Islam does not obligate its followers to rely on their fate but displays their earnest efforts to earn a better living. Muslims are always encouraged to seek income or earnings by involving themselves in economic activities, including investment. Islam views that investment is one of the activities that can free humankind from the bondage of poverty. This view is supported by a hadith narrated by Imam Malik in his book al-Muwatta’al-Muwatta’ chapter zakat:
“Trade with the property of orphans, and then it will not be eaten away by zakat.”
The above hadith entails that the Prophet Muhammad ﷺ instructs the guardian of an orphan’s wealth to prudently manage it by wise investment to avoid the wealth from being reduced and depleted. Suppose the wealth is managed wisely by involving it in an investment. In that case, it can be multiplied to secure the orphan’s benefit in the long run. This scenario illustrates that investing is an encouraged way to expand wealth in Islam.
However, specific considerations and factors need to be considered before investing. Investing your surplus earnings is permissible and quite logical. Financing for significant assets like a home or kickstarting a business for your family’s future is equally understandable. However, suppose someone borrows solely to invest without any surplus. In that case, it signals a lack of available funds or possibly a deficit, which could pose risks in their investment strategy.
Taking out a loan to invest, sometimes known as “investing a loan,” refers to the practice of using borrowed funds to purchase financial assets for investment purposes, with the expectation that the returns on those investments will surpass the cost of the loan, including interest and any associated fees. Although there are views that highlight that it may be worth taking out a loan for investing in specific types of investments, here are a few reasons why taking out a personal loan to invest may not be a good idea:
- The uncertain profits from the investment
- By default, there is no guarantee in any risky investments. Leveraging a loan to invest increases the overall risk in your investment portfolio. If your investments perform well, you could retain the invested amount and be obligated to repay the loan and the interest, potentially leading to substantial financial losses.
- Interest payments may be higher than the investment returns.
- It is essential to understand that personal loan interest rates generally may hike up to 20% or 25%, and they also may contain extra charges that one may overlook. Even if your investment appreciates, it may not be enough to compensate for the interest rate, fees and taxes that you will be owing.
- Trapped in debt
- Regardless of how your investment goes or how quickly you pay off your loan, you will still have taken on more debt than you started, which can hurt your debt-to-income (DTI) ratio and, thus, your credit score.
Based on the above reasons, leveraging solely for investment should be avoided. It is best to refrain from it as such action brings more harm than benefits. The potential risks and threats it presents could ultimately jeopardize someone’s financial security, leading to a prolonged entanglement in debt. Our advice is based on the fiqh principle of ”Dar” al-afraid awla min jalb al-masalih”, which means “preventing harm takes precedence over achieving benefits”. Preserving the interest of wealth is considered part of the ultimate objective of Shariah, including repelling any activities that could potentially cause harmful repercussions on the state of one’s wealth, i.e., investing in a bank loan.
Since the majority of financing in Singapore are interest-based, we do not recommend that local Muslims invest in the bank’s borrowings, except when purchasing necessary assets, i.e., a house, which can be considered on a case-to-case basis. If one’s salary is insufficient, one should look for other work through which Allah may grant them sufficient provision. As for investing a loan that one is not guaranteed to be able to pay off, we see it as an unreasonable and unjustifiable decision.
All in all, let us take comfort in our financial affairs from the recitation of doa, which has been taught by the Prophet Muhammad ﷺ regarding abstinence from being trapped in debt:
اللَّهُمَّ إِنِّي أَعُوذُ بِكَ مِنْ الْهَمِّ وَالْحَزَنِ وَأَعُوذُ بِكَ مِنْ الْعَجْزِ وَالْكَسَلِ وَأَعُوذُ بِكَ مِنْ الْجُبْنِ وَالْبُخْلِ وَأَعُوذُ بِكَ مِنْ غَلَبَةِ الدَّيْنِ وَقَهْرِ الرِّجَالِ
“O Allah! I seek refuge with You from worry and grief, from incapacity and laziness, from cowardice and miserliness, from being heavily in debt and from being overpowered by (other) men.”
(Sahih al-Bukhari, 6369)
References:
