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A New Frontier: Faith-based Investing @Work

If you keep up with the financial world, you’re probably familiar with an increasingly more popular investment trend – socially responsible investing (SRI). Basically, SRI is an investment strategy that allows people to take a more active role in choosing investments that fit their personal values or beliefs, whether they’re looking at social, environmental or faith-based criteria.

So if you’re concerned about the environment, you can invest in companies that are exploring alternative energy sources. If you’re worried about a world increasingly devastated by war, you can screen out companies that do business with oppressive regimes or those that manufacture nuclear weapons. And interestingly, if you’re coming from a religious perspective, now you can even align your investment portfolio with your religious beliefs and practices.

Traditionally, investors looking to make ethical investment choices have stayed away from “sin stocks,” or companies that deal with tobacco, alcohol, defense and pornography. But today’s investment options take this concept a step further. Now, although it may have begun as an offshoot of SRI, faith-based investing is gaining traction. There are Judeo-Christian funds, funds that promote investing according to Shariah (Islamic law) and even Dharma funds that select investments that are in line with Buddhist and Hindu principles. Individual religious investors have more choices that ever when it comes to saving and growing their money.

But for observant Muslims, it’s interesting to note that religion truly dictates how one chooses investment vehicles. Islamic law prohibits the collection and payment of interest (riba). Observant Muslims who invest in financial services firms or funds that generate interest are concerned that by doing so they are transgressing Shariah (Islamic law). In addition, Shariah principles prohibit investing in businesses that are considered unlawful (haraam). For example, The Dow Jones Islamic Fund screens out alcohol, tobacco, pork-related products, financial services (banking and insurance), weapons and defense, and many forms of entertainment. While an interested Muslim investor can set up a Shariah-compliant retirement account at The Dow Jones Islamic Fund or other funds, it becomes more complicated if that very same Muslim employee also wishes to invest his 401k contributions according to Shariah law. Many companies’ 401k plans provide a limited number of options in order to keep costs down – and it can be expensive to add specific funds that will appeal to only a small number of employees. In the U.S., according to Title VII of the Civil Rights Act of 1964, companies are required to reasonably accommodate religious requests, unless doing so would impose an undue hardship on the employer. In this example, if an employee would request that a Shariah option (or any other faith-based fund) be added to the 401k choices, it very well might be a significant burden on the employer. 401k plan administrators have a long list of fiduciary duties that they are legally bound to uphold, one of them being insuring the diversification of plan investment choices. So employers would need to weigh their responsibility to provide a religious accommodation with the degree of burden that this accommodation imposes. Have any of you out there invested in an SRI or faith-based fund, either on your own or through your 401k plan? Please share your thoughts or experiences – we’d love to hear more about this topic.