What is an Islamic investment policy?

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. How do I judge a mutual fund's performance?

    Evaluate mutual fund performance utilizing resources such as Morningstar; compare the fund with others in its peer group ...
  2. What's the difference between alpha and beta?

    Learn about alpha and beta, two very important technical risk ratios that investors use to evaluate relative performance, ...
  3. How can I protect my portfolio from market corrections?

    Learn about some of the types of investment strategies designed to protect an investment portfolio from losing value during ...
  4. What is the difference between investing and trading?

    Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing ...
RELATED TERMS
  1. Discretionary Investment Management

    A form of investment management in which buy and sell decisions ...
  2. Account Minimum

    The minimum balance required to be maintained in an investment ...
  3. Capital Growth

    The increase in value of an asset or investment over time. It ...
  4. Absolute Percentage Growth

    An increase in the value of an asset or account expressed in ...
  5. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified ...
  6. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...

You May Also Like

Related Articles
  1. Investing Basics

    Online Portfolio Management, DIY or ...

  2. A Monte Carlo simulation allows analysts and advisors to convert investment chances into choices. The advantage of Monte Carlo is its ability to factor in a range of values for various inputs.
    Fundamental Analysis

    What Can The Monte Carlo Simulation ...

  3. Investing Basics

    Using Normal Distribution Formula To ...

  4. Investing Basics

    Human Capital, An Important Asset For ...

  5. Investing Basics

    Tracking Your Portfolio On Yahoo! Finance

Trading Center