Fund Management under Shariah Compliance

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Fund Management under Shariah Compliance

Introduction

Islamic finance means that all financial transactions are conducted in accordance with the Shariah law, which is the legislative framework that regulates all aspects of life both private and public. That legislative framework depends on four main sources: 1) The Holy Quran: which is the literal words of Allah (may he be glorified and exalted); 2) Sunnah: which refers to saying, actions, and approvals of the prophet and Allah's messenger Mohammad (peace be upon him); 3) Ijmah: which refers to the consensus that has been reached by Islamic scholars on a particular issue throughout the history; and 4) Qiyas: which means analogy and it refers to rulings on issues where there is no explicit guidance in either the Quran or the Sunnah and, therefore are derived by qualified scholars with preference to rulings related to similar issues.

Islamic finance is considered the only source of finance for Muslim investors that want to preserve their Islamic values and morals. This is because Islamic finance provides these Muslim investors with the opportunity to participate in different capital and financial markets without the fear that such participation is going be at the cost of their Islamic religious identity and values. In addition, Islamic finance started to become a vast global practice and a preferable source of finance for non-Muslim investors as well due to its ethical nature. That is, non-Muslim investors started to view investing in Shariah-compliant products as a form of socially responsible investing. As a result, the industry of Islamic finance, even though it is still relatively new when compared to the industry of conventional finance, has been experiencing an excellent and a rapid growth. Therefore, all the issues and aspects related to Fund Management under Shariah Compliance will be discussed in detail.

The importance of Islamic Finance

Shariah law does not permit interest-based financing (riba), but it permits other financing modes because they apply one or more of the following three financing concepts that Shariah law believes would create and add real value to the economy, increase social welfare, minimize potential injustice, and enhance public good. The first concept is the profit-loss-sharing financing concept which can be represented by two financing modes: Musharakah and Mudarabah. The second concept is the trade-based financing concept which can be represented by four financing modes: Murabahah, Bay'mu'ajjal, Salam, and Ijarah. The third concept is the asset-based financing concept which can be represented by Sukuk (Bassens, Derudder & Witlox, 2011, 103).

Musharakah is the Arabic translation of partnership. It refers to a situation where capital is raised by all parties of a contract. Thus, profits and losses are pro rata distributed and each partner has the right to participate in the decision making of the enterprise. Mudarabah is a special kind of Musharakah where the party that has the investment capital and the party that has the expertise and management skills get together to undertake an investment project or to form a business ...