Islamic Investments - White Paper

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Islamic Finance forInvestment Managers

Five Steps to Creating a Shariah-Compliant Portfolio

With a Glossary of Islamic Finance Terms

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TABLE OF CONTENTS

[03] Introduction

[04] Step One: Finding Your Way AroundShariah PrinciplesAccounting and Audit Organisation for Islamic FinancialInstitutions (AAOIFI)

Islamic Financial Services Board (IFSB)

Islamic Fiqh Academy (IFA)

[05] Step Two: Choosing What to Offer:

Most Common Islamic Productsand TransactionsStandard Contracts

Shariah-Compliant Communal Investment Vehicles

Sukuk

Other Instruments

Some Primary Islamic Transaction Types

[09] Step Three: Choosing What to Offer:ShariahView on ConventionalInstruments

[10] Step Four: The Financial Screening ofConventional Stock: How to Pick Sharesfor a Shariah-Compliant Portfolio

[12] Step Five: Specific RecommendationsRegarding Conventional StockPurification of Income from Conventional Stock

Segregation of Funds/Islamic Windows

Workflow

The Term Interest

[13] Conclusion

[14] Glossary


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Step One: Finding Your Way AroundShariah Principles

Islamic finance is finance under Islamic law (or Shariah) principles. Thebasic sources ofShariah are the Quran and the Sunnah, which are

followed by the consensus of the jurists and interpreters of Islamic law.

The main principles of Islamic finance include:

The prohibition of taking or receiving interest (riba);

Capital must have a social and ethical purpose beyond pure,

unfettered return;

Investments in businesses dealing with alcohol, gambling, drugs or

anything else that Shariah considers unlawful are prohibited;

A prohibition on transactions involving maysir(speculation orgambling); and

A prohibition on gharar, or uncertainty about the subject-matter

and terms of contractsthis includes a prohibition on selling

something that one does not own.

Because of the restriction on interest-earning investments, Islamic

banks seek to obtain their earnings through profit-sharing investments

or fee-based returns. When financing is provided for business pur-

poses, the financier, if he wants to make a legitimate gain under the

Shariah, should take part in the risk. If a financier does not take part

in the risk, his receipt of any gain over the amount provided is classed

as interest.4

Although Islamic banking and finance authorities are attempting to

provide a uniform code of standards and practices, the specifics relat-

ing to Shariah-compliance can vary between regions and Islamic

schools of thought.

To ensure local adherence, each financial institution must therefore be

guided by its own internal board of Islamic scholars (often assisted by

national boards) that advise on the way in which all transactions are to

be processed. Moreover, a number of bodies aim to provide standards

and references.

Accounting and Audit Organisation for IslamicFinancial Institutions (AAOIFI)

The Accounting and Audit Organisation for Islamic Financial Institu-

tions (AAOIFI), established in 1990 in Bahrain, is an autonomous non-

for-profit body that prepares accounting, auditing, governance, ethics

and Shariah standards for Islamic financial institutions, with a view to

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Although Islamic banking

and finance authorities areattempting to provide a uniform

code of standards and practices,

the specifics relating to Shariah-

compliance can vary between

regions and Islamic schools of

thought.

4 Source: Freshfields Bruckhaus DeringerIslamic Finance: Basic Principles and

Structures


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having them globally adopted as international benchmarks for the

industry. They are intended to complement existing international

accounting standards (lAS), where there are no specific standards to

deal with Islamic banking transactions.Bahrain and Sudan now require Islamic banks to comply with AAOIFIs

standards, and in the Kingdom of Saudi Arabia and other Muslim major-

ity countries, AAOIFIs standards are being specified as guidelines.

Islamic Financial Services Board (IFSB)

The IFSB, based in Kuala Lumpur (Malaysia), is an organisation intended

to develop international regulatory standards to promote the sound-

ness and stability of the Islamic financial services industry. Its main

objectives are to promote the development of prudent and transparent

Islamic financial services and provide guidance on the effective supervi-

sion and regulation of institutions offering Islamic financial products.

