Islamic Mutual Funds: History, Current Trends and Future

Submitted By: Ahmed Mugheera (13257) Mamoon Iqbal (13276)

To: Mr. Shakeel Iqbal Awan Essential of Islamic Finance Fall 2011

Department of Management Sciences IQRA UNIVERSITY, ISLAMABAD CAMPUS

Table of Contents

Abstract....................... 1

Introduction ................ 2 Concepts of collective investment Mutual fund .. Capital Market .. Stock or Equity . Islamic principles of Investment Islamic Mutual Fund . Sukuk . Difference between conventional and Islamic Mutual Funds Literature Review . 9 History of Islamic Investment methods Islamic Investment Banking Islamic mutual fund Islamic capital Markets Growth and Evolution Analysis ....18 Current trends Worldwide practices Islamic Investment Policy Findings ............ 27 Performance of Islamic products Popularity and Competition Current Issues Conclusion and Recommendation 32

Challenges .. Opportunities . Recommendations ..

References Plagiarism Report

Abstract

Islamic investment methods, equity market and financing has taken shape and grown to maturity and popularity in last quarter century. We want to study the concepts, background, development history, evolution and maturity of Islamic mutual funds, Islamic investment banking and instruments being used for this. We will analyze them and compare them to conventional methods. Also, we will review the current situation, trends and practices of Islamic mutual funds and investment methods that have been established and being practiced all over the world. We will also emphasis and consider the future aspects of Islamic investments. It will include the challenges and opportunities of future outlook. The products of Islamic Mutual funds being offered and the strategy of its growth will be under discussion in the forthcoming chapters. This will be a literature based report.

1 Introduction

Islamic investment Funds have become today an undeniable fact. The number of Islamic institutions/Funds is ever-increasing. New Islamic Funds with increasing amount of capital are being established. Conventional banks are opening Islamic windows for the operations of Islamic Funds. Lets first introduce some terms and concepts of mutual funds, investment and Shariah compliance. Concepts of Collective Investment A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group. These advantages include ability to

employ a specialized investment manager, which theoretically offers the prospects of better returns and/or risk management benefit from economies of scale - cost sharing among others Diversify more than would be feasible for most individual investors which, theoretically, reduce risk.

Terminology varies with country but collective investment schemes are often referred to as mutual funds, investment funds, managed funds, or simply funds (note: mutual fund has a specific meaning in the US). Around the world large markets have developed around collective investment and these account for a substantial portion of all trading on major stock exchanges. Collective investments are promoted with a wide range of investment aims either targeting specific geographic regions (e.g. Emerging, Europe) or specified industry sectors (e.g. Technology). Depending on the country there is normally a bias towards the domestic market to reflect national self-interest as perceived by policymakers, familiarity, and the lack of currency risk. Funds are often selected on the basis of these specified investment aims, their past investment performance and other factors such as fees. Mutual Fund A mutual fund is a specialized managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.[1] A mutual fund is an investment company that invests its assets in various tools such as stocks and bonds among others according to a defined strategy. Typically, the minimum initial investment is around $2500 but it can be lower or higher. The advantage of a mutual fund is that by investing in a mutual fund, the investor can indirectly take a position in the mutual fund's investments without having to incur high fees or spend time with research. For example, an investor desirous of building a diversified portfolio can avoid the time and money needed to accomplish this by investing in a mutual fund which is specialized managed.

Mutual funds in general provide investment programs for investors. In general they buy multiple stocks to reduce risk providing diversification and hopefully high returns or income to their investors. In the United States, a mutual fund is registered with the Securities and Exchange Commission (SEC) and is overseen by a board of directors (if organized as a corporation) or board of trustees (if organized as a trust). The board is charged with ensuring that the fund is managed in the best interests of the fund's investors and with hiring the fund manager and other service providers to the fund. The fund manager, also known as the fund sponsor or fund management company, trades (buys and sells) the fund's investments in accordance with the fund's investment objective. A fund manager must be a registered investment advisor. Funds that are managed by the same fund manager and that have the same brand name are known as a "fund family" or "fund complex". The Investment Company Act of 1940 (the 1940 Act) established three types of registered investment companies or RICs in the United States: open-end funds, unit investment trusts (UITs); and closed-end funds. Recently, exchange-traded funds (ETFs), which are open-end funds or unit investment trusts that trade on an exchange, have gained in popularity. While the term "mutual fund" may refer to all three types of registered investment companies, it is more commonly used to refer exclusively to the open-end type.

Types of Mutual Funds

Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments and investment strategies. At the fundamental level, there are three varieties of mutual funds: 1) Equity funds (stocks) 2) Fixed-income funds (bonds) 3) Money market funds All mutual funds are variations of these three asset classes. For example, while equity funds that invest in fast-growing companies are known as growth funds, equity funds that invest only in companies of the same sector or region are known as specialty funds.

Any Mutual Fund falls roughly into one of two categories (as below).Before you invest in a fund, you have to know which type it is, and whether that type is suitable for your goals:
Income Funds These aim to provide the investor with a regular income (monthly/quarterly) by investing in securities that provide income (e.g. dividend paying stocks, etc.). The appreciation of capital is of secondary importance (if at all).

Growth Funds The main aim of this type of fund is to grow the capital invested by appreciation of the underlying securities, and not to provide any annual/quarterly income.

Hedge funds are not considered a type of mutual fund. While they are another type of commingled investment scheme, they are not governed by the Investment Company Act of 1940 and are not required to register with the Securities and Exchange Commission (though many hedge fund managers now must register as investment advisors). Mutual funds are not taxed on their income as long as they comply with certain requirements established in the Internal Revenue Code. Specifically, they must diversify their investments, limit ownership of voting securities, distribute most of their income to their investors annually, and earn most of the income by investing in securities and currencies.[2] Mutual funds pass taxable income on to their investors. The type of income they earn is unchanged as it passes through to the shareholders. For example, mutual fund distributions of dividend income are reported as dividend income by the investor. There is an exception: net losses incurred by a mutual fund are not distributed or passed through to fund investors. Outside of the United States, mutual fund is used as a generic term for various types of collective investment vehicles available to the general public, such as unit trusts, open-ended investment companies, unitized insurance funds, Undertakings for Collective Investment in Transferable Securities, and SICAVs. Capital Market A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year , as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Money markets and capital markets are parts of financial markets. Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties. Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.

