2023 Guide to Shariah Compliant Funds

As a seasoned investor, it is important to be aware of Shariah-compliant funds and halal investing. In this comprehensive guide, I will delve into the principles behind these investment vehicles and uncovering the untapped potential they hold for both Muslim and non-Muslim investors.


Introduction to Shariah Compliant Funds

Shariah compliant funds, also known as Islamic funds or Ethical funds, are investment funds that adhere to Islamic law or Shariah principles. As the world’s second largest religion with over 1.9 billion followers, Islam provides guidelines for all aspects of Muslim life, including finances and investing.

According to Islamic finance principles, investments should align with core values of social responsibility, equitable distribution of wealth, and avoidance of unethical industries. Shariah compliant funds aim to offer Muslim investors an opportunity to invest in line with their faith.

Some key principles include:

  • Avoiding interest (riba) and usury
  • Exclusion of certain sectors like gambling, alcohol, etc.
  • Focus on shared business risk and profit
  • Asset purification of any non-compliant income
  • Oversight by Shariah advisory boards

As noted in this source:

Shariah compliant funds enable investors to invest in line with Islamic principles in an easy and accessible way.

The market has seen significant growth in recent years as demand rises globally. According to estimates, over $2 trillion in assets are managed under Shariah compliant principles.

In this article, we will explore the structure, principles, and performance of these unique funds. Additionally, we will look at major providers as well as the future outlook for Islamic finance.


Key Principles of Shariah Compliant Investing

Shariah compliant funds adhere to several core principles derived from Islamic law:

  • Prohibition of interest (riba) – Charging or paying interest is prohibited under Shariah law. Funds avoid bonds, preferred shares, and interest-based investments.

  • Avoidance of excessive uncertainty and speculation (gharar) – Investments are restricted to transparent and well-understood assets. Highly complex or speculative derivatives are avoided.

  • Exclusion of certain sectors – Industries inconsistent with Islamic values are screened out, including:

    • Alcohol
    • Tobacco
    • Gambling
    • Adult entertainment
    • Conventional financial services
    • Weapons, firearms
  • Focus on ethical practices – Investments promote social responsibility and environmental stewardship aligned with Islamic principles.

  • Payment of zakat (charity) – Annual payment made to benefit the poor as purification of legitimate wealth.

  • Oversight by Shariah boards – Funds appoint panels of Islamic scholars to ensure compliance as noted in Shariah screening of halal stocks.

As one provider states:

“Our Shariah board ensures that all aspects of the fund management process, from stock selection to income purification, adhere to time-honored Islamic principles.”

By aligning investments with faith-based values, Shariah compliant funds offer an opportunity for Muslim investors to meet their financial objectives without compromising on their beliefs.


Structure and Operations

Shariah compliant funds have unique structures and operations to deliver returns in a manner consistent with Islamic principles:

  • Oversight by Shariah boards – Funds appoint panels of Islamic scholars to provide guidance and certify compliance. As noted on Islamic finance and banking, their role is critical for credibility.

  • Investment screening – Potential investments are evaluated against guidelines to avoid prohibited sectors and ensure alignment with values. Stocks may be filtered based on criteria like halal investment thresholds.

  • Use of profit-sharing agreements – To avoid interest, fund returns are tied to profit-and-loss sharing arrangements like mudharabah partnerships.

  • Asset purification – Any non-compliant income from investments is “purified” by donating to charity, as outlined by scholars.

  • Zakat payment – As a pillar of Islam, zakat is deducted from the fund’s assets annually for distribution to the poor.

  • Macro considerations – Funds may also consider broader macro factors like public interest and social justice in decisions.

Structure Description
Shariah Board Provides oversight on compliance
Screens Filter potential investments
Agreements Use profit-sharing, not interest
Purification Remove non-compliant income
Zakat Annual charity payment

By aligning with both spiritual values and financial objectives, these funds allow Muslim investors to participate in global markets in a Shariah-compliant manner.


Growth and Popularity

The Shariah compliant funds market has seen tremendous growth in recent years:

  • Increasing assets under management – Islamic funds globally had over $2.2 trillion in assets as of 2020, up from just $185 billion in 2003.

