Rusd Investment Bank Inc.

Shariah Investment Guidelines

Contents
Equity ............................................................................................................................................................ 3
Eligibility Criteria – Equity ............................................................................................................................. 3
Sector-Based Screens ................................................................................................................................ 3
Accounting-Based Screens ........................................................................................................................ 4
Fixed Income ................................................................................................................................................. 6
Eligibility Criteria ........................................................................................................................................... 6
Sukuk ............................................................................................................................................................. 6
Mudaraba - Agreement ................................................................................................................................ 6
Murabaha – Agreement ................................................................................................................................ 6
Musharaka - Agreement: .............................................................................................................................. 6
Basic rules of Capital: ................................................................................................................................ 7
Basic rules of distribution of Profit ........................................................................................................... 7
Leasing Agreement...................................................................................................................................... 7
Real Estate .................................................................................................................................................... 8
Real Estate .................................................................................................................................................... 8
 Equity
Eligibility Criteria – Equity

Each underlying instrument (stock, ETF or index) is screened for compliance with the below Shariah-
based rules. Underlying constituents passing these screens form the eligible universe for each index.

Sector-Based Screens
Business activities related to the following are excluded:

1. Advertising
a. Advertisers of pork, alcohol, gambling, tobacco and all other non-Islamic activities
b. Advertising means and modes which contravene the tenets of Islam

2. Media & Entertainment

a. Producers, distributors and broadcasters of music, movies, television shows and musical
radio shows
b. Cinema operators
Exceptions:
I. News Channels o Newspapers
II. Sports Channels
III. Children’s Channels
IV. Educational Channels

3. Alcohol
4. Financial services,
Except:
i. Islamic Banks
ii. Islamic Financial Institutions
iii. Islamic Insurance Companies

Defined as a company having:

 Shariah Committee to supervise all activities

 All products are Islamic
 All investments of the company are Islamic
 Passes accounting-based screens

5. Involved in any activity related to gambling

6. Pork related activities
7. Pornography
8. Manufacturing, packaging or distribution of Tobacco
9. Operating hotels and restaurants involved in any of the above prohibited industries
During the selection process, each company’s latest financial statement is reviewed to ensure that the
company is not involved in any non-Shariah compliant activities, regardless of whether the latest
statement is a quarterly, semi-annual, or annual statement. If the latest statement is available in all
three of these frequencies an annual statement will likely be used, as these are more likely to be
audited. Those that are found to be non-compliant are screened out. The above industries are not
considered Shariah-compliant and would not be permissible for investment by Shariah compliant
investors.

Accounting-Based Screens

After removing companies with non-compliant business activities, the remaining companies are
examined for compliance with certain financial ratios. Three areas of focus are leverage, cash, and the
share of revenues derived from non-compliant activities. All of these are subject to evaluation on an
ongoing basis.

Stocks deemed compliant at the prior evaluation period that exceed the maximum ratio for any
accounting-based screen at the current evaluation period remain compliant if the ratio is within two
percentage points of the maximum allowed. However, if the maximum is breached for three consecutive
evaluation periods the stock will be deemed non-compliant. If any of the ratios are above the two-
percentage point buffer limit, the stock is deemed non-compliant immediately.

Such accounting-based screens are not applicable to companies which are run on a fully Shariah
compliant basis and such companies shall be considered compliant. Such companies may be
characterized by (the list below is indicative, non-exhaustive and reviewed on a case-to-case basis):

 Having a Shariah Supervisory Board

 All transactions (business and financial) are in accordance with Shariah principles
 Incorporated and managed in a fully Shariah compliant manner

Leverage Compliance.

This is measured as:

Debt / Market Value of Equity (36-month average) < 33 %

Cash Compliance

Certain rules related to cash holdings must be met. These are:

Accounts Receivables / Market value of Equity (36-month average) < 49 %

(Cash + Interest Bearing Securities) / Market value of Equity (36-month average) < 33%

Revenue Share from Non-Compliant Activities

In certain cases, revenues from non-compliant activities can be tolerated, if they comply with the
following threshold:
(Non-Permissible Income other than Interest Income) / Revenue < 5%
Dividend Purification Ratio

This ratio is provided to investors for purification purposes, it is calculated as:

Dividends * (Non-Permissible Revenue3 / Total Revenue)

Review:

The underlying securities are reviewed annually to ensure that the company is not involved in any non-
Shariah compliant activities, regardless of whether the latest statement is a quarterly, semi-annual or
annual statement. Those that are found to be non-compliant are screened out.