In December 2005, the IFSB adopted two standardsthe Guiding

Principles of Risk Management and the Capital Adequacy Standard

which were intended to complement the Basel II accord with provisions

specifically designed for Islamic banks.

Islamic Fiqh Academy (IFA)

The Islamic Fiqh Academy (IFA) was established in 1982 in Jeddah by

the Organisation of the Islamic Conference. It meets annually to con-

sider topics relevant to modern-day Islamic life including Islamic

finance. One of the most important conclusions relating to Islamicbanking arose from the 1985 IFA meeting which definitively ruled on

what constituted riba, thus ending decades of uncertainty.

Step Two: Choosing What to Offer:Most Common Islamic Productsand TransactionsIt will be the decision of an individual firm to determine whether co-

mingling of compliant and non-compliant investments is permittedwithin a portfolio and even whether the institution is prepared to con-

duct business in (or hold) non-compliant investments at all.

A Shariah-compliant portfolio may be made up of:

Islamic-based permitted (halal) investments

Qualifying conventional securities and cash

The Islamic-based permitted investments are covered by a number of

standard contract types.

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Standard Contracts

Mutual Investment Contracts

The principal transactions within this group are the mudaraba and

musharaka.

In the mudaraba arrangement, the bank will provide funds to the entre-

preneur who will supply labour or expertise. The bank may invest its

own funds in which case it is the investor (Rab ul-Mal), or it may act as

agent (mudarib) on behalf of other bank clients who wish to invest

funds in which case the bank aggregates the investment funds and

places them with the entrepreneur. Profits will be shared according to a

pre-defined ratio while losses are borne purely by the investor(s).

The musharaka is a similar partnership arrangement, but the bank does

not act alone in investing in the project. In amusharaka

there are otherdirect investors, which may include the entrepreneurs themselves. Prof-

its are shared according to a pre-agreed ratio, but losses are shared on

the pro-rata of the capital investments.

This sharing of profits in an agreed ratio enables the bank to take a

higher proportion of profits in order that its investment may be returned

earlier, enabling the bank to exit the arrangement earlier than other

investors. This arrangement (called a diminishing musharaka) can be

used by a client to finance the start-up of a business or the purchase of

real estate where the banks share of the ownership gradually reduces.

Finance ContractsThis group of transactions are used by banks to provide assets, or the

use of assets, directly to their clients.

The most common types are the murabaha (cost plus sale), the ijara

(lease), and the salam and Istisnaa forward finance transactions.

The murabaha is the most common Islamic form of financing. In this

the bank acquires an asset on behalf of the client, and in turn the client

will buy the asset back from the bank over time. The client and bank

agree at the time of contract on the amount of profit that the bank will

make. This contract can be used at a retail level, say to buy a car, or at

a corporate level, for example to acquire real estate.

In its reverse form murabaha is used as a method of time deposit. In

this arrangement, it is the bank that does the buying and the investor

that sells. Most commonly the investor buys a stated commodity

which is then sold to the bank for selling price plus profit. The banks

payment will be deferred for an agreed time. In this way the investor

deposits money with the bank which is then repaid plus profit at a

given time in the future, avoiding interest.

The ijara lease is similar to a conventional lease in form but presents

some significant differences. The bank acquires the asset (plane, manu-

The murabaha is the most

common Islamic form of

financing. In this the bank

acquires an asset on behalf of the

client, and in turn the client will

buy the asset back from the bank

over time.


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facturing equipment, etc.) and gives the client the right to use the

asset (called usufruct) in return for agreed lease payments. Ownership

of the asset remains with the bank, which is also responsible for its

maintenance.In an ijara wa iktina, payments contain an element of capital repayment

so that at the end of the agreed lease period the capital amount is fully

repaid and ownership transfers to the client.

