Many Muslims rely on Shariah law to provide ethical guidance for every aspect of daily living. This can extend to how wealth is earned, managed and invested, which means that everyday financial decisions not only support a devout investor’s strategic goals, but also their spiritual ones.
Based on guidance from religious texts such as the Qur’an and the Sunnah, Sharia-compliant investing can help Muslims achieve their financial goals while also honoring the core principles of their faith.
Principles of Shariah-Compliant Investing
Shariah investing is centered around three core principles:
- equity, fairness and transparency;
- risk-sharing; and,
- ownership and materiality.
This includes:
- Prohibiting interest: As emphasized in the Qur’an, earning or charging interest, known as riba, is considered exploitative because it creates an unequal relationship between the lender and the borrower.
- Avoiding excessive uncertainty: Referred to as gharar, highly speculative investments, such as options, futures and other derivatives, run contrary to the Shariah ideals of certainty and transparency.
- Avoiding haram investments: Activities or industries that are considered haram (proscribed by Islamic law), including trade in commodities such as alcohol, tobacco or pork, should be avoided.
- Engaging in charitable giving: Known as zakat, this is the religious obligation to donate a portion of wealth each year to those in need in order to improve social harmony and economic justice.
- Sharing risk: Shariah investing requires that investment returns be earned by sharing risk, not just by the passage of time. This favors the sharing of realized profit and loss, instead of interest.
- Investing in real economic activity: All investments must be tied to tangible assets or economic activity, ensuring that value creation is grounded in productivity and not speculation.
Approaches to Shariah Compliant Investing
Your Morgan Stanley Financial Advisor can work with you to build a portfolio that incorporates Shariah guidance with your overall financial goals and risk tolerance. Investors can leverage approaches such as:
- Using Shariah values as a restriction screen: Investors can screen out industries or sectors considered haram, such as non-Islamic banks and insurance companies, tobacco, weapons, alcohol and gambling.
- Focusing on halal investments: Investors can also screen for activities that are halal to ensure investments are aligned with Islamic values, such as screening for investments with low debt ratios.
- Thematic investing: Investors can focus on themes that generate a positive impact in accordance with Shariah values, such as companies that provide access to clean water or that support economic equality, education and affordable housing.
- Seeking to influence company behavior: Investors can use shareholder engagement, such as voting proxies and filing shareholder resolutions, to influence the practices of the companies in which they invest in order to spur positive change.
Opportunities for Investors
When building a Shariah-compliant investment strategy, investors may find that certain asset classes offer more opportunities than others.
For example, there are more Shariah-compliant investment strategies in public equities than in fixed income. Although actively managed funds previously dominated equity offerings, growing demand for Shariah-compliant strategies has led to passive investments becoming more widely available, including Shariah-compliant exchange-traded funds (ETFs).
Growth and product development in the Islamic finance industry also have led to increased availability of funds covering other asset classes, such as sukuk, a bond-like financial certificate structured to generate returns without infringing on Islamic interest prohibitions.
The values of certainty and transparency under Shariah additionally favor asset-backed investments such as real estate or commodities, while alternative investments such as hedge funds are typically excluded due to their speculative strategies. Other asset classes that lend themselves to Shariah-compliant investing include private equity investing with little to no leverage, though these strategies may have more limited availability.
Aligning Your Portfolio With Your Values
With the Morgan Stanley Impact Quotient® (MSIQ), our patented impact reporting tool, your Morgan Stanley Financial Advisor can help align your portfolio with your faith-based values and monitor progress toward your goals. Morgan Stanley offers more than 3,000 investment strategies, including strategies on our Investing with Impact Platform that intentionally address Shariah values or can be customized to comply with Shariah law.
As the Qur’an teaches, “Whatever good you put forward for yourselves, you will find it with Allah” (Qur’an, 2:110). For many Muslim investors, this principle reminds them that wealth is more than just money, but an opportunity to act justly by investing ethically.
Connect with your Morgan Stanley Financial Advisor to explore how your investments can reflect your faith and values. To learn more, you can also request a copy of the Global Investment Office report, Investing in Alignment with Shariah Values.
Important Disclosures
Risk ConsiderationsEnvironmental, Social and Governance-Aware Investments (ESG)
Certain portfolios may include investment holdings that takes into account one or more Environmental, Social and Governance (“ESG”) factors (referred to as “ESG investments”). For reference, environmental ("E") factors can include, but are not limited to, climate change, water, waste, and biodiversity. Social ("S") factors can include, but not are not limited to, employees, diversity & inclusion, cyber security, data privacy, health & wellness, supply chains, product safety & security, community engagement, and human rights. Governance ("G") factors can include, but are not limited to, board structure & oversight, leadership composition, pay and incentive structures, corruption & bribery, ethics & business conduct, shareholder rights, accounting & audit practices, tax evasion, and risk management. You should carefully review an investment product's prospectus or other offering documents, disclosures and/or marketing material to learn more about how it incorporates ESG factors into its investment strategy.
ESG investments may also be referred to as sustainable investments, impact aware investments, socially responsible investments or diversity, equity, and inclusion (“DEI”) investments. It is important to understand that ESG definitions and criteria used within the industry can vary, and ESG ratings of the same subject companies and/or securities can vary among different ESG ratings providers for various reasons including differences in definitions, methodologies, processes, data sources and subjectivity among ESG rating providers when determining a rating. Certain issuers of investments including, but not limited to, separately managed accounts (“SMAs”), mutual funds and exchange traded funds (“ETFs”) may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. Further, socially responsible norms vary by region, and an issuer’s ESG practices or Morgan Stanley’s assessment of an issuer’s ESG practices can change over time.
