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An overview of Islamic Investment

Islamic Investment, Islamic Banking otherwise known as Islamic Law compliant Investment or Shariah Compliant Investment is a growing industry, which is become more and more known in the West and more seriously considered by all the participants in the modern financial world.

There is an estimate that this market will become worth over 1 trillion USD dollars in size over the next 5-10 years, fuelled by the wealth from Oil, property and the resurgence of growth in the Middle East. There are many banks looking to get into this space, and Islamic Structured Products (Structured Products and Retail Structured Products which meet the requirements of Shariah Boards to be passed as Shariah Compliant) are at the cutting edge of Islamic Investment.

This is a general introduction to some of the background terms and concepts, but the important thing to know before we begin, is that there are many paths to the same outcome, and many views on a subject which has been discussed for hundreds if not thousands of years.

Islamic Banking

When banking practices are able to meet the requirements to be compliant with Shariah, or Islamic law, they are said to be Islamic Banking practices. These practices are open to all, and not restricted to Muslim only use.

IIt is worth noting therefore that the participants in Islamic Banking, need not be Muslim.

Shariah Boards / Shariah Investment Boards / Shariah Committee

Because of the complexity of Islamic Law, and the importance for clients to comply, groups of Scholars who are versed in the Law are usually formed into Shariah Boards in order to give advice, guidance and rulings on investments and financial products as to whether they are Shariah Compliant.

Prohibited Concepts

  • Gharar - Uncertainty
  • Maysir - Gambling
  • Riba - Interest

Concepts of Islamic Investment

  • amanah - Trust - trustworthiness, faithfulness and honesty, also in relation to keeping another party's assets in Trus. It can also include safe custody, deposit taking and safekeeping.
  • Arbun - A deposit at the start of a contract that is non-refundable if the contract is completed during the alloted period
  • Gharar - Uncertainty - not allowed in Islamic Finance - often speculation, gambling, and convential financial derivatives are seen as this.
  • jara - Islamic lease agreement.
  • Ijarah wa iqtinah - a hire and purchase agreement.
  • maysir - gambling - not allowed in Islamic Finance - often speculation, gambling, and convential financial derivatives are seen as this.
  • mudaraba - an Investment partnership, investor (the Rab ul Mal) entrepreneur (the Mudarib). Profits are shared as per the agreement, but any losses of investment are only forthe Rab ul Mal. Also used as Discretionary Asset Management investment.
  • mudarib - entrepreneur or investment manager in a mudarabah agreement
  • murabaha - Purchase and resale
  • usharaka: - a partnership with preagreed profit and loss sharing.
  • riba - Interest - Strictly prohibited - the return of money on money itself.
  • Shariah - Islamic law as in the Quran, and by the Prophet Muhammad
  • Shariah advisor - independent professional Islamic legal scholar
  • Shariah compliant - complies with Shariah Law
  • Sukuk - Asset backed bond
  • Takaful - Islamic "insurance"
  • Tawarruq - Reverse murabahah.