The salam and Istisnaa contracts are considered exceptions under

Shariah because they involve the purchase of something that at the

time of the contract does not exist. The existence and possession of

the item by the seller is normally a mandatory condition for a contract

of sale, but these two types of contracts are for the growth (salam) or

manufacture (Istisnaa) of the items. In both of these types of contract

the price paid may be less than the current market price. The descrip-tion, quantity, quality and time and place of delivery must be clearly

agreed in the contract.

Accessory Contracts

This group of contracts are those where the bank acts on a fee-earning

basis. Examples of accessory contracts are agency agreements

(wakalah) where the bank is appointed agent for the performance of

specific duties such as buying or selling shares, or trust agreements

(amanah) whereby the bank is appointed trustee and takes on a duty of

care, or where it provides a guarantee (kafalah), whereby a third party

becomes surety for the payment of debt if unpaid by the person origi-nally liable.

Shariah-Compliant Communal InvestmentVehicles

Additionally, there are many Islamic communal investment vehicles

such as unit trusts and other Shariah-compliant investment funds,

many of which specialise in property investment or other halalpur-

poses. Such funds are structured, priced and traded in generally similar

ways as their conventional counterparts.

Shariah Equity FundsShariah equity funds most commonly invest in the shares of listed

Islamic companies whose business purposes are of course halal. Con-

ventional listed companies may or may not be included, but if they are

they will need to comply with stipulations detailed in this paper.

Shariah Real Estate Funds

Shariah-compliant investment in real estate funds can often involve

investment in leased commercial properties, where the fund leases out

property and receives rentmost often through an ijara contract.

There are many Islamic

communal investment

vehicles such as unit trusts and

other Shariah-compliant invest-

ment funds, many of which

specialise in property investment

or other halal purposes.


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Step Three: Choosing What to Offer:ShariahView on ConventionalInstrumentsThe prevailing Shariah view is that certain type of stock market invest-

ments are acceptable.

Equity-Based SecuritiesMay be Acceptable

Equity-based securitiesshares in businessesdo not guarantee any

return and in fact, the investor has a real chance of loss, so this is in line

with Islamic principles. However, for a conventional equity investment

to be Shariah-compliant the business must not be one that is engaged

in forbidden activities, and the capital structure of the firm must con-

form to Islamic financial principles. These requirements are further dis-

cussed below.

Debt-Based SecuritiesUnacceptable

Much of the capital markets consist of debt-based securities. Because

these types of securities carry a fixed return until maturity, they are

inconsistent with Islamic financial principles. Essentially, all government

and corporate bonds are seen as interest-based instruments.

Instrument Classification Brief Description

Murabaha Asset or a Type of Financing Cost price (or deposit amount) plus a defined profit that may berepaid on a deferred basis. Can be used either as financing orcustomer time deposit.

Sukuk Communal Investment Vehicle On the buy-side have similar financial characteristics to conven-tional bonds. Often some variation of SPV owning (for the term) theasset that creates the profits. Certificates (sukuk) represent owner-ship in SPV.

Mudaraba Profit Sharing One partner invests funds, the other expertise. Profits are shared onan agreed basis, but not losses. Often used where an investordeposits funds with a manager (mudarib) who makes a profit from anacceptable form of investment.

Musharaka Profit Sharing Multiple partners invest funds, while a manager provides expertise.Normally, parties share profits on an agreed basis but losses areshared on a pro rata basis.

Ijara Islamic Leasing Islamic leasing arrangement. The bank acquires an asset and givesthe client the right to use it in return for agreed lease payments.

Salam Agricultural Finance Buyer agrees to the advance purchase of agricultural produce tofinance its planting, growing and harvesting.

Istisnaa Manufacturing Finance Buyer agrees to the advance purchase of specified goods to financemanufacture or construction.

Some Primary Islamic Transaction Types


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Preferred StocksUnacceptable

If the business goes bankrupt, preferred stockholders have priority in

getting their money back over ordinary shareholders, which is unac-

ceptable under Shariah. The provision for paying fixed dividends isalso unacceptable, so these investments cannot be considered.

