Question # 556: Assalamu ‘laikum warahmatullahi wabarakatuh, Can you please provide detailed information about the ruling on investing in Islamic mutual funds, such as those offered by Al-Meezan Group? Is it completely Halal to invest in these types of funds? Thanks

bismi-llahi r-raḥmani r-raḥīm,

Assalamu ‘laikum warahmatullahi wabarakatuh,

All praise and thanks are due to Allah (سبحانه و تعالى), and peace and blessings be upon His Messenger (صلى الله عليه و سلم).

Dear questioner,

First of all, we implore Allah (سبحانه و تعالى) to help us serve His cause and render our work for His sake.

Shorter Answer: Dr. Monzer Kahf’s fatwa outlines specific criteria for permissible investments in Mutual Funds. Applying those criteria suggests that Al-Meezan Mutual Fund probably follows the necessary principles to be considered halal. However, neither do we guarantee the Shari’ah compliance of Al-Meezan Mutual Fund, nor do we endorse it for investment. It is incumbent upon the questioner (investor) to conduct his own thorough research before making any investment decisions. (Please read the long version of the answer to understand the criteria used and applied)

Long Answer: Following is the fatwa (dated 4/17/2002) of Dr. Monzer Kahf in this regard: “Investment in mutual funds is like investment in individual stocks from the point of view of the criteria of the permissibility of owning and trading. The principle is that a Muslim must not own any stock in a company whose management, because it acts on the basis of authorization from shareholders, may do any forbidden action for the company. But since this poses considerable hardship on many Muslim savers, who have small amounts of money to invest, a few Ulama argue that such hardships call for relaxation. They suggest certain criteria, essentially: the main activity must be permissible (i.e., conventional banks [and insurance companies], weapon industry in Western countries, and environmentally damaging industries [like gambling, pork, alcohol, tobacco] are ruled out), interest and other prohibited income must not make more than [5%, per Dow Jones Islamic Market Indices Methodology] of net income of the company, use of assets in interest-based activities must not exceed 33%, leverage, i.e., dependence on loans must not exceed 50% of total net worth, and that one must always estimate the percentage of gains that arise from those prohibited minor activities and give an equivalent amount to Muslim charities and Islamic general causes such as helping occupation resistance in occupied Muslim land…”

Based on the Islamic financial principles and the abovementioned fatwa, investing in Islamic mutual funds can generally be considered halal (permissible) if certain conditions are met:

  1. Shari’ah compliance: Islamic mutual funds must adhere to Shari’ah principles in their investment activities. This means:
    • Avoid investments in companies involved in prohibited activities, such as alcohol, gambling, pork, conventional banking, insurance companies, and the weapon industry
    • Conventional Debt/Total Market Capitalization – 33%,
    • (Cash +Interest Bearing Deposits)/Total Market Capitalization – 33%
    • Use of assets in interest-based activities must not exceed 33%, leverage,
    • Avoiding interest (riba) in all transactions; if unavoidable, interest and other prohibited income must not make more than 5% of the net income of the company.
  1. Expert oversight: Islamic mutual funds are typically supervised by renowned Islamic scholars and Shari’ah boards to ensure compliance with Islamic principles.
  2. Halal income sources: The funds invest only in Shari’ah-compliant equities, Sukuk (Islamic bonds), and other halal investment vehicles.
  3. Profit-and-loss sharing: Returns are based on actual profits and losses from investments, not guaranteed interest.
  4. Purification of income: Any small amounts of impermissible income (e.g., from unavoidable interest) are typically purified by donating to charity.

Specifically, with regards to Al-Meezan Mutual Fund, their website mentions it as a leading Islamic mutual fund in Pakistan, investing in a diversified portfolio of Shari’ah-compliant stocks, Sukuk, and other halal investment vehicles. They adhere to the Shari’ah guidelines as advised by the Shari’ah Board. Comparing the criteria used by Al-Meezan, we note, under the Shari’ah Methodology section of their website:

  1. Investment in securities of any company dealing in conventional banking, conventional insurance, alcoholic drinks, tobacco, pork production, arms manufacturing, pornography, or related activities is not permissible: This criterion is fully compliant with Shari’ah principles.
  2. Debt to Asset ratio should be less than 37%: This criterion is slightly more lenient than some standards, but it’s still within an acceptable range. Many Shari’ah-compliant investments use a 33% threshold, so this 37% limit is close to common practice.
  3. The ratio of non-compliant investments to total assets should be less than 33%: This criterion is consistent with typical Shari’ah-compliant investment guidelines.
  4. The ratio of non-compliant income to total revenue should be less than 5%: This criterion is standard in Shari’ah-compliant investing.
  5. The ratio of illiquid assets to total assets should be at least 25%: This criterion is consistent with Shari’ah principles, which emphasize real economic activity and discourage excessive speculation.

Although the above suggests that Al-Meezan Mutual Fund probably follows the necessary principles to be considered halal, please be aware that the information provided above regarding the Al-Meezan Mutual Fund is only a brief overview. Neither do we guarantee the Shari’ah compliance of Al-Meezan Mutual Fund, nor do we endorse it for investment. It is incumbent upon the questioner (investor) to conduct his own thorough research before making any investment decisions. The criteria can be found on the internet under Dow Jones Company, in the Islamic Market Dow Jones Index. Please review them in detail and apply these criteria to the stocks in the Al-Meezan Mutual Fund because each fund has its own structure of stocks it deals with.

Allahu A’lam (Allah (سبحانه و تعالى) knows best) and all Perfections belong to Allah, and all mistakes belong to me alone. May Allah (سبحانه و تعالى) forgive me, Ameen.

Wassalaam