Shariah RFP M3 cheat sheet

Prohibited elements are riba (interest), gharar (excessive uncertainty), maysir (gambling), and haram business lines: alcohol, pork, conventional finance, gambling, tobacco, adult entertainment, and weapons.

Core nominate contracts: murabaha (cost-plus sale), ijara (lease), musharakah (joint partnership), mudarabah (capital-plus-effort), wakala (agency), salam (prepaid forward), istisna (manufacture), and rahn (pledge).

Riba al-nasiah is a stipulated increase for deferment of payment; riba al-fadl is excess in exchange of identical commodities, so spot exchange of gold, silver, wheat, barley, dates, and salt must be equal and immediate.

A Shariah Supervisory Board issues fatwas, approves product structures, and performs ex-post compliance audits; its rulings bind the institution's product documentation.

AAOIFI issues Shariah, accounting, auditing, and governance standards; IFSB issues prudential and supervisory standards for Islamic financial institutions.

Zakat is 2.5% of zakatable wealth held for one lunar year above nisab (85 g gold or 595 g silver); purification removes the impermissible income share from returns.

Sukuk holders own underlying assets or usufruct, not a debt claim; true sale and asset transfer distinguish sukuk from conventional bonds.

Bay' ma la yamlik (sale of what one does not own) and short selling of unowned securities are generally prohibited; hedging uses wa'd, arboun, or permissible salam structures.

Business screen excludes companies with primary revenue from alcohol, pork, conventional banking and insurance, gambling, tobacco, adult entertainment, and weapons; incidental revenue tolerance varies by methodology.

AAOIFI-style financial ratios: interest-bearing debt/total assets < 33%; interest income/total revenue < 5%; accounts receivable/total assets < 70% for some methodologies.

MSCI Islamic uses total assets as denominator for leverage and cash-plus-receivables thresholds; DJIM and FTSE use market capitalization, so a stock can be compliant in one index and not another.

Dividend purification amount = dividend received × (impermissible revenue ÷ total revenue); the amount is donated, not retained.

Capital gains on a stock that later fails screening are generally not purified; only income attributable to impermissible sources is donated.

Murabaha and other debt-based sukuk are tradable only at par; ijara, musharakah, mudarabah, and wakala sukuk may trade at market prices subject to asset ownership.

Screen at initial purchase and on each periodic review; corporate actions, mergers, and balance-sheet changes can move ratios across thresholds.

Non-compliant income must be segregated in a separate account and disbursed to charity; it cannot be used to offset fees or distributed to investors.

Shariah screening shrinks the investable universe and typically concentrates portfolios in technology, healthcare, industrials, and energy; conventional financials and consumer staples with alcohol exposure drop out.

Expected return net of purification = gross expected return − (portfolio impermissible income ratio × expected income yield).

Rebalancing rule: review financial ratios quarterly and after corporate actions; exit a holding when it fails the chosen methodology's screen.

Liquidity is held in commodity murabaha, wakala deposits, or short-dated sukuk; interest-bearing cash and conventional money market funds are excluded.

Derivatives are restricted: plain vanilla options and futures are generally excluded; permissible hedging uses wa'd (promise), arboun (earnest money), or salam with strict conditions.

Sukuk allocation replaces conventional bonds; asset-based sukuk carry credit risk of the originator, while asset-backed sukuk carry true asset performance risk.

Profit-sharing ratio in mudarabah determines manager compensation; losses fall on capital unless caused by manager misconduct or negligence.

Zakat on portfolio = 2.5% × market value of zakatable holdings (cash, gold, trading securities), using the lunar-year holding period.

Shariah non-compliance risk arises from a product breaching a fatwa or screen; remediation includes purifying income, restructuring, and disclosing the breach to the SSB.

Murabaha sukuk are debt receivables and cannot be traded at a premium or discount; they are held to maturity at par, so they behave like amortized cost instruments.

Ijara sukuk are rate-sensitive: price moves inversely with profit rates; duration and convexity apply but with lease-specific cash flows and asset ownership risk.

Performance reporting shows gross return, purification amount, and net return; benchmarking against a Shariah index avoids apples-to-oranges comparison with conventional indices.

Risk-free rate is replaced by an Islamic benchmark such as sukuk yield or Islamic interbank profit rate when computing Sharpe ratio and valuation.

Tracking error widens when the Shariah universe excludes large sectors; information ratio and active share explain benchmark-relative performance.

Stress tests cover sector concentration, liquidity of sukuk, originator credit deterioration, and commodity price moves in murabaha and salam exposures.

Annual Shariah audit verifies compliance; findings require correction, income purification, and SSB reporting, with records retained per regulator.

Shariah profile captures compliance strictness (strict screening vs tolerance of mixed activity with purification), preferred purification method, and zakat handling.

Suitability assessment records objectives, time horizon, liquidity needs, risk tolerance, knowledge, existing holdings, and Shariah constraints before any recommendation.

Client's existing non-compliant holdings require a transition plan with exit timing, tax impact, and purification of income earned during the transition.

Zakat obligation depends on nisab and lunar-year holding; client must identify zakatable assets including cash, gold, business inventory, and Shariah-compliant investments.

ESG or ethical preferences can conflict with Shariah screening outcomes; the mandate documents which preference prevails.

Review triggers include marriage, inheritance, business sale, retirement, and change in Shariah preference; document updated profile.

Risk capacity differs from risk tolerance; a client with high capacity but low tolerance receives a conservative allocation.

Shariah investment mandate documents screening methodology, prohibited sectors, purification method, zakat treatment, benchmark, rebalancing policy, and reporting frequency.

Fatwa disclosure identifies the ruling, issuing scholar body, date, and scope; product documentation must not claim approval beyond the fatwa's scope.

Wakala and mudarabah agreements state agency scope, profit-sharing ratio, fee basis, investment restrictions, and termination terms; fixed interest-bearing fees are avoided.

Suitability report records client data, recommendation rationale, Shariah preferences, risks, and client acknowledgment before execution.

Performance reports disclose gross return, purification amount, net return, and benchmark; zakat calculations and donations are separately reported.

Records of screening decisions, SSB minutes, and purification donations are retained for the regulator's required period, commonly five to ten years.

Conflicts of interest, related-party transactions, and fee structures are disclosed; advisory fees cannot be structured as riba-bearing loans or penalties.