Islamic Fund Management
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1. INTRODUCTION
The capital markets, both Islamic and conventional, represent an important component of the
overall financial system. Similar to conventional finance, the ICMs play a crucial intermediary
role between the supply and demand of funds, by meeting the requisite investment and
financing needs. ICMs must conform to certain rules and principles, as set out in the Shariah
(Islamic law), such as the prohibition of interest (riba), uncertainty (gharar), gambling and
speculation (maysir ), investment in prohibited elements such as alcohol, pork, tobacco,
pornography, illegal drugs and other non-permissible activities. An ICM thus provides a
platform for the issuance of Shariah-compliant securities such as shares and sukuk (Islamic
investment certificates, also known as Islamic bonds) in the primary market, thereby enabling
the public and private sectors to raise funds to be channelled into productive investment areas.
Market participants such as governments, Islamic banks, Islamic insurance (takaful) operators,
AMCs and other institutions as well as households invest their excess liquidity in these
Shariah-compliant securities―to earn capital gains, dividends and profits. Concurrently, an
ICM enables the establishment of a well-functioning secondary market where market players
can trade these securities, initially issued in the primary market, to manage their liquidity. By
making available various financial services and fulfilling the needs of investors and fund
seekers, ICMs contribute significantly to the overall development and growth of economies.
The ICM was initially developed in the 1990s through the equity market, with the Islamic
screening of shares and the launch of Shariah-compliant funds. At the same time, the Islamic
debt market had started evolving through the issuance of sukuk. Over the years, the equity
market has expanded to include various types of funds such as Islamic unit trusts, Islamic
exchange-traded funds (ETFs), commodity funds, Islamic real estate investment trusts (REITs),
Islamic private equity (PE) and venture capital (VC) funds, money market funds, other
structured funds and various types of Islamic indices and index products. The development of
sukuk as an alternative to conventional debt securities has been an important step towards
accelerating the development of ICMs. So far, sukuk has been the backbone of ICM
development in many jurisdictions. It is expected to continue playing a major role in further
expanding the frontiers of the ICM beyond Muslim countries.
For an efficient, well-functioning and well-regulated ICM, the key requisites include a
facilitative legal and regulatory framework, a robust Shariah governance framework, attractive
taxation policies, proper accounting and audit mechanisms, adequate risk-management
strategies, product innovation, standardisation and documentation, as well as a diversified
pool of investors and market players. In particular, the Shariah governance function requires
important organisational measures to be in place to ensure the independent oversight of
Shariah compliance over all processes in the industry, from product structuring and
implementation to issuance and further development.
1.1 Aim, Objectives and Scope of the Study
The focus of this study is on the Islamic fund management industry, which represents a key
segment of the overall Islamic finance industry, and the ICM in particular. The aim is to
examine the working mechanisms, development, challenges and prospects of the Islamic fund
management globally as well as in country-specific case studies. The key objectives are as
follows: