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Saturday, April 5, 2008

Money, ethics and Sharia

(Gulf News, 5 April 08)

There has been a lot of literature recently about the rise of Islamic banking and the many types of investment instruments that conform to Sharia principles. The most popular of these are sukuk, or Islamic bonds. From Asia to Europe, the advantages of Islamic finance have been recognised and embraced. In fact, the UK Government has set out plans to become the first Western government to issue sukuk in 2008.

Another growing segment of Islamic finance is in the stock markets where companies, though not directly involved in Islamic activities, strive to become operationally Sharia-compliant. In reaction to this, most of the globally-recognised index providers have set up indices for the Islamic and non-Islamic regions. The rise of Islamic indices helps investors guide them towards the "acceptable" stocks and assists fund managers in benchmarking their investment products.

The product range of Islamic products matches those of the conventional ones. Sharia law, in fact, allows for a multitude of investment funds - commodity, Murabaha, Bai' al Dain (sale of debt) and of course equity funds.

The increased interest in Islamic investing stems from the fact that there are 1.2 billion Muslims in the world and that Islamic investing is based on the principal of social investing. In fact, the two major guiding principles of Islamic investing are: no interest and social responsibility.

Socially responsible investment is a growing global phenomenon whereby investors select stocks based on the companies' moral and ethical behaviour. This typically includes avoiding involvement in certain businesses, as well as maintaining ethical environmental and employment practices. In Islam, these issues are governed by the Sharia, or divine guiding principles revealed in the Quran, which Muslims worldwide are expected to follow to the extent possible given their circumstances.

From the Americas to Asia, equity funds adhering to Sharia principles have sprung up and the Islamic equity funds industry has grown to about $20 billion in assets under management. Funds are supported by a Sharia adviser or board who make sure that the fund is abiding by Sharia principles.

Sharia prohibits all business activities that produce significant harm or undignified moral behaviour. It clearly calls for avoiding the payment or receipt of interest on money-lending (riba in Arabic) and obeying the laws of the land (government laws). Although some people may view this as restrictive, it in fact leads to a very sound investment: investing in a company that is on sound financial and moral ground.

In addition to investing in stocks, the fund is also involved in giving to charity on behalf of its investors. This charity comes in the form of "purification" of investment gains. The fund manager, along with guidance from the advisory board must estimate the percentage of profits that may have come from riba (interest) and other prohibited activities and donate it to general charitable causes so that their investment and profit remain pure.

Social responsibility and Sharia principles go hand-in-hand when it comes to Sharia investments, and therefore provide the perfect investment avenue for 1.2 billion Muslims and a multitude number of socially responsible investors.

The writer is fund manager (Asset Management Group), National Bank of Abu Dhabi. 
to invest in the best Islamic unit trusts in Malaysia, 
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