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Introduction

Islamic Investment Funds are joint pool where


investor invests its surplus money to earn halal
profits with the percepts of Islamic Shariah.

The investor may receive a document against
his investment entitled to the pro-rata profits
actually earned by the fund.

Whatever the document might called it should
fulfill two conditions explained by the Shariah.
Shariah Conditions
First Condition:
Instead of fixed return tied up with their face
value, they must carry a pro-rata profit
actually earned by the fund.

Second Condition:
The amounts so pooled together must be in a
business acceptable to Shariah.

Returns are tied up with the actual profits
earned or losses suffered.
In case of loss caused by the negligence on
the part of management, compensation will be
provided by the management.
Funds raised must be invested in Shariah
approved businesses.
Principle of Islamic Investment
funds
Modes of Investment
1. Equity fund
2. Ijarah funds
3. Commodity funds
4. Murabaha funds
5. Bai al Dain
6. Mixed funds


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 business of hire purchase or interest
etc.
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 exceed 30% of the
company's total market capitalization.
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.
Ijara Fund
Ijara is an exchange transaction in which a
known benefit is made arising from a
specified asset available in return for a
payment, but where ownership of the asset
itself is not transferred.
The ijara contract is essentially of the same
design as an installment leasing agreement
which can return to the lessor at the end of
the lease period.
It takes on the features of an operating lease.
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
change the owner in the asset.
Ijara Fund
Some conditions of the Ijara contract
1. The leased assets must have some usufruct (the
legal right of using and enjoying the profits of
something belonging to another), 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.
Commodity Funds
This type of fund is used for purchasing
commodities for resale to earn profits.
All the transactions should comply the Shariah
conditions like;
1. The seller must own the commodities.
2. Forward sales are not allowed.
3. Commodities must be Halal.
4. The seller must have physical or constructive
possession over the commodity he wants to
sell.
5. Price of the commodity must be fixed and
known to the parties, it can't be tied up with
any uncertain event.
Commodity Funds
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.
Murabaha Fund
Murabaha is one of the most commonly used
modes of financing by Islamic Banks and
financial institutions.

It is a particular kind of sale where the seller
expressly mentions the cost of the sold
commodity he has incurred, and sells it to
another person by adding some profit thereon.

It is not a loan given on interest; it is a sale of a
commodity for cash/deferred price.
Murabaha Fund
The Bai' Murabahah involves purchase of a
commodity by a bank on behalf of a client
and its resale to the latter on cost-plus-profit
basis. Under this arrangement the bank
discloses its cost and profit margin to the
client.
Bai al Dain / Sale of Debt
Sale of debt is not allowed in Shariah, .e.g.
discounting of bills receivable or debts
receivable.
Majority of Muslim jurists believe that bai-al-dain
with discount is not allowed in Shariah.
Any increase or decrease from one side is similar
to Riba' and can never be allowed in Shariah.
However, Some of Malaysian scholars have
allowed this kind of sale.
Bai al Dain / Sale of Debt
The Islamic Fiqah Academy of Jeddah,
which is the largest representative body of
the Shariah scholars and has the
representation of all the Muslim countries,
including Malaysia, has approved the
prohibition of bai-al-dain unanimously
without a single dissent.

Mixed Fund
A fund where the subscription amount is
invested in different types of investments, like
equities, leasing, commodities, etc.
Certificates of units of funds are tradable in the
secondary market only if the tangible assets are
more than 51% while the liquidity and debts are
less than 50%.
Otherwise it will be a closed end fund.