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.

The rationale behind this approach, is to have some resources in the fund that receive fixed return. Because the fund can generate higher earnings than that fixed return, then participants will have their return on investment improved. It is not wholly unlikely that an Islamically acceptable design to the same effect. For example, the fund can purchase some assets on Murabahah basis using the rest of assets in the fund as collateral.

Source: An Introduction To Islamic Banking, Shaykh Dr Mohamed Ali Elgari. Republished with permission.