Islamic Investing 101 : Getting to Know Sukuk, a Shariah-Compliant Bond
The term ‘Sukuk’ may still be unfamiliar to many Australians. Originating from Islamic finance principles, this investment instrument represents a form of financial certificate similar to a traditional bond but is structured to comply with Shariah law, which prohibits the charging of interest.
Despite its origins in Islamic finance, Sukuk has attracted global interest, extending beyond Muslim-majority nations. This alternative investment has become increasingly popular among international investors seeking portfolio diversification and new market opportunities.
Sukuk is an Islamic financial certificate similar to a traditional bond, but it follows Shariah law by prohibiting Riba. It represents ownership in an asset, project, or investment, with returns generated from the underlying asset. Unlike traditional bond, this instrument offers ethical investment options in compliance with Islamic principles.
This instrument can utilize various assets, including but not limited to land, buildings, and specific projects. The key point is that they need to follow the principles of Shariah in the capital market, ensuring that all investments are in line with ethical and religious guidelines.
Sukuk comes in various forms, each with its own unique features and risk profiles. Some common types include Ijarah, Musharakah, and Mudarabah. These diverse options allow investors to choose the instrument that aligns with their risk appetite and financial goals, providing a customizable and flexible investment experience.
Sukuk and traditional bond serve as vital investment instruments, each with their own unique characteristics and underlying principles. Understanding the key differences between these two is crucial for making informed investment decisions. So, what are the differences between these two?
- Sukuk, based on asset ownership and profit-sharing, follows ethical and Shariah guidelines. They are tied to the performance of underlying assets, providing a more secure investment option. This instrument appeals to Shariah-compliant and ethically conscious investors, promoting ethical investment practices and inclusive financial development, particularly in Islamic finance markets.
- Traditional bond rely on interest payments, reflecting a debtor-creditor relationship. They are subject to market interest rate fluctuations, posing potential risks for investors. This instrument attracts investors from various backgrounds without specific ethical considerations and operates within the regulatory framework of the global financial system.
In recent years, the global Sukuk market has experienced significant growth, attracting investors from various backgrounds and beliefs. Countries such as Malaysia, Saudi Arabia, and the UAE have played a vital role in promoting and expanding the market, showcasing its potential for ethical and inclusive financial development.
Currently, the global Sukuk market is valued at USD 915 billion in 2022 and is expected to reach a value of USD 2.3 trillion by 2028, based on a predicted cumulative annual growth rate (CAGR) of 16.2% from 2023 to 20281 .
Hejaz, a leading global Islamic finance provider, has made history by introducing Australia’s first ever Sukuk Exchange Traded Fund (ETF). This new offering provides investors with access to a Shariah-compliant bond alternative product, marking a significant milestone in the Australian financial landscape.
Launched on the ASX, November 2, 2023, the Hejaz Sukuk ETF (ASX: SKUK) presents an opportunity for retail, wholesale, and institutional investors in Australia and New Zealand to engage in Sukuk, a shariah-compliant fixed income asset similiar to a traditional bond.
Don’t miss your chance to be part of this groundbreaking investment venture. Invest in the Hejaz Sukuk ETF (ASX: SKUK) today and become a part of the future of ethical investing!
Disclaimer:
The information presented above is prepared by Hejaz Asset Management Pty Ltd (ABN 69 613 618 821). It provides general information only, which means it does not take into account your individual objectives, financial situation, needs or circumstances. Before making any financial decision, you should assess whether the information is appropriate for you. You should also seek appropriate financial advice tailored to your needs before making any financial decisions. This information is not an offer or recommendation to make any investment or adopt any investment strategy. Past performance is not a reliable indicator of future performance.
1 IMARC Group. (2022). Sukuk Market Report. Retrieved from https://www.imarcgroup.com/sukuk-market
What is Hejaz Equities Fund?
The Hejaz Equities Fund is a professionally managed investment fund that aims to produce returns by matching or beating the performance of the iShares MSCI World Islamic UCITS ETF. The fund is also designed to follow Islamic religious principles. With over a rolling 5 to 7-year timeframe through exposure to diversified equities. Hejaz Equities Fund considers ethical values and social justice in its investment decisions. Balancing between financial and spiritual investment screens while investing in a variety of stocks to diversify risk.
Islamic ETFs are designed for investors that want their investments to be consistent with their values and beliefs. In 2022, Hejaz launched the first Islamic ETFs in the Australian Securities Exchange (ASX). The Hejaz Equities Fund can be found by putting (ASX: ISLM) and it is available to be traded like any listed security. Hejaz Equities Fund follows strict guidelines and ethical screening processes set by an independent Sharia board, Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and Global Islamic Financial Services (GIFS).
