An introduction to Islamic investments. Shariah-compliance, halal investing and profits can go hand-in-hand.

Islamic finance is an egalitarian method of finance that can be found in Malaysia and one that you might want to take note of if you are interested in becoming an investor (or are one already). It derives its values from Islamic law, the Shariah.

Interest prohibition, whether nominal or excessive, simple or compound, fixed or floating, is the most distinctive feature of Islamic finance. Shariah Compliant financial transactions are centred on the critical principle of the sharing of risk and reward. With negotiated terms, the consumer and the financier share the burden of any transaction and split the profits between them. To gain the benefit, Islamic finance does not allow new financial risks to be created; it is about protecting the public from deceit, fraud and social tensions.

Investment in Shariah will mean investing in funds compliant with Shariah aka compliance with Islamic law. While the companies operating the fund do not necessarily have to comply with Shariah, the funds that Muslim investors want to invest need to be in line with the principles of Shariah. It is possible to control Shariah funds like mutual funds, ETFs, or hedge funds.

 

Shariah Compliant Securities

Shariah-compliant securities are securities of a Bursa Malaysia-listed company (ordinary shares, warrants and transferable subscription rights) which have been categorized as Shariah-compliant securities for investments based on the company’s compliance with Shariah principles concerning its primary business and investment activities.

The Shariah-compliant securities list was adopted by the Securities Commission’s (SC) Shariah Advisory Council (SAC) in June 1997. The list is updated twice a year in May and November, by reviewing the annual financial reports of the firms, responses to a survey to obtain accurate information about the company and relevant inquiries made to the management of the respective company.

The SAC established several specific Shariah requirements as guidelines in the process of deciding the Shariah status of listed securities. The requirements, as well as the general principles of Syara’, were based on the Quran and Sunnah. The SAC concentrated in this phase on the key operations of the businesses, such as the products and services provided to their customers. By applying the principle of Maslahah (public interest) and Umum Balwa (common plight), the SAC were more attentive to businesses that were engaged in both Shariah-compliant and non-compliant practices. Specific benchmarks and additional parameters, such as interest income and image, have been created for this purpose to allow the SAC to assess the Shariah compliance of such companies. In such situations, the SAC would classify whether the shares of these firms as Shariah-compliant if the financial contributions from the non-permissible activities fall below the benchmark level.

 

Shariah-compliant Exchange Traded Funds (i-ETFs)

Exchange Traded Funds (ETF) are a creative financial product with characteristics of the best open-ended fund and stock listing. The ETF is described in the Exchange-Traded Funds Guidelines of the Securities Commission of Malaysia as a listed index tracking fund formed as a unit trust scheme or any other authorized structure whose primary objective is to achieve returns corresponding to the performance of a given index. To put it plainly, the ETF is listed and exchanged on a stock exchange as a unit trust.

In general, it is passively managed because the purpose of the ETF is to reproduce the success of a given market index, either by investing all (full replication) or substantially all (strategic sampling) in the constituent securities.

Unlike traditional ETFs that have the right to track any benchmark index regardless of the component stocks’ Shariah status, i-ETF only monitors a benchmark index where the components of the index are Shariah-compliant companies. Additionally, i-ETF management shall strictly follow the Shariah principles and the guidelines for Islamic investment. The i-ETF activity is also supervised by a Shariah board, committee or attorney who from time to time, will perform Shariah-compliant audits and reviews.

 

Shariah-Compliant Unit Trust Funds

A Shariah-compliant unit trust fund is a collective investment scheme, similar to a conventional unit trust fund, that pools money from investors with similar goals into a special fund managed by professional fund managers. In compliance with the investment purpose of the unit trust fund and as allowed under the SC Guidelines and regulations, the pooled money would then be invested in a diversified portfolio of Shariah-compliant securities and other assets, provided that all investments must comply with the requirements of Shariah.

In the following fields, the key discrepancies exist between a traditional unit trust fund and a Shariah-compliant unit trust fund: fund purpose, structure, investment policy, operations and management, documentation, investment avenues and activities, and accounts and reporting.

 

Islamic Real Estate Investment Trusts (i-REITs)

There are REITs, as with other types of investment, that conform in their business activities to Syariah or Islamic principles. Out of the 18 REITs in Malaysia, four are Islamic or Syariah-compliant REITs (i-REITs), according to Bursa Malaysia. There are:

  1. Al-’Aqar Healthcare Reit (ALAQAR) – hospitals and hotels.
  2. Al-Salam REIT (ALSREIT) – offices and factories.
  3. AXIS REIT (AXREIT) – warehouses, offices and factories.
  4. KLCC Property Holding (KLCC) – offices and shops.

The source of income is the gap between i-REITs and traditional REITs. I-REITs derive their revenue from Syariah-compliant business practices that exclude business activities considered immoral, such as alcohol, tobacco, gambling and non-halal food products. As for i-REITs that do business in a mixture of activities complying with Syariah and non-Syariah, the returns from activities complying with non-Syariah must not exceed 20% of their total profits.

 

Sukuk: Islamic Bonds

Finally, Sukuk, which are Islamic financial certificates reflecting ownership in a halal portfolio of qualifying current or potential properties, is one new form of financial interest. These have emerged due to the ban on traditional interest, which prohibits the issuance of conventional bonds.

Like traditional bonds, Sukuk is seen as having lower risk profiles than equity, while investors receive both partial ownership of the asset and benefit payments accumulated over time, rather than a stream of interest payments, unlike conventional bonds.

 

The true worth of financial freedom is a life focused not on money but on true freedom in time, wealth, and meaningful relationships.

What Shairah-compliant investments are you investing or planning to invest in?

 

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