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What is Shariah compliant investment? The Islamic way to wealth
Are you looking to invest your money but want to ensure it aligns with your religious beliefs? Shariah-compliant investment might be exactly what you’ve been seeking.
This unique approach to investing, grounded in Islamic law, offers a range of opportunities while avoiding certain prohibited activities.
Let’s delve into understanding Shariah-compliant investments and how they can bring both financial returns and spiritual peace.
Key takeaways
●Shariah-compliant investments follow Islamic law. They don't use money for bad things like alcohol or gambling.
●Many types of Shariah-compliant investments exist. Examples include stocks, real estate, and special bonds called sukuk.
●These funds often do better than other types because they grow fast and hold lots of value.
●Picking the right investment manager is key to making sure your money follows all the rules of Islam while also making a profit.
Understanding Shariah-Compliant Investments
Shariah-compliant investments adhere to the principles of Islamic law, steering clear of activities considered “haram” or forbidden, such as alcohol production or gambling.
This investment management process provides opportunities for investors wanting to align their financial strategies with their ethical beliefs.
Examples include diverse asset classes like public and private equities, fixed-income debt through Sukuk (Islamic bonds), real estate, and more alternative sectors.
The concept requires considerable effort to implement since much attention must be paid to compliance with a comprehensive set of rules and requirements guided by the Shariah principles.
Definition and Principles What Is Shariah Compliant Investment
Shariah-compliant investments follow Islamic law. They are the rules made by people who know a lot about Islam, called Islamic scholars. These scholars make sure that the money is used in a good way.
This means no use of alcohol, pork products, bad pictures or videos, games for money, or things to fight with.
All these are part of Shariah principles which guide how we use our money and make it grow without breaking any laws of Islam.
Examples of Shariah-Compliant Investments
There are many types of Shariah-compliant investments. Here are a few examples:
- Stocks and equity funds: These are a big part of Islamic finance. They let people own a part of a business.
- Real estate: This is an area where people can put their money in Shariah-compliant ways.
- Sukuk: These are like bonds, but they follow the rules of Islam.
- Islamic contracts: Things like Musharakah, Mudarabah, Ijarah, and Murabaha are all allowed under Islamic law.
- Halal investment funds: HSBC Global Islamic Equity Index Fund and iShares MSCI USA Islamic UCITS ETF are two examples.
The Benefits of Shariah-Compliant Investing
Shariah-compliant investing offers several benefits, including the potential to outperform peers due to efficient risk management and diversification.
This type of investing aligns with ethical and social impact values, making it a form of socially responsible investment that appeals to those seeking positive societal changes.
Shariah-compliant funds also tend to be resilient during financial downturns due to their strict adherence to prudent financial practices as set out in Islamic law. These advantages make Shariah-compliant investing an attractive choice for both Muslim and non-Muslim investors alike.
Outperforming Peers
Some Shariah-compliant funds outdo other types of funds. This can happen for a few reasons:
- They might grow fast. For example, from 2000 to 2010, Shariah-compliant funds grew by 26% each year.
- In one year, between 2002 and 2003, they grew a lot more than others.
- They can also hold a large value. By early 2017, all Shariah funds in the world held $70.8 billion.
Ethical and Social Impact Investing
Shariah-compliant funds are not just about more money. They have a deep link with what’s good for all of us. Such funds line up with ethical and social impact investing goals. It means they use money in a way that helps people and the world around us.
They protect society from tricks, scams, and strife while making a profit. These funds stay away from sinful businesses like alcohol, pork, betting, weapons, tobacco, or any other things seen as ‘Haraam’.
They follow special rules to make sure everything is done right according to Islamic law.
- Ethical alignment.
- Social responsibility.
- Stable returns.
- Diversification.
- Shariah investments appeal beyond Muslims.
- Potential for competitive returns.
- Ethical misalignment.
- Haram income risk.
- Volatility.
- Exclusion from Shariah-Compliant Markets.
- Limited access to ethical funds.
- Potential ethical concerns.
Types of Shariah-Compliant Investments
Shariah-compliant investments span a wide array of asset classes, including public and private equity, money market funds, fixed-income or private debts, infrastructure projects, real estate properties, and liquid alternatives.
These investment types all adhere to Islamic laws on permissible activities – in line with the principles of halal- thus rejecting ventures that involve interest (riba), uncertainty (gharar), or any prohibited (haram) industries such as alcohol or gambling.
It’s also worth noting that some specific financial instruments like derivatives and speculative strategies are often avoided due to their conflict with Shariah principles. Consequently, prudent investors explore these diverse options under the guidance of a knowledgeable Shariah-compliant investment manager who ensures strict adherence to these ethical standards.
Shariah-compliant funds are one of many categories found in socially responsible investing. Similar to other socially responsible funds within the environmental, social, and governance (ESG) universe, the funds screen potential portfolio investments for specific requirements desired by followers of the Islamic religion.
Public and Private Equity
Public and private equity are two types of Shariah-compliant investments. Both types follow Islamic law rules. Public equity involves buying shares in big companies that the public can buy too.
Private equity is when you invest in firms not open to the public. These funds like private equity because it aligns with their idea of sharing profit and loss equally.
But they must still screen these investments for things Islam forbids, like gambling or alcohol sales. While popular, both forms need a good understanding before investing in them.
