Shariah-compliant securities are securities of a public-listed company which have been classified as Shariah permissible for investment, based on the company’s compliance with Shariah principles in terms of its primary business and investment activities as well as financial position.
The principles of investment that are used in Islamic finance are based on Islamic teachings related to the MU’AMALAT or the ways of interaction between the players in the economy. The laws of Islam are divided into laws for various areas needed by individuals and society in life Muslims need to have guidance in marital affairs (MUNAKAHAT), criminal affairs (JINAYAT), economic affairs (MU’AMALAT), and how to actually perform the act of worshipping Allah (IBADAT). That is what Islamic law prescribes to the believers of the religion. Islam being the religion that provides guidance in every aspect of the followers lives, is referred to as the religion of the way of life. Islamic financial affairs or investments are referring to those financial affairs that are in conformity to Syariah-compliant. In order to learn about the technicalities of how Islamic-compliant products are designed, we need to first understand the concepts of instruments in Islamic finance. These instruments, which include among others, MU’AMALAT, MURABAHAH and IJARAH, can be employed to create Islamic structured products, to name a few.
Afzal-ur-Rahman (1974) in the Economic Doctrines of Islam stated that the economic philosophies of Islam or simply put, the aims of the economic dealings in accordance to Islamic teachings, are as follows:
(a) The concept of worshipping Allah (TAUHID).
(b) The concept of the God being the Master of the universe (RUBUBIYYAH).
(c) The concept of the Good Manners (AKHLAQ).
(d) The concept of believing in Judgement Day (QIYAMAH).
(e) Human as the creation in charge of the world (KHALIFAH).
(f) The concept of equitability among human beings.
(g) The concept of Allah being the ultimate owner of all property.
The Islamic financial instruments differ from the conventional instruments on the basis of FIVE SHARIAH RULES they are grounded on. As Shariah rules are derived from the QURAN and HADITH, they hear commonality in all aspects of transactions, whether one in dealing with Islamic banks, mutual funds, investments, or financial planning. Shariah rules help market players to distinguish the permissible activities from the prohibited ones. These rules revealed by God and will remain paramount in all business decisions undertaken by Islamic financial institution. The FIVE SHARIAH RULES on financial transactions are given below:
(a) Prohibition of RIBA.
(b) Application of BAY’ (Trade and Commerce).
(c) Avoidance of GHARAR (Ambiguities) in Contractual Agreement.
(d) Prohibit of MAYSIR (Gambling).
( e) Prohibition from conducting business involving impure commodities susch as pork, liquor, narcotics, pornography etc.
Each of the above Shariah rules is unique in its own way when one looks at each particular market at a time. For example, the prohibition of RIBA is the cornerstone in the markets of deposits and financing in the Islamic banking business. However, when one deals with Islamic investments and the use of derivatives for hedging purposes, the gambling (MAYSIR) and ambiguous (GHARAR) are likely to command more attention than RIBA.
Useful links
Islamic Finance, Islamic Banking and Sukuk
Shariah-Compliant Funds: Definition and Examples
Shariah compliant company – definition
Newly classified Shariah-compliant securities
Shariah-compliant Stocks (i-Stocks)