DerivativesGenerally Unacceptable

The arguments regarding the compliance of derivatives are many and

complex. Financiers are attempting to create structures that may

deliver the characteristics of certain derivative types.

However, for the Shariah requirements of investing in real assets (not

just money), the price must be certain, delivery must occur and,

although there must be an element of risk and no fixed returns, there

should be no speculation in the transaction. These all conspire to gen-

erally prohibit derivative-type instruments, although in some markets

some emerging contract types may be deemed permissible.

Similarly for hedge funds, although financiers are trying to replicate the

characteristics of hedge funds, the Shariah requirements relating to

selling of assets that are not actually owned (short-selling), the require-

ment that income is obtained from the use of real assets and avoidance

of speculation (gharar) would all act as barriers to Shariah compliance.

Step Four: The Financial Screening of

Conventional Stock: How to Pick Sharesfor a Shariah-Compliant PortfolioAs seen above, some conventional equity investments can be owned

individually or through collective investment schemes after they have

been examined and declared as acceptable (halal). A screening

process is carried out to exclude stocks deemed unacceptable (haram).

Lists of acceptable stocks are supplied by various index providers,

although not all may be universally accepted by Shariah experts.

Obviously excluded are stocks in companies that deal with alcohol

(and often tobacco), gambling activities, pork and arms manufacturing.Some investors may prefer to avoid investing in airlines, hotels or

supermarket chains that serve or sell alcohol, even though this is a

minor part of their business. This would, however, result in a much

more restricted potential portfolio selection. Therefore, businesses are

usually defined by their primary activity. This principle may make a hotel

group acceptable, but a brewery unacceptable. There are parallels with

ethical investment funds that avoid investing in tobacco companies but

may invest in retailers selling cigarettes alongside other items.

The prevailing Shari'ah

view is that certain type

of stock market investments are

acceptable.


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While there is no universal consensus among Shariah scholars on the

prohibition of tobacco companies and the defence industry, most

boards advise against investment in these activities.

Investment in conventional interest-based financial institutions is alsonon-permissible. Insurance companies are excluded for this reason,

and also because the concept of conventional insurance itself is not

wholly accepted.

Generally, it would be desirable to avoid investing in companies that

have any involvement at all with interest (riba) or riba-based banks.

However, this would mean the exclusion of virtually all quoted compa-

nies, including those that have their stocks traded in the equity markets

of Muslim countries.

Additionally, most Islamic scholars accept that modern corporate capi-

tal structures of conventional corporations inevitably include somedebt on the balance sheet and fixed-income liabilities. As a result

of this pragmatic thinking, investments in companies that have low

interest income and below average debt-to-equity ratios have been

declared acceptable by various Shariah advisory boards, often with the

provision that profits must be purified (see below).

However, Islamic scholars differ in defining an acceptable debt-to-

capital ratio. In practice, investors seeking to comply with Shariah

principles adopt several criteria:

The extent to which a companys income is derived from interest,

generally any proportion in excess of 5% being unacceptable;

The extent of debt-to-equity finance, a proportion in excess of

one-third generally being unacceptable.

Positive criteria can also be used to pick acceptable stocks, such as

companies with pro-environmental policies or ones that support their

communities or provide humanitarian services.

A helpful tool is provided by index specialists through widespread

screening of conventional stocks listed on major exchanges. The

prominent index providers each offer their own Islamic indexes such as

the FTSE Shariah Global Equity Index Series, the Dow Jones IslamicMarket (DJIM) Indexes, S&P Islamic Indexes and the MSCI Islamic

Indexes.

Most Islamic scholars

accept that modern

corporate capital structures

of conventional corporations

inevitably include some debt

on the balance sheet and fixed-

income liabilities.


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Step Five: Specific RecommendationsRegarding Conventional Stock

When setting up portfolios and workflows, some additional items mustbe taken into account to preserve Shariah compliance.

