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About ShariahCompliantInvestmentsAssets of Islamic financial institutions have grown by an averageof 15-20% per annum* over the past five years, suggesting robustdemand for Islamic investing. It is expected Islamic finance willcontinue to grow at this rate for the next few years as it continues toflourish in the Middle East and the Far East and that total assets inIslamic finance will reach 1 trillion by 2012*.The growth in Islamic finance has also been mirrored in the growthof Shariah compliant investment funds. It is estimated that currently,there are more than US 30 billion under management* in Shariahcompliant investment funds.Shariah compliant investment funds invest in a wide range of assetclasses – equities, real estate, commodities, private equity andinfrastructure and the number of Shariah compliant funds worldwideis expected to double by 2010*.Islamic financial institutions have taken the form of commercial banks,investment banks, investment and financial companies, insurancecompanies, and financial service companies.This is an industry that is still evolving, developing and growing. Theindustry has also grown from retail banking to commercial bankingand, more recently, into investment banking. Its sophistication andproduct offering have developed along with this change.There is a general perception that Islamic finance is concentrated inthe Middle East. While it is true that, at present, about 60% of thetotal assets of Islamic financial institutions are in the Middle East,Islamic finance is expanding to other Muslim-majority countries.This is primarily because wealth creation and demand for Shariahcompliant financial services are making those markets economicallyviable for financial institutions.Owing to the oil boom of the 1970s, Islamic banking flourished on theArabian Peninsula and, from there, expanded into the Middle East andSouth-East Asia. It is now rapidly developing in Western countries thathave large Muslim communities such as in Europe and the UnitedStates, with significant activity taking place in London. Islamic bankinghas already been integrated into the British, French and Germanbanking systems to allow Muslims living in Europe to bank and investusing Shariah compliant products.Source: HSBC Amanah October 2008 and www. zawya.com1

About HSBC AmanahHSBC Amanah is the Islamic financial services division of theHSBC Group. With experienced personnel working from regionaloffices, its mission is to ensure that HSBC is the leading providerof value-added Shariah compliant financial products and services toits clients.HSBC Amanah is uniquely positioned to understand, structure,and deliver financial solutions that are compatible with therequirements of Shariah. It is headquartered in Dubai, and withregional representatives in New York, Riyadh, London, Jakarta andKuala Lumpur, HSBC Amanah is one of the leading global players inthe Islamic finance industry.HSBC Amanah is guided and supervised by the HSBC AmanahCentral Shariah Committee, an independent committee ofIslamic scholars. The Committee oversees the development andoperations of all HSBC Amanah products and transactions toensure that they meet the requirements of Shariah.HSBC Amanah AwardsHSBC Amanah – Best Islamic Fund Manager 2007(Euromoney)Amanah Saudi Equity Fund – Best performing GCC EquityFund over 3-year period (Lipper)Best Islamic Equity Fund (Amanah Saudi Equity Fund) 2005(Failaka)Best GCC Equity Fund (Amanah GCC Equity Fund) 2007(Failaka)The ConceptIslamic finance principles embody a unique form of investmentmanagement which corresponds with the values of sociallyresponsible investing. Islamic finance is an ethical and equitablemode of finance that derives its principles from the Shariah (Islamiclaw). The Shariah is based on the Quran (the sacred text of Islam)and the example of Prophet Muhammad, Peace Be Upon Him,(PBUH), and it governs all aspects of personal and collective lifeof Muslims. The most distinctive element of Islamic finance is theFigure 1: Sectorsprohibition of interest, whether “nominal” or “excessive,” simpleor compound, fixed or floating. To comply with Shariah, investmentmust not involve interest (also known as “Riba”).Islamic investment funds are joint pools wherein investorscontribute their surplus funds for the purpose of their investment toearn Halaal (“lawful”) profits strict conformity with the precepts ofShariah. Under the principles of Shariah, in addition to prohibition ofinterest, investment is also disallowed in businesses that deal withalcohol, pork, gambling, tobacco, media, pornography and anythingelse which