The structure is actually pretty awesome.
It took 5 weeks to finish this book and understand the context of its writing, but it’s finally done.
Last year, I did a company-provided online qualification for selling Shariah-compliant funds, but there were a lot of fundamentals that I still didn’t understand.
The completion of this book, followed by a slightly more rigorous understand of the rationale, context and procedure of Shariah-compliant funds hopefully will allow me to better connect with Muslims who adhere strictly to their religious laws - while granting them all the benefits of a retail investor.
What are Shariah Complaint Investment Funds?
It is commonly misunderstood - even amongst Muslims themselves, that they cannot invest at all for religious reasons. But Shariah-compliant investment funds are investment portfolios that adhere strictly to Islamic law and are vetted by an external and credible board of Islamic scholars.
In order to be deemed Shariah-compliant, the board must ensure a certain set of criteria:
a) An absence of Riba (interest/usury): Where investments are not based on lending/credit or interest for profit. As such, any investment in traditional bonds or in financials is typically prohibited.
The majority of Shariah investments are also Equity-Based due to this, because a united front/partnership through joint ownership is acceptable, even encouraged. Islamic Bonds, otherwise known as Sukkuk, run on similar grounds that I will explain later.
b) Ethical upkeep: Any investments in relation to gambling, tobacco, pornography and other financials that utilize Riba are all prohibited.
c) High Legitimacy and Transparency: Islamic Finance has a reputation for having much higher standards with the primary components of their contracts [e.g. price, expected completion] to deter uncertainty.
There are additional measures for purification carried out by the board that are typically linked to charity, as well as regular check ups on the businesses in the fund to ensure they continue to stay Shariah compliant.
With a general understanding of what Shariah Funds are, here are 4 good reasons that you should consider purchasing them – religious or otherwise.
4 reasons to invest in Shariah Funds
1) Highly Secure [Or Higher ‘Credit’ Rating]:
The number one reason I would invest.
Every Shariah backed investment has far less potential conflict of interest than traditional investments due to the structure of its existence (as shown above).
Their bonds operate similarly – Sukkuk is entirely backed by collateral and the value of these ‘bonds’ can increase or decrease depending on the value of said collateral as well. Sukkuk is so secure that its been compared to Singapore Government Bonds. Traditional bonds, especially unsecured ones, are just based on credit, which is the kind of thing that contributed to the Financial Crisis of 2008.
While that carries on its own additional element of risk, it’s far better than the kind of leverage-borrowing risks that is likely to crash the market
In a nutshell, you have a higher likelihood of protected downside and capital preservation, as well as potentially higher returns from the financial benefits of high ethical standards.
It’s a lot easier to sleep at night, even with equities.
2) Socially Responsible:
Living in abundant Singapore makes us likely to lean towards socially responsible causes – and that includes our investments.
We want our investments and values to be aligned as much as our financial objectives.
The ethical upkeep of Shariah-complaint investments allows us to do this successfully, without encouraging the production and distribution of traditionally harmful products such as tobacco, alcohol and pornography. These are social causes that are usually taken for granted.
Aside from growing your wealth, you generally contribute to the betterment of society and are left with some positivity.
3) Diversified:
Contrary to popular belief, this doesn’t limit exposure to global markets at all – only bits and pieces of certain sectors, and primarily the financial sector.
You still gain easy and affordable reach to comfortable household names like Samsung, TenCents, Exxon Mobil, Home Depot and 3M.
In terms of sector diversification, most Shariah funds are extremely well diversified as well. Some even delve into specific sub sectors, such as Automotive or Oil/Gas specifically.
Fans of the STI [which is 60% Financials] can consider increased diversification, but I wouldn’t waste my time with it to begin with.
4) Most Importantly – It allows your Muslim friends to invest
Shariah-Compliant investment vehicles have been around since the 60s, but they’ve only began to achieve high accessibility and popularity in the last few years. According to Reuters in 2015, Shariah investments are expected to triple by 2019 from $20 to $60 billion.
Prior to this, it wasn't even well established that Muslims could invest at all. Now they have not only the means and opportunity, but comfort knowing that there's a higher standard held than traditional investments. There are also such options available via using your CPF and SRS monies.
...In recent years we've become much bigger fans of addressing social inequality, and while there's a wide range of debate about who's responsible, how to go about fixing it, etc - one inevitability that will cause social inequality is the difference between those who invest and those who do not.
Muslims make up about 3 out of every 20 people roaming Singapore. That's almost a million people who may not have known or had the opportunity to invest before, retire with some dignity and to achieve Financial Freedom.
Happy Holidays.
Money Maverick