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Sharia Compliant Investment Opportunities
CPA Mohamed Ebrahim, MBA (Manchester), CIFE, Advance CIFE in Islamic Accounting
CEO - Ace Financial Advisory Ltd and Audit Partner – Ace Associates – CPA’s
Introduction to Islamic Finance Principles
◦ Islamic Sharia Compliant Investment’s have to comply with the Islamic Finance Principles based on Islamic
commercial law is called Fiqh al-Mu’amalah and it is based on the tenets of equitable distribution, social justice
and fairness, as described in the Sharī‘ah. Sharī‘ah guidelines with respect to commercial transactions are that,
“they are permissible unless there is a clear prohibition”.
◦ An Investment is Sharī‘ah-compliant, if elements clearly prohibited by the Sharī‘ah are removed. The four
elements clearly and undisputably prohibited by the Sharī‘ah are:
◦ Ribâ - Interest or Usury
◦ Gharar - Uncertainity
◦ Maisir – Gambling
◦ Non-halal food and drinks and immoral activities.
The Prohibitions -Riba
The literal meaning of Ribâ is `excess’ and it refers to any increase or excess that one party in a
transaction gets at the expense of the other party. Through the following verses, the Holy Qur’ān asserts
that trade is lawful, but Ribâ or usury is not.
Verse two hundred and seventy five of the Surah Al-Baqarah of the Holy Qur’ān says this: Those who
consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by
Satan into insanity. That is because they say, "Trade is [just] like interest." But Allâh has permitted trade
and has forbidden interest. So whoever has received an admonition from his Lord and desists may have
what is past, and his affair rests with Allâh. But whoever returns to [dealing in interest or usury] - those
are the companions of the Fire; they will abide eternally therein.”
The Sharī‘ah identifies two types of Ribâ – Ribâ Qurudh and Ribâ Buyu.
The prohibition of Ribâ Qurudh is specific to usury and loan transactions where, a rate of return is
assured according to the maturity and amount of the principal, whether or not the investment has been
The Ribâ Buyu applies to the sale and purchase of six Ribâ commodities – gold, silver, dates, barley,
wheat and salt.
The Prohibitions - Gharar
The Sharī‘ah prohibits activities that have elements of Gharar or uncertainty.
The term Gharar covers uncertainty, ambiguity and deception of the buyer.
Uncertainty can affect the price and delivery of goods.
The Sharī‘ah acknowledges that Gharar cannot be completely eliminated
from the market and allows for some uncertainty provided it is not excessive
in the contract.
The Sharī‘ah prohibits Gharar in commercial transactions. For example,
Sharī‘ah scholars refuse to accept conventional insurance because a policy
holder pays a premium expecting a certain amount in case of emergency, but
there is no guarantee or certainty about that amount.
The Prohibitions - Maisir
Maisir or Qimar means gambling in Arabic. It refers to any activity where two
parties risk a loss and the loss of one means the gain of the other.
Islam prohibits gambling because it distracts people from productive activities
and creates wealth without effort.
The holy Qur’ān and the traditions of the Prophet (peace be upon him) prohibit
unearned income, or Al-Maisir, such as from games of chance. Speculation
always involves a risky attempt at earning greater profit. While all business
decisions are speculative to some extent, the lack of relevant information and
conditions of excessive uncertainty make business speculation closely related.
Any activity related to the gambling industry is strictly prohibited, including
investing, partnering or participating.
"O believers! Intoxicants and gambling, worshipping stones and divination by arrows are impure, of shaytan's handiwork:
refrain from such abomination that ye may prosper. “ (Qur'aan 5:90
They ask you about wine and gambling. Say: 'In them both lies grave sin, though some benefit, to mankind. But their sin is
more grave than their benefit.‘ — Qur‘aan, 2:219 (al Baqara)
The Prohibitions - Non-halal products and services
Islam forbids the use of alcoholic and non-permissible foods such as pork. Activities such as pornography,
prostitution ( associated with Zina- adultery/ fornication) and other immoral entertainment are strictly
prohibited. Any related activities such as creating, marketing, processing and selling such products are
forbidden too. Companies involved in any of these activities will not be deemed as Sharī‘ah-compliant.
