When you are young you look at money as something that you use. It’s there to spend, then it is gone. If you don’t spend it, it’s just there. I personally know many people, especially in the Muslim community, who practice one type of finance: mattress finance. What you don’t realize is that you can take that same money that is sitting under your mattress and invest it, earning interest or a dividend.
Yes, Riba is Haram and there are better options
Now this is an important point, “earning interest or a dividend.” Many people in the Muslim community get stuck at this point, thinking that ANY return on their capital is interest, interest = Riba, Riba = Haram, and therefor return on capital = Haram.
This is true: Riba is Haram and interest earned on unsecured money loaned is Riba.
But, while you may think that it’s safer to put your money under your mattress, there are better options. The first thing to come to mind are savings accounts. Place your money in a savings account, earn interest, profit. While you will earn a small return from your savings account, you are losing in two ways. You are involved in something impermissible according to the vast majority of Islamic legal scholarship, and you may be losing money by not investing. Many (if not most) savings accounts at the time of writing this article pay something like 0.1% on the money you deposit, which isn’t even enough to beat inflation much less make money. You may be better off placing your money in an index fund or similar, where it actually represents ownership in business working the real economy. Not only is this permissible, but will earn more for you as well, because for the most part index funds have shown to match the market year after year. The key here is: choose the right fund, and have enough patience to be in it for the long haul. Even if you do like some investors, choose a small basket of stocks to invest in and then wait, you will in the long run probably be better off than sitting on cash or stashing your money in an interest bearing account. If you can invest in stocks that pay dividends, you’ll even make a return on top of the stock growth.
But the stock paid me money, isn’t that Riba?
Dividends from stocks that you’ve invested are not considered “Riba” or interest. They are earnings you make on your share of ownership in a company. Think of it this way: If you took that money and gave it to a friend who owns a business with the agreement that you are funding his business activities, wouldn’t it only be fair to share in the upside when he makes a profit. Likewise, if you gave him that money knowing that if he lost money you wouldn’t get any cash sent to you, but you’d still be a partner in the business, and the value of your share may go down this too would be fair, correct?
Investing in a stock that pays dividends is analogous to this. You buy a piece of the company – some people call them stock, others call them shares – and when the company makes money you are paid your portion of the profit. This upside or profit is called a dividend. When a company has made enough money that they no longer have the ability to invest that money back into the business, they distribute dividends. Make enough dividends on your shares owned and it will be counted as income, capital income precisely. There are special tax laws for income from dividends, but if you are smart (or have a smart advisor) you can harvest the losses from your trading as well as the income, offsetting any taxes you may owe while still making a profit. Consult with a qualified tax accountant to get more details on how to do that.
The bottom line here is: Don’t just let your money sit around, but make your money work for you.