First steps on the road to Shariah-compliant investment

There are several Shariah-compliant investment funds now established in South Africa. Where do you start if you want to invest in a fund that both meets your investment objectives and your religious obligations? Below are a number of questions you should ask your Shariah fund manager before making a decision.

What are the Top 10 shares that your fund is invested in?

This is important because you should feel comfortable with the underlying shares that you are investing in. Most fund managers disclose this information and investors have the right to know what the full holdings are in the portfolio. Transparency is a key Shariah principle.

Does the fund comply with the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOFI) standards?

These are international standards which reflect global best practice.

Who is on the Shariah Supervisory Board?

The Shariah Supervisory Board plays a key role in ensuring that the fund is Shariah compliant. Find out who the board members are and make sure that they are competent and esteemed scholars who are internationally highly respected for their knowledge of Islamic finance. There are few such scholars in the world: any member who is on the AAOFI Shariah Board would be regarded as competent.

The Association of Collective Investments (ACI) recommends that the majority of board members be internationally recognised scholars who have adopted the AAOFI standards.

Is the Board independent?

It is important that board members are independent from the fund manager so that the selection of the investment universe cannot be manipulated by the fund manager for the benefit of performance while compromising Shariah requirements. This is an AAOIFI requirement.

Who monitors ongoing Shariah compliance?

A Shariah Board usually meets once a year. However, throughout the year there should be regular audits to ensure that the fund manager is operating within the prescribed guidelines and that the shares in the portfolio have been approved by the Shariah Board.

Does the fund have a local Shariah Board?

A good Shariah Board consists of mainly international scholars who might have little knowledge of local companies. They would know, for example, that ABSA is a bank and therefore not permitted but might not be fully informed on South African regulations. It is important to have a local Shariah Board that meets regularly throughout the year and interfaces with the main Board.

How can I be sure that the fund I'm investing in is Shariah compliant?

Transparency is key. Request a copy of the fund manager's mandate, investment holdings and the Shariah certificate that certifies the investments made by the fund are Shariah compliant. Also ask the questions outlined above. The answers will put you in a better position to make an informed decision.