Fixed Income / Private Debt
Investments in fixed-income and private debt are part of Shariah-compliant funds. These include sukuk, a kind of Islamic bond, that follows the profit and loss sharing rule.
This means investors share both the gain and loss from the money they put in. Also, Islamic contracts such as Musharakah and Mudarabah guide private debt investments.
These agreements make sure the financing aligns with Islamic values. The set rate of return on these investments comes from this profit-sharing plan.
But it’s crucial to note one thing – these funds won’t invest in businesses linked to bad stuff like alcohol, pork meat, gambling, or weapons.
Infrastructure
Shariah-compliant investments need a good set-up. This is called infrastructure. It starts with setting up a Shariah board. They watch over and check all things in line with Islamic law.
Next, they make rules for their work known as policies. After that, funds use unique Islamic deals like Musharakah, Mudarabah, Ijarah, and Murabaha.
They keep an eye on bad practices too that can hurt how the company does business. In such funds, you can find equity funds or real estate funds among others.
Real Estate
Real estate is a big part of Shariah-compliant funds. These are houses, lands, or buildings that can be bought or sold. But not all real estate can be part of these funds.
They must fit with Islamic law and rules. These rules mean that some types of real estate are off-limits. For example, if the rent comes from selling pork or alcohol, it can’t go into the fund.
If cash comes from places like casinos, army supply shops, or adult film stores it is also a no-go. There is a group called the Shariah board that checks if everything in the fund fits with the rules.
Even after they say yes to a building being put in, there’s an every-year check-up by auditors to make sure everything still follows the Shariah laws and the principles of Islam.
Some income cannot go into these funds even if they pass these checks at first glance. This money has to go to charity instead.
Liquid Alternatives
Liquid Alternatives are one more type of Shariah-compliant investment. These are good choices for Muslim investors. They stick to the rules of Islamic law. This means they don’t invest in things that go against these laws.
Instead, they put money into things like real estate, trade finance, and asset leasing. But they stay away from risky bets and high-risk trading strategies which aren’t okay under Shariah law.
How to Invest in Shariah-Compliant Funds
In Shariah-compliant investing, the first step is to identify and select suitable investment funds that align with Islamic principles.
It’s essential to conduct due diligence on these funds, assessing their adherence to both the financial objectives and the ethical guidelines of Shariah law.
Consider utilizing various resources such as FTSE Russell and MSCI for finding reputable halal investment funds.
Once you’ve identified potential Sharia-compliant opportunities, appoint a qualified investment manager with expertise in Islamic finance.
The chosen manager should be experienced in managing portfolio constructions that meet Shariah-compliant criteria while achieving sound risk-adjusted returns.
Make sure your selected manager understands not only conventional finance systems but also the specific prohibitions under Islamic law – like riba (interest), gharar (unreasonable uncertainty), and haram activities.
Ensure regular annual audits are conducted by an independent Shariah board composed of scholars proficient in Islamic jurisprudence related to finance.
Finally, it’s crucial to verify all operational considerations including legal stipulations
Finding Shariah-Compliant Investment Funds
Finding and understanding Shariah-compliant Funds is easy.
- Look for funds that follow Islamic law. These will not make money from things like alcohol or weapons.
- See if the fund has a Shariah board. This group makes sure everything stays by the rules of Islam.
- Check for an annual audit focused on Sharia law. This audit makes sure all the rules are followed each year.
- See if they give some money to charity. Some types of income are not allowed in Islam, and those have to go somewhere else, usually to help others in need.
- Look at how much the fund has grown since the early 2000s. Many Islamic funds got bigger then because countries with lots of oil money started investing more.
- Finally, reach out to investment managers or financial advisers who may help you find such funds.
Appointing a Sharia-Compliant Investment Manager
To get a Shariah-compliant investment manager, you need someone who knows and lives by Shariah law. This person will guide your money choices. They will make sure your investments follow all the rules of the Islamic religion.
Your manager will check that the money does not come from bad things like alcohol or gambling. He or she will also see that your funds do not earn interest, which is not allowed in Islam.
It’s critical to pick a manager who can balance these laws with making good profits for you.
Conclusion
The Shariah-compliant fund observes Islamic laws. They avoid things like charging interest or bad actions. This kind of investment is good for people who want to earn but also follow their faith.
With the right knowledge, anyone can take part in Shariah-compliant investment.
FAQs
Shariah-compliant investments are governed by the requirements of Shariah law and the principles of Islam. It only supports halal activities and avoids prohibited types of income like adult entertainment and pork-related products. Shariah-compliant funds are considered to be a type of socially responsible investing.
A mutual fund follows the rules set by Islamic scholars of finance to be Shariah-compliant. A yearly audit also checks if the funds follow all rules.
Yes, you can! However, there are some specific rules for trading commodities under Islamic law.
No, not all sectors are allowed under the principles of Shariah investing. Some areas like the healthcare sector and information technology sector may be okay, but others like weapons or alcohol might not fit with these laws.
Businesses that deal with pork-related products, non-halal food production, adult entertainment, and weapons do not meet the Halal standard for Sharia-compliant investments.
This ratio tells about how much money a business takes as loans compared to its own wealth. Businesses that have more debts than equity often go against the profit-and-loss sharing principle which isn’t suitable under Sharia laws.
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