The Shariah-based investment industry is flourishing and expected to double in assets in less than two years, said experts in Islamic finance during a presentation at the Investment Funds Institute of Canada’s annual conference in Toronto on Thursday.

Currently with assets of US $700 billion worldwide — and growing at a 22%-a-year pace — Shariah-compliant funds are expected to double to US$1.4 trillion in assets by 2010, said Rehan Saeed, a Shariah liaison with the Mississauga, Ont.-based Islamic Finance Advisory Board.

Shariah, otherwise known as Islamic religious law, governs all Islamic banking and investing practices. To comply with Shariah, stocks and bonds within a portfolio need to be screened for the types of businesses they are associated with.

For instance, investments related to alcohol, tobacco, gambling, banking and pornography are not allowed, said Imtiyaz Ahmed, representative for Shariah capital markets at frontierAlt.

“Think of it as a socially responsible fund,” Ahmed added. “There are a just a few extra controls.”

Besides business screens, Shariah-compliant funds also restrict investments in companies with excessive debt. Ahmed explained that “excessive” is a debt to equity ratio above the 30% range.

However, Shariah regulators recognize it’s not a perfect world. Inevitably, regardless of how hard fund managers try to create products in line with the framework, some companies may have a small income stream coming from interest or from a black-listed activity.

To solve this problem, funds can be “purged of their sins” by donating a company’s income stream from non-Shariah compliant activities to charity, said Habib Meghjee, associate partner at Deloitte & Touche LLP. For example, if a fund invests in a company that earns $10 a share, but has 10% of its revenue coming from interest income, the fund managers would donate $1 a share to charity in order to be 100% Shariah compliant, Meghjee said.

A growing Muslim population demanding more Shariah-compliant funds in Canada has driven the demands for these investments in North America, said Ricky Pinto, also a partner with Deloitte & Touche.

“There’s only a sprinkling of funds in Canada,” said Pinto. “Around the world, people are seeing these opportunities.”

Currently, the $3 million frontierAlt Oasis Canada Fund is the only Shariah-compliant fund in Canada. The fund’s assets under management have tripled from $1 million since launching in November 2006, according to Les Young, vice president of frontierAlt.

And with the Muslim community expected to grow to 4.9% from 3.7% of the Canadian population by 2017, Saeed said, the Shariah-compliant based fund industry is still largely untapped.

Islamic finance began in the 1960s, staring with two funds in Egypt and Malaysia. Today, the industry has grown to include a number of funds and governing bodies around the world. The organizations include the Accounting and Auditing Organization for Islamic Financial Institutions, the Islamic Financial Services Board and the International Islamic Rating Agency.