Working of an Islamic equity fund: In the Islamic equity fund all the subscription amounts form a joint pool and is invested only in purchasing the shares of various Shari'ah-compliant in accordance with the above mentioned criteria. The subscribers to the fund are treated as partners and they receive pro rata profit accruing to the fund either through dividends distributed by the companies or through appreciation in the prices of the shares. The fund manager may act either as a mudarib for the subscriber or as his agent.
In the former case he will receive a certain percentage of the annual profit accrued to the fund. As for the second case the manager receives a pre-agreed fee for its services. This fee may be fixed in lump sum or as monthly or annual remuneration. According to the Shari'ah law it is necessary that the methods of fund management be fixed before the launching of the fund. Thus, whoever subscribes to the Fund agrees to the terms and condition of the funds.
The National Bank of Kuwait has floated an open-ended equity fund - Islamic Global Equity Fund in 1998. Minimum investment in the Fund is $10,000 with additional investment in multiples of $1,000.
Investments of the pooled amount are made primarily in the global equity market in companies whose principle activities are within the scope of the Islamic Shari'ah provisions and which mainly derive their revenue from trading and manufacturing transactions.
THE INVESTMENT IS MADE IN VARIOUS SECTORS AS FOLLOWS:
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Energy 35%
Health care 29%
Technology 24%
Consumer 18%
Telecom 5%
Other 12%
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IJARAH (LEASING) FUNDS: Another type of the Islamic fund is Ijarah fund. Ijarah means leasing. Ijarah is probably one of the fastest growing activities of the Islamic financial institutions. In this fund a number of unrelated investors club together and place their money in a pool - the fund. The total amount is then managed by a fund manager and invested in purchasing assets like real estate, motor vehicles, or other equipment for the purpose of leasing them out to a third party in exchange for specified rent.
The asset remains the property of the lessor, and so, at the end of the term, the fund can sell the asset. These rentals charged from the users are the source of income for the fund which is distributed pro rata to the subscribers. The subscribers of the fund are given certificates as evidence of their proportionate ownership assets in the leased and in order to ensure their entitlement to the pro rata share in the income.
According to the Islamic law, since these certificates represent claims on tangible assets and not on liquid amounts or debts, they can be traded in the secondary market.
NBK, IJARAH (ISLAMIC LEASING) FUND: National Bank of Kuwait (NBK), the largest commercial bank in Kuwait, has launched an Ijarah (Islamic Leasing) Fund, offering investors a steady and attractive monthly income in accordance with the provisions of the Islamic Shari'ah without taking excessive risk.
The main features of the Fund are; regular and attractive returns; compliance with Islamic Shari'ah; leasing transactions mainly with "Fortune 1000" companies that satisfy the requirements of the shari'ah; risk control portfolio construction; and making the Fund a low-risk investment vehicle.
Finally, the Fund's structure and operations shall be reviewed annually by Shari'ah Board constituted for the purpose.
The fund, a close-ended one is launched on March 31st , 2002. The Investment period is 3.5 years with the possibility of extending it for upto 11 months upon the Manager's discretion. For the first 6 months, the fund's assets shall be invested in murabahah transactions or used to purchase ijarah equipment transactions in order to build the portfolio.
From the 7th month upto the 42nd month, the assets will be invested in ijarah transactions mainly in Fortune 1000 US companies. Finally, the last 11 months could be used to wind the fund down, finishing the ijarah contracts and selling the remaining assets (equipment).
The minimum amount one can invest is $25,000 with additional investments in multiples of $1,000. Hence, the fund is designed for the middle and high net worthy customers seeking low-risk investment vehicle, paying regular, reliable and attractive monthly returns.
Murabahah fund: Murabahah (cost plus sale) is a common Islamic mode of transaction whereby a commodity acquired through first sale is transferred to someone else with a certain profit added to its cost. Under the murabahah scheme, the Islamic fund purchases, in its own name, goods that a buyer wants, and then sells them to him at an agreed mark-up.
The two parties may agree that method of payment would be on deferred or instalment basis. In a murabahah fund the pooled fund is invested in accordance with Shari'ah principles concerning murabahah transactions. Murabahah funds operate with the fund manager utilising the pooled fund in purchasing commodities from third parties (typically through a bank as an agent of the fund) and reselling the same commodities to the customer on deferred payment basis as per the Shari'ah rules pertaining to murabahah deals.
The bank as an agent, has to ensure that the transactions are based on physical commodities and that the profit ratio for each transaction is agreed to in advance as between the bank and the fund at the time it purchases the goods.
ISLAMIC DOLLAR MURABAHAH FUND: Islamic dollar Murabahah fund is an open-ended one launched on May 31st, 2001. Initial subscription must be at least $50,000. Subsequent subscription must be in minimum increments of at least $5,000. Management fee is 0.30% per annum.
