Investment Guide: Investing In Shariah-Compliant Investments

Investment Guide: Investing In Shariah-Compliant Investments

Ethical and responsible investing is not a foreign concept. Globally, investors are showing interest in investments that cover a whole range of ethical options, from investing in businesses which cause the least environmental damage to those that safeguard human rights, or promote corporate governance and shareholder advocacy.

One of the most common options investors now look to are Shariah-compliant investments. These not only cater to Muslims, but also to other investors who are looking for more responsible investments in the portfolio.

The main objective of Shariah-compliant investments is to provide an avenue for investors who are sensitive to Shariah requirements on their investments. A Shariah-compliant investment should be free from activities prohibited by Islam such as usury (riba), gambling (maisir) and ambiguity (gharar). It should also exclude investments in companies or sectors primarily involved in Shariah non-compliant activities such as products or services related to conventional banking, conventional insurance, gambling, alcoholic beverages and non-halal food products.

The principles of Shariah investing don’t prevent an investor from operating profitably. The end goal of Shariah-compliant investing is the same as any other investment, which is to seek capital gains for its investors.

Here are six Shariah-compliant investments that you can consider investing in:

The principles of Shariah investing don’t prevent an investor from operating profitably. The end goal of Shariah-compliant investing is the same as any other investment, which is to seek capital gains for its investors.

Here are six Shariah-compliant investments that you can consider investing in:

1. Shariah-compliant securities (from companies that have passed Shariah screening)

The screening methodologies used by the Shariah board are as follows:

a. Business activity screening

The following screens have to be fulfilled to ensure Shariah-compliance:

  • Cumulative revenue from non-compliant activities and non-operating interest income should not exceed:
5% of total income, applicable to the following business activities• conventional banking;
• conventional insurance;
• gambling;
• liquor and liquor-related activities;
• pork and pork-related activities;
• non-halal food and beverages;
• Shariah non-compliant entertainment;
• interest income from conventional accounts and instruments;
• tobacco and tobacco-related activities; and
• other activities deemed non-compliant according to Shariah.
20% of total income, applicable to the following business activities• hotel and resort operations;
share trading;
• stockbroking business;
• rental received from Shariah non-compliant activities; and
• other activities deemed non-compliant according to Shariah.

b. Financial ratio screening

The following screens have to be fulfilled to ensure Shariah-compliance:

  • Cash over Total Assets
    • Cash will only include cash placed in conventional accounts and instruments, whereas cash placed in Islamic accounts and instruments will be excluded from the calculation.
  • Debt over Total Assets
    • Debt will only include interest-bearing debt whereas Islamic debt/financing or sukuk will be excluded from the calculation. Both ratios, which are intended to measure riba and riba-based elements within a company’s balance sheet, must be lower than 33%.

If it exceeds the percentage allowed, the company or investment will be considered Shariah non-compliant.

You can visit Securities Commission’s official website to find out which Shariah compliant stocks you can invest in.

2. Islamic exchange-traded funds (ETFs)

Islamic ETFs only track an Islamic benchmark index where the index constituents are comprised of companies which are Shariah-compliant. In addition, Islamic ETF is managed under the Shariah principle and guidelines, and overseen by an appointed Shariah committee. The Shariah committee conducts regular reviews and audits on the Islamic ETF to ensure strict compliance with the Shariah principles and practices.

Following are Islamic ETFs that are managed under i-VCAP Management Sdn Bhd that you can invest in:

  • MyETF Dow Jones Islamic Market Malaysia Titans 25
  • MyETF MSCI Malaysia Islamic Dividend
  • MyETF MSCI SEA Islamic Dividend

3. Islamic real estate investment trusts (REITs)

Investors can look towards Shariah-compliant iREITs as a means of diversifying their portfolio into properties while still complying with the requirements of an Islamic fund. This will be a new investment opportunities in collective real estate investments through a Shariah-compliant capital market instrument.

Popular property types within Shariah-compliant iREITs include industrial properties such as factories and warehouses, and healthcare properties such as hospitals and nursing homes. Shariah-compliant REITs are known to refrain from hospitality and entertainment-oriented properties such as hotels, serviced residences, alcoholic beverages dealers, karaoke lounges, wine cellars and gambling premises.

Following are Islamic REITs that you can invest in:

  • Al-‘Aqar Healthcare REIT
  • Axis-REIT
  • KLCCP Stapled Securities

4. Islamic unit trust funds

Islamic unit trust funds are a collective investment fund that offers investors the opportunity to invest in a diversified portfolio of Shariah-compliant shares and fixed-income securities as well as other Shariah-compliant money market instruments. For investments in local listed securities or stocks, the Islamic unit trust fund’s screening methodology will be based on the list of Shariah-compliant securities issued by the Shariah Advisory Council (SAC) or the SC while for unlisted securities/stocks and investment in foreign listed securities/stocks, the screening methodology is determined by the Shariah board or the appointed Shariah Committee.

