The Islamic Fund: Religious Take on Socially Responsible Investing

Islamic fund is an investment fund that is managed according to the Sharia law. The law is based on Islam's sacred texts. In many ways, the resulting policies often overlap with the goals of socially responsible investing. Socially responsible investing is the term for investment practices that try to earn profit in a socially responsible way without hurting the investors' bottom lines. Like socially responsible investors, Islamic investors seek to minimize risk, contribute to social causes and avoid contributing to industries that they view as damaging to the public good. However, because of unique features of Sharia law, Islamic funds and the goals of social investing don't always converge.

Setting Policies and Objectives

When investors start a socially responsible investment fund, they work together to craft a policy that guides how the fund will be used. It will include the goals of the fund, what kinds of things they will invest in and what kind of things they will avoid. They will use that statement to evaluate their investment decisions. If the company they are considering investing in doesn't fit their policy, they move on to another company. The investors also make an effort to keep track of their existing investments and check to see if they still fit with their policy. If they do not, the socially responsible investors pull their investments out.

The Sharia council serves the similar role in Islamic funds. The Sharia council is a group of respected Islamic scholars who examine every aspect of the fund and make sure it is Sharia-compliant. The council has the power to reject investment opportunities if they aren't Sharia-compatible or if they stop being Sharia-compatible anywhere along the way. However, unlike socially responsible investors, who rely on specific policies, Sharia council relies on existing texts and nearly a millennium worth of legal precedent. Furthermore, the law isn't universal along all Muslims. Sunni and Shia Muslims--the two major branches of Islam--use different methods to interpret Sharia laws and have their own, separate sets of precedents. This makes their decision-making process less predictable and more complex.

Islamic Funds and Ethnically Responsible Investing

Both socially responsible investment funds and Islamic funds have investment areas that they will usually avoid because they are completely prohibited by the fund policy and Sharia law (respectively). In some cases, these prohibitions overlap. Like Islamic funds, socially responsible investment funds will usually avoid anything to do with weapons manufacture, pornography, gambling, tobacco and alcohol products. Other prohibitions are unique to Islamic funds. Under Sharia law, interest is immoral, so Islamic funds can't be used towards any investment that charges interest, even if that business otherwise fits Sharia law.

Similarly, the prohibition on gambling extends beyond commercial gambling and covers any form of "game of chance." This term covers any investment where the outcome is uncertain and the risk of loss is high. The Shariah law also prohibits investments in entertainment companies, regardless of the nature of the content they produce. Finally, because Sharia law prohibits pork, the Islamic fund cannot invest in anything that produces or handles pork-based products.

Islamic Funds and Charities

Both socially responsible investment funds and Islamic funds are designed to ensure that some of the profits go towards charities and organizations that help the less fortunate.

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