The Shariah Advisor monitors the operations and investments of the Fund in accordance with the Shariah investment guidelines. To ensure compliance with Shariah principles, the Shariah Advisor reviews the Fund operations and investments every month.
The Shariah investment guidelines stipulate that investments in shares of companies identified as morally deficient, such as those related to alcohol, tobacco, gambling, pork processing, and pornography are prohibited. In addition, because Shariah law prohibits the charging of interest (riba), investments in many financial companies are excluded. The Manager provides the Shariah Advisor with a monthly report on the holdings and transactions of the Fund.
Shariah investing requires that companies that do not comply with Shariah law are not considered for purchase. Securities of companies that fail to pass a series of financial ratio filters are also excluded from consideration.
The Fund does not invest in debt instruments and investments that might be considered as speculative, such as derivatives. As the Fund does not speculate, it does not engage in short-term trading and normally holds its investments for several years.
Rules on divestment of Shariah non-compliant securities
In the event the following investment instances occur in the Fund, the rules below shall be executed by the Manager:
“Shariah-compliant securities” which are subsequently considered “Shariah non-compliant”
This refers to those securities which were earlier classified as Shariah-compliant securities but are subsequently reclassified as Shariah non-compliant. In this regard, if on the date the securities turned Shariah non-compliant, the respective market price of Shariah non-compliant securities exceeds or is equal to the original investment cost, the Manager must liquidate them. Since it is not always feasible to liquidate an entire position in one day, any dividends received and excess capital gains from the disposal of the Shariah non-compliant securities after the date of the announcement at a market price that is higher than the closing price on the date of the announcement shall be recorded for reporting in the annual report in the section on purification.
On the other hand, the Fund is allowed to hold the investment in the Shariah non-compliant securities if the market price of the said securities is below the Fund’s original investment costs. It is also permissible for the Fund to keep the dividends received during the holding period until such time when the total amount of dividends received and the market value of the Shariah noncompliant securities held equal the original investment cost. The Fund is allowed to hold such investment until breakeven.
Shariah non-compliant securities
If the Manager mistakenly invests in Shariah non-compliant securities, the Manager needs to dispose of any Shariah non-compliant securities, within a month of becoming aware of the status of the securities. Any gain made in the form of capital gain or dividend received before or after the disposal of the securities shall be handled in the same manner as purification, detailed in “Purification Guidelines” section below. The Fund has a right to retain only the original investment cost, which may include brokerage fees and other transaction costs. If the disposal of the investment resulted in losses to the Fund, the losses are to be borne by the Manager.
Under the Shariah principles, any income or distribution received by the Fund from investments in its portfolio which relates to income from Shariah non-compliant investments are considered as impure income. This impure income is subject to an income purification process.
Income purification is calculated on two criteria:
- Benefit of riba-based loan (in cases where the companies obtain riba based loans); and
- Haram income, regardless of the sources
The process of income purification is calculated as follows:
In the case of companies which are involved in riba-based loans, purification of the benefit arising out of money obtained through riba-based loans is done as follows:
- Total amount of riba-based loans of the company is divided over the company’s assets;
- The result is then multiplied over total net dividend received by the Fund;
- The result would be total net dividend received by the Fund arising out of riba-based loans; and
The amount would then be divided into two, capital and labour; capital is to be purified. The portion arising out of capital must be purified because the capital was obtained from Shariah non-compliant source while the portion arising out of the labour is allowed to be kept because the business activities are permissible. Purification of benefit from riba-based loans shall not be carried out when the companies are not paying any dividend. For short-term riba-based loans, purification shall be carried out in accordance with the tenure of the loan over the financial period.
In case of non-permissible or haram income, purification must be carried out on the total income regardless of the source of income or whether the company has gained profit or otherwise and whether dividend has been distributed or otherwise. In cases where the actual amount of the non-permissible or haram income could not be obtained, such amount shall be estimated. Purification in this scenario shall be carried out by dividing the total haram income over total shares of the company and multiplied by the average number of shares owned by the Fund during the period. The purification amount would then be pro-rated according to the period of holding. The purification amount shall be deposited into a separate account which is segregated from the account of the Fund. The Manager shall distribute the purification amount to the Unit Holders, pro rata, as soon as possible with consultation of the Shariah Advisor.
The Manager must inform Unit Holder that they are obliged to purify their specific purification amount in accordance with the Shariah principles by channelling it to Baitulmal and/or any charitable bodies.
The Fund’s purification method has been approved by the Shariah Advisor.