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KembaraXtra–Islamic Finance–Islamic Capital Market – Shari’ah-Compliant Stocks
-Shari’ah-compliant stocks are shares of companies that are approved for investment only after being examined under Shari’ah principles
-Both the securities and the company’s overall operations must comply with Shari’ah tenets before approval
-These stocks are usually issued by publicly listed companies,making them tradable in the secondary market
-Shari’ah compliance is assessed across all key dimensions of the company,including:
-Primary business activities,to ensure the core operations are halal
-Investment activities,to ensure funds are not invested in prohibited sectors
-Financial position,to ensure limited involvement in interest-based transactions
-The classification and monitoring of Shari’ah-compliant stocks are carried out by Islamic stock index providers
-Major global providers include Dow Jones,S&P,and MSCI
-These providers apply two main screening approaches:
-Qualitative screening,to evaluate the nature of business activities and ethical considerations
-Quantitative screening,to assess financial ratios such as debt,interest income,cash,and receivables
-The screening process establishes benchmarks for acceptable business involvement and financial thresholds
-Only companies that meet both qualitative and quantitative criteria are classified as Shari’ah-compliant
-Key takeaway:Shari’ah-compliant stocks represent ownership in ethically screened,financially disciplined companies,ensuring investments align with Islamic principles while remaining part of modern capital markets
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KembaraXtra–Islamic Finance–Islamic Capital Market – Islamic Mutual Funds
-Islamic mutual funds function similarly to conventional mutual funds in terms of structure and management
-The key distinction is that all investments must be Shari’ah compliant
-Funds are deployed only into assets and companies that comply with Islamic principles
-Shari’ah-compliant investments are designed according to the principles of Islam
-They must be free from Riba (interest) and Gharar (excessive uncertainty or speculation)
-Investments must also avoid prohibited sectors such as alcohol,gambling,conventional banking,and non-halal activities
-Islamic mutual funds primarily invest in shares of Shari’ah-compliant joint-stock companies
-Investors collectively own portions of the underlying portfolio through fund units
-Profits earned by investors mainly arise from capital gains,which occur when the market value of the shares increases
-Some Islamic mutual funds may also distribute dividends,provided they are Shari’ah compliant and purified if necessary
-The value of an Islamic mutual fund is measured using Net Asset Value (NAV)
-NAV represents the per-unit value of the fund at a specific point in time
-It reflects the market value of all assets owned by the fund after deducting liabilities
NAV Calculation:
-NAV = (Total market value of fund assets − Total liabilities) ÷ Total number of units outstanding
Example:
-If an Islamic mutual fund owns Shari’ah-compliant shares worth USD 10 million
-And has liabilities of USD 500,000
-And 1 million units outstanding
-NAV = (10,000,000 − 500,000) ÷ 1,000,000 = USD 9.50 per unit
-Key takeaway:Islamic mutual funds provide a Shari’ah-compliant way for investors to pool funds,invest in halal equities,and earn returns through real business performance,with NAV serving as the benchmark for fund valuation
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KembaraXtra–Islamic Finance–Islamic Capital Market – What Is a Shari’ah-Compliant Joint-Stock Company?
