Financial Islam - Islamic Finance
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  • Home
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  • The Islamic law
    • Socio-economic Justice
    • The ownership of wealth
    • Prohibition of Riba, Maysir and Gharar
    • Zakah
  • Islamic Economics
    • Shareholding in Islam
    • Loans and debts in the Sharia'h
    • The Islamic Development Bank
  • Islamic Finance
    • Financial intermediation
    • Islamic accounting
    • Financial statements analysis
    • Regulation and Supervision
      • Shari’ah Boards
      • Operations within the conventional system
    • Islamic Commercial contracts
      • Relationship with central banks
      • Valid transactions
      • Mudarabah
      • Musharakah
      • Diminishing Musharakah
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    • Starting an Islamic Bank
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      • Ijarah financing
      • Musharakah and Mudarabah certificates
      • Diminishing Musharakah
      • Replacing interest-based lending
    • Capital Market Operations
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      • Islamic Fund Structures
      • Investment screening
      • Islamic Market Indexes
      • Islamic ETF
      • Venture Capital
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    • Sukuk structures
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    • Indexation of financial obligations
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Shari’ah Principles for Investment Funds

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Equity Fund

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. 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.

Commodity Fund 

The subscription amounts in commodity funds are used in purchasing different commodities for the purpose of the resale. The profits generated by the sale are the income of the fund which is distributed pro rated among the subscribers. In order to make this fund acceptable to Shariah, it is necessary that all the rules governing the transactions and fully complied with. For example:
1. The commodity must be owned by the seller at the time of sale, therefore, short sales where a person sells a commodity before he owns it are not allowed in Shariah.
2. Forward sales are not allowed except in the case of salam and istisna' (For their full details my book "Islamic Finance" may be consulted).
3. The commodities must be halal, therefore, it is not allowed to deal in wines, pork, or other prohibited materials.
4. The seller must have physical or constructive possession or the commodity he wants to sell. (Constructive possession includes any act by which the risk of the commodity is passed on to the purchaser).
5. The price of the commodity must be fixed and known to the parties. Any price which is uncertain or is tied up with an uncertain event renders the sale invalid.
In view of the above and similar other conditions, it may easily be understood that the transactions prevalent in the contemporary commodity markets, specially in the futures commodity markets do not comply with these conditions. Therefore, an Islamic Commodity Fund cannot enter into such transactions. However, if there are genuine commodity transactions observing all the requirements of Shariah, including the above conditions, a commodity fund may well be established. The units of such fund can also be traded in with the condition that the portfolio owns some commodities at all times.

Mudarabah Fund

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



Murabaha Fund

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.

Ijarah Fund

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

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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  • Home
  • News
  • The Islamic law
    • Socio-economic Justice
    • The ownership of wealth
    • Prohibition of Riba, Maysir and Gharar
    • Zakah
  • Islamic Economics
    • Shareholding in Islam
    • Loans and debts in the Sharia'h
    • The Islamic Development Bank
  • Islamic Finance
    • Financial intermediation
    • Islamic accounting
    • Financial statements analysis
    • Regulation and Supervision
      • Shari’ah Boards
      • Operations within the conventional system
    • Islamic Commercial contracts
      • Relationship with central banks
      • Valid transactions
      • Mudarabah
      • Musharakah
      • Diminishing Musharakah
      • Murabahah
      • Salam
      • Istisna'a
      • Ijarah
      • Wakalah
      • Other contracts
  • Islamic Banking Operations
    • Starting an Islamic Bank
    • Commercial transactions
    • Deposits
    • Islamic credit cards
    • Fee-based services
    • Letter of Credit
    • Bank Guarantee
    • Modes of financing and investment
      • Ijarah financing
      • Musharakah and Mudarabah certificates
      • Diminishing Musharakah
      • Replacing interest-based lending
    • Capital Market Operations
      • Islamic Unit Trusts
      • Islamic Fund Structures
      • Investment screening
      • Islamic Market Indexes
      • Islamic ETF
      • Venture Capital
      • Foreign exchange
  • Sukuk
    • Sukuk structures
    • Controversy
    • Indexation of financial obligations
    • Risks underlying Sukuk
  • Takaful
    • Takaful Agreements
    • Takaful models
    • Areas of Takaful
    • General insurance
    • Life insurance
    • Reinsurance
    • Corporate Governance
  • Glossary
  • Contact