Investing in the Financial Sector

The following question and answer by Sheikh Yusuf Talal DeLorenzo attendees of the Dow Jones University Courses on Islamic Investement.Question:: (South America) I was particularly interested to know what kinds of sectors islamic investors should avoid, like the financial sector. I assume that some smaller banks generate more revenue from profits arising investment returns on deposits received. Does it make sense to say that in a scenario where 80% of the bank's revenue is generated from investment returns (from financing development projects), then from whatever returns I might make as a Muslim investor in this bank, I would have to cleanse 20%? I know that I am oversimplifying the scenario for most banks am not taking into account the fact that halaal investment projects in the bank might constitute only a small part of the bank's overall profit. But assuming a direct relationship (each % of halaal investment by the bank contributes 1% of profit to the banks bottom line), is my reasoning correct. I am also wondering to what extent my assumptions about the ratio of halaal to haram (investment vs loan financing) business dealings in a typical bank are sound.Answer: The financial sector in general, and banks and insurance companies in particular, represent dangerous ground for Muslim investors owing to their involvement, in a very fundamental way, with riba. As a result, the entire sector has been declared "off limits" by most Shari`ah boards. The Dow Jones Islamic Market Indexes, for example, include no banking or insurance securities. If, however, you are considering an investment in a bank that transacts with a minimum of riba, your answer is at least theoretically correct. However, the real problem is determining the amount of the income the bank actually earns from riba and this, in practical terms, is nearly impossible. Therefore, my advice would be to stay away from such an investment. In addition, several of our most respected Shariah scholars have given the opinion that it is unlawful to deposit in riba-based banks (if an Islamic alternative is available) because to do so encourages and supports the riba-based system of finance. Then, when this is their opinion on deposits, their opinion in regard to investing in such banks is that to do so is clearly unlawful. And Allah knows best.

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