In Shari'a We Trust

There are several different schools of Islamic theology and jurisprudence – with the most significant two being Sunni and Shia – and within each of these are many different sub-schools.

In relation to inheritance, the Shari'a system encourages an outright distribution of wealth to the family in fixed proportions and there are slight variations between the rules of each school. In any particular case, clients should seek advice from their own Imam (an authority on Islam) or other suitable experts, as the creation of trusts within Shari'a is fraught with difficulties.

The Shari'a investment rules create the distinction between investments that are halal (Shari'a-compliant) and those that are haram (non-compliant). The most relevant haram investment is Riba or usury – the practice of charging interest on loans. This is a bar on any investment that produces a predetermined fixed return – the profit element is then Haram. Therefore, there must be no guaranteed return, but instead the chance to make a profit and the risk of loss whenever any money is committed to a project.

Unethical investment

At the same time investment in unethical or haram industries or products is illegal – these include pornography, alcohol, drugs, gambling, and tobacco rights, and they can also include hotel or entertainment investments.

The practical consequence is a ban not just on bank deposits and loans, but also (depending on the school of Islam) a ban on futures and options, bonds, derivatives, mutual and hedge funds – which could all be seen as a form of gambling – as well as property where haram activities are conducted.

So is the creation of a Shari'a-compliant trust possible? There is no concept of a trust in Shari'a but it is not wholly alien because there is a type of charitable gift in which the donor or his family can retain a form of usufruct, known as a Waqf.

Consistent with this is the general rule that a Muslim has complete freedom to make lifetime gifts, whether or not in the Shari'a proportions, although some scholars suggest that lifetime gifts that are free of the Shari'a devolution rules have to be limited to one-third of the estate.

The Shari'a has no concept of "clawback", but lifetime gifts made during a period known as the "death sickness" – this is in effect the Shari'a concept of legal capacity – are forbidden.

Therefore, it is certainly possible to create a Shari'a-compliant trust, but there are gradations of compliance, particularly in the...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT