Shariah Principle of Investment Fund

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Shari’ah Principles for Investment Funds

Mudarabah Fund

In the Mudarabah fund the amount may be invested in a specific business activity on the basis of profit and loss sharing.

Equity Fund

(Source: Principles of Shariah Governing Islamic Investment Funds by Mufti Taqi Usmani)

In an equity fund the amounts are invested in the shares of joint stock companies. The profits are derived mainly through the capital gains by purchasing the shares and selling them when their prices are increased. Profits are also achieved by the dividends distributed by the relevant companies. If the main business of a company is not lawful in terms of Shari’ah, it is not allowed for an Islamic Fund to purchase, hold or sell its shares, because it will entail the direct involvement of the shareholder in that prohibited business. Similarly the contemporary Shari’ah experts are almost unanimous on the point that if all the transactions of a company are in full conformity with Shari’ah, which includes that the company neither borrows money on interest nor keeps its surplus in an interest bearing account, its shares can be purchased, held and sold without any hindrance from the Shari’ah side. But evidently, such companies are very rare in the contemporary stock markets. Almost all the companies quoted in the present stock market or in some way involved in an activity which violates the injunctions of

Murabaha Fund

(Source: Principles of Shariah Governing Islamic Investment Funds by Mufti Taqi Usmani)

In a Murabaha fund the amount is companies whose operations are on basis of murabaha where transactions are undertaken on a cost-plus basis. This kind of sale has been adopted by the contemporary Islamic banks and financial institutions as a mode of financing. They purchase the commodity for the benefit of their clients, and then sell it to them on the basis of deferred payment at an agreed margin of profit added to the cost. If a fund is created to undertake this kind of sale, it should be a closed-end fund and its units can not be negotiable in a secondary market. The reason is that in the in the case murabaha, as undertaken by the present financial institutions, the commodities are sold to the clients immediately after their purchase from the original supplier, while the price being on deferred payment basis becomes a debt payable by the client. Therefore, the portfolio of murabaha does not own any tangible assets, rather it comprises of either cash or the receivable debts, and both these things are not negotiable, as explained earlier. If they are exchanged for money, it must be at par value.

Ijarah Fund

(Source: Principles of Shariah Governing Islamic Investment Funds by Mufti Taqi Usmani)

The Ijarah Fund will involve in companies dealing in the leasing of assets according to Shari’ah principles. The ownership of these assets remains with the Fund and the rentals are charged from the users. These rentals are the source of income for the fund which is distributed pro rated to the investors.

Mixed Fund

(Principles of Shariah Governing Islamic Investment Funds by Mufti Taqi Usmani)

Another type of Islamic Fund maybe of a nature where the subscription amounts are employed in different types of investments, like equities, leasing, commodities, etc. This may be called a Mixed Islamic Fund. In this case if the tangible assets of the Fund are more than 51% while the liquidity and debts are less than 50% the units of the fund may be negotiable. However, if the proportion of liquidity and debts exceeds 50%, its units cannot be traded in according to the majority of the contemporary scholars. In this case the Fund must be a closed-end Fund.

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