For investors seeking European residency or citizenship in a European country while adhering to Islamic financial principles, Portugal has actively explored opportunities to offer Shariah-compliant investment funds. These funds are designed to align with the ethical and religious guidelines of Shariah law, providing a viable investment avenue for Muslim investors.
Portugal is providing Shariah Certification Approval for funds that comply with Islamic law, making it a suitable investment for those seeking Shariah-compliant alternatives to conventional financial products. This initiative not only caters to the economic needs of Muslim investors but also supports their goal of obtaining residency or citizenship in Europe.
The appeal of Shariah-compliant finance extends beyond Islamic countries[1], with global financial centers recognizing its potential. London, for example, has positioned itself as a hub for Islamic finance. Islamic finance has also gained traction in non-Muslim-majority countries, reflecting a growing interest in ethical and sustainable financial practices on a global scale.
In this article, we will explore Portugal’s involvement in Shariah-compliant finance and examine the principles, challenges, and requirements of Shariah-compliant funds.
What are Shariah-compliant funds?
The term “Shariah Compliant Fund” means a joint pool wherein the investors contribute their money for the purpose of investment to earn halal profits in strict conformity with the precepts of Shariah[2]. Shariah-compliant funds represent a specialized category of socially responsible investing, guided by Islamic law principles[3].
These funds are distinguished by their rigorous screening processes to ensure alignment with Islamic religious values. They strictly avoid investments in sectors that generate income from activities forbidden by Shariah law, such as alcohol, pork, gambling, and other prohibited industries. The meticulous implementation of Shariah principles involves adhering to a comprehensive set of rules to maintain ethical and religious integrity in financial transactions.
Resilient industry
The global Islamic financial services industry[4] (IFSI) in 2022 demonstrated soundness and resilience and recorded structural development, despite challenging global finance conditions. The global IFSI is estimated to be $3.25 trillion in 2022. Within the IFSI, Islamic banking remained dominant, with an asset size of $2.25 trillion, accounting for 69.3% of the global IFSI assets.
The Islamic capital market segment, including sukuk (Islamic bonds), Islamic funds, and Islamic equities, experienced slower growth rates than previous years. The sukuk sub-segment, which retained its dominance, grew by 7% in 2022, while Islamic funds grew marginally by 1%. Unfavorable global economic conditions and reduced sovereign issuances affected the growth of sukuk, while Islamic equities and funds were impacted by market volatility and liquidity strain.
Shariah-compliant requirements
A Shariah fund must ensure that the underlying businesses in which it holds securities are Shariah compliant[5]. The fund may not invest in any businesses whose underlying activities are involved in any non-halal items. The investment manager of a Shariah fund cannot, for example, include any companies involved in sectors such as alcohol, tobacco, port, adult entertainment industry, gambling, weapons, conventional banks, and insurance companies. In addition, a Shariah fund may not invest in interest-bearing instruments. It may not invest in conventional derivatives and may not sell short. These restrictions will impact certain strategies.
Shariah funds must also appoint a Shariah board to guide the fund’s directors and the investment manager on matters of Shariah law. These funds must be audited on an annual basis to ensure that they are adhering to Shariah principles. The audit is carried out either by the scholars or an outside party. It is important for all funds, but a particular issue is for index funds that invest in large numbers of securities. These funds aim to make the process systematic so that mistakes are avoided and resources conserved. Quantitative methods are often used to analyze a wide range of business and financial variables affecting Shariah status.
Although the custodian of a Shariah-compliant fund does not itself need to operate along the lines of an Islamic bank, it must service the Shariah-compliant fund without violating Shariah principles. Funds are not allowed to receive interest offered by time deposits or to enter into repo contracts. So the assets must either be placed in a non-interest-bearing account or a commodities contract with a bank. Similarly, in the case of a failed trade, an interest charge would normally apply to the client in a conventional fund structure. But this cannot take place in Shariah finance, so an alternative process is required, such as the imposition of a fee.
Challenges in Shariah-Compliant Finance
While Shariah-compliant finance offers ethical alternatives, it faces challenges such as standardization, regulatory frameworks, and global acceptance. Efforts are underway to standardize Shariah-compliant practices[6], and regulatory bodies increasingly recognize the importance of accommodating Islamic finance within existing frameworks. Continued collaboration among scholars, financial institutions, and regulatory bodies is essential to address these challenges effectively.
In conclusion, Portugal’s initiative to offer Shariah-compliant investment funds is part of a broader trend of integrating Islamic finance into global markets, promoting ethical and socially responsible investment options.
For more information about the route for investing in Portuguese funds to gain a European Residency, contact us on WhatsApp.
Sources
[1]https://globalislamicfinancemagazine.com/shariah-compliant-finance/
[2] https://www.alameenfunds.com/how-to-invest/shariah-compliant/
[3] https://www.supermoney.com/encyclopedia/shariah-compliant
[4] https://www.ifsb.org/wp-content/uploads/2023/10/Islamic-Financial-Services-Industry-Stability-Report-2023_En.pdf
[5] https://www.pwc.com/gx/en/financial-services/islamic-finance-programme/assets/shariah-compliant-funds.pdf
[6] https://globalislamicfinancemagazine.com/shariah-compliant-finance/