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Islamic Funds

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Islamic and Conventional Funds are very similar in principle since these share common objectives such as maximising return, preserving capital and pooling investors. However, there is one main difference since Islamic Funds must invest in conformity with the principles of the Shariah Law.

It is worth noting that Islamic funds never promise that the amount originally invested will be returned and an investor in Islamic funds will earn a return only if the fund makes a profit. Also, the pooled amount must be invested in companies whose primary business is regarded as acceptable under the Shariah Law. This implies that funds are prohibited from making investments in industries categorized as morally deficient, such as those related to gambling or alcohol.

An Islamic Fund can take a number of different forms, among which are:

 

Ijarah Funds

An Ijarah Fund is a rental contract by which the subscription amounts received from investors are used to purchase one or more assets. These assets could range from aircrafts and vessels to manufacturing equipment and are subsequently leased for a fixed period to a client in exchange for rent.  Since the leased asset has the right of use, the rent receivable is charged from the moment the asset is passed over. This rental amount paid by the lessee must be fixed and stipulated to both parties at the beginning of the contract, thus the investors receive a fixed income.

Legal ownership of the assets remains with the fund, as does the responsibility for the management of these assets.  Also, the asset cannot be used for business which is prohibited under the Shariah Law and the lessee is liable for any harm to the asset caused by any misuse or negligence on his part.

 

Murabaha Funds

Murabaha funds are commodity funds. In such funds, the amount pooled by the investors is used for the purchasing of commodities. The purchased commodities must be Halal, therefore it is prohibited to deal in wines, pork or other prohibited materials. These commodities are subsequently sold to a third party at their original cost plus a fixed profit mark-up.  The actual cost which was incurred in acquiring the commodity and the amount of profit that will be charged in addition to the cost must be disclosed by the seller. Also, the price of the commodity must be fixed since any price which is uncertain or which is related to events which are uncertain renders the sale invalid. 

Thus, the fund’s assets are initially tangible assets which are subsequently exchanged for receivables owed by clients and cash obtained from settled receivables. The receivables are not negotiable under the principles of Shariah and cash is not tradable unless at par.

 

Mudarabah Funds

Mudarabahis a form of partnership in which one partner provides the capital for investment in a commercial enterprise, while the other partner manages the fund and provides the expertise. The capital is invested in shares of joint stock companies and assets, among others. The objective of the fund is to make a profit in the form of capital gains. The profits are derived from the dividends distributed by the companies in which the fund invests. If the fund succeeds in making a profit, this is shared according to a previously stipulated ratio which has been agreed upon by both parties.  Incentives may be also given to the partner providing the expertise and management as a bonus.

In the case where there are losses, these are wholly borne by the partner providing the capital, except in the case where this is due to negligence or misconduct on the part of the entrepreneur.

The Mudarabah fund only invests in those companies whose conduct of business follows the principles of Shariah, otherwise it will be considered as having direct involvement as a shareholder in the prohibited business of that company. 

 

Mixed Funds

In Mixed Islamic Funds, the subscription amounts pooled from investors are invested into a mix of different investment instruments such as equities, leases and commodities among others. It must be noted that the investment vehicles in which the fund invests must follow the principles of Shariah.  In Mixed Islamic Funds, if the tangible assets of the fund amount to more than 51% whilst the liquid assets and debts amount to less than 50%, the units of the fund may be negotiable.  On the other hand, if the amount of liquid assets and debts is greater than 50%, then the fund will be a close-ended fund. This implies that the number of shares is to remain fixed and thus the Fund’s units cannot be traded.

 

The Role of the Shariah Board

A Shariah Board is a structure which can be found within any Islamic Finance Institution and whose main role is ensuring that all products and services being offered by the institution comply with the principles of the Shariah Law.

Furthermore, the Shariah Board must also review and oversee any potential new product offerings and may also be called upon to make a judgement on individual cases referred to it, relating to whether specific customer business requests are acceptable to the company. In turn, the institution must ensure thatShariah Board has a high level of autonomy to prevent from commercial pressures.

In setting up an Islamic Fund, the Shariah Board has a say as to how the fund is to be set up as well as an ongoing role in ensuring that the investments of the underlying assets of the fund are in conformity with the Shariah principles. The Shariah Board must also review any activities carried out by the fund in order to ensure compliance.

 

Whether you require further information in this regard or would like to set up an Islamic Fund, kindly do not hesitate to Contact Us and we will gladly assist you with any queries you might have.

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