Syariah Compliant Funds
From Financial Literacy Wiki
Syariah Compliant Funds are funds that invest in accordance with the religious beliefs and cultural mores of Muslim Society.
Contents |
Investment Principles
Basically such funds invest with the following principle:
Riba
Payment and receipt of interest is usury and therefore investment in entities that involve borrowing or lending would be prohibited. Debt is also disliked thus highly geared companies are also not invested in.
Haram
Investment in entities that engaged in illicit, immoral or dubious trade such as pornography, alcohol or pork are forbidden.
Maisir
Syariah imposes a prohibition on gambling and in some funds this might be extended to futures and options.
Due to these principles, the areas permitted for investment would generally be in real estate and infrastructure.
Suitable for
Syariah compliant funds are generally suitable for Muslim investors but non-Muslim investors who believe strongly in socially responsible investing can invest in them.
Advantages and Disadvantages
Generally because of the guidelines, it has been shown to reduces risk because of the conservative nature of investing. Because of the restrictive nature of investing, it was not affected by the scandals on WorldCom and Enron because of their highly leveraged balance sheet (i.e. having a lot of debts).
The disadvantage of investing is because of the restrictive nature, there is less diversification. As this is a new type of investment in most countries, regulatory framework are still evolving and at infancy stage for such products.
Popularity
Growth in such products have been popular since 2003. Reason being Asia experiencing strong economic growth, as such Muslim population have accumulated much wealth. The increase in oil prices improve the wealth of Middle East creating higher demand for Islamic finance product.
