KembaraXtra–Islamic Finance–Islamic Capital Market – Islamic Assets Under Management

-Meaning of fund management in Islamic finance:
-When a group of investors pool resources to collectively purchase stocks or other assets,the activity requires professional management
-This activity is known as fund management
-A professional fund manager is appointed to manage investments on behalf of investors


-Why collective investment is used:
-Individual investors may lack sufficient capital or expertise to invest independently
-Collective investment enables access to diversified portfolios and professional decision-making


-Institutions providing fund management:
-Both commercial banks and investment banks offer fund management services
-In practice,investment banks dominate this service more than commercial banks
-Because Islamic finance is asset-based,fund management suits Islamic financial institutions (IFIs) better than traditional lending

-Global presence of Islamic funds (2018):
-Approximately 323 Islamic funds offered Shari’ah-compliant products
-Funds operated across Saudi Arabia,Bahrain,Kuwait,Qatar,Pakistan,Malaysia,Singapore,Germany,the US,the UK,and Ireland
-Funds covered low-risk/moderate-return,balanced,and high-risk/high-return categories
-Most were equity and mutual funds,with some in real estate,hybrid funds,and Takaful

Modes of Managing Islamic Funds

-Mudarabah basis:
-The fund manager acts as mudarib
-The manager earns a share of realised profits based on a pre-agreed ratio
-No fixed salary is guaranteed


-Agency (Wakalah) basis:
-The fund manager acts as an agent
-The manager receives a fixed fee or a percentage of the fund’s Net Asset Value (NAV)


Classification of Islamic Investment Funds by Usage

-Equity funds:
-Invest in shares of Shari’ah-compliant joint-stock companies
-Returns earned through capital gains and halal dividends
-Distributed to investors on a pro rata basis


-Ijarah funds:
-Used to purchase assets for leasing
-Lease income is shared among fund subscribers
-Ijarah Sukuk can be traded in the secondary market
-New buyers assume all rights and obligations of the seller


-Commodity funds:
-Used to purchase commodities for resale
-Profits from resale are distributed among investors


-Murabahah funds:
-Closed-ended funds
-Not tradable in the secondary market
-Reason:Islamic banks do not hold sufficient tangible assets in Murabahah structures


-Mixed funds:
-Invest in a combination of equities,commodities,and leasing assets
-Trading allowed only if 51% or more of assets are tangible

Role of Shari’ah-Compliant Products

-Serve purposes of equity and debt securitisation
-Also used in Shari’ah-compliant derivative-like structures
-Banking,brokering,investment,and Shari’ah advisory services follow Islamic principles

Equity Financing in Islamic Finance

-Equity financing is central to Islamic finance
-Achieved through Uqud Al-Isytirak (partnership contracts)
-Includes:
-Mudarabah – profit-sharing
-Musharaka – profit and loss sharing

Debt Financing in Islamic Finance

-Conventional interest-based debt is prohibited
-Islamic debt financing must be linked to real assets
-Achieved through Uqud Al-Mu’awadat (exchange contracts)

-Common Islamic debt instruments include:
-Murabahah – cost-plus sale
-Ijarah – leasing
-Bai‘ al-Salam – advance purchase
-Istisna – purchase order/manufacturing contract

-Types of Ijarah recognised under Shari’ah:
-Operating lease
-Finance lease

Key Takeaway

-Islamic assets under management emphasise asset-backed financing,ethical investment,risk-sharing,and professional fund management,forming a core pillar of the Islamic capital market