The fund invests in short term (72.07%), medium term (27.53%) and long term (0.4%) murabahah transactions.
ISLAMIC REAL ESTATE FUND: In an Islamic real estate fund a number of unrelated investors club together and place their money in a pool-the fund. The total amount is then managed by a fund manager and invested according to the respective investment policy in various properties. Each investor is a co-owner of a real estate portfolio with prime properties in proportion to the amount he has invested.
The fund manager (an Islamic financial institution) gets a certain percentage as management fee. The investors ie the fund subscriber receive a fixed percentage of return if earned. Property funds have recently gained immense popularity and interest among investors in the Middle East and Europe.
In addition there are also Islamic real estate investment trust funds which invest their portfolios in listed real estate securities that own and operate real estates such as residential, commercial, and retail properties, storage facilities, warehouses and car parks. Islamic real estate funds differ from conventional property funds only in terms of the requirement to observe Islamic investment policies and guidelines and Shari'ah principles.
CASE EXAMPLE: Islamic Asian real estate fund: It is a close-ended investment vehicle that seeks to achieve current income and capital appreciation from a portfolio of investments in the Asian real estate in accordance with the Islamic Shari'ah.
The fund will pursue its objective by investing in a diversified portfolio of high quality office buildings and residential real estate properties in exclusively first-class inner-city locations in Asian countries, such as Korea, China, Hong Kong, Malaysia, Singapore, Japan.
The term of the fund is 6 years extendable up to 3 additional years. Minimum investment is $5,000 with additional investment in multiples of $10,000.
GROWTH OF ISLAMIC INVESTMENT FUNDS: Today there is a wide array of Islamic investment funds to meet the needs of those who seeks to invest in accordance with Shari'ah principles. During the last decade particularly, the establishment of Islamic investment gained momentum.
The Amanah Income Fund, the first Islamic equity fund to be launched in the United States, was formed in 1986 by members of the North American Islamic Trust. In 1987, Dallah Al Barkah Group established two companies, namely Al Tawfeek and Al-Amin which were specifically formed for the development of the Islamic equity funds.
These two companies have successfully launched a number of Islamic funds focusing on such diverse schemes such as real estate and international equities. Since its incorporation Al-Tawfeek has structured and launched 14 Islamic investment funds with an aggregate issued capital of more than $1 billion.
These funds cover almost all asset classes, which comply with the rules of Shari'ah.
In the Malaysian capital market Islamic funds have been in existence since the launching of the first Islamic equity fund by Arab-Malaysian Unit Trust Berhad in 1993. Since then, no less than 55 Islamic funds have been launched, representing approximately a quarter of the total of 226 funds in the country by the end of the year 2003.
Islamic investment funds registered excellent growth during the late 1990s. In 1996, for example, there were 29 Islamic funds on the market with $800 million in assets. Between 1994 and the end of 2001, approximately 120 Islamic funds were launched by both Islamic and conventional institutions. Of these, over 60% of the funds were established to invest in international equities mostly in US companies stocks.
By the end of the year 2003 there were 108 Islamic investment funds in the market the size of Islamic funds with approximately $3.6 billion in assets. The industry has been growing at over 25% annually over the past seven years.
The rapid growth of the Islamic funds is expected to continue as new players, both Islamic and conventional enter the market due to enhanced awareness and familiarity with the products.
A close look at the performance of Islamic investment funds reveals some interesting facts. First, the pace of growth of the Islamic funds has slowed down during the last few years. For example, whereas the number of Islamic funds increased from 41 in 1997 to 102 in 2000, the rate of increase after 2000 was not encouraging (the number of fund increased from 102 in 2000 to 108 by the end of 2003).
The phenomenon can be attributed to the poor performance of the stock markets world-wide. Another important fact is that most of the Islamic funds do not invest in Islamic companies. They invest in companies listed on major stock markets screened according to Shari'ah guidelines. Another alarming fact is that the Islamic funds do not invest in Muslim countries.
This probably is due to the bitter fact that the majority of Islamic funds are not community-focused, they are business-focused. Investment portfolios of the major Islamic funds show that major investments of the funds are in international stocks and properties and in the US and European companies.
Today, the most widely held stocks by the Islamic funds are in energy and health sectors such as Pfizer, Astrazenca, BP Amoco and Exxon Mobil. Considering these facts, a more appropriate description of the Islamic investment fund would only be 'Shari'ah acceptable funds' since they are not truly Islamic in their intent and purpose.
Another important fact is that the Islamic funds market in the global capital market is almost negligible. A vast majority of the Islamic funds have assets in the $10-$30 million range which is not a cause of celebration for the champions of Islamic finance.
However, the launching of the Islamic funds by Muslim as well non-Muslim financial institutions does reflect a definite trend in the psyche of Muslim investors-ie their search of avenues for halal (lawful) earning.
(Concluded)
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