23 June 2024

Is ECF a syariah-compliant investment?


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By: Dr Mohd Hisham Hanifa, Assoc Prof Dr Anna Azriati Che Azmi

Are you looking for investments that align with your Islamic values? If yes, then participate as an investor in the equity crowdfunding (ECF) campaign conducted on various online platforms. ECF offers a quick Syariah-compliant investment as returns are shared between investors and business owners based on the principle of profit and loss sharing.

The top fundraisers on these platforms are typically Malaysian SMEs and micro-SMEs who have major growth opportunities that have a direct impact on our overall economy. Thanks to government tax incentives, investors who invest in ECF can, under certain conditions, deduct their investment amount on their income tax return.

While the Securities Commission (SC) is looking into creating more Islamic ECF platforms, some platform operators are concerned. They worry that limiting issuers and investors to only Syariah-compliant options might shrink the overall market, similar to what happened with dedicated Islamic financial institutions.

There are different ways ECF platforms can show if an investment is Syariah-compliant. Some say all businesses are ‘Syariah-compliant’ directly. Others use terms like JAKIM certified, GMP, Halal, or Islamic. However, some SMEs like those in the education or manufacturing business might not use any Islamic terms but still be halal. SMEs could also help by openly explaining how they follow Islamic principles. This could include things like protecting the environment, treating workers fairly, and respecting culture.

One useful tool to identify whether a business is Syariah-compliant is to use the Syariah Screening Assessment Toolkit launched by the Securities Commission (SC). This toolkit helps you choose investments that align with Islamic principles, giving you peace of mind about both your returns and following Syariah guidelines. In short, the toolkit guides investors towards businesses with halal activities and avoid those that rely heavily on interest. This toolkit goes beyond labels and asks specific questions about the company’s operations.

The key takeaway is investing in ECF according to Syariah principles can be complex. While using labels like ‘halal’ can be a starting point, they don’t tell the whole story. To make truly informed choices, go beyond the label and ask deeper questions. Does this SME operate sustainably and treat its employees fairly? Also consider the impact of this SME on society and the environment, and how their actions might affect future generations. Finally, educate yourself on Syariah principles.

By taking these steps, you can invest with confidence, knowing your money aligns with Syariah principles. Remember, informed decisions are key to achieving your investment goals through ECF while staying true to your Islamic beliefs.

The authors are from the Faculty of Business and Economics, Universiti Malaya.