It is allowed to hold their investment in the re-classified Shariah non-compliant securities if the market
price of the said securities is below the investment cost. It is also permissible to keep the dividends
received during the holding period until such time when the total amount of dividends received and the
market value of the Shariah non-compliant securities held is equal to the investment cost. Once the
market value of the Shariah non-compliant securities held is equal to the investment cost, the security
has to be disposed off.
 Fixed Income
Eligibility Criteria

Sukuk
Debt Instruments issued under Sukuk structure approved by Shariah scholars are eligible for inclusion in
the investment universe.

Mudaraba - Agreement
In Mudaraba agreement, the Firm can invest customer funds on profit and loss sharing basis in
structures which will be invested in the functioning of economic activity/business that comply with
principles of Sharia.

Murabaha – Agreement
Following AAOIFI Shariah Standard guidelines to be observed while entering Commodity Murabaha
agreements.:

1. Different brokers: The trades must involve the market and involve different brokers from the
buy and sell side. This ensures that the trades are genuine and that the brokers are
selling/buying the asset with an interest in the asset.
2. Real asset :The trades must involve a real asset. A fictitious product cannot be sold. The asset
transaction must impact the inventory of the seller and the eventual buyer.
3. Real trades: All the Shariah requirements for trading must be met in terms of valid offer,
acceptance, legal capacities of the parties, agreement on the commodity, agreement on price
etc.
4. True ownership: The traders should assume true ownership through true sales of the underlying
commodity.
5. Possession: The traders must assume possession; either physically, constructively or digitally.
This possession must allow them to dispose of the asset or redeem the asset.
6. Correct Sequence: The Commodity Murabaha must be performed in a correct sequence which
further establishes and validates all of the above key elements.
7. Discretion to not sell: The traders must have the discretion to not sell and hold. This ensures
that the trade is not fictitious.
8. Different agents: The financier should not be the sole agent for all the parties involved in the
Commodity Murabaha.

Musharaka - Agreement:
Musharakah is a relationship established by the parties through a mutual contract. Besides having all the
necessary conditions of a valid contract, following conditions should also be adhered to:
Basic rules of Capital:
The capital in a Musharakah agreement should be:

1. Quantified (Ma’loom): Meaning how much etc.

2. Specified (Muta’aiyan): Meaning specified currency etc.
3. Not necessarily be merged: The mixing of capital is not required.
4. Not necessarily be in liquid form: Capital share may be contributed either in cash/liquid or in the
form of commodities. In case of a commodity, the market value of the commodity shall
determine the share of the partner in the capital.

The normal principle of Musharakah is that every partner has a right to take part in its management and
to work for it. However, the partners may agree upon a condition that the management shall be carried
out by one of them (i.e. RUSD), and no other partner shall work for the Musharakah. But in this case the
sleeping partner (i.e. Customer) shall be entitled to the profit only to the extent of his investment, and
the ratio of profit allocated to him should not exceed the ratio of his investment, as discussed earlier.

Basic rules of distribution of Profit

The ratio of profit for each partner must be determined in proportion to the actual profit accrued to the
business and not in proportion to the capital invested by him. E.g. if it is agreed between them that ‘A’
will get 1% of his investment, the contract is not valid.

It is not allowed to fix a lump sum amount for anyone of the partners or any rate of profit tied up with
his investment.

Leasing Agreement
The investment will focus on the operating leases of the equipment, vehicles for personal and industrial
use, primarily in the GCC. These leases will be based on investment vehicle’s ownership of these assets
which are business-essential to the investment vehicle’s lessees. The Firm will not be engage in those
lease transactions

1. Where the lessee could be considered the owner of the asset and
corresponding payments received by the Firm treated as debt service and
2. Where the lease asset may be used in activities that are contrary to Shariah
principles.
 Real Estate

Real Estate
1. Following are broad guidelines for selection of Real Estate investment assets. The Firm shall not
invest in properties in which tenants conduct activities related to following prohibited
businesses:

a) Gambling
b) The production and/or sale of alcoholic beverages
c) Tobacco products
d) Pork related products
e) Armaments
f) Pornography
g) Illegal drugs
h) Insurance & interest based lending
i) Or other non-Shariah compliant businesses

2. The Firm may invest in office properties which may have tenants in financial services and/or
insurance and limited service hotels where a portion of the hotel’s revenue may be derived from
sale of alcoholic beverages, provided that total revenues derived from such impermissible
activities do not exceed 5% of the total revenues of the transaction.

3. In case of conventional debt is involved in the purchase of RE asset, it should be ensured that
conventional borrowing structure is adequately detached from the investment structure as such
the investment vehicle is not engaged in borrowing activity.