Stock or Equity
The capital stock (or just stock) of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business

since it cannot be withdrawn to the detriment of the creditors. Stock is different from the property and the assets of a business which may fluctuate in quantity and value. Islamic Principles for Investment Islamic finance principles ensure that contractual certainty and mutually beneficial balance are maintained between borrowers and lenders. Any financial transaction under Islamic law implies direct participation in asset performance (asset layer) and assigns to financiers clearly identifiable rights and obligations for which they are entitled to receive commensurate return in the form of state-contingent payments. Shariahlaw prohibits the sale and purchase of debt contracts with the aim of obtaining an interest gain (riba) profit taking without real economic activity and asset transfer, as well as legal uncertainty surrounding the enforceability of contractual claims. Only interest-free forms of finance associated with activities thatdo not involve any association with pork, alcohol, fire arms, adult entertainmentor gambling are considered permissible in Islamic finance.However, the shariahdoes not object to profit-taking and payment for theuse of an asset as long as both lender and borrower share the investmentrisk together and profits are earned in line with shariahprescriptions.Moreover, returns cannot be guaranteed ex ante but accrue only if theinvestment itself yields income. The fact that Islamic laws prohibit paying and receiving interest doesnot imply that they frown on making money or encourage reverting toan all-cash or barter economy. They encourage all parties in afinancial transaction to share the risk and profit or loss of the venture.Depositors in Islamic banking can be compared to investors orshareholders, who earn dividends when the bank makes a profit orlose part of their savings if the bank posts a loss. The rationale is tolink the return in an Islamic contract to productivity and the quality ofthe project, thereby ensuring a more equitable distribution of wealth. These principles are best illustrated in Islamic banking, probably theoldest area of Islamic finance. For instance, Islamic banks determine therate of return on deposits differently from commercial banks. In conventionalbanking, the rate of return is set contractually (fixed in advance ortied to a reference rate) and does not depend on the banks lending performance. In an Islamic bank, the rate of return on a deposit is directlydependent on the performance of the banks investments. If the bankrecords losses as a result of poor investments, depositors maylose some (orall) of their deposits. Thus, the contractual agreement between depositorsandIslamic banks does not pre-determine any rates of return; it only setsthe ratio according to which profits and losses are distributed between theparties to the deposit contract. Islamic Mutual Fund In case of Islamic Funds, the investment made in different instruments is to be in line with the Islamic Shairah Rules. The Fund is generally to be governed by an Islamic Shariah Board. And then there is a purification process that needs to be followed, as some of the money lying in reserve may gain interest, which is not desirable in case of Islamic investments.

The Islamic Investment Fund is a joint pool where in the investors contribute their surplus money for the purpose of its investment in conformity with the Islamic Shariah. In Islamic Investment (Equity, Venture Capital, or Trust-type) Funds are so structured that the Funds share owners entrusts the Mudarib (Manager) to act in their behalf. In the Islamic Investment Funds the Returns on Investments depend on the actual profit or loss generated by the Fund. Differences between Conventional and Islamic Mutual Funds Islamic financial products are aimed at investors who want to comply with the Islamic laws (Shariah) that govern a Muslim's daily life. These laws forbid giving or receiving interest (because earning profit from an exchange of money for money is considered immoral); mandate that all financial transactions be based on real economic activity; and prohibit investment in sectors such as tobacco, alcohol, gambling, and armaments. Islamic financial institutions are providing an increasingly broad range of many financial services, such as fund mobilization, asset allocation, payment and exchange settlement services, and risk transformation and mitigation. But these specialized financial intermediaries perform transactions using financial instruments compliant with Shariah principles. Conventional Equity Funds: Company or Enterprise, regardless of activity engaged, qualifies for investors ownership of stocks. The sole criteria to purchase the stock are the Companys ability to prosper and produce high dividends and opportunity to increase in Capital-Gain share value. The taking of interest is considered the cost of doing business Islamic Equity Fund: Islamic investment funds as the fiduciaries accordingly must reflect their obligations towards their investors and thus must invest based on Islamic rules. These include the four main prohibitions on riba (interest), gharar (uncertainty), maysir (gambling), and in companies that produce certain haram goods, such as alcohol and pork. Building on these prohibitions, the roles of these funds must be strengthened in ensuring their investment portfolios comply with Islamic teachings. In this case, evaluation of the financial securities included in the investment portfolio must be made continuously to ensure that their investment does not violate the Islamic precepts. The roles to comply with the Islamic principles here are considered as accountability of funds towards their investors. In case of Islamic Funds, the investment made in different instruments is to be in line with the Islamic Shairah Rules. The Fund is generally to be governed by an Islamic Shariah Board. And then there is a purification process that needs to be followed, as some of the money lying in reserve may gain interest, which is not desirable in case of Islamic investments. The principal of Sharia does not allow interest to be considered as a part of the cost of product or service, it does not add to the end value and plays no part in the commercial system. Prohibits the Share acquisition of any companies whose income is derived from Gambling, Alcoholic beverages, Financial lending for interest, either with or without risk, derivatives,
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selling short or any other method in conflict with Sharia Islamic Law. Also borrowing at interest (leverage) is impermissible. Advantages of mutual funds Mutual funds have advantages compared to direct investing in individual securities.[3] These include:

Increased diversification Daily liquidity Specialized investment management Ability to participate in investments that may be available only to larger investors Service and convenience Government oversight Ease of comparison

Disadvantages of mutual funds Mutual funds have disadvantages as well, which include[4]:

Fees Less control over timing of recognition of gains Less predictable income No opportunity to customize

2 Literature Review

The Islamic Mutual Equity Funds have covered various regionsand sectors world-wide and diversified their investments onGlobal Equity, US Equity, European Equity, Emerging Markets& Country Funds and Asia Equity Markets. The Cyprus-based Capital Intelligence notes that: "Islamic financing is gaining wider acceptance oninternational markets. However, before 1990s, for most devout Muslims, stock market investmentswere perceived as grey and controversial areas. The stock market acceptance among them was largely due to the fatwa on investment banking issued by the Moslem JurisprudenceAcademy in Saudi Arabia in the mid-1990s. This kingdom's leading authority on religious law ruled that, within certain parameters, equity investment was acceptable under Syariah (Siddiq, 2000). Hence, in the mid-1990s, interest in Islamic mutual funds has grown with higher participation from private investors and institutions in Muslim countries for Islamic equity fund. This great interest is due to the fact thatIslamic mutual funds have high 'correlations' with the Syariah (Islamic Law) principles of equity participation and the sharing of risks. History of Islamic Investment Methods The industry has its roots in the post-colonial times in late 1950, when many scholars in previously and newly independent states worked to establish a new economic system, a third mode between capitalism and socialism based on the assumption that Muslims it will have a larger social interest in their economic interactions than non Muslims; they will be homo Islamic rather than homo economic, as conventional economics assumes. To date, there are over 70 dedicated Islamic funds world wide, of which around half originated from the Middle East. These funds are mostly open-ended and registered in Luxem bourg,Dublin, Grand Cayman, Guernsey and the Channel Islands (Siddiq, 2000). Dedicated Islamic funds are almost exclusively marketed towards institutional and high net worth private clients, rather than retail investors. By contrast western conventional mutual funds are mostly targeted at retail investors. However, the Islamic investment market during the 1990s expanded at an annual rate of 12-to-15 percent. This exceptional growth potential has encouraged major western investment banks to offer added-value niche services, compatible with Shariah Law. The rapid development of Islamically-structured dedicated funds is important in the diversification of Islamic finance. Following the trend set in the 1990s, Sharia-approved equity fundsare likely to increase this decade, targeting the US, European and selective Middle Eastern and Asian-Pacific markets. Further growth of such funds will help to boost stock markets in Islamic countries,where governments are pursuing privatization programmes. In recent years, returns, i.e. profits anddividends generated by Islamic funds have been comparable to western mutual funds. This shows boththe level of prudence of Islamic investments and a wide geographical spread. In Malaysia, mostIslamic funds measure their performance against newly established benchmarks such as the KLsyariah Index, which tracks 100 companies, and the FTSE Global Islamic Index Series. The stockscovered by the indices have a total capitalization of $7.5 trillion.

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Islamic Investment Banking Islamic financial instruments take the form of contracts between providers and users of funds to manage risk. On the asset side, Islamic banks engage in investment and trading activities according to the various contracts available. On the deposit side, funds are mainly mobilized on the basis of a Mudaraba contract or an interest-free loan contract (Qard Al Hasan). Overall, Islamic banks offer their depositors four classes of accounts: current, savings, investment, and special purpose investment accounts.

Mudaraba/Musharaka + Murabaha Fund The following diagram is an example of a typical Murabaha Fund Structure as discussed earlier. The first part, which is the Mudaraba Element, is also used in equity funds and is interchangeable with the Musharaka where investors have more involvement in the management, than just being the Rab-ul-maal (providers of investment). In an equity fund the Mudarib or mushairik would invest in the fund or hold certificates of ownership of the fund, which would then invest in sharia compliant stocks and dividends or capital gain on sale of stocks, would be distributed to the shareholders. In a Mudaraba fund, the structure is similar to the Mudaraba with the difference only being in the usage of funds, where the Mudarib (manager) invests in the purchase of commodities that are then sold at cost plus mark up on a deferred payment basis. The deferred payments are to act as revenues and profits earned and are distributed amongst the fund shareholders. The distribution of profits can be fixed periodically (which is the structure utilized by sukuks) or variable depending on the type of commodity or fund structure chosen.

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Ijara Fund

(Source: Securities and Investment Institute Islamic Finance Qualification Workbook) Islamic Mutual Funds The following Mutual Funds advertise that they operate according to Islamic Sharia principle. Most have a Sharia Advisory board that oversees its compliance with Islamic teachings:

Azzad Asset Management is a financial services firm specialized in providing ethical (halal only) financial solutions. The company offers the Azzad Funds as well as an ethical (halal) separately managed program using asset allocation. Clients can choose from a variety of retirement, college savings, and managed investment accounts. In addition, the company assists affluent investors with their estate planning needs. Businesses and individuals depend on Azzad to help them turn their wealth into their goals by using ONLY halal investing. Amana Mutual Funds they offer two Mutual Funds (Growth and Income) operating according to Islamic Principles, with an Islamic Advisory Board. On their web site, you will find: o Prospectus and Application Form o 1999 Annual Report(HTML (browser) Format and PDF (Acrobat) Formatdetailing the sectors and companies they invest in and the number of shares in each, and percentage of profit (or loss) per sector and industry.
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You can check their current price and last daily change, with links to further analysis: Amana Income Fund: AMANX Amana Growth Fund: AMAGX Allied Asset Advisors These are a Islamic Mutual Fund that tracks the Dow Jones Islamic Markets USA (DJIMUS). The symbol is IMANX. More info can be found on their web site. Wright Islamic Equity Investment Their objective is to "provide competitive Shari'ah compliant investment returns utilizing a globally diversified portfolio of high quality equity investments rigorously screened for Shari'ah compliance. The minimum account size is 500,000$, so they are geared more towards institutional investors or Very High Net worth individuals. They follow the Dow Jones Islamic Market Index principles and Sharia rules. Halal Mutual Investment Company Is a Bermuda company, but based in U.K. Miraj Global Equity Funds Based in Montreal, Quebec, Canada, with representatives in Dubai, U.A.E, and Jeddah, Saudi Arabia. Al Tawfeek Based in Jeddah, Saudi Arabia, and a subsidiary of Al Baraka group of companies. They offer several mutual funds of various types. FrontierAlt Oasis Mutual Funds Based in Canada, and offers Shariah compliant mutual funds. They have a Canada fund as well as a World fund. Failaka List of Islamic Fund Lists all the Islamic Mutual Funds worldwide. You may want to check this for funds not listed above, or ones that have no web presence, and operate in your city/country/region.
o o

Islamic Mutual Fund Monitoring In the U.S.A, Morning Star publishes performance data of the various Mutual Funds that are available for investors in the U.S.A. Their data is available on most investmentsites such as Quicken. Failaka is a Chicago, Illinois, U.S.A.company with an office in Kuwait. They monitor the performance of many Islamic Mutual Funds worldwide.

Islamic Index Funds Historically, 80% of fund managers have underperformed the major market indexes. This means that the average non-Muslim investor is better off buying a no-load index fund, than choosing a more "managed" fund.

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Muslims can now take advantage of this, since there are several IslamicIndexes, including the Dow Jones Islamic Markets. There are several companies planning to offer Mutual Funds that track the major Islamic Indexes. Check this MorningStar article titled: Profiting According to the Words of the Prophet. One word of caution: it is not sufficient for a fund to track an Islamic index to be 100% islamically acceptable! It is a step in the right direction, but there are other considerations that need to be taken care of:

Sharia Advisory Board The fund must be overseen by a Sharia Advisory Board of renown scholars that will advise the fund managers on Islamic Sharia rulings on various issues of investment and finance. Purification Process Any Mutual Fund (or even stock broker account) will have some cash reserves that will allow investors to withdraw their holdings completely or partially. This cash generates some interest, and has to be dealt with in a well defined Purification process.

Sukuk (Arabic: plural of Sakk, "legal instrument, deed, check") is the Arabic name for , financial certificates, but commonly refers to the Islamic equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk securities are structured to comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets. Conservative estimates by the Ten-Year Framework and Strategies suggest that over $1.2 trillion of assets are being managed according to Islamic investment principles.[1] Such principles form part of Shari'ah, which is often understood to be Islamic Law, but it is actually broader than this in that it also encompasses the general body of spiritual and moral obligations and duties in Islam. In the Persian Gulf and Asia, Standard & Poor's estimates that 20 per cent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile

Islamic Capital Markets Although the first Islamic fund was launched on Wall Street in the early 1990s, the major Islamic funds market does not actually reside there. On the contrary, the market for Islamic funds lies in the oil rich Middle East, which is reaping the benefits of high fuel prices and hence
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enjoying the excess liquidity, as well as the Asia Pacific region, which make up two-thirds of the market, as suggested by an earlier figure. E&Y gives the following outlook on the Middle East region. Macro-economic growth in the region has been robust on the back of strong oil prices and diversification. Growth has trickled down to individual and institutional investor segments. Investors portfolio allocations indicate a need for diversified asset classes. Current penetration levels of Islamic funds indicate room to grow. The international Islamic bond market is dividedinto sovereign (and quasi-sovereign) and corporateSukuk(or Islamic note) marketsa particularlyinnovative, rapidly growing area. These asset-basedbonds of medium-term maturity have been issuedinternationally by sovereign and corporate entities.Sukukpaper has the advantage of competitivepricing as a risk-mitigation structure. In 2001, theBahrain Monetary Agency was among the firstcentral banks to issue this paper, in its case in threeandfive-year maturities, with most issuesoversubscribed. Qatar issued Qatar Global Sukukwith a seven-year maturity (the largest issue ever at$700 million). The German State of Saxony-Anhalt became thefirst non-Muslim issuer to tap the global Islamicdebt market in 2004, raising some 100 millioneuros via a Sukukissue in an innovative effort toappeal to a broader range of investors. Morerecently, the Islamic Development Bank created thefirst program for repeat issues of Sukuk.Widespread Sukukpaper issuance could lay thegroundwork for the emergence of Islamic capitalmarkets. On the equity side, two indices were launched in1999 to provide a benchmark for equity pricesforinvestment by Islamic financial institutions: theDow Jones Islamic Market (DJIM) Index inBahrain and the Financial Times Stock ExchangeGlobal Islamic Index Series (GIIS). Although theseindices have since been published worldwide,Islamic indices remain in their infancy andplay alimited role in Islamic financial markets.Many Islamic financial institutions, particularlyinBahrain, Malaysia, and Sudan, have been gearingup for further expansion by continuing todevelop,refine, and market innovative Islamic financialinstruments, on both the asset andliability sides. Inrecent years, many new Islamic financial productshave been developed and are increasingly used infinancial market activities, including equity andbond trading and investment, Islamic insurance andreinsurance (Takaful/re-Takaful), Islamicsyndicated lending, and investment in Islamiccollective investment schemes and other wealth andasset management products. In recent years, Islamic investment funds haveprospered in the Gulf countries and Malaysia.Among the different categories are equity funds,real estate and property funds, Murabaha funds, commodity funds, and leasing funds. equityfunds are the most common, and total assetsworldwide grew more than 25 percent over the19972003 period. In Malaysia, the number ofIslamic investment funds reached 71 in 2004, upfrom 7 in 1995, and their share of net asset value asa percentage of total funds more than doubled overthis 10-year period (see chart).A

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range of Islamic instruments is also in use inseveral countries for financing specific governmentprojects and procurement of goods and services. Inrecent years, several countries, such as Sudan andIran, have introduced shorttermgovernmentsecurities based mainly on participation principlesfor funding government operations andliquiditysterilization.

Evolution and Growth

Investment Funds constitute one of the fastest growing areas of Islamic finance. At present, total value of equity funds under Islamic management varies between US$ 1 to 3 billion. Main reasons for the rapid growth: There is a growing interest from Muslim investors. Islamic Shariah Boards are demonstrating greater understanding. The Islamic Mutual funds are generating better returns. The Conventional Banking Industry is emulating the Islamic Investment Instruments and appointing Shariah Boards Advisors for Shariah compliance. Availability of Islamic Indexes. Without taking capital appreciation into account, Islamic Mutual Funds are growing at a rate of between 20-25 percent a year.
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The growth of the sector has been explosive. According to the Failaka Investment Inc. in April 2000 more than 85 Islamic Equity Funds have been identified world-wide

At present, Islamic Mutual Funds concentrate on various asset classes such as: .. Trade Finance & Commodities .. Leasing .. Real Estate .. Venture Capital .. Equities. .. Islamic Mutual Equity Funds are one of the fastest growing area of the Islamic Finance Industry. There are about 85 Islamic Equity Funds around the world, of which about half originate in the Middle East. .. The Future growth of the sector may be further encouraged by the launch of Islamic equity indexes. Series of Indexes have been established to track the movements of stocks conforming to Shariah in the Global Equity markets. The series comprise Dow Jones Islamic Market Index (DJIM), FTSE Global index & four FTSE sub-indexes covering North America, Europe, Pacific rim and South Africa,- with its own Sharia Committee and MSCI Easter European Index. The subscribers of the Fund may receive a document certifying their subscription and entitling them to the pro-rated profits actually accrued to the Fund. These documents may be called "certificates" "units" "shares" or may be given any other name, but their validity in terms of Shariah, will always be subject to two basic conditions: First, instead of a fixed return tied up with their face value, they must carry a pro-rated profit actually earned by the Fund. Therefore, neither the principal nor a rate of profit (tied up with the principal) can be guaranteed. The subscribers must enter into the fund with a clear understanding that the return on their subscription is tied up with the actual profit earned or loss suffered by the Fund. If the Fund earns huge profits, the return in their subscription will increase to that proportion; however, in case the Fund suffers loss, they will have to share it also, unless the loss is caused by the negligence or mismanagement, in which case the management, and not the Fund, will be liable to compensate it. Second, the amounts so pooled together must be invested in a business acceptable to Shariah. It means that not only the channels of investment, but also the terms agreed with them must conform to the Islamic principles.

