Islamic Investing in the West | Roch? Islamic Finance

Investing, and specifically Islamic Investing, is a broad topic and one that is widely discussed amongst investors as well as investment professionals. Although there are numerous asset/investment classes, I will look at some of the commonly used conventional products and how they fit into the Islamic Finance framework.

Bonds:

A bond is a certificate issued by a government or a corporation when they borrow money from investors. The relationship is of a borrower (government) and a lender (investor). The certificate promises a certain premium over the principal investment.

Government bonds could last for 5 years, 10 years, or even 25 years. Corporate bonds are generally short-term with a quick turnaround of 6-12 months.?The?Canadian Savings Bond?is an example government bond.?Bond investments are also structured as a collection of bonds, as in AGF?s?Canadian Bond Fund. ?

Bond investors receive an interest payment for extending the loan to the issuer. According to Islamic investing principles, one cannot earn income from extending a loan. This practically eliminates bonds as an acceptable asset class in Islamic Finance.

Real Estate:

Property investing is very common and comes in various forms, residential, commercial, new developments, hospitals, and real estate funds.

From an Islamic investment standpoint, there is nothing wrong with property investing. The question is how these properties are acquired. If an interest-based mortgage is used to acquire the property then any income from it becomes unacceptable.

Real estate investment trusts or REITS are good for small cap investors. REITS could:

• Acquire commercial properties and pass on returns to investors

• Finance property development and property acquisition

• Purchase a property portfolio or a mortgage portfolio

An Islamic REIT would either acquire properties or fund property purchases using Islamic financing modes. Al Aqar KPJ REIT?is an Islamic REIT based in Malaysia. There are no Islamic REITs in the US or Canada at this stage.

Equities:

Equity investing and business partnerships are highly encouraged within Islamic Finance since it involves engaging in productive activity.?Equity investments require screening of the underlying business. Investing in businesses that derive income from alcohol, tobacco, pornography, or other Islamically unacceptable modes is not permitted. Additional financial criteria must be met including their debt ratios, interest income ratios, and so forth.

Equity investment is ideal if one is able to screen equities efficiently, which can be a fair bit of work.?In the US, Amana Mutual Funds focus on Islamic equity investments. In Canada, there is no Mutual Fund as yet in the Islamic Finance sphere.

In general, Islamic investment opportunities in the west are limited. The ones that exist are likely in real estate, hard assets like silver, or some form of equity/partnership investment with returns based on the productive activity of the business.?

Source: http://www.rocheislamicfinance.com/islamic-investing-in-the-west/

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