5. Sukuk

Sukuk commonly refers to the Islamic equivalent of bonds. However, as opposed to conventional bonds, which merely confer ownership of a debt, Sukuk grants the investor a share of an asset, along with the commensurate cash flows and risk. As such, Sukuk securities adhere to Islamic laws, prohibiting the charging or payment of interest.

In Malaysia, the issuance of sukuk is regulated by the Securities Commission Malaysia, through the framework provided under the Trust Deeds Guidelines1. The structure of sukuk must be confirmed and approved by a Shariah Adviser who is appointed by the issuer. A Shariah Adviser can be an independent Shariah Adviser approved by the SC or a Shariah Committee attached to a financial institution that operates Islamic banking activities approved by Bank Negara Malaysia.

Retail bonds and sukuk2 may be issued by the Malaysian Government and any company whose issuances are guaranteed by the Malaysian Government. Some of examples of sukuk issuers are:

  • A public company listed on Bursa Malaysia (PLC);
  • A bank licensed under the Banking and Financial Institutions Act 1989 or Islamic Banking Act 1983;
  • Cagamas Berhad; and
  • An unlisted public company whose bond and sukuk issuance is guaranteed by Danajamin Nasional Berhad, Credit Guarantee and Investment Facility or any of the eligible issuers above.

Investors can generally expect the following characteristics in bonds and sukuk:

Bonds and sukuk issued or guaranteed by the Malaysian GovernmentBonds and sukuk issued by other Issuers
• Low credit risk

• There will be exposure to market risk (e.g. interest rate risk) and fluctuation of bonds and sukuk prices

• Investors can expect guaranteed returns at pre-determined rate throughout the tenure of the bonds and sukuk
• Credit risk will be dependent on the credit rating of the issuance (where rating is required) and the credit worthiness of the issuer

• There will be exposure to market risk (e.g. interest rate risk) and fluctuation of bonds and sukuk prices

• Investors can expect guaranteed returns at pre-determined rate throughout the tenure of the bonds and sukuk
• Return of Capital

• Return of principal invested is guaranteed if held to maturity

• Where bonds and sukuk are sold prior to maturity, the principal returned will be dependent on the market price at that time
• Return of Capital

• Subject to the terms and conditions of the bond or sukuk, the principal invested will be returned at end of tenure provided the issuer does not default on the bond or sukuk concerned.). This is why it is important for investors to monitor the credit rating of the issuance (where rating is required) and the credit worthiness of the issuer)

• Where bonds and sukuk are sold prior to maturity, the principal returned will be dependent on the market price at that time

 6. Islamic venture capital

A venture capital is a form of equity financing in which the investor actively participates in the venture being financed. The objective is to add value to the recipient company during the financing period, so that the venture capitalist can sell his share later on with positive returns. From an Islamic point of view, venture capital is based on equity financing (sharikat’inan). Combining economic viability and Islamic preference, the following Shariah principles and concepts will apply to Islamic venture capital investments:

1. Musharakah

A partnership between two parties (or more) to finance a business venture whereby all parties contribute capital. If the venture is profitable, the profit will be distributed based on a pre-agreed ratio. In the event of a loss, the loss shall be shared on the basis of capital contribution.

2. Mudharabah

A contract made between two parties to finance a business venture. The parties are a rabb al-mal (investor) who solely provides the capital and a mudharib (entrepreneur) who solely manages the project. If the venture is profitable, the profit will be distributed based on a pre-agreed ratio. In the event of a loss, it should be borne solely by the investor, to the extent of the capital contribution.

3. Wakalah

A contract which gives the power and rights to another party to act on their behalf, based on the agreed terms and conditions.

The activities of the venture companies must be Shariah-compliant. Non-permitted Shariah activities include:-

  • financial services based on riba (interest);
  • gambling or gaming;
  • manufacture or sale of non-halal products;
  • non-permissible entertainment activities;
  • manufacture or sale of tobacco-based products;
  • stockbroking or share trading in Shariah non-compliant securities; and
  • hotels and resorts

Shariah-compliant investment can be diversified and perform on par with conventional investment. These products are also flexible instruments which are open to investments across all investor classes, irrespective of their religious beliefs. The Shariah-compliant investment and financial products are expected to grow by leaps and bounds over the years, and to not miss out a piece of the pie, it pays to understand how they work.

1It should be Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework

2Retail bonds and sukuk are governed under the Guidelines on Issuance of Private Debt Securities and Sukuk to Retail Investors

You don’t need to have thousands of Ringgit lying around to start investing. You will be surprised to find that you can start with as little as RM1,000 to see returns!

Leave your comment