Foundational Principles
• Shariah Compliance:
Adherence to Islamic law (Shariah), which prohibits interest (Riba), excessive uncertainty (gharar), and unethical business practices.
• Halal Investment: An investment permissible under Islamic law, free from prohibited elements like alcohol, gambling, pork, and interest-based finance.
• Riba: Any guaranteed interest on capital—strictly prohibited in Islamic finance.
• Gharar: Excessive uncertainty or ambiguity in contracts or transactions, which is not allowed.
Screening Criteria
• Business Activity Screening: Excludes companies involved in non-permissible sectors (e.g., conventional banking, insurance, alcohol, tobacco, gambling, adult entertainment).
• Financial Ratio Screening: Evaluates financial metrics to ensure compliance:
• Debt Ratio: Total interest-bearing debt should be below a defined threshold (often less then 33% of market cap or assets).
• Interest Income Ratio:Non-permissible income (e.g., interest) must be below a set percentage (typically less then 5% of total income).
• Liquidity Ratio:Liquid assets should not dominate the balance sheet, ensuring the investment is in real economic activity.
Key Terms
• Shariah Board: A panel of Islamic scholars who certify and monitor compliance of financial products and companies.
• Purification: The process of donating non-compliant income (e.g., interest earned) to charity to cleanse the investment.
• Tainted Income: Earnings from non-permissible sources that must be purified.
• Zakat: An obligatory charitable contribution; investors may calculate Zakat on their equity holdings based on net asset value.
Valuation & Ratios
• Market Capitalization: Total value of a company’s outstanding shares; used in financial screening thresholds.
•Net Asset Value (NAV): Used to calculate Zakat and assess the real value of Shariah-compliant funds.
•Dividend Purification Ratio: Percentage of dividends that must be donated due to non-compliant income sources.
Investment Vehicles
• Islamic Equity Fund: A mutual fund investing in Shariah-compliant stocks screened by a Shariah board.
• Sukuk: Islamic bonds structured to generate returns without interest, often used alongside equity investments.
• REITs (Shariah-compliant): Real Estate Investment Trusts that invest in halal properties and avoid interest-based financing.
Governance & Oversight
• AAOIFI: Accounting and Auditing Organization for Islamic Financial Institutions—sets global standards for Islamic finance.
• IFSB: Islamic Financial Services Board—regulates and promotes stability in Islamic financial systems.
• Shariah Audit: A periodic review to ensure ongoing compliance with Islamic principles.
For further details and personalized portfolio discussion, please contact us at 0327-7117776