Understanding Islamic Finance - Doha Academy of Tertiary Studies

Overview of Financial Institutions and Products 203intermediary, agent or manager because wages or commission are their right in lieu of thework they have undertaken. In the case of fund management, it is the responsibility of themanagement company to exclude prohibited income.Al-Meezan Investment Management (Pakistan), which operates a number of Islamic funds,calculates the percentage of noncompliant income to the gross revenue (net sales + otherincome) for each investee company and this percentage is called the charity rate. The charityrate for each investee company is multiplied by the dividend income from the respectivecompanies to get the charitable amount. This charitable amount is then transferred to aseparate account.Islamic equity funds experienced excellent growth during the late 1990s. In 1996, forexample, there were 29 Islamic equity funds on the market with $800 million in assets. Byearly 2000, the number of funds had grown to 98, with approximately $5 billion in assets.Today there are over 100 Islamic equity funds on the market, offering investment solutionsto meet any Islamic investor’s taste.8.8.2 Principles Relating to StocksSince investment in stocks of joint stock companies is the core business of Islamic investmentbanks and other NBFIs, we may briefly discuss its main features and aspects. The IslamicFiqh Council of the OIC in its seventh session (9–14th May, 1992) resolved the followingin respect of shares of joint stock companies: 201. Trading in stocks of companies— Since the essential thing about transactions is the nature of their business, the establishmentof a joint stock company with unprohibited purposes and activities is permissible.— Trading in stocks of companies whose main purpose is a prohibited activity, such astransactions with Riba, production of, or dealing in, prohibited products is prohibited.— Trading in stocks of companies that deal at times in prohibited things, such as Riba,etc., but their main activities are not based on any prohibited business is permissible.2. Underwriting: underwriting is an agreement made upon establishment of a company withsomeone who undertakes to guarantee the sale of all or part of the shares being issued,i.e. to undertake to subscribe for shares that remain unsubscribed by others. There is noSharī´ah objection to this provided that the obligee subscribes to the shares at nominalvalue without any compensation for the commitment per se, though the obligee mayreceive compensation for work other than the underwriting – such as making feasibilitystudies or marketing of shares.3. Object of the contract in the sale of shares: the object of the contract in the sale ofshares is the unidentified portion of the company’s assets (known as Musha‘a in Islamicjurisprudence) and the share certificate is a document attesting entitlement to the saidportion.4. Preference shares: it is not permissible to issue preference shares with financial characteristicsthat involve guaranteed payment of the capital or of a certain amount of profit orensure precedence over other shares at the time of liquidation or distribution of dividends.20 This is a brief summary of the resolution; for details, see Council of the Islamic Fiqh Academy, 2000.