An introduction to Sharia investing

Sharia investing is an Islamic faith-based approach to investing, which could appeal to anyone seeking ethical or responsible investment solutions.

Sharia investing adheres to Islamic principles, which on the surface may suggest that it is only of interest to a small subset of investors who wish to align their portfolios with their religious beliefs. However, the general approach of excluding sectors such as alcohol, gambling, and interest-based finance, Sharia-compliant funds offer a unique, values-driven approach to investing which can appeal beyond the Muslim community.

A different approach to ethical investing

While rooted in Islamic principles, Sharia-compliant funds resonate with a broader audience of ethically conscious investors. These funds emphasise transparency, and ethical and responsible financial practices, thus appealing to a broader audience of investors who seek to align their investments with their personal values. There is also a focus on investments that contribute to broader societal well-being, such as companies that promote fair labour practices, environmental stewardship, and community development. This emphasis on ethical governance resonates with a wide group of socially responsible investors.

As the demand for ethical and responsible investing grows, so does the appeal of Sharia-compliant funds. From large Muslim populations to global investors searching for ethical alternatives, Sharia investing is expanding its reach. Integration into mainstream financial platforms further solidifies its position as a growing and scalable approach to investing.

Balancing principles and prosperity

Sharia law prohibits excessive uncertainty or speculation (gharar) in investments. As a result, Sharia-compliant funds aim to avoid high-risk, speculative investments, and instead focus on achieving a conservative, stable approach to wealth accumulation.

Another aspect is income and interest purification, which involves the removal of any income deemed impermissible under ethical or religious guidelines. For investors, this means that any returns generated from non-compliant sources, such as interest earned on cash balances, must be identified and separated from their total investment income. Typically, this portion is donated to charity, ensuring that the investor’s returns remain in line with moral or religious principles while maintaining the overall purity of their financial activities. This identification and donation process is usually handled within the fund, but some funds provide a calculation that allows investors to determine how they wish to treat any identified non-compliant income themselves.

Advisory boards

Sharia compliance is meticulously overseen by Sharia advisory boards, which evaluate and approve the investment practices. The boards are comprised of Islamic scholars with expertise in both Islamic law and finance and their role is to ensure that the investments align with Islamic principles, such as the prohibition of interest (riba) and uncertainty (gharar). It’s common for scholars to have different views on how to best apply Islamic principles to the investment approach and therefore advisory boards may vary in their interpretations, leading to different Sharia investments for investors to consider.

Benchmarks

Sharia benchmarks, similar to other financial benchmarks, differ in methodology. However, they also feature additional layers of compliance, as each benchmark has its own Sharia board that reviews the adherence to Islamic principles. Just like with the Sharia funds, the differences in interpretation among advisory boards for different benchmarks influence which stocks are included, as well as the tolerances for debt-to-equity or interest ratios. As a result, discrepancies can arise between Sharia benchmarks with some including assets that others may exclude.

Sharia investing on TILLIT

As a curated DIY investment platform, our Investment Committee and Fund Selection team continuously review the funds available in the market to identify and select the best-in-class investment opportunities for our customers. We maintain a stringent fund selection process to ensure that any addition to our Universe meets our high standards. Sharia-compliant funds are no exception. Our mission is to provide customers with the very best investment opportunities so that they can align their pension, ISA or other accounts with their beliefs and values alongside their investment goals. With that in mind, we are delighted to launch our new category of Sharia-compliant funds!

Date of publication: 27th February 2025