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3 Analysis

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Current Trends
Islamic investment funds, unit trust funds and mutual funds based on the Islamic Financial Services Board (IFSB) are placed under the Islamic Collective Investment Scheme (ICIS). There are several types of Islamic investment funds including equity funds, Ijarah funds, commodity funds, real estate funds, Murabahah funds, money market funds and mixed funds. These various funds embody very different patterns of returns, a feature that is of considerable importance in times of financial turmoil. Ijarah and Murabahah funds offer virtually fixed returns being based on fixed leasing charges on capital equipment on hire purchase and cost-plus profit rates respectively, while equities necessarily are exposed to greater market volatility in the short run and need to be seen as an investment for the long term. Funds which specialise in real estate development (many structured as private equity) offer a different balance between risks and returns again. Hedge funds are becoming one prospective fund category in the industry, though there are several arguments on their permissibility among the scholars. Due to above reasons, the researchers are interested to investigate the performance of such funds by focusing on more aggressive Islamic equity types of fund based on their risk and returns. On the other hand, the objective of this research is to investigate whether those funds are overly performed or underperformed the market index. Amid a growing demand for alternative investments, there has been asurge in recent years in the issuance of Islamic capital market securities bycorporates and public sector entities across the world. Asset securitizationplays a special role in this regard. Although the concept of assetbacking isinherent to Islamic finance, very few structured credit transactions havebeen executed following the precepts of the shariah. Since asset backing,entrepreneurial investment and specific credit participation in identifiedbusiness risk are fundamental to any Islamic transaction,shariah-compliantsecuritization represents a straightforward capital market-based formof Islamic finance. Worldwide Practices The following are five major categories of funds that are widely in operation throughout the world: 1. Equity Funds 2. Commodity Funds 3. Ijara Funds 4. Murabaha Funds
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5. Mixed Funds. Equity Funds According to Shaikh TaqiUsmani, in an equity fund the amounts are invested in the shares of joint stock companies. The profits are mainly derived through capital gains by purchasing the shares and selling them when their value increases. Profits are also earned through dividends distributed by the relevant companies. Commodity Funds Islamic Jurisprudence allows for commodity funds that entail the purchase and subsequent sale, by the fund, of commodities for a profit. These profits are distributed in proportion to their investment. Ijara Funds Another type of Islamic Fund is the Ijara fund. Ijara means leasing whereby the purchased assets are leased out to third parties. In this fund the subscription amounts are used to purchase halal (permissible) assets like real estate, motor vehicles or other equipments for the purpose of leasing them out to their ultimate users. The ownership of these assets remains with the Fund and the rentals are charged from the users. Murabaha Funds Murabaha is a specific kind of sale where the commodities are sold on a cost-plus basis. Murabaha is a specific case where the buyer knows the price and agrees to the premium over the initial price (El Gamal, 2000). This kind of sale has been adopted by the contemporary Islamic banks and financial institutions as a mode of financing. They purchase the commodity for the benefit of their clients, and then sell it to them on the basis of deferred payment at an agreed margin of profit added to the cost. This type of fund can also be structured as a Sukuk and is used widely in Islamic capital markets. Mixed Funds Another type of Islamic fund may be of a nature where the subscription amounts are employed in different types of investments, like equities, leasing, commodities, etc. This may be called a Mixed Islamic Fund. In this case if the tangible assets of the fund are more than 51 percent while the liquidity and debts are less than 50 percent, the units of the fund may be negotiable. However, if the proportion of liquidity and debts exceeds 50 percent, its units cannot be traded according to the majority of contemporary scholars. In this case the fund must be a closed-end fund. Islamic Mutual Funds
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Islamic mutual funds are similar to conventional funds in most ways but differ with them in that they promote partnership schemes while investment in businesses forbidding: Transactions in un-Islamic goods and services Earning returns from a loan contract (Riba/Interest) Compensation-based restructuring of debts Excessive uncertainty in contracts as well as selling something that cannot be described in accurate details such as type, size, amount etc (Gharar) Gambling and chance-based games (Qimar/maysir) as well as speculation Trading in debt contracts at discount Forward foreign exchange transactions
(Source: Global Investment House)

Of the different types of Islamic investment funds, those involving equity investment comprise more than 50% of the total funds. The current market trend shows there has been expansion of these types of financial vehicles since their development in the 1980s. From 161 Islamic investment funds in 2006 (not including money market funds), this number in 2007 was estimated at 480 funds (including all types of Islamic investment funds) in the worldwide financial industry, showing great interest among the investors to be involved in the capital market. As mentioned earlier, the Ijarah sukuk is one the most popular Islamic fixed income securities where assets are typically Ijarah contracts (leasing) but may include or utilize other forms of Islamic financing among a group of fourteen sanctioned by AAOIFI, e.g. Murabaha (sale of goods at a higher predetermined price payable usually in installments), Istisnaa (sale of assets to be constructed/manufactured, payable in installments) or Musharaka/Mudarabah (partnership), which are equity based structures. While the distribution may appear variable, it is usually possible to determine a fairly precise expected rate of return based on the underlying contracts, and the transaction documents may indicate a benchmark rate of return. (Source: S&P research) Moreover, with project finance expected to grow to 3 billion dollars by 2012 and massive infrastructure projects in the Gulf, estimated in excess of $1.6 trillion according to S&P analysis, major funding via means of sukuks would definitely be required. Sukuks have performed extremely well despite the recent crisis of the credit crunch in the world financial market. As suggested by the following graph, currently sukuks issues are growing at a CAGR of 232 percent is staggering growth by any standards and with the focus of Middle Eastern and other governments issuing sovereign Sukuks for large infrastructure projects, that rate will only increase. However, this particular market being in its infancy is yet to face more challenges of the financial world and stand the test of time. The successes and challenges faced by this latest addition to the Islamic assets class and phenomenon that has taken the financial world by storm is an area of research of itself.

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Similarly, the Sukuk market private equity market is also about to witness a boom according to E&Ys 2007 Islamic Investment Report, which illustrates the growth in diversification options for Islamic investors. The diagrams below illustrate the growth in the Middle East for private equity.

