Islamic investment is basically a unique form of socially responsible investment. This investment comes from Islamic beliefs that don’t have a division between the secular and spiritual. Consequently, this investment type gets a lot of scrutinies since all of the financial decisions rely on religion.
There are specific guidelines that this Islamic investment policy needs to follow.
Defining Islamic Investment Policy
This investment, both for institutions or individual investors, comes from the Sharia Board. That is a group of Islamic scholars that that check if an investment product is linear to the Islamic Law.
All of the rules within this investment follow a hierarchy of authority. The first is the Quran, which Muslims believe as the words of Allah as revealed to his prophet Muhammad in the seventh century. The second is the Sunnah, this are rules from the prophets’ actions and sayings.
After that, they have Qiyas, which are the scholarly legal deduction, and the last is Ijma, the scholars’ consensus on a specific issue.
The Drawbacks of Islamic Investing
The biggest challenge from the Sharia types of the portfolio is similar to the problems faced by other portfolio managers when they have to come up against various clients. They have to make an investment thesis that will later guide the criteria for portfolio selection.
Then, the portfolio manager decides the right benchmark that will measure the investors’ performance. Besides, the application of this type of investment toward corporate finance usually also face some interesting questions.
Those questions appear due to borrowing and setting aside excess funds in low-risk, interest-bearing, short-term instrument are inseparable.
That leaves the stock selection of this Sharia-compliant to the Islamic law to require some adaptation from the companies. These companies, even the ones that do not engage in the prohibited business, need to find and borrow a principal-protected repository for the excessed cash. Therefore, that creates difficulties for the companies.