A:

Islamic investments are a unique form of socially responsible investments because Islam makes no division between the spiritual and the secular.

The establishment of an Islamic investment policy, be it for the institutional or individual investor, starts with the Sharia Board, a group of Islamic scholars (jurists) that vests investment products for compliance with Islamic Law and conducts ongoing due diligence of them. Sources for interpretation follow a hierarchy of authority: the Quran, believed by Muslims to be the words of Allah verbatim as revealed to his prophet Muhammad in the seventh century; the Sunnah which are rules from the prophet's sayings (Hadiths) and actions; Qiyas which are scholarly legal deductions; and Ijma, the consensus of scholars on a particular issue.

The challenges that a Sharia-compliant portfolio faces would appear to be no different than those that any other portfolio manager would come up against. A manager formulates an investment thesis which drives portfolio selection criteria. He or she then needs to decide against the appropriate benchmark against which to measure performance. Managing assets in accordance with Islamic precepts is a bit more unique in that the practice is a form of socially responsible investing with the unique specification of avoiding interest bearing investments of any kind. Because borrowing and setting aside excess funds in short-term, low-risk, interest-bearing instruments are integral to corporate finance, the application of Islamic law to corporate finance poses some interesting questions.

Is it feasible for a portfolio manager to be completely invested at all times? May one remain faithful to Islamic law in the stock selection when the realities of corporate finance dictate the need for companies, even those not engaged in prohibited businesses, both to borrow and to find a principal-protected repository for excess cash?

From a private client portfolio management perspective, once armed with Sharia-permissible products, an investment committee at an Islamic private wealth firm would face the same issues as any other, namely, how to develop, implement and monitor an investment policy consistent with a client's objectives. Additional challenges exist, namely the lack of both a deep secondary market for these products and the lack of uniform standards in the vetting process across the Muslim world.

To read more on this subject, see Working With Islamic Finance.

RELATED FAQS
  1. Can I match a fund to my religion?

    Specialized mutual funds offer investments tailored for particular religions including Judeo-Christian faiths and Islam. ... Read Answer >>
  2. Is there a difference between socially responsible investing (SRI) and green investing?

    There isn't a huge difference between socially responsible investing (SRI) and green investing; green investing is actually ... Read Answer >>
  3. How does price elasticity affect my stock purchase decisions?

    Explore the many possible corporate positions which may, depending on the size and structure of a business, be responsible ... Read Answer >>
  4. What is a "socially responsible" mutual fund?

    As the name suggests, socially responsible mutual funds invest exclusively in socially responsible investments. Securities ... Read Answer >>
  5. What proportion of my overall investments should be in securities?

    Understand the various factors that should be considered by individuals in regard to investment portfolio management and ... Read Answer >>
  6. What is private wealth management?

    Understand what private wealth management is from the perspective of both the private client as well as the private wealth ... Read Answer >>
Related Articles
  1. Retirement

    Working With Islamic Finance

    There is no division between the spiritual and the secular in this type of socially responsible investing.
  2. ETFs & Mutual Funds

    A Guide To Faith-Based Investing

    If you've wondered how to invest in a way that reflects your religious belief, we've got the answers for you.
  3. Markets

    The 3 Most Dangerous Terrorist Organizations

    A brief look at the Islamic State, Al Qaeda and Boko Haram. What are they? What do they want? Where did they come from?
  4. Investing

    How The Islamic State (IS) Got Its Start

    Despite its relatively new emergence in radical Islamist terrorism, the Islamic State, or ISIS, has been around for nearly 12 years.
  5. Markets

    If Trump Had His Way: The U.S. GDP Minus Muslims

    Banning the entry of Muslims into the U.S. could negatively impact its tourism and investment sectors, as well as certain parts of the private sector.
  6. Managing Wealth

    Portfolio Manager: Job Description & Average Salary

    Discover the duties and responsibilities of a portfolio manager, along with education, training and skills requirements, and salary expectations.
  7. Investing

    Who Funds ISIS?

    Faced with the high costs of running and defending a state, ISIS has been resourceful, resorting to just about any way of earning revenue.
  8. Managing Wealth

    Go Green With Socially Responsible Investing

    Find out how morals and ethics can bring you a surprising return.
  9. Financial Advisor

    Asset Manager Ethics: Investment Process and Actions

    Managers, in developing their investment process, need to determine some “general rules” that make it meaningful. We offer six.
  10. Managing Wealth

    Understand Your Role In The Investing Process

    Knowing what to expect when managing your assets will help you achieve your financial goals.
RELATED TERMS
  1. Islamic Banking

    A banking system that is based on the principles of Islamic law ...
  2. Accounting and Auditing Organization for Islamic Financial Institutions - AAOIFI

    A not-for-profit organization that was established to maintain ...
  3. Takaful

    A type of Islamic insurance, where members contribute money into ...
  4. Sharia

    Islamic religious law that governs not only religious rituals, ...
  5. Riba

    A concept in Islamic banking that refers to charged interest. ...
  6. Shirkah

    An Islamic finance term that describes a partnership between ...
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center