Islamic property funds have grown as a popular means of Shari'ah investment. The key distinction bet...
Islamic property funds have grown as a popular means of Shari'ah investment. The key distinction between Islamic property funds and their traditional counterparts is the adherence to Shari'ah (Islamic law) principles. Islam forbids certain financial contracts due to inherent elements that render them Haraam (unlawful). The first relates to the payment or receipt of Riba (interest), which covers any financial return on money regardless of whether the interest is fixed or floating, simple or compounded, and at any rate. The second is Maysir (gambling); conventional insurance and derivatives would fall under this category. The third, Gharar (uncertainty), covers certain types of uncertainty or contingency contracts such as short selling and derivatives.
An important element of Shari'ah compliant property investing is the underlying use of the property must be permissible by Shari'ah. Therefore, ownership of properties that engage in finance, banking, insurance, pork, weapons, alcohol, tobacco and gambling is prohibited. Shari'ah compliant properties include apartment buildings, industrial properties and select retail and office buildings.
Since Islam prohibits borrowing and payment of interest, a Shari'ah compliant property investment will not employ a traditional, interest-bearing loan. The investment will be structured such that the financier acquires the property and leases it to the entrepreneur, who then sub-leases it to the underlying tenant who uses the property. Rent is the consideration of the lease, which is acceptable under Shari'ah as the financier takes ownership risk of the property. This type of Islamic lease agreement is known as an Ijara. Most Shari'ah compliant property investments are undertaken through the Ijara.
Another contract commonly used in Shari'ah compliant property investing is the Murabaha. Instead of loaning funds to the purchaser of the property, the financier - typically a bank - buys the property from the seller and re-sells it to the intending purchaser at a profit on an instalment basis. To protect its investment, the financier uses the property as collateral by registering it in its name until the transaction is completed.
The growth in Shari'ah compliant property funds is part of a bigger trend of growth in demand for such products.
Assets of Islamic financial institutions have grown by an average of 20% per annum over the past five years, suggesting robust demand for Islamic investing. This outlook has spurred the growth of the Shari'ah compliant investment funds that invest in a wide range of sectors - equities, commodities, private equity and infrastructure, as well as real estate. It is estimated that there is currently more than $500bn under management in Shari'ah compliant investment funds.
There is a general perception that Islamic finance is concentrated in the Middle East and that it may not spread beyond to other Muslim countries. While it is true that, at present, about 60% of the total assets of Islamic financial institutions are in the Middle East, Islamic finance is expanding to other Muslim majority countries as wealth creation makes those markets economically viable for financial institutions. Islamic banking and finance is expected to grow at 15-20% per year for the next five years as it continues to flourish in the Middle East and the Far East. It is predicted that the number of Shari'ah-compliant funds worldwide will double by 2010.
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