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Sharia investments
Sharia (other variations Shariah, Shariah, Sharah)[1] is
the Muslim or Islamic law which regulates many aspects
of a Muslims life including the type of investments al-
lowed. For instance, interests are considered usury ac-
cording to theRibarule therefore bonds are prohibited to
investors following the Sharia law. A Shariah compliant
fund is an investment vehicle fund structured in accor-
dance to Shariah rules. Shariah funds can be managed
as mutual funds, ETFs[2] orhedge funds. They are in
essence common funds with an extra layer of ethical rules
integrated in the investment polices of the fund[1]
not dis-similar toSRIs. While the funds are required to be
fully
compliant with Shariah rule, the companies structuring,
managing and promoting the funds do not have to be nec-
essarily Shariah compliant.
1 Type of funds
1.1 Commodities
Commodities funds generate profits by buying and re-
selling Halal commodities.[1] Because of the restrictions
on the use of derivatives, commodities fund make use of
two types of Shariah approved contracts:
Istisna- Its a contract where the buyer of an item funds
upfront the production of the item. A detailed specifica-
tion of the item has to be agreed before production starts
and the cost of production can be paid partially according
to manufacturing stages.
Bay al-salam- Its similar to a forward contract where the
buyer pays in advance for the delivery of raw materials
orfungible goods at a given date. The spot price of the item
includes the profit of the person who has taken the task of
purchasing good and, of course, the cost of the product.
1.2 Equity funds
Funds that invest in common shares in companies en-
gaged in halal business. Companies are also screened in
order to check for Shariah compliant accounting princi-
ples. Because of the limited pool of companies the fundscan
invest into, equity funds can have higher volatility
compared to similar funds in the same space.[1]
1.3 Murabaha
They are similar to development funds, also referred to
as cost-plus financing, where a fund will buy goods and
resell them to a third party at a given price. The price is
made of the cost of goods plus a profit margin. Cost and
margin are agreed in advance.
1.4 Ijara
Funds that acquire and keep ownership of an asset (real
estate, machinery, vehicles or equipment) and then makes
profits by leasing it out in return of a rental payment.[1]
The fund is responsible for the management of the asset
and will normally receive a management fee. The leased
item must be used in a Halal manner.
2 Investment restrictions
2.1 Riba
Main article:Riba
The payment or receipt of interests are considered
usury and unjust.[1] Debt is also disapproved making in-
vestments in highly leveraged companies unacceptable.
Funds cannot pay fixed or guaranteed return on capital.
Instead of borrowing and lending, Islamic finance relies
on sharing the ownership of the assets and therefore risk
and profit/loss.[1]
2.2 Haram
Companies involved in prohibited business activities can-
not be part of a Shariah fund strategy. Prohibited busi-
ness activities can relate to food (production and sales of
alcoholic beverages including pubs and restaurants, pork
products, tobacco), gambling (casinos, on-line gambling,
betting, lottery schemes), adult oriented (video, maga-
zines, on-line material, strip clubs), dubious, immoral and
illicit trades (prostitution, drugs).
2.3 Maisir
Islam forbids gambling in any form. Consequentially,
derivatives, forwards, options and futures are prohibited.
1
https://en.wikipedia.org/wiki/Ribahttps://en.wikipedia.org/wiki/Cost-plushttps://en.wikipedia.org/wiki/Socially_Responsible_Investmenthttps://en.wikipedia.org/wiki/Hedge_fundshttps://en.wikipedia.org/wiki/Exchange-traded_fundhttps://en.wikipedia.org/wiki/Mutual_fundshttps://en.wikipedia.org/wiki/Ribahttps://en.wikipedia.org/wiki/Sharia
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6 Text and image sources, contributors, and licenses
6.1 Text
Sharia investments Source:
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