariah-compliant funds? You can get started with these tips:
1. Understand your goals
First, step back and ask yourself: Why do I want to invest? Are you planning for retirement, saving for a home, or building a fund for your children’s education? Each goal may call for a different investment strategy.
For example, long-term goals like retirement may be suited for higher-risk investments with potentially higher returns, while short-term goals may require lower-risk more stable options. Knowing your goals will help you choose the right type of Shariah-compliant fund and remain focused, even during market fluctuations.
2. Choose a suitable platform
Next, you’ll need to pick a platform that offers Shariah-compliant funds. Many banks, investment companies, and fintech platforms in Malaysia provide halal investment options. Look for platforms licensed by the Securities Commission Malaysia and have funds approved by the Shariah Advisory Council. Some well-known options include Public Mutual, BIMB Invest, and online platforms like Wahed Invest or Funding Societies. If you’re new to investing, a digital platform with a user-friendly interface and an easy onboarding process might be a good choice.
3. Learn the requirements for opening an investment account
To start investing, you’ll need to open an investment account by filling out an application, verifying your identity (using your IC or passport), and answering questions about your financial situation and risk tolerance. Most platforms require you to be 18 years old and have a Malaysian bank account. The process is relatively straightforward, and many platforms now allow you to sign up and complete everything online within minutes. Be sure to check the minimum investment amount for each fund, too!
4. Start with low-cost options
If you’re just starting, there’s no need to start big. What you can do instead is to start small and build your confidence over time. Low-cost investment options like Islamic PRS funds, ASNB’s Shariah-compliant funds, or Islamic P2P investment notes are excellent for beginners. Platforms like Funding Societies, for instance, allow you to start investing in halal business from as little as RM100. This approach helps you learn how investing works without initially risking too much of your savings.
5. Regularly allocate your income
How much should you allocate for your investment? You can allocate at least 10–20% of your monthly income if you’re a beginner. To ensure you don’t forget, automate your contributions so that a fixed amount is transferred to your investment account monthly. This method, called ring-fencing your income, helps you stay disciplined and build your portfolio over time. Even small monthly contributions can grow significantly in the long run, especially with halal compound growth.
6. Monitor and diversify your portfolio as needed
Once you’ve started investing, don’t just leave and forget about it. Review your portfolio every few months to see how it’s performing. Make sure your funds still align with your goals and risk appetite. If one area isn’t performing well, consider diversifying.
Additionally, you can invest in different types of Shariah-compliant funds, such as sukuk, Islamic unit trusts, or P2P financing, to reduce your overall risk. Diversification ensures that if one investment drops in value, others can help balance things.
Shariah-compliant investment is a meaningful way to grow wealth while staying true to your values. It’s never too early—or too late—to take control of your financial future. If you’re ready to begin your journey, why not start with Funding Societies? It offers a range of guaranteed Islamic investment notes with low entry requirements, flexible tenures, and halal returns. Discover more about the benefits and how to sign up here!
References:
https://www.investopedia.com/terms/s/shariah-compliant-funds.asp
https://www.mrmoneytv.com/post/top-7-shariah-compliant-investments-in-malaysia
https://www.principal.com.my/en/islamic-investments
https://blog.zoya.finance/getting-started-with-halal-investing/
https://www.jago.com/en/blog/start-sharia-investments
https://fundingsocieties.com.my/guaranteed-islamic-investment-notes?tab=signup