is deemed “Haraam” (unlawful). It is also ensuredthat not only the underlying investments but also the contractualterms agreed between the investors and the investment managerconform to Islamic principles.All Shariah compliant investments must be certified by experts inShariah, generally through a panel or board comprised of respectedShariah scholars who are qualified to issue “Fatwas” (religiousrulings) on financial transactions. This panel of Shariah expertsensure full compliance of the all Shariah compliant investmentfunds.For illustration, the Central Shariah Committee of HSBC Amanahhas determined that investment funds investing in equities as anasset class will not invest in companies whose primary businessactivity is shown in Figure 1 (sectoral screens), or in companieswhich exhibit characteristics shown in Figure 2 (financial screens).Islam has disallowed certain contracts due to inherent elementswhich render them Haraam :Gharar: Uncertainty. This concept covers particular types ofuncertainty or contingency in contracts such as short selling andderivatives.Maysir: Gambling. Prohibition renders conventional insuranceand derivatives Haraam.Riba: Interest. In simple terms, it covers any financial return onmoney regardless of whether the interest is fixed or floating,simple or compounded, and at whatever rate.Figure 2: FinancialAlcoholWeaponsAll the following should be less than 33%TobaccoPorkTotal Debt/12 month trailing market capitalisationFinancial servicesGamblingCash & Interest bearing securities/12 month trailing market capitalisationPornographyLeisure/mediaAccounts Receivable/12 month trailing market capitalisation2

Central Shariah CommitteeAll Shariah compliant investments must be certified by experts inShariah, generally through a panel or board comprised of respectedShariah scholars who are qualified to issue “Fatwas” (religious rulings) on financial transactions. This panel of Shariah experts ensurefull compliance of all Shariah compliant investment funds.Three scholars of international repute, well versed in both Islamic lawand modern finance, serve on the HSBC Amanah Shariah Committee. The Committee not only provides initial approvals on investmentobjectives and investment strategy of all funds, but also reviews theinvestments periodically to ensure the continuous compliance of theinvestments of the funds to Islamic principles. Moreover, the Committee conducts annual audits of all funds to ensure adherence totheir rulings during the year.Sheikh Nizam YaqubyHe is a graduate in economics and comparative religion from McGillUniversity and is an internationally acclaimed scholar in the islamicbanking industry. He has been a teacher of Tafsir since 1976. Headvises a number of banks and financial institutions including BNPParibas, Dow Jones, Lloyds TSB and Standard Chartered on islamicbanking and finance.Sheikh Dr Mohamed ElgariHolds a PhD in economics from the University of California. He is aProfessor of Islamic Economics and the director of the Centre forResearch in Islamic Economics at King Abdulaziz University in SaudiArabia. He is an expert at the Islamic Jurisprudence Academy (OIC),Jeddah. Dr Elgari is the editor of the Review of Islamic Economics.He is also an adviser to several Islamic financial institutions worldwideand the author of many books on Islamic banking.Dr Mohamed Imran Ashraf UsmaniHolds a PhD in Islamic Finance. He also obtained degrees ofAlimiyyah and Takhassus (specialisation in Islamic Jurisprudence)from Jamia Darul Uloom, Karachi. His area of expertise is IslamicFinance in which he has carried out extensive research. Dr. Usmani isa faculty member/teacher of Jamia Darul Uloom, Karachi and Instituteof Business Administration (IBA), Karachi. He is the author of variousbooks on Shariah (Islamic lawfrom Jamia Darul Uloom, Karachi.His area of expertise is Islamic Finance in which he has carried outextensive research. Dr. Usmani is a faculty member/teacher of JamiaDarul Uloom, Karachi and Institute of Business Administration (IBA),Karachi. He is the author of various books on Shariah (Islamic law).53

