Understanding basics of Shariah investing

We all have different reasons to invest our hard-earned money. It might be for a short-term purpose like the purchase of a car or a house, or a long-term goal such as funding our children's education or ensuring a more comfortable retirement.

Investing can take on a religious significance, too. For a growing Muslim audience, investments must not only be able to achieve their goals, but also be compliant with the Islamic law.

The principles of Shariah investing dictate that to be considered acceptable, companies must pass a certain set of criteria. Among them, the balance sheet structure should contain neither too many liquid assets nor debt, and the company should not engage in "haram" (forbidden) industries such as alcohol, tobacco, gambling as well as specific foods considered non-halal or impure.

Advisers who are considered experts in Islamic law are integral to the investment selection and review process. At Franklin Templeton Investments, for instance, portfolios are independently reviewed and endorsed by the Amanie International Shariah Supervisory Board, which is highly regarded for its extensive Shariah and technical expertise.

The Amanie scholars provide initial approval on investment objectives and strategy, as well as ongoing supervisory and monitoring services to ensure continuous adherence to internationally accepted Shariah principles and standards.

Implementation of these standards can be subjective at times, as it depends on the interpretation of different Shariah boards - a challenge to portfolio managers. In addition, this can lead to a lack of homogenized investment approach as well as confuse potential investors.

Shariah Investing 101

Generally, a company that holds too many liquid assets may have Shariah restriction on eligibility. So one would think, this will result to the elimination of the company.

However, this is not always straightforward. It can depend upon the Shariah screening methodology applied by the fund adviser in the review process in which one calculates the company's financial ratio.

If a company classifies a large portion of its liquid assets as long-term, certain Shariah benchmarks will not include it as part of their liquid asset calculations. In addition, some benchmarks will use market capitalization as the denominator while others will use total assets - both of which could provide different results.

Using market capitalization as the denominator is particularly difficult for value investors (like us) because as a stock gets cheaper and hence provides more long-term value, it could suddenly become ineligible as the market capitalization falls relative to the liquid assets or debt.

Stocks that were compliant at one time but then later deemed non-compliant must be disposed of, but once again it's all about details. For example, the frequency at which the company pays its dividends (once a year, semi-annually or annually) could make a difference to eligibility.

Depending on the Shariah screening methodology, a company that accumulates large amounts of cash throughout the year before paying it out in the form of dividends runs the risk of becoming non-compliant. Once it pays the dividend, it may become compliant and hence an eligible investment once again.

The grace period given to dispose a stock (once it becomes non-compliant) is also different from one benchmark or adviser to another. For instance in as far as dividend is concerned, if the grace period to sell non-compliant stocks is short, one may be forced to sell it before it pays the dividend. Conversely, if the grace period is long, the stock could remain compliant by paying the dividend and reducing cash on the balance sheet.

Opportunities abound

Such are the challenges of Shariah investing. But despite the constraints, we are able to find plenty of potential opportunities.

In managing Shariah portfolios, we leverage the same investment team and research process. So Muslim investors essentially get a subset of our broader portfolio, which is compatible with specific Shariah principles.

Overall, our team is finding potential opportunities in the healthcare, energy, and telecommunications sectors. European financials represent a sector our Shariah portfolios cannot invest in, but we've been finding a lot of value over the past year there in our other portfolios.

By country, Malaysia represents one of the biggest markets right now for Shariah investing, and is growing because of its advanced national pension scheme. There is a mandatory monthly contribution into the national pension fund that grows with population and income levels.

Other emerging centers include Middle East financial hubs like Dubai and Abu Dhabi. I think the natural interest in Shariah investing is likely to be confined to Muslim nations, but it would not be surprising to find other countries that are also keen to offer an Islamic investment vehicle. This is due in part to a large and growing Muslim diaspora globally.

Our potential investment opportunities could likewise continue to expand, and we think it's an exciting time to be an investor in this growing space.

Alan Chua is a Singapore-based EVP and portfolio manager at Templeton Global Equity Group.

(Zawya / 15 April 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Canada: Shariah Investment for Canada Muslims

Ontario – Celebrating a growing market of Shari`ah-compliant funds, Canadian Muslims are resorting to products that comply with Islamic principles for their retirement income and investments.

"The way I actually look at Shari`ah-compliant products is mainly as a subset of ethical, or socially responsible investing [such as avoiding the adult entertainment industry or any company that may negatively impact the environment]," Mohammad Khalid, a retired economist living in Oakville, Ontario, told CBC News on Monday, February 27.

Khalid, a devout Muslim, said Muslims must be careful about their investments, such as securities and equities.

Managing his own portfolio, he invests in sectors such as mining, forestry and technology as well as helping his older children save for their retirement.

"The whole market is essentially available, excluding some of the major ones [such as insurance companies and banks]. ...There are so many different companies which will keep giving you dividends year after year," Khalid said.

Shari`ah-compliant funds in Canada are focused on mining, forestry and technology.

"We've assisted in getting the Shari`ah-compliant certification for a couple of the mutual funds that are in Canada right now," said Rehan Huda, a director with Amana Canada Holdings, a niche financial firm that sells Shari`ah-compliant investment funds.

"There’s one fund – a bullion fund – that’s a fairly large fund that has gold, silver, platinum stored here, and it’s a purely Shari`ah-compliant fund.

"Since we're heavily in resource and technology-weighted [funds] ... when those do well, the Shari`ah funds generally do well."

Islam forbids Muslims from usury, receiving or paying interest on loans.

Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.

The Shari`ah-compliant system is now being practiced in 50 countries worldwide, making it one of the fastest growing sectors in the global financial industry.

Flourishing Investments

With the growing Muslim population in Canada, the demand for Shari`ah-compliant investments was increasing.

"An inordinate amount of cash is found among Muslim investors that I know ... and they are waiting for Shari`ah-compliant products," Huda, from the director with Amana Canada Holdings, told CBC News.

"In the future, there’s going to be a lot more products because the population is increasing here."

Muslims make around 2.8 percent of Canada's 32.8 million population, and Islam is the number one non-Christian faith in the Roman Catholic country.

A recent report from the Washington-based Pew Forum on Religion & Public Life said that Muslims are expected to make up 6.6% of Canada’s total population in 2030.

A testament to the growing interest in Shariah-compliant investing is Standard & Poor’s introduction of its Shari`ah stock index (S&P/TSX 60 Shariah Index) into the Canadian market in 2009.

The index recategorizes equities on the S&P/TSX 60 and excludes all equities that do not comply with Islamic law, which is based on the Muslim holy book, the Qur'an.

Though many Canadians think the Shari`ah-compliant funds are not profitable, Khalid says there are many "wonderful companies" that can help investors reap big dividends, including technology companies.

"Absolutely nothing is holding them back," he said.

"If they don’t [invest], obviously they’re losing something big time. You can reduce your taxes big time."

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

(OnIslam, 26 Feb2012)

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Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com