Topic vii. islamic investment funds

1. Islamic Investment Funds
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2. Islamic Investment Funds
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 A joint pool wherein the investors contribute their
surplus money for the purpose of its investment to
earn halal profit in strict conformity with the percepts
of Islamic Shariah.
 The subscriber may receive a document called
certificates or units and entitling them to the pro
rata profits earned by the funds.
 There are two conditions:
1. Instead of a fixed return tied up with their face
value, there must be pro rata profit. Therefore
neither the principal nor a rate of profit can be
guaranteed. If the loss is due to the negligence of
the management, in which case management and
not the fund will be liable to compensate it.
2. The amount so pooled together must be invested in
a business acceptable to Shariah.

3. Equity Fund
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 Amounts are invested in the shares of joint stock
companies.
 Profits are derived from capital gains and also
from distributed dividends.
 The main business of the company is lawful.
 Contemporary Shariah experts are almost
unanimous on the point that if all the transactions
of the company are in full conformity with shariah,
which includes that the company neither borrows
money on interest nor keep its surplus in an
interest bearing account, its share can be
purchased are sold.
 But companies without borrowing and lending are
very rare.

4. Equity Fund
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 A group of the Shariah experts is of the view that it is not
allowed for a Muslim to deal in a shares of a company
using interest in business, even if the main business is
halal.
 Their views is that, when a company is financed on the
basis of interest, its funds employed in the business are
impure.
 However a large number of present day scholars do not
endorse this view, they argue that a joint stock company is
basically different from a simple partnership.
 In partnership all the policy decisions are taken through
the consensus of all the partners, therefore all the actions
are rightfully attributed to each partner.
 In joint stock company all the actions are taken by
majority.
 Therefore each and every action taken by the company
cannot be attributed to every shareholder in his individual
capacity.

5. Equity Fund
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 Therefore, a company engaged in a halal
business, but also keeps its surplus money in
an interest bearing account, wherefrom a small
incidental income of interest is received, it does
not render all the business of the company
unlawful.
 If a shareholder is not personally agreeable to
such borrowings, but has been overruled by the
majority, these borrowing transactions cannot
be attributed to him.

6. Conditions for Investment in
Shares
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 The main business of the company is not violative of
shariah, therefore it is not permissible to buy shares
of banks, insurance or the companies involved in
some other businesses not approved by shariah.
 If the main business is halal, and they receive some
surplus in interest bearing account, the shareholder
must express his disapproval against such
dealings, preferably by raising his voice against such
activities in the annual general meeting of the
company.
 If some income from the interest bearing accounts is
included in the income of the company, the
proportions of such income in the dividend paid to the
shareholder must be given in charity, and must not
be retained by him.

7. Conditions for Investment in
Shares
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 The shares of a company are negotiable only if
the company owns some illiquid assets.
 If all the assets of a company are in liquid form,
they cannot be purchased or sold except at par.
 What should be the exact proportion of illiquid
assets, the scholars have different views.
 Some said more than 51%, some said minimum
33%.
 According to Hanafi school, if there is a
combination of liquid and illiquid assets, it can be
negotiated irrespective of the proportion of its
liquid part. But there are two conditions:

8. Conditions for Investment in
Shares
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1. The illiquid part of the combination must not be in ignorable
quantity, mean should have considerable proportion.
2. The price of the combination should be more than the value of
the liquid amount contained therein. Example
 Subject to these conditions, the purchase and sale of the shares
is permissible in Shariah.
 If profits are earned through dividends, a certain proportion of the
dividend which corresponds to the proportion of the interest
earned must be given in charity.
 This process is called purification.
 The shariah have different views about whether the purification
is necessary where the profits are made through capital gains.
 Some scholars are of the view that even in capital gains
purification is necessary.
 The other views is that no purification required if there is capital
gain.
 In open end fund purification make more justifiable.

