Muslim Investors Find Faith in Stock Markets; at Last Most Shari'ah Scholars Agree That Buying and Selling Corporate Stocks Does Not Impinge upon Islam Because Stocks and Shares Represent Real Assets. Dividends Comply with Shari'ah. (Investment)

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Until the early 1990s, there were major doubts about whether investing on the stock markets was Islamically acceptable. However, a decree on investment banking issued by the Saudi Arabian-based Islamic Fiqh (Islamic Jurisprudence) Academy, the Muslim world's leading authority on religious issues, ruled that within certain parameters, equity investment as an `asset class' was permissible under the Shari'ah (Islamic Canon Law).

At last most Shari'ah scholars agree that buying and selling corporate stocks does not impinge upon Islam because stocks and shares represent real assets. Dividends comply with Shari'ah, whereas payments or receipts of interest do not.

Therefore, unlike fixed-income assets such as government/corporate bonds and term bank deposits, equities are more compatible with the Islamic doctrine of risk-sharing and profit-sharing principles. Professor J Presley of Loughborough University in England explained: "Islamic banking is all about taking risks and sharing that risk with the client." Islamic mutual funds (appealing to more risk-averse investors) are similar to Ethical or Socially Responsible Investments.

Ethical investing has both profit-objectives and enhancing the `public good'. In essence, socially-conscienced investors are concerned not only with the financial aspects of a business, but also the socio/political, environmental and economic impacts upon the wider community.

Islamic finance seeks to promote specified sectors/industries, which provide `added-value' to the real economy. But like any other strategic investors, devout Muslim clients are equally sophisticated. They expect their portfolio fund managers to provide stable earnings and capital growth opportunities in halal investments.

Islamic equity funds experienced exceptionally strong growth during the second half of the 1990s. In 1996, there were just 29 specialist funds (valued at $800 million), according to Failaka International, the online information service for Islamic equities. By March 2002, the number of funds rose to 105 with total assets under management of $3,324 million, though down from almost $5,000 million in 2000. These mostly `open-ended' dedicated funds, listed in Luxembourg, Dublin, Grand Cayman, Guernsey and the Channel Islands are targeted at retail customers, high net-worth individuals (HNWIs) and institutional investors.

The emergence of Islamic equities as a global portfolio business has encouraged closer alliances between Arab banks and western financial institutions, including Citibank, Barclays Capital, Morgan Stanley, Commerzbank, Merrill Lynch, Nomura Securities, UBS Warburg, Royal Bank of Canada, HSBC and ANZ Investment Bank.

Most halal funds have minimum investment thresholds of between $2,000 and $5,000 and are sufficiently modest to attract a substantial middleclass clientele. Funds including Al-Ahli Global Trading Equity, offered by Saudi Arabia's National Commercial Bank; Saudi American Bank (SAMBA) Global Equity; Arab Investor Crescent Fund (Arab National Bank), Al-Mashariq Japanese Equity (Bank Al-Jazira) and HSBC Amanah Global Equity, have extensive retail distribution channels and charge reasonable annual management fees, while few funds like Hegira Global Equity, offered by US-based Wellington Management Company and Barclays Global Equity are targeted exclusively at HNWIs. The latter has a minimum threshold of $1 million and the former $5 million. There are a further 13 funds where minimum thresholds are $100,000 and nine funds specifying between $25,000 and $50,000. But investors usually have to pay higher fees, plus up-front charges, compared with conventional western funds.

Shari'ah compliant funds involve careful investment strategies and screening or `cleansing' process. Thus before approving every potential investment, the Shari'ah board of advisors must analyse balance sheets, income statements and products/services in order to ensure that the core activities of respective companies do not offend the tenets of Islam. …