Purification of Income fromConventional Stock

While Shariah scholars generally accept investing in conventional com-

panies that incur some income from interest but have acceptable debt-

to-equity ratios, many do not find it acceptable to profit directly from

those haram activities.

Instead they require that income from these companies be purified.

This purification requires managers to determine what percentage of acompanys profit is derived from interest-bearing accounts and other

haram activities. That ratio is used to purifyi.e. segregateany prof-

its the shareholder has gained from holding stock in that company

(such as dividends and possibly capital gains) and an equivalent

amount is then given to charitable organisations through a zakator

charity account.

The institutions Shariah Board should advise on the treatment of

purification. From a technical standpoint, there are systems that can

then automate the calculations.

Segregation of Funds/Islamic Windows

Not all Islamic institutions are solely Shariah-compliant. Some offer

mixed conventional and Shariah-compliant investments, where it is

important that workflows and the IT systems segregate funds and cash

flows so as not to co-mingle Shariah-compliant and non-compliant

monies. This requirement can create significant workflow and technol-

ogy challenges.

Workflow

Workflow is of particular importance because, as mentioned, the inter-

nal Shariah advisory board will consider each transaction type and howit is required to be processed. It is essential that any system can repli-

cate this transaction flow each time the transaction is processed.

The Term Interest

In a Shariah-compliant banking system the term interest should

never appear. In the case of an institution investing in both Islamic and

conventional products, however, there may be a need for a system

capable of dealing with the relevant vocabulary of both investment

types.

Not all Islamic institutions

are solely Shariah-

compliant. Some offer mixed

conventional and Shariah-

compliant investments.


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ConclusionFinancial institutions considering the creation of a Shariah compliant

offering must strive to understand and fully integrate the core princi-

ples of Islamic finance to their organisation, with the advice and assis-

tance of their Shariah advisory board, and to abide by the locally

accepted interpretations of these principles in the markets where they

want to sell. This will include choosing which types of products to offer,

both Islamic and acceptable conventional products, and ensuring the

right screening processes, workflows, purification methods and segre-

gations of monies are in place to ensure compliance of the Islamic

investments at all times.

Much of the Islamic banking requirements relate to prohibition of inter-

est, the methods of arranging customer lending or financing, the

degree of risk or lack of certainty of a transaction, the validity of thesale transaction, or how detailed transaction processing occurs (such as

how late or early payments are processed), but ultimately, Shariah

compliance is concerned about what an asset is, what it is used for, and

its financial constitution.

While achieving Shariah compliance involves significant effort and

expense, the dramatic growth in these vehicles may well justify such an

investment in future. With the continued development of many emerg-

ing markets with a dominant Muslim population, in addition to Islamic

products potential appeal for non-Muslim investors in search of ethical

products, this investment types 10% annual growth is indeed expectedto continue over the next several years. Moreover, international bodies

are continuously working towards greater harmonization of interna-

tional standards, with the increased participation of leading financial

services jurisdictions such as Luxembourg or Singapore. The more

standardization the industry can develop, the more exportable and

replicable the products will be, enabling Islamic financial institutions to

harness the benefits of their initial investments to achieve compliance.

Ultimately, Shariah com-

pliance is concerned about

what an asset is, what it is used

for, and its financial constitution.


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terms of the contract. Such ambiguity will render most contracts

invalid. The root Gharardenotes deception; an exchange in which

there is an element of deception either through ignorance of the

goods, the price, or through faulty description of the goods. Thus, oneor both parties stand to be deceived through ignorance of an essential

element of exchange. Gambling is a form ofghararbecause the gam-

bler is ignorant of the result of the gamble. Speculative risk-taking

in commerce, which involves the investment of assets, skills and labor,

is not considered similar to gambling. This is because the buyer is

engaged in a transaction aimed at making profit through trading and

not through dishonest appropriation of the property of others. The

prohibition on ghararis often used as the grounds for criticism of con-

ventional financial practices such as short selling, speculation and

derivatives.

