The concept of Shariah-compliant indices first came up in the 1960s; however, they have only recently started to become popular. Still, Shariah-compliant assets account for less than 1% of global financial assets, according to professional services firm PwC.
Shariah-compliant indices need to obey Shariah principles, meaning they are mostly restricted from investing in companies involved in selling alcohol, pork products, pornography or weapons, as well as those with gambling interests. Any income arising from these sources must be donated to charity.
By excluding these often volatile sectors – many of which are influenced by political decisions – these ETFs tend to be less volatile than others, and have outperformed over the past few years.
Muslims represent about a quarter of the world’s population, which means the growth potential of this type of investing is huge.
The first Shariah-compliant indices arose in Malaysia in the late 1960s, followed by the Middle East in the mid-1970s. The big players have all introduced Shariah-compliant indices, which have been supervised and approved by their respective Islamic supervisory boards.
In 2009, the first Shariah-compliant index was launched in South Africa, introducing more investment possibilities to the country’s large Muslim community.
Shariah-compliant indices are not only interesting investment options for Muslims, but also for non-Muslim investors since they can be less volatile than other strategies.