Five steps to creating a Shariah-compliant portfolio

By Kaushiq Kodithodika, Advent

Its appeal partly lies in its resilience, due to the fact that it is based in the real economy. The size of the global Muslim population — 1.3 billion people across more than 50 countries — contributes to its attractiveness in the eyes of financial institutions, but more recently, firms have also begun to realise that Islamic Finance is not only relevant for Muslim investors, but that it is a type of ethical investment that can appeal to a much broader audience. In fact, many non-Islamic countries have been adapting their financial regulations to enable and promote the adoption of Islamic financial products within their jurisdictions.

Islamic Finance has thus become an important sector within the global asset management industry, and one that more and more firms are looking to develop. However, it comes with its own set of unique challenges, from varying regional interpretations of Shariah law to the necessity for investment firms to have their own Shariah advisory board, and the obligatory screening of conventional stocks to ensure acceptability before investing in them for a Shariah-compliant portfolio. Therefore, Islamic investment management today presents great opportunities, but setting up a compliant operation requires considering a number of things.

This series of articles will explore the five steps firms need to consider before setting up a Shariah-compliant investment management activity — after which success will depend, as in conventional finance, on each organisation's strategy and investment decisions.