Know What Is an Islamic Investment Policy

Know What Is an Islamic Investment Policy

Islamic investments policy is a unique type of socially responsible investment. In Islam, there is no separation between the spiritual and the secular realms. Religion has an influence on all financial decisions, leading to a meticulous examination of investment practices. Investments that want to be compliant with Islamic Investment Policy must adhere to a specific set of rules.

Understanding Islamic Investment Policy

Islamic investment is based on Islamic finance principles, which strive to meet investors’ financial demands with integrity and in a fair, trustworthy, and honest manner while also ensuring an equal wealth distribution. Islamic investing is not merely a religious-based investment but also an ethical investment that encourages socially valuable real economic activities.

Companies engaged in specific activities will be filtered out of a Shariah-compliant fund due to the regulations and requirements of Shariah principles, including; conventional finance, alcohol, haram food, gambling, adult entertainment, weapon, etc.

In Islamic investment policy, the utilization of debt and interest-bearing assets is subject to several restrictions. Collecting and paying interest is not permissible under Islamic law. Therefore, Islamic banks agree to share a portion of the business’s profit or loss to earn money without charging interest.

In addition, the investment screening method is similar to that of ethical funds that have been “negatively screened” based on ESG (environmental, social, and governance) parameters. On the other hand, a Shariah-compliant fund will have a Shariah board comprised of Islamic experts who will decide or check which companies comply with the standards. Different funds will have slightly different policies depending on their advisory board’s opinions and interpretations.

Difficulties in Islamic Investing

The challenges with Sharia-compliant portfolios are similar to those faced by any other portfolio manager for any other client. In that, the manager must first formulate an investment thesis that drives portfolio selection criteria. Secondly, he needs to choose an appropriate benchmark against which to measure performance.

Managing assets in accordance with Islamic principles is a little more difficult. Because of each requirement to avoid all interest-bearing investments. Borrowing and investing the money excess funds in short-term, low-risk, interest-bearing instruments are essential components of corporate finance. That’s why applying Islamic law to corporate finance raises some questions.

Achieving Shariah Compliance

From the standpoint of private client portfolio management, an investment committee at an Islamic private wealth firm would face the same issues as any other once it offers Sharia-compliant products. Specifically, how to develop, implement, and monitor an investment policy that is consistent with the objectives of a client. However, there are additional challenges, including a lack of a robust secondary market for these products as well as a lack of consistency in processes across the Muslim world.

Companies that are not based in Islamic countries but rely heavily on Islamic investment often hire in-house Sharia counsel or outsource the compliance-checking to a third party firm due to the complexities involved and the potential capital loss of falling out of compliance.

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