Islamic Equity Funds By Osman Babikir Ahmed

Top 20 FREQUENT WORDS

fund 303 funds 169 islamic 166 companies 136 investment 134 equity 103 fiqh 85 portfolio 78 iefs 75 assets 59 shares 53 subscription 51 international 48 exhibit 45 stocks 45 investors 43 shari 43 income 42 performance 40 percent 39

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background paper C islamic research and training institute islamic development bank doctor osman babikir ahmed jeddah islamic equity funds the mode of resource mobilization and placement pages the views expressed in this book are not necessarily those of the islamic research and training institute nor of the islamic development bank
reference and citations are allowed but must be properly acknowledged

this study is on equity funds and addresses a central question that can equity funds be worked on islamic principles this notion has been approached in three dimensions first to be pursuant to islamic rulings equity funds must not transact in equities of companies which produce or trade in prohibited goods second equity funds run on islamic basis must get rid of interest income generated through interest based lending third islamic equity funds should not
background of the subject the use of mutual funds as financial products in general increased tremendously during the last three decades as there has been a greater awareness of the benefit of diversified portfolio under full time professional management with the safeguard of trustee supervision and statutory control

structure of the study section i is on principles governing workings of islamic equity funds and their implementation section ii on procedures and policies of islamic equity funds in light of islamic principles regulating their work section iii concentrates assessing performance of islamic equity funds and section iv is the conclusion
the study assumption the basic assumption is that theory and practice of the traditional equity funds can be evolved according to islamic principles

of many issues in this connection the most significant are i area of activity for companies whose shares are the target for iefs ii the interest element in companies income iii the debt equity ratio of companies
here is a discussion of these issues in two stages via a fiqh based guidelines regulating works of iefs in practice and b an assessment of these guidelines in light of the recent fiqh view

transacting stocks of shareholding companies a fiqh view trading of stocks of shareholding companies has been explored in fiqh perspective by focussing on permissibility and non permissibility of participating in stocks of companies which commit interest based deals on frequent basis provided their activities are permissible

corporate fiqh view disallowing subscription a the islamic fiqh academy ifa issues recommendation in relation to participation of the islamic development bank in companies december a saying that the idb should not subscribe in any company that does not avoid riba interest even if its activities are compliant to shari ah rules journal of islamic fiqh academy vol
he divides these companies into three types i those which declare their involvement in prohibited activities ii those whose rules do not declare this but are well known in practicing prohibited activities including riba and iii companies which are managed and controlled by non believers who do not care very much to avoid prohibited activities journal of islamic fiqh academy vol

b commenting on bin baya s view al dareer agrees with this fiqh view especially with respect to management of the joint venture by the partner who might be a non believer a jewish or a christian a in absence of the muslim partner al dareer p
he asserts that the shareholding company must be an islamic company with shari ah supervisory board to vet its activities with the view to be compliant with shari ah principles

fiqh view allowing subscription a among those who advocate participation in shareholding companies is al qaradaqi who suggests some qualifications for subscription as follows a the subscriber s intention is to change the company s activities towards permissible activities b subscription would be under necessity conditions c a subscriber must purify the income received by deducting the estimated interest component journal of islamic fiqh academy vol

the main finding that comes up out of these opinions may be that they prohibit subscription and express this prohibition in different ways and for different reasons as follows a if the muslim subscriber is unable or unwilling to change usurious activities b if business is overwhelmingly controlled by non believers or the jews or christians who do not observe any religious banning of riba in the absence of muslim partner or in case of inability of the latter to eliminate usurious practices c if the company business is of a commercial nature rather than strategic business that the society would need

see journal of the islamic fiqh academy vol
vii part i p

thus contracts involves riba are invalid whether riba is in small percentage or large percentage obvious or hidden and whether it is pure riba or mixed with other permissible businesses b subscribing in shareholding companies owned and managed by nonmuslims is prohibited as the prophet prohibits partnership with the jew or the christian unless sale and purchase is in the hands of the muslim partner c shari ah rules are more concerned about the prohibited practices than the ordered practices

j use of qiyas will reveal that dealing in these stocks which involve obvious riba is decidedly prohibited because here riba is by all means committed whereas riba in sale of al muzabana and almuhaqala is probable and despite that these two sales are prohibited

filtration in this regard is undertaken to exclude companies if their a total debt divided by total assets is equal to or greater than percent b accounts receivables divided by total assets is equal to or greater than percent c non operating interest income divided by operating income is equal to or greater than percent
the process of selecting shari ah compatible stocks is i excluding stocks of companies that produce distribute prohibited goods services ii the remaining universe of stocks is filtered by three financial ratios with the view to remove companies with unaccepexhibit financial ratios

exhibit composition of the djimi december region weight sector weight americas consumer non cyclical europe africa technology asia pacific utilities energy consumer cyclical industrial basic materials independent real estate total percentages add above due to rounding off source dow jones

