Islamic

Investment Funds
1. Principles of Islamic
Investment funds
 Islamic Investment Funds are joint pool of funds wherein the investors

contribute their surplus money for the purpose of its investment to earn

halal profits in strict conformity with the principles of Islamic Shariah

 Subscribers of funds receive a document may be called a certificate, a

unit, a share or any other name representing the value and will earn pro

rated profits on it.

 Management can share in the profits or can charge a fee for their services

on monthly or annual basis.

Funds being Operated in the
Market
 UBL Sharia stock fund

 United Islamic income fund

 HBL Islamic money market fund

 HBL Islamic stock fund

 Al- Meezan Mutual fund Ltd.

 Askari Islamic asset allocation fund

 …………………
2. Modes of Investment

1. Equity fund
2. Ijarah funds
3. Murabaha funds
2.1 Equity Funds

 Equity funds are invested in joint stock companies.

 Profits are generated through the trading of shares

in the stock market and the dividends.

 It is prohibited to invest in stocks of those

companies that are involved in activities not
approved by sharia, e.g. companies manufacturing,
selling or offering liquor, pork, haram meat, or
involved in gambling, night club activities,
pornography, prostitution, or involved in the
2.1 Equity Funds

 If a company is doing Halal business but earns income from haram

sources as well, like interest payment/receipt on surplus/borrowed
money borrowed or deposited in the bank. In such situation the
investor should

1. Raise voice against such activities in annual general meeting of

the company.

2. Avoid investing in companies where the income from Haram

sources exceed 5% of the total income.

3. Deduct the proportion of Haram income from the profits earned

and give to charity. This is called purification.
2.1 Equity Funds
Conditions for investment in shares

 Not involved in Manufacturing , Selling or offering

Liquors, Pork, Haram meat, gambling, night clubs,
pornography.

 Business should be Halal like automobile and

Textile etc.

 company's total short term and long term

investment in non-permissible business should not
 2.1 Equity Funds
Management of funds
Management of the fund can be carried out in two ways;
 Managers of fund may act as Mudarib.
 To act as an agent for the subscribers and charge a pre
agreed fee for services,
1. Fee can be a fixed in lump sum or as a monthly or
annual remuneration.
2. Fee can also be based on a percentage of the net
asset value of the fund. For example, it may be
agreed that the management will get 2% or 3% of the
net asset value of the fund at the end of every
financial year.
2.2 Ijara Fund
 Funds or subscription amounts are used to
purchase assets like real estate, motor
vehicles, or other equipment's for the purpose
of leasing.
 The ownership of these assets remains with the
Fund and the rentals are charged from the
users.
 Rentals on these assets are the income of fund.
 Each subscriber is given a certificate that is
more likely to be called Sukuk.
 Sale of these Sukuk certificates would simply
2.2 Ijara Fund

Some conditions of the Ijara contract

1. The leased assets must have some usufruct, and
the rental must be charged only from that point
of time when the usufruct is handed over to the
lessee.
2. The leased assets must be of a nature that their
Halal (permissible) use is possible.
3. The lessor must undertake all the responsibilities
consequent to the ownership of the assets.
4. The rental must be fixed and known to the
parties
5. In this type of fund management will be offered
a fee for their services; it may be fix or a
percentage of rentals received.
2.2 Ijara Fund

Management of the funds

1. In this type of fund management will be
offered a fee for their services.
2. Fee may be fixed or a percentage of rentals
received.
3. According to Muslim jurists such a fund cannot
be created on the basis of Mudarabah,
because Mudarabah, according to them, is
restricted to the sale of commodities and does
not extend to the business of services and
leases.
4. However, in the Hanbali School, Mudarabah
can be effected in services and leases also.
This view has been preferred by a number of
contemporary scholars.
2.3 Murabaha Fund

 kind of sale where the commodities are

sold on a cost-plus basis.
 This type of fund is a closed-end fund
and its units are not negotiable in the
secondary market.
 As the Murabaha fund certificates don't
represent a physical ownership of assets
rather it represents a claim of debt and
profit there on, so the sale of debt is not
allowed unless it is exchanged with
exactly the same amount or at par value.
2.3 Murabaha Fund

Management of the funds

1. In this type of fund management will be
offered a fee for their services.
2. Fee may be fixed or a percentage a the
profits earned.
3. Mudarabah arrangement to share profits
is also feasible here.
3. Challenges Being Faced By Islamic Funds

 Fund size is small.

 Lack in strong legal and institutional framework.

 Lack in supervisory framework.

 Lack of knowledge and understanding of the Islamic

Fund.

 Lack in research and development in the field of

Islamic finance and economics.

 Lack in HR development and training to the banks staff

on Islamic Banking system.
3. Challenges Being Faced By
Islamic Funds

 Lack of guidance and information system.

 Lack in Marketing of Islamic products

/services and their introduction in
international market.

 Lack of financial engineering.

 Doubts about instruments used.

 Summary of the Lecture
Today we studied the following concepts of Islamic investment funds;
 Principles of Islamic investment funds.
 Modes of investment of funds and their management under Islamic
financial system.
1. Equity fund
2. Ijarah funds
3. Murabaha funds
 Challenges being faced by Islamic funds