Are islamic Funds and/or ETF's really halaal investments?

Question

According to iShares:

The MSCI World Islamic Index offers exposure to stocks from the MSCI World Index which comply with Shariah investment principles.

I don't get it, the ETF LSE:ISWD (ISHARES II PLC ISHARES MSCI WORLD ISLAMIC) has IBM as 1 of the companies.

On 2012/12/31, IBM had assets in the form of cash and cash equivalents of about $10 million USD. I'm not saying that IBM does this, but what that would normally mean is that they have raw cash in a bank account earning interest, and/or short-term government bonds earning interest, which would normally go back into the business, i.e. consuming interest.

That is interest, which is haraam isn't it? So how can LSE:ISWD be considered halaal? Via the ETF, you end up being a partial owner of IBM don't you? Which means you own a business which is consuming interest from cash in a bank account!

I mentioned IBM here for no particular reason. I could have mentioned any of the companies listed in this ETF, and I would be surprised if any of them were not earning interest from cash in bank accounts...

For example, Intel is also in the list, who have about $8.5 million as cash possibly in banks and short-term government bonds, so chances are probably high that they are earning interest on that money which goes back into the company.

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According to HSBC Amanah:

HSBC Amanah is the Islamic financial services division of the HSBC Group. It's been specifically designed for investors who want to invest in equity markets in compliance with Shariah. And is uniquely positioned to understand, structure and deliver financial solutions that are compatible with the requirements of Islamic law.

Then there is HSBC Amana Freedom Funds which are supposedly halaal too. In these funds you will find Apple, which based on their annual report, earned 1.03% interest on cash which they have in banks, and 0.77% interest on cash equivalents. If we round it off to 1%, based on Apple having 10.5 million in cash and cash equivalents, they earned about 100,500USD of interest last year...

So my question, if you missed it, How are islamic funds/etf halaal investments? I really don't see the halaal part...?

Answer 1

I have read many fatawa by scholars (such as this example from SunniPath) permitting investment in companies that have some of their profits earned through interest, so long as these interest-related profits don't comprise a significant amount of the company's earnings (e.g. are not a primary source of income). The same basic ruling applies for any shari'ah non-compliant income, such as earnings made from gambling or alcohol. Your own income in such matters would then need to be "purified" by disposing of this non-compliant income.

For example, if 1% of the company's income comes from interest, you can purify it by donating 1% of your own subsequent income to the poor (with no expectation of reward).

The MSCI Global Islamic Index handles this using a method called "dividend purification," where the Index value reflects returns after the portion of the company income from shari'ah non-compliant sources is deducted from the reinvested dividends. Since this is already accounted for by the Index itself, no further action is needed if you invest directly therein; any income you receive is already "purified."

I cannot speak for the HSBC Amanah funds (or other Islamic funds in general), but I imagine they do something similar. Researching individual funds before investment is, of course, recommended at all times.

Answer 2

You know what, at this point in time, nothing is halal. Take the dollar that is in your wallet. Do you think it is halal to use? Are you aware of the fact that each time a dollar is printed, interest is attached to it. It is backed by a government bond, which is pure interest. It is sad, but we live in a pure riba world.

Answer 3

It all relies on the percentage of Haram(noncompliant) in the balance sheet of a company: here is the summary of the rules: • Debt is less than 33.333% of total assets; • Cash and interest bearing items are less than 33.333% of total assets; • Accounts receivable and cash are less than 50% of total assets; • Total interest and non compliant activities income should not exceed 5% of total revenue.