The word "Sharia" is making waves in the investment world these days and to many it is a new way to make money but to a certain group, it is a religious practice that they hold very dear to their way of life. It has it foundation in Islamic Law - an Islamic investor should always invest his assets as opposed to simply just gathering and keeping them close to him.
However, the guidelines of Sharia dictate that making money from paying or charging interest ("usury") is prohibited and that a person should share in the profit or loss of his investments. Gambling, pornography, alcohol, manufacturing of arms, processing pork and tobacco are also some of the main prohibited investments as they go to the root of not being of any benefit to society. An Islamic investor can invest in equipment, properties, water, gas and almost any goods or services that are of value to the community.
Under the principle of risk sharing each investor can share (either positively or negatively) in the investment and no form of usury will occur. Therefore, an investment house can accept money from an Islamic investor and invest the funds, say, into various real estate contracts and then share the growth with him (or the loss).
Although most of the parameters of the investment are adhered to by the investment house involved, normally a "Sharia Committee" or "Sharia Supervisory Board" (depending on the situation) is set up to make sure that the intended investments are not inconsistent with the principles of Sharia.
These are some of the major avenues (but not exhaustive as there are continuing developments) for investments using Sharia principles:-
- Ijara;
- Ijara wa iqtina;
- Modaraba; and
- Sukuk
Ijara
This is basically a leasing arrangement where an investment house may use the investor’s money to acquire properties where rental income is collected from these properties and at the end the properties are disposed of by the investor himself.
Ijara wa iqtina
This is very similar to the above arrangement but different in that at the end of the period the investor has the option to purchase the properties for himself.
Modaraba
This is somewhat similar to an English/Cayman Islands trust structure (although the investment is carried out mainly through companies and not by setting up a trust). Essentially a manager (trustee) accepts money who then invests the money according to certain guidelines and then the principal sum is later returned to the investor with a share of the profits.
Sukuk
There are several different types Sukuk products that have been created to meet different investor needs. This kind of investment, however, is the closest to conventional investment opportunities whilst still remaining compliant with Sharia law. They belong to the family of Asset Backed Securities structures.
This Sharia wave has received a lot attention in recent times, for example, Standard & Poor’s has created a dedicated S&P Sharia index. No doubt this was specifically designed to rate these investments on the open market and to inform investors of their products that are Sharia compliant.
In addition to the S&P index, there is also the International Islamic Ratings Agency (IIRA) that pays particular attention to these kinds of investments.
What is the future for Sharia compliant investments? It is anticipated that these kinds of investments will continue to grow about 15 to 20 per cent over the next couple of years and will make steady inroads in the European and US markets. As more and more people of Islam (both institutions and individuals) move into these regions of the world, it is only natural that they will want to invest, build homes and provide security for their descendants. This will cause an automatic need for banks and other institutions to cater to their requirements and therefore, Sharia investment will be enhanced.
Over the past few years, UK lending institutions have developed Sharia mortgages as a means of capitalising on the influx from the Islamic community looking to purchase homes.
Form a Cayman Islands perspective, our Companies Law makes it very flexible to accommodate these types of investments through our international business companies, "Exempted Companies" as they are referred to in the Cayman Islands.
Within our firm we are seeing considerable interest in the use of Cayman vehicles in Sharia compliant investment products and anticipate that this will continue to grow as the Sharia wave gains further momentum.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
