The Shariah law is an Islamic law that governs several facets of life. In the context of investments, it is this law which defines the nature of investments that may be undertaken by individuals. It basically defines the parameters of Islamic banking and the nature of several Islamic financial products.
What is a Shariah-compliant investment?
Shariah-compliant Islamic investment refers to those investments that obey the Shariah law strictly. The dictates of the Shariah state that investments must not be made towards those areas, which include establishments that engage in immoral produce such as alcohol manufacturing and gambling or casinos. In addition to this, there are also many other prohibitions pertaining to involvement in debt. This means that investing in highly leveraged companies or those companies that have large amounts of debt is also not allowed according to the Sharia.
Another dictate of the law strictly prohibits individuals investing in funds of companies that employ exploitative measures. Therefore, any Shariah-compliant investment must fulfill all these ethical requirements. Some instances or examples of investments that comply with the rules and requirements of the Shariah law are technology, education, healthcare, transportation, specific systems within real-estate and so on.
What are the investment options?
The investment options that are Shariah-compliant are categorised into the following types – ijarah, murabahah, equity and commodity. For further understanding, let us have a look at them separately:
- Ijirah – In this mode of Shariah-compliant investment, the investor is in possession of an asset, such as a land/ real estate or property, and can lease it out to another party in return for payment in the form of rent. The investor, in this case, must ensure that the process is in complete compliance with the Shariah law before making the deal.
- Murabahah – In this case, the investor is permitted to purchase a commodity from another party and sell it to a third party at a cost that is determined in advance. His benefit arises from this sale to the third party, since he not only receives the full cost of the commodity in return, but also a profit margin.
- Equity – According to this form of Shariah-compliant investment, individuals can directly invest in a company by buying its shares. Nevertheless, it is a given that these companies must employ Shariah-compliant modes of business and trade. Moreover, at the end, the individual must also contribute a portion of his income from the investment towards charity.
- Commodity – With this form of investment, the investor can directly deal in the manufacture and sale of physical commodities. In engaging in such trade relations, the investor can summon either the istisna’a contract or the bai salam contract. The istisna’a permits the pre-determination of the price of goods to be manufactured and delivered at a later date. The manufacturer, in this case, receives the payment for the goods in advance.
By the bai salam’s dictates, the payment for a specific deal must be made at the time of making the contract and not at the time of completion. Under these circumstances, the interests of the seller are protected. However, the buyer benefits in this kind of investment as he pays less than he might probably have to during the time of completion, when the prices are likely to be higher.
The payment restrictions under the Shariah include: Riba which is the payment or even the receipt of interests; Maisir or gambling, or any similar illegal activity. Examples of Shariah non-compliant investments would be arms and ammunition, conventional banking and insurance, hotels, pornography, alcohol and tobacco among many others.