Halal Funds Similar to Ethical Funds

A Western Ethical Fund invests in companies based on certain principles which include positive contribution to the world and avoids those companies which are harmful. Before investing in a company, either the fund manager or an outside organization screens the companies against the defined ethical criteria. In case of Islamic funds, the screening is provided by the Shari’ah Boards consisting of religious scholars. The Board decision is binding on the fund manager.

Besides choosing companies involved in Shari’ah compliant business, an additional requirement of Islamicfunds is that the companies should not be involved in interest dealings for profit or to finance their business. Their business activities also must not include areas prohibited in Islam. The following is a list of some of the advisory responsibilities of the Shari’ah Committee according to Sheikh Yusuf Talal Delorenzo who is member of many Shariah committees for Islamic financial institutions.

1. Earnings from interest bearing investments of the companies constituting a fund must be determined, separated and given out as charity. Muslims also have to pay Zakat on their wealth but according to most scholars this is the responsibility of the investor.

1. The companies selected must not be involved in prohibited activities.

1. The portfolio of securities should be constantly monitored to make sure it remains Shari’ah compliantas new situation arise in the economy.

1. The Shari’ah committee has to monitor the activities of fund managers in regard to the operations to verify that the fund managers are applying Islamic rules. Any interest dealing must be tracked so the income from that can be separated from the earnings.

1. The fund is free to charge whatever fees they deem necessary to the fund but the advisor must make sure of transparency to the investors so that they are well informed about their costs.

1. Shari’ah Committee must review all legal and business documentation of the fund for compliance.

Besides Shari’ah advisor, Malaysian Securities Commission has proposed the following additional requirements.

1. The investment committee should have at least two Muslim members and at least one of whom will be present in all formal meetings.

1. The fund must have a Muslim compliance officer who should attend Shari’ah committee meetings.

1. There are additional requirements for Shari’ah committee:
   1. The Shari’ah Committee must have a representative present in all investment committee meetings to advice on Shari’ah principles.
   2. The representative must avoid conflict of interest if he is working for more than one Islamic fund.
   3. The committee must verify the annual report for Shari’ah compliance.

1. The committee members must be qualified for their field, have good reputation, must not be bankrupt, or have criminal record.