University Islamic Finance: Investment Management Analysis Report

This report provides a comprehensive analysis of Islamic Investment Management, exploring its principles and practices within the global financial system. It begins with an executive summary and table of contents, followed by an introduction that outlines the report's objectives: to understand Islamic investment management and its relationship with conventional investment systems. The report then delves into the core concepts of Islamic finance, emphasizing Sharia-compliant banking and investment principles. It defines Islamic investment, highlighting the importance of Sharia boards and the prohibition of certain activities. Various types of Islamic funds, including Ijara, equity, exchange-traded, real estate, commodity, and fixed income funds, are examined in detail. The report also discusses the performance of Islamic funds, liquidity strategies, challenges in origination and distribution, components of Islamic mutual fund structures, and the role of Sharia boards. It concludes that Islamic investment management has experienced significant growth and has become a permanent feature of the global financial landscape, offering insights into the innovative financial instruments that align with Sharia principles.

Running Head: ISLAMIC FINANCE
ISLAMIC FINANCE
Name of the Student
Name of the University
Author Note

1ISLAMIC FINANCE
Executive Summary
The aim of this report is to do the analysis on the Islamic Investment Management. It is
concerned with the professionally management of the investments of the securities which is
Sharia’a-complaint. Under this report, discussion will be based on the introduction of the
Islamic finance and Islamic finance investments. In addition, discussion will also be based on
the performance of the Islamic fund, liquidity strategy, origination and distribution
challenges, components of the Islamic Mutual fund structure and role of Sharia’s board in
relation with the conventional finance system. Therefore, it has been concluded that Islamic
Investment management has experienced the growth rate and it has become the permanent
feature of global financial system.

2ISLAMIC FINANCE
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Islamic Finance......................................................................................................................3
Islamic Investment.................................................................................................................4
Performance of the Islamic Fund.........................................................................................10
Strategy of Liquidity............................................................................................................10
Origination and Distribution challenges..............................................................................11
Components of the Islamic Mutual fund structure...............................................................12
Role of Sharia’a Board.........................................................................................................12
Conclusion................................................................................................................................12
Reference..................................................................................................................................13

3ISLAMIC FINANCE
Introduction
The aim of this report is to understand the Islamic investment management. It is the
concise guide of the important characteristic and working of the Islamic investment system
and fund management in relation with the conventional management system of investments.
It is concerned with the offering of the holistic approach to the Islamic asset management
with the end-to-end process in accordance with the principles of the Sharia’a. For the
discussion of this topic, discussion will be done on the Islamic investments, its importance,
and their performance. In addition, liquidity strategy, origination and distribution challenges,
components of the Islamic mutual fund structure and role of Sharia’a board in relation with
Islamic investment management will be discussed.
This report will provide the analysis on the theory behind the concept and process of
Islamic Investment Management. The industry perseverance has resulted in the growth of
innovative financial instrument of Islamic, which is in accordance with the Sharia principles.
Discussion
Islamic Finance
Islamic finance is concerned with that banking system that is non-interest banking and
the principles of it is based on Islamic and Sharia law, guided by economics of Islamic. The
Islamic banking has been originated from the beginning of Islam at seventh century. The
Prophet Muhammad had used many principles of the contemporary Islamic banking
(Kammer et al.). The business activities during the Middle Ages in the Muslims world were
relied on the principles of the Islamic banking. These principles provided the basis for the
principles of the western banking that was throughout spread in the Mediterranean, Spain and
the Baltic states. Islamic banking has been reappeared in the modern era from the year 1960
to 1970 (Kammer et al.).

