Sharia-compliant investment is a topic that has seen increased publicity not only in the Middle East, but also in many other countries, particularly over the past 10 or so years. The retail banking sector has offered sharia-compliant accounts for some time, but actual investment choices have been limited, with few options available to the average investor.
What makes an investment sharia-compliant?
For an investment to be considered sharia-compliant it must operate in accordance with the stated principles of Islam. The main focus is on the avoidance of unsuitable stocks and/ or investment structure which include:
- Any business which is involved in practices which are forbidden in Islam, such as gambling or the production or consumption of alcohol.
- Financial services organisations and companies that are highly leveraged.
- Conventional derivatives, future or options.
In certain ways sharia investment principles are not dissimilar to those of many Socially Responsible Investment (SRI) funds, also known as ethical funds, in the stocks that they exclude.
Who says if a fund is sharia-compliant?
Funds have a high-level of compliance to ensure that the principles are maintained and are supervised by a sharia board, or at least by an Islamic scholar. Guidelines are set at outset and regularly reviewed. There may be some differences in interpretation and there is talk of setting up a supreme Sharia Board for the Gulf Arab states by 2013. This additional level of ongoing scrutiny can also lead to higher charges so investors need to be aware of this.
Are there many options?
Latest estimates are that there are now over 500 equity funds worldwide that comply with Islamic principles and this number is predicted to increase exponentially. In some cases they are offered by companies with a total commitment to sharia investment, but many of the biggest names in the investment and insurance worlds are now offering their own versions. Some detractors have suggested this is simply to ensure that they can provide a full range for their customers, whilst other companies may be seeking a share of the growing MENA investment market. Either way, consumers now have significant choice.
Is there a future for sharia-compliant investing?
There are an estimated 1.2 to 1.6 billion Muslims in the world and it is considered to be the fastest growing religion. It is thought that a significant percentage would prefer their investments to be arranged in accordance with religious traditions, now that such options are available so these funds are set to stay. With the ongoing development of this market, we can safely assume that demand for sharia-compliant investments will continue to grow and both individuals and organisations will have a wide range of opportunities.
Keren Bobker is an Independent Financial Adviser at Holborn Assets and writes at financialuae.me