Hejaz Equities Fund (HEF) provides investors with exposure to both domestic and international markets. So that the investment risks can be reduced through diversification. The investment approach is to research, screen, and then select quality investments. And it will apply across Australian and international equities. Furthermore, HEF uses a rigorous and robust investment approach. It encompasses a quantitative and qualitative analysis. It also adopts an adaptive investment style to consider value, quality, and growth across the short, medium, and long term.
Who manages the Fund?
1. Responsible Entity – Equity Trustees LtdEquity Trustees Limited is a financial company that manages a fund and handles issuing documents related to it.3. Fund Manager – Hejaz Financial Advisers Pty LimitedTheir role is to assist Equity Trustees Ltd to oversee and monitor the Investment Manager’s investment and management of the Funds. Furthermore, they aim to promote and market the Fund.2. Investment Manager – Hejaz Asset Management Pty LimitedHejaz Asset Management Pty Limited is an Australian-based fund manager specializing in ethical and Sharia-compliant investments. They specialize in offering boutique ethical advisory and investment services. They analyse the prospective investment focusing on Finance, Credit, and Structuring rules. They ensure sustainability to the Portfolio. 4. Custodian and Administrator – Mainstream Fund Services Pty LimitedThey are selected by the Responsible Entity to act as administrators for the Fund. That includes keeping financial books and records and calculating the Net Asset Value (NAV) of the Fund.
Benefits
Investing in Hejaz Equity Fund offers benefits for investors. The Fund offers investors an easy way to diversify their portfolios across various equity securities. For both domestic and international. HEF adheres to strict ethical guidelines as outlined in the Ultra-Ethical Code of Governance. The Fund also follows Sharia Ethical Investment Standards set by the AAOIFI. These guidelines include a negative screening process for investments in harmful industries. It avoids investing in companies that are directly involved in or generate more than 5% of their revenue from industries such as alcohol, military, pig products, media/adult entertainment, tobacco, gambling, and traditional financial institutions. This helps to ensure that the portfolio is free from investments in harmful industries. In conclusion, the Hejaz Equities Fund is a unique investment option offering prospects to investors to align their investments with their values and beliefs while generating returns. Managed by a team of professionals, including Equity Trustees Ltd as the Responsible Entity, Hejaz Asset Management as the Investment Manager, and Hejaz Financial Advisers as the Fund Manager, with Mainstream Fund Services as the Custodian and Administrator. Furthermore, investing in Hejaz Equities fund offers benefits such as diversification across various equity securities, strict adherence to ethical guidelines, and avoidance of investments in harmful industries. To find out more about Hejaz ETF, click here on how to buy Australia’s first Islamic ETFs.
What Are the Differences Between Halal Shares and Halal ETF?
Muslims nowadays look for ways to invest in accordance to Islam. Through Halal Shares and Halal ETFs Muslims have more options available. The launch of Hejaz Equities Fund (ASX: ISLM) Hejaz Property Fund (ASX: HJZP) and Hejaz Sukuk Fund (ASX: SKUK) marks the first listed Shariah-compliant ETFs on the ASX.
Hejaz vets companies for shariah compliance using guidelines set by an independent Shariah board. These guidelines prevent investment in socially or morally damaging companies. As a result, Hejaz Halal ETFs offer investors the peace of mind of knowing that their investments are being managed by their Islamic values.
Shariah-compliant shares are units of equity ownership companies that meet Islamic investment screens. Shares exist as a financial asset that provides an equal distribution to any residual profits in the form of dividends. Hejaz follows Shariah Ethical Screening processes set by independent bodies AAOIFI and GIFS.Halal ETFs are for investors who want a variety of shariah-compliant assets. Hejaz benchmarks against MSCI World Islamic which targets clean energy, community services, and health care. Hejaz does not invest in companies and industries that are Islamically impermissible. These companies involve alcohol, pork, tobacco, weapons, gambling, and pornography.
Many conventional ETFs invest in companies that involve haram activities under Shariah law. iShares ITA and SPDR XAR are some examples of conventional ETFs that are not Shariah-compliant as they invest in Aerospace and Military (Investopedia, 2022). Many ETFs do not consider environmental, social, or governance (ESG) criteria when selecting investments. Shariah compliance and ESG criteria both seek to promote sustainable and responsible investing. However, Shariah compliance has extra requirements above ESG investing such as avoiding interest.