4ISLAMIC FINANCE
The funds of Islamic financial institution are raised by two different sources that are
investment accounts where the withdrawals are because of notice or otherwise it is restricted
and current account where withdrawn of funds can be done because of demand. In additions
to these functions, directly social services are as carried out by Islamic banks because they
have responsibility for the development and growth of their staff and local communities and
indirectly through the charities in which they donates the funds which is purified such as
Zakat and other funds. In comparison with the commercial banks, the industry of Islamic
finance also consists of investment banks, development and multilateral banks like IDB and
fund managers (Mallin et al.).
Islamic Investment
Investment is defined as allocating money in any fixed assets in the expectation of future
benefit in the form of return such as investment in the purchase of shares is considered as
conventional concept of investment. Islamic Investment is the different form of investment,
which aims at socially responsible investments because no division is made between the
secular and the spiritual. The investment in the Islamic investment requires to be done by the
method of Sharia ’a-complaint (Jawadi et al.). The inception of the policy of Islamic
Investment for the individual and institutional investor starts with the board of Sharia, which
consists of the number of Islamic scholar that invest in the investment products for complying
to the laws and conducts of the Islamic. The sources, which are, used for the interpretation
follows the hierarchy of the authorities (Ibrahim).
Investment is recognized as the most important process that helps in benefiting the
participant involved in the process as well as economy as a whole. In spite of the wealth
investors have, Islam encourages increase in the wealth by the process of investments.
Investment in the shares in the conventional financial institution requires lot of fund, which
will not be possible for the investors with low income and wealth (Masih et al.). However,

5ISLAMIC FINANCE
investment through the contacts of Sharia ‘a-complaint such as Ijara, Mudaraba, Musharaka
and Salam would be beneficial for the investors. This instrument will be helpful in the
purposes of the fund management and serving the assets. The investment in the conventional
financial institution considers increase in the profit and wealth as the primary motive whereas
investment in the Sharia’a complaint financial institution considers investment for meeting
the needs of the society as a whole (Masih et al.).
There are certain objectives in the minds of the investors of Sharia’a complaint such as
linking the methodology of the Islamic investment with the moral behavior and social
objectives by avoiding the activities, which are prohibited in Islam. In addition, there are the
objectives of the incorporation of the behavioral ethics and principles of Sharia’a in the
process of the investment. Apart from the above objectives, other common objectives of the
investors is fulfilled such as preservation of the capital, maximizing the owner’s capital and
ensuring that there is balance between profitability and liquidity (Masih et al.).
In order for the acceptance in Islam, the investment of underlying assets and the financial
transaction requires to be halal or legitimate according to Sharia’a. The standards, principles
and provisions of the investment are prepared in accordance with tehn Sharia’a and their holy
book Quran. It is because they provide insights to be what practices have to be followed,
what is permissible and what is not according to the standards and principles of Sharia’a.
Some of the investment, which is prohibited according to the Sharia’a, includes gambling in
the any form, production and selling of the beverages products, borrowing and depositing
money with the conventional banks (Masih et al.). In addition, investment in the speculative
financial instrument, which includes derivatives, financial futures, conventional fixed income
are also prohibited. Moreover, other prohibited investment includes manufacturing and
selling of the drugs that are prohibited, processing and selling of the meats which is not

6ISLAMIC FINANCE
processed and pork and investment in those transactions which requires excessive risk of loss
(Ullah et al.).
Islamic Investment Funds
Under this the buying and selling of the shares of the institutional and the individual
investor is in the companies of Sharia’a complaint. It includes wide opportunities for the
investment such as hedge funds to the fixed-income funds. The market of Islamic equity
comprises of private equity as well as listed equity (Abdelsalam et al.). All the investments
relating to the equity, their documentations, calculations of the financial statements, their
ratios have to comply with the Sharia’a-complaint. The functions of the conventional market
is same as Islamic capital market which provide long term and short term liquidity on the
basis of interbank. Islamic capital market uses instruments, which is only Sharia’a complaint
such as Murabaha, Wakala and Sukuk (Ho et al.). The fund manager is appointed by the
investors who investments in the funds which is able to generate profits. They are entitled to
get fee for their services in spite of the fact that investor is responsible for the losses incurred.
Following are the types of Islamic fund used in the investments:
Ijara Funds: Ijara contracts involve providing the services and products, which is on lease
and rental basis. Under this, the party is given right for using the objects for the particular
period; however, the owner retains the ownership. The risk attached with this type of fund is
generally higher than the funds of fixed-income. Lease fund is the investment in the finance
leases. The assets of the lease fund have no residual risk it is because assets are sold at the
end of lease term, (Mosteanu). The fund manager who acts as the agent of the investors are
paid fee for their services. The investment in the Islamic lease fund requires investment in
the pools of the leased assets which is suitable that is sold to special purposes vehicles which
is owned by fund. The sponsor of the products underwrites the exit strategy of the investment