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Islamic Investment Policy Islamic investments are a unique form of socially responsible investments because Islam makes no division between the spiritual and the secular. The establishment of an Islamic investment policy, be it for the institutional or individual investor, starts with the Sharia Board, a group of Islamic scholars (jurists) that vests investment products for compliance with Islamic Law and conducts ongoing due diligence of them. Sources for interpretation follow a hierarchy of authority: the Quran, believed by Muslims to be the words of Allah verbatim as revealed to his prophet Muhammad in the seventh century; the Sunnah which are rules from the prophet's sayings (Hadiths) and actions; Qiyas which are scholarly legal deductions; and Ijma, the consensus of scholars on a particular issue. The challenges that a Sharia-compliant portfolio faces would appear to be no different than those that any other portfolio manager would come up against. A manager formulates an investment thesis which drives portfolio selection criteria. He or she then needs to decide against the appropriate benchmark against which to measure performance. Managing assets in accordance with Islamic precepts is a bit more unique in that the practice is a form of socially responsible investing with the unique specification of avoiding interest bearing investments of any
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kind.Because borrowing and setting aside excess funds in short-term, low-risk, interest-bearing instruments are integral to corporate finance, the application of Islamic law to corporate finance poses some interesting questions. Is it feasible for a portfolio manager to be completely invested at all times? May one remain faithful to Islamic law in the stock selection when the realities of corporate finance dictate the need for companies, even those not engaged in prohibited businesses, both to borrow and to find a principal-protected repository for excess cash? From a private client portfolio management perspective, once armed with Sharia-permissible products, an investment committee at an Islamic private wealth firm would face the same issues as any other, namely, how to develop, implement and monitor an investment policy consistent with a client's objectives. Additional challenges exist, namely the lack of both a deep secondary market for these products and the lack of uniform standards in the vetting process across the Muslim world. In the light of the forgoing discussion, dealing in equity shares can be acceptable in Shariah subject to the following conditions: 1. The main business of the company is not in violation of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah, such as the companies manufacturing, selling or offering liquors, pork, haram meat, or involved in gambling, night club activities, pornography etc. 2. If the main business of the companies is halal, like automobiles, textile, etc. but they deposit there surplus amounts in an interest-bearing account or borrow money on interest, the shareholder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company. 3. If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity. 4. The shares of a company are negotiable only if the company owns some non-liquid assets. If all the assets of a company are in liquid form, i.e. in the form of money that cannot be purchased or sold, except on par value, because in this case the share represents money only and the money cannot be traded in except at par. What should be the exact proportion of non-liquid assets of a company for the negotiability of its shares? The contemporary scholars have different views about this question. Some scholars are of the view that the ratio of non-liquid assets must be 51% at the least. They argue that if such assets are less than 50%, the most of the assets are in liquid form, therefore, all its assets should be treated as liquid on the basis of the juristic principle: The majority deserves to be treated as the whole of a thing. Some other scholars have opined that even if the non-liquid asset of a company or 33%, its shares can be treated as negotiable.
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The third view is based on the Hanafi jurisprudence. The principle of the Hanafischool is that whenever an asset is a mixture of a liquid and non-liquid assets, it can be negotiable irrespective of the proportion of its liquid part. However, this principle is subject to two conditions: First, the non-liquid part of the mixture must not be in a negligible quantity. It means that it should be in a considerable proportion. Second, the price of the mixture should be more than the price of the liquid amount contained therein. For example, if a share of 100 dollars represents 75 dollars, plus some fixed assets the price of the share must be more than 75 dollars. In this case, if the price of the share is fixed as 105, it will mean that 75 dollars are in exchange of 75 dollars owned by the share and the rest of 30 dollars are in exchange of the fixed asset. Conversely, if the price of that share fixed as 70 dollars, it will not be allowed, because the 75 dollars owned by the share are in this case against an amount which is less than 75. This kind of exchange falls within the definition of "riba" and is not allowed. Similarly, if the price of the share, in the above example, is fixed as 75 dollars, it will not be permissible, because if we presume that 75 dollars owned by the share, no part of the price can be attributed to the fixed assets owned by the share. Therefore, some part of the price (75 dollars) must be presumed to be in exchange of the fixed assets of the share. In this case, the remaining amount will not be adequate for the price of 75 dollars. For this reason the transaction will not be valid. However, in practical terms, this is merely a theoretical possibility, because it is difficult to imagine a situation where a price of the share goes lower than its liquid assets. Subject to these conditions, the purchase and sale of shares is permissible in Shariah. An Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be treated in Shariah as partners "inter se." All the subscription amounts will form a joint pool and will be invested in purchasing the shares of different companies. The profits can accrue either through dividends distributed by the relevant companies or through the appreciation in the prices of the shares. In the first case i.e. where the profits earned through dividends, a certain proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given in charity. The contemporary Islamic Funds have termed this process as "purification." The Shariah scholars have different views about whether the "purification" is necessary where the profits are made through capital gains (i.e. by purchasing the shares at a lower price and selling them at a higher price). Some scholars are of the view that even in the case of capital gains the process of "purification" is necessary, because the market price of the share may reflect an element of interest included in the assets of the company. The other view is that no purification is required if the share is sold, even if it results in a capital gain. The reason is that no specific amount of price can be allocated for the interest received by the company. It is obvious if all the above requirements of the halal shares are observed, the most of the assets of the company are halal, and a very small proportion of its assets may have been created by the income of interest. This small proportion is not only unknown, but also a negligible as compared to the bulk of the assets of the company. Therefore, the price of the share, in fact, is against the bulk of the assets, and not against such a small proportion. The whole price of the share therefore, may be taken as the price of the halal assets only.

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Although this second view is not without force, yet the first view is more cautious and far from doubts.Particularly, it is more equitable in an open-ended equity fund because if the purification is not carried out on the appreciation and a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit after some dividends have been received in the fund and the amount of purification has been deducted therefrom, reducing the net asset value per unit, he will get a lesser price compared to the first person. On the contrary, if purification is carried out both on dividend and capital gains, all the unitholders will be treated at par with the regard to the deduction of the amounts of purification. Therefore, it is not only free from doubts but also more equitable for all the unit-holders to carry out purification in the capital gains. This purification may be carried out on the basis of an average percentage of the interest earned by the companies included in the portfolio. The management of the fund may be carried out in two alternative ways. The managers of the Fund may act as mudaribs for the subscriber. In this case a certain percentage of the annual profit accrued to the Fund may be determined as the reward of the management, meaning thereby that the management will get its share only if the fund has earned some profit. If there is no profit in the fund, the management will deserve nothing, but the share of the management will increase with the increase of profits. The second option of the management is to act as an agent for the subscribers. In this case, the management may be given a pre agreed fee for its services. This fee may be fixed in lump sum or as a monthly or annual remuneration. According to the contemporary Shariah scholars, the fee can also be based on a percentage of the net asset value of the fund. For example, it may be agreed that the management will get 2% or 3% of the net asset value of the fund at the end of every financial year. However, it is necessary in Shariah to determine any of the aforesaid methods before the launch of the fund. The practical way for this would be to disclose in the prospectus of the fund on what basis the fees of the management will be paid. It is generally presumed that whoever subscribes to the fund agrees with the terms mentioned in the prospectus. Therefore, the manner of paying the management will be taken as agreed upon on all the subscribers.

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Findings

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Performance of Islamic Products

Of the different types of Islamic investment funds, those involving equity investment comprise more than 50% of the total funds. The current market trend shows there has been expansion of these types of financial vehicles since their development in the 1980s. From 161 Islamic investment funds in 2006 (not including money market funds), this number in 2007 was estimated at 480 funds (including all types of Islamic investment funds) in the worldwide financial industry, showing great interest among the investors to be involved in the capital market.
Anything less than 10 million is considered small, which is where the majority of the Islamic funds lie. It is natural, as the phenomenon of Islamic finance is still in its infancy that fund sizes will remain relatively small. However, if Islamic funds are to compete with their conventional counterparts, then fund sizes will have to follow the trend suggested in the diagram below.

