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Islamic Saving OptionsBy Wahaj Aslam

Fund Manager - Siraj Islamic Funds

Islamic banking has seen some vibrant years in recent pastwhereby it received due recognition with a commendable doubledigit growth. Investors globally hold more than $1.5 trillion inShariah-compliant investments and there are more than 500funds globally that comply with Islamic principles, of which one-third of the funds were launched during the past four years - thefigure is projected to double in the coming five years. This isdespite the fact that the demand for Islamic products is stilloutpacing the supply, and there a dearth of education and trainingfor Islamic investment managers and Shariah scholars.

Islamic Finance Products fall into two broad categories - thosethat have the characteristics of Equity and those that have the

characteristics of Debt. Equity products are considered "more"Shariah-compliant since these promote the Shariah principle thatreward should come from sharing the risk of a venture.Nonetheless, debt products do have a place in the modern Islamicfinance industry - e.g. Profit and loss sharing bank accounts.

Islamic Equity FinanceInvestment in shares of a company (without the element ofspeculation or intra-day trading) is de facto Shariah compliantsince Islamic finance values equity partnership as the ideal methodof investment as long as the underlying business is compliantwith the screening criteria. However, investors are prohibitedfrom investing in preferred shares of stock due to the guaranteedrate of profit they entail. Islamic equity funds have experienced

tremendous growth and have proved to be an attractiveinvestment vehicle for investors looking for Islamic modes ofinvestment.

The crux of Islamic investments is sharingof risk and exclusion of fixed orpre-determined interest products.In Islamic finance, profits only come at thecost of risk exposure but excessive risksand uncontrollable and uncertain obligations

are also forbidden.

Investment Screening Criteria

1) Business of the investee companyThe business of the investee company should be Halal.Accordingly, investment in shares of conventional banks,insurance companies, leasing companies, Modarabacompanies, companies dealing in alcohol, gambling

etc. are not permissible.

2) Debt to total assetsThe total debt of the investee company should notexceed 40% of the total assets. The debt here includesall interest-based debt & interest based financing.

3) Illiquid to total assetsThe total illiquid assets of the investee company as apercentage of the total assets should be at least 20%.

4) Investment in non-Shariah compliantactivities and income from non-Shariah

compliant investmentsThe total investment of the investee company in non-Shariah compliant business should not exceed 33% ofthe total assets. The income from non-Shariah compliantinvestment should not exceed 5% of the gross revenue.Subsequently, giving the proportionate portion of non-compliant income to charity is required to purify thedividend income from these stocks.

5) Net liquid assets versus share priceThe net liquid assets per share should be less than themarket price of the share. [Net Liquid Assets = TotalAssets - (Tangible Fixed Assets + Inventory) - Liabilities]

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Islamic Debt Finance (Deposits)Profit and loss sharing (PLS) is the ideal business form in Islamicfinance since it promotes equity and the sharing of risk andreward (partnership is highly regarded in Islamic financial Fiqh)between parties. There are t wo main forms of partnerships inuse namely Modaraba and Musharaka. These two structures areused by Islamic banks in savings accounts.

Islamic banks offer two kinds of deposits: Current accounts andInvestment accounts. Current accounts are similar to those offeredby conventional banks. The deposited capital is guaranteed andmade available to the client at any moment whereby no rewardor return is paid on deposits. They are mainly used for transactionand safety purposes and deposits are accepted on the conceptof Qard / Loan.

In contrast, Investment deposits or conversely Term Depositsbased on the principles of Partnership (Modaraba or Musharaka)must remain with the bank for a certain, previously agreed,period (majority of Islamic Financial Institutions have nowsuccessfully launched PLS daily product deposits). Investmentaccounts are based on trust financing. The depositor is the

financing partner, while the bank is the managing partner. Thebank pools all investment deposits and searches for suitableinvestment opportunities. The return on investment (positive ornegative) is then shared with the depositors, after the bank hasdeducted its own costs and a previously agreed fee for its efforts.In the event the investment is not profitable, the depositors sharethe loss. Their maximum liability is the deposited sum. Investmentdeposits can only be withdrawn prematurely by paying a certainfine.

