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KembaraXtra–Islamic Finance–Islamic Capital Market – Ijarah Funds and NAV
-Meaning of an Ijarah fund:
-An Ijarah fund is a Shari’ah-compliant investment fund that pools money from investors to purchase tangible assets such as buildings,aircraft,vehicles,or machinery
-These assets are then leased to users under Ijarah (leasing) contracts
-Investors collectively own the leased assets through the fund
-Source of return:
-Returns are generated from lease (rental) income paid by lessees
-The rental income is distributed among investors on a pro rata basis
-Returns are performance-based and depend on asset utilisation and lease payments
-Risk-sharing aspect:
-Investors bear risks related to asset ownership,such as asset damage,vacancy,or depreciation
-This aligns with Shari’ah principles of ownership and risk-sharing
-Does an Ijarah fund involve NAV?
-Yes,Ijarah funds also use Net Asset Value (NAV)
-Although the assets are leased and income-generating,the fund is still a collective investment vehicle
-Investors buy and redeem fund units directly with the fund,not through market trading
-Why NAV is necessary for Ijarah funds:
-NAV reflects the current market value of leased assets plus accrued rental income
-Liabilities such as management fees,maintenance costs,and financing obligations are deducted
-NAV provides a fair valuation for investors entering or exiting the fund
-NAV calculation in an Ijarah fund:
-NAV = (Market value of leased assets + accrued rental income − liabilities) ÷ total units
-Liquidity of Ijarah funds:
-Units are generally redeemable at NAV,subject to fund terms
-Ijarah funds are usually less liquid than equity funds due to the nature of physical assets
-Shari’ah perspective:
-Using NAV ensures transparency,fairness,and justice among investors
-It prevents speculation and aligns pricing with real asset value
-Key takeaway:
-Ijarah funds involve NAV because they are mutual-fund-type structures investing in leased assets,and NAV ensures fair pricing based on real asset ownership and rental income
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