What are 'Shariah-Compliant Funds'
Shariah-compliant funds are investment funds which meets all of the requirements of Shariah law and the principles articulated for "Islamic finance." Shariah-Compliant Funds must follow a variety of rules, including investing only in Shariah-compliant companies, appointing a Shariah board, carrying out an annual Shariah audit and purifying certain prohibited types of income, such as interest, by donating them to a charity.
BREAKING DOWN 'Shariah-Compliant Funds'
Shariah-Compliant Funds have expanded in popularity only recently, even though the concept was first developed in the late 1960s. The concept requires considerable effort to implement, since much attention must be paid to compliance with the Shariah principles, both at the fund operations level and for all underlying investments.
Shariah-Compliant funds are prohibited from investing in companies which derives income from the sales of alcohol, pork products, pornography, gambling, military equipment or weapons. Shariah allows for a small portion of an investment's income to come from prohibited sources, though a Shariah-Compliant fund cannot profit from this income. Instead, it must separately account for these earnings and donate them to a charity.