Islamic Fund Management
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Contractual Obligations Relating to Shariah Contracts in Islamic Fund Management
Various Shariah contracts bind the different parties involved in Islamic fund management
(ISRA, 2015, p 532-533), namely:
1. Partnership ( musharakah) contract: This exists between the unit holders (i.e.
investors) who invest their money in a fund, with the view that the profit derived will
be shared according to their capital contributions or agreed profit-sharing ratios.
2. Sale ( bay’) contract: This is executed between the unit holders and the fund manager
(via sellers or distributors), usually on a cash payment basis. The unit in a unit trust
fund is normally priced based on the manager’s forward selling or buying price on the
next valuation point, upon the receipt of a request for purchase or redemption. The
valuation is done at the close of the business day.
3. Agency (wakalah) contract: This takes place when the unit holders appoint the
manager to execute the purchase or redemption order on their behalf. Under a
wakalah contract, the principal is the unit holder, the agent is the manager and the
objective of appointing an agent is for the purchase or redemption of units. A wakalah
contract also takes place when the unit holders appoint the trustee to act as a
custodian to the fund and hold in trust all the assets of the fund on their behalf.
4. Safekeeping with guarantee (wadi’ah yad damanah) contract: This takes place
when the unit holders deposit their investments with the trustee. The owners of the
units are the unit holders, the custodian is the trustee and the property comprises all
the assets of the fund in the form of money and other investments.
illustrates the Shariah contractual relationships among the key parties involved in
Islamic fund management.