What is Shariah-compliant investing?
The growth in recent years of socially responsible, or ethical investing, has seen an increase in the number of investment opportunities that comply with Shariah principles in the broadest sense. There is a great deal of overlap between the two, with a strong focus on societal good, environmental stewardship and corporate governance.
Shariah-compliant investing follows Islamic canonical laws which determine the types of investment considered permissible (‘halal’) and forbidden (‘haram’) for Muslims. Shariah, which dates back to the late 1960s, is often viewed as a form of socially responsible investing as it is guided by ethical principles that forbid activities such as ‘profiting from immoral activities’. Shariah principles are extremely rigorous, and consequently only around 1% of the world’s financial assets are deemed fully Shariah-compliant. However the market is growing steadily, fuelled by interest from pension and sovereign wealth funds.
Charging interest is not permitted
A key belief in Shariah is that wealth should be evenly distributed, and used to bring about social justice and improvement for all. For this reason, investments on which interest is charged, or which contain an interest element, are strictly forbidden. The concept of charged interest or ‘riba’, loosely translatable as usury or lending money at excessively high interest rates, is deemed an exploitative practice as it can allow a lender to profit from someone else’s debt burden. Shariah is intended to ensure equity in exchange, promoting charity and helping others through kindness. In order to earn money without charging interest, Islamic banks instead receive a percentage of the profit generated by a business.
Minimal debt burden
The concept of riba also means that Shariah investments can only be made in businesses with minimal debt, since risk/high levels of debt are to be avoided. Borrowing on interest is haram, and borrowing must be limited to a tolerable level, generally interpreted as a debt-to-equity ratio of no more than 33%. Another restriction is that Shariah-compliant companies should have accounts receivable (i.e. money owed by the company’s debtors) and cash of no more than 50% of their total assets.
Which activities are haram (forbidden)?
Shariah-compliant investments must avoid activities such as:
- Conventional finance, i.e. non-Islamic banking and insurance
- Drug (including tobacco) and alcohol production
- Adult entertainment
- Weapons and defence
- Anything relating to pork meat production
How does Shariah-compliant investing work?
For Shariah-compliant investors, transparency is essential. Most Shariah-compliant funds will have a Board of between three and five Islamic experts and scholars, who screen each investment in much the same way as managers would with an ESG fund. Funds must be audited annually to ensure full compliance with Shariah principles. If any income is generated that breaches Shariah principles, such as interest, it must be purified by being given to charity.
FTSE Russell and MSCI offer specific indices for Shariah-compliant companies and there are funds based on these, which are generally run on a ‘passive’ basis (i.e. trackers) to replicate the performance of the main index.
In terms of equities, funds are often heavily weighted towards sectors that are less likely to contravene Shariah principles such as healthcare, IT, property and construction.
What is a Shariah-compliant mortgage?
Given the constraints of riba, Sharia-compliant mortgages function quite differently from regular mortgages, a key element of which is charged interest. With a Shariah mortgage, the bank buys the property on the homeowner’s behalf and becomes the legal owner. Monthly payments function as part rent, part capital i.e. a portion of the payment goes towards buying out the bank’s stake. At the end of the mortgage term the homeowner has either acquired the property from the bank in full or they will have a single lump sum left to pay before becoming the legal owner. Most UK banks and building societies now offer Shariah mortgages.
What are the main types of Shariah-compliant investment?
Property is generally deemed Shariah-compliant because it increases in value simply through market growth without exploiting another individual for personal gain. As a result, it is often a key element in Shariah-compliant investment funds. Other types of shariah-compliant investment include:
- Shares – similar to property, any gain earned from a share increasing in value is halal, as it was achieved through an increase in market growth and did not involve the exploitation of another individual for personal gain.
- Sukuk – this is a term for a type of bond where stakeholders gain partial ownership of the issuer’s assets until the maturity date, and receive a share of the profit generated by the underlying asset rather than a fixed-interest payment. Sukuk are akin to the conventional concept of securitization (whereby an asset is converted into marketable securities and sold to investors) in that a special purpose vehicle (SPV) is set up to acquire assets, then these underlying assets are transferred to a wide range of investors in the form of certificates representing their proportionate value.
- Venture capital and private equity, providing the underlying activity of the businesses is Shariah-compliant.
- Tafakul – a type of Islamic insurance covering health, life and general insurance. Tafakul pools members’ money and combines it in a fund that guarantees each other.
Investing with confidence
The growth in recent years of socially responsible, or ethical investing, has seen an increase in the number of investment opportunities that comply with Shariah principles in the broadest sense. There is a great deal of overlap between the two, with a strong focus on societal good, environmental stewardship and corporate governance. However, the constraints of riba can transform an ethically-compliant company into a haram Shariah investment. Investors seeking Shariah-compliant investments must therefore do their own due diligence if an investment is not specifically advertised as being Shariah-compliant.
At Acorn, our underlying principles focus on sustainability and creating homes that will benefit their local communities for generations to come. Our ethical and Shariah-compliant investment opportunities, in partnership with Amanah Advisors, are launching soon. Contact Investor Services on 0203 858 9881or email firstname.lastname@example.org to join the waiting list or find out more.
To invest you must be a high net worth individual or a self-certified sophisticated investor.
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Investment opportunities available via Acorn Property Invest are exclusively targeted at exempt investors who are experienced, knowledgeable and sophisticated enough to sufficiently understand the risks involved, and who are able to make their own decisions about suitability of those investment opportunities. All investors should seek an independent professional investment and tax advice before deciding to invest. Any historic performance of investment opportunities is NOT a guide or guarantee for future performance and any projections of future performance are not guaranteed. All investment opportunities available via Acorn Property Invest are NOT regulated by the Financial Conduct Authority (FCA) and you will NOT have access to Financial Services Compensation Scheme (FSCS) and may not have access to the Financial Ombudsman Service (FOS).