In contrast, the ESG benchmark assesses a company’s environmental, social, and governance practices. ESG considers a range of environmental factors when making investment decisions. These include a company’s climate policies, energy use, waste, and pollution. Social factors include a company’s stakeholder relations, diversity, justice, and fighting against racism.
While Shariah compliance and ESG criteria can sometimes overlap, but they are not the same. For example, an ESG-compliant fund may exclude military or tobacco investments but might invest in pig products and riba(interest). Shariah compliance adds more requirements concerning liquidity, morality, and honesty. Hejaz screens against companies that derive more than 5% of their gross revenue from impermissible income. Exclusions include alcohol, military, riba(interest), pig products, and conventional financial institutions.
Conclusions
Shariah-compliant Shares and ETFs offer some advantages for Muslims. Hejaz Financial Services provides Shariah-compliant ETFs and investment options. Muslim investors can invest in line with their values with the Hejaz Equities Fund (ASX:ISLM) the Hejaz Property Fund (ASX:HJZP) and the Hejaz Sukuk Fund (ASX:SKUK).
EQUITY TRUSTEES LIMITED (“EQUITY TRUSTEES”) ABN 46 004 031 298, AFSL 240975, IS THE RESPONSIBLE ENTITY FOR THE HEJAZ EQUITIES FUND (MANAGED FUND) ARSN 653 786 273 ASX: ISLM, AND HEJAZ PROPERTY FUND (MANAGED FUND) ARSN 653 783 085 ASX: HJZP . EQUITY TRUSTEES IS A SUBSIDIARY OF EQT HOLDINGS LIMITED ABN 22 607 797 615, A PUBLICLY LISTED COMPANY ON THE AUSTRALIAN SECURITIES EXCHANGE (ASX: EQT). THIS WEBPAGE HAS BEEN PREPARED BY HEJAZ ASSET MANAGEMENT PTY LTD ABN 69 613 618 821 AS AUTHORISED AFS REPRESENTATIVE OF HEJAZ FINANCIAL ADVISERS PTY LTD (ABN 49 634 683 613, AFSL 517686) AFS REPRESENTATIVE NUMBER 001285318, TO PROVIDE YOU WITH GENERAL INFORMATION ONLY. IN PREPARING THIS WEBPAGE, WE DID NOT TAKE INTO ACCOUNT THE INVESTMENT OBJECTIVES, FINANCIAL SITUATION OR PARTICULAR NEEDS OF ANY PARTICULAR PERSON. IT IS NOT INTENDED TO TAKE THE PLACE OF PROFESSIONAL ADVICE AND YOU SHOULD NOT TAKE ACTION ON SPECIFIC ISSUES IN RELIANCE ON THIS INFORMATION. NEITHER HEJAZ ASSET MANAGEMENT PTY LTD ABN 69 613 618 821, EQUITY TRUSTEES NOR ANY RELATED PARTIES, THEIR EMPLOYEES OR DIRECTORS, PROVIDE AND WARRANTY OF ACCURACY OR RELIABILITY IN RELATION TO SUCH INFORMATION OR ACCEPTS ANY LIABILITY TO ANY PERSON WHO RELIES ON IT. PAST PERFORMANCE SHOULD NOT BE TAKEN AS AN INDICATOR OF FUTURE PERFORMANCE. YOU SHOULD OBTAIN A COPY OF THE PRODUCT DISCLOSURE STATEMENT BEFORE MAKING A DECISION ABOUT WHETHER TO INVEST IN THIS PRODUCT.
HEJAZ EQUITIES AND PROPERTY FUND’S TARGET MARKET DETERMINATION IS AVAILABLE HTTPS://WWW.EQT.COM.AU/CORPORATES-AND-FUND-MANAGERS/FUND-MANAGERS/INSTITUTIONAL-FUNDS/INSTITUTIONAL-FUND-MANAGER?F=758642C0-588E-4B35-A980-FF530D6DF548. A TARGET MARKET DETERMINATION DESCRIBES WHO THIS FINANCIAL PRODUCT IS LIKELY TO BE APPROPRIATE FOR (I.E. THE TARGET MARKET), AND ANY CONDITIONS AROUND HOW THE PRODUCT CAN BE DISTRIBUTED TO INVESTORS. IT ALSO DESCRIBES THE EVENTS OR CIRCUMSTANCES WHERE THE TARGET MARKET DETERMINATION FOR THIS FINANCIAL PRODUCT MAY NEED TO BE REVIEWED.
