What is Sharia Investing?

Sharia Investing is about following Islamic law and thus excludes 7 company activities. By following Islamic law and principles this puts Sharia Investing in the specialist branch of ethical investing.

7 activities Islamic law prohibits

The rules and requirements of the Sharia principles mean that companies involved in certain activities will be excluded from Sharia compliant funds.

The 7 activities are:

  1. Conventional finance (Riba)
  2. Alcohol 
  3. Pork related products/non-halal foods
  4. Gambling (Maisir)
  5. Adult entertainment 
  6. Tobacco
  7. Weapons & defence

There are additional requirements surrounding the use of debt and interest. Islamic law prohibits the collection or payment of interest by lenders and investors.

The way Islamic banks get around this is to charge interest if the banks agree to participate in a certain amount of profit/loss the business generates.

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To learn more about Islamic banking check out ACCA intro to Islamic banking:

https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f9/technical-articles/introduction-to-islamic-finance.html

Law of Islamic investing

Sharia compliant companies. 

Para- Researching and doing due diligence on companies to make sure they comply with Sharia can take a lot of time. Instead of trying to pick individual stocks one of the most simple and efficient ways to invest is through ETFs/Index funds.

Looking at the iShares World Islamic ETF we can look at the top 10 holdings. You can see here that these are actually very common companies you would find in non specialist ETFs like the Vanguard All-World ETF.

Sharia Investing

4 Shariah compliant funds.

Para- With Sharia Investing being a specialist branch of ethical investing it can be hard to find funds which suit your goal.

But here are 3 Shariah compliant funds you can look into.

  1. iShares MSCI World Islamic UCITS ETF

https://www.ishares.com/uk/individual/en/products/251394/ishares-msci-world-islamic-ucits-etf

  1. HSBC Islamic Global Equity Index Fund

https://markets.ft.com/data/funds/tearsheet/summary?s=LU1092475968:GBP 

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  1. iShares MSCI USA Islamic UCITS ETF

https://www.ishares.com/uk/individual/en/products/251393/ishares-msci-usa-islamic-ucits-etf 

Fund fees

You will usually find that with speciality funds such as Sharia or ESG investing that the on-going fees would be more than traditional Index ETFs due to the extra research needed to filter out banned investments. While this is mostly true these funds don’t actually charge substantially more than other ETFs.

iShares World Islamic HSBC Islamic Global iShares USA Islamic
0.6% 0.3%* 0.5%

*HSBC Islamic Global has a 5.54% initial charge for the fund.

We can compare these to the famous Vanguard funds which on average charge 0.2% on going fee.

https://www.vanguardinvestor.co.uk/what-we-offer/fees-explained 

Let’s run a little test to see how much these fees affect returns.

In this we shall use the annual charges and the initial charge relating to the HSBC Islamic Global fund. We will start off with a lump sum of £10,000 and have a regular contribution of £500 a month over a 10 year period. For this we will assume a 6% annual return.

Fund Total end worth Fees
iShares World Islamic £96,041 £3,500
HSBC Islamic Global £92,357 £7,184
iShares USA Islamic £96,615 £2,925
Vanguard Average £98,358 £1,183

*Site used for calculations:

http://www.candidmoney.com/calculators/investment-charges-impact-calculator 

As a result we find that between the best Shariah fund and the Average Vanguard fund there is a difference of £1,743 in total end worth and a total of £2,317 difference in fees. Take with a pinch of salt, this calculation has been based on fixed numbers and funds perform differently and may use different benchmarks.

Fees taking money.

Other Shariah compliant investments

You may be aware that stocks & ETFs are not the only investments you are able to make.

For example, gold is considered a safe and traditional asset class which is Shariah compliant. It is easy to obtain and invest into. Because of the type of investment gold is, its not deemed to breach any Islamic financial laws.

Another asset class is property investment. It’s a great way for anyone to invest, whether its a home or an investment property like a Buy To Let (BTL). 

The only caveat with property is that if a mortgage is needed then it would need to be a mortgage without any element of riba.

Riba is an Islamic concept which relates to interest, specifically to forbid interest. Riba is one of the Islamic concepts which also affects investing into banks which is one of the 7 activities not allowed with Sharia Investing.

Are you interested in specialised Industries such as Shariah investing? Check out our ESG investing article to find out how your investment strategy can help for a better world:
https://www.sensibleinvestors.co.uk/investing-styles/esg-investing/

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