9. Conditions for Investment
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 Management of Funds carried out in two alternative
ways:
1. The managers of the fund may act as mudaribs for
the subscribers. In this case a certain percentage of
the annual profits accrued to the funds may be
determined as reward of the management. If there
is no profit in fund, the management will deserve
nothing.
2. The second option, the management act as an
agent. In this case the management may be given a
pre agreed fee for its services. This fee may be
fixed in lump sum or as a monthly or annual
remuneration. The fee can also be based on a
percentage of the net asset value of the fund. But
decision should be made before the launch of the
fund.

10. Ijarah Fund
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 In this fund the subscription amounts, are used to
purchase assets like real estate, motor vehicles or
other equipment for the purpose of the leasing them
out to their ultimate users.
 The ownership of the assets remains with the fund
and the rentals are charged from the users.
 These rentals are source of income for the fund which
is distributed pro rata to the subscribers.
 Each subscriber is given a certificate to evidence his
proportionate ownership, this certificate may
preferably be called sukuk.
 The price of these sukuk will be determined on the
basis of market forces, and are normally based on
their profitability.

11. Ijarah Fund
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 The contract of leasing must conform to the
principles of shariah. Lessor is responsible,
halal use is possible, rentals, usufruct, rentals
must be fixed and known.
 In this type of the fund the management should
act as an agent of the subscribers and be paid a
fee for its services.
 Most of the Muslim jurists are of the view that
such a fund cannot be basis of mudarabah
because mudarabah according to them is
restricted to the sale of commodities only and not
for services and leases.
 However in the Hanbali school, mudarabah can
be affected in services and leases also. This view

12. Commodity Fund
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 Subscription amount are used in purchasing different
commodities for the purpose of their resale.
 Profit is distributed on pro rata basis.
 Basis rule of sale is applied.
 Commodity must be owned by the seller.
 Short sale is not allowed.
 Forward sale is not allowed except in the case of
Salam and istisna.
 Commodity must be halal.
 Seller must have physical and constructive
procession.
 The price of the commodity must be fixed and known
to the parties.

13. Murabahah Fund
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 Murabahah is a specific kind of sale where the
commodities are sold on a cost-plus basis.
 If the fund is created to undertake this kind of
sale, its units cannot be negotiable in a
secondary market.
 Commodities are sold are it comprises either
cash or other receivable debts.
 Both of these things are not negotiable, if they are
exchanged for money, it must be at par value.

14. Bai Al Dain
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 Dain means debt and bai means sale.
 If a person has debt receivable and he wants to sell it at a
discount, as normally happens in the bills of exchange, it is
termed in shariah as Bai al din.
 Traditional Muslim jurists are unanimous on the point that
bai al dain with discount is not allowed in shariah.
 However, some scholars of Malaysia have allowed this
kind of sale.
 They refer to the ruling of Shafiite school.
 The Shafiite school allowed this but only in case where a
debt is sold at its par value.
 Some scholars argue that the permissibility of bai al dain is
restricted to a case where the debt is created through the
sale of a commodity.

15. Bai Al Din
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 The Islamic Fiqh Academy of Jeddah, which is
the largest representative body of the shariah
scholars, has approved the prohibition of bai al
dain unanimously.
Mixed Fund
 In mixed fund subscription amounts are employed
in different types of investments like equities,
leasing, commodities etc.
 If the proportion of liquidity and debts exceeds
50%, its unit cannot be traded according to the
majority of the contemporary scholars.

16. The Principle of Limited Liability
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 Questions is whether the concept of limited
liability is acceptable in pure Islamic economy.
 In limited liability a partner or shareholder of a
business secure himself from bearing a loss
greater than the amount he has invested in a
company or partnership.
 In this case the loss cannot extend to his
personal assets.
 The creditors cannot claim the remaining part of
their receivables from the personal assets of the
shareholders.
 In some countries limited liability concept
applied to partnership also, yet it was most
commonly applied to the companies and

17. The Principle of Limited Liability
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 The basic purpose to the introduction of this principle was
to attract the maximum number of investors and to
ensure that their personal assets will not be at stake.
 Limited liability is beneficial to the shareholders, but at the
same time, it may be injurious to its creditors.
 If company liquidated, the creditors can only recover from
liquidated assets.
 Even the directors of the company cannot held liable for
the claims of creditors.
 Limited liability requires consideration and research from
the Shariah viewpoint.
 Joint stock company in itself enjoys the status of a
separate entity as distinguished from the individual
entities of its shareholders.