the ibn khaldoun international equity fund adopts conditions such as the percentages of investments in one company s securities shall not exceed percent the fund will not invest more than percent of its total assets in any one single particular sector the fund shall not purchase securities not fully owned or those of new companies or unquoted companies securities
the fund and in exceptional circumstances uses its assets in murabaha so that at least per cent of its net assets will be held either in cash or in noninterest bearing deposits or invested in murabaha transactions or in other easily liquidated portfolios

redemption of investment units on one hand the iefs under investigation are similar with respect to a partial redemption which is allowed by all funds b cancellation suspension and deferral of redemption under circumstances such as the closing of markets where equities are dealt in or when prices are so inappropriate c reduction of the redemption amounts if they are big or significant enough to affect the remaining units d if redemption leads to a resultant balance less than the minimum subscription then this will be considered as total withdrawal from the fund e refusal of redemption if it is less than certain minimum amounts
the global equity fund al baraka the islamic multi investments funds faisal finance the malaysian dcb a rhb mudaraba fund ibn majid fund and citi islamic portfolio all impose redemption fees ranging from

among those that impose this type of fees the citi islamic portfolio fund is of the least charge us whereas the islamic multi investment fund incurs the highest cost among the group us
iefs vary with regard to fees they charge some funds such as al khawarizmi fund the small cap equity fund the citi islamic bank and islamic multi investment fund amortize initial fees over a couple of years

however unlike the other two funds run by the international investor which charges percent as is seen above the ibn majid fund is the least as compared to these two funds that charges subscription fees it puts only percent of the nav as fees for participation
thus some iefs impose relatively higher subscription fees others require low fees and a third group does not impose any such type of fees

the common risks for all iefs crystallize around the following a the risk of adherence to shari ah rules which prevents all iefs from certain transactions even if these transactions are pretty profitable b the securities trading in which iefs deal is directly affected by factors such as economic conditions ups and downs in business and finance and in world affairs
some funds such as al khawarizmi ibn khaldoun islamic multiinvestment fund the small cap equity and the global equity fund of albaraka all implement the performance fee paid either to the manager alone or to both the manager and investment advisors

c other factors could bring risk to iefs such as government policies climate conditions and fluctuating exchange rates and economic conditions in general d the risk of illiquid investments e the risk of conflict of interest which might arise as investment advisors of iefs may buy or sell securities to the benefit of iefs as well as to their competitors f the risk of extra regulations in certain economies where ief have existence or registered g risk that arise due to the fact that these iefs are new entrants into the field they do not have trace record
the special risk categories are in connection with holdings of iefs in emerging markets as these markets are characterized by a financial volatility b investment and repatriation restrictions c the risk of settlement which carries with it the problem of ownership transfer d high probabilities of illiquid positions e risks of exchange rate fluctuations f risk of restriction on buying and selling certain securities g lack of the standard reporting capabilities h lack of disclosure

in particular what are the information sources for investors who want to participate in the iefs marketing channels are yet less effective to penetrate the target group of investors especially small and middle class savers section iii below evaluates performance of some of the iefs including another category of islamic mutual funds
this would entail extra costs and possibly moral hazard and negligence of shari ah criteria c muslim investor is not provided with detailed analysis of the equity market and their prospective futures

the national commercial bank ncb al ahli has three types of funds with respect to risk a short term funds and this category includes the islamic international trade fund b medium term funds and among this class the islamic fund is al salam commodity fund c long term funds where al ahli has the global trading equity fund
until late the ncb runs mutual funds four of which are of short term nature four are of medium term nature and are for long term and relatively high risky investment

at the level of regional distribution of the fund portfolio shares of companies working in the united states canada and in europe represented the majority of holdings
the companies dealing in the health matters came the second as a sector in whose shares the fund deploy its money

compared to the global trading equity index and to msci world the ncb global trading equity fund held as at march equities of the international companies that the fund examined from the shari ah point of view are as follows exhibit ncb global trading equity fund country weights mcbgtef gtei msci europe uk
performance total returns on shares of the fund were higher than returns on shares of the companies included in msci world index and were also higher than

the national center for managerial services amended conditions of the contract and now the fund is run on murabaha basis
therefore on sector wise the assets under management are distributed among companies working in different activities such as car production metals and petroleum products

in january however records about the fund shows that the minimum subscription of us grew as follow according to period it remained with the fund for investment a remaining for more than three months it grew to us b remaining for more than months it increased in value to us c remaining for more than months it increased in value to us and d since launch the minimum subscription grew to us
as of the end of the fund s portfolio favored positions in nonprecious metals and commodities as follows soft commodities

the valuation is used in determining the unit value and the bid and offer prices of the units the manager charges the fund on every subscription day for the services it provides the fee rate is
an amount of sr a the minimum subscription a grew in value as follow reaching sr for three months sr after six months sr after a year and since launching of the fund

performance records on operations of the fund are yet inadequate and incomplete owing to the fact that the fund is still new just starting in july
classified on the basis of risk degree al baraka funds fall into four main categories as a low risk funds like al baraka general fund

exhibit al tawfeek company s mutual funds a till june mutual fund issued capital us million albaraka general fund lebanon reconstruction fund us real estate fund gcc leasing fund al sukoor equity funds gcc leasing fund international leasing fund al safwa international equity fund al nukhba asia equity fund children investment fund
b medium risk funds these are leasing funds such as gcc leasing fund the international leasing fund c moderately risk funds are some of the equity funds e

