(part 3 of 6)

Preface:
At the two previous parts, we talk about how investment faces risk beside return and structured investment as another way instead of portfolio in investment.

3. ISLAMIC STRUCTURED INVESTMENT PRODUCT

There are so many kinds of SIPs in investing world today as alternatives of investment to choose. Like other investors, Muslims also look for any SIP to add to their portfolios. But, surely they will never take a SIP except it is Shari’ah compliant¹². It means the SIP have to be free from anything prohibited by islamic law, whether its structure, features, business process, or the product itself. SIP with Shari’ah compliant must be free from riba (interest), gharar (speculation/ manipulation), and maysir (gambling) transaction. The company that provides instruments of investment must have business activities where their profits are generated in acceptable way based on islamic law. Their products and services also have to be halal to buy and sell. That is why, Islamic SIP must be free from the companies that produce, market, or in touch with drugs (alcohol), money game activities, pork, tobacco, weapon / defense product, pornography, etc. Surely on Islamic SIP, there is no harm to another person or party, environment or society in its structure, features, or business process.

The SIP that complies with Shari’ah is named “Islamic Structured Investment Product” (Islamic SIP). But, it is needed to differentiate between Islamic SIP and using “islamic money” to buy a conventional SIP¹³. The last type is absolutely not an Islamic SIP.

In early 1990s, there are only two types of Shari’ah compliant funds for investment. Both are Equity and Murabaha. But, since then, the number of available products has rapidly burgeoned. Douglas Clark Johnson, CEO of Calyx Financial, has an interesting chart (Figure-2) that illustrates the growth. Meanwhile, from the same source, it is worth emphasizing that along with its composition, the slice which has been growing most rapidly has been the non-traditional funds segment. It would include here Islamic SIP. See the trend graphically on Figure-3.

Figure-2. Types of Shari’ah Compliant Funds Growth¹⁴

Figure-3. Number of Shari’ah-Compliant Funds Growth¹⁵

From the above trend, non-traditional fund (included Islamic SIP) is composition that has grown fastest. It shows that especially Islamic SIP has some advantages compared with the other investment scheme. Some of the advantages¹⁶ are:

• The investment performance does not depend on an individual fund manager and his or her ability to outperform the market.
• The income received by an investor is usually greater than deposit accounts and he or she can balance the risk by initial investment with the need for income.
• The growth options can result in a positive return even when investing directly in an index or individual stock would have resulted in a loss.
• Investor can achieve growth rate which are far higher than the growth from stock markets, while still protecting the investment unless markets fall signifantly.
• Both the maximum return investor can gain or maximum he/she can lose are clear. There is no other share-based investment where investor knows the worst-case situation before committing his/her money or assets.
• Above all, the result from shari’ah compliant investment — like Islamic SIP — makes the investor more comfortable and safe in investing under islamic law and absolutely barakah in life.

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¹² Shaikh Hamzah. Op.Cit. Page 92.
¹³ Hasan, Aznan. Building Blocks for Islamic Structured Products. Slide of International Islamic University Malaysia (IIUM). Page 8.
¹⁴ Clark Johnson, Douglas. Interpreting Trends in Islamic Investing. Presentation paper on World Islamic Funds Conference: Bahrain, May 7, 2006. Page 2.
¹⁵ Ibid., Page 3.
¹⁶ Vipin. Loc.Cit.

Note.
Picture is taken from: http://www.developing8.org

[to be continued ...]