  • Rising demand in Muslim countries – Populations in Gulf nations and Southeast Asia are key drivers of growth as incomes rise.

  • Adoption by conventional firms – Major financial institutions like HSBC, Standard Chartered, and Citigroup now offer Islamic fund options to serve this demand.

As noted in Indonesia’s booming crypto industry, the country with the world’s largest Muslim population has embraced these investments. The underlying principles resonate both with faith-based and socially responsible investors.

According to Muslims in crypto:

“The fast growth has been driven by strong demand as Muslim investors seek to align faith and finance.”

Shariah compliant funds allow easy access for investors to gain exposure in equities, sukuk bonds, real estate and more, in compliance with their beliefs. This universal appeal is driving more assets globally.

Year Assets Under Management Growth
2003 $185 billion
2010 $939 billion 407%
2020 $2.2 trillion 134%

With this rapid growth, Islamic finance principles are now applying to modern assets like cryptocurrency as well. The future remains bright for Shariah compliant investing.


Performance and Considerations

Shariah compliant funds aim to generate returns in line with conventional counterparts, while adhering to Islamic principles:

  • Competitive returns – By diversifying across sectors and regions within guidelines, Islamic funds can offer performance comparable to traditional options.

  • Constrained investment universe – The narrower pool of Shariah-approved securities may limit some opportunities and upside.

  • Higher costs – Additional expenses related to Shariah screening and oversight result in somewhat higher fees.

  • Values-based investing – While returns are important, these funds appeal to those seeking alignment with Islamic finance principles.

According to research from halal investment criteria:

“Shariah compliant funds deliver returns in line with benchmarks, with low correlation and volatility.”

Performance relative to conventional counterparts will vary based on market conditions and the specific screens used by the fund. But they provide a viable option for Islamic investors to participate while adhering to faith. With a longer-term perspective, the constraints may be an acceptable tradeoff for aligning with religious beliefs.

While returns are important, Shariah compliant funds ultimately offer a means of putting one’s money to work in a manner consistent with Islamic values. This peace of mind supports their growing adoption globally.


Examples of Shariah Compliant Funds

Many leading fund managers now offer Islamic finance products across major asset classes:

  • Equity fundsScreening for halal stocks allows shariah compliant funds to invest in listed shares of permissible sectors. Popular examples are funds from HSBC and Franklin Templeton.

  • Sukuk bonds – Interest-free sukuk provide fixed income exposure in compliance with Islamic principles. JPMorgan and BNP Paribas offer shariah compliant sukuk funds.

  • Money market funds – Funds like the Shariah Money Market Fund from SATURN invest in short-term, liquid instruments for stability.

  • Mixed asset funds – These funds like the Amana Income Fund combine equities, sukuk and cash for balanced returns.

In addition to mutual funds, providers also offer Shariah compliant ETFs, hedge funds, and private equity to meet diverse investment needs. With a wide range of options now available, Muslim investors can construct a portfolio aligned with their faith.

Going forward, applying Islamic finance principles to new digital asset classes like cryptocurrency will further expand access and opportunities in shariah compliant investing.



In summary, Shariah compliant funds offer a unique investment approach aligned with Islamic finance principles:

  • They adhere to guidelines from Quranic teachings on interest, risk, and prohibited industries.

  • Oversight by Shariah scholars ensures continual compliance with core values for Muslim investors.

  • The market has grown rapidly with over $2 trillion now invested in these ethical funds.

  • Performance is competitive to conventional funds, with some limitations on investment universe.

As discussed in Islamic finance principles, these funds fulfill a demand for values-based investing consistent with the beliefs of over 1.9 billion Muslims globally. Providers continue to expand access across asset classes.

Looking ahead, applying the guidelines from Quranic injunctions on riba and gharar to new technologies like blockchain and cryptocurrency will be an area of focus. Overall, Shariah compliant investing enables Muslims to integrate faith with finance.

The growth reflects a universal appeal for those seeking ethical investment alternatives. For Islamic investors, participating in global markets in compliance with their religion is now more convenient than ever before.

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