FinancialInstrumentsThe most common forms of Shariah compliant investment fundsare equity funds, real estate funds and money market Funds. Theseinvestment funds employ Islamic contracts which ensure that theterms and rights of all parties are safeguarded in conformity withIslamic principles (examples and definitions are given below).Musharakah: A partnership where profits are shared according to apre-agreed ratio while losses are shared in proportion to the capitalinvestment of each partner. This equity financing arrangement iswidely regarded as the purest form of Islamic financing.Mudarabah: An investment partnership under which the investor(the “Rab-ul-Mal”) provides capital to the investment manager (the“Mudarib”) in order to undertake a business or an investment activity.While profits are shared on a pre-agreed ratio, losses are borne onlyby the investor.Ijarah: An Islamic lease agreement. Instead of lending money andearning interest, Ijarah allows the investor to earn profits by chargingrentals on the asset leased to the user.Murabaha: Purchase and resale of an asset. Instead of lendingmoney, the investor purchases the desired asset from a thirdparty and resells it at a predetermined higher price to the user. Bypaying this higher price over instalments, the user of the asset haseffectively obtained credit without paying interest.The classical equity instruments in Islamic commercial law(musharakah and mudarabah) require partnership and profit sharing.In financial markets, investing in stocks and equity funds is permittedbut must conform to certain guidelines.Conventional interest-based lending or bonds are ruled out in Islamicfinance because it relies on interest. Instead, asset-backed financingis encouraged with the risk being shared by the provider and the userof the asset.64

GlossaryAmanah: Trust, with associated meanings of trustworthiness,Mudarib: The mudarib is the entrepreneur or investment manager infaithfulness and honesty. As an important secondary meaning, the terma mudarabah who invests the investor’s funds in a project or portfolioalso identifies a transaction where one party keeps another’s fundsin exchange for a share of the profits. For example, a mudarabah isor property in trust. This is in fact the most widely understood andessentially similar to a diversified pool of assets held in a Discretionaryused application of the term, and has a long history of use in IslamicAsset Management Portfolio.commercial law. By extension, the term can also be used to describedifferent financial or commercial activities such as deposit taking,custody or goods on consignment.Murabaha: Purchase and resale. Instead of lending out money, thecapital provider purchases the desired commodity (for which theloan would have been taken out) from a third party and resells it at aArbun: Earnest money/Down payment; a non-refundable depositpredetermined higher price to the capital user. By paying this higherpaid by the client (buyer) to the seller upon concluding a contract ofprice over installments, the capital user has effectively obtained creditsale, with the provision that the contract will be completed during thewithout paying interest.prescribed period.Musharakah: Profit and loss sharing. It is a partnership where profitsGharar: Uncertainty. One of three fundamental prohibitions in Islamicare shared as per an agreed ratio whereas the losses are shared infinance (the other two being riba and maysir). Gharar is a sophisticatedproportion to the capital/investment of each partner. In a Musharakah,concept that covers certain types of uncertainty or contingency in aall partners to a business undertaking contribute funds and have thecontract. The prohibition on gharar is the basis for disallowing practicesright, but not the obligation, to exercise executive powers in thatsuch as short selling, speculation and derivatives.project, which is similar to a conventional partnership structure andIslamic banking: Financial services that meet the requirements of theShariah, or Islamic law. While designed to meet the specific religiousthe holding of voting stock in a limited company. This equity financingarrangement is widely regarded as the purest form of Islamic financing.requirements of Muslim customers, Islamic banking is not restricted toRiba: Interest. The legal notion extends beyond just interest, but inMuslims: both the financial services provider and the customer can besimple terms riba covers any return of money on money - whether thenon-Muslim as well as Muslim. Also called Islamic finance or Islamicinterest is fixed or floating, simple or compounded, and at whatever thefinancial services.rate. Riba is strictly prohibited in accordance with the Islamic tradition.Ijarah: An Islamic lease agreement. Instead of lending money andShariah: Shariah or Islamic refers to divine guidance as given by theearning interest, Ijarah allows the bank to earn profits by chargingHoly Quran and the Sunnah (practice) of the Prophet Muhammadrentals on the asset leased to the customer. Ijarah wa iqtinah extends(Peace Be Upon Him) and embodies all aspects of the Islamic Faith,the concept of ijarah to a hire and purchase agreement.including belie