-A Shari’ah-compliant joint-stock company is a normal modern company with shares whose ownership is divided into stocks,but whose business activities and financial practices fully comply with Shari’ah principles
-The company operates as a separate legal entity with limited liability,both of which are recognised under Shari’ah
Key Conditions for Shari’ah Compliance
-Halal core business activities:
-The company’s primary business must involve lawful goods and services
-Prohibited activities such as alcohol,gambling,conventional banking,insurance,pork,arms,and unethical entertainment are not allowed
-Shari’ah-compliant investment activities:
-The company must not invest in non-compliant businesses or interest-based instruments
-Financial structure within Shari’ah limits:
-Interest-based debt must remain below approved Shari’ah thresholds
-Income from interest or non-permissible sources must be minimal and subject to purification
-Cash and receivables must also fall within accepted Shari’ah ratios
Ownership and Trading of Shares
-Shares represent real ownership in the company’s assets and operations
-Shareholders share profits and losses in proportion to their ownership
-Shares may be freely traded in the secondary market,provided the company remains Shari’ah compliant
Screening and Supervision
-Shari’ah-compliant joint-stock companies are identified through Shari’ah screening
-Screening is conducted using both qualitative (business activity) and quantitative (financial ratio) tests
-Global Islamic index providers such as Dow Jones,FTSE,S&P,and MSCI apply these screening standards
Simple Example
-A manufacturing company producing halal food
-Uses limited debt and avoids interest-based financing
-Does not engage in prohibited activities
-Its shares can be classified as Shari’ah-compliant and included in Islamic portfolios
One-Line Summary
-A Shari’ah-compliant joint-stock company is a share-issuing company that conducts halal business,maintains Shari’ah-approved financial ratios,and allows investors to share profits and risks ethically
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KembaraXtra–Islamic Finance–Islamic Capital Market – Purification (Cleansing) in Islamic Finance
-Meaning of purification (cleansing):
-Purification is the process of removing and donating the non-Shari’ah-compliant portion of income that unintentionally enters an otherwise Shari’ah-compliant investment
-Why purification is needed:
-In modern markets,it is difficult to avoid all impermissible income
-Shari’ah allows minor unavoidable exposure only if it is cleansed
-Purification ensures investors do not personally benefit from haram income
-What type of income requires purification:
-Income from interest (riba)
-Income from non-permissible side activities
-Interest earned on cash balances or deposits
-Any incidental haram income identified through screening
-How purification works in practice:
-The impermissible portion is calculated proportionately
-That portion must be donated to charity
-The investor cannot keep or benefit from this amount
-Who performs purification:
-Individual investors (most common)
-Islamic mutual funds or ETFs on behalf of investors (in some cases)
-Purification in Shari’ah-compliant stocks:
-If a company earns a small amount of interest income
-The shareholder must purify their share of that income
-Based on dividends received or ownership percentage
-Purification in Islamic mutual funds:
-Fund managers may calculate the non-compliant income
-The equivalent amount is deducted and donated before distribution
-Example (simple):
-You receive USD 1,000 in dividends
-5% is identified as interest-related income
-USD 50 must be donated to charity
-You may keep only USD 950
-Important Shari’ah rule:
-Purified money must not be used for personal benefit
-It is given away without intention of reward
-Difference between purification and zakah:
-Purification removes haram income
-Zakah is a mandatory religious obligation on halal wealth
-They serve different purposes and are calculated separately
-Key takeaway:
-Purification preserves ethical integrity in Islamic finance
-It allows participation in modern markets without compromising Shari’ah principles
-Meaning of purification (cleansing):
-Purification is the process of removing and donating the non-Shari’ah-compliant portion of income that unintentionally enters an otherwise Shari’ah-compliant investment
-Why purification is needed:
-In modern markets,it is difficult to avoid all impermissible income
