Shariah-compliant Investments

What is a Shariah-compliant investment?

Investments which are in accordance with the Islamic Principles are called Shariah-compliant. There are three principal rules which need to be adhered to when analyzing an investment from the standpoint of Shariah permissibility.

The first is the absence of interest (riba) in the investment. Islam has strictly prohibited interest (riba). This is based on the principle that it is unacceptable in and of itself for same commodity, including money, to increase in value merely by being lent to another person. The prohibition is bilateral, which means that the lender cannot receive it and the borrower cannot pay it.

However, Shariah does not prohibit the making of a return on capital if the provider is willing to share in the risks of a productive enterprise. The conclusion then is that whenever capital is “lent” rather than “invested”, interest (Riba) is the return rather than profit.

The second is the potential for ‘unethical concerns’ in the investment mix. Muslim scholars have put together the following benchmarks clarifying what is not acceptable as an investment under Shariah.

  • Alcohol – Brewers or distillers of alcohol or any firm exclusively involved in the production or sale of alcohol.
  • Banks – and other banking Institutions involved in interest. (Insurance companies are usually included in the this section too)
  • Gambling – Casino and gambling outlets
  • Pornography Manufacturers, retailers and distributors of pornographic material as well as firms involved in pornographic activity.
  • Tobacco – Manufacturers of tobacco and tobacco related products.
  • Ancillary Activity – Any business though not directly engaged in the above, derives greater than 5% of its income from the above.
  • Or any other forms whose activities the Shariah Board feels are prejudicial to the interests of Islam or Muslims.

The final area relates to the nature of the contract between the parties involved. Islamic finance also places great emphasis on the validity and transparency of contracts. In addition to insisting on investment contracts being put in writing, there are clear guidelines on ensuring that all terms and conditions of the investment contract are detailed in a manner in which no disputes can arise in the future. Any contract failing to pin down its key components (e.g. price, subject matter, delivery date etc) in a manner in which the uncertainty may cause a dispute between the contracting parties is guilty of containing “gharar” (Unacceptable Uncertainty) and is null and void in the eyes of Shariah.

What is an ‘Islamic Investment Fund’?

The term “Islamic Investment Fund” means a joint pool wherein the investors contribute their money for the purpose of investment to earn halal profits in strict conformity with the precepts of Islamic Shariah.

The concept of Islamic Mutual Funds has its roots in “Musharaka”, an Islamic investment vehicle. ‘Musharakah’ is a word of Arabic origin which literally means sharing. In the context of business it means a joint enterprise in which all the investors or “partners” share the profit or loss of the joint venture.

  • In an Islamic Fund the investors have the relationship of partners amongst themselves, so they are eligible to share proportionately the profit earned (or loss incurred) on their investment.
  • The Fund Manager of an Islamic Fund works as the investment agent and manages the investment activities on behalf of the investors’ collective investment, against a fixed fee (known as the Management Fee).
  • An Islamic Fund can not offer a fixed return on investment; they must carry a pro-rated profit actually earned by the Fund. Therefore, neither the principal nor a rate of profit (tied up with the principal) can be guaranteed (unless a capital protected fund).

As opposed to conventional funds, Islamic Funds are in total compliance with the Shariah rules and regulations to earn “halal” profits in strict conformity with the precepts of Islamic Shariah. The instruments selected for investment by the Fund Manager are approved and monitored by the Shariah Advisory Board of the Fund as Shariah-compliant.

Keeping these basic requisites in view, the Islamic Investment Funds may accommodate a variety of modes of investments, such as equities, income, or balanced.

What does the portfolio of a Shariah-compliant ‘Income Fund’ consist of?

Islamic Income Funds aim to provide a regular source of income to investors while endeavoring to preserve the principal investment. To achieve this goal, funds are generally invested in low-risk assets such as Islamic Banks’ Term-deposit accounts, Sukuks (Islamic Bonds) and Ijarah (Islamic Leasing).

  • Sukuks, also known as Islamic Bonds, is the name of Shariah-compliant Investment Certificate issued by the Government or a private institution. Such certificates normally represent investors’ ownership in a fixed asset leased to the issuer. The issuer pays periodic rentals which generate profit for the investors.
  • Ijarah is the name of Islamic Leasing products issued by the Government or a private institution. In Ijarah, the subscription amounts are used to purchase assets like real estate, motor vehicles, or other equipment for the purpose of leasing them out to their ultimate users. The ownership of these assets remains with the Fund and the rentals are charged from the users. These rentals are the source of income for the fund which is distributed to the subscribers.

