Islamic Investing
There are approximately 1.5 billion Muslims worldwide. Islamic investing is quickly becoming very popular worldwide. Over 7 million Muslims live in the US, half of which make $50,000 according to a recent survey by Zogby International. This is above the USA national average. American Muslims as well as millions around the world want investment alternatives that meet their needs. About half of Islamic borrowers are immigrants and half were born in the United States. They come from a variety of backgrounds: African-American, Arab, Pakistani and Iranian are among the most common. All share a common tongue in religious matters i.e. Arabic.
Shariah Compliant Investing
If there is any thing that draw consensus in Islam among the Ulema (educated class of Muslim legal scholars) it is the condemnation of Interest. Yet all vibrant and growing economies use interest as a tool to attract money and capital. For a detail discussion, go to the Islamic Finance page. Corporations in the Muslim world, including banks and other lending institutions, raise capital in accordance with Shari'ah, or Islamic law. Equity financing of companies is permissible. This requires portfolio managers to follow a specific Islamic investment policy, be it for the institutional or individual investor which originates with a Shari'ah Board, a group of Islamic scholars (jurists) that vests investment products for compliance with Islamic Law and conducts ongoing due diligence of them.
Permissible Types Of Investment For Islamic Investing
Equities
Shari'ah law allows investment in company shares (common stock) as long as those companies do not engage in lending, gambling or the production of alcohol, tobacco, weaponry or pornography. Investment in companies may be in shares or by direct investment (private equity). Islamic scholars have made some concessions on permissible companies, as most use debt either to address liquidity shortages (they borrow) or to invest excess cash (interest-bearing instruments). One set of filters excludes companies that hold interest-bearing debt, receive interest or other impure income or trade debts for more than their face values. A further distillation of the aforementioned screens would exclude companies whose debt/total asset ratio equals or exceeds 33%; companies with "impure plus non-operating interest income" revenue equal to or greater than 5% or companies whose accounts receivable/total assets equal or exceed 45% or more.
Fixed-Income Funds.
Retirement Investments. Retirees who want their investments to comply with the tenets of Islam face a dilemma in that fixed-income investments include Riba, which is forbidden. Investing in Shariah Compliant Fixed Income Investments such as specific types of investment in real estate or REITS could provide steady retirement income while not running afoul of Shari'ah law.
Fixed Income Example: Sukuk
Under Shariah or Islamic law…payment of Interest or Riba is banned as is investment in companies involved in activities deemed unacceptable, such as gambling. For that reason, Islamic bonds, known as Sukuk, are typically structured as profit-sharing transactions. Sukuk Bonds avoid Riba. In a typical Ijara Sukuk (leasing bond-equivalent), the issuer will sell the financial certificate to an investor group, who will own them before renting them back to the issuer in exchange for a predetermined rental return. Like the interest rate on a conventional bond, the rental return may be a fixed or floating rate pegged to a benchmark, such as LIBOR. The issuer makes a binding promise to buy back the bonds at a future date at par value. Special purpose vehicles (SPV) are often set up to act as intermediaries in the transaction. A sukuk may be a new borrowing, or it may be the Shari'ah compliant replacement of a conventional bond issue.
Commodity Fund
In commodity funds, the subscription amounts are used in purchasing different commodities for the purpose of the resale. The profits generated by the sale are the income of the fund which is distributed pro rated among the subscribers. In order to make this fund acceptable to Shariah, it is necessary that all the rules governing the transactions and fully complied with.
Commodity Fund Example
The commodity must be owned by the seller at the time of sale, therefore, short sales where a person sells a commodity before he owns it are not allowed in Shariah. Forward sales are not allowed except in the case of Salam and Istisna.
- The commodities must be Halal, therefore, it is not allowed to deal in wines, pork, or other prohibited materials.
- The seller must have physical or constructive possession or the commodity he wants to sell. (Constructive possession includes any act by which the risk of the commodity is passed on to the purchaser).
- The price of the commodity must be fixed and known to the parties.
- Any price which is uncertain or is tied up with an uncertain event renders the sale invalid.
Most commodity funds do not comply with these conditions. Therefore, an Islamic Commodity Fund cannot enter into such transactions. However, if there are genuine commodity transactions observing all the requirements of Shariah, including the above conditions, a commodity fund may well be established.
Murabahah Fund
“Murabahah” is a specific kind of sale where the commodities are sold on a cost-plus basis. The contemporary Islamic banks and financial institutions have adopted this kind of sale as a mode of financing. They purchase the commodity for the benefit of their clients, then sell it to them on the basis of deferred payment at an agreed margin of profit added to the cost. If a fund is created to undertake this kind of sale, it should be a closed-end fund and its units cannot be negotiable in a secondary market. The reason is that in the case Murabahah, as undertaken by the present financial institutions, the commodities are sold to the clients immediately after their purchase from the original supplier, while the price being on deferred payment basis becomes a debt payable by the client. Therefore, the portfolio of Murabahah does not own any tangible assets, rather it comprises of either cash or the receivable debts, and both these things are not negotiable, as explained earlier. If they are exchanged for money, it must be at par value.
Mixed Fund
Another type of Islamic Fund is where the subscription amounts are employed in different types of investments, like equities, leasing, commodities, etc. This may be called a Mixed Islamic Fund. In this case if the tangible assets of the Fund are more than 51% while the liquidity and debts are less than 50% the units of the fund may be negotiable. However, if the proportion of liquidity and debts exceeds 50%, its units cannot be traded in according to the majority of the contemporary scholars. In this case the Fund must be a closed-end Fund.
Sharia Compliant Indexes
- MSCI Barra Sharia Compliant Indexes
- Standard and Poor’s (S&P) Sharia Compliant Indexes
- Dow Jones Indexes Sharia Compliant Indexes
- FTSE Sharia Compliant Indexes