Portfolios that include investment holdings deemed ESG investments or that employ ESG screening criteria as part of an overall strategy may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results. For risks related to a specific fund, please refer to the fund's prospectus or summary prospectus.
Investment managers can have different approaches to ESG and can offer strategies that differ from the strategies offered by other investment managers with respect to the same theme or topic. Additionally, when evaluating investments, an investment manager is dependent upon information and data that may be incomplete, inaccurate or unavailable, which could cause the manager to incorrectly assess an investment’s ESG characteristics or performance. Such data or information may be obtained through voluntary or third-party reporting. Morgan Stanley does not verify that such information and data is accurate and makes no representation or warranty as to its accuracy, timeliness, or completeness when evaluating an issuer.
Morgan Stanley’s assessment of an issuer’s ESG practices or an ESG portfolio is as of the date of this material. No assurance is provided that the underlying assets have maintained or will maintain any applicable ESG designations or any stated ESG compliance, or that the underlying assets have been operated or will be operated in an ESG-compliant manner. The ESG impacts of the securities and any underlying assets may vary over time.
This can cause Morgan Stanley to incorrectly assess an issuer’s business practices with respect to its ESG practices. As a result, it is difficult to compare ESG investment products.
Morgan Stanley makes no representation as to the compliance or otherwise of any fund or portfolio with any laws or regulatory guidelines, recommendations, requirements or similar relating to the ESG characterization of any fund or portfolio, or in connection with or to meet any of your investing ESG objectives, metrics or criteria.
The appropriateness of a particular ESG investment or strategy will depend on an investor’s individual circumstances and objectives. Principal value and return of an investment will fluctuate with changes in market conditions.
Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
An investment in an exchange-traded fund involves risks similar to those of investing in a broadly based portfolio of equity securities traded on an exchange in the relevant securities market, such as market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived trends in stock and bond prices. Investing in an international ETF also involves certain risks and considerations not typically associated with investing in an ETF that invests in the securities of U.S. issues, such as political, currency, economic and market risks. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. ETFs investing in physical commodities and commodity or currency futures have special tax considerations. Physical commodities may be treated as collectibles subject to a maximum 28% long-term capital gains rates, while futures are marked-to-market and may be subject to a blended 60% long- and 40% short-term capital gains tax rate. Rolling futures positions may create taxable events. For specifics and a greater explanation of possible risks with ETFs¸ along with the ETF’s investment objectives, charges and expenses, please consult a copy of the ETF’s prospectus. Investing in sectors may be more volatile than diversifying across many industries. The investment return and principal value of ETF investments will fluctuate, so an investor’s ETF shares (Creation Units), if or when sold, may be worth more or less than the original cost. ETFs are redeemable only in Creation Unit size through an Authorized Participant and are not individually redeemable from an ETF.
Please consider the investment objectives, risks, charges and expenses of the fund(s) carefully before investing. The prospectus contains this and other information about the fund(s). To obtain a prospectus, contact your financial advisor. Please read the prospectus carefully before investing.
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.
Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objective s and risk tolerance before investing in high-yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio.
Investing in foreign markets entails risks not typically associated with domestic markets, such as currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, and the potential for political instability. These risks may be magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies.
Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.
Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.
Physical precious metals are non-regulated products. Precious metals are speculative investments, which may experience short-term and long term price volatility. The value of precious metals investments may fluctuate and may appreciate or decline, depending on market conditions. If sold in a declining market, the price you receive may be less than your original investment. Unlike bonds and stocks, precious metals do not make interest or dividend payments. Therefore, precious metals may not be appropriate for investors who require current income. Precious metals are commodities that should be safely stored, which may impose additional costs on the investor. The Securities Investor Protection Corporation (“SIPC”) provides certain protection for customers’ cash and securities in the event of a brokerage firm’s bankruptcy, other financial difficulties, or if customers’ assets are missing. SIPC insurance does not apply to precious metals or other commodities.
Alternative investments may be either traditional alternative investment vehicles, such as hedge funds, fund of hedge funds, private equity, private real estate and managed futures or, non-traditional products such as mutual funds and exchange-traded funds that also seek alternative like exposure but have significant differences from traditional alternative investments. The risks of traditional alternative investments may include: can be highly illiquid, speculative and not appropriate for all investors, loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification and resulting higher risk due to concentration of trading authority when a single advisor is utilized, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than open-end mutual funds, and risks associated with the operations, personnel and processes of the manager. Non-traditional alternative strategy products may employ various investment strategies and techniques for both hedging and more speculative purposes such as short-selling, leverage, derivatives and options, which can increase volatility and the risk of investment loss. These investments are subject to the risks normally associated with debt instruments and also carry substantial additional risks. Investors could lose all or a substantial amount of their investment. These investments typically have higher fees or expenses than traditional investments.
Hedge funds may involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited diversification and sensitivity to economic factors such as interest rate changes and market recessions.
Risks of private real estate include: illiquidity; a long-term investment horizon with a limited or nonexistent secondary market; lack of transparency; volatility (risk of loss); and leverage.
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