Islam has some rules when it comes to investments and financial transactions, and in recent years Shariah-compliant services gained more popularity and witnessed an increase in demand. More banks and investors are now showing interest in Islamic-ruled investments.
So, a Shariah-compliant investment is any kind of investment that complies with Shariah law and avoids any prohibited products banned by Islam. Due to the sensitive nature of Islam-compliant investments, not all financial institutions are capable of making them. A company must recruit people who actually majored in or studied Islamic finance somehow.
How Do Shariah-compliant Investments Differ?
Making a traditional investment differs from making an Islamic one. There are things considered normal in traditional investments but are absolutely forbidden in Islam and deems an investment unlawful.
Interest is referred to as “riba” in Islam, and all its types are prohibited in Shariah-compliant investments. Nominal interest, excessive, compound, fixed, and floating interest are all banned in such investments. The justification for this is that Islam looks at interest as an inequitable form of transaction.
The Risk Is Shared
What’s is special about Shariah investment products is that they embrace transparency, justice, and accountability.
If any of the parties involved in the contract lacks the proper knowledge about certain aspects or terms of the contract; resulting in making bad decisions and harming those parties then the contract is deemed unlawful according to the principles of Islam.
Investing in Specific Sectors Is Prohibited
There are certain products and practices that are forbidden in Islam. These include eating pork, drinking alcohol, gambling. Therefore, investing in businesses dealing with those forbidden products is considered unlawful in Islam. In addition, investing in tobacco, weapons, and media is banned according to Islamic financial rules.
The terms of the investment contract must also comply with some Shariah principles. Contracts implying uncertainty are considered haram (unlawful). Hence, options trading and short selling are prohibited.
If any of the parties involved in the contract lacks the proper knowledge about certain aspects or terms of the contract, resulting in making bad decisions and harming these parties, then the contract is deemed unlawful according to the principles of Islam.
How Shariah-compliant Companies Ensure Compliance
Companies adopting Shariah principles employ a Shariah board. The board consists of Shariah experts, who are qualified to make Fatwas (ruling and interpretations on Islamic laws). Their job is to ensure that each investment made conforms to Shariah principles. They are also responsible for conducting regular audits to guarantee that all transactions and investment funds go side by side with Shariah values.
How Companies Pass the Shariah Screening
To make an investment in a Shariah-compliant company, the company must pass the two stages of the Shariah screening process. The first stage involves checking for the forbidden activities mentioned above; pork, alcohol, gambling, tobacco, weapons, and media.
The company must then go through a Shariah financial screening. The process examines the company’s conventional debt/total market capitalization, cash +interest bearing deposits/total market capitalization, and total interest/revenue. The numbers concerning those must not exceed a certain percentage.