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KembaraXtra–Islamic Finance–Islamic Capital Market – Murabahah Funds and NAV
-Meaning of Murabahah funds:
-A Murabahah fund is a Shari’ah-compliant investment fund that uses Murabahah (cost-plus sale) contracts as its core investment activity
-The fund pools money from investors and uses it to purchase assets or commodities, which are then sold to clients at a pre-agreed cost plus profit margin
-The profit margin is fixed at the time of the contract and disclosed upfront
-Nature of assets in Murabahah funds:
-The fund primarily holds receivables (debts) created from Murabahah sales
-Once the sale is executed, the fund no longer holds physical assets but outstanding payment obligations from buyers
-Source of return:
-Returns are generated from the mark-up embedded in Murabahah transactions
-The income is trade-based,not interest-based
-Profits are distributed to investors according to their units in the fund
-Shari’ah compliance conditions:
-The fund must own the asset before selling it to the client
-The sale price and profit margin must be fixed and known in advance
-No interest,risk-free guarantees,or speculative activities are allowed
-Risk profile:
-Risk is relatively lower compared to equity or commodity funds
-Main risks include credit risk (buyer default) and operational risk
-There is no price fluctuation risk after the Murabahah sale is completed
-Closed-ended nature of Murabahah funds:
-Murabahah funds are usually closed-ended
-Trading of Murabahah fund units in the secondary market is not permissible,because most assets are debts
-Shari’ah prohibits trading of debt at a price other than par
-Does a Murabahah fund involve NAV?
-Yes,Murabahah funds still use NAV for valuation purposes
-NAV is mainly used for internal valuation,profit calculation,and redemption at maturity
-Why NAV is used in Murabahah funds:
-NAV reflects the outstanding Murabahah receivables plus cash balances
-It ensures accurate distribution of profits among investors
-NAV helps determine the value of investor units at fund closure
-NAV calculation in Murabahah funds:
-NAV = (Outstanding Murabahah receivables + cash − liabilities) ÷ total units
-Liquidity aspect:
-Murabahah funds offer low liquidity during the fund tenure
-Investors usually exit only at maturity,not through secondary market trading
-Key takeaway:
-Murabahah funds generate halal returns through cost-plus trade transactions,and although their units are not tradable, NAV remains essential for fair valuation and profit distribution
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