withdrawal is allowed given the following conditions i us or less is liable for immediate withdrawal without notice ii withdrawal of us or less needs to be reported two days earlier iii for us the investor has to give notice six days earlier and iv above us needs arrangement with the mudarib
there are three categories of investment units via category a where units are liquidated on demand category b units are liquidated

diversification the fund portfolio was distributed according to islamic modes of finance in as in cash form and short term investments was leased end to ownership operations as mudarabah were participation in equities were deposits in islamic banks and were investments in financial assets
the mudarib ai tawfeek company chooses the relevant country for investment according to certain criteria including investment opportunities available in a given country stability of the economy in terms of growth rates inflation rates and fluctuations in currency value

performance performance of the general fund is elaborated in terms of three main issued units which are most liquid a unit a is liquefied at any time with no restriction b unit b which is redeemable every three months and c unit c is entitled to annual redemption
for the net profit rates for the three classes of units were as shown by exhibit blow

the gulf cooperative council leasing fund as said before al barak runs funds of medium risk nature such as the gulf cooperative council leasing fund gcclf and the international leasing fund

thus rigidities in lease contract affect the rate of return delay and defaults in payments of the rents of leased assets would reduce the real rates of return particularly when clearance of these delays and defaults involve legal procedures and increased costs on legal matters

investment in real sector comes in the third place and lastly the financial services sector as disclosed by the exhibit below exhibit international leasing fund a investment distribution no
the fund which is an open ended one diversified its portfolio as at february as follow

al safwa international equity fund this is a moderately risk open ended fund with the objective to generate medium to long term capital growth by investing in shari oh compliant diversified portfolio of equities listed and traded in the world stock exchanges
on the whole rate of return on investment of the ilf is lower that that on investment of the gcclf

because the fund is structured to deal in stocks of the asian and pacific companies the remaining balance of its portfolio is composed of shares of companies in hong kong and singapore exhibit
al nukhba fund like al safwa fund al nukhba is a moderately risk open ended fund

but a tolerable level of or less is endorsed by the shari ah board b purifying of returns subject to a cleansing formula developed by the group investors are advised to deduct a certain percentage of their return every year to get return free of interest element

on the other hand and under normal circumstances it is the policy of the growth fund to invest at least of assets in common stocks that involve greater risk than some other investments such as investments in short term bonds and money market instruments
the shares of each fund have equal voting rights and all shares are fully paid non assessable transferable and with rights of redemption and are not subject to preemptive rights

portfolio turnover rate while rocketing in first three years from to started declining in to only and was active again in to be around see exhibit
performance exhibits and overleaf uncover data on performance of the two funds for several years since inception of each

advisers of the fund were appointed under supervision of the fund s three man shari ah committee which initially meets every two weeks and who will screen the contracts and activities of the fund on an ongoing basis
the underwriters albany international is part of the giant ny based metropolitan life group met life which in the uk includes albany life insurance company ltd

the investment objective of the fund is to achieve a target for its investors of to per annum over the medium term
al meezan commodity fund ltd al meezan was launched in may by kleinwort benson limited kbl and the manama based islamic investment company bahrain

this school of fiqh thought believes that trading in shares of such companies is not verifiable in the eyes of fiqh even for necessity because the concept of necessity is not applicable in this case
muslim jurists and islamic bankers and economists have structured a set of rules to make working of these equity funds in compliance with islamic teachings

this serves two purposes first economically benefiting muslims themselves and second resolving shari ah issue that the majority of fiqh jurists argue that one of the strong reasons for prohibition of transacting shares of foreign companies is that they are under control and management of non believers who never observe banning of riba or any practices prohibited by the shari ah

al amin compare and contrasting fiqh views prohibiting the deal in shareholding companies which frequently deal in usurious practices research paper presented to the th fiqh workshop kuwait finance house a november kuwait
a paper presented to the conference on the role of banks and financial institutions in investments organized by the arab academy for financial and banking sciences a december

comparative measures of performance for us based international equity mutual funds in journal of banking and finance

hammad n carnal listing fiqh evidences prohibiting the deal in stocks of shareholding companies which frequently commit various practices research paper presented to the workshop on participating in shareholding companies kuwait finance house november kuwait

nor mohamed yacop creating assets through debt securitization the malay way in islamic banker issue no
lilja robert international equity markets the art of the deal euromoney publications plc first edition

shadi ibrahim investments in mutual funds in the american journal of islamic finance vol
shahid ibrahim and abdul kadir summary analysis amanah saham mendaki growth fund in the american journal of lslamic finance vol

yule iain umbrella funds a switch in time in investment international issue no
wellons philip germidis dimitri and glavanis bianca banks and specialized financial intermediaries in development

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AlHuda Material\sukuk islamic

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fund islam invest shariah equities asset manage stock index companies global marketability production return risk investor countries sharecropping busi financi

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Number of Pages

66

Published Date

2006-12-25 15:25:44

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Islamic Equity Funds By Osman Babikir Ahmed

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