-Shari’ah allows minor unavoidable exposure only if it is cleansed
-Purification ensures investors do not personally benefit from haram income
-What type of income requires purification:
-Income from interest (riba)
-Income from non-permissible side activities
-Interest earned on cash balances or deposits
-Any incidental haram income identified through screening
-How purification works in practice:
-The impermissible portion is calculated proportionately
-That portion must be donated to charity
-The investor cannot keep or benefit from this amount
-Who performs purification:
-Individual investors (most common)
-Islamic mutual funds or ETFs on behalf of investors (in some cases)
-Purification in Shari’ah-compliant stocks:
-If a company earns a small amount of interest income
-The shareholder must purify their share of that income
-Based on dividends received or ownership percentage
-Purification in Islamic mutual funds:
-Fund managers may calculate the non-compliant income
-The equivalent amount is deducted and donated before distribution
-Example (simple):
-You receive USD 1,000 in dividends
-5% is identified as interest-related income
-USD 50 must be donated to charity
-You may keep only USD 950
-Important Shari’ah rule:
-Purified money must not be used for personal benefit
-It is given away without intention of reward
-Difference between purification and zakah:
-Purification removes haram income
-Zakah is a mandatory religious obligation on halal wealth
-They serve different purposes and are calculated separately
-Key takeaway:
-Purification preserves ethical integrity in Islamic finance
-It allows participation in modern markets without compromising Shari’ah principles
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KembaraXtra–Islamic Finance–Islamic Capital Market – Mixed Islamic Funds
-Meaning of mixed Islamic funds:
-Mixed Islamic funds are Shari’ah-compliant investment funds that invest in a combination of asset classes,such as equities,leasing (Ijarah),commodities,and similar permissible assets
-Investors subscribe to these funds under different investment types within a single portfolio
-Asset composition rule:
-The tradability of mixed Islamic fund units in the market is allowed only if tangible assets constitute at least 51% of the fund’s total assets
-Liquid assets and debts must not exceed 49% or less
-This rule ensures that fund units represent real assets,not merely cash or debt,which is required under Shari’ah
-Market negotiation:
-Because tangible assets dominate the portfolio,the fund units can be negotiated and traded in the market at mutually agreed prices
-Market size and growth (2019 data):
-Malaysia had 440 Islamic funds with an estimated value of USD 32 billion
-Globally,Islamic funds were valued at approximately USD 140 billion
-Iran emerged as the fastest-growing Islamic fund asset market worldwide
-Among non-Muslim countries,the United States and Luxembourg were the most active in offering Islamic investment funds
-Assurance of Shari’ah compliance:
-Investments in Islamic equities ensure that funds are used to purchase Shari’ah-compliant assets only
-This gives investors confidence that their money is not used in prohibited activities
-Key benefits of investing in Islamic equity and mixed Islamic funds:
-Transparency:
-Shari’ah compliance requires high transparency from fund managers
-Fund managers must clearly disclose the industries,companies,and assets they invest in
-Financial screening:
-All companies and assets undergo Shari’ah screening
-Financial ratios,such as debt levels and interest exposure,are examined
-Islamic equity funds are generally more conservative and avoid companies with high debt,reducing financial risk
-Diversification:
-Funds invest in assets across multiple companies and sectors
-Diversification helps reduce the risk of capital loss if one company or sector performs poorly
-Liquidity:
-Islamic investors often prefer funds over fixed-term investments because fund units can be sold more easily
-This allows investors to access cash more conveniently during adverse situations
-However,Islamic investments,including Islamic funds,are generally less liquid than conventional funds
-Key takeaway:
-Mixed Islamic funds provide diversified,asset-backed,and Shari’ah-compliant investment opportunities,but still face relative liquidity limitations compared to conventional funds
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KembaraXtra–Islamic Finance–Islamic Capital Market – What Is a Shari’ah-Compliant Investment Fund?
