The Rise of Sharia Compliant Investments Among Non-Islamic Investors

It was once the case that Sharia Compliant Investments were viewed as the reserve of Islamic investors. Vice versa, non-compliant investments were considered strictly off limits for Muslims.

However, in recent times we have seen a shift in the status quo, observing that many western, non-Islamic investors are beginning to actively diverge into the Sharia investments they once shied away from.

And once again, the coin has two sides, with many Islamic investors moving portions of their holdings into firms which they once thought to be unacceptable.

So why are we seeing this convergence?

The market for Islamic insurance and banking has shown a steady growth over recent years, as has demand for Sukuk bonds. This prosperity has unfortunately not been seen by the Islamic Fund market. The Islamic Fund, however, has remained somewhat less desired. This is in no part down to a lack of drive by governments and companies to promote them.

So, why has the market been so stagnant?

Well, the Sharia Compliant Fund did not have the best start. The funds were introduced during one of the worst financial crises in living memory. This of course had the effect of associating the funds with decreased confidence on a grand scale.

That said, the resulting lack of good Sharia Compliant products is not completely negative, many investors are seeing an opportunity for high returns.

In the past, non-Islamic investors had access to more opportunities that Islamic investors did. At that time a number of financial houses offered both compliant and non-compliant investments but were deemed by many to have little credibility from both sides. This, along with the general idea that Sharia Compliant investments were less important, less diverse, less reliable and had higher fees, led the investments to be considered less meaningful for many western banks.

That view has thankfully begun to change, with major banks shifting an increasing segment of their holdings into Sharia-compliant investments. Some of the world's largest fund managers have also begun to offer Islamic funds to their clients both, Islamic and otherwise.

Several of the groups are using a more reserved strategy, approaching Islamic investment specialists and marketing existing compliant products to their clients. This has had a great effect on the consensus of most investors, swinging the view to a positive one.

The strategy has had an especially notable trend of attracting investors who are not necessarily bound by Sharia law, but see the advantages it can hold from a financial stand point.

In accordance with Sharia law, investments into alcohol, weapons, the finance industry and pork, among others, is strictly forbidden. Responsible and ethical investing is the underlying concept of Islamic investing, and this approach to the markets has won a considerable number of western admirers in recent years.

For example, the Bank of London and the Middle East (BLME) has seen a dramatic increase in non-Islamic investors involved in their compliant products. BLME have even stated that most of their clients who are involved in Sharia Compliant are not Islamic. This is in part due to the 4.8% savings rate offered.

Due to restrictions on debt and receiving interest payments, in order to remain Sharia-compliant fund managers cannot allow investors to participate in leveraged buyouts. They can however invest into companies whose debt is no more than 30% of their market capitalization.

This has led many private equity groups to implement Sharia Compliant funds that run parallel to their non-compliant funds. These funds act the same, the only difference is that non-compliant equities are removed and often replaced with a suitable equivalent.

Although this may seem like the perfect solution, there is a drawback. The funds are either compliant or they are not. Some investors have missed out on great opportunities because their portfolios are weighted too heavily one way or the other. For example; western investors who hold only Sharia Compliant funds will have missed the opportunity to make high returns recently from insurance stocks.

The choice of western investors to enter into Sharia Compliant investments is not always so obvious though. A number of compliant investments have been offered as 'Ethical Investments'. This may be the case but not being forthright with this type of information can be dangerous. There have been cases of institutions being accused of misleading investors in order to boost the volume of their funds.

There have also been cases of unscrupulous groups labelling investments as Sharia Compliant when they are not. Not only is this illegal but it is unethical. It only destroys the confidence of Islamic investors in terms of investing into products offered by western groups.

However, not all institutions are using underhanded tactics to push compliant investments. Vantage Capital Research (VCR) (www.vantagecapitalresearch.com) offers a smaller range of Sharia Compliant products so that they can focus more on maintaining the integrity of their offerings. TTG place a heavy emphasis on the ethical and responsible side of investing, allowing clients of all faiths and creeds to invest in opportunities that are both profitable and principled.

This article is a small excerpt of a 47 page study by William Cooper.

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