Shariah Compliant Funds
Shariah Compliant Funds – Islamic Investment Policy
For those of the Islamic faith who want their investing to be along socially responsible lines, Shariah compliant funds is a way to fulfill this desire. Put simply, these are investment fund that are overseen by Shariah law which follows the basic tenants of Islam.
As with funds that focus on environmentally conscious causes or other social principles, Shariah compliant funds are designed to provide peace of mind for those who wish to invest in a manner that is socially conscious for them.
Shariah compliant funds have been around since the late 1960s, but only recently have they become prominent. At some point just after the turn of the 21st century, the rise in popularity of these funds skyrocketed, growing an average of 26% over the first decade of the 2000s. This may have been due in large part to the liquidity of petrodollars and expansion of capital markets by the Gulf Cooperation Council (GCC) in 2002 which provided the rise in such socially conscious funds.
How Islamic Finance Works
Many Shariah compliant indexes are maintained by S&P Dow Jones which includes subsidiaries such as S&P Global Healthcare Shariah, S&P Developed Large and Midcap Shariah, S&P Global Infrastructure Shariah, and the like.
Shariah compliant funds have a set of requirements that allows the investor to place their money in companies or corporations that engage in ethical behavior according to Shariah law.
The areas in which Shariah investing is steered-away from includes the following industries.
- Alcohol and pork products
- Pornography and gambling
- Military equipment and weapons
But these are not the only characteristics. A Shariah board is appointed to oversee the industries in which the investing is made. This means that an annual audit is made to ensure that changes in the companies or corporations do not include any of the aforementioned areas. Plus, that any interest being accrued as a result of such changes is instead directed at charity.
Examples of Shariah Compliant Fund Investments
While the areas that are forbidden tend to be known, the industries that are acceptable cover a broad range of companies and corporations.
Many such Shariah investment opportunities involve mutual funds and common stocks into areas that cover many basic products or services such as the following.
- Healthcare and technology
- Property Investing
- Consumer cyclical and defensive
- Basic industrial products
Information technology is a popular industry in which Shariah compliant funds can be found. It is a high-growth industry that does offer some risk, but the rewards have been considerable over the years.
How Shariah Compliant Funds are Governed
The rules that are implemented are done so by the board. This type of management does require salaries to be paid to scholars of the Islamic faith which adds to the cost of managing such funds. Because there may be interpretation and disagreement, it is possible that different Shariah boards may have different ideas about what constitutes areas that are objectionable or not. Plus, what to do if a company suddenly participates or benefits financially from areas that are considered objectionable.
Therefore, some areas or industries tend to be targeted by Shariah compliant funds because they avoid direct interaction with what might be objectional. Such areas include exchange-traded funds along with real estate. While private equity is also generally acceptable, the carried interest is problematic within the confines of Shariah law and must be dealt with in the proper manner.
Opportunities and Challenges of Islamic Investing
There are no doubt limitations on what you can invest when Shariah compliant funds are used. As with any portfolio management, there are issue that clients might face that would not be present if they operated under another set of principles. The limitations range from annoying to possibly harmful to the portfolio depending in large part on current trends.
The avoidance of interest-bearing investments is arguably the most challenging aspect of this type of investment. So, some basic investing principles are put to the test when operating inside Shariah law when purchasing such funds. For example, corporate financing is built on borrowing and putting aside funds that have reached an excess amount to invest in short-term, interest bearing areas. Since such investments are not seen as compliant, this misses out on plenty of investing opportunities.
But this is not to say that people have difficulty growing their portfolios under Shariah compliant funds. It is simply that the challenges are such to make the right selection of funds more limiting. However, careful planning combined with moving assets to the right areas of investment results in growth designed to expand portfolios while still being compliant under Shariah law.
Another issue is that different councils will have different ways of viewing the same funds. So, depending on which firm you choose, the results may vary in what can and cannot be invested. It is this lack of uniformity in the process which may create some doubt for the investor if they see others investing in funds that they cannot.
Why Choose Shariah Compliant Funds?
For those who are concerned that their investing strategies may result in compromising their moral or religious beliefs, then Shariah guidance is the answer. This provides the investor with the information needed to ensure that all areas of Shariah law are considered before the investments are made. The result is that the investor has peace of mind when growing their portfolios.
From the perspective of the investor, the process of obtaining funds compliant with Shariah law is more than purchasing what is permissible. It begins with an evaluation of the portfolio itself, where it needs to be over time, and then implementing strategies that are consistent with the law while providing proper growth for the client’s portfolio.
There will be issues with such guidance, but the result is that the investor will feel more comfortable with their investments, at least in terms of how they are making their money. Building a proper portfolio that avoids unwanted industries while following the principles of Islam can be achieved when having your investments managed under Shariah compliant funds.
About the Expert Contributor
Zanthe Alexander Bentley is a finance veteran with over 25 years’ wealth management experience advising both family offices and institutions on their corporate finance requirements including capital raises (debt & equity), restructurings and M&A activities. He has significant experience in investment management and investment banking and spent nine years at UBS focused on convertible bond arbitrage and equity derivatives.
Prior to getting involved in Asset Management he expanded a small Spanish brokerage from a handful of staff in Barcelona to a diversified brokerage company with over 150 personnel spread across 9 countries, transacting deals from High Grade to High Yield Fixed Income and Loans; Structured Products through to exchanged traded equities.
After taking time to focus on family office activities in Asia, Zanthe-Alexander now leads an ambitious zero-leveraged fund providing exceptional growth and income to Sophisticated Investors.