How can financial planning be done as per Shariah?


Hi Fpguru,

I want to know how financial planning is done by Islamic way of investments, particularly insurance as there is no clarity with me whether insurance is allowed or not. Please guide me with a proper source if possible.

Regards. Zaid.


Hi Zaid,
Thanks for visiting our website & asking us to solve your query. You have asked us a question on Islamic way of investments or Shariah investments. Investments as per Shariah or Islamic Laws have to follow certain principles. The first principle is no investments should earn interest. As per Shariah it is wrong to receive interest as well as give it, as it is unjust. This is known as Riba. This means that if you want to follow financial planning in the Shariah way, you cannot invest in Debt instruments nor take any commercial bank loan. The second principle is that you cannot invest in Haraam business activities. Haraam means unlawful & it covers companies which deal in alcohol, tobacco & other intoxicants, gambling activities, pork products, immoral & adult oriented activities. Also companies whose main business is earning interest are also not allowed i.e. Banks. As gambling is not allowed, day trading & derivatives are prohibited. This in fact is what all financial planners preach- do not trade, only invest.
So the question arises how go about financial planning with the above restrictions. Well, Shariah investment is a major concept the world over now & we have Shariah-compliant equity indices in New York stock exchange, FTSE & other world exchanges. This makes it easy to identify which companies are Shariah. In India too we have an ETF called Shariah BEE’s which invests only in Shariah stocks. You can definitely look at that. So equity investments are not really a problem.

Debt instruments cannot be part of your portfolio as interest is prohibited. There are Islamic bonds available in the Middle East but their availability in India is limited. One of the biggest concerns in financial planning is that if debt is prohibited then how a person can secure one’s retirement. This is because in retirement, a debt oriented portfolio is a must. The solution to this is buying an additional real estate property which can earn you rent for your retirement needs. You can invest in Shariah stocks during you earning period & with the gains buy a property without any loan taken to secure your retirement.

Insurance is something which has been debated among many clerics. Some believe it not allowed as it based on uncertainty & chance, while other believe it is allowed as it is a common pool for sharing losses. If we take the common pool for sharing losses argument then a Term plan can be allowed.

We have tried to answer your query with full honesty & information we could gather on Shariah Investments. We hope you understand the same. What is important to understand is that financial planning can be done in the Shariah way. Though there are several restrictions, you can still follow the same & achieve your financial goals!

Hope this answers your query. Do visit us again & feel free to ask us anything related to your personal finance. We are always there to give you unbiased advice!

Thanks & regards,


+1 #6 Fpguru 2011-08-01 19:47
@ Faisal, That is true but in today's financial markets it's impossible to fully escape interest. Thus shariah fund managers only include companies which earn less than 10% of their revenues from interest.

The important thing is the right intention & the intention's of these funds is right.

Hope that answers your query!

Thanks & regards,
0 #5 Faisal 2011-07-29 07:13
Shariah says, " not a single rupee should be earned through interest". but than majority of companies complied with sharia fund managers' either give or take interest. how is this justified.
0 #4 AZAD 2011-07-11 07:24
Nice explanation
+3 #3 Mujahid Sharif 2011-05-19 08:33
A new Financial Instrument,a development & Innovation for Financial Planning. Crystal Clear view of Shariah Investments. Thanks FPGURU.
+1 #2 Zaid Ansari 2011-05-18 18:17
Thanks for the reply it was of great help to me.
+3 #1 Imran 2011-05-17 09:51
Really liked this article! I always wondered how to ethically invest in the current financial markets, but with this I now know how to go about it!! Really appreciate this, Fpguru!

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