Halal: That which is permissible by the Shariah, valid earnings. The

concept ofhalalhas spiritual overtones. Muslims believe that all things

have been provided by God, and the benefits derived from them, are

essentially for the use of mankind, and so are permissible except what

is expressly prohibited in the Quran or the Sunnah. It also refers to

activities, contracts and transactions as well as earnings. When guid-

ance is not clearly given in the Quran there are several other sources

of law, for example, guidance can be sought from Fiqh, which means

understanding and is the science of jurisprudence: the science of

human intelligence, debate and discussion. The concept ofhalalis

one of the distinctive features of Islamic economics vis-a-vis Westerneconomics where no such concept exists. In Western economics, all

activities are judged on the touchstone of economic utility. In Islamic

economics, other factors, mostly ethical and moral are also involved.

An activity may be economically sound but may not be allowed in the

Islamic society if it is not permitted by the Shariah.

Haram: Unlawful in Islam. Activities which are explicitly prohibited by

the Quran or the Sunnah. The prohibitions also includes professions,

contracts and transactions as well as earnings.

Ijara: Technically, sale of a definite usufruct in exchange for a definite

reward. Commonly used for wages, it also refers to a contract of landlease at a fixed rent payable in cash. More definitions are available at

http://www.islamic-banking.com/glossary_I.aspx

Ijara wa iktina: Lease agreement with option to acquire the leased

asset at the end of the lease period. Often used in the context of home

purchasing. It extends the concept ofIjarah to a hire and purchase

agreement.

Istisnaa: A contract of sale of specified goods that have to be manu-

factured before delivery is possible. A forward sale; literal meaning, to

manufacture or build. Under the Shariah, a sale cannot normally be
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effected unless the goods are in existence at the time of the contract

however, it is argued that it is justified in the case of istisnaa as the

need for the goods are such that they cannot be sold until they are

manufactured, however the order to manufacture is demonstrationof the general need and the availability of the manufactured goods is

relatively certain.

Kafalah: Surety, an obligation in addition to an existing obligation in

respect of a demand for something. Lit: responsibility or suretyship. It

is a covenant or pledge given. Legally, a third party becomes surety for

the payment of a debt of another. Suretyship in Shariah is the creation

of an additional liability with regard to a claim, not to the debt or the

assumption only of a liability and not of the debt. A person providing

surety or a guarantor is known as Kafil. Islamic banks use Kafalah to

issue guarantees for their business customers, for example, the bank

may guarantee the customers standing to facilitate any business

endeavours that may require such guarantees, or the bank may give a

surety to the owner of a ship or the shipping agent, to discharge goods

imported by a customer on arrival of the carrying ship, pending receipt

of the original shipping documents before the customer can take deliv-

ery of the imported goods. Also, known as Kifalah.

Maysir: Games of chance or gambling, trying to earn easy money with-

out having to provide equivalent consideration. A prohibited activity,

as it is a zero-sum game just transferring the wealth not creating new

wealth. One of three fundamental prohibitions in Islamic finance, the

other two being riba and gharar. The prohibition on Maysiris often

used as the grounds for criticism of conventional financial practices

such as speculation, conventional insurance and derivatives.

Mudaraba: 1. An investment partnership with profit-loss-sharing impli-

cations. 2. A form of business partnership contract in which one party

brings capital and the other personal effort to undertake a business

enterprise, as manager or entrepreneur.

Mudarib: The partner in Mudarabah providing entrepreneurship and

management to a partner providing the capital.

Murabaha: 1. A contract of sale between a seller and a buyer; theseller sells certain specific goods to the buyer at a cost plus an agreed

profit mark-up. The seller must disclose the cost of goods and the

profit mark-up. 2. Cost-plus financinga contract sale between the fin-

ancier or bank and its client for the sale of goods at a price which

includes a profit margin agreed by both parties.

