Islamic Fund Management
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interest income as a part of their quarterly/annual financial statements. As a result, the data a
fund manager uses can be erroneous, thus leading to improper selection of a Shariah-
compliant stock or portfolio. Likewise, many companies do not differentiate between cash and
cash equivalents (e.g. money market instruments and treasury bills that can be readily
converted into cash) in their financial reports. By the same token, many companies use old
financial data to calculate various financial ratios, which result in misleading information. In
other cases, data providers may miss out on important announcements by corporates, such as
stock splits, bonus declarations and dividend payments (Cognizant 20-20 Insights, 2012).
5. Adapting to Fintech
Another emerging challenge stems from new realities like changing client demographics and
preferences for modern and digitalised distribution methods. The global asset management
industry is being pushed to embrace new investment platforms in trying to meet the needs of
an evolving clientele. These clients favour new distribution channels such as mobile devices.
This situation poses unique sales challenges besides demanding transparency. If the Islamic
fund management industry fails to adapt to these changing dynamics, it can exacerbate its
competitive disadvantage (IFSB, 2017).
6. Scalability
Scalability is another challenge facing the Islamic fund management industry. Typically, fund
management entails fixed costs that become more efficient as AuM increases. Because ICM is a
niche market, achieving a minimum level of scale efficiency is a challenge. Fintech is helping to
reduce the threshold required to achieve this minimum efficiency.
Issues and Challenges Related to Investment and Commercial Considerations
1. Smaller Universe of Shariah-Compliant Investible Assets
Although Shariah-compliant investment has made great strides since the 1990s, one of the
major challenges has been the perceived lack of investment opportunities and Shariah-
compliant financial assets (Chan, 2017). Islamic indices have a limited universe of stocks. Many
companies are not included in these indices. Fund managers, therefore, find it challenging to
select a stock no matter how appropriate it may be for his portfolio construction, in case that
stock is not listed on the Shariah-compliant index that he adopts. Additionally, some sectors
form an integral part of traditional funds but are not an option for an Islamic fund manager as
they are excluded due to Shariah restrictions. A good example is the traditional banking and
financial services sector. Almost all such companies (excluding Islamic financial institutions)
are deemed Shariah non-compliant and are thus not an option for Islamic fund managers
(Cognizant 20-20 insights, 2012). The screening process, which excludes many investment
areas from the potential list, limits the options available to fund managers, thereby limiting
their ability to take advantage of many profitable investment opportunities.
2. Higher Transaction Cost
Islamic funds are always more expensive to manage than their equivalent conventional
counterparts; the former requires additional fees for the Shariah board/advisor and periodic
Shariah audits if they are performed by external parties.