Professional Documents
Culture Documents
06 Chapter 6 Islamic Asset and Funds Managment
06 Chapter 6 Islamic Asset and Funds Managment
Chapter 6
Instructor:
Masood Aijazi CFA
October 2017
Learning Objectives
2
Review and Fundamentals of Islamic
Investing
3
Review and Fundamentals of Islamic
Investing
- Gambling
- Alcohol
- Pork
- Uncensored media/leisure
- Pornography
- Other activities that are explicitly prohibited under the
Sharī'ah
4
Review and Fundamentals of
Islamic Investing
– Be socially responsible
5
Review and Fundamentals of Islamic
Investing
Non-Interest-bearing Products
• Islam places special emphasis on ethical investing
• Islam prohibits all forms of interest, whether fixed or
floating, simple or compound
• “Nominal” or “excessive” interest amounts are prohibited
and they are treated alike under the prohibition rule
• Fund managers must ensure that clients’ investments are
free from all forms of interest-bearing products and
investments are Sharī'ah-compliant
• Financial returns must bear two inseparable features of
Islamic investing, i.e. profits and loss
6
Review and Fundamentals of Islamic
Investing
7
Review and Fundamentals of Islamic
Investing
Social Responsibility
8
Contractual Terms and Certification
by Sharī'ah Experts
9
Contractual Terms and Certification
by Sharī'ah Experts
10
Contractual Terms and Certification
by Sharī'ah Experts
11
Contractual Terms and Certification
by Sharī'ah Experts
• MSCI Barra
12
Contractual Terms and Certification
by Sharī'ah Experts
Figure 6.1: Example of a Stock Market Index
13
Contractual Terms and Certification
by Sharī'ah Experts
- The Dow Jones Islamic Market Indexes are the most visible
and widely-used set of Shari´ah-compliant benchmarks
14
Contractual Terms and Certification
by Sharī'ah Experts
15
Contractual Terms and Certification
by Sharī'ah Experts
16
Contractual Terms and Certification
by Sharī'ah Experts
17
Contractual Terms and Certification
by Sharī'ah Experts
18
Contractual Terms and Certification
by Sharī'ah Experts
Financial Screen
The firms under investment should be operating according to
Islamic financial norms. i, e., free of any prohibited financial
practice including:
- riba (interest)
- maysir (gambling and pure games of chance)
- gharar (speculations and excessive risk)
- any other prohibited element in commercial
transactions
19
Contractual Terms and Certification
by Sharī'ah Experts
20
Contractual Terms and Certification
by Sharī'ah Experts
21
Contractual Terms and Certification
by Sharī'ah Experts
- Corporate bonds
- Treasury bonds and bills
- Certificates of deposit (CDs)
- Preferred stocks
- Warrants
- Some derivatives (such as options)
22
Contractual Terms
and Certification by
Sharī'ah Experts
23
Contractual Terms and Certification
by Sharī'ah Experts
24
Contractual Terms and Certification
by Sharī'ah Experts
25
Contractual Terms and Certification
by Sharī'ah Experts
26
Contractual Terms and Certification
by Sharī'ah Experts
Issues of Non-compliant Stocks
Degree of non-compliance :
1. Temporary non-compliance with Industry or Financial Screens
2. Short-term non-compliance with Industry or Financial
Screens:
- Fund manager should report to the supervisory board if
stock becomes non-compliant for a longer period of time
- Supervisory board should review the status of the non-
compliant stocks at regular intervals
- Fund manager should donate restricted earning to
charity
3. Permanent non-compliance with Industry or Financial
Screens: The Sharī'ah board may ask fund manager to divest
from such stocks
27
Structure Islamic Investments
Funds
28
Structure Islamic Investments
Funds
29
Structure Islamic Investments
Funds
30
Structure Islamic Investments
Funds
31
Structure Islamic Investments
Funds
Figure 6.4:
The Five Steps
in the
Structure of
Islamic Debt
Funds
32
Structure Islamic Investments
Funds
Commodity Funds
• Commodity funds involve murabahah operations or bai
bithaman ajil (BBA): the fund manager uses the
subscribed pool of funds to purchase different
