Module 5

Islamic Asset and Fund Management In many countries, the development of banking is often
prioritized to the detriment of fund management.
Fund management involves a group of investors channeling
‒ The reliance on fractional reserve banking creates a more
their surplus money to a legal entity known as a ‘fund’, which
fragile financial system.
pools the collected funds and invests it in a diversified
‒ Such a model can increase the risk of bank runs and
portfolio of securities and other assets to achieve specific
economic instability during financial crises.
financial goals.
‒ Efficient capital mobilization is hampered, leading to less
Islamic investment funds are similar to conventional funds in
optimal allocation of resources across the economy.
terms of the common objectives that they share, such as
pooled investment, capital preservation and returns
Banks’ lending practices:
optimization (In accordance with Shariah principles)
‒ Banks typically favor collateralized lending, which prioritizes
loans to the public and corporate sectors, as well as personal
loans for homes and vehicles.
‒ This approach limits the availability of funds for riskier, but
potentially more innovative, projects.
‒ SMEs often struggle to access the funding they need for
growth and development. This gap in funding hinder overall
economic development.

Specialized Venture Capital and Private Equity funds are

generally skilled at deploying capital, raising corporate
capabilities and enhancing corporate behavior.
• Investors in the public market play a significant role in
shaping corporate practices and ethics through their screening
processes.
Islamic funds ‒ Negative screen from the boycotting of companies
practicing apartheid in South Africa by investors in the 1970s.
Contractual relationship ‒ Modern-day ESG screens employed by powerful investor
Wakalah contract: investors are principals while the fund networks, such that companies are incentivized to adopt high
manager is the agent. The agent manages the investor’s funds ESG standards.
on a fee basis. • Companies must recognize the importance of aligning with
Murabaha contract: investors are the capital providers and the investor values to secure funding.
manager manages the funds. • Embracing transparency and accountability in ESG practices
Fee structure can enhance reputation and attract a broader investor base.
Wakalah structure: management fee is applicable. As a result, corporate behavior is
Mudaraba structure: profit is shared, as determined in the increasingly aligned with societal values, fostering long-term
investors’ agreement. sustainability.
Advantages Fund (both) Management
Fund Investment • Allows individuals and institutions to combine smaller
Profits amounts of money into a larger sum, thus
• Investor is entitled to a proportionate share of the participating in a wider range of investments that
returns generated by the investment fund (net of the may not be feasible for an individual investor
manager’s cut and any other possible deductions) • Investors also benefit from lower costs (i.e. smaller
• Returns are in the form of income distribution brokerage commissions) as the cost for professional
(dividends) and/or capital appreciation, as the fund’s management is spread across many investors
value grows with the good performance of its • Fund management further allows investors to profit
underlying assets. from a reduction of risks through diversification
Costs Roles and Advantages Islamic Fund Management
• Front-end load: A commission fee upon the purchase • Reduction in search cost in selecting Shariah-
of units compliant investments.
• Back-end load: A redemption fee upon the sale of • Screening requires a considerable amount of
units information (e.g. company annual reports) to be
• Annual management fee
 scrutinized to discern trends and know if the investee Islamic Funds
company has kept to its stated objectives. An Ijara fund is an Islamic leasing arrangement where the fund
• Professional management services: skills are required purchases assets to lease them to clients, allowing clients to
to analyze financial ratios access necessary assets without upfront costs while
• Greater authenticity of risk-sharing and financial generating rental income for investors.
inclusion model A Murabaha fund uses a cost-plus financing model to
• Shariah governance in the form of investment purchase goods or assets and sell them to clients at a pre-
reviews and audits agreed profit margin, allowing clients to pay in installments
while providing income for investors.
Every mutual fund is started by a New Fund Offer (NFO). Hajj fund helps Muslims save for their pilgrimage to
When an investor appeals for a mutual fund scheme during Mecca by allowing participants to contribute regularly, with
this period, he/she gets fund units at the NFO price. Mutual the fund investing in Shariah-compliant assets to grow savings
Funds: and provide financial support when needed
Open Ended: There is no limit on the number of Waqf fund is based on the concept of charitable endowment
units/shares that the fund can issue. An investor can (waqf), where assets are donated for religious or charitable
purchase/sell units directly from the fund or through purposes and managed to generate ongoing income
authorised agents.
Trends in Fund Management
Closed Ended: The fund issues a fixed number of shares via an Sustainable and Responsible
initial public offering (IPO). Once the IPO is over, it is closed to Investments (SRI): The shared SRI and Islamic finance values
new investments. Units are traded on the exchange. provide a positive outlook on Shariah-compliant
SRI funds
Fintech: Fund management industry is expected to
leverage FinTech to augment its market by
reducing costs, expanding online services, and
extending customer outreach.

Mutual Funds Types

Equity: Investments in the stocks of listed companies.
Debt: Investments in commodities such as precious metals
and energy resources.
Money Market: Investments in short term money market
securities for mainly liquidity purposes.
Commodities: Investments with the objective to generate a
flow of fixed income.
Private Equity: Invests in mature companies, restructures
them, and aims to sell for a profit.
Venture Capital: Invests in high-risk startups with growth
potential, seeking high returns.
Sovereign Wealth Funds are state-owned investment
funds that manage a country's surplus capital and reserves,
investing in diverse assets to generate long term returns for
economic stability and future obligations.
Hedge funds are alternative investments that pool capital to
generate active returns by leveraging various
strategies, aiming to outperform traditional investments in all
market (rising and falling) conditions.
Pension funds are investment pools that manage
contributions from employees and employers to provide
retirement income. They invest in assets like stocks, bonds,
and real estate to grow over time and support retirees.