Gulf News January 9, 2010
10 January 2010
Gulf News: "Investing the Sharia-Compliant Way"
Q. Many advisors ask clients to invest in emerging markets (India, China, Brazil, Russia, Poland, Vietnam etc.), US treasury (bonds) etc. But being an Emirati can I invest directly into those markets and bonds, and how to go about investing in these places and asset classes?
As an Emirati you are able to invest in any way you choose all over the world, including in the emerging markets of India, China, Brazil, Russia etc. However, being an Emirati means you are also a Muslim, and so your choice of investments will be limited to those that are Sharia’a-compliant.
In line with the above, the most important element of making appropriate investment choices is to have an understanding of some of the main principles involved in Shari’a compliance. One of the key principles involved is that the notion of earning ‘interest’ is considered as being ‘haram’ i.e. forbidden.
Consequently, you must immediately ignore US Treasury Bonds, and their world-wide equivalents, as they invariably pay out interest. The equivalent Sharia’a-compliant instruments to bonds are Sukuk, which are structured to pay out profit only, which makes them perfectly acceptable to Muslims.
As a Muslim it is important to know what other investment activities are prohibited. These include; traditional insurance and re-insurance, alcohol and prohibited drug related dealings, gambling, and the processing and selling of pork products. This is not an exhaustive list but indicates some of the main areas to be avoided when considering where to invest in a Sharia’a-compliant way.
To originate a Sharia’a-compliant equity investment opportunity in the emerging markets (or any stock market in the world) will require the administration of a qualitative process to screen or ‘purify’ investment areas, so that Sharia’a rules will not be contravened.
This analysis involves the elimination of any company involved in the above-mentioned list, and any and other forbidden activities. The screening process can be quite complex, and very few companies operating in the global markets are Sharia’a-compliant in their cash management and debt profile. In other words, most companies will both receive and pay out interest to one extent or another.
The majority of Muslim scholars currently concur that it is difficult to remove all tainted stocks, and so the screening process incorporates financial ratios which limit the amount of interest involved in any particular company. Any company exceeding these ratios will be automatically eliminated.
As you can see meeting the requirements of Islamic investments is a complex business, which means acting as an individual investor making direct investments in stocks in emerging markets represents a difficult task, unless you have the necessary expertise.
For the majority of people, a more suitable approach is to invest in funds that leave the choice of individual investments to expert fund managers. Luckily for you Islamic finance is growing in popularity and so there are an increased number of investment companies to choose from these days, each of which offer a wide range of investment objectives to which you can match your attitude to risk. Investment in these funds should usually be made for 10- years plus, and should meet your future financial goals.
It is true to say that many analysts believe that investing in developing markets can provide good opportunities. However, there are no certainties in life, and that is why you should consider your attitude to risk and the length of time you wish to invest, before making any decisions. You may also find it helpful to seek out an independent financial adviser to provide some guidance.