How to buy Australia’s first Islamic ETFs
Islamic ETFs are a new investment product that is Sharia-compliant, which become the factors why investors choose to invest in Islamic ETFs. The launch of the Hejaz Equities Fund (ASX: ISLM) and Hejaz Property Fund (ASX: HJZP) both makes it to be the first Sharia-compliant ETFs on the ASX. They offer convenience and comfort for customers knowing that their money is invested properly by avoiding engaging with companies that have excessive debts and support haram products and services, such as alcohol, pork products, and pornography. Investing in an Islamic ETF could be smart if you’re motivated by ethical concerns, seek increased diversification, or tap into the growing global demand for Halal products and services.
What to consider when trading ETFs?
1. ETFs can be purchased and sold anytime during the exchange trading hours
During the opening and closing hours, the markets tend to be more volatile. As such, trading after and before the 15 minutes of the day is the best time when the market has less activity, resulting in wider spreads between bids and offers. Furthermore, it is important to understand the underlying exposure of an ETF. For example, holding ETFs with underlying exposures on the US market, consider trading when the markets are open, due to the value of the ETF being easier to calculate and the bid/offer spread tighter.
2. The order type by limit and market of the order
Limit order allows the investor to specify the price they are willing to buy or sell at, ensuring they get the desired price or better. On the other hand, the market order executes as soon as possible at the going price at the time. However, this type of order is usually executed more quickly but can result in an unexpected outcome if the market price changes rapidly. When buying Exchange Traded Funds (ETFs), Limit Orders are generally recommended to get the best possible price.
3. ETF liquidity has always been very important when selecting any investment
The more liquid an investment is, the easier and more cost-effective it could be traded. The less liquid an investment has, it may take longer to buy or sell and higher-priced. When evaluating ETFs liquidity, it needs to be considered that ETFs are open-ended investment vehicles. This means the number of shares in the ETFs will increase or reduce in favor of the investor.
How to buy Hejaz Islamic ETFs?
Open an account with a broker that offers your favored ETFs
It is important to compare their fees and features to find the suitable one you need. You will then be required to deposit cash into your trading account or link your bank account. Later, you will need to log in and go toward the trading section. In that section, enter the ASX code or ‘ticker’ of the ETFs you are interested in, either ‘ISLM’ or ‘HJZP’ for Islamic ETFs.
Place an order with your broker and specify the number of shares
Once you have decided which ETFs you buy, you will need to place an order with your broker and specify the number of shares you want to purchase along with the price you are willing to buy. You can also request to buy at a specific price known as a limit order, or the best available price at that time, known as a market order. When the order has been placed, wait for the trade to settle and your broker will notify you when the order has been completed. After the trade settled, keep watch on your investments by tracking the ETFs performance and ensuring that it meets your investment goals. Lastly, you will need to sell your ETFs when you are ready to exit your investment. You can do this by placing an order with your broker.
Conclusion
Islamic ETFs are a new and growing investment product that offers many benefits to investors, they have become a popular investment product due to their compliance with Sharia law. The launch of Hejaz Equities Fund (ASX: ISLM) and Hejaz Property Fund (ASX: HJZP). made them the first Sharia-compliant ETFs on the ASX. The Hejaz ISLM and HJZP are both excellent investment options for those motivated by ethical concerns, seeking increased diversification, or tapping into the growing global demand for Halal products and services. Investing in an Islamic ETF could be a smart choice, are you interested in investing in an Islamic ETF?
EQUITY TRUSTEES LIMITED (“EQUITY TRUSTEES”) ABN 46 004 031 298, AFSL 240975, IS THE RESPONSIBLE ENTITY FOR THE HEJAZ EQUITIES FUND (MANAGED FUND) ARSN 653 786 273 ASX: ISLM, AND HEJAZ PROPERTY FUND (MANAGED FUND) ARSN 653 783 085 ASX: HJZP . EQUITY TRUSTEES IS A SUBSIDIARY OF EQT HOLDINGS LIMITED ABN 22 607 797 615, A PUBLICLY LISTED COMPANY ON THE AUSTRALIAN SECURITIES EXCHANGE (ASX: EQT). THIS WEBPAGE HAS BEEN PREPARED BY HEJAZ ASSET MANAGEMENT PTY LTD ABN 69 613 618 821 AS AUTHORISED AFS REPRESENTATIVE OF HEJAZ FINANCIAL ADVISERS PTY LTD (ABN 49 634 683 613, AFSL 517686) AFS REPRESENTATIVE NUMBER 001285318, TO PROVIDE YOU WITH GENERAL INFORMATION ONLY. IN PREPARING THIS WEBPAGE, WE DID NOT TAKE INTO ACCOUNT THE INVESTMENT OBJECTIVES, FINANCIAL SITUATION OR PARTICULAR NEEDS OF ANY PARTICULAR PERSON. IT IS NOT INTENDED TO TAKE THE PLACE OF PROFESSIONAL ADVICE AND YOU SHOULD NOT TAKE ACTION ON SPECIFIC ISSUES IN RELIANCE ON THIS INFORMATION. NEITHER HEJAZ ASSET MANAGEMENT PTY LTD ABN 69 613 618 821, EQUITY TRUSTEES NOR ANY RELATED PARTIES, THEIR EMPLOYEES OR DIRECTORS, PROVIDE AND WARRANTY OF ACCURACY OR RELIABILITY IN RELATION TO SUCH INFORMATION OR ACCEPTS ANY LIABILITY TO ANY PERSON WHO RELIES ON IT. PAST PERFORMANCE SHOULD NOT BE TAKEN AS AN INDICATOR OF FUTURE PERFORMANCE. YOU SHOULD OBTAIN A COPY OF THE PRODUCT DISCLOSURE STATEMENT BEFORE MAKING A DECISION ABOUT WHETHER TO INVEST IN THIS PRODUCT.
