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Islamic Investment Funds

The term “Islamic Investment Fund” in this chapter means a joint pool wherein the investors contribute their surplus money for the purpose of its investment to earn halal profits in strict conformity with the precepts of Islamic Shariah.

Lessons

Islamic Investment Funds

The term “Islamic Investment Fund” in this chapter means a joint pool wherein the investors contribute their surplus money for the purpose of its investment to earn halal profits in strict conformity with the precepts of Islamic Shariah. The subscribers of the Fund may receive a document certifying their subscription and entitling them to the pro-rata profits actually earned by the Fund.

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Investment in Shares – Criteria

1. The main business of the company does not violate Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah, such as companies manufacturing, selling or offering liquors, pork, haram meat, or involved in gambling, night club activities, pornography etc.

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Reserves in Islamic Equity Funds

Reserves are important to the proper management of the fund and the smoothing of redemption payments to the investors. If distribution of profit and redemption of units is done on accrual basis, then reserves are a must for the operation of the fund. Reserves are deducted from the profit generated through the invested funds. This raises two Shari’ah questions. Firstly, whether investors are aware of such deduction and they are consenting to their amount. This problem can be solved through clear mention in the prospectus and signed on the agreement with each investor. Secondly, who own such reserves at the winding down of the investment fund? Many investment funds that are managed by Islamic banks opt for donating such amount at the closing of the fund to charity. One should remember, however, that most of these open-end funds have no specific date nor any future plan for ending the operation of the fund.

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Islamic Equity Funds

In an Islamic equity fund the amounts are invested in the shares of joint stock companies. The profits are mainly derived through the capital gains by purchasing the shares and selling them when their prices are increased. Profits are also earned through dividends distributed by the relevant companies.

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Islamic Commodity Funds

Another possible type of Islamic Funds may be a commodity fund. In the fund of this type the subscription amounts are used in purchasing different commodities for the purpose of their resale. The profits generated by the sales are the income of the fund which is distributed pro rata among the subscribers.

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Ijarah Investment Funds

Another type of Islamic Fund may be an ijarah fund. Ijarah means leasing the detailed rules of which have already been discussed in the third chapter of this book. In this fund the subscription amounts are used to purchase assets like real estate, motor vehicles or other equipment for the purpose of leasing them out to their ultimate users.

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Murabahah Investment Funds

Murabahah is a specific kind of sale where the commodities are sold on a cost-plus basis. This kind of sale has been adopted by the contemporary Islamic banks and financial institutions as a mode of financing. They purchase the commodity for the benefit of their clients, then sell it to them on the basis of deferred payment at an agreed margin of profit added to the cost.

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Mixed Islamic Funds

Another type of Islamic Fund may be of a nature where the subscription amounts are employed in different types of investments, like equities, leasing, commodities etc. This may be called a Mixed Islamic Fund. In this case if the tangible assets of the Fund are more than 51% while the liquidity and debts are less than 50% the units of the fund may be negotiable.

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Bai’ Al Dain

Here comes the question whether or not bai’-al-dain is allowed in Shariah. Dain means ‘debt’ and bai’ means sale. Bai’-al-dain, therefore, connotes the sale of debt. If a person has a debt receivable from a person and he wants to sell it at a discount, as normally happens in the bills of exchange, it is termed in Shariah as Bai’-al-dain. The traditional Muslim jurists (fuqaha) are unanimous on the point that bai’al-dain with discount is not allowed in Shariah.

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Islamic Equity Funds

Islamic Equity Funds are Basically “Ethical Investing” Ethical Investing is not new. It goes back to the 1920’s. They became popular, however, in the 1970’s and thereafter. In 1971 a group of Methodist clergy in the USA discovered that their church regularly received letters from individuals asking how to invest in companies not manufacturing weaponry. After finding that no organization specializes in this kind of investment, the ministers went to Wall Street firms asking for assistance in setting up a fund for this purpose. Pax World Fund may be the first equity fund to adopt a full set of ethical issues in its screens. The pioneer fund which excluded companies producing alcohol & tobacco from its portfolio holding was available to investors in 1928. Then the environmental movement and the equal employment opportunities programs in the 1970’s produced a number of equity funds tailored to the preferences of investors who are concerned about these issues, and want their money to help influence the business sector into more compliance. Dreyfus third century fund was pioneering in this regard. Such funds do exist now in USA & Europe.

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Equity Funds - Guarantee of capital of the fund by the manager

To attract investors, many conventional fund managers guarantee to the investors the nominal value of their investment. This is not acceptable from Shari’ah point of view. Many advanced to a manager that guarantees it return at the end of the period (or at any time in the future) makes it, from contractual point of view, a lender-borrower relationship. Profit on such money will then be a form of usury (riba), even of such profit is variable. In an Islamically managed fund no such guarantee should be made.

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Gearing in Investment Funds

One of the most important advantages of investment funds in conventional setting is gearing, i.e., the possibility of pledging the assets in the fund for borrowing and reinvesting to enhance the earning in the fund. This is clearly not acceptable from Shari’ah point of view since these borrowings are interest based.

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Purification in Islamic Equity Fund

Meaning of purificationPurification simply means: deducting from one’s investment those earning the source of which is not acceptable from Shari’ah point of view. In the case of equity investment, this refers primarily to interest earning and incidental income from other non-permissible sources such as sale of liquors or pork. While the idea looks simple, infact it is not. A company is a going concern. It is a living entity with far reaching activities and a widely stretched concerns. It is also very complex from accounting and financial point of view. Things are not as simple as they may look. Therefore, estimating such income is a formidable task. One that require an excellent knowledge of accounting and corporate finance and exceptional ability to handle Shari’ah issues, a combination that is not always within reach.

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