Islamic Fund Management
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Zakah Payment
Following are the two main opinions on zakah payment for Islamic funds. The first opinion is
more widely accepted in most jurisdictions.
1. Zakah is the obligation of the individual unit holder/investor. Upon selling the fund or
receiving dividends, the investors must pay zakah if they have owned the wealth for
one lunar year (hawl), and the amount received reaches the ‘zakatable’ amount (nisab).
2. Islamic funds, as legal entities similar to individuals, should pay zakah.
Management of Risk
Shariah requires parties to be fair, just and ethical in their dealings with one another, and for
the balance of risk (and its accompanying rewards) to be apportioned. The aim is to prevent a
party with a stronger bargaining position from exploiting another one that is less able to
negotiate fair and equal terms for a transaction.
There is an increasing focus on ensuring that the level of risk commensurates with the risk the
client is willing and able to accept. While Islamic principles require the acceptance of risk to
justify the earning of a reward, the concept of speculation (maysir) forbids risk taking that is
akin to gambling.
As a result, one of the primary difficulties for Islamic fund managers is to provide an
investment fund that minimises the potential risk to the investor. Unlike mainstream funds
that can hedge their risks by diversifying the portfolio of investments, Islamic funds are
severely restricted to investments that pass the screening criteria. Traditional derivative
instruments, such as futures, are generally not permitted. There is a recent trend of permitted
options that can hedge the risks of equity, commodities and currencies. However, the primary
method of managing risk is in the form of capital-protected equity structures. These require
the investor to use a small portion of the overall portfolio as a downpayment (‘urbun) for a
basket of shares that will be delivered on a date in the future. The disadvantage of this
structure is that it reduces the short-term liquidity of the investment and requires the investor
to relinquish redemption frequency (Motani & Sah, 2017).