Shariah Investing: How to grow your portfolio without compromising religious values
We speak for a lot of people when we say that our financial security and that of our children are paramount. Investing hard-earned money early in life is the best way to make sure we save enough for emergencies and old age. However, there are some rules to investing if you’re an adherent of Islam. Collectively, these rules are referred to as Shariah. So, Muslims often lean towards Shariah-compliant financial instruments.
That said, in a world full of investment opportunities and emerging asset classes, it is not easy to figure out what is Shariah-compliant and what isn’t. A financial advisor can look at all your income sources and work with you to develop a financial plan that does not compromise your core beliefs.
Here are some frequently asked questions about Shariah investments:
What does it mean to be Shariah-compliant?
The term ‘Shariah-compliant’ means that a financial product/service/activity complies with the principles of Islam, as stipulated in the central religious text Quran. One of the most critical aspects of Sharia law is ensuring that all income sources are “halal” — the Arabic word that translates to "permissible" in English. Non-permissible, or haram in Arabic, financial activities are those that are interest-based or businesses that operate in the alcohol, pork, entertainment, pornography, and tobacco industries.
What are the principles of Shariah investing?
According to Islamic laws of finance, Muslims should invest ethically and responsibly. Investments made by Muslims should not only benefit them but also contribute to the overall development of society.
As per the Shariah rules, Muslims must comply with a set of principles. The three major principles of Shariah investing are:
Prohibition of interest: Interest is strictly prohibited by the Shariah rules. Muslims are not allowed to either pay or receive interest, as it is considered unjust. For instance, an interest-based home loan is not permitted by Islamic law. But if the bank purchases the house, and rents it to someone, paying rent to the bank is permissible. The rent received by the bank can be distributed among the depositors of the bank as a way of sharing profits.
Prohibition of investing in certain businesses: Shariah prohibits Muslims from investing in businesses that earn their income from the sale of alcohol, abusive drugs, pork, gambling, weapons, and other such products.
Balanced distribution of wealth: Shariah also dictates that a certain percentage of wealth must be given as charity. Muslims are required to share their wealth with those who are less fortunate than them. It cleanses and purifies the remainder of the wealth. Besides, Shariah also says that both risks and returns associated with any financial transaction must be shared between both parties. No single party must be the only beneficiary or benefactor.
What type of investment is allowed in Islam?
As per the Shariah law, the following investments are permissible:
Gold: Gold is considered a safe and traditional investment instrument as per the Shariah law. Gold often appreciates in value, is easy to obtain and invest in, and is not deemed to be in violation of any Islamic finance laws.
Sukuk: Sukuks are Islamic financial certificates, similar to conventional bonds. They are an alternative to traditional bonds as they do not bear any interest. Often referred to as Islamic bonds, they are normally asset-based. It is a conservative investment instrument, in that it is part of the 'fixed income' market.
Property: Investing in property is allowed as per Shariah law. However, Muslims need to make sure that the mortgage is halal, which means it should not involve the payment of any interest.
What is a Sharia-compliant ETF?
Shariah-compliant ETFs are investment funds governed by the requirements of Shariah law and the principles of the Islamic religion. They are also called i-ETFs (Islamic ETFs). While a conventional ETF can track any benchmark index, an i-ETF tracks only the benchmark indices whose constituents are Shariah-compliant companies. Apart from that, the management of i-ETFs has to strictly observe the Shariah principles and Islamic investment guidelines. The operation of i-ETFs is overseen by a Shariah board, which conducts compliance audits and reviews from time to time.
What kind of returns can be expected from a Shariah fund?
Shariah funds invest in private equity, real estate, and exchange-traded funds. The performance and risk sensitivity of Shariah funds are the same as that of any Socially Responsible Investment (SRI) fund — there are no significant differences in performance. However, these funds include a very low level of risk because companies and derivatives with high debts are not included.
How can one invest in Shariah-compliant funds/companies?
The best way to invest in Shariah-compliant funds and companies is to take the advice of a competent financial services provider who not only understands the financial market but also has a thorough knowledge of Shariah principles and laws and how they apply to your portfolio. Such a financial advisor can help you look at all your income sources and work with you to develop a plan to meet your goals. At the Continental Group, we offer free one-on-one consultations to help you build a financial plan that does not compromise your core values. Contact us at Clientservice@cfsgroup.com.