Are you ready to change the way you view investing? Welcome to Shariah-compliant investing - an exciting and ethically satisfying approach that integrates investing with your values and beliefs. This unique blend of ethics and finance is a game-changer, especially in Malaysia, a global leader in Islamic finance.
It doesn't matter if you're a beginner stepping into the investment landscape or an intermediate investor looking to diversify. We'll delve into key concepts, provide insights, and unveil practical strategies to build an optimal portfolio that not only elevates your financial health but does so in an ethically conscious way. Embrace this new perspective on investing, where financial success and ethics are not mutually exclusive, but partners on your path to prosperity.
Embarking on the Ethical Journey: Shariah-Compliant Investing
Shariah-compliant investing embodies an ethical approach in finance, adhering to Islamic laws (Shariah) to enable individuals to achieve financial goals without ethical compromise. This method excludes investments in businesses related to non-Halal food and beverages, gambling, or interest-based lending, aligning financial growth with ethical values. It strictly avoids Riba (interest, considered usury), Gharar (speculative uncertainty), and Haram (forbidden activities), prohibiting investments in these areas. This framework ensures that financial practices align with fundamental Islamic principles, promoting ethical financial growth.
In addition, it is also important to know -about Islamic finance terms, such as Murabaha, a financing agreement based on cost-plus, and Mudaraba, an agreement that involves profit-sharing. These Islamic finance mechanisms adhere to the principles of Shariah, making them compliant with Islamic law.
Quantitatively, the Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) uses a two-tier approach. The first tier involves business activity benchmarks, which assess the contribution of non-compliant activities to a company's revenue and profit. These benchmarks are set at 5% for certain activities like conventional banking, gambling, and liquor, and 20% for others like share trading and rental from non-compliant activities. The second tier considers financial ratios, with a threshold of 33% for cash over total assets and debt over total assets, focusing on interest-bearing elements within a company’s financial statements.
Qualitatively, the SAC of SC considers the public perception of a company's activities from an Islamic perspective. This includes evaluating how the company's operations align with Islamic teachings, which is crucial as it reflects the ethical and moral considerations central to Shariah compliance.
Additionally, the SAC of SC issues a List of Shariah-compliant Securities biannually, in May and November. The list is critical for investors seeking to ensure their portfolios align with Shariah principles, as it identifies companies that meet the criteria of the -screening methodology which are deemed compliant.
Crafting Your Ethical Arsenal: Building a Diverse Shariah-Compliant Portfolio
In the arena of investments, the adage "Don't put all your eggs into one basket" rings particularly true. Diversification is a crucial strategy to mitigate risk and enhance potential returns over time, and it is equally essential in Shariah-compliant investing. When we speak of diversification in a Shariah-compliant portfolio, we refer to an array of asset classes, each following the principles of Islamic finance. These classes include Shariah-compliant equities, Sukuk (Islamic bonds), and Islamic funds.
Let's delve into each of these:
- Shariah-Compliant Equities: These are shares in companies that operate businesses that align with Shariah principles. The businesses must abstain from Haram (forbidden) activities, such as dealing with alcohol, pork or interest-based lending. They also must adhere to specific financial ratios related to debt and interest-bearing securities.
- Sukuk (Islamic Bonds): Unlike conventional bonds that involve paying interest (a concept forbidden in Islam), Sukuk represents a certificate of ownership in a tangible asset, project, business, or a joint venture. The Sukuk holder essentially lease out the asset and earns profits from the income generated by the asset, thus avoiding Riba (interest).
- Islamic Funds: These are investment funds managed in compliance with Shariah principles. The funds consist of only Shariah-compliant investments. Types of Islamic funds can include equity funds, Sukuk funds, money market funds, and balanced funds.
Building a diverse Shariah-compliant portfolio involves strategically balancing these asset classes. For instance, equities can potentially offer high returns, but it comes with high investment risk. Sukuk, on the other hand have low investment risk, provide more stable, albeit lower returns. Therefore, a combination of these assets in your portfolio can balance the risk-return trade off.
