Shari’ah Investment Guidelines for Private Equity

Company Selections: No Investment may be made in:

1. Companies whose interest-bearing debt to equity ratio is more than 30%. Equity is the company’s enterprise value. This applies when investing in existing businesses. For companies yet to formed, the debt to equity ratio is zero.

2. The portfolio must not be invested in companies: 

   (a) Involved in the following businesses:

   i. Manufacture and/or sale/distribution of alcohol, tobacco, pork, gold, silver, music and pornographic productions. ii. Restaurant and hotels/motels except those not selling alcohol iii. Operators of gambling casinos and manufacturers of gambling machines Paraphernalia. iv. Operators of movie theaters. Financial services (for example: bank, brokerage firms, investment funds that invest in companies that engage in the restricted activities, insurance companies).

   (b) Whose total assets are made up solely of cash, including balances with banks, non-tangible assets and/or accounts receivable.

3. Financial Instruments:

   The following instruments or any derivatives therefrom must not be used in the portfolio:

   a. Futures contracts of all kinds

   b. Options contracts of all kinds.

          c. Swaps

          d. Preferred shares

          e. Short sales

          f. Other instruments where any of its components involve the payment or receipt of interest

Handling Excess Cash

Funds must be fully invested at all time. Uninvested cash or short-term liquidity must be invested in Murabaha transactions.

Source: An Introduction To Islamic Banking, Shaykh Dr Mohamed Ali Elgari. Republished with permission.