What is Shari’ah Compliant Investment?
Shari’ah-compliant investment represents a series of ethical financial transactions organized in accordance with Islamic law. The economic growth in many Muslim countries has meant that an ever-increasing number of Muslims and non-Muslims are seeking to invest their wealth in a Shari’ah compliant manner. The modern-day Islamic finance industry has developed globally at a considerable rate since its inception over 35 years ago.
The Shari’ah governs all aspects of an individual’s life from matters of state, such as governance and foreign relations, to issues of daily living and financial transactions. It is the set of rules and principles that Muslims believe expresses God’s guidance on the way individuals should lead their lives. The Shari’ah is derived from two primary sources, the Quran and the Sunnah
Internationally, there has been a surge in demand for Shari’ah-compliant investment instruments within the last decade. So far, however, this worldwide trend has not supported the development of Shari’ah-compliant investment products by local financial institutions in Kenya, however, there have been increasing numbers of banking institutions which offer a more and more sophisticated Shari’ah-compliant banking assortment to their customers.
The global Islamic banking industry is valued at US$ 1.1 trillion with more than 300 financial institutions already participating. With growth of 37% p.a. over the past two years, even if we estimate Shari’ah compliant products to grow at a modest 10% p.a., assets under Islamic institutions is expected to surpass US$2.4 trillion in value by 2020.
The emergence of Islamic banking in recent years is one of the most important trends in the financial world. There has always been a demand among Muslims for financial products and services that conform to the Islamic law. With the development of viable Islamic alternatives to conventional finance, Muslims are increasingly able to participate in the financial world without bearing an economic penalty.
It is a young and fast-growing industry that continues to evolve and expand both financially and geographically. This industry’s vast market includes devout Muslims in indigenous Muslim societies as well as in Muslim minorities of non-Muslim countries. Furthermore, it offers a broad appeal beyond its traditional Muslim base: non-Muslim individuals and communities that seek ethical financial solutions have also been attracted to Islamic banking.
The industry has gone from commercial banking to syndicated transactions and equities, and more recently, into debt issuance and structured products. Its sophistication and product offerings have developed along with this change. At an earlier stage, industry growth was in part a reflection of economic growth in the Islamic world, fuelled primarily by oil wealth. This created a growing middle-wealth segment and hence made banking a necessary service to the larger segment of the population. In the past several years, increased awareness about Islamic banking has led to increased market share (from conventional banking) and continued high growth (15-20% in key markets).
Significant opportunities currently arise for Shari’ah-complaint products. Several reasons support this case:
- Strong economic growth supports greater affluence and increasing demand for Shari’ah-compliant products.
- Low penetration levels by Islamic funds and lack of depth across asset classes and products signifies untapped potential.
- Movement away from conservative portfolios parallels an emerging interest in alternative investment options.
- Recent and forthcoming regulatory reforms may prove beneficial for growth in the market.
- Government surpluses are oriented toward investments in infrastructure projects to stimulate long-term economic growth.