EXPLAINER | Shariah investing – what you need to know

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Shariah investing has a strong ethical foundation, which makes it attractive to Muslims and non-Muslims alike.

Equities, property and Islamic bonds, known as “sukuks”, form the basis of Shariah-compliant unit trust fund investments.

There are about 30 Shariah-compliant collective investment schemes available to retail investors.

Shariah is a set of Islamic principles governing all aspects of the day-to-day activities of Muslims.

Financial products that are Shariah-compliant have a moral and ethical foundation that is lacking in Western-style capitalist economies, where regulators must impose legislation to curb excesses and unfair business practices.

While aimed primarily at Muslim people, Shariah investing also appeals to non-Muslims who are looking to invest in an ethical and socially responsible way.

What Shariah principles are followed?

Islamic investing adheres to the following fundamental principles:

Risk and reward must be equitably distributed between lender and borrower or between investor and investee (the entity into which the investment is made).

When money is lent, charging interest at a fixed rate on the capital (“riba”, which literally means “excess”) is forbidden as it favours the lender. This is contrary to the Western idea that money has a “time value”.

You cannot invest in businesses that are prohibited by Shariah. These include:

Financial transactions must be transparent. Shariah forbids any form of deception (“gharar”) between parties.