HEJAZ EQUITIES AND PROPERTY FUND’S TARGET MARKET DETERMINATION IS AVAILABLE HTTPS://WWW.EQT.COM.AU/CORPORATES-AND-FUND-MANAGERS/FUND-MANAGERS/INSTITUTIONAL-FUNDS/INSTITUTIONAL-FUND-MANAGER?F=758642C0-588E-4B35-A980-FF530D6DF548. A TARGET MARKET DETERMINATION DESCRIBES WHO THIS FINANCIAL PRODUCT IS LIKELY TO BE APPROPRIATE FOR (I.E. THE TARGET MARKET), AND ANY CONDITIONS AROUND HOW THE PRODUCT CAN BE DISTRIBUTED TO INVESTORS. IT ALSO DESCRIBES THE EVENTS OR CIRCUMSTANCES WHERE THE TARGET MARKET DETERMINATION FOR THIS FINANCIAL PRODUCT MAY NEED TO BE REVIEWED.
Halal Investing vs. Ethical Investing
Halal investing is sometimes called Shariah investing or Shariah-compliant investing, while ethical investing is also called socially responsible investing. The growth of halal and ethical investments is mainly due to the fact that the corporate world becomes more sensitive to the growing social awareness of shareholders and contribution to real economic activities.
Halal Investing
Halal investing is based on religious belief, which means that all investments must adhere to Sharia principles. Halal investment must therefore follow the principles of Sharia, which must be free from prohibited elements, including riba (interest), maysir (game) and gharar (uncertainty). Riba or interests are expressly forbidden in the Quran. Basically, riba is the excess money paid by the borrower to the lender in addition to the principal for the use of the lender’s money over a certain period of time. Therefore, financial products bearing the riba element such as interest-bearing deposits, bonds, private debt securities and money market instruments are considered prohibited (haram).
Maysir, which literally means a way to easily get something and get undeserved profit from it, are driven by pure chance. As a game of chance, gambling often leads people to take high risks and behave irrationally in order to win big. In Islam it is forbidden to take extreme risks unknowingly and to add value in view of the outcome with the possibility of losing money. Gharar essentially refers to the uncertainty of contractual terms that could lead to exploitation and deception of people, which could lead to litigation and contract manipulation. In addition to the three prohibited elements, halal investment is also based on the principle that Islam prohibits any activity with illegal activities (haram) such as wine, alcohol, adultery, gambling, tobacco, banks and conventional insurance, and meat. Pig. Therefore, the actions of companies contaminated by one of the prohibited elements are considered non-compliant with sharia.
Ethical Investing
On the other hand, ethical investing means incorporating corporate values and personal concerns into investment decisions. Ethical investing considers both the financial needs of investors and the impact of the investment on society. Ethical investing applies ethical and social criteria in the selection and management of investment portfolios. Investors are concerned not only with the financial returns of their portfolios and the associated risks, but also with the characteristics of the companies in which their funds are invested. This includes the nature of the company’s goods or services, the location of the company and the way in which it conducts its business and business operations.
