Strict rules leave Muslims with few investing options
By Meg Richards
Associated Press
NEW YORK — For the millions of Muslims in America who want to conduct their financial lives according to their faith, there are few options, especially when it comes to long-term investing.
Shariah: Islamic law, based upon defined sources and methods of determining precedent. The primary source is the Muslim holy book, the Quran. Secondary sources include the Sunnah, a collection of the words and actions of the Prophet Muhammad. Halal: Anything considered acceptable under Islamic law. Haram: Anything forbidden under Islamic law. Riba: An unjust return, such as interest. Zakat: A charity tax that financially able Muslims are required to pay each year. Its name is related to the Arabic verb, "to purify," and the Quran teaches that in sharing their wealth, Muslims purify the total sum of it. Source: Lightbulb Press Guide to Understanding Islamic Investing in Accordance with Islamic Shariah
Islam has strict rules regarding money, including a sweeping prohibition on interest, known as riba. This puts everything from conventional savings accounts and credit cards to interest-bearing or fixed-income investments like bonds and Treasuries off limits for faithful Muslims. Islamic law, or Shariah, does allow stock investing, however, and a small but growing number of equity mutual funds are targeting Muslims with portfolios that invest only in acceptable, or halal, companies.
Terms used in Islamic investing
Devout Muslims do not drink alcohol, eat pork, gamble, consume pornography or accept profits from interest — and any business that profits from these activities is haram, or forbidden. That cuts out the entire financial sector, many retailers, most hotel, restaurant and casino operators, businesses that are heavily leveraged and companies that derive a significant portion of revenues from interest on large cash positions. Makers of weapons and defense products, marketers of tobacco and polluters are also considered unacceptable.
"When you're evaluating a company, what one has to do is not only look at their primary business, but look at their ancillary businesses, as well," said Monem Salam, director of Islamic investing at Saturna Capital, investment adviser to the Amana funds. "You really have to dig deep into the financials and the annual reports to find this information."
Islamic mutual funds are a subset of socially responsible funds, and with the exception of the prohibition on interest, they look a lot like many portfolios that invest with an eye toward Christian values or even environmentalism. Because they tend to avoid industrials and utilities, they often have a growth orientation.
Like socially responsible funds, Islamic funds use a screening process to determine which stocks are acceptable. They also consult a panel of scholars, known as a Shariah board, who help decide whether companies are good investments under the teachings of the Prophet Muhammad. Energy companies, chemical manufacturers, high-tech concerns and telecom stocks often pass the test.
Globally there are about 130 Islamic mutual funds, but only a handful operate out of the United States, including the two offerings from Bellingham, Wash.-based Amana Funds. With just $34 million in assets, Amana's growth fund charges a relatively high expense ratio, but its performance shows halal investing doesn't have to come at a cost. It's been ranked high for the past three- and five-year periods, as well, handily beating overall the Standard & Poor's 500 index.
There's also the Dow Jones Islamic Fund, a basket of almost 300 companies, including many U.S. companies found in the Dow Jones Islamic Market, a global family of about 80 indexes launched in 1999. This fund, which has a more palatable expense ratio, is about 80 percent passively managed and about 20 percent actively managed. It has posted above-average returns for the past three years.
