Islamic Finances: Guide to Managing Your Money as a Muslim in America
Islamic finance is guided by the kinds of investments that are permissible under Islamic ethics, with specific financial products that take into account the values of Islam and promote social and economic justice. If you’re a Muslim-American or if you’ve recently moved to the U.S, this will help you navigate the challenges that may arise while trying to manage your money. It will also help you find banking institutions that comply with the principles of the Muslim faith.
- Paying or charging interest, known as riba (usury), is strictly prohibited.
- Investing in businesses that are centered on activities considered to be haram, like producing or selling alcohol or pork, is forbidden.
- Speculation or gambling, known as maisir, is not allowed.
- Participating in contracts with excessive risk or uncertainty is banned.
Muslims are less frequently included in the global financial system than non-Muslims, according to research conducted by the World Bank. Muslims are also less likely to have bank accounts than non-Muslims due to both religious observance and discrimination. Understanding the challenges that may arise when dealing with finances and Islam is essential to having a better grasp of the products that may be available to you.
Challenges Related to Finance and Islam
Over 70 nationalities within the Muslim population are represented in North America, but Muslim-Americans are less likely to own a home than Hispanic or non-Muslim African Americans. Fraudulent schemes can also have a significant impact on finances.
The American Journal of Islamic Finance estimates that the demographic gap in homeownership means that in the U.S., 420,000 families do not own a home, relative to homeownership rates among non-Muslim peers. Efforts to bridge the gap between Islamic financing and homeownership are now addressing this.
Scams and Frauds
Islamic financing, like any other financing, is susceptible to phishing or fraud by criminals who mislead people by email, telephone call or text message. This is a particular issue during Ramadan when fraudsters look to take advantage of Muslim donors with scams that play on one of the five pillars of Islam, Zakat. Always be safe with your donating, and check credentials of any organization looking for donations from you or offering a service of any kind.
Managing Personal Finances
Managing your personal finances can help you achieve short-term and long-term goals. Various aspects of personal finance include running a household, gift-giving and banking, as well as the impact a marriage has on a couple’s finances.
Grocery Shopping and Eating the Right Foods
When it comes to food and beverages, you’ll want to make sure that you stick to Prophetic eating habits of consuming what is good for you without overindulging. This will also help you save money on food you won’t eat. Look for the halal symbol or certification from the Islamic Food and Nutrition Council of America (IFANCA) on food, beverages and pharmaceuticals. Every year, IFANCA certifies different products, so make sure what you’re buying has a valid halal certificate.
Charitable Giving During Holidays
There are many ways to make the most of holidays like Ramadan and Eid. Purchasing your Eid gifts early can help save money if you take the time to find deals. Look into creating personalized gifts to make any occasion more meaningful. You may also want to consider making decorations with your family, which allows you to spend quality time together and helps save money.
The third pillar of Islam, Zakat, is rooted in supporting charitable causes by donating 2.5% of one’s wealth every year. This is often done during Ramadan. Be sure to factor this into your budget so you know what you have allocated.
Islamic banks operate on the principle of risk sharing, or profit and loss sharing rather than on paying and receiving interest on money, and they focus on generating returns on investments through tools that are compliant with the Shari’ah. There are international standards for banks offering these services that help guide the industry, but the U.S. doesn’t have a central authority responsible for ensuring that transactions or products are Sharia-compliant. Look for a bank that works with a reputable Sharia board. You can usually find an Islamic bank by talking to those in the community around you or researching online. If you’re moving from one bank account to another and have interest accrued, it’s advised to give that interest away to someone less fortunate.
Marriage and Finances
In Islam, a man has financial responsibility for his nuclear family, including his wife. There is no law on shared bank accounts, so it’s generally considered best practice to talk to your spouse about what works best for you when it comes to husband and wife financial responsibilities, as well as whether to bank together and how to file taxes as a couple. Whether or not you choose to file tax returns or not, you’ll still need to do a Zakat calculation, and this can be streamlined if you do have a separate account.
Navigating Interest, Renting and Loans
While the exchange of goods and services through trade is permitted under Islamic ethics, riba is not. This is commonly translated to interest -- something the traditional banking world is wholly centered on. Managing riba in the U.S. as an American Muslim relies largely on how one deals with interest when using financial products on offer.
Credit cards should be paid on time to avoid paying interest, and a checking account should be chosen over an interest-bearing one. However, the demand for alternative financial products that provide access to credit in a manner consistent with religious beliefs is growing.
Renting or Buying a Home
Renting an apartment or paying cash for a house are two ways Muslims can avoid paying interest (riba) when looking for a home. However, an Islamic mortgage allows you to buy a house in a Sharia-compliant manner over a number of years without using any interest. There are different types of Islamic mortgage products:
- Diminishing musharaka is essentially a co-ownership agreement in which both you and a bank own a separate share of a property. Each time you make a repayment, you buy more of the bank’s share until eventually you own the bank’s share of the property.
- Ijarah, or “rent-only” Islamic mortgages, occur when the bank purchases the property you want to buy and leases it to you for a fixed term at an agreed monthly cost. When the term is over, full ownership of the property will be transferred to you.
- Murabaha mortgages are when the bank buys the property on your behalf and sells it to you at a higher price, which you then repay in equal installments over a fixed term.
Home or renters insurance, in general, is considered haram, or a sin, as it involves gambling, but there are some instances where it is permitted.
Getting a Car
When it comes to buying a car or obtaining a car loan, some financial products are structured under Islamic financing in a similar manner to home purchases. They are looked at as purchase-and-resale of real assets, instead of as a loan. The contract between a financial institution and the person intending to obtain the car will depend on the model of financing that is chosen.
