Halal Investing and Socially Responsible Investing Lateefat Oba BSc, FCA, ACS, ACSI, CIFE, AFIIBI Halal

or Shariah-compliant Investing is investing according to the values dictated by Islamic law. Halal means permitted as opposed to Haram which means forbidden. Halal Investing in modern times is based on the guidelines issued by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). Socially responsible investing, the web informs us, is investing according to the investors ethical beliefs and social values. Socially responsible investing is also referred to as ethical or green investing. The guidelines are broad and investors will have to investigate to find the companies or funds that meet their own personal criteria. In the case of Halal Investing the guidelines given by AAOIFI indicate what constitutes haram and should be avoided when investing. Two broad screens are indicated, the industry screen and the financial screen. The Industry Screen forbids investment in companies in the following sectors: Alcoholic beverages Pork products Tobacco products Production and Distribution of Music media Gambling / Casinos Conventional Financial Services Conventional Insurance Hotels serving alcohol or operating casinos Adult Entertainment / Pornography Weapons and defence

The AAOIFI Financial Screen consists of the following financial ratios: Conventional debt/Total market capitalisation < 30%. (Cash + Interest-bearing deposits)/ Total market capitalisation < 30% (Total interest + income from non-compliant activities)/Revenue < 5% Dividend purification is required when the revenue of a company consists of income from non-compliant activities. The proportion of the relevant dividend is calculated and donated to charity. The industries shunned in socially responsible Investing generally include: Alcohol Tobacco Gambling

Defence/Weapon Animal testing Intensive farming Genetic modification or engineering Nuclear power Pornography and other adult entertainment

Socially responsible investing goes further to seek to invest in companies that exhibit positive criteria in the following: Environment Human rights Labour relations Employment equality Community investment

A Halal fund has an added governance structure in the Shariah Board. The Shariah Board ensures the fund is and remains Shariah-compliant. While the haram industries are universal across Halal funds, the exact financial ratios are determined by each funds Shariah Board. This is evident in the financial screen of well-known Islamic Indices shown below: FTSEs MSCI Global Islamic Indices Islamic Indices Total Debt/Total Assets (Cash and Interest-bearing securities)/Total Assets (Cash and Accounts Receivable)/Total Assets Accounts Receivable/Total Assets Non-compliant income other than interest Interest income Non-compliant income and interest income < 33% < 33% < 50% < 5% < 5% < 5% < 33.33% < 33.33% < 33.33% < 70% < 5%

Dow Jones Islamic Indices Total debt/trailing 24-month average market capitalization Cash and interest-bearing securities/trailing 24-month average market capitalization Accounts receivables/trailing 24-month average market capitalization < 33% < 33%

< 33%

Emphasis on Halal Investing is on negative criteria which some, but not all, are found in socially responsible investing. Halal Investing is not explicit in the positive criteria that socially responsible investing emphasise. Are these positive criteria implicit in selection of companies for Halal funds? Could this be the reason Halal investing is not mentioned when socially responsible investing is discussed? Contemporary Islamic jurists exercised their learned opinion to arrive at the screens that are being used. It has been argued that these criteria do not adequately meet Shariah requirements. Full Shariah-compliance in Islamic finance is work-inprogress. One of the jurists, Sheikh Yusuf Talal Delorenzo asserted that the ratios cannot be final word on any of these matters; they are interim tolerance parameters that apply only to non-Muslim owned/operated companies; furthermore the criteria are not to be understood as an endorsement of these corporate practices. Halal investing is based on the tenets of one of the two aspects of Shariah Muamalat, which deals with man-to-man activities. The other aspect is Ibadat which deals with man-to-God worship. Muamalat deals with political, social and economic activities and interactions of man. The aim is to promote social harmony. It follows that Halal investing aims to be socially responsible, it must therefore be seen to be so. Halal investing is open to all and not restricted to Muslims. -o-

Lateefat Oba is a Chartered Accountant, Chartered Stockbroker and an Islamic Finance Consultant.

References:
http://wiki.islamicfinance.de/index.php/Screening http://www.djindexes.com/islamicmarket/?go=shariah-compliance http://www.mscibarra.com/eqb/gimi/islamic/MSCI_Global_Islamic_Indices_IndexSummary_July200 7.pdf http://www.yasaar.org/FTSE-Yasaar_criteria%5B1%5D.pdf http://en.wikipedia.org/wiki/Socially_responsible_investing http://www.islamic-banking.com

CISI Professional Refresher: Investment Principles and Risk