Shari'ah law and alternative investment funds
Shari'ah law and alternative investment funds

The following Financial Services practice note provides comprehensive and up to date legal information covering:

  • Shari'ah law and alternative investment funds
  • What is Shari'ah law?
  • What are the Shari'ah principles for investment?
  • Principle 1
  • Principle 2
  • Principle 3
  • Principle 4
  • The practical application of Shari'ah
  • Structuring a Shari'ah compliant fund
  • Musharaka
  • More...

What is Shari'ah law?

Shari'ah law is a set of Islamic principles adhered to by Muslims, and is derived from the central religious text of Islam, the holy Qùran, the Sunna (the path of the prophet) and other Islamic scriptures.

Shari'ah law governs nearly all aspects of Muslim life, including placing certain restrictions on the types of finance and investments available within Muslim countries. Investments that are considered unfair or unethical under Shari'ah law ie investments where the burden of risk is carried by only one party, are therefore prohibited. The guiding principles of Shari'ah have precluded Muslims from investing in many forms of conventional investment vehicles, predominantly those seen in the West. In consequence, the Shari'ah compliant investment market has seen a major surge in popularity in recent years to cater for the growing interest in this method of investment.

What are the Shari'ah principles for investment?

In general, Shari'ah compliant investments should encourage the attainment of halal, that is, ‘pure income’. This is achieved by adhering to a set of absolute basic principles:

Principle 1

Investments should be free from unjust enrichment.

This applies the Shari'ah principle of usary also known as interest or riba (see: Riba—interest, below).

The obtaining of a return through the application of interest is considered unjust. Instead Islamic finance is based on the ownership of assets (musharaka) and the sharing of risk (mudaraba). These

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