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2009/02/18

Surviving the credit crunch – Shari'ah-compliant retail investment opportunities
01 January, 2009 Institute of Islamic Banking and Insurance UK Lectures

Surviving the credit crunch – Shari'ah-compliant retail investment opportunities
Bashir Timol, director of 1st Ethical Ltd, a UK-based firm of Islamic investment and tax advisers, delivered the lecture on 16th October 2008. Timol has played a central part over the last seven years in developing a range of Shari'ah-compliant investments, tax planning products and Islamic wills for the domestic Muslim community. He has also liaised with Her Majesty's Revenue & Customs (HMRC), HM Treasury and the Financial Services Authority (FSA) over the development of Shari'ah-compliant regulation and legislation in the UK and has considerable experience of advanced tax mitigation strategies for UK-based owner-managed companies and professionals. The lecture was chaired by Mukhtar Karim, solicitor at Trowers & Hamlins, an international law firm.


The love affair with bricks and mortar has been especially pronounced within the UK Muslim community who have historically embraced property as a low-risk 'Shari'ah-compliant' alternative to conventional investments. The credit crunch and resulting property market price fall have dramatically underlined the need for investors to hold a diverse range of assets. Timol first discussed the key principles for Shari'ah compliance of investment transactions; all Islamic investment transactions must conform to certain guidelines to meet Shari'ah compliance. Like ethical or socially responsible investing, undesirable companies and industries are screened out on the basis of both qualitative criteria (nature of business) and quantitative criteria (level of receivables, debt and interest), and the investment supports only those products and businesses permissible from the Shari'ah viewpoint. Shari'ah-compliant investment transactions do not involve riba (interest). Instead, income is generated by investing the capital in the real economic activities and earning profit is legitimised by engaging in an economic activity and thereby contributing to the development of resources and the society.

He mentioned that such transactions should not involve gharar (excessive uncertainty) or any kind of ambiguity in terms of the rights and responsibilities of the parties in the transaction. While uncertainty cannot be avoided altogether in any business transaction, Shari'ah scholars have derived a general principle that any contract must not be doubtful and uncertain as far as rights and obligations of the parties are concerned. Also, funds should not be channelled to economic activities involving maysir (gambling).

Timol then listed the key businesses excluded from Shari'ah-compliant investments based on the above criteria. These include gambling outlets, the tobacco industry, the pornography industry, conventional interest-based banks and insurance companies, alcohol manufacturers and distributors, etc. Apart from business screening, financial screening criteria are also applied. Organisations whose principal activity is not the above, but derive more than five per cent of income from above activities or highly leveraged (having interest-bearing debt in excess of 33 per cent) are also excluded from Shari'ah-compliant investment transactions.

Timol outlined the key guidelines from the FSA, the UK regulator for the financial sector, for investment advice; these include comprehensive understanding of clients' risk profile – risk is inextricably linked to reward but can also result in a loss. This criterion sits alongside all other Shari'ah requirements when structuring a balanced client portfolio. The issue of penalties and client's requirement to access funds is also considered in the decision-making process.

He then classified the available Shari'ah-compliant investment opportunities in the UK into three categories: low risk, medium risk and high risk. Low risk investments include Islamic bank accounts. These are offered by the Islamic Bank of Britain (IBB), HSBC Amanah and Lloyds TSB; other low risk investments are Shari'ah-compliant property funds, though these have proved riskier in the recent financial turmoil. Ethical/Islamic unit trusts (such as offered by Friends Provident), agricultural land and leasing contracts were classified as medium risk, while Shari'ah-compliant UK equities, musharakah projects, musharakah and commodity funds were classified as high risk investments.

He concluded the presentation by stating that Islam allows a wide investment remit as long as interest and unethical businesses are avoided; a portfolio must be diversified; accessibility of investments must also be available to investors.

After the presentation, participants raised various questions about the musharakah funds on offer in UK, the performance of Shari'ah-compliant equity funds as compared to conventional ones, key providers of Islamic investment products in the UK and the criteria for setting the financial screening ratios for Shari'ah compliance.

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1 Comments:

At Tue Feb 09, 01:14:00 PM GMT-1, Anonymous schariabank said...

great blog about islamic finance. i started a own website for the german audience and i am still searching for good information. thanks!

 

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