Shariah Funds

Financial institutions have established Shariah funds in financial centres,where there are strong concentrations of affluent Muslim populations such as London, Malaysia and Indonesia. Due to the rapid growth in Islamic finance over recent years, the available range of Shariah-compliant funds has expanded as financial services providers seek to tap into the increasing demand for investment products that respect the principles of Islam. Shariah-compliant investment funds provide a means of investing while still honouring the high morals and principles of Islam. Shariah-compliant funds promote large-scale investment along lines similar to the niche ethical funds available to Western consumers. The funds can be more expensive to develop and administer than mainstream funds due to the need for greater verification of compliance with Shariah principles.

Shariah-compliant funds are investment vehicles which are fully compliant with the principles of Islam. The funds are prohibited from making investments in industries categorized as morally deficient, such as those related to gambling or alcohol. They have avoided some of the excesses of financial crises because Islam does not permit any form of exploitation, therefore, ensuring that any kind of investment in conventional banking is outlawed. The concept of debt is also contrary to the principles of Islam. Investment in highly leveraged companies is also not permitted for Shariah-compliant funds. The exclusions extend to potential investments in other funds which offer guaranteed returns.

Any use of futures and options, either by the fund managers or by companies in which the funds invest, is also likely to attract close scrutiny by the funds’ supervisory Shariah boards.

The investment criteria for Shariah based funds has not only enabled them to avoid the excesses of the global financial crisis but has drawn the attention of more conventional investors if only because they present a set of investment mandates or criteria that meet some of the investment challenges of the current environment.