commodities for reselling at a profit (based on a
deferred payment arrangement)
• The amount of profit from the resale constitutes the
main income of the fund
• Profit is distributed among the subscribers based on
their pro rata subscription to the fund
33
Structure Islamic Investments Funds
Ijarah Fund
• The ijarah fund is
- Created through the pool of surplus financial resources
- Managed by a fund manager
- Used to purchase a leasable asset for establishing a
lease agreement with a third party (the ultimate user)
34
Structure Islamic Investments Funds
a mudarabah contract
The two main parties are:
a) The investors (rabb al-mal) assume the role of silent
partners in the trust partnership
b) The fund manager (mudarib) as the entrepreneur
performs the managerial functions
35
Structure Islamic Investments Funds
36
Structure Islamic Investments
Funds
Alternative Investments
37
Marketing and Distribution of
Structure Islamic Investments Funds
38
Structure Islamic Investments Funds
39
Structure Islamic Investments Funds
- Seed-stage financing
- Early-stage financing
- Formative-stage financing
- Later-stage financing
- Expansion-stage financing
- Balanced-stage financing
40
Structure Islamic Investments Funds
41
Structure Islamic Investments
Funds
42
Structure Islamic Investments Funds
43
Structure Islamic Investments Funds
• Mudarabah contract
44
Structure Islamic Investments Funds
45
Structure Islamic Investments Funds
46
Structure Islamic Investments Funds
2. Mortgage REITs:
Extends credit facilities to real estate owners and
operators
3. Hybrid REITs:
A combination of the above two categories where the
REIT acquires and develops properties and at the
same time lends money to real estate owners and
operators
47
Structure Islamic Investments Funds
48
Structure Islamic Investments Funds
49
Structure Islamic Investments Funds
Fund of Funds
• Instead of creating its own portfolio, fund of funds
applies a passive investment strategy where the
investing fund invests in another fund with a different
investment objective to diversify its exposure
50
Marketing and Distribution of Structure
Islamic Investments Funds
Mixed Funds
51
Structure Islamic Investments Funds
52
Structure Islamic Investments Funds
• Joint Venture
• Strategic Alliances
• Franchising
• Outsourcing
53
Structure Islamic Investments Funds
Joint Ventures
Islamic investment funds may enter into joint venture
agreements with other Islamic banks or conventional banks
to:
- get higher market exposure and increase the investor
network at a lower cost
54
Structure Islamic Investments Funds
Franchising
55
Structure Islamic Investments Funds
56
Sharī'ah Governance of Islamic Funds
57
Sharī'ah Governance of Islamic Funds
58
Governance of Sharia Framework
Composition of the Sharī'ah Supervisory Board
• Islamic funds include members from different
demographics
• Whether an institution has a minimum of three members
for the Sharī'ah supervisory board (as per the
requirements of AAOIFI) or a single supervisor is its own
choice
• The composition of the Sharī'ah board should be included
in the charter of the fund
• The members of the board should possess:
- Strong academic and professional background in
Islamic jurisprudence
- Understanding of the financial transaction and
financial system
59
Sharī'ah Governance of Islamic Funds
60
Sharī'ah Governance of Islamic Funds
61
Sharī'ah Governance of Islamic Funds
62
Sharī'ah Governance of Islamic
Funds
Disclosure Issues
63
Risk Management for Islamic
Investment Funds
64
Risk Management for Islamic
Investment Funds
65
Risk Management for Islamic
Investment Funds
66
Risk Management for Islamic
Investment Funds
67
Risk Management for Islamic
Investment Funds
68
Risk Management for Islamic
Investment Funds
69
Risk Management for Islamic
Investment Funds
70
Risk Management for Islamic
Investment Funds
71
Risk Management for Islamic
Investment Funds
72
Risk Management for Islamic
Investment Funds
73
Key Terms and Concepts
74
Key Terms and Concepts
75
Thank You
76