Understanding Islamic Finance - Doha Academy of Tertiary Studies

Overview of Financial Institutions and Products 201in the case of stable income securities. These would accommodate risk-taking investorswith the commensurate possibility of a higher income.8.8.1 Islamic FundsFund management can be conducted both by commercial and investment banks, but presently,mostly investment banks are involved. Due to the asset-based nature of Islamic finance, thistype of business is more suitable for IFIs than short-term commercial banking.Fund management refers to investors pooling their resources to purchase a larger numberof shares through any manager collectively, which otherwise they could not purchaseindividually. About 150 mutual funds of various categories are providing low risk/moderatereturn, balanced risk/return and high risk/high return Sharī´ah-compliant investment facilitiesto investors in various parts of the world. While presently Islamic mutual funds are operatingmainly in Saudi Arabia, UAE, Bahrain, Kuwait, Qatar, Pakistan, Malaysia, Brunei, Singapore,Germany, Ireland, the UK, the USA, Canada, Switzerland and South Africa, effortsare underway to provide investment facilities through mutual funds in all parts of the worldto capture the emerging demand. Most of these funds are equity funds while a number ofhybrid funds are managing leasing, real estate, Takaful and other funds.Management of the funds can be carried out on Mudarabah or agency basis. In the caseof Mudarabah, the fund manager would get any pre-agreed percentage of the realized profit,while in the case of an agency arrangement, the manager would get a fee on agreed termsthat may be any specified amount or percentage of the net asset value of the fund.Shaikh Taqi Usmani has indicated the following categories of Islamic investment fund:1. Equity funds, the proceeds of which are invested in shares of joint stock companies,and returns in the form of capital gains and dividends are distributed on a pro rata basisamong the investors.2. Ijarah funds. The amounts of such funds are used to purchase the assets for the purposeof leasing. Rentals received from the user are distributed among subscribers of the fund.Ijarah Sukuk can be traded in the secondary market on the basis of market forces. Anyonewho purchases these Sukuk replaces the sellers in the pro rata ownership of the relevantassets and all the rights and obligations of the original subscriber are passed on to him.3. Commodity funds, in which the subscription amounts are used to purchase differentcommodities for the purpose of resale. The profits generated by the sales are distributedamong the subscribers.4. Murabaha funds. Any fund created for Murabaha sale should be a closed-end fund;its units cannot be negotiable in a secondary market as an Islamic bank’s portfolio ofMurabaha does not own any tangible assets.5. Mixed funds, the subscription amounts of which are employed in different types of investmentslike equities, leasing, commodities, etc. For trading of mixed funds, the tangible assetsshould be more than 51 %, while the liquid assets and debts less than 50 %. 19Asset Management Through Equity FundsAs compared to a conventional equity fund, in which a fixed return is tied up with itsface value, an Islamic equity fund must carry a pro rata profit actually earned by the fund.19 Usmani, 2000a, pp. 203–218.