While retail players typically rely on Shariah compliance certification by firms providing investment offerings, high-net-worth individuals (HNWIs) and asset managers would usually require extra screenings to be conducted.
Akber Khan, acting CEO at Qatar’s Al Rayan Investment, said such due diligence is necessary as the firm operates what is arguably the largest Shariah compliant GCC fund around. “Our investors pay us, for us to do the work ourselves. Our investors trust us.”
Citing the examples of the MSCI USA Islamic Index and the Dow Jones Islamic Market US Index, Akber said each using different screening methodologies resulted in these indices not having the same component stocks.
Noting the basic Islamic premise of the target company not being involved in socially undesirable activities, Akber said an equally critical screening methodology that savvy investors use is that of the balance sheet ratios matrix.
Being debt-heavy would typically disqualify the Shariah status, but Akber said there is also concern for any investor if the company has too much ready cash available. External parties get worried about such a situation being a reinvestment risk — where the company’s management would use the cash in a sloppy manner by overpaying for an asset that is valued far lesser.
Such risky transactions could typically be spotted with regular audits, which can include recertifying Shariah compliance, said SharLife Partner Arham Merican who used to be with Bursa Malaysia’s Shariah advisory committee.
Arham said many HNWIs readily pay to seek guidance on whether investments are Shariah compliant, preferring to have the latest certifications rather than relying on outdated paper guarantees. Noting the lack of common Shariah compliance standards among different nations and jurisdictions, Arham said contradiction often occurs even among scholars.
