Growing Demand for Islamic Mutual Funds

Islamic mutual fund functions in an identical style as a traditional fund besides the important factor that the Islamic Mutual Fund only uses funds in Shariah-Compliant investments. Shariah-compliant investments are those which abide the beliefs of Islam, i.e. they are free of Riba (interest) and Gharar (speculation).

Features of Shariah – Compliant Mutual Funds

Based on the Islamic law, a Muslim is not permitted to invest in all forms of funds. There are specific limitations on their investment like for instance; a Shariah Compliant Mutual Fund that invests within the frontiers of the Islamic laws.

The key features of these funds are :-

Muslims cannot invest in any asset which can harm other people either (physically or emotionally) or which can harm the environment or, even in organisations that support any illegal and harmful activities, etc.

These funds prohibit investments in businesses which produces a big section of its income by selling alcohol, drug, tobacco, pork, weapons and other military equipment or gambling and erotica. These are all deemed as non-halal activities.

According to the Holy Quran, it is believed that anyone who involves in non-halal activities has involved themselves in fight against God. Which is why, Muslims are also not permitted to invest in organisations which deals openly in Riba. Therefore, these funds forbid all types of interests. An appointed Shariah board prevents such prohibited sources of income by offering it to charity instead.

These funds tend to prevent high levels of risks. Derivatives and organisations with excessive debts are not included. Shariah-compliant funds also avoid investment in fixed-income instruments. These funds are not just limited to the followers of Islam, all investors of any religion are permitted to invest in these funds.

An Interesting Read: What is Islamic Finance?

Types of Islamic Funds

A broad range of funds can be initiated to attract investors which prefer this type of investment manner. One can opt for equity, commodity and sukuk funds.

  1. Equity Fund : In an equity fund the sums are invested in shares of joint stock companies. It is evident that if the primary business of a company is not lawful in terms of Shariah, it is not permitted for an Islamic Fund to buy, hold or sell its shares, as it will cover the direct involvement of the shareholder in that forbidden business.
  1. Commodities Fund : The subscription sums are deployed in buying several commodities for the intent of the resale. The gains made by the sale are the income of the fund that is given pro-rated among the subscribers. To make this fund admissible to Shariah, it is mandatory that all the rules governing the transactions are fully complied with.

For instance :-

  • The commodity must be possessed by the seller at the time of sale; hence, short sales are not permitted in Shariah.
  • The commodities should be halal. Hence, it is not permitted to trade in alcohol, pork or other forbidden materials.
  1. Sukuk Fund : This is similar to bond fund apart from the interest part. This type of fund gathers money and invests in projects, joint ventures, and start-ups. Although, neither the principal nor the returns are assured. The return on investment rely on profit earned from these investments.

Increasing Demand of Shariah-Compliant Mutual Funds

Islamic banking’s focus on shared responsibility and community paves way for a more inclusive economy. For instance, various Islamic financial instruments are created to assist investors with ‘zakat’, one of the five pillars of Islam which instructs on offering a section of your wealth to charity. Furthermore, Islamic banks giveaway all late payment fees and forfeited income to charity. Islamic banks have no motive for widespread or non-transparent fee charging, as they will not be permitted to acknowledge it as income.

Islamic finance most definitely remains to be profitable in terms of both creation and development. Shariah complaint funds are invested in businesses depending on their capability for development and success. Hence, each bank will invest in promising business ventures and try to out-perform its competitors in order to attract more funds from its depositors. Eventually, this results in a high return on investments for both the bank and depositors. At conventional banks, this is highly unlikely as depositors redeem returns on their deposits based on a pre-determined interest rate.

Read more : Islamic Finance in Commercial Aircraft Leasing

Advantages of a Labuan Mutual Fund

The mutual fund or fund sector in Labuan is permitted to be structured as a Labuan company, partnership, protected cell company, foundation or unit trust. Labuan is also complaint with Shariah principles making it ideal to set up for Labuan Islamic mutual funds.

Take a look at some of the many advantages of a Labuan Mutual Fund :-

  • Flexible structure – in the form of Labuan company, partnership, protected cell company, foundation or unit trust
  • Promotes multiclass fund – multi currency / asset class
  • Smooth private fund set-up – no approval needed; fund manager is not required to be licensed
  • Well-regulated jurisdiction with a solid tax framework
  • Zero withholding tax on payments to non-residents
  • No foreign exchange controls
  • No capital gains tax / inheritance tax
  • Strategically located in the Asia Pacific region and sharing a common time zone with many big Asian cities
  • Double Tax Agreements between Malaysia and over 70 countries
  • 100% exemption for director’s fees attained by non-citizen directors of Labuan companies

Bringing the concept of ethical and responsible financing in the picture, Islamic finance has experienced continuous growth in the past few decades. With each passing year, there has been increasing expansion of Islamic finance assets as well as a sophistication of products, together with an ever-growing number of countries, companies and institutions participating in the industry. Interested to set-up your own conventional or Islamic Labuan Mutual Fund, connect with QX Trust team of consultants at CONTACT US  or for a complimentary session.