Like with home insurance, conventional insurance is generally prohibited. As Umar Moghul says, there are cases of necessity or need with their own definitions per Islamic ethics that have rendered some insurance in certain contexts permissible, so having the cheapest car insurance options at your disposal will be useful.
Sometimes the inflation-only interest paid on student loans for undergraduates and postgraduates is seen as riba, although not all Islamic scholars share this view.
Options can be limited for Muslims who aren’t able to pay for their tuition upfront through a part-time or full-time job or by relying on family for help. If you have student loan debt, the best way to navigate this may be to apply for fee waivers, scholarships, hardship schemes, apprenticeships, bursaries or zakat (charity funds). A handful of charities and colleges have student loans that only require the borrowers to repay the amount they borrowed.
When it comes to investing that is Sharia-compliant, ensuring that one’s earnings are halal is crucial. Earnings don’t just include salary and business revenue, they also include income earned through investments. Halal investing can also be considered a type of socially responsible investing since it shares similar principles.
Islamic Investment Principles
Umar Moghul, a lawyer who specializes in Islamic finance and investment, says the Islamic principles focus on what you are doing with your capital and what types of businesses, assets and operations you are furthering.
Six foundations of Shariah-compliant or Halal investing
- Sharing of profit
- Prohibition of riba, and other unjust, exploitative gains
- Prohibition on gambling
- Investing in lawful activities only
- Upholding of ethical and moral values at all times
- Linkage with the real economy
Ways to Invest That Are Compliant With Islamic Law
Moghul says it’s important to work with an asset manager who meets all of the usual criteria in terms of experience and track record and who also has established expertise in Islamic principles. Such people are often called Sharia scholars, and they can function like an ethical review board, Moghul adds.
Investments that pay interest, like money markets, certificates of deposit, municipal bonds, and U.S. Treasuries and corporate bonds, are not considered Sharia-compliant.
Some investments may change over time, affecting compliance. There are four common types of investments available that comply with Islamic law and principles:
“Transparency and disclosure play important roles for an investor to find something they would be comfortable with,” says Moghul. He also points to tools that help, like the Dow Jones Islamic Market USA Index, which measures the performance of stocks traded globally that pass rules-based screens for adherence to Sharia investment guidelines, in addition to various platforms and apps that help asset managers vet investments, such as Zoya.
Alternative Ways to Invest
The same ethical criteria apply to retirement plans and pensions, and how to identify whether or not they are halal. You’ll need to find out if your employer’s retirement plan offers you the opportunity to step out of a fixed universe of funds and find funds that do comply, such as a mutual fund like Azzad or Saturna.
Many common methods of investments, such as options, swaps, foreign exchange, forwards and futures have features that tend to render them non-Sharia-compliant, so it’s best to work with someone who knows the details of permissibility.
Expert Insight on Personal Finance in Islam
MoneyGeek spoke with industry leaders and academics to provide expert insight into personal finance and Islam and how best to navigate issues that may come up along the way.
- What are the biggest challenges facing Muslims in the U.S. when they’re trying to bank according to the practices of Islam?
- What should one keep in mind when looking for institutions/companies that are compliant with Islamic financial principles?
Partner at Roberts Moghul & Partners
Adjunct Professor of International Business at The Fletcher School of Tufts University
President and Executive Director at Saturna Sdn. Bhd.
There is a growing amount of information available for Muslims looking to find information on financial products and institutions that comply with Islamic principles. Here are just a few places that provide deeper insight:
- The ACLU: This organization works to fight anti-Muslim discrimination on a number of fronts and can provide general information that is highly useful.
- The Islamic Food and Nutrition Council of America: This is helpful for finding halal food, beverage and pharmaceutical products and companies in the U.S., including items like a shoppers guide.
- IslamicFinanceGuru (IFG): This British-based hub helps Muslims with their investment, personal finance and entrepreneurial journeys in easy-to-read articles and blog posts.
- Guidance Residential: This company offers many resources, including tips on how to obtain a home under Islamic financing. They also have a YouTube channel full of information, too.
- A Muslim’s Guide to Investing and Personal Finance: This book is a detailed guide to the ins-and-outs of navigating the financial world as a Muslim.
- Wealthface: This online investment company highlights important things to know when getting into investing.
About Nadia Neophytou
- Center for American Progress. "Understanding Sharia Law." Accessed June 16, 2021.
- Compare The Market. "Islamic Mortgages." Accessed June 17, 2021.
- Corporate Finance Institute. "Islamic Finance: Financing activities that must comply with Sharia (Islamic Law)." Accessed June 30, 2021.
- Council on Foreign Relations. "The Rise of Islamic Finance." Accessed June 17, 2021.
- Eureka Hedge. "Islamic Finance (Finally) Taking Root in North America." Accessed June 18, 2021.
- Gordon Conwell Theological Seminary. "How Many Muslims Are There in the US?." Accessed June 17, 2021.
- Pew Research Center. "New estimates show U.S. Muslim population continues to grow." Accessed June 17, 2021.
- S&P Global Ratings. "Islamic Finance Outlook." Accessed June 30, 2021.
- Stanford Social Innovation Review. "Islamic Finance and Social Responsibility." Accessed June 18, 2021.
- Thomson Reuters and Dinar Standard. "Outpacing the Mainstream: State of the Global Islamic Economy Report." Accessed June 30, 2021.
- World Bank Group. "Leveraging Islamic Fintech to Improve Financial Inclusion." Accessed June 30, 2021.