Musharaka: The literal meaning ofMusharakah is sharing, an invest-

ment partnership with profit-loss-sharing implications. A musharakah

contract is similar to a mudarabah contract, the difference being that

in a musharakah all the partners contribute to the capital and share in


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both the profit and the loss. They also have the right, but not the

obligation to participate in the management. (more details at

http://www.islamic-banking.com/glossary_M.aspx)

Rab ul-Mal (also Rab-al-Maal / Rab al-Mal): Owner of capital. In amudarabah contract the person who invests the capital (the capital

owner or financier).

Riba: Technically it denotes any increase or addition to capital

obtained by the lender as a condition of the loan. In simple terms Riba

covers any return on money on money, whether the interest rate is

fixed, floating, simple or compounded and at whatever rate which is

guaranteed irrespective of the performance of the investment, is con-

sidered riba and is so prohibited. Riba, in all forms, is strictly prohibited

in Islamic tradition as it is considered an unjust return that leads to

unjust enrichment. Commonly understood as interest charged orreceived on lending though the legal definition goes beyond just inter-

est. It is one of the three fundamental prohibitions in Islamic finance,

the other two being ghararand maysir. (more details and specific

forms of riba are defined at http://www.islamic-banking.com/

glossary_R.aspx)

Salam: An advance purchase or a type of sale in which the full price of

the goods is paid in advance and the goods are delivered later at a

specified date in the future. It is similar to a modern forward sale con-

tract. Under Shariah, a sale cannot normally be effected unless the

goods are in existence at the time of the contract. However, this typeof sale is an exception provided the goods are defined and the time of

delivery is fixed. The exception was practiced in the early days of Islam

to meet the needs of the small farmers in Arabia who required money

to grow their crops and to feed their family until the time the crop

could be harvested and sold; owing to the prohibition ofriba they

could not borrow money on interest; they were allowed to sell the agri-

cultural produce in advance of cultivation for delivery later and take

payment in advance. The object of the sale must be tangible goods

that can be defined as to quantity, quality and workmanship. The mode

of financing is often applied in the agricultural sector, where Islamic

bank advances money without interest for various inputs and inexchange receives a share of the produce, which it then sells after

delivery. To hedge against fall in prices, the bank can also sell the

goods to a third party before delivery through a parallel contract of

Salam.

Shariah: Often referred to as Islamic law. Refers to the rulings con-

tained in and derived from the Quran and the Sunnah. These cover

every action performed by an individual or a society. It is primarily

concerned with a set of values that are essential to Islam and the best

manner of their protection. The essential values of the Shariah include
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those of faith, life, intellect, lineage, property, protection of honour,

fulfilment of contracts, preservation of ties of kinship, honouring the

rights of ones neighbour in so far as the affairs of this world are con-

cerned, and the love of God, sincerity, trustworthiness and moral purity,in relationship to the hereafter.

The method of finding solutions to new issues in the light of the goals

and principles of Islam are Ijtihad(independent reasoning), Ijma (con-

sensus) and Qiyas (analogy), these solutions are all upheld and sup-

ported by the Quran and the Sunnah.

Sukuk: A financial certificate. Similar characteristics to that of a conven-

tional bond with the key difference being that they are assets backed;

sukukrepresent proportionate beneficial ownership in the underlying

tangible asset(s) of particular projects or investment activity.

Wakalah (also wakala / al-wakala / wakalah bil ajr): Agency. A con-

tract of agency in which one party appoints another party to perform a

certain task on its behalf, usually for payment a fee or commission. An

agency arrangement without provision for payment of a fee cannot be

considered irrevocable, thus allowing an agent the right to terminate

the agency at any time.

Zakat (also zakah): Lit: blessing, purification, increase or cultivation of

good deeds. An obligatory contribution or tax prescribed by Islam on

all Muslim persons having wealth above an exemption limit at a rate

fixed by the Shariah. Zakatis the third pillar of Islam. According to the

Islamic beliefZakatpurifies wealth and souls. The objective is to take

away a part of the wealth of the well-to-do and pay it to the Islamic

state and/or distribute it among the poor and needy.


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Islamic Investments - White Paper

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