What are the portfolio constituents of a Shariah-compliant Equity Fund?

In an equity fund, the investors’ money is invested in the shares of joint stock companies. The profits are mainly achieved through capital gains (purchasing shares and selling them when their prices are increased. Profits are also achieved by the dividends distributed by the relevant companies.
Dealing in equity shares can be acceptable in Shariah subject to the following conditions:

  • The main business of the company is not in violation of Shariah. Therefore, it is not permissible to acquire the shares of companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah (as mentioned earlier).
  • If the main business of the companies is Halal, like automobiles, textile, etc. but they deposit there surplus amounts in an interest-bearing account or borrow money on interest, the proportion of such income in the dividend paid to the share-holder must be given as charity, and must not be retained. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity.
  • The shares of a company are negotiable only if the company owns some non-liquid assets. If all the assets of a company are in liquid form, i.e. in the form of money that cannot be purchased or sold, except on par value, because in this case the share represents money only and the money cannot be traded in except at par.

What is Al-Ameen Funds?

Al-Ameen Funds is the Islamic investments division of UBL Fund Managers that is dedicated to offering innovative asset management and investment advisory services in accordance with the principles of Islamic Shariah.

At Al-Ameen Funds you can benefit from an investment experience that is highly personalized, global and competitive; the result of our deep experience in the asset management sector and our strong commitment to values and ethics.

Who are the members on the Shariah Advisory Board of Al-Ameen Funds and what is their role?

All investments made in our Islamic Funds are approved and monitored by the Shariah Advisory Board (SAB) that comprises of renowned Islamic Scholars.

A renowned Islamic Scholar having considerable experience in advising financial institutions on Shariah related affairs, he is renowned as an expert on Takaful and is a Shariah Board Member of Pak Kuwait, Pak Qatar Family Takaful Company Limited, Shariah Consultant for Deloitte (Global Islamic Finance Team) and has served as the Shariah Advisor for Pakistan operations of AlBaraka Islamic Bank. He is also a Member of Shariah Advisory Panel of IIBI London. He has been teaching Islamic Studies and Arabic at Dar-ul-Uloom Karachi and Centre of Islamic Economics, Karachi. He has strong an academic background in Islamic studies and Islamic Economics having completed Takhassus Fil Ifta and Alimiyyah from Dar-ul-Uloom Karachi, a renowned Islamic Institute of Pakistan. He also serves as a permanent faculty member of Centre of Islamic Economics, Karachi.

A recognized Islamic scholar and researcher having strong comprehension of all aspects of Islamic Law and a specialization in Islamic Jurisprudence and Islamic Finance, he is currently engaged as Shariah Advisor of Habib Metropolitan Bank, Islamic Banking operations and is principal of Hira Foundation School. He has also been on engaged by the SBP, GoP and ICAP as Shariah Consultant and is an important member of various committees. He has vast experience of teaching Islamic Law, Islamic Jurisprudence, Islamic Studies and Arabic at various institutes in Pakistan and abroad. He successfully completed his Takhassus from Dar-ul-Uloom Karachi and specialization in Islamic Jurisprudence (majoring in Finance) under the supervision of Mufti Taqi Usmani.

The role of the Shariah Advisory Board is to ensure compliance with Islamic Shariah principles, and this includes:

Portfolio Purification
Impure earnings from investments are to be purified through a donation to charity, called Zakat (purification). The Shariah Board separates the impure earnings from the capital gains and/or dividends and redistributes the rest to investors.

Adequate Selection of Investment Instruments
Based on the Islamic Principles, the Shariah Board determines and regularly monitors the criteria for the selection of companies or instruments in which the fund may invest.

Monitoring Management
The Shariah Board helps coordinate investment strategies and ensure compliance of the fund’s activities in accordance with the Islamic guidelines.

Information Reporting
The Board also prepares annual Shariah Audit and Review Reports concerning the Fund’s activities. This is generally included in the Fund’s Financial Statements.

Watch our Shariah Board Members answer your most common questions related to Islamic Investments

Watch the exclusive series of videos featuring our esteemed Shariab Advisory Board Members answering to some of the most common questions related to Islamic Finance & Islamic Investments.

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