Investment Advice and Documentation under Shariah Constraints
What this domain tests
This domain tests the advice process and the paper trail: suitability, disclosure of structure and fees, risk warnings, purification and zakat treatment.
Required content of advice
- Suitability rationale linking the recommendation to the client's Shariah profile, horizon, liquidity and risk capacity.
- Shariah basis: the structure (ijarah, mudarabah, wakalah), the approving Shariah committee or SAC reference, and the product's purification policy.
- Fee and profit-sharing terms: wakalah fees, mudarabah profit-sharing ratios and how losses are shared.
- Risk disclosure: capital is not guaranteed; sukuk values can fall; liquidity may be limited.
- Zakat and purification treatment and who performs the calculation.
- Conflicts of interest and complaint handling.
Worked example
You recommend a mudarabah fund with a 60:40 profit-sharing ratio (investor:manager). The suitability letter must state that capital is not guaranteed, that the manager takes 40% of profit, how a loss is borne by the investor unless caused by manager misconduct, the purification method, and the benchmark used. A verbal explanation alone is insufficient; the client signs the disclosure.
Communication rules
Do not promise or illustrate guaranteed returns; that is gharar in marketing. Do not describe a Shariah-compliant product as risk-free. Performance illustrations must be net of purification where relevant.
Traps that cost marks
- Relying on verbal advice with no suitability record.
- Omitting the purification policy from the disclosure.
- Using conventional performance comparisons that mislead.
- Presenting a projected return as certain.