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Shariah-Compliant Funds

Shariah-Compliant Funds
InvestingSustainable Investing

What are Shariah-Compliant Funds?

Shariah-compliant funds are investment funds administered by the requirements of Shariah law and the principles of the Islamic religion. Shariah-compliant funds are viewed as a type of socially responsible investing.

Figuring out Shariah-Compliant Funds

Shariah-compliant funds are one of numerous categories found in socially responsible investing. Like other socially responsible funds inside the environmental, social and governance (ESG) universe, the funds screen potential portfolio investments for specific requirements wanted by devotees of the Islamic religion.

Shariah-compliant funds have expanded in prevalence as of late, even however the concept was first developed in the late 1960s. As per a 2011 report by counseling firm PricewaterhouseCoopers (PwC), Shariah-compliant funds developed at an annualized rate of 26% in the initial decade of this century. The report further states that "an inflection point" in their growth happened somewhere in the range of 2002 and 2003, when petrodollar liquidity duplicated and capital markets in the Gulf Cooperation Council (GCC) countries matured to empower investment.

As per a report by the Malaysia Islamic International Financial Center, total global Islamic assets under management (AUM) were $70.8 billion toward the finish of the principal quarter of 2017.The relating figure in 2008 was $47 billion. Nonetheless, it is challenging to accurately estimate the business' size or valuation since a large part of the investment happens through private placement. The funds are likewise not traded in secondary markets, in this manner giving to a lesser extent a window into their constituents.

The concept requires impressive work to execute, since much consideration must be paid to compliance with a far reaching set of rules and requirements directed by the Shariah principles.

Shariah-compliant funds have numerous requirements that must be stuck to. A portion of the requirements for a Shariah-compliant fund incorporate the exclusion of investments which determine a majority of their income from the sale of liquor, pork products, erotic entertainment, gambling, military equipment or weapons. Different qualities of a Shariah-compliant fund incorporate a selected Shariah board, an annual Shariah review and filtering certain denied types of income, like interest, by giving them to a charity.

These rules can add complexity and costs to the management of a Shariah-compliant fund. For instance, Shariah boards are comprised of Islamic researchers whose fees can run into a great many dollars each year, adding to the overall cost of dealing with the fund. The researchers have changing understandings of Islamic law, making it troublesome and tedious for them to show up at a consensus for analysis and implementation in regards to a specific course of action.

Famous categories of investment for Shariah-compliant funds incorporate real estate and exchange-traded funds. Private equity is likewise viewed as a wise investment however carried interest is viewed as a problem inside Shariah law.

Instances of Shariah-Compliant Investments

A number of products and indexes exist to oblige Shariah-compliant investing. Saturna Capital gives several Shariah-compliant investment funds through its Amana series. Its Amana Growth Fund (AMAGX) looks for long-term capital growth through investments sticking to Islamic principles. The Fund was sent off on February 3, 1994. The Amana Growth Fund is a mutual fund investing no less than 80% of its assets in common stocks. As of November 2017 it had $1.7 billion in total assets under management. It has an expense ratio of 1.10%. It requires a base investment of $250. Technology investments account for a huge portion of the Fund's assets at 48%. Different sectors incorporate healthcare, industrials, consumer defensive and consumer cyclical.

S&P Dow Jones Indices has made numerous Shariah-compliant indexes for Muslim investors. The S&P 500 Shariah was sent off in December 2006. The S&P 500 Shariah Index is contained all of the Shariah-compliant constituents in the S&P 500. As of October 2017, it had 235 constituents with data technology accounting for the largest portion of the Index at 38%.

Other Shariah-compliant indexes kept up with by S&P Dow Jones include: S&P Global Healthcare Shariah, S&P Global Infrastructure Shariah, S&P Developed Large and Mid Cap Shariah, S&P Developed Small Cap Shariah and the S&P Developed BMI Shariah Index.

Features

  • They are not quite the same as conventional investment funds since they have numerous requirements, for example, arrangement of a Shariah board and preclusion from investing in companies that determine a majority of their income from sale of liquor, pork products, gambling and so on.
  • Shariah-compliant funds are investment funds that follow Islamic law.
  • While Shariah-compliant funds have developed at a decent clasp, it is challenging to estimate the business' size or valuation accurately.