What is Shariah Compliance: Definition, and Shariah Compliant Funds

Investing

What is Shariah Compliance: Definition, and Shariah Compliant Funds

Investing

Funds with Shariah compliance are investment tools that are governed by the tenets of Shariah and the founding principles of the Muslim religion. Funds with Shariah compliance are considered to be a kind of socially responsible investing.

“On the authority of Abu Huraira (RA) the Messenger of Allah (SAW) said:

If anyone amasses wealth through haram means and then gives charity from it,

there is no regard for him and the burden of sin remains.”

(Sahih Ibn Khuzaymah (4/110) No. 2471)

For any Muslim investor, making sure that his/her earnings are Shariah compliant is extremely important. These earnings go beyond salary and money earned through business, Shariah compliance also includes income accrued through other investments as well. If you wanted to learn more about Funds with Shariah compliance, this post has got you covered. Without further ado, let’s get started.

What are Funds with Shariah compliance?

What is Shariah Compliance: Definition

These are the six foundations of Shariah-compliance/Halal investing:

  • Sharing of profit
  • Prohibition of riba (unjust, exploitative gains)
  • Gambling prohibition
  • Investing in lawful activities only
  • Upholding of ethical and moral values at all times
  • A successful and functional with the real economy

Understanding Funds with Shariah compliance

Funds with Shariah compliance are a part of the multiple categories found in the field of socially responsible investing. Just like the other socially responsible methods of investing within the environmental, social and governance (ESG) universe, the Funds with Shariah compliance screen potential portfolio investments for specific requirements desired by followers of the Muslim religion.

Funds with Shariah compliance have expanded in popularity only recently, albeit the concept was first developed near the end of the 1960s. According to a 2011 report by consulting company PricewaterhouseCoopers (PwC), Funds with Shariah compliance grew at an annualized rate of 26% within the first ten years of the 21st century. The report further states that “an inflection point” in their growth occurred between 2002 and 2003 when petrodollar liquidity multiplied and capital markets in the Gulf Cooperation Council (GCC) countries matured to enable investment.

According to a report by the Malaysia Islamic International Financial Center, total global Islamic assets under management (AUM) were $70.8 billion at the end of the first quarter of 2017. The corresponding figure in 2008 was $47 billion. However, it’s difficult to accurately estimate the industry’s size or valuation because much of the investment occurs through private placement. The funds are also not traded in secondary markets, thereby providing less of a window into their constituents.

How are Funds with Shariah compliance managed?

The Shariah compliance concept is difficult to implement and takes a lot of effort to successfully execute. A lot of attention needs to be paid to compliance with a comprehensive set of rules and requirements guided by the Shariah principles.

Funds with Shariah compliance have many requirements that are compulsorily adhered to. Some of the key requirements for a Shariah compliant fund include the exclusion of investments which derive a majority of their income from the sale of alcohol, pork products, pornography, gambling, military equipment or weapons. Other characteristics of a Shariah compliant fund include an appointed Shariah board, an annual Shariah audit and purifying certain prohibited sorts of income, like interest, by donating them to a charity.

These rules can add complexity and costs to the management of a Shariah compliant fund. For example, Shariah boards are constituted of Islamic scholars whose fees can run into millions of dollars per year, adding to the overall cost of managing the fund. The scholars have varying interpretations of Islamic law, making it difficult and time-consuming for them to arrive at a consensus for analysis and implementation regarding a particular course of action.

Popular categories of investment for Funds with Shariah compliance include land and exchange-traded funds. Private equity is additionally considered a good type of Shariah compliant investment but carried interest is considered to be a major problem within Islam.

What are some examples of Funds with Shariah compliance?

In order to accommodate Shariah compliant investing, a lot of products and indices exist in the market. Saturna Capital provides several Shariah compliant investment avenues through its Amana series. The Amana Growth Fund (AMAGX) offers long-term capital growth through Funds with Shariah compliance that adhere to Islamic principles. The Fund was launched on February 3, 1994. The Amana Growth Fund is a mutual fund investing at least 80% of its assets in common stocks. As of November 2017, it had $1.7 billion in total assets under management. It has an expense ratio of 1.10%. It requires a minimum investment of $250. Technology investments account for a significant portion of the Fund’s assets at 48%. Other sectors include healthcare, industrials, consumer defensive and consumer cyclical.

S&P Dow Jones Indices has come up with numerous Shariah compliant indices for all kinds of Shariah abiding Muslim investors. The S&P 500 Shariah was launched in December 2006. The S&P 500 Shariah Index is made up of all of the Shariah compliant constituents in the S&P 500. As of October 2017, it had 235 constituents with information technology accounting for the largest portion of the Index at 38%.

Some other Shariah compliant indices that are provided and maintained by S&P Dow Jones include: S&P Global Healthcare Shariah, S&P Global Infrastructure Shariah, S&P Developed Large and Mid Cap Shariah, S&P Developed Small Cap Shariah and the S&P Developed BMI Shariah Index.

Funds with Shariah compliance: FAQs

What are Funds with Shariah compliance?

Funds with Shariah compliance are types of investment funds that abide by the Shariah law of Islam.

How are Funds with Shariah compliance different from conventional funds?

They are different from conventional investment because they need to fulfill many requirements, like the appointment of a Shariah board and prohibition from investing in companies that derive a majority of their income from the sale of alcohol, pork products, gambling etc.

How is the market for Funds with Shariah compliance?

While Funds with Shariah compliance have grown at a good rate, it is difficult to accurately estimate the industry’s size or valuation.

 

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