investor invests its surplus money to earn halal profits with the percepts of Islamic Shariah.
The investor may receive a document against his investment entitled to the pro-rata profits actually earned by the fund.
Whatever the document might called it should fulfill two conditions explained by the Shariah. Shariah Conditions First Condition: Instead of fixed return tied up with their face value, they must carry a pro-rata profit actually earned by the fund.
Second Condition: The amounts so pooled together must be in a business acceptable to Shariah.
Returns are tied up with the actual profits earned or losses suffered. In case of loss caused by the negligence on the part of management, compensation will be provided by the management. Funds raised must be invested in Shariah approved businesses. Principle of Islamic Investment funds Modes of Investment 1. Equity fund 2. Ijarah funds 3. Commodity funds 4. Murabaha funds 5. Bai al Dain 6. Mixed funds
Equity Funds Equity funds are invested in joint stock companies. Profits are generated through the trading of shares in the stock market and the dividends. It is prohibited to invest in stocks of those companies that are involved in activities not approved by sharia, e.g. companies manufacturing, selling or offering liquor, pork, haram meat, or involved in gambling, night club activities, pornography, prostitution, or involved in the business of hire purchase or interest etc. Equity Funds Conditions for investment in shares
Not involved in Manufacturing , Selling or offering Liquors, Pork, Haram meat, gambling, night clubs, pornography. Business should be Halal like automobile and Textile etc. company's total short term and long term investment in non-permissible business should not exceed 30% of the company's total market capitalization. Equity Funds Management of funds
Management of the fund can be carried out in two ways; Managers of fund may act as Mudarib. To act as an agent for the subscribers and charge a pre agreed fee for services, 1. Fee can be a fixed in lump sum or as a monthly or annual remuneration. 2. Fee can also be based on a percentage of the net asset value of the fund. For example, it may be agreed that the management will get 2% or 3% of the net asset value of the fund at the end of every financial year. Ijara Fund Ijara is an exchange transaction in which a known benefit is made arising from a specified asset available in return for a payment, but where ownership of the asset itself is not transferred. The ijara contract is essentially of the same design as an installment leasing agreement which can return to the lessor at the end of the lease period. It takes on the features of an operating lease. Ijara Fund Funds or subscription amounts are used to purchase assets like real estate, motor vehicles, or other equipment's for the purpose of leasing. The ownership of these assets remains with the Fund and the rentals are charged from the users. Rentals on these assets are the income of fund. Each subscriber is given a certificate that is more likely to be called Sukuk. Sale of these Sukuk certificates would simply change the owner in the asset. Ijara Fund Some conditions of the Ijara contract 1. The leased assets must have some usufruct (the legal right of using and enjoying the profits of something belonging to another), and the rental must be charged only from that point of time when the usufruct is handed over to the lessee. 2. The leased assets must be of a nature that their Halal (permissible) use is possible. 3. The lessor must undertake all the responsibilities consequent to the ownership of the assets. 4. The rental must be fixed and known to the parties. Commodity Funds This type of fund is used for purchasing commodities for resale to earn profits. All the transactions should comply the Shariah conditions like; 1. The seller must own the commodities. 2. Forward sales are not allowed. 3. Commodities must be Halal. 4. The seller must have physical or constructive possession over the commodity he wants to sell. 5. Price of the commodity must be fixed and known to the parties, it can't be tied up with any uncertain event. Commodity Funds Management of the funds 1. In this type of fund management will be offered a fee for their services. 2. Fee may be fixed or a percentage a the profits earned. 3. Mudarabah arrangement to share profits is also feasible here. Murabaha Fund Murabaha is one of the most commonly used modes of financing by Islamic Banks and financial institutions.
It is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit thereon.
It is not a loan given on interest; it is a sale of a commodity for cash/deferred price. Murabaha Fund The Bai' Murabahah involves purchase of a commodity by a bank on behalf of a client and its resale to the latter on cost-plus-profit basis. Under this arrangement the bank discloses its cost and profit margin to the client. Bai al Dain / Sale of Debt Sale of debt is not allowed in Shariah, .e.g. discounting of bills receivable or debts receivable. Majority of Muslim jurists believe that bai-al-dain with discount is not allowed in Shariah. Any increase or decrease from one side is similar to Riba' and can never be allowed in Shariah. However, Some of Malaysian scholars have allowed this kind of sale. Bai al Dain / Sale of Debt The Islamic Fiqah Academy of Jeddah, which is the largest representative body of the Shariah scholars and has the representation of all the Muslim countries, including Malaysia, has approved the prohibition of bai-al-dain unanimously without a single dissent.
Mixed Fund A fund where the subscription amount is invested in different types of investments, like equities, leasing, commodities, etc. Certificates of units of funds are tradable in the secondary market only if the tangible assets are more than 51% while the liquidity and debts are less than 50%. Otherwise it will be a closed end fund.