Comparing performance metrics of Islamic funds against SRI funds (or any other group of funds) carries many caveats, and it has been avoided for a variety of reasons (in particular the low overlap of investment geographies and mandates). An alternative approach could compare tracking errors (analysing SRI funds versus an SRI index, Islamic funds versus an Islamic index,
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etc) and Section 3 took the first steps in that direction. This could allow an assessment of both populations, but is not feasible since SRI data and SRI indices are not immediately available. A less optimal but nonetheless interesting alternative is to consider whether a naive investor could build two fund portfolios (one Islamic and another conventional) and expect similar returns from both. We thus select funds at random from our Islamic funds database to collate a sample of 30 (a somewhat similar experiment to the one that selected stocks from the pages of the Wall Street Journal). This method also allows us to incorporate analysis of not only equity funds but also the other asset classes (fixed income, money market and balanced funds). The size of Islamic Funds is expected to be at least doubled during the next decade, and the operations of the Islamic Funds are expected to cover a large area of financial transactions including regional, sectoral and index funds, real estate investment trusts (REITs) and venture capital markets etc. The shining example of the growth and potential of Islamicfinance are sukukbonds. Defying the ramifications from the US subprimecrisis so far, the sukukmarket has been growing rapidly and will surpass theUS$150 billion mark by 2010, driven by demand from financial institutions,insurance companies and pension funds across Islamic and non-Islamic countries. Manychallenges still lie ahead, but the banks search forprofitable opportunities and the ensuing financial innovation process intandem with favorable regulatory developments at domestic and internationallevels as well as growing capital market sophistication, will ensurethat the Islamic finance industry will continue to develop at a steady pace. Popularity and Competition Number of Muslim investors who Islamically accept equities investments is growing fast as a result of increasingly developed market. This tremendous growth parallels that of the Islamic financial market generally. Assets under management of Islamic financial institutions were estimated at over US$360 billion in 2006. Furthermore, Islamic financial services are offered in 70 countries, including non-Muslim ones. Based on this current development, there is a possibility that their investment can be expanded to the global capital market, rather than only focusing on the local market, although current conditions in world equity markets are likely to interrupt this longer term trend path in the case of Islamic mutual funds. Islamic funds are maturing, not only in terms of track records and fund manager expertise, but also in terms of data transparency, industry consolidation, investor familiarity and overall market penetration. Increased levels of information are helping in the understanding and quantification of the total market opportunity. Recent Islamic bank mergers and acquisitions also suggest a repositioning from established players, especially as we observe the recent entry of global investment banks into the fray (further evidence of the confidence in terms of the underlying market potential).

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Nonetheless, the new entrants still lag behind in terms of the depth of their client networks whereas some well-established names are only recently exploring their existing clients appetite for Islamic products (hence increasing their Islamic share of wallet). On the other hand, local and regional players are looking for more innovative products and structures, away from plain vanilla solutions. Ultimately, a compromise seems to be the partnership between specialised institutions and Islamic banks, where they are able to amalgamate the best of breed products with a readilyaccessible investor base. The net asset value of Islamic investment funds as a share of all Malaysian investment funds more than doubled over the past decade

Source: Investment Organization of Securities Commissions.

Current Issues Recent regulatory changes concerning the structure of Sukuk warrant careful consideration and might mute some of the recent enthusiasm for Islamic capital market products. In February 2008, the Shariah committee of AAOIFI issued new recommendations regarding the role of asset ownership, investment guarantees, and the Shariah advisory and approval process in Sukuk origination and trading. These proposed rules attracted significant attention prior to their release, following a statement by the chairman of the shariah committee in November 2007 indicating that 85percent of Sukuk issues in the GCC do not concur with Shariah principles. Most sukuk issued in the GCC have explicit repurchase agreements that guarantee the repayment of principal but violate the profitloss sharing (PLS) features of Shariah law. There are currently
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discussions underway between the various stakeholders and some market participants to gauge the potential of these recommendations to cause permanent damage to the Sukuk market.

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5 Conclusion and Recommendations

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With 15 to 20 per cent growth a year Islamic Finance& Banking has emerged to become one of the vital pillars of the global financial system. Currently more than 300 Islamic financial institutions are operating in over 75 countries, managing between $500 billion and $1 trillion dollars in assets, according to Dr. Jassim Hussain, an economist and member of Bahrain's Parliament (zawya.com). Islamic Investments Funds have had a major impact on Global Finance. Ever since the formation of Dow Jones and the FTSE Islamic Index in the 1990s, all of the different Islamic funds have not only gained momentum but also popularity with assets only on the Islamic Equity side totaling $20 billion from almost nothing a decade ago. This growth has also been driven by the degree of Islamic orientation in the Middle East/Africa and the Asia Pacific region, which is experiencing tremendous growth. This has increased so significantly in the recent past that Islamic fund management is now a mainstream arm of most conventional banks and financial institutions. Recent estimates put Islamic Financial markets at around $230 billion with a growth rate of about 15 percent.

Challenges
At present there is no global body governing overall Islamic finance, the fund structures that are considered acceptable by one board are unacceptable by the other or acceptable by one scholar and not by another. This sends out mixed messages to those interested in the Islamic funds market and deters a number of potential clientele from investment in the funds altogether. An example of this was a recent case where one of the prominent scholars sitting on several boards. Such verdicts can shake the very confidence in Islamic funds and finance altogether, but fortunately did not dent the progress of Sukuk much, as other eminent scholars werent in complete agreement. The major reason why Islamic finance institutions have been unaffected by this is mainly due to lack of knowledge or even ignorance of the Shariah compliance of the investors, which in itself is a major problem that will be discussed later. However, as the surge in Islamic jurisprudence, particularly finance related jurisprudence actually re compatible with the board at the supervisory agency would be to undertake similar supervisory roles. One of the major issues faced by the industry in general but particularly by Islamic funds one of the reasons cited is that Islamic fund management firms have not done a good enough job in marketing themselves. As highlighted earlier, without the Shariah scholars there is no Islamic finance. Of dependence on scholars and king their fatwas, i.e., opinions, as decrees etched in stone. Some fear this could lead to the monopolization of the industry in the hands of the few, which could have detrimental effects onencouraged so as to produce truly Islamically viable solutions and increase awareness amongst the public about Islamic finance in general. This will also certainly reap benefits in the long run as part of the process to creating a universal set of Islamic principles and standards such as GAAP (Generally Accepted Accounting Principles) as homogeneity in regulations is becoming vital as this industry moves from infancy to maturity. Lack of Knowledge and Understanding of the Islamic Funds

