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Islamic Finance creating wealth through trading in real assets, investments and partnership
Text Box: Profit at any cost is not acceptable, investments must comply to Islamic principles and Shariah compliant investors are seeking profits with additional objectives: to incorporate Islamic doctrine and Shariah principles Comply with Shariah ethics (socially responsible) Exclude prohibitions (haram factors) Limit investment to legitimate goods (halal factors)

Islamic Finance - Investment Industry

Objectives

Whilst Islam forbids lending with usury, it has always encouraged investment and the increase of wealth through a scheme of fairer and mutually beneficial form of contracts, capital becomes a factor of production.

 

Shariah compliant contracts such as Mudaraba, Musharaka, Ijara and Salem are typical forms of contracts.

 

Stock Selection - Industry Screen

The first stage is to avoid selected industries non-compliant in Shariah:

· Insurers  (interest key component in tradional companies)

· Banking (actively into interest)

· Alcohol (or related areas e.g. distribution, sales, etc)

· Pork (producers, distributors)

· Defence (substantial income from this sector)

· Gambling (casinos, bookmakers etc)

· Entertainment (particularly adult entertainment)

Stock Selection - Financial Screen

Financial statements of companies in Shariah compliant sector need to be examined for interest income and debt ratio. High ratios will start to confine these into haram sector.  Ratios are published for this type of screening.

 

Profit Cleansing - proportional profit related to for example interest earned on cash by the company (most companies will always have some cash)  must to calculated and given to charity.

Stock Selection - Islamic Indices

There are now Islamic indices published which include:

· Dow Jones Islamic Index (DJIM)

· FTSE Global Islamic Index