The other haraam aspects are:
Gharar: Uncertainty. This concept covers particular types of uncertainty or contingency in contracts such as short selling and derivatives.
Maysir: Gambling. Prohibition renders conventional insurance and derivatives Haraam.
Riba: Interest. In simple terms, it covers any financial return on money regardless of whether the interest is fixed or floating, simple or compounded, and at whatever rate.
Central Shariah Committee
All Shariah compliant investments must be certified by experts in Shariah, generally through a panel or board comprised of respected Shariah scholars who are qualified to issue Fatwas (religious rulings) on financial transactions. These panels of Shariah experts ensure full compliance of all Shariah compliant investment funds.
Scholars of international repute, well versed in Islamic law and modern finance, serve Shariah Committee. The Committee not only provides initial approvals on investment objectives and investment strategy of all funds, but also reviews the investments periodically to ensure the continuous compliance of the investments of the funds to Islamic principles. Moreover, the Committee conducts annual audits of all funds to ensure adherence to their rulings during the year.
The most common forms of Shariah compliant investment funds are equity funds, real estate funds and money market Funds. These investment funds employ Islamic contracts which ensure that the terms and rights of all parties are safeguarded in conformity with Islamic principles (examples and definitions are given below).
A partnership where profits are shared according to a pre-agreed ratio while losses are shared in proportion to the capital investment of each partner. This equity financing arrangement is widely regarded as the purest form of Islamic financing.
An investment partnership under which the investor (the Rab-ul-Mal) provides capital to the investment manager (the Mudarib) in order to undertake a business or an investment activity. While profits are shared on a pre-agreed ratio, losses are borne only by the investor.
An Islamic lease agreement. Instead of lending money and earning interest, Ijarah allows the investor to earn profits by charging rentals on the asset leased to the user.
Purchase and resale of an asset. Instead of lending money, the investor purchases the desired asset from a third party and resells it at a predetermined higher price to the user. By paying this higher price over installments, the user of the asset has effectively obtained credit without paying interest.
Stock Markets or Equity Investing:
The classical equity instruments in Islamic commercial law (Musharakah and Mudarabah) require partnership and profit sharing.
In financial markets, investing in stocks and equity funds is permitted but must conform to certain guidelines as previously mentioned.
For illustration, the Central Shariah Committee has determined that investment funds investing in equities as an asset class will not invest in companies whose primary business activity is
|or in companies which exhibit characteristics (financial screens). All the following financial ratios should be less than 33%|
|Conventional interest-based lending or bonds are ruled out in Islamic finance because it relies on interest. Instead, asset-backed financing is encouraged with the risk being shared by the provider and the user of the asset.|
|(Adapted with modifications from the original text “Introduction to Islamic Investing” – HSBC Amanah)|