“O ye who believe! Strong drink and games of chance and idols and divining arrows are only an infamy of
Satan’s handiwork. Leave it aside in order that ye may succeed. Satan seeketh only to cast among you enmity
and hatred by means of strong drink and games of chance, and to turn you from remembrance of Allah
and from (His) worship. Will ye then have done? (Quran 5:90-91)
"He has only forbidden to you dead animals, blood, the flesh of swine, and that which has been dedicated
to other than Allah". (Al Baqara 2:173)
Tell the believing men to lower their gaze (from looking at forbidden things), and protect their private parts
(from illegal sexual acts, etc.)…} [Quran 24: 30]
"Nor come nigh to fornication/adultery: for it is a shameful (deed) and an evil, opening the road (to other
evils).“ — Qur'an, Sura 17 (Al-Isra), ayat 32
Sharia Compliant Investment Opportunities
Investments which are Sharia compliant are also ethical as there is a natural overlap and
synergy of Sharia and ethical principles; indeed, Imam Ghazzali, a very reputable Islamic
scholar of the past, described the purpose of the Sharia as "to promote the wellbeing of the
people, which lies in safeguarding their faith , their lives, their intellect, their posterity and their
wealth. Whatever ensures the safeguarding of these five serves public interest and is
desirable, and whatever hurts them is against public interest and its removal is desirable".
The main Sharia Complaint Investment opportunities are as below-
• Islamic Investment Funds - Ijarah funds, commodity funds, Murabahah funds and mixed funds
• Islamic Equity Funds –Equities Screened per Shariah principles.
• Investment Sukuk Funds – Shariah compliant asset based or asset backed Financial Certificates
• Islamic Sharia Compliant Real Estate Investment Trusts, or in short Islamic REITs
• Islamic Sharia Compliant Venture capital/Private Equity Funds.
Islamic Investment Funds
When a group of investors pool their resources into a fund and purchase stock collectively, it becomes
necessary to manage that fund. This activity is called fund management. Usually a manager takes care of
the pooled resources. In Kenya Investment Advisory and Fund Management licensing is done by the
Capital Markets Authority. The multiple investors come together because they may not be able to
individually buy the shares, stock or Sukuk with the requisite level of diversification to reduce risk on the
portfolio and have it professionally managed by financial trained managers.
The management of the fund may be carried out in two alternative ways:
1) The managers of the Fund may act as Mudaribs for the subscribers. In this case, a certain percentage of
the annual profit accrued to the Fund may be determined as the reward of the management, meaning
thereby that the management will get its share only if the fund has earned a profit. If there is no profit in
the fund, the management will deserve nothing. The amount of the management fee will increase with the
increase in profits.
2) The second option for the management is to act as an agent for the subscribers. In this case, the
management may be given a pre-agreed fee for its services. This fee may be fixed in lump sum or as a
monthly or annual remuneration. According to the contemporary Shariah scholars, the fee can also be
based on a percentage of the net asset value of the fund. For example, it may be agreed that the
management will get 2% or 3% of the net asset value of the fund at the end of every financial year.
Types of Islamic Investment Funds -Ijarah funds
One type of Islamic Fund is an Ijarah fund (Ijarah = leasing). In this fund, the subscription amounts
are used to purchase assets like real estate, motor vehicles or other equipment for the purpose of
leasing them out to their ultimate users. The ownership of these assets remains with the Fund and the
rentals are charged from the users. These rentals are the source of income for the fund, which is
distributed pro rata to the subscribers. Each subscriber is given a certificate to evidence his proportionate
ownership in the leased assets and to ensure his entitlement to the pro rata share in the income.
However, it should be kept in mind that the contracts of leasing must conform to the principles of
the Shariah which substantially differ from the terms and conditions used in the agreements of
conventional financial leases.
The basic principles are summarized below:
1) The leased assets must have some usufruct (right to use and derive profit therefrom), and the rental must
be charged only from that point of time when the usufruct is handed over to the lessee.