7ISLAMIC FINANCE
for the funds of Ijara who acquires holdings of the assets from the investors on the ‘matched’
basis and ‘best efforts’. Investment certificates are issued by the fund manager, which
indicates proportionate shares of the associated income stream and underlying assets
(Mosteanu).
Equity Funds: It includes the investment in the private and public equity listed in the Islamic
index and should adhere by the rulings of the Sharia’a. The profit is derived from investment
in the listed companies of Islamic index (Kamil et al.).
Exchange Traded Funds: These are the securities whose performances are tracked by the
Islamic index as it one in case of conventional financial institution’s index fund. The trading
in the exchange traded funds is done in the same way as done in case of securities. There are
changes in the price of the exchange-traded funds during the day, which is the result of the
buying and selling of the units (Jawadi).
Real Estate Funds: These are the funds, which are invested, in the residential and
commercial real estate, under which the profits are realized from the increase in the
properties’ value and rental income. The investment in the properties of commercial use
should not be rented to the conventional financial institutions rather there requires the use of
property which should be Sharia’a complaint (Kammer et al.).
Commodity Funds: This is the investment of the funds in the range of commodities, which
is eligible for generating profits. The fund manager is not entitled to short-sell the
commodity; neither should they engage in the forward contracts and selling in the price,
which is uncertain (Brisard).
Fixed Income Funds: It includes the investments in the Ijara and Sukuk, which uses
instruments of the cash and cash equivalents for meeting the requirement of the liquidity. The
investment in the Ijara and Sukuk depends on the fund’s characteristics of risk and return.

8ISLAMIC FINANCE
Apart from that, the credit-worthiness of the assets also influences the risk level of the
yielding assets, costs of transactions and the cost, which is required for maintaining the
liquidity position of the fund. These funds makes use of instruments of the money market
with the required mix of the return, security and liquidity for investing in the instruments of
Ijara, Sukuk and Murabaha for generation of the return on the liquid assets (Mansor et al.).
The Products of the Islamic Investment includes following:
Islamic Equity Funds: It includes investment of the funds in the private and public listed
equity fund under the compliance of Sharia’a standards. Several study is done in order to
check that that whether the particular equity is complying with the standards of the Sharia
rules and regulations or not. The fund manager is responsible for doing survey and many
levels screening for determining the fact that if the company is involved in the haram
business or not (Nainggolan et al.).
Asset yield and risk diversification: There is the great challenge for the Islamic fund
manager to meet the requirements of the Sharia along with the competitiveness of the fund in
comparison with the offerings of the conventional fund. The fund manager is responsible for
building the diversified portfolio, which contains the categories of diversified assets. It calls
for the adaptation and origination of the broad classes of assets. The portfolio includes
liquidity by offering liquid assets that is cash equivalents and it includes range of instruments,
which can be invested in the Islamic funds, which contains traded commodities, real estates,
equity investments and regional and emerging equities (Dewandaru et al.).
Some businesses are involved in the activities of haram. Hence, the selection process
of the investment in accompany passes through two process of screening which provides the
basis for the whether the stock of the company should be allowed for being the part of
Sharia’a complaint.

