Capital Markets 175
Islamic Funds
Islamic investment funds emerged in the late 1980s, operating on the basis
of a principal–agent model. Clients invest capital in the fund, which in turn
channels capital only to select companies which satisfy Shari’ah require-
ments. Funds may be restricted to a specifi c asset class — such as real estate,
leasing, commodities, or equities — or could be general purpose and diversi-
fi ed across asset classes, such as a hybrid of equities and commodities. As
we have seen, Islamic investment funds operate on the basis of a variety
of Shari’ah - compliant contracts, including murabahah, musharakah, salam,
istisna’, and ijarah. The funds provide low-, medium - , and high - risk oppor-
tunities ranging from short - term (under one year) to long - term (over three
years) maturity. Portfolios of sukuk are also available as investible funds.
Figure 9.1 shows the breakdown of market share of different investment
funds, illustrating that equity funds dominate the market.
Currently, there are about 750 Islamic funds, managing more than
US$50 billion - worth of assets. This is compared to more than 65,000 con-
ventional funds, with more than US$20 trillion in assets under management.
It is worth noting that more than 50 percent of Islamic fund managers have
less than US$50 million under management. There is a growing trend of
offering funds to institutional investors in addition to retail investors. For
example, during the period 2005–10, 75 percent of funds introduced were
targeted to institutional investors.
The principles underpinning activities of Islamic funds make for socially
responsible investment and are therefore also attractive to non - Muslim
investors interested in “ethical” fi nance. By performing the dual functions of
risk intermediation and the effective allocation of excess liquidity, Islamic
investment funds have earned a reputation as a fundamental pillar of the
burgeoning Islamic fi nancial industry.^1 They provide a wide array of portfolio -
management options and mobilize long - term investments necessary for the
expansion of capital markets.
Equities, 54%Real Estate, 7%Hybrid (mixed
assets), 15%Money Market,
17%Sukuk, 5%Other, 2%FIGURE 9.1 Distribution of types of Islamic funds, March 2011
Source: IFIS