Islamic Fund Management

In the Islamic finance market,

takaful

and Islamic pension funds are still too small to make a

meaningful contribution to the current asset management industry. For the asset management

industry to grow, there is a need to first build up assets on the

takaful

side, which will provide

natural growth to Islamic funds. A report by the Quorum Centre (2018) proposes building a

sustainable

takaful

industry by developing a global

hajj

savings scheme under a

takaful

umbrella. If only 1% of the world’s nearly two billion Muslims contributed USD10 per month,

an equivalent of USD200 million per month or USD2.4 billion per year will be invested as new

money in the

takaful

and Islamic asset management industries.

The IFSB (2018) also notes that active Islamic funds, with an average AuM of USD80 million

per fund, remain small in contrast to their conventional counterparts. This shows that Islamic

funds need to explore potential mergers and different forms of collaboration to achieve critical

mass volume and economies of scale that will enable them to become more competitive in the

global fund management industry. The practice of merging to gain scale is a relatively recent

phenomenon, even in the conventional market. In Europe, for instance, there have been

mergers among several international fund managers to reduce overlapping costs, leverage

distribution and spread fixed costs (PWC, 2017).

2.2

Islamic Fund Management and Its Role in Islamic Capital Markets

Islamic fund management plays a significant role in intermediating foreign capital inflows and

mobilising domestic savings to promote a country’s economic expansion. The industry

complements the entire financial and capital markets ecosystem. Prior to examining this, the

section delineates the basic requirements vis-à-vis setting up a Shariah-compliant fund and the

parties involved in Islamic fund management as well as their roles.

2.2.1

Structuring a Shariah-Compliant Fund

Basic Shariah Requirements to Establish an Islamic Fund

The establishment of an Islamic fund is not as straightforward as setting up a conventional

fund. The former needs to fulfil specific Shariah requirements, as delineated below. Fulfilling

these requirements is pertinent to gaining investors’ confidence on the compliance of a fund

structure.

Shariah board/advisor:

To appoint a Shariah board or advisor that monitors,

evaluates and ensures that the fund’s activities comply with Shariah principles,

particularly on the investment aspects. The Shariah board/advisor also provides

guidance to the board of directors and the managers of the fund. Rulings issued by the

Shariah board are binding on the fund and its manager.

Shariah audit/review:

To conduct an annual audit or review on the fund to ensure its

compliance with Shariah principles. This exercise can be undertaken by either the

Shariah board/advisor or a recognised and qualified third party.

Shariah-compliant investment:

To only invest in Shariah-compliant assets or

portfolios, which are determined through a screening process.

Shariah screening:

To identify whether the companies that Islamic funds invest in

partake in Shariah non-compliant activities (i.e. business screening) or if the financial

management of the companies involves interest-based borrowings or have excessive