9ISLAMIC FINANCE
 The first stage will include the ‘Industry screen’ process, which includes the
evaluation of the activities of the business, which complies with the restrictions of the
Sharia for adhering the business activities. The screening is applied at every level of
the organization and their subsidiaries if any (Clarke).
 After the screening of the business activity has been done, the next process is the
‘financial screen’ of the company in which the investment has to be carries out. It
includes the review the impact of the financial behavior of the company and impact
on the shares price and performance if it is Non-Sharia’a complaint. The financial
ratios need to be complaint with board of Sharia. Any income, which is related to the
activity of the non-Sharia’a complaint, is needs to be purified by charity donations
(Ashraf).
 Futher, after the screening process of initial investments are complete the next stage
comes where the fund manager ensures that the component of the stocks comply with
the parameters set by the board of Sharia. There may be the situation when due to the
rise and fall in the market and mergers and acquisition, the stocks that were approved
becomes non-complaint. The non-complaint stocks have to be given in notice to the
Sharia’a board. The advisers of the Sharia have established certain flexibility in
respect of the parameters of the fund in dealing with these situations. It includes
financial screen or industry’s temporary non-compliance, finance screen or industry’s
short-term non-compliance and permanent non-compliance (Che, Anna and
Mohamed).
 The last process of the screening includes the endorsement of Islamic equity
investment. The factor that is responsible for the development of the new instruments
of the Islamic equity and their development includes expansion in the stock markets
of Islamic jurisdiction, sustainable market growth, competition between the Islamic

10ISLAMIC FINANCE
institutions and increasing pragmatic approach to the investment of the international
equity (Iqbal, Munawar and Philip).
Performance of the Islamic Fund
Equal attention is required in all aspects of the Islamic indices such as assets
allocation, asset structuring, risk management and portfolio performance. Earlier, Islamic
equity fund’s performance were measured by the help of conventional indices in which the
fund manager used weighting adjustments for reducing the haram stocks. However, after the
Sharia’a complaint indices come into force, the benchmark requirement against the
conventional indices is no more required (Ashraf, Dawood and Nazeeruddin). FTSE, Dow
Jones, S&P, Russel-Jadwa and MSCI provide Index series of Sharia’a-complaint. They all
apply the standards of AAOIFI Sharia foe determining the investment’s eligibility. Generally,
the fund managers for measuring the performance of the funds and overall portfolios prefer
indices of Sharia’a. However, certain managers prefer mainstream benchmarks for comparing
their portfolios as they thing they ar more relevant. For the inclusion of the stock in the
Islamic index, industry and financial screening is required (Ho et al.).
Strategy of Liquidity
Mismatches in the balance sheet and assets exposure of the Islamic financial
institution has led to the slow growth and evolution of the efficient capital market Islam
because they were not sold easily in the market. The fund manager’s critical consideration is
the ability for monetizing the assets. The fund manager has to check the effect of the strategy
of the liquidity and manages the funds surplus liquidity (Waemustafa, Waeibrorheem and
Suriani). The limited potential in accessing the acceptance to the short-term instruments of
Sharia’a complaint is disadvantageous to the managers of the Islamic fund. Generally,
investment exit strategy is dependent upon the product sponsor, bank, nominated liquidity
agent who acquire the underlying assets on the behalf of the investor, which is one of the

11ISLAMIC FINANCE
common feature of Islamic funds. Hence, the success of the approach depends upon the
promoter’s strength, liquidity agent and guarantor. The liquidity strategy adopted for the
liquidity includes programs of overnight investment and short-term investments. It has been
observed that, not all the Islamic funds have performed well, however, some have performed
well in line with or have performed better than the benchmarks of both Islamic and
international. Apart from the fact that, the number of the funds and aggregate assets under the
management is small, the market is still growing and fees are getting in line with the
conventional funds (Acca).
Origination and Distribution challenges
For attracting the investors, elements such as client support, competitive performance,
Sharia’a compliance and distribution plays the important role. The delivery of the Islamic
investments funds is done by the mainstream institutions who have benefit of large scale
resources as well as awareness of market (Al Arif).
There is also the origination in the Joint ventures in the Islamic institutions. However,
there are some Islamic financial institutions who are not that much resourced for managing
funds in house. Hence, they have developed the identities and brands, which enables them for
delivering the financial products to the shareholders and local clients and it forms the
alliances with the international and regional for the effective distribution (Al Arif).
It has been observed that Islamic investors are quite determined in realigning the
strategies of Sharia complaints. Global attention of the Islamic funds and Islamic asset
management has been put into attention after its incorporation in the international jurisdiction
(Al Arif).