The lack of knowledge and understanding of its functioning cause investors that they differentiate themselves from their conventional counterparts.Furthermore, the limited number of educational institutions teaching Islamic finance around the globe doesnt help the cause
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either. Hence, creating awareness at the grassroots level by having open lectures, seminars, courses and degree programs.This role is not limited to fund management firms but is also comes under the duty of regulators, who uphold the Shariah law, to increase awareness through transparency as well as a forum to explain their rationale for different laws. Moreover, it has become critical to have educated staff, i.e., relationship managers, investment advisors and other professionals who are just as well versed in Islamic finance as they are in conventional finance to educate their clientele. This would be the best source of education. The sukuk market is also still plagued by illiquidity due to limited depth and breadth, mainly because Middle Eastern banks, which are the most likely securitizers/sellers of risk, are flush with liquidity and capital, sothere is no strong funding or balance sheet rationale for sukuk. Althoughthe commoditization of illiquid asset exposures through securitizationfacilitates the disciplining effect of capital markets, the lack of information from private sources about securitized assets in many sukukand the prevalenceof buy-and-hold investments inhibit efficient price discovery andinformation dissemination. Moreover, sukukare available at maturities of 3,5, and 10 years but not for short-term maturities, which significantly limitstheir application for money markets. Although Islamic banks are currentlyone of the largest buyers of shariah-compliant products (at longmaturities), they would benefit most from issues at shorter tenors. Thereis some hope that the launch of different sukukfunds in the near futuremight potentially unlock liquidity constraints, but this might only createnew demand without sufficiently alleviating supply constraints. It is currentlyalso difficult to set up sukukfunds with sufficient diversification.Notwithstanding the compelling value proposition of sukuk, without efficientand transparent capital markets and appropriate legal frameworks tooperate within, Islamic capital markets will not continue to grow meaningfullyin the near future. Given that investments are made in a number of international geographical areas with which local investors are not familiar, these investors may be unwilling to place their capital in Islamic investment funds that operate under this purpose. They may prefer to invest in funds that only include local equity and other securities, to which they are more exposed. These challenges thus must be dealt with by the funds. Gaining the investors confidence is needed to encourage their involvement in these diversified forms of funds, thus expanding these funds activities. The reluctance of investors to participate in cross-border investment can be overcome if Islamic investment funds (through the sponsor or fund managers) play their roles effectively, and this can be done for example through precise compliance with Islamic principles and reducing the information asymmetry between the investors and the funds. Opportunities Islamic wealth management has tremendous potential to pick up the slack in the area suggested in the earlier discussion. The growth of Islamic wealth management will force Islamic finance professionals to tap into new asset classes and develop new finds for betterdiversification and portfolio management.

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Such developments, especially among Muslim countries, have the potential to be expanded further. Islamic investment funds (through their fund managers) can play an active role in encouraging the growth of capital, and for monies to be invested in the international market. In this way, the large amount of capital from the rich Muslim countries can be transferred to other countries that can offer high profits, with the investments made following Islamic principles. As stated earlier, project finance is on the rise and is expected to reach 1.6 trillion dollarsby 2012 with a major chunk of that being real estate projects. Hence, the time is ripe for theIslamic real estate funds to cash in on the monstrous projects being undertaken all across theAsian continent, consequently adding a new dimension to world of Islamic funds. Real estate hasbeen the most popular investment for most conventional private equity firms in the region. Asthe major markets in the region, which include the Middle East. India and China, continue togrow. so will the prospects of Islamic real estate funds. Another long terni opportunity is NorthAmerica. which is coming out of the recent housing crisis. With lower housing costs. Islamic real estate funds are ideally positioned as the oil rich investors of the Middle East would be morethan willing to enter into this market. The latter figure clearly indicates the trend of investmentsof real estate funds. According to Ernst & Youngs 2007 Islamic Funds report, in order to target the opportunities presented in light of the above discussion, Islamic financial institutions will have to meet the objectives as indicated in the diagram below in order to gain a solid footing in themarket and capture the two segments indicated in the diagram earlier, i.e., the value seekers and Islamic over conventional, which make up 70 percent of the market.

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Recommendations
With the formation of the different boards and standards, Islamic funds are well on their way to becoming a viable mainstream investment in the world financial market. Standardisation and a better overall education system is required to sustain its strong upward growth. This will not only bring stability but also much needed innovation, which presently is the job of a handful of experts. Having staff qualified in Islamic finance and with strong expertise in asset allocation and portfolio management would produce a truly winning combined of the four areas that understand and are able to develop programs as well as growth incentives to keep them in the organisation. This is critical particularly in this part of the world, where education is scare and employee retention can be exemplified by a revolving door. Developing strong corporate governance standards by having strong, efficient and effective management practices is just as crucial as having the expertise. This will increase transparency and reliability throughout the chain while reducing systematic risk. This also puts the interest of not only the investors but all other stakeholders, which includes the society at large. Being an ethically or moral transparent operations working efficiently and effectively is a critical factor in taking advantage of this opportunity.

The future growth of the Islamic Financial industry may be further stimulated by the promotion of Islamic equity indexes which track the movements of stocks which conform to Shariaparameters. There are several ways by which the information asymmetry from Islamic investment funds to the investors can be further reduced to enhance investor confidence, notably improving the transparency and disclosure of Islamic investment funds information. In this context, Islamic investment funds as institutional investors must be open in their investment processes and thus show the investors actual and accurate information, so that they know how the funds are managed, and the potential and actual financial performance of their investment capital. There is standard information provided by funds to the public or their investors related to investment objectives (depending on the type of funds), asset allocation, potential risk, financial performance, etc. However, the information supplied to the investors could be enhanced by including other elements such as the potential risk of investment in the different regional capital markets, and the mechanisms for dealing with those risks. Rather than just giving the information of the benefits of investment in different capital markets, information on current market situations, in which they made their transaction, should also be provided.

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References
1. AL-MEEZAN: The Biggest Islamic Fund Manager By: SHABBIR H KAZMI - (Pakistan & Gulf Economist) URL http://www.mutualfundspakistan.com/shownews.aspx?ni=0000021 2. Trend and challenges in Islamic Finance WORLD ECONOMICS Vol. 9 No. 2 AprilJune 2008 3. http://www.investopedia.com/ask/answers/07/islamic_investments.asp 4.Key Trends in Islamic Funds Rajeev Baddepudi, Bernardo VizcainoEurekahedge http://www.eurekahedge.com/news/07_july_EH_IFS_Key_Trends.asp 5. New Trends in Islamic Funds Bernardo Vizcaino, Eurekahedge http://www.eurekahedge.com/news/07_feb_EH_New_trends_in_Ifs.asp 6.Bruce Jacobs, All About Mutual Funds, McGraw Hills I-nc. 2001, Pg. 17. http://www.mutualfundspakistan.com/fundtype.aspx 7. http://en.wikipedia.org/wiki/Islamic_banking 8. http://www.scribd.com/doc/17116904/Islamic-Banking-vs-Conventional-Banking 9. Islamic & Socially Responsible Investing in Mutual Funds Dr. SalehJameelMalaikah, Seventh Annual Symposium on LARIBA Banking & Finance, 2000 10. Mutual Funds: Different Types Of Funds http://www.investopedia.com/university/mutualfunds/mutualfunds1.asp#axzz1h6uJZJHC 11. http://muslim-investor.com/mi/mutual.phtml 12. The Role of Islamic Investment Funds in Promoting Cross-Border Islamic Investments Mervyn K Lewis, Professor of Banking and Finance, and NurulAiniMuhamed, PhD candidate University of South Australia, Adelaide 13. Principles of Shariah Governing Islamic Investment Funds http://www.albalagh.net/Islamic_economics/finance.shtml 14. ISLAMIC INVESTMENT FUNDS:AN ANALYSIS OF RISKS AND RETURNS Sanjoy Bose, New York Institute of Technology, Robert W. McGee, Florida International University

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Plagiarism Report

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THANKS

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