A Look at Shariah Compliant Financial Investment

A Look at Shariah Compliant Financial Investment
Nakla Team
Fintech Group
Calendar
Jan 10, 2023
Timer
4
Mins Read
Last Updated
Jan 10, 2023
Shariah Compliant Featured Image

It is critical for every Muslim investor to ensure that their earnings are Shariah-compliant. Islamic scholars have relatively few halal financial alternatives, mainly when talking about internet investments.

These revenues extend beyond pay and business profits. Also, Shariah compliance covers income from other assets.

This blog will explain everything you require to know about Shariah-compliant funds. Let's get started without further ado.

What does Sharia Compliant mean?

Sharia-compliant refers to any goods or construction verified as Sharia-compliant. This indicates that a Sharia researcher has assessed it and that the goods satisfy Sharia criteria from start to finish. They are a sort of socially responsible investment vehicle. 

Although the notion of Shariah-compliant funds was conceived in the late 1960s, it has only lately gained prominence. According to a 2011 analysis by PricewaterhouseCoopers (PwC), Shariah-compliant funds expanded at a 26 percent annual rate. This happened in the first 10 years of this century.

According to the research, "an inflection moment" in their expansion happened around 2002 and 2003 when oil market liquidity surged.

The notion necessitates a significant amount of work to execute. This is because strict adherence to a complete set of regulations and standards dictated by Shariah principles is required.

You are required to meet several standards set by Shariah-compliant mutual funds. Some of them include eliminating total assets that receive the majority of their revenue from the sale of liquor, obscenity, or firearms.

Other features of a Shariah-compliant fund include an elected Shariah committee and a yearly Shariah inspection. Apart from this, the donation of some banned sources of revenue, such as interest to charity also plays a vital role.

Why is Shariah compliance important?

Shariah governance is critical to the durability of the Islamic financial system. The establishment of a Shariah ethical investing structure boosts public trust in the authenticity, management, and commercial ventures of Islamic financial companies.

Compliance is crucial in ensuring the healthy and steady growth of the Islamic financial industry. The methodology, in particular, has resulted in the standardization of governance structures, rules, and procedures. These are aimed at promoting end-to-end Shariah compliance in Islamic financial activities.

Reputational risk is among the most significant hazards facing an Islamic financial enterprise. Consumers deposit their faith in the organization, anticipating Shariah-compliant profits to be produced. 

Any non-compliance found by the entity results in a lack of earnings. This is because the revenue created by a deal that violates the essence of Shariah is made available as charity. A little error in contract execution might render the transaction entirely illegal.

What are the criteria for Shariah-compliant?

Shariah funds screening standards give rules for evaluating organizations that engage in non-Shariah–compliant commercial activity. Businesses whose finances do not match the minimally acceptable standards are also excluded.

The criteria were created with the ultimate goal of rejecting firms that do not adhere to Shariah standards. We shall first go through the screening criteria proposed by Shariah investment experts in 1987 in great detail. Following that, we will go through the Shariah funds screening requirements.

Any review of Shariah’s screening criteria would be meaningless without the addition of the screening criteria. The Accounting and Auditing Organization for Islamic Financial Institutions highlights such criteria.

Business Operation Screens:

The following commercial operations are prohibited under Shariah mutual fund investing. As a result, the firms engaged in these actions are forbidden from Shariah-compliant investments:

  • Alcoholic beverages, cigarettes, and pork-related items;
  • Resorts, casinos, cinema halls, music, adultery, and other forms of entertainment
  • Traditional financial services (like banking and insurance); and
  • Human/animal genetic engineering biotechnology businesses

A corporation must pass the test if it generates at least 95 percent of its gross sales. This sale must be generated from products apart from those listed above. Some Shariah auditors have also barred United States firms in the publishing and media sectors, including newspapers. Other sub-sectors of "advertising and media" are evaluated on an autonomous basis to determine their suitability.

Corporations are barred from participating in the aforementioned industries because Muslims are required to do nice things and fight for justice. Many of the industries mentioned above' products are expressly forbidden in Islamic teachings.

Financial Ratio Screens:

Islamic principles forbid involvement in or gain from any deal, including interest of any kind. As a result, firms that grant or receive interest are ineligible for Shariah-compliant operations.

Financial ratio screens aim to eliminate enterprises that do not meet a certain level of influence, receivables, and interest margin. Financial ratio requirements have developed throughout time.

In terms of filthy investment returns, a corporation would be suitable for Shariah-compliant investments if it encounters such situations:

  • Overall non-Shariah compliant credit must be less than 33 percent of the stock;
  • Account receivables must be below 49% of overall assets; and
  • Interest income from funds and interest-bearing instruments must not exceed 5 percent of the overall income.

Is ETF Shariah compliant?

ETFs are verified as Sharia-compliant by an Islamic financial consultant and auditing company. These funds are created in accordance with Sharia standards and have been approved by an Islamic financial body. However, these ETFs may be less sensitive to interest rates since it eliminates firms with significant exposure to interest-bearing assets.

Examples of Shariah-compliant

Many goods and indices are available in the capital market to support Shariah-compliant halal Islamic investment.

Through its Amana line, Saturna Capital offers many Shariah-compliant investment choices.

The Amana Growth Fund (AMAGX) provides long-term capital appreciation via Shariah-compliant funds that follow Islamic principles.

On February 3, 1994, the Fund was established. Amana Growth Fund is a fund that invests at a minimum of 80% of its assets in common equities.

It managed $1.7 billion worth of assets as of November 2017. It has a 1.10 percent expenditure ratio. A preliminary investment of $250 is required.

Technology investments make for over half of the Fund's assets (48 percent).

Several sectors are pharmaceuticals, industrial companies, customer defensive, and consumer cyclical.

S&P Dow Jones Indexes has created several Shariah-compliant indices for various types of Muslim investors.

In December 2006, the S&P 500 Shariah Index was introduced. It includes all Shariah-compliant S&P 500 companies.

It had 235 components as of October 2017, with information technology contributing to 38 percent of the Indices.

S&P Dow Jones also provides and maintains Shariah-compliant indexes. This includes S&P Global Healthcare Shariah, S&P Developed Large and Mid Cap Shariah, and the S&P Developed BMI Shariah Index.

Conclusion

With its distinctive operating procedures in mind, the Islamic banking sector should begin halal investing in companies. This can be done with both technology and Shariah's understanding so that clients do not lose out on these improvements. The Islamic banking industry competes with international fintech. It must examine budgetary allocations for investments in new-age technology.

Nakla Team
Nakla Team

Nakla team aims to provide their customers with all the latest happenings in the financial market and keep them updated with trending terminologies. We have the resources that help you upgrade your investment game and make your investment journey seamless.