The Beginner's Guide to Halal RRSP InvestmentsWritten by Sawitri Mardyani and Rehan Huda
With the RRSP deadline on March 2nd, many Canadians are wondering and worrying about where to invest their hard-earned money. For Muslim Canadians, the challenge is two-fold, as not only are they looking for investments that are financially sound, they also need to ensure that their investments are religiously sound, or Shari’ah compliant or halal (Islamically permissible).
What is an RRSP?
An RRSP is a registered retirement savings plan that is registered with the Canadian government. In effect, it's a special bank account used to save up for retirement. This account is made up of investment products, such as stocks, bonds, and mutual funds that allow savings to grow over time. It's up to individuals to choose what investment products to have in their RRSPs.
Unlike regular investment accounts, money inside an RRSP is tax-sheltered, meaning that it doesn't get taxed like regular income or investments. Putting money into RRSPs allows individuals to pay less income tax and get a larger tax return. As investments grow in an RRSP, the returns received each year are also tax-sheltered, allowing savings to grow faster.
Given the potential tax savings and the importance of saving for retirement, making the decision to have an RRSP is relatively easy. The challenge comes in deciding what to invest in to make the most of the plan.
In the same way that observant Muslims need to know about food ingredients to ensure that their food is halal, they also need to know about the nature of their investments to ensure their investments are halal.
What is Shari’ah Compliance?
Because interest is explicitly forbidden in the Qur'an, many interest-based transactions and investments are considered not halal or non-Shari’ah compliant. This would include interest-based savings accounts and Guaranteed Investment Certificates (GICs), where the initial investment is guaranteed and the returns are based on interest.
Along the same lines, bonds, which are interest-based investments in companies or governments, are also not halal. A bond is a debt investment in which the investor loans money to a company. After a fixed time period, the company returns the loan to the investor, plus interest. This means that regardless of how the company performs, the investor is guaranteed a fixed return.
For an investment in a company to be halal, that investment must be in equity, not in debt. This means that the investor is taking a share of the company. If the company does well, the value of the share increases and investor can sell that share and earn a profit. If the company does poorly, the value of the share decreases.
Not all equity-based investments are halal, however. It is also important to consider what the company does. For obvious reasons, investments in companies that sell alcohol, pork-products, gambling, pornography, or weapons do not pass the test of Shari’ah compliance.
Another, less obvious consideration is the amount of debt that a company has. Scholars have also ruled that a company's debt must equal no more than 1/3 its value in order to qualify as a halal, or Shari’ah compliant investment.
Halal RRSP Investment Options
So, given these restrictions and considerations, what is a Muslim investor to do?
If you are a skilled investor, one option is to choose investments that follow the guidelines from the Dow Jones Islamic Index, as all of these have already been scrutinized by a board of Shari’ah scholars and deemed Shari’ah compliant. This will ensure that your investments are halal.
However, choosing your own stocks does involve some risk and a lot of analysis. Market forces have a habit of sending the value of individual stocks on a rollercoaster of ups and downs. One way to minimize risk is to diversify your investments so that they are not all in one, two, or even a handful of companies, but in dozens or hundreds.
This is where mutual funds come in. A mutual fund is a professionally managed investment fund composed of many different stocks. When you invest in a mutual fund, you’re actually investing in all of these stocks at once. It’s up to the mutual fund manager to decide what percentage of the investment fund goes into each different company in order to maximize returns and minimize risk.
There are a couple of drawbacks about investing in mutual funds. First, you don’t have control over exactly which companies to invest in. If there’s a company in the mutual fund you don’t want to be investing in, you don’t have a choice. You either take the whole list of companies or leave it.
Second, a portion of the returns that come from the mutual fund is used to pay the fund managers. These management expenses reduce the potential returns that come from the investment fund.
In Canada, one of the Shari’ah compliant mutual funds is The Global Iman Fund, offered by Global Growth Assets Inc. Established in 2009, as of February 28, 2014, the top 10 investments that made up the Global Iman Fund included Apple, Microsoft, Google, Johnson & Johnson and Procter & Gamble.
The other RRSP option is the bullion funds offered by Bullion Management Group. Rather than shares of companies, these bullion funds represent ownership of physical gold, silver, and platinum bars. Your investment in the bullion fund represents your ownership of precious metals, which are stored in a Canadian vault. As the value of these precious resources go up and down, so too does the value of your investments.
So while it can seem a challenge for Muslims to take advantage of RRSPs to prepare for retirement, there are options and with research and due diligence, you can find halal investments to meet your needs.
To learn about the Bullion Management Group visit their website.
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