Remember, diversification also means spreading your investments across different sectors, industries, and regions. This method to ensures your portfolio isn't excessively exposed to any single economic event or downturn.
Shariah-Compliant Investing in Malaysia
Malaysia has consistently been at the forefront of the Islamic finance industry, earning a global reputation as a robust hub for Shariah-compliant investments. This reputation stems from a combination of innovative financial products, well-regulated markets, and an unwavering commitment to maintaining the highest standards of Islamic law.
One of the key Bursa Malaysia Shariah-compliant investing advancements is the enhancement of the Islamic Securities Selling and Buying - Negotiated Transaction (ISSBNT) Framework. Introduced as the world's first Shariah-compliant alternative to conventional securities borrowing and lending in December 2017, this framework was recently improved to include an 'Additional Remedial Option'. This option facilitates greater flexibility by allowing participants to recall or reacquire securities if their Shariah status changes, ensuring all transactions remain compliant with Shariah principles.
Bursa Malaysia's Shariah-compliant market is extensive, with 81.9% of its total market capitalisation adhering to Shariah principles as of June 2023. This vast ecosystem includes a wide array of instruments such as sukuk, Islamic exchange-traded funds (i-ETFs), and Islamic Real Estate Investment Trusts (REITs). Specifically, the market features five Islamic REITs, which account for 43% of the market capitalisation of all 19 REITs listed on the exchange. Additionally, there are six i-ETFs, representing 18.9% of the net asset value of the 20 ETFs on Bursa Malaysia. These developments highlight the depth and breadth of Shariah-compliant investment opportunities available, catering to a range of investor needs and risk profiles.
Bursa Malaysia-i, as a fully integrated Islamic securities exchange platform, leverages the existing infrastructure of Bursa Malaysia with enhancements to incorporate Shariah-compliant features. This platform supports a complete suite of exchange-related services, including listing, trading, clearing, settlement, and depository services, all within a Shariah-compliant framework.
Let's break down some key elements of the Islamic capital market landscape in Malaysia:
- Islamic Indexes: The FTSE Bursa Malaysia Hijrah Shariah Index, for instance, is a leading indicator for Islamic equity investments. This index consists of companies listed on the Exchange that comply with Shariah principles. It is meticulously vetted by the SAC of the SC, ensuring that all included firms pass stringent compliance checks. For investors, tracking such indexes can be instrumental in making informed investment decisions.
- Islamic Fund Management Companies: Malaysia is home to a host of fund management firms that offers Islamic fund management services. These companies offer a wide variety of Shariah-compliant funds, catering to diverse investment goals and risk appetites. Whether you're seeking aggressive growth or a conservative, income-oriented approach, you're likely to find a suitable Islamic fund to add to your portfolio.
- Regulatory Oversight: Central to the Islamic finance ecosystem in Malaysia is the SC. This regulatory body, along with Bank Negara Malaysia, oversees the functioning of the Islamic financial sector, ensuring transparency, compliance, and investor protection. Their continuous efforts to enhance the regulatory framework promote market integrity and confidence among investors.
Embracing Shariah-compliant investing in Malaysia means becoming part of a well-regulated, progressive, and ethically grounded financial system. For the discerning investor, this presents not only opportunities for financial growth but also the fulfilment of contributing to an economic paradigm that aligns financial success with ethical responsibility.
About Bursa Malaysia
Bursa Malaysia is an exchange holding company incorporated in 1976 and listed in 2005. One of the largest bourses in ASEAN, Bursa Malaysia helps over 900 companies raise capital – whether through the Main Market for established large-cap companies, the ACE Market for emerging companies of all sizes, or the LEAP Market for up-and-coming SME companies. Bursa Malaysia’s diverse product range includes equities, derivatives, offshore and Islamic assets as well as Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs) and Exchange Traded Bonds and Sukuk (ETBS). Find out more here.
* Some financial products and services may not be classified as Shariah-compliant. Please research carefully before making any financial decisions
References
Shariah Compliant Securities Screening Methodology
Frequently Asked Questions on Revised Shariah Screening Methodology
Shariah Screening Methodlogy in Malaysia
List of Shariah Compliant Securities
