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Taint of controversy

An embarrassing and potentially damaging controversy is emerging in Islamic equity funds. Because of the way the vast majority have been handled by mainstream brokers, many may not be as Shariah-compliant as investing customers would expect.

Many Islamic equity funds are managed by conventional asset managers that may operate a large number of funds, of which only a few are marketed as Shariah-compliant. There will be overlap between the stocks held in the Shariah-compliant funds and the other funds.

If the fund manager trades through an omnibus account with a broker, there may be little or no security that non-compliant stocks don't end up in the Islamic account. If it does happen and is spotted, the stock would have to be sold but the revenue would be unclean.

Also, margin financing is likely to be done conventionally for all stocks traded by the broker for the manager. Because of related interest charges this would not be Shariah-compliant.

The source of the funding, from a conventional broker that makes a high proportion of its income from interest would also be unclean. And if the fund manager fails to pay the broker on time it will incur interest charges.

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