-A Shari’ah-compliant investment fund is a pooled investment vehicle that collects money from multiple investors and invests it strictly in accordance with Islamic (Shari’ah) principles
-The fund must operate under continuous Shari’ah supervision to ensure compliance at all times
-Core purpose:
-To generate profits through halal economic activities while ensuring fairness,ethical conduct,and risk-sharing
Key Characteristics
-Halal investment universe:
-The fund invests only in Shari’ah-permissible assets such as compliant equities,Sukuk,real estate,and commodities
-Prohibited sectors like alcohol,gambling,conventional banking,insurance,pork,arms,and unethical entertainment are excluded
-Prohibition of riba,gharar,and maisir:
-The fund does not earn or pay interest (riba)
-Excessive uncertainty (gharar) and gambling (maisir) are not allowed
-Shari’ah screening:
-All companies and assets undergo qualitative (business activity) and quantitative (financial ratio) screening
-Only assets passing both tests are eligible
-Risk-sharing structure:
-Investors participate as owners,not lenders
-Returns are linked to actual performance of underlying assets
-Losses are shared according to investment proportion
-Purification (cleansing):
-If any minor non-permissible income arises,it is calculated and donated to charity
-Investors do not benefit from such income
-Shari’ah governance:
-The fund is overseen by a Shari’ah Supervisory Board (SSB)
-The SSB approves investment decisions,monitors compliance,and certifies purification
Types of Shari’ah-Compliant Investment Funds
-Islamic mutual funds
-Islamic exchange-traded funds (ETFs)
-Islamic Sukuk funds
-Islamic REITs
-Islamic mixed asset funds
-Islamic private equity and venture capital funds
Simple Example
-An Islamic equity fund that invests only in halal manufacturing,technology,and healthcare companies with low debt and no interest income
Key Takeaway
-A Shari’ah-compliant investment fund allows investors to grow wealth ethically by investing in real,productive,and halal economic activities while fully adhering to Islamic principles
-A Shari’ah-compliant investment fund is a pooled investment vehicle that collects money from multiple investors and invests it strictly in accordance with Islamic (Shari’ah) principles
-The fund must operate under continuous Shari’ah supervision to ensure compliance at all times
-Core purpose:
-To generate profits through halal economic activities while ensuring fairness,ethical conduct,and risk-sharing
Key Characteristics
-Halal investment universe:
-The fund invests only in Shari’ah-permissible assets such as compliant equities,Sukuk,real estate,and commodities
-Prohibited sectors like alcohol,gambling,conventional banking,insurance,pork,arms,and unethical entertainment are excluded
-Prohibition of riba,gharar,and maisir:
-The fund does not earn or pay interest (riba)
-Excessive uncertainty (gharar) and gambling (maisir) are not allowed
-Shari’ah screening:
-All companies and assets undergo qualitative (business activity) and quantitative (financial ratio) screening
-Only assets passing both tests are eligible
-Risk-sharing structure:
-Investors participate as owners,not lenders
-Returns are linked to actual performance of underlying assets
-Losses are shared according to investment proportion
-Purification (cleansing):
-If any minor non-permissible income arises,it is calculated and donated to charity
-Investors do not benefit from such income
-Shari’ah governance:
-The fund is overseen by a Shari’ah Supervisory Board (SSB)
-The SSB approves investment decisions,monitors compliance,and certifies purification
Types of Shari’ah-Compliant Investment Funds
-Islamic mutual funds
-Islamic exchange-traded funds (ETFs)
-Islamic Sukuk funds
-Islamic REITs
-Islamic mixed asset funds
-Islamic private equity and venture capital funds
Simple Example
-An Islamic equity fund that invests only in halal manufacturing,technology,and healthcare companies with low debt and no interest income
Key Takeaway
-A Shari’ah-compliant investment fund allows investors to grow wealth ethically by investing in real,productive,and halal economic activities while fully adhering to Islamic principles
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KembaraXtra–Islamic Finance–Islamic Capital Market – Types of Shari’ah-Compliant Investment Funds (Note Forms)
Islamic Mutual Fund
-Pooled investment fund managed professionally under Shari’ah supervision
-Invests in Shari’ah-compliant equities,Sukuk,and approved money market instruments
-Investors receive fund units and returns based on Net Asset Value (NAV)
-Returns come from capital gains and halal dividends
-Risk level is moderate and depends on underlying assets
-Liquidity is moderate as units are redeemed at NAV (usually daily)
Islamic Exchange-Traded Fund (ETF)
-Fund that tracks a Shari’ah-compliant index
-Units are traded on a stock exchange like shares
-Investments are limited to Shari’ah-approved index constituents
-Returns mirror the performance of the tracked index
-Highly liquid since units can be bought and sold intraday
-Risk is market-linked
Islamic Sukuk Fund
-Invests primarily in Shari’ah-compliant Sukuk
-Income is generated from lease rentals or profit-sharing structures
-Lower risk compared to equity-based funds
-Suitable for income-seeking investors
-Liquidity is moderate depending on Sukuk market depth
Islamic REIT (Real Estate Investment Trust)
-Invests in Shari’ah-compliant real estate assets
-Income generated mainly through rental payments
-Properties must be halal in use and financing
-Risk is moderate and linked to real estate market conditions
-Liquidity is higher if REIT is listed on an exchange
Islamic Money Market Fund
-Invests in short-term Shari’ah-compliant instruments such as Murabahah and Wakalah
-Focuses on capital preservation and liquidity rather than high returns
-Very low risk compared to other Islamic funds
-Highly liquid and suitable for short-term cash management
Mixed Islamic Fund
-Invests in a combination of equities,Sukuk,leasing,and commodities
-Tradable only if tangible assets make up at least 51% of the portfolio
-Offers diversification across asset classes
-Risk and return are balanced
-Liquidity is moderate
Islamic Private Equity Fund
-Invests in unlisted Shari’ah-compliant companies
-Focuses on long-term value creation
-Involves active management and business development
-High risk with potentially high returns
-Very low liquidity due to long lock-in periods
Islamic Venture Capital Fund
-Invests in early-stage and start-up halal businesses
-Aims for high growth and capital appreciation
-Highest risk among Islamic investment funds
-Returns depend on business success
-Liquidity is very low as exits take time
Key Takeaway
-All Shari’ah-compliant investment funds follow strict screening and purification rules
-Returns are performance-based,not guaranteed
-Choice of fund depends on investor risk appetite,liquidity needs,and investment horizon
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KembaraXtra–Islamic Finance–Islamic Capital Market – Islamic Mutual Funds vs Islamic Mixed Funds
Islamic Mutual Funds
-Invest in one main asset class or a focused strategy,most commonly Shari’ah-compliant equities or Sukuk
-All investments must strictly pass Shari’ah qualitative and quantitative screening
-Funds are structured similarly to conventional mutual funds but without riba,gharar,and maisir
-Investors receive units,and fund value is calculated using Net Asset Value (NAV)
-Returns are mainly generated from capital gains and halal dividends
-Risk level depends on the specific fund type (equity funds are riskier than Sukuk funds)
-Liquidity is moderate,as units are usually redeemable at NAV on a daily or periodic basis
-Suitable for investors seeking focused exposure to a specific Shari’ah-compliant asset class
Example:
-An Islamic equity mutual fund investing only in Shari’ah-compliant listed companies
Islamic Mixed Funds
-Invest in a combination of asset classes,such as equities,Sukuk,leasing (Ijarah),and commodities
-Designed to provide diversification within a single fund
-Trading of fund units in the market is permitted only if tangible assets constitute at least 51% of the portfolio
-Liquid assets and debts must not exceed 49%,to comply with Shari’ah rules on tradability
-Returns come from multiple sources,including equity appreciation,rental income,and Sukuk returns
-Risk profile is generally balanced,as losses in one asset class may be offset by gains in another
-Liquidity is moderate to low,and generally lower than pure Islamic mutual funds
-Suitable for investors seeking risk diversification and balanced growth
Example:
-A mixed Islamic fund investing in Shari’ah-compliant equities,Sukuk,and leased real estate assets
Key Differences
-Islamic mutual funds focus on specialisation,while Islamic mixed funds focus on diversification
-Islamic mutual funds rely mainly on NAV-based redemption,whereas Islamic mixed funds may involve market negotiation depending on asset composition
