What is Islamic, or Shariah Compliant Investing?

Islamic, or Shariah Compliant Investing, is a type of investment that must follow Islamic Law. It is known as socially responsible investing due to the specific requirement to access the fund that complies with Islamic principles. As charging interest is prohibited, Islamic banks agree to a certain amount of profit or loss from the business.

Like most social investments, a shariah compliant social investment fund will care about both financial return and social impact created for beneficiaries. They will also need to adhere to Sharia Law (Islamic law), which means this type of fund needs to be managed within the core principles of Islamic Faith.

What are the key principles and benefits of Sharia Compliant Investing? We'll also give some examples here.

Key Principles of Shariah Compliant Investing

i)   Prohibition of Riba (interest or cost of capital): riba is the Islamic term for interest which is prohibited in Islam. This is a fundamental principle of the investment practice and in basic terms means that Muslims are encouraged to avoid any kind of investment deals that involve paying or receiving interest as part of the financial terms.

ii)   Avoidance of Haram: Haram is an Arabic term in Islam that describes anything that is ‘forbidden, inviolable or sacred’ according to Shariah Law. In relation to social investment, this specifically refers to interest-bearing financial agreements, but could also cover any loans/investments into sectors that cover forbidden activities, including gambling, alcohol, weaponry and some meat-based trading.

iii)  Socially Responsible Investments: Islamic Investment lends itself to social investment because of the emphasis placed on the social impact delivered to beneficiaries by the investment, alongside any kind of financial return. Any kind of repayable finance will need to be able to plan, measure and communicate the impact they deliver to attract individuals looking to invest in accordance to these principles.

iv)  Transparency and Fairness: For repayable finance to be Halal (permissible) for investors and beneficiaries, transparency and fairness must be evident throughout every stage of the investment process. We would expect this already from social investors, but in some cases, organisations may need to make fundamental changes to their operation so as to remain compliant, particularly around sharing cost of capital rates.

As with many things, there’s no one-size-fits-all when it comes to Shariah Compliant Investing, and some of the above will be open to interpretation. It is important to remember that people will have different approaches and relationship regards to their faith, so investors should not assume and rather have conversations on a case-to-case basis.

Benefits

By its very nature, social investment adopts Mudarabah, which means that profits, losses and risk is split across stakeholders. Risk sharing also promotes the Islamic value of ‘togetherness’ as both parties carry risk, this protects them both from one of the parties gaining at the cost of someone else.

Shariah compliant investing is designed for the prevention of social harm and the protection of the individual, for example lending money at high rates of interest is impermissible due to the risks of debt, inflation and monopolising investment in the benefit of high-end investors.

Challenges

Whilst Shariah investing grows in popularity, it is still not considered a mainstream form of investment, and it’s lacking in public exposure and specific regulation in some areas. Shariah investing still presents challenges, and some of the requirements could translate to fewer investment choices. Despite these limitations, Shariah compliant investment is constantly growing with more organisations considering it by the day. the rapid growth it has experienced is undeniable within the UK, especially London, which is recognised as the hub for Islamic Finance in the West.

Caravel Partners offers three Islamic Investment Strategies - Defensive, Balanced and Growth. All fund assets and fixed return wakahlahs are Shaira Compliant and certified as such.