Modaraba

A Modaraba is a silent partnership between investors, orsleeping partners (known as the rabb-al-mal) who provide

capital to an agent (the mudarib) who acts on their behalfand invests the capital on behalf of the investors. Theinvestors and the agent share the profits of a venture (ifany) according to a predetermined ratio. The mudarib mayonly use the funds for purposes that are explicitly definedin the contract. At the conclusion of the Modarabatransaction, the mudarib must return the principal and thepredetermined share of profit to the investors.

MusharakaThe Musharaka is a full contractual partnership formed topursue a specific line of business or project. The projectcan be a new venture or an exist ing one that requiresadditional capital. In contrast to the Modaraba, a Musharakaallows each partner to contribute capital (i.e. each partnerin the Musharaka receives an equity stake in the venture)and to jointly share in the profits and losses of the venture.Another key difference between the two contracts is thatin the Musharaka each partner not only contributes capital,but also contributes some amount of labor.

Murabaha (Cost Plus)

This concept refers to the sale of goods at a price, whichincludes a profit margin agreed to by both parties. Thepurchase and selling price, other costs and the profit marginmust be clearly stated at the time of the sale agreement.The investor is compensated for the time value of its moneyin the form of the profit margin. This is a fixed-income loanfor the purchase of a real asset (such as real estate or a

vehicle), with a fixed rate of interest determined by theprofit margin.

When considering Islamic investment options, the followingsummarizes the saving options available in the market place:

Islamic Certificates of InvestmentsCertificate of Islamic Investment are offered by Islamic banks invarious tenors ranging from one (1) month to five (5) years. Inthe prevailing environment, the average rate for a tenor of 6-

months and an investment of below Rs. 10 million is around7.62% p.a.

Sukuk (Islamic Bonds)Sukuk, one of the most popular investment instruments may beunderstood as a Shariah compliant 'Bond'. In it s simplest formSukuks represent ownership of an asset and not just a claim tothe cash flow.

A Sukuk can be of many types depending upon the type of Islamicmodes of financing and trades used in its structuring. However,the most important and common among those are Ijarah, Shirkah,Salam and Istisna. Ijarah Sukuk is the most popular structure andhas been recently launched by the Government of Pakistan aswell. These Sukuks represent ownership of equal shares in a

rented real estate, right to receive the rent and dispose of theirSukuk in a manner that does not affect the right of the lessee,i.e. they are tradable. The holders of such Sukuks bear all cost ofmaintenance and damage to the real estate. Ijara Sukuks issuedby the Government are now available to individual investors aswell since the State Bank has instructed banks to offer "InvestorPortfolio Securities Account (IPS)" to its clients.

Real EstateInvesting in real estate is fundamentally one other permissibleform of Islamic investment. Therefore, buying, maintaining,leasing, and selling real estate via which an income is generatedis acceptable in the eyes of the Shariah. Real estate and propertydevelopment is a key industry in the Middle East, the Arab world,

and the Muslim world which requires a substantial amount ofcapital and may not be feasible or efficient for many investors.Consequently, investing in a Real Estate Investment Trust (REIT)is a more suitable option.

Real Estate Investment TrustA REIT is an entity that invests in different kinds of realestate or real estate related assets. The properties can beof a residential nature, or be commercial real estateproperties, such as offices, hotels, and malls.

Shariah Advisory Board"Shariah Advisor y Board (SAB)" is a regulatory body thatsupervises and ensures that the Islamic financial institutionsperform their operations according to the Islamic law. Shariahsupervision and approval is the main differentiating factorbetween a conventional and an Islamic instrument. An SABcomprises of appropriately qualified scholars to determinethe relevant rules for financial transactions. Ideally the roleof a Shariah advisor comes into play from the time ofdevelopment of an Islamic product or service, to its launchand throughout the period it is offered. The Board providestheir opinion on compliance by issuing a Fatwa (an Islamic

legal opinion) which is a stamp of approval for an Islamicinvestment

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