2) The leased assets must be of a nature that their halal (permissible) use is possible.
3) The lessor must undertake all the responsibilities consequent to the ownership of the assets.
4) The rental must be fixed and known to the parties right at the beginning of the contract.
Types of Islamic Investment Funds- Commodity funds
Another type of Islamic Investment fund is the commodity fund. In this fund, the subscription amounts are
used to purchase different commodities for the purpose of their resale. The profits generated by the sales are the
income of the fund, which is distributed pro rata among the subscribers. In order to make this fund Shariah
compliant, it is necessary that all the rules governing the transactions of sale are fully complied with.
The Rules to be complied with include:
1) The seller must own the commodity at the time of sale, because short sales in which a person sells a
commodity before he owns it, are not allowed in the Shariah.
2) Forward sales are not allowed except in the case of Salam and Istisna
3) The commodities must be halal. Therefore, it is not allowed to deal in wines, pork or other prohibited items.
4) The seller must have physical or constructive possession over the commodity he wants to sell.
(Constructive possession includes any act by which the risk of the commodity is passed on to the purchaser).
5) The price of the commodity must be fixed and known to the parties. Any price, which is uncertain
or is tied up with an uncertain event, renders the sale invalid.
The units of such a fund can also be traded in with the condition that the portfolio owns some commodities at
Types of Islamic Investment Funds- Murabaha Funds and Mixed Funds
'Murabaha' is a specific kind of sale where the commodities are sold on a cost-plus basis. The
fund manager purchases the commodity or item for the benefit of their clients, then sell it to
them on the basis of deferred payment, at an agreed margin of profit added to the cost. If a
fund is created to undertake this kind of sale, it should be a closed-end fund and its units cannot
be negotiable in a secondary market, as the certificates would be constituting debts whose sale is
controversial as the fund does not own the commodity, but value represents cash or receivables
(Bai al Dain) in Islamic Shariah. The Islamic Fiqh Academy of Jeddah, which is the largest
representative body of the Shariah scholars and has the representation of all the Muslim
countries, including Malaysia, has approved the prohibition of Bai-Al-Dain unanimously without
a single dissent.
Mixed funds are used to purchase a mix of assets such as equities and commodities and assets
for leasing. Mixed funds can be traded only if fifty one per cent of their assets are tangible, if not
it has to be a closed end fund, and certificates not tradeable.
Islamic Equity Funds –Equities Screened per Shariah
In an all equity mutual fund or unit trust, the amounts are invested in the shares of joint stock companies, quoted
in organized Securities Exchanges like NSE, FT LSE, NYS, NASQAD Dubai etc. The profits of the fund are
derived from capital gains by purchasing the shares and selling them, when their prices are increased and earned
through dividends distributed by the companies. From this angle, dealing in equity shares can be acceptable in the
Shariah subject to the following conditions:
The main business of the company must be Shariah compliant.
If some income from interest-bearing accounts or non Shariah compliant activities is included in the
income of the company, the proportion of such income should not exceed 5% of the total income. If
it exceeds 5%, it is not permissible to invest in that company.
Debt to Equity/Debt to Total Asset Ratio, the leverage or debt to equity ratio of the company should not
exceed around 30%*. It should be kept in mind that, companies sometimes borrow money from conventional
financial institutions that are mostly based on interest, even though according to the principles of Islamic
jurisprudence, borrowing on interest is a grave sinful act, for which the borrower is responsible in the
Hereafter; but, this sinful act does not render the whole business of the borrower as Haram (impermissible).*
“One third is big or abundant" (Tirmizy). Hence, whatever is less than one third, would be insignificant.
Therefore, to avoid the majority or abundance specified in the hadith, such a limit is fixed at less than one third
of the total assets of the company.
Illiquid to Total Asset - Some scholars are of the view that the ratio of illiquid assets must be at least 51%
others 33% (1/3).
