Islamic Funds: Shariah Structuring And Compliance

Author:Mr Habib Motani and Monica Sah
Profession:Labuan IBFC Inc
 
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Islamic investment wealth management funds allow Islamic investors to invest in funds structured through Shariah-compliant contracts. The funds invest in shares or units of Shariah-compliant assets.

Increasingly, Islamic funds have been authorised by a variety of international regulators and listed on international exchanges. This has provided Islamic wealth management with a growing global audience with mainstream financial institutions providing Islamic investment funds. 

Characteristics of an Islamic fund

In many respects, the structural characteristics of a Shariah-compliant fund will not differ from those of a conventional investment fund. For example, the choice of legal structure for the investment vehicle and the choice of jurisdiction will still be driven by considerations such as: 

(i) a flexible, cost-efficient regulatory framework, particularly with regard to the need to obtain approvals from supervisory authorities and possibly seek a stock exchange listing; and

(ii) a favourable tax regime.

A primary feature of an Islamic fund is an independent Shariah board of three to five Shariah scholars. This board will establish compliance parameters for the fund, usually prior to the establishment of the fund and before any assets are acquired. The Shariah board will also be responsible for publishing an annual statement which sets out how the fund has complied with Shariah. The statutory documents of the fund need to clearly set out the roles and responsibilities of both the Shariah board and the fund manager to avoid any potential conflicts of interest, which is an area of particular concern to international regulators.

Islamic stock screening

In order for an investment fund to be Shariah-compliant, the stock of the company in question must be screened to ensure that the potential investment is suitable under Islam. Under Shariah law, the ownership of shares in a company is considered a proportionate share of that company's business and assets with the result that Islamic investors cannot own a company that is involved in any haram activity. Investors will seek guidance from the fund's Shariah board on the permissibility of an investment or business venture.

In order to increase access to the financial markets for Islamic investors, a group of leading Shariah scholars developed a series of screening criteria which aimed to identify the non-Shariah-compliant elements of a company and impose means of avoiding or dealing with them in a...

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