Sharia safe investing

How do you reach an Islamic business community that does not approach mainstream banks? Two new funds in the UK hope to have found an answer by offering capital funding that complies with Islamic sharia law. As reported in the latest issue of Clear Profit, there are three main ways investors generate a return on capital under sharia law. The first by leasing assets to it, the second by sharing in profits. The new funds will both rely on the third way - a process known as "murabah".

Murabah lenders sell a consignment of a tradeable commodity worth the cash value required by the borrower plus an agreed profit for the lender, for which payment is deferred for the period of the loan. The borrower immediately sells the commodity to release the cash.

The two new funds have initial capital of around £250m. It remains to be seen how popular (and profitable) the funds will prove for investors, but this could be a growth market.