Q&A on shariah-compliant investing

Shariah is a set of Islamic religious laws that governs aspects of day-to-day life for Muslims, in addition to religious rituals. Shariah also provides a set of principles and guidelines for making important life decisions, including those related to finances and investments.

Halal is compliance with shariah principles. Therefore, “halal investing” requires investment decisions to be in accordance with Islamic principles, governing finances and investments.

To help ensure compliance, shariah investment funds typically retain the services of an Islamic finance advisory board, an independent body of Islamic legal scholars. This board provides guidance and oversight on the compliance of financial products, services and transactions with the principles of shariah.

Some investments are forbidden (“haram”) under shariah principles, due to their business activities. For example, one shariah principle (“riba”) forbids investors from receiving profits from interest-bearing investments, such as loans and traditional bond products. Typically, an independent shariah supervisory board is responsible for identifying haram businesses.

The Mackenzie Shariah Global Equity Fund seeks companies within a benchmark index, which employs rules-based stock screens for shariah compliance. These rules remove securities from the investible universe based on the following screening method as an example¹:

Sector-based screens remove companies with over 5% revenue generated from alcohol, tobacco, pork-related products, non-Islamic financial services, entertainment, weapons and defense.

The Shariah Supervisory Board of Ratings Intelligence Partners is comprised of globally respected shariah scholars. The board’s role is to:

• Provide guidance and oversight on the compliance of financial products, services and transactions with the principles of shariah.
• Certify shariah-compliant products and issue a shariah-compliance fatwa (shariah certification).
• Conduct semi-annual audits on the transactions of the portfolio to determine whether the fund is shariah-compliant for the applicable audit period.
• Discuss and provide guidance on emerging shariah compliance issues.
• Provide ongoing monitoring to identify any deviation from shariah requirements.

For more information on the Shariah Advisory Board of Ratings Intelligence, please visit Shariah Advisory Board Role & Members - Rating Intelligence (ratingsintelligence.com)

Dividend purification is the process of purging any income a company makes from sources that are not shariah-compliant, or “impure”, such as any non-permissible business activities or interest income. This non-permissible revenue must be less than 5% of a company’s total revenue for the company to pass sector-based screening.

The purification ratio represents the percentage of impure income that may be purified by the investor through donation to a charity or other worthy cause. In a shariah-compliant fund, the purification ratio for dividend income is calculated by removing the portion of dividends that is generated from non-shariah compliant sources, such as interest income or income from prohibited activities.

On an annual basis, Mackenzie Investments will publish the purification ratio information on the Mackenzie website, so investors can make informed decisions about any purifying donations they may wish to make.

The fund only invests in companies that have been pre-approved for inclusion in the Dow Jones Islamic Market World Index, which is built with guidance from the globally recognized Shariah Advisory Board of Ratings Intelligence Partners. Ratings Intelligence Partners issues a judgment (“fatwa”) on the shariah compliance of each company that is included in the index. They also conduct a semi-annual shariah audit on the index. The fund has also retained the services of this advisory board to help ensure shariah compliance and the accurate calculation of the fund’s purification ratio.