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Shariah investing

Is investing in compliance with the set goals and values under Shariah.

When translated from Arabic, the meaning of Shariah in literal terms is ‘the clear, well-trodden path to water’. It’s the code by which people of the Muslim faith live their lives, covering a wide range of topics like prayers, food, and financial affairs.

The Islamic tradition governs that you must be ethically and socially responsible while investing your money. It means that your investments not only benefit you but also contribute to the overall development of society.

Interestingly, Islam has had a long affinity with the financial world. In the 2nd century, the famous Silk Road ran through the Arabian Peninsula and Northern Africa - where locals developed an economy based on trading.

This ‘merchant capitalism’ combined an Islamic socialist ruling that branded interest as forbidden because it was seen to create social injustice, as individuals could create wealth without much effort.

For modern-day Muslims this presents challenges. Cash accounts, credit cards, loans and even investing in the stock market may well involve the payment of interest. Some funds and companies will also invest in sectors that are not permissible in Islam like gambling or alcohol.

Under Shariah investing, you must comply with a set of principles.

Anything discouraged or banned by Shariah law is regarded as haram, while suitable activities are halal. Haram activities notably include:

● Conventional finance (non-Islamic banking, finance and insurance, etc.)

● Alcohol

● Pork-related products and non-halal food production, packaging and processing or connected activity

● Gambling

● Adult entertainment

● Tobacco

● Weapons and defence

Three Major Principles of Shariah Investing

Image by Austin Distel

Prohibition of Interest

You are not allowed to either pay or receive interest as it is considered unjust. For example, a bank following Shariah cannot give interest-based home loan to you. Instead, the bank will purchase the house and rent it to you, and you are required to pay rent to the bank.
Image by Microsoft 365

Prohibition to Invest in Certain Businesses

Shariah prohibits you from investing in businesses that earn their income through the sale of alcohol, abusive drugs, pork products, gambling, weapons, and other such products. You are also forbidden to invest in companies that earn most of their income, like interest from others.
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Balanced Distribution of Wealth

As per Shariah, you must pay a certain percentage of your wealth as an act of charity. If we compare it with Tax, it is somewhat similar in the sense that you must share your wealth with others who are less fortunate. It is considered to cleanse and purify the remainder of your wealth.

In addition to the above three points, Shariah also governs both risks and returns associated with any financial transaction that must be shared between both parties. No one party must be the only beneficiary.

Shariah-compliant investments filter out companies that do not follow these principles. Additionally, there are requirements surrounding the use of debt and interest-bearing assets. Islamic law prohibits the collection and payment of interest, meaning banks participate in a share of the profits or losses from business activities.

There are also accounting restrictions in Shariah investing. Companies must maintain a debt-to-equity ratio of less than 33%, focusing on more stable businesses. Halal-compliant companies generally must have accounts receivable and cash of less than 50% of total assets.

While halal investment options are currently limited, the movement towards broader responsible investing is growing. There are parallels between Shariah-compliant investing and principles of sustainability, which encompass strong corporate governance, environmental stewardship, and societal good.

How to Invest Following Shariah Principles?

For clients seeking adherence to Islamic Law, Mithril Asset Management offers customized Shariah-compliant portfolios across various asset classes, including global and regional equities and Sukuk.


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