18. The Principle of Limited Liability
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 The separate entity may thus sue and be sued,
may make contracts, may held property in its
name and has the legal status of a natural
person.
 Now the question is whether the concept of
judicial person is acceptable in Shariah or not.
 If a real person dies insolvent, his creditors
have no claim except to the extent to the assets
he has left behind.
 The same principle applied to company.

19. Waqf
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 The waqf is a legal and religious institution wherein a
person dedicates some of his properties for a
religious or a charitable purpose.
 The properties after being declared as waqf, no
longer remain in the ownership of the donor.
 The beneficiaries of a waqf can benefit from the
corpus or the proceeds of the dedicated property, but
they are not its owners.
 It seems Muslim jurists have treated the waqf as a
separate legal entity.
 If the property purchased with the income of the waqf,
the property so purchased shall be treated as a
property owned by the waqf.

20. Waqf
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 If the money is given to mosque as donation does
not form part of the waqf, but it passes to the
ownership of the mosque.
 So mosque is capable of being the owner of
something.
 So waqf can own property.
 Waqf is not human being, yet they have treated is
as a human being in the matter of ownership.
 Once ownership established, so now it can sell
and purchase, may become debtor or creditors,
can sue or be sued.

21. Baitul-Mal
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 Another example of juridical person is Baitul-mal
(the exchequer of an Islamic state).
 Being public property, all the citizens have some
beneficial rights over the Baitul-mal, yet nobody
can claim to be its owner.
 Different department of the Baitul-mal can borrow
and advance loans.
 The liability of these loans cannot lie on the head
of state, but on the concerned department of
Baitul-mal.
 Its mean each department of Baitul-mal is a
separate legal entity.

22. Joint Stock
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 According to Shafii school, if more than one person
run their business in partnership, where their assets
are mixed with each other, the zakat will be levied
individually.
 But it will be payable on their joint stock as a whole,
so much so that even if one of them does not own the
amount of nisab, but the combined value of the total
assets exceeds the prescribed limit of the nisab, zakat
will be payable on the whole joint stock.
 The separate assets should not be joined together nor
the joint assets should be separated in order to
reduce the amount of Zakat levied on them.
 It mean joint stock has been treated a separate entity.

23. Inheritance under Debt
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 The fourth example is the property by a deceased
whose liabilities exceed the value of all of property left
by him.
 According to jurists, this property is neither owned by
the deceased because he is no more alive, nor is it
owned by his heirs.
 It is even not owned by creditors, the settlement has
not yet taken place.
 Being property of nobody, it has its own existence
and it can be termed as legal entity.
 The heirs of the deceased will look after the property
as managers, but they are not the owners.
 This inheritance under debt has its own entity which
may sell and purchase, become debtor and creditors
and have characteristics similar to juridical person.

24. The Limited Liability of the Master of
a Slave
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 Next example related to our past history when slavery
was in vogue, and the slaves were treated as the
property of their masters and were freely traded in.
 There were two kinds of slaves in those days.
 The first kind was not permitted by their masters to
enter into any commercial transactions.
 There was another kind who were allowed by their
masters to trade.
 Capital was provided by the master, but slave was
free to enter into all the commercials transactions.
 If there is loss more than assets, the creditors had
aright to sell the slave and settle their claims.

25. The Limited Liability of the Master of
a Slave
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 If their claims not satisfied even after selling the slave, the
creditors could not approach his master for the rest of
their claims.
 So master’s liability is limited to the capital invested
including the value of the slave.
 The concept of limited liability should not be allowed to
work for cheating people and escaping the natural
liabilities consequent to a profitable trade.
 The concept of limited liability is justified in case of public
joint stock company.
 In case of private company and partnership, the concept of
limited liability not applied.
 For sleeping praters or inactive shareholders of private
company, there is exception and their liability may be
limited.