While Islamic or Sharia financing has been available in Australia for some time, Sharia compliant investment opportunities have been fairly limited. Indeed it was not until 2009 that Australia had an Islamic focused investment fund operating onshore.
What are Islamic investments?
Islamic investments are those that comply to a complex set of source rules as found in the Holy Qur'an the ahadith and traditional juristic interpretations, the totality of which is referred to as Sharia, This means several fundamental things:
- The investments must not earn interest, known as al-riba or usury.
- As interest is forbidden, the provider of capital conceptually takes on some form of risk via the sharing of profit or loss. This may take a number of forms including, profit sharing Mudharabah, safekeeping Wadiah, joint venture Musharakah, cost plus Murabahah and leasing Ijar.
- Investments must not support any activities that are prohibited within Sharia law. For instance by investing in companies that trade in forbidden products such as, alcohol, pornography, gambling, weapons and pork.
These rules aim to encourage ethical behaviour and moral investments. But they also limit the types of companies that can be invested in. In fact, up to 40 per cent of the traditional investment market is out of bounds to people wishing to abide by Sharia law.
Who do I invest with?
The operating model of all Australian banks and most other financial institutions puts them outside of the accepted parameters of Sharia law. Indeed, none of the traditional high street banks currently offer Islamic products. But there are exceptions.
In Australia, Cresent Wealth is currently the only onshore Sharia law equity fund. Launched last October with an initial $5.5 million under management, it provides investment and superannuation funds. The fund is expected to grow to $13 billion in funds under management in the next seven years.
Interestingly the first Sharia compliant fund, the Australian Alif Fund, was offered by an Australian fund manager LM Investment Ltd in 2009. While no longer open to investors, LM Investment have not ruled out offering something similar in the future.
Currently, there are only three Australian organisations offering Sharia compliant finance products to the local retail sector, MCCA, Islamic Co-operative Finance Australia Limited (‘ICFAL’) and Iskan Finance.
While many well known companies offer Islamic products such as HSBC, Citi and Arab Bank, the only foreign subsidiary offering Islamic financial services in Australia is Kuwait Finance House (located in Melbourne).
Who can invest?
Technically, anyone can invest in an Islamic fund. Obviously, people who are observant Muslims who wish to invest in Sharia law compliant funds are the primary market.
However, anyone who is seeking an investment option with strong ethical and moral grounds may invest. So, if you are looking for a socially responsible fund, an Islamic investment fund is an option. As the investment laws are quite stringent, you really can be assured that the fund is working with companies that adhere to Sharia requirements.
How much money are we talking about
Globally there are $1.4 trillion in funds under management with Sharia law compliant investment companies, up from $822 billion in 2009. It is estimated that there are over 550 plus financial institutions (banks and mutual funds) in over 51 countries that comply with Islamic principles. And it is a sector growing at a rate of 15 to 20 per cent per year.
The most visible of these institutions, to Westerners in any case, is Saturna Capital, a US based Islamic investment fund, currently valued at well over $2.8 billion. Interestingly it has been estimated that 90 per cent of US investors are not actually of the Muslim faith.
Mortgages and loans
As we noted there are a number of financial institutions that offer Sharia compliant home financing and loans. However it should be noted that they take forms quite different than what you may be used to.
An Islamic mortgage takes the idea of partnership to an interesting conclusion. Instead of leading money directly to a buyer, the bank itself purchases the property. The buyer then pays the bank in instalments. Any profit for the bank is intentionally not made explicit, which is also why there are no defined penalties. However the bank protects its interests by requiring strict collateral. The land is also registered to the name of the buyer.
Another approach, Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The borrower progressively buys the bank’s share of the entity. This method allows for floating rates according to the current market rate.
Islamic loans for vehicles are dealt with in a similar way. In EIjara wa EIqtina refers to where a bank sells a vehicle, at a higher-than-market price, to the debtor and retains ownership of the vehicle until the loan is paid.
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