The ethical investment strategy can be positive or negative. The positive approach is favourable to companies that enjoy a high reputation in terms of products, activities or business methods, while the negative approach aims to avoid investing in companies involved in products or countries. unacceptable or whose business methods are considered unethical. the ethical investment decision is mainly influenced by ethical issues such as environmental improvement, climate change, genetically modified foods, gambling, human rights violations, nuclear energy and military, animal testing, health and safety violations, etc. The concept of ethical investing is consistent as it evolves to provide appropriate policies according to the changing environment. In its most recent adaptation, ethical investing moves from negative to positive selection to promote innovation and positive contributions to society, not simply to reduce the negative impact of business and industry practices and environment.
Common Values
Despite the differences, halal and ethical investing generally share an ethical investing philosophy which is a value-based approach to aligning an investor’s portfolio with religious beliefs. Both focus on real economic activities such as improving people’s living conditions and well-being, creating social equity, and preventing injustices in trade and commerce.
Halal and ethical investments also focus on the protection of natural and environmental resources with the exception of institutional financial sectors and invest in the same economic sectors, namely industry, health, consumer goods, services utilities, consumer services and basic materials such as technology. In addition, both apply measures that eliminate a group of companies or entire sectors based on social or religious beliefs. For example, industries such as tobacco, alcohol, and pornography are excluded due to the nature of the products and services that are harmful to society.
Screening Process
While halal and ethical investments use a screening process in managing their portfolios, the application of the screening process should be distinct. companies from which the portfolio manager can select investments.
Ethical investing applies the screening process to ensure that the companies they invest in adhere to their ethics policy. The screening process weeds out companies deemed negative and will encourage investment in positive companies. Negative screening avoids certain types of investments, for example gaming companies or arms manufacturers. Positive filtering, on the other hand, favours activities or characteristics deemed desirable such as the renewable energy industry or health. Some managers also use the “best-in-the-industry” rule, which selects leading companies in each business sector based on their social and environmental commitment, and the “overlapping social responsibility” rule, whereby the actions of a portfolio are selected according to the usual procedure, but a process is added to address social responsibility issues.
While the ethical investment screening process limits the inclusion of companies that are unaware of human rights and environmental concerns, halal investing appears to apply a different approach based on business compatibility with human rights. Sharia principles. On this point, halal investment is subject to the Shariah screening methodology determined by the Shariah Supervisory Board or the Shariah advisors of fund management companies. In some jurisdictions, e.g., Malaysia, the Shariah screening methodology is determined by a centralized Shariah advisory body established by the regulator, i.e. the Malaysian Securities Commission, as a more high authority in determining Shariah issues in relation to Islamic capital market activities which include Shariah compliance. investments.
The Sharia screening process generally includes two categories of screening, namely qualitative screening and financial screening. Quality screening excludes companies involved in prohibited activities such as alcohol, tobacco, gambling, pork products, and conventional banking and insurance. Sharia screening is usually made available by index companies such as FTSE, S&P Dow Jones and MSCI, which offer a wider range of Islamic indices for fund managers to compare against. Financial screening is applied using financial ratios to ensure securities are Sharia compliant, which involves calculating ratios, such as the ratio of interest-bearing debt to assets or the ratio of the total debt to the average market capitalization of a company. The wisdom behind financial screening is to avoid investing in debt-embedded securities.
Other Considerations
Halal investing is further characterized by strict limitations such as the purification process and the exclusion of investments in interest-bearing securities to which ethical investing is not subject. On this point, halal investment provides for a purification of investment income tainted by impure income by purification. it is required when the companies are joint ventures that have passed the tolerable test of Sharia screening process resulting in tainted income generated from the investment. Purification involves giving a certain percentage of that income to charity as a form of repentance for being involved in a certain level of non-Sharia compliant investments.
In a nutshell, halal and ethical investments are closely related but not similar. It is argued that Sharia principles often go beyond the requirements of ethical investing and have the benefit of providing clearer ethical coding and standards as well as an enforcement mechanism overseen by the supervisory board. of Sharia or Sharia advisors.
The convergence of values between the concepts of halal investment and ethical investment highlights the ethical and social protection agreement. The Halal Investment Screening Criteria applies a more standardized negative screening approach for industries and companies that do not meet the basic Halal investment criteria. Although there are differences in the interpretation of the appropriate filters in the Islamic investment screening process, the differences are minor and in fact harmonize as the market develops and progresses.
Above all, the decision to invest in halal or ethical investments will always depend on the values of the investor, as well as their overall portfolio and financial planning objectives. Investors interested in halal and ethical investing often look for fund managers who offer a high level of disclosure and transparency in terms of investment process, portfolio listings and detailed reports before making an investment decision.
Super for House Deposit
Should you invest your house deposit?
