Islamic Fund Management
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3.3.1 Key Issues and Challenges in Islamic Fund Management
Recent Developments
Islamic funds will face increasing challenges, particularly when diversifying into non-Islamic
jurisdictions. Recent regulatory developments in Europe (such as the incoming Alternative
Investment Fund Managers Directive) will impose further restrictions on fund managers.
Many of the tenets of Islam already comply with the latest European regulations. The risk-
reward profile of Shariah-compliant investment funds is mirrored by the increased focus of
European regulators on the suitability of products provided by wealth managers to their
clients. There is a clear obligation on the part of the wealth manager, who makes a personal
recommendation or exercises its discretion to trade to ensure that the recommendation or
trade is suitable for a client. This obligation flows from the mainstream principles to act in the
best interests of clients and to treat them fairly.
Islamic fund managers are very much more restricted in their ability to exercise discretion on
behalf of their investors, and must satisfy the additional requirement of linking investments to
moral objectives.
The key issues and challenges associated with the current Islamic fund management industry
include the following:
Issues and Challenges Related to Infrastructure Development of Islamic Funds
1. Lack of Regulation in Certain Jurisdictions
The regulation of the asset management industry, particularly funds, varies significantly
between jurisdictions in the GCC and the Far East. Such regulation remains largely weak in
comparison to the developed markets. Although the regulatory environment is improving,
several jurisdictions remain under-regulated. This could expose both the industry and the
investors to unnecessary risks such as industry-wide reputational risk and the risk of Shariah
non-compliance, which could arise if an Islamic financial institution were to run into financial
difficulties or be accused of not conforming to Shariah. Such an incident will be further
compounded by the nascent state of the industry and may undermine its existence. An under-
regulated jurisdiction also affects market confidence and ultimately hinders the development
of the industry. Therefore, further regulation of the fund management industry will assist in
the maturity and growth of this nascent segment of the Islamic finance industry (The Islamic
Fund and Investment Report, 2008). Apart from that, the regulation needs to be clear and
enabling, and must be accompanied by strong market supervision.
Lack of transparency and disclosure is particularly true about the Islamic investment industry,
as opposed to Islamic banking. The reason for this lack of regulation and disclosure is not the
fault of the Islamic finance industry itself. These funds have grown without the scrutiny they
may have needed; proper regulations and closer scrutiny may contribute much to market
transparency (Siddiqi & Hrubi, 2008). This will boost investor confidence in both the Islamic
and conventional segments, which in turn will contribute to the further expansion and
development of the Islamic fund management industry.