Shariah-Compliant Funds: Definition and Examples

What are Shariah-Compliant Funds?

Shariah-compliant funds are investment funds governed by the requirements of Shariah law and the principles of the Islamic religion. Shariah-compliant funds are considered to be a type of socially responsible investing. 

Understanding Shariah-Compliant Funds

Shariah-compliant funds are one of many categories found in socially responsible investing. Similar to other socially responsible funds within the environmental, social and governance (ESG) universe, the funds screen potential portfolio investments for specific requirements desired by followers of the Islamic religion.

Shariah-compliant funds have expanded in popularity only recently, even though the concept was first developed in the late 1960s. According to a 2011 report by consulting firm PricewaterhouseCoopers (PwC), Shariah-compliant funds grew at an annualized rate of 26% in the first ten years of this century. The report further states that "an inflection point" in their growth occurred between 2002 and 2003, when petrodollar liquidity multiplied and capital markets in the Gulf Cooperation Council (GCC) countries matured to enable investment.

According to a report by the Malaysia Islamic International Financial Center, total global Islamic assets under management (AUM) were $70.8 billion at the end of the first quarter of 2017.The corresponding figure in 2008 was $47 billion. However, it is difficult to accurately estimate the industry's size or valuation because much of the investment occurs through private placement. The funds are also not traded in secondary markets, thereby providing less of a window into their constituents.

The concept requires considerable effort to implement, since much attention must be paid to compliance with a comprehensive set of rules and requirements guided by the Shariah principles.

Shariah-compliant funds have many requirements that must be adhered to. Some of the requirements for a Shariah-compliant fund include the exclusion of investments which derive a majority of their income from the sale of alcohol, pork products, pornography, gambling, military equipment or weapons. Other characteristics of a Shariah-compliant fund include an appointed Shariah board, an annual Shariah audit and purifying certain prohibited types of income, such as interest, by donating them to a charity.

These rules can add complexity and costs to the management of a Shariah-compliant fund. For example, Shariah boards are constituted of Islamic scholars whose fees can run into millions of dollars per year, adding to the overall cost of managing the fund. The scholars have varying interpretations of Islamic law, making it difficult and time-consuming for them to arrive at a consensus for analysis and implementation regarding a particular course of action.

Popular categories of investment for Shariah-compliant funds include real estate and exchange-traded funds. Private equity is also considered a good investment but carried interest is considered a problem within Shariah law.

Examples of Shariah-Compliant Investments

A number of products and indexes exist to accommodate Shariah-compliant investing. Saturna Capital provides several Shariah-compliant investment funds through its Amana series. Its Amana Growth Fund (AMAGX) seeks long-term capital growth through investments adhering to Islamic principles. The Fund was launched on February 3, 1994. The Amana Growth Fund is a mutual fund investing at least 80% of its assets in common stocks. As of November 2017 it had $1.7 billion in total assets under management. It has an expense ratio of 1.10%. It requires a minimum investment of $250. Technology investments account for a significant portion of the Fund’s assets at 48%. Other sectors include healthcare, industrials, consumer defensive and consumer cyclical.

S&P Dow Jones Indices has created many Shariah-compliant indexes for Muslim investors. The S&P 500 Shariah was launched in December 2006. The S&P 500 Shariah Index is comprised of all of the Shariah-compliant constituents in the S&P 500. As of October 2017, it had 235 constituents with information technology accounting for the largest portion of the Index at 38%.

Other Shariah-compliant indexes maintained by S&P Dow Jones include: S&P Global Healthcare Shariah, S&P Global Infrastructure Shariah, S&P Developed Large and Mid Cap Shariah, S&P Developed Small Cap Shariah and the S&P Developed BMI Shariah Index.