-Islamic mixed funds must observe the 51% tangible asset rule,which is not a specific requirement for Islamic mutual funds
-Risk in Islamic mutual funds is more concentrated,while risk in Islamic mixed funds is more spread across assets
Simple Conclusion
-Islamic mutual funds are ideal for targeted Shari’ah-compliant investing
-Islamic mixed funds are suitable for investors seeking diversified,asset-backed,and balanced Islamic investments
Islamic Mutual Funds
-Invest in one main asset class or a focused strategy,most commonly Shari’ah-compliant equities or Sukuk
-All investments must strictly pass Shari’ah qualitative and quantitative screening
-Funds are structured similarly to conventional mutual funds but without riba,gharar,and maisir
-Investors receive units,and fund value is calculated using Net Asset Value (NAV)
-Returns are mainly generated from capital gains and halal dividends
-Risk level depends on the specific fund type (equity funds are riskier than Sukuk funds)
-Liquidity is moderate,as units are usually redeemable at NAV on a daily or periodic basis
-Suitable for investors seeking focused exposure to a specific Shari’ah-compliant asset class
Example:
-An Islamic equity mutual fund investing only in Shari’ah-compliant listed companies
Islamic Mixed Funds
-Invest in a combination of asset classes,such as equities,Sukuk,leasing (Ijarah),and commodities
-Designed to provide diversification within a single fund
-Trading of fund units in the market is permitted only if tangible assets constitute at least 51% of the portfolio
-Liquid assets and debts must not exceed 49%,to comply with Shari’ah rules on tradability
-Returns come from multiple sources,including equity appreciation,rental income,and Sukuk returns
-Risk profile is generally balanced,as losses in one asset class may be offset by gains in another
-Liquidity is moderate to low,and generally lower than pure Islamic mutual funds
-Suitable for investors seeking risk diversification and balanced growth
Example:
-A mixed Islamic fund investing in Shari’ah-compliant equities,Sukuk,and leased real estate assets
Key Differences
-Islamic mutual funds focus on specialisation,while Islamic mixed funds focus on diversification
-Islamic mutual funds rely mainly on NAV-based redemption,whereas Islamic mixed funds may involve market negotiation depending on asset composition
-Islamic mixed funds must observe the 51% tangible asset rule,which is not a specific requirement for Islamic mutual funds
-Risk in Islamic mutual funds is more concentrated,while risk in Islamic mixed funds is more spread across assets
Simple Conclusion
-Islamic mutual funds are ideal for targeted Shari’ah-compliant investing
-Islamic mixed funds are suitable for investors seeking diversified,asset-backed,and balanced Islamic investments
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KembaraXtra– Islamic Banking- Meaning of Shariah
Sharīʿah Framework in Banking
Fundamentals of Sharīʿah
Meaning of Sharīʿah
Sharīʿah in Islam
Scope of Sharīʿah Laws
Sharīʿah Framework in Banking
Fundamentals of Sharīʿah
Meaning of Sharīʿah
- Derived from Arabic root sharaʿa
- Literal meanings:
- To open something
- To open a path or door leading to a street
- Related term mashraʿa:
- Path leading to a water source or watering place
- Sharaʿa means to make, establish, or lay down laws
- The term Sharīʿah is derived from this root
Sharīʿah in Islam
- Refers to laws governing all aspects of human life
- Laws established by Allah for His servants
Scope of Sharīʿah Laws
- Divided into three aspects:
- Belief (ʿAqīdah) – matters of faith
- Deeds (ʿAmal) – actions and practices
- Ethics (Akhlāq) – moral conduct
- Sharīʿah comprehensively covers belief, actions, and ethics
- Sharīʿah may be regarded as another term for Islam as a complete way of life
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KembaraXtra – Islamic Banking-The Meaning of Fiqh
- Fiqh means laws governing human deeds
- Defined as:
- Understanding laws relating to human actions
- Laws derived from their respective evidences
- Evidences of fiqh:
- Specific verses of the Qurʾān
- Sunnah of the Prophet ﷺ
- Covers every aspect of human deeds
- In modern usage:
- Sharīʿah is sometimes applied with a meaning equivalent to fiqh
- Fiqh (as part of Sharīʿah) is divided into four (4) categories:
- ʿIbādāt – religious worship and rituals
- Munākaḥāt – marriage and family laws
- Muʿāmalāt – commercial and transactional matters
- Jināyāt – offences, crimes, and punishments
