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Islamic finance and Sharia compliance

Conventional finance and thinking has been the norm for the last century, in tandem with the Anglo-American dominance of the world economy. However, it is now clear that an era of re-balancing is underway and one of the beneficiaries could be Sharia-compliant vehicles.

Conventional trustees are taught that trusts first came about to safeguard the assets of knights going on Crusade in the 12th Century. Muslims claim that the concept was created prior to this period, under the waqf principle of donating assets for charitable or communal purposes. For those wishing to avoid controversy, there is also a version from the era of the Roman Empire so choices abound to suit one's belief.

Sharia-compliant trusts must adhere to forced heirship principles laid down in the Qu'ran. The onus is on male heirs to take responsibility for the rest of the family, which is why they inherit a greater ratio of assets. While this may sound patriarchal to westerners, the provisions represented a great improvement for the status of female dependents compared with the past.

The problem for Islamic trusts is that the structure winds up on death of the settlor whereas Common Law trusts endure post-death and can cater for generations to come. The argument is erroneously applied that assets in a trust are outside of one's estate and therefore cease to fall under Sharia principles. The fact that their relatives receive benefit from a forbidden source is conveniently overlooked. Compounding the frustration is the fact that most trustees, not surprisingly, lack knowledge of Sharia-compliant investing and inheritance principles.

Another disadvantage is that profligate progeny may receive distributions that will be wasted with little account taken of age or maturity with money. This is where a fusion of the two elements can take advantage of the existing trust industry infrastructure while adhering to Islamic precepts.

A conventional trust deed may be drafted such that Sharia scholars or Protectors are consulted about the assets and their distribution. This preserves the discretion of the trustees, as demanded by legislation, but provides flexibility to take the settlor's wishes into account. The Letter of Wishes is non-binding on trustees and by keeping the assets in a neutral jurisdiction it means that Trust Law takes precedent over Sharia Law.

This may sound counter-intuitive for Muslims but a recent legal case concerning Islamic "bonds" has shown that it is better to have certainty than conflict over what style of jurisprudence dominates. Another method of preserving the life of the trust is to divide the trust assets into sub-funds where the trustees have discretion to distribute. If the settlor feels that female dependents require more, then there are of course no restrictions on lifetime gifts.

Sharia investment philosophy shares many synergies with conservative trustees such as the avoidance of speculation, gearing and unethical investments. Trustees' role in stewardship ties in with the holistic approach of Islam that wishes money to be beneficial for the community rather than growing for its own sake. An annual charity tax or Zakat means that accumulated wealth has a half-life such that hoarding becomes self-defeating.

With the shrinkage in western finance, it is no wonder that its Islamic counterpart is expanding rapidly, albeit with growing pains along the way.

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