Islamic Unit Trusts
A Unit Trust is an investment vehicle that allows investors to take advantage of investing in a diversified group of stocks which manages risk and exposure to one or a few stocks. It also offers the opportunity to participate in the long-term performance of the stock market. Islamic Unit Trusts add other aspects that are a screening process to remove stocks of companies deemed to be inappropriate for Muslim investors and cleansing or purification of a company’s profits by removing any income derived from non-Shariah complaint sources, such as interest a company would earn on its bank accounts and donating them to charities. Therefore, Islamic unit trust schemes are required to additionally appoint a Shari’ah committee or to ensure that their operations are in accordance with Shari’ah.
Islamic Unit Trusts can invest in many financial products in conventional financial markets which are not interest-based, or where the element of interest could be eliminated, such as property funds, commodities, financial options and futures and forward transactions in foreign currencies (Treasury and Capital Market Operations by IIBI; 2009). They can take advantage of international markets growth by giving priority to equity investments in Islamic banks and financial institutions, stock markets of Muslim countries; and companies managed under the Islamic system.
The manager of a Unit Trust mutual fund would typically invest the pooled money in a portfolio which may include the asset classes such as cash, bonds and deposits, shares, property and commodities; tangible assets represent more than 51% of the portfolio. Islamic Unit Trusts have also a wide range of investment options based on growth and income, open-ended, redeemable, etc. Their investments can cover international equity markets, currencies and properties. A Mudarabah fund can invest in a specific business activity on the basis of profit and loss sharing; Murabahah fund invest in companies whose transactions are undertaken on a cost-plus basis; Through Musharakah the Unit Trust and the third party contribute funds in a joint venture, producing equity participation; And in Ijarah fund, the Islamic Trust finances equipment, building or entire project for a third party against an agreed rental. Besides, there will be no restriction to stop non-Muslims investing in an Islamic Unit Trust.
Islamic Unit Trusts can invest in many financial products in conventional financial markets which are not interest-based, or where the element of interest could be eliminated, such as property funds, commodities, financial options and futures and forward transactions in foreign currencies (Treasury and Capital Market Operations by IIBI; 2009). They can take advantage of international markets growth by giving priority to equity investments in Islamic banks and financial institutions, stock markets of Muslim countries; and companies managed under the Islamic system.
The manager of a Unit Trust mutual fund would typically invest the pooled money in a portfolio which may include the asset classes such as cash, bonds and deposits, shares, property and commodities; tangible assets represent more than 51% of the portfolio. Islamic Unit Trusts have also a wide range of investment options based on growth and income, open-ended, redeemable, etc. Their investments can cover international equity markets, currencies and properties. A Mudarabah fund can invest in a specific business activity on the basis of profit and loss sharing; Murabahah fund invest in companies whose transactions are undertaken on a cost-plus basis; Through Musharakah the Unit Trust and the third party contribute funds in a joint venture, producing equity participation; And in Ijarah fund, the Islamic Trust finances equipment, building or entire project for a third party against an agreed rental. Besides, there will be no restriction to stop non-Muslims investing in an Islamic Unit Trust.
Islamic Unit Trusts / Ethical Unit Trusts
A good analogy with Islamic Unit Trusts is one of ethical and green Unit Trusts. Here the universe of investable securities is limited by certain criteria based on moral and ethical considerations (muamalah.com; 2009). An ethical investment is the principle of investing in companies which make a positive contribution to the world and avoiding those which harm the world, its people or its wildlife. Society's increasing awareness of its environmental and social responsibilities is impacting on financial services, more and more investments based on ethical principles are now available. Some may think that the restrictions imposed by ethical investment with strict criteria may result in weaker performance; however ethical funds have often matched or beaten their non-ethical counterparts.
Ethical investments are generally made through managed funds such as unit trusts which speciality is to seek profits for investors while conforming to certain ethical criteria such as that the company is not involved in activities like illegal armaments, gambling or pornography, or that it doesn’t produce or distribute alcohol, tobacco or drugs. Before buying shares of companies in a chosen sector, an ethical fund manager will run checks on that company to find out if it has interests in a number of areas according to pre-determined criteria. Accordingly, clients who invest in ethical funds can be sure that their money will be invested in companies that engage in legal and ethical activities.
Islamic Unit Trusts investments are also based on specific criteria based on morality, the main criteria is to not deal in transactions which involve the paying and receiving of interest. Islamic Unit Trusts should be run on a transparent and modern corporate basis and up-to-date accounting and within a legal framework in conformity with the Shari’ah. In the same way the decision to invest in the case of ethical unit trusts is made by the fund managers, based on information received from various professional bodies and specially constituted committees of reference, the decision in the case of Islamic unit trusts is conditioned by the a binding approval from the Shari’ah Boards which consist of established religious scholars who make a decision based on the interpretations of particular operations and contexts.
Ethical investments are generally made through managed funds such as unit trusts which speciality is to seek profits for investors while conforming to certain ethical criteria such as that the company is not involved in activities like illegal armaments, gambling or pornography, or that it doesn’t produce or distribute alcohol, tobacco or drugs. Before buying shares of companies in a chosen sector, an ethical fund manager will run checks on that company to find out if it has interests in a number of areas according to pre-determined criteria. Accordingly, clients who invest in ethical funds can be sure that their money will be invested in companies that engage in legal and ethical activities.
Islamic Unit Trusts investments are also based on specific criteria based on morality, the main criteria is to not deal in transactions which involve the paying and receiving of interest. Islamic Unit Trusts should be run on a transparent and modern corporate basis and up-to-date accounting and within a legal framework in conformity with the Shari’ah. In the same way the decision to invest in the case of ethical unit trusts is made by the fund managers, based on information received from various professional bodies and specially constituted committees of reference, the decision in the case of Islamic unit trusts is conditioned by the a binding approval from the Shari’ah Boards which consist of established religious scholars who make a decision based on the interpretations of particular operations and contexts.