It’s never been easy to save the deposit for a home, but low rates make it even more difficult. For starters low rates drive up house prices, forcing homebuyers to come up with bigger deposit amounts. Then those low rates rob buyers of the ability to earn a decent, low risk return on their hard-earned savings. When the traditional savings vehicles of homebuyers – savings accounts and term deposits – offer only token rates of return, aspiring homebuyers start to ask themselves what can they do to build their deposit more quickly?
This is the situation that Ahmad and Layla find themselves in. They’ve made a solid start on saving a deposit, but calculate it will still be several years before they’ll be able to start bidding on a home.
They’ve explored the obvious options of course – spending less and saving more of their income, but there are only so many smashed avos on sourdough that can be foregone or extra jobs that can be worked. So what else can they do? Looking at the depressingly low rate they are earning on their existing savings, they wonder if those savings can be made to work harder by investing them in assets that have the potential to deliver higher returns.
The first thing that Ahmad and Layla need to recognise is that any attempt to earn more than the cash rate comes with increased risk. Most people are aware, for example, that shares can fluctuate significantly in value, even from day to day. On the positive side, over the long term – five years and longer – a well-diversified share portfolio is likely to produce significantly better returns than cash. This doesn’t mean Ahmad and Layla should invest all of their current and ongoing savings into shares. Far from it. But these statistics make a good case for investing a portion of their savings in a broad mix of higher yielding assets. In addition to shares this may include property and various forms of fixed returns. However, with protecting their fortune a high priority.
Ahmad and Layla should avoid speculative and many so-called ‘alternative’ investments. And they should avoid long-term illiquid investments, such as some unlisted property trusts. They may end up wanting to access their money at short notice.
They also need to be aware of how their investment income will be taxed both annually (share dividends, rental income) and on the ultimate sale of their investments (capital gains tax). Some tax treatments are positive, potentially including franking credits on share dividends, and a discount on capital gains tax.
Saving a home deposit requires great discipline, and exposing a portion of savings to even modest risk entails even greater discipline. Ahmad and Layla will need to avoid the temptation to invest larger sums when markets are up, or to want to bolt to cash at the first downturn in the market.
If the idea of investing a portion of your house deposit appeals to you talk to us. We will be able to help you understand the risks involved and how to manage them, recommend appropriate investment options that balance out those risks and potential returns, and help to keep you concentrated on your main goal.
Savings: it’s simply magic!
Forget about location, location, location being the key to a good investment outcome. For now, let’s think of the most important ingredient as being regular, regular, regular!
A regular savings plan can turn small amounts of money into a sum that can take you closer to your dreams much faster. All that’s needed is time and discipline.
For example, let’s see what happens to an investment starting with just $100 and adding $100 each week from your regular income. Table 1 shows what the investment value would reach after five years and up to thirty years. In this example, we have assumed that the investment pays a return of 5% per annum (paid quarterly).
Table 1: Regular savings plan of $100 per week compounding monthly.
| 5 years | 10 years | 15 years | 20 years | 25 years | 30 years | |
| 5% return | $29,598 | $67,454 | $116,037 | $178,386 | $258,402 | $361,092 |
The results show that a regular savings habit can turn small sacrifices into real outcomes.
To budget or not to budget
Think about what you might have to do in order to save $100 per week to add to your investment. Maybe instead of eating out every week, make it a special monthly event. Taking lunch to work is a big saver – or you could cut back on your coffee purchases if you’re a regular at the local café. Review essentials such as your mobile phone plan and utilities to get better deals and direct that extra cash straight to your investment.
It might sound picky, but in return for this self-restraint you can see what can be achieved:
- the $29,000 in 5 years might go towards a deposit on your first home or an overseas holiday;
- the $67,000 in 10 years might contribute to your young children’s secondary or tertiary education; or
- the extra $258,000 in 25 years might help you to retire more comfortably or earlier than you thought you could.
Any of these goals would seem to make your small sacrifices extremely worthwhile in the long run. And remember to write down your financial goals as early as you can because it’s much easier to make those sacrifices if you know what they are helping you to achieve.
Reducing expenses is not the only way to find a spare $100 each week. Another good time to start a savings plan is when you receive an increase in your disposable income from a new job or a pay rise. Before you spend the extra money, put it away.
The trick is to start soon
Everyone’s ability to save is different. If you can’t save $100 every week, the above figures are still worthy of your attention. For example, if you can save $50 per week simply halve the results in Table 1. Conversely, if your savings capacity is higher, multiply the figures.
The results also demonstrate the effect of time and compounding returns on the value of your investment. The sooner you start, the less you need to save in order to achieve the same outcomes.
