Islamic Funds
Having grown exponentially in recent years thanks to their agreeable universal features, Islamic funds are becoming more and more attractive to investors of all faiths. By Elsa Febiola Aryanti.
A widely held misconception about Sharia-compliant or Islamic funds is that they cater only to Muslim investors. In fact, the values that form the basis of Islamic funds are so universal, they can be enjoyed by both Muslims and non-Muslims. The fairness and clarity in the contracts of Islamic funds are attractive to investors. The returns on Islamic funds are also comparable to more conventional versions. In recent years, the rise in popularity of Islamic funds has been staggering. Among the institutions now offering Islamic financial products and services are banking groups such as Citigroup, HSBC and Standard Chartered Bank.
REIT – Real Estate Investment Trust
The growing popularity of Islamic funds has also increased their variety. They include Islamic index funds, Sharia-compliant private equity funds, Sharia-compliant hedge funds, Islamic equity funds, Sharia-compliant ETFs, Islamic REITs, murabaha funds, Islamic commodity funds and Ijara funds. The fast growth of Islamic funds has empowered investors with more choice.
Islamic funds may only hold Sharia-compliant securities. In addition to regular financial audits, industrial ones are also conducted to comply with the Sharia. These audits ensure that companies are not and have not been involved in industries such as alcohol, tobacco, weapons or gambling. Those that are not environmentally friendly, or have a high proportion of debt or poor reputations, may also be considered non-Sharia-compliant. A Sharia advisory board must be appointed for such Islamic funds, and audits conducted regularly, to ensure continuous conformity to the Sharia.
What is Sharia?
The Sharia is a system of devising laws based on the Qur’an, hadiths (sayings of Prophet Muhammad; peace be upon him), Sunnah (the teachings and practices of Prophet Muhammad; peace be upon him), as well as centuries of debate, precedents and interpretations by legal scholars in specific instances, drawing on the Qur’an and other reliable religious sources.
The Sharia Prohibits the Following:
- Riba – interest/usury
- Maysir or Qimar – gambling/speculation
- Gharar – uncertainty
- Exploitation
- Unfairness
- Undertaking haram activities (such as gambling and pornography)
The Sharia Requires:
- Risk sharing
- Reward sharing
- Fairness
- Transparency
- Sanctity of contracts
The unique balance in Islamic funds is shown by the equal emphasis on both investment returns and ethical values. The welfare of the shareholder, investor and society is considered—it is not about only achieving high returns. Islamic funds encourage socially responsible ethical investments that benefit the greater society.
With so many to choose from, can Islamic funds be sound investments? Yes, they have every reason to be. But bear in mind that all normal investment precautions must be carefully considered. Learn what your appetite for investment risk is. If you are risk-averse, Ijara funds or sukuk securities may be suitable for you. If you have a higher appetite for risk and plan to invest for a longer term, an Islamic equity fund can give you high return over a long period of time, but it may be more volatile (change more rapidly) in the short and medium terms.
Today, Islamic funds offer a wide range of options to match your investment with your financial goals and investment horizon. And with the Sharia in place to protect the investor and the invested, as well as society and the environment, the growth of Islamic funds shows no hint of slowing down.
The author is a fund manager at a reputable state-owned pension fund institution in Indonesia as well as a Sharia-based financial planner, writer and trainer. She also volunteers at a zakat organisation in Indonesia.
Mini Lexicon
A Commodity Fund derives income from the purchase and resale of commodities such as agricultural products or metals. It is strictly prohibited by the Sharia to sell a commodity before it is actually owned.
Profits in Equity Funds are gained generally when the price of a stock rises (capital gains) or when portions of profits are paid out to stockholders (as dividends).
A Hedge Fund is an aggressively managed portfolio of investments that uses advanced investment strategies with the goal of generating high returns. Islamic Hedge Funds are modified versions that comply with the Sharia.
An Ijara Fund is usually established for the purpose of purchasing assets such as property and machinery. They are then leased to third parties in return for rental income.
Index Funds are a type of mutual fund with a portfolio constructed to match or track the components of a market index. Sharia-compliant index funds track or match the components of an Islamic market index, such as the Dow Jones Islamic Market Index.
A Murabaha Fund is a type of ‘cost-plus’ financing. Typically, the fund in question will acquire goods in order to resell them to a third party at their cost plus a fixed profit—all values must be agreed upon in advance.
Private Equity Funds are funds invested directly in non-public (not listed) securities.
Securities are broadly classified over two categories: as ‘debentures’ such as bonds and banknotes, and as equities such as stocks.
Sukuk are an Islamic financial certificate (singular of sukuk is ‘sakk’). They are similar to bonds but without the same interest-paying structure, which is not permitted in Islam. Instead, sukuk have clear and defined underlying assets as their basis. An issuer sells a sukuk certificate to an investor, who then rents it back to the issuer for a predetermined fee. The issuer also makes a contractual promise to buy back the ‘bonds’ at a future date at their initial value. Any profit sharing or rent proportion takes place during its tenure. Sukuk are not debt certificates.
Extracts of the above obtained from www.investopedia.com and a publication by Hogan Lovells International titled ‘Sharia Compliant Funds’.
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