Investment funds have become one of the most important investment tools known in the financial markets due to their great impact in attracting large investors to them, and encouraging novice investors to enter them to take advantage of their various advantages in building an investment portfolio.
Therefore, Islamic banks in the world needed to establish Islamic investment funds in their financial activities and transactions to attract Muslim investors to them, and to develop their business following the provisions of Islamic Sharia. This local and global trend toward working in Islamic investment funds helped them spread and gain great importance in the financial transactions of Muslim traders and investors who wish to follow the teachings of Islamic Sharia.
What are mutual funds?
Mutual funds are a type of financial portfolio in which small savings are accumulated by a group of investors wishing to invest in the stock market. The objective of these funds or portfolios is to diversify to reduce risks to investments. The banks or companies that offer this type of financial transaction appoint experts and specialists to manage these financial portfolios, and they buy and sell securities to achieve the objectives of the investment fund.
In many cases, specialized government agencies supervise investment funds for supervision and direction. In general, financial assets are managed and invested on behalf of the owners of funds to achieve a return greater than other investment methods.
Islamic investment funds
Islamic investment funds whose goal is to collect the money of people wishing to invest and manage their money per the provisions of Islamic Sharia, to obtain halal profit.
Therefore, the success of Islamic investment funds was not based on building portfolios of securities and managing them under the controls of Islamic Sharia and Islamic investment standards in various economic activities.
Islamic investment funds include the company that manages the fund and the fund’s subscribers (the employers) who pay certain amounts of cash to the fund’s management. The capital of the investment fund is what is collected from the subscribers, and in return, the subscribers get instruments that represent their share in the fund. Then the profits are distributed according to the prospectus committed by both parties. In the event of any loss, it falls on the subscribers in their capacity as the owners of the money, unless mismanagement appears by those in charge of managing the fund.
The history of investment funds
The emergence of investment funds in general dates back to the nineteenth century in Britain, which were known at the time as (stock and bond funds). In the United States of America, investment funds began to appear at the beginning of the twenties of the last century and developed tremendously so that the volume of American investment funds in the eighties was about 180 billion dollars and reached 1.6 trillion dollars in 1995.
Islamic investment funds’ history
Islamic investment funds first appeared in the mid-1980s in the Arab Gulf states. At that time, the Kingdom of Saudi Arabia started offering Islamic investment funds to provide more advanced investment tools to its citizens while adhering to the teachings of Islamic Sharia.
In the 1990s, there was a huge expansion in Islamic investment funds in the Arab Gulf countries, and their number rose to more than 215 funds with assets of more than 16 billion dollars. This development in structuring Islamic investment funds in the Arabian Gulf is attributed to the rise in national income, which is based on the oil sector and its derivatives.
In recent years, the volume of Islamic investment funds in the world amounted to more than 73 billion dollars. Saudi Arabia manages 40% of the total of these funds, followed by Malaysia with 28%.
What is the structure of Islamic investment funds?
Islamic investment funds are based on a clear principle that investors entrust their savings to the fund manager according to a contract signed by both parties. Both parties share profits and losses under this contract. The manager of the Islamic investment fund receives his wages by deducting a percentage of the profits, but the loss is borne by the investor in full unless the loss is the result of negligence or mismanagement of the fund manager.
The structure of Islamic investment funds is characterized by the presence of a Shariah body whose mission is to issue standards and laws to determine whether the investments made by the funds comply with the provisions of Islamic Sharia.
Duties of the Shariah Board in Islamic Investment Funds:
- Defending the rights of investors.
- Ensure that the fund’s transactions comply with the provisions of Sharia.
- Ensuring compliance with the fees set and their disclosure to investors.
- Evaluate the fund’s financial assets to ensure that they meet the standards.
- Issuing regular reports on the fund’s status to investors.
- Advising investors about financial assets and their legality.
- Advising the fund manager regarding his relationship with investors.
Prohibited Financial Assets in Islamic Investment Funds
The Shariah Board of Islamic investment funds prohibits industries and products that do not comply with the provisions of Islamic Sharia, including but not limited to:
- Distilleries and wineries
- Food products: especially pork.
- Entertainment products and services
- Tobacco and bets
- Entertainment and TV companies
- Banking and insurance sector
- brokers and finance companies
- Real estate, investment, and mortgage services.
Islamic investment funds in the world today
Islamic banking, also called Islamic finance or Shari’a-compliant finance, refers to financial activities that adhere to Shari’a (Islamic law). The basic principles of Islamic banking are the distribution of profits and losses with the prohibition of collection and payment of interest by lenders and investors. Something completely different from traditional banking that most readers are familiar with.
There are approximately 520 banks and 1,700 mutual funds worldwide that comply with the principles of Islamic law. Between 2012 and 2020, Islamic financial assets grew from $1.7 trillion to $3.1 trillion and are expected to grow to nearly $3.7 trillion by 2024, according to the 2020 report by the Islamic Corporation for the Development of the Private Sector (ICD). This growth is largely attributed to the growth of the economies of Islamic countries, especially those that benefited from high oil prices.
The reason for the growth of the Islamic finance industry
The growth in the global Islamic finance industry during the period from 2021 to 2222 is due to increased bond issuance and continued economic recovery in the financial markets. Islamic assets managed to expand more than 10% in 2020 despite the COVID-19 pandemic.
Islamic banking is based on the principles of the Islamic faith concerning commercial transactions. The principles of Islamic banking are derived from the Holy Quran. In Islamic banking, all transactions must comply with Sharia and Islamic legal law, based on the teachings of the Qur’an. The rules that govern commercial transactions in Islamic banking are known as Fiqh al-Moamalat.
Are Islamic investment funds halal?
In general, public investment funds are considered forbidden according to the rules of Islamic Sharia. But Islamic mutual funds are created specifically for Muslim investors. As these Shariah-compliant funds are investment funds that meet all the requirements of Islamic halal financing.
Naturally, what makes an Islamic investment fund halal is the type of financial assets that it invests in, especially in the stock and securities sector. It is unnatural, for example, to consider the shares of companies that are based on the manufacture of alcohol, tobacco, gambling, betting, etc., as Halal.
Advantages of Islamic investment funds
Diversity and focus
Investment funds with large capital provide the opportunity to benefit from diversification of investment in multiple financial assets, and this leads to a great deal of stability in the return and protection of capital. This also reduces investment risk.
Investment funds usually allocate the competencies and expertise of people with outstanding abilities in the field of money management.
Investment funds provide high liquidity at low costs to investors who cannot obtain it through direct investment.
The importance of Islamic investment funds
The same reason for the emergence, spread, and growth of Islamic investment funds is the same reason that emerged through the Islamic banking model that relies on halal financial transactions.
Establishing an Islamic investment fund is possible under the laws regulating these funds anywhere in the world because those laws took into consideration that the primary purpose of the funds is to meet the preferences and desires of investors who do not find what they are satisfied within commercial banks and investment companies.
Islamic investment funds represent the first Islamic banking business free of usurious interest imposed by commercial banks.