The difference 10 years can make!
Esma plans to retire in 20 years from now so she starts saving an extra $100 per week for this goal. Based on our simple calculations she might expect to have an investment of around $178,000 to add to any other superannuation or retirement benefits she has at that time.
Esma’s twin Yusuf also plans to put down the tools in 20 years, but he is confident that he can save more money than his sister. So Yusuf ignores any type of retirement planning for the next 10 years. He then saves twice as much as Esma – $200 per week – for the last 10 years of his working life.
Assuming a 5% return on the investment, the difference is staggering. By starting 10 years earlier, Esma will have saved just over $178,000 compared to Yusuf’s outcome of $134,743.
Even though his regular savings amount totals exactly the same as his sister ($104,000 over the period of the investment), Esma has benefited from the compounding investment returns on her money over a longer period of time, earning an extra $44,000 in interest – or better known as “free money”!
Another way to look at it is that Yusuf would need to save $265 per week for the last 10 years of his working life (a total of $137,800) to end up with the same outcome as Esma.
And finally…
The examples we have used here are aimed at highlighting the benefits of time and discipline when it comes to investing in a regular savings plan. To keep things simple, we have not taken into account other factors that will impact on the outcomes you can achieve, such as taxation, fees and differing investment returns. These factors are nonetheless important and will need to be considered when you are deciding on the type of investment you choose for your regular savings plan.
Higher-return savings accounts, managed share funds and superannuation are just a few ways to implement a regular savings plan like the one we have examined here (although you won’t find any at call bank accounts that pay close to 5% at present!). The type of investment that is best for you will depend on your own specific circumstances, including your goals, timeframes and attitude to risk (volatility).
You can start a compounding savings plan on your own or talk to us – we can show you more options to help you achieve your dreams sooner.
Islamic Finance: Why 2022 will be the year of ethical and impact investing
The pandemic continues to upend the financial situations of many and as a result, Australians are turning to new ways to invest and save. But for those that Australia’s big banks don’t cater for, the recent tumultuous years have highlighted a glaring issue: traditional financial services are failing to meet the needs of our growing and increasingly diverse population.
As Australia diversifies so should the services on offer. Australian Muslims, for instance, are a growing market that are traditionally well-educated, hard-working, and great at saving. Yet, a recent study by Hejaz Financial Services found that a significant portion of Australian Muslims are avoiding everyday financial products like savings accounts and insurance because of a lack of suitable options. Of those that are using traditional financial products for investments like a mortgage, almost half (46 percent) are doing so “reluctantly” in the knowledge that income from interest runs contrary to their religious beliefs.
Even more concerning, the research found that over 1 in 3 Australian Muslims keep significant cash savings at home because of a lack of suitable finance options and to avoid earning non-Sharia compliant interest. In a developed country such as Australia, this situation beggars belief. Besides the obvious security risks associated with storing cash savings outside of a secure facility, a decision like this leaves many Australian Muslims at a financial disadvantage, unable to generate wealth or invest for their future.
Ethical financial products take centre stage amidst a growing Australian population
The demand for ethical financial products that align with religious and core beliefs is also growing. Hejaz Financial Services has seen the rise of ethical and impact investing, with more consumers seeking out alternative finance options that align with their personal values and beliefs. Looking forward to 2022, Muslims and non-Muslims will invest with purpose in sustainable companies, industries, and solutions that ‘do no harm’ and have a positive impact.
Sharia-compliant financing is a clear example of these underlying environmental, social, and corporate governance (ESG) principles. To be classed as Sharia compliant, investment in the following business activities is not allowed: conventional banking and insurance, alcohol, pork and all non-Halal food items, gambling, tobacco, adult entertainment, conventional derivatives, weapons, and other impermissible actions as decided by the Sharia Supervisory Board.
Australians want to take ethical finance into their own hands
There is an appetite in the Islamic community for proactive finance management, with 2 in 5 respondents saying they are educating themselves and searching for financial resources. Almost a quarter (23 per cent) are currently seeking help from a professional adviser, while many are turning to family, friends, and colleagues for advice.
As interest in ethical investments and companies with positive ESG credentials rises, alongside living expenses, it is our mission to provide suitable Sharia-compliant financing options. Our ambition is to become Australia’s first Islamic Bank.
If your new year’s resolution is to reduce your social and environmental impact, a great first step is to review your finances. What are you personally investing in? What is your superannuation fund investing in on your behalf? These are important questions with sometimes difficult answers. Hejaz Financial Services’ network of financial experts can assist you in making ethical and sustainable decisions for your financial future today.