Fast Facts About: Islamic FinTech & Online Trading
Nearly all the world’s top brokerage firms now offer at least one version of an Islamic compliant account for investors and traders. Whether users are individuals or corporations, brokers realize that a growing number of prospective customers want to use trading methods and assets that meet the requirements of Sharia law. That’s why you’ll see a tab for halal investing products and services on most brokers platforms in 2023. The main concepts people need to remember is that Islamic-based finance forbids the earning of interest, speculating, gambling, and a few other practices that are everyday practices in non-Islamic finance and fintech.
As the growth of Islamic-based finance continues to grow and attract many non-Muslims, the entire field of online trading has felt the impact in dozens of ways. Primarily, the changes are about giving more choices to all account holders, some of whom realize the unique advantages and safe-haven features of Islamic fintech in trading, banking, lending, and all fields of economics and finance. What are the current choices that customers have when shopping for online brokers? What are the most common halal concepts and investments?
Halal Concepts
The entire concept of ethical business practices, in this case called halal trading, carries with it a group of guidelines for faithful Muslims who invest. How is the process structured? One of the primary components is that no activity can be related to the earning of interest. The whole idea is to put capital into businesses that follow the faith’s general rules about what is ethical and what is not.
How does halal play out in the real world of markets, buying, selling, and investing? For starters, halal-based traders don’t put their funds into businesses that deal with, produce, process, or sell tobacco products, alcoholic beverages, pork, gambling-related enterprises, or any other forbidden (called “haram”) activities. The big picture result is that Sharia-compliant investing aims for permitted investing in corporate stocks, Sharia-compliant bonds, businesses, and various kinds of real estate.
Five Categories
Even the idea of what is okay and not okay is more precise. There are five general categories that include all types of trading. As noted above, “haram” investments are strictly forbidden, while “halal” ones are fully allowed. However, “makruh” activities are not forbidden, but they are considered strongly offensive. The other two categories are “mustahab,” which are viewed as neutral, and “fard,” which are compulsory.
There’s not a lot of guesswork for individuals, as all the techniques are clearly spelled out. Even among non-Muslims, several of the forbidden, or haram, actions are well-known. They include the strict rule against earning “riba,” or monetary interest and “gharar,” or flat-out speculation. Instead, Islam encourages people to use their capital in ethical ways and share the many types of risk associated with all money-related transactions.
What About Leverage?
The question usually comes up what about using leverage in a common situation like buying forex currency pairs? As far as the widespread practice of leverage, it is indeed permitted, or “halal” for compliant individuals. From the perspective of Islamic-based finance, leverage is simply one of many permitted ways to conduct a financial strategy by using debt to purchase an asset. However, the asset in question, whether it’s a stock, currency, or something else, must be Shariah-compliant. But leverage is allowed and rather common within the Muslim investing community.
What’s Unique About Islamic FinTech?
The most apparent impact that Islamic-based finance and compliant fintech has had on online trading is in the kinds of services offered by brokerage firms. Crowdfunding and P2P lending tend to be quite popular because they are based on ethical sharing of risk. The same is true for investments in trading platforms, insurance companies, money transfer businesses, wealth management firms, and mobile payment companies. Several IBF companies have come to prominence in the past few years as the idea of halal trade has spread globally. Leaders offer a wide range of services, including robo-investing advice, direct investment in businesses, peer-to-peer lending, cryptocurrency ICOs (initial coin offerings), among others.
Ripple Effect on Other Faith-Based Methods
One surprising effect that Islamic-based finance has had on the financial world in general is a renewed focus on ethical practices aligned with the investor’s faith. In the wake of Sharia-compliant practices, some brokers are exploring and implementing other kinds of rule-based portfolios for Christians, Buddhists, Hindus, and other religious groups. Large numbers of Catholics, Protestants, and Asian Buddhists refrain from putting money into companies that provide abortion services, manufacture armaments, or sell recreational drugs. You don’t need to look far for a broker who offers one or another type of ethics-based portfolio or list of securities that meet your requirements.