Many terms have been used to describe London’s junior market. ‘Pure’ didn’t feature among them until the Family Shariah Fund, the first Shariah-compliant multi-asset class investment fund, launched on AIM in July.
The Family Office, the Bahrain-based fund manager, raised $31.5 million (£15.8 million) in a private placing from devout Muslim families and individuals awash with oil cash and wanting to make investments in a broad range of Shariah-compliant products and investments outside the GCC region.
Davide Barzilai, partner at Norton Rose who provided legal advice to the Family Office on listing, said: “Equity finance and fundraisings are sometimes called the ‘purest’ forms of Islamic finance as they revolve around placing your capital at risk.
“The essence of a listing is fundamentally Shariah compliant as it isn’t interest based and shareholders aren’t guaranteed a return on their capital. Their return is based on the success of the business – the concept of providing an assured profit isn’t liked in Shariah law.”
The Family Office, which was established in 2004 to advise families on growing and preserving their wealth through conventional and Islamic investments, plans to put the $31.5 million to work in “a diversified pool of Shariah compliant assets, such as the money markets and cash, Islamic income and leasing, equities, alternative investments, real estate and private equity,” says Richard Joye, partner at the Family Office.
Barzilai adds: “Islamic law promotes the use of capital and rejects the concept of hoarding, which is considered to be non-Islamic as it isn’t beneficial to society. The moral concept that underpins Islamic finance is that investing capital benefits society as somewhere down the line someone will gain from the injection of capital into the economic system.”
The fund’s investors are high net worth individuals, families and an institutional investor based in the Middle East. Joye observes: “There is a real shortage of investment strategies for investors looking for Shariah-compliant investments outside the GCC. We launched the fund on AIM to target external investors and to help them to diversify their portfolios into world markets and into certain funds that may not be available to them normally.”
Historically, Joye explains Shariah-compliant investments have been focused on equity-based deals structured to deliver the fixed return and certainty of a bank loan. Increased demand for Islamic finance has caused new products to emerge, expanding the range of Shariah-compliant instruments available to investors.
Abdulmohsin Al Omran, CEO and founding partner of the Family Office, says: “We have seen an opportunity in the growth of Islamic finance to create an Islamic investment portfolio that will enable the average investor to invest their savings in the most efficient way as Islamic banking has relatively high charges,” he adds.
To date the Family Office has invested 10 per cent of the funds in an Islamic income fund (fixed income) and 20 per cent into active and passive equity instruments.
“As we have had a great deal of interest from a number of institutional investors looking for ethical investments, we intend to increase the size of the fund in the short to medium term,” says Al Omran.
Islamic finance has seen rapid global growth of 10-15 per cent per annum over recent years, according to the IMF, and some estimate the market to be worth close to $500 billion.
The number of Shariah compliant products has surged, opening up less traditional investment opportunities in Europe, Asia and North America, to Muslim investors.
Al Omran says Islamic investors are becoming more adventurous and turning to more complex capital market products as opposed to focusing their investments in quasi-deposit accounts or real estate.
In much the same way that ethical investors in the West consider the social, ethical and environmental impact of their investments before taking the plunge, Islamic investors stay clear of financial products and investments that are considered non beneficial to society under Islamic law, such as interest-bearing accounts.
Barzilai notes: “The concept of interest, which is lending someone money for a greater amount of money for a fixed rate or one linked to LIBOR, for instance, is not permitted because no risk is being taken in the underlying venture.”
Investing in industries involved in gambling, alcohol production and pig farming is also prohibited.
Just as ethical fund managers search for companies or investments with positive social and environmental characteristics through a positive screening process, the Islamic finance industry is led by a group of expert scholars who have a background in economics, banking and Islamic law. These experts form committees called Shariah Supervisory Boards who examine the structure and documentation on a transaction and deliver opinions to financial institutions and investors.
The Family Shariah Fund has two Shariah scholars on its board. Sheikh Nizam S Yaquby and Sheikh Abdul Sattar Abdul Karim Abu Ghuddah give their legal proclamations, or Fatwa, reassuring investors that the fund’s financial structures are compliant with Shariah.
“There may be discussions at the edges of certain financial structures and how they are used. It is perfectly acceptable for an investment to be compliant for one institution, but not for another. It just means that an institution is taking a different opinion,” adds Barzilai.
“If the scholars approve a controversial structure, they are not answerable to shareholders but to God.”
The Next stage
Over the last five years, the UK government has made changes to the tax system to bring Islamic financing on a par with conventional financing. In October, it will announce whether the first Islamic bonds, or sukuk, will be launched by a Western government.
Kitty Ussher, the UK’s economic secretary to the Treasury, recently said: “We are determined to issue Islamic bonds. It will bring money to London and send out a strong positive signal to the Muslim community.”
If the government’s plans go ahead it will strengthen London’s position as a major Western centre for Islamic finance.
Shariah, which literally means “way” or “path to the water source” is the legal framework within which all economic and social activities, public and some private aspects of life, are regulated for Muslims.
It has evolved over 1,400 years and is based on fairness and participating on a risk and profit-sharing concept.
The overriding concept of Islamic finance is one of social justice and the economic prosperity of society.
No unfair gain
Shariah-compliant investments have a number of key elements, one of the best known is that the receipt and payment of interest, or riba, is prohibited. Any return on investments should be linked to the profits of a venture as the creation of money from money itself is considered to be a sin.
Transactions based on chance or speculation, or maisir, and not the efforts of the parties involved to produce a return are banned under Shariah. This means that Islamic transactions must be based on tangible assets, such as commodities, buildings or land.
Shariah doesn’t prohibit ordinary commercial speculation or risk-taking, so transactions involving the use of swaps and options have to be carefully considered to ensure that the commercial substance of the transaction complies with Shariah principles.
The existence of uncertainty, or gharar, in a contract is prohibited as Islamic law requires the occurrence of an event. Any type of transaction where the subject matter, the price, or both are not determined or fixed in advance will be viewed with suspicion under Shariah.