Many advisers ask clients to invest in emerging markets and US bonds. But, being an Emirati, can I invest directly into those markets and bonds, and how to go about investing in these places and asset classes?
Answer: As an Emirati you are able to invest in any way you choose all over the world, including in the emerging markets of India, China, Brazil, Russia etc. However, being an Emirati means you are also a Muslim, and so your choice of investments will be limited to those that are Sharia-compliant.
In line with the above, the most important element to making appropriate investment choices is to have an understanding of some of the main principles involved in Sharia compliance. One of the key principles involved is that the notion of earning ‘interest' is considered to be ‘haram' i.e. forbidden.
Consequently, you must immediately ignore US Treasury bonds and their worldwide equivalents, as they invariably pay out interest. The equivalent Sharia-compliant instruments to bonds are sukuk, which are structured to pay out profit only, which makes them perfectly acceptable to Muslims.
As a Muslim it is important to know what other investment activities are prohibited. These include; traditional insurance and re-insurance, alcohol and prohibited drug related dealings, gambling, and the processing and selling of pork products. This is not an exhaustive list but indicates some of the main areas to be avoided.
To originate a Sharia-compliant equity investment opportunity in the emerging markets (or any stock market in the world) will require the administration of a qualitative process to screen or ‘purify' investment areas, so that Sharia rules will not be contravened.
This analysis involves the elimination of any company involved in the above-mentioned list, and any other forbidden activities. The screening process can be quite complex, and very few companies operating in the global markets are Sharia-compliant in their cash management and debt profile. In other words, most companies will both receive and pay out interest to one extent or another.
The majority of Muslim scholars currently concur that it is difficult to remove all tainted stocks, and so the screening process incorporates financial ratios which limit the amount of interest involved in any particular company. Any company exceeding these ratios will be eliminated.