Investment Sukuk (Islamic Bonds) Funds
The Islamic alternative to a bond which can be traded freely in the secondary market in a Shariah compliant
way is a Sukuk. This is developed through the securitization of assets. The security created through the
securitization of assets represents the proportionate ownership of the holder in the assets. Trade of such
securities is permissible, as it will be tantamount to the sale/ purchase of a holder's proportionate share in the
assets, which is allowed in the Shariah. For the purpose of securitization, a pool of assets needs to be created
and the operations of the pool would be as follows:
1. The Sukuk portfolio may contain either Ijarah (lease), Murabahah (cost plus) assets or a mixture of assets.
2. Every subscriber can be given a certificate, which represents his proportionate ownership in the assets of
3. The Profit earned by the portfolio would be distributed among the subscribers according to their ratio of
investment, after deduction of a management fee for the manager.
4. Loss, if any would also be shared among the subscribers on pro rata basis.
5. Certificates can be bought and sold in the secondary market at any value.
Sukuk can be issued by governments, corporations, banking and non-banking financial institutions and
business and industrial entities. the interesting thing about Sukuks is that they can be traded at any Value/price
in the secondary market just as any other treasury bill/bond. This feature of sukuks helps in managing
liquidity in the same manner as Treasury bills/bonds are used in the conventional market.
Islamic Sharia Compliant Real Estate Investment Trusts
A REIT is a firm that collects funds from various individuals and corporation and invests in income-creating
real estate or develops real estate for sale at a profit on completion. These real estate include residential
homes, office blocks, industrial parks, commercial parks, health care facilities and shopping malls. REITs can
be listed on major stock exchanges and are publicly traded. When these comply with Islamic Sharia Principles,
these are then termed Islamic REIT’s.
REIT’s in Kenya are governed by the Capital Markets (Real Estate Investment Trusts - Collective Investment
Scheme) Regulations, 2013. Which provides guidelines on Islamic REITs and the appointment of a Shariah
Advisor, “In general, an Islamic REIT is a collective investment scheme in real estate, in which the tenant(s)
operates permissible activities according to the Shariah”. This would involve acquisition and leasing of real
estate (including tenancies and sub-tenancies), where the activities and operations are Shariah-compliant.
Examples of impermissible activities/operations include conventional banking services, gambling and casino
operations, sale of liquor and non-halal food items among others. In case of mixed tenants operating mixed
activities (Shariah compliant and non-compliant activities), the proportion of rentals from the operation of
non-permissible activities to total turnover of the Islamic REIT in any current financial year must not exceed
20%. This is also given special treatment for tax purposes in the Income Tax Act, which states (“20.(1) (c) - a
real estate investment trust registered by the commissioner, shall be exempt from income tax except for the payment of
withholding tax on interest income and dividends as a resident person as specified in the Third Schedule to the extent that its
unit holders or shareholders are not exempt persons under the First Schedule.
(2) All distributions of income, and all payments for redemption of units or sale of shares received by unit holders or
shareholders shall be deemed to have been already tax paid.”
Islamic Sharia Compliant Venture capital/Private Equity Funds.
Venture capital is the investment made in your business by professional and institutionally backed investors.
This can either be in the form of an investment made by a Private Equity firm, or by a venture capital fund
that has been created especially for the purpose of investing in businesses. In return for agreeing to invest in
your business, the venture capital firm or fund will normally take an “equity position” in your business – in
other words, they will become share/stockholders.
Islamic commercial law already promotes all of the underlying elements for a venture capital structure using
the Mudaraba Concept – entrepreneur who runs the business, and investors who fund the business, they
share the profits in accordance with the pre-agreed ratio, losses are borne by the rabal maal unless negligence
of Mudrib is proven. All that is left is to establish a system that is acceptable to all parties and ensure
funding businesses with non-permissible activities are avoided.
The most accurate translation of a mudaraba financing is a contract under which one person, the investor
(known as the rabal-maal), brings financing and the other person, the entrepreneur (known as the mudarib),
brings expertise and effort. Collectively they share the profit as per their pre-arranged agreement. The
structure is made up of two Mudarabah agreements in that the venture capital fund manager is Mudrib,
when they collect funds from investors in the fund, who are the rabal maal, and the venture capital becomes
Investor (rabal maal), when the fund invests in business ventures of entrepreneur’s.