Islamic Fund is an investment vehicle that invests in companies whose business activities are consistent with the principles of Islam. These funds have been a growing segment in the global capital market. They have the potential to contribute to sustainable development, reducing poverty and boosting shared prosperity.
This type of finance emphasizes partnership-style financing, and may be useful in reducing the gap in access to financial services. It also encourages investment in infrastructure, agriculture and small businesses.
It is a type of mutual fund
Unlike traditional mutual funds, Islamic funds invest in assets that comply with the moral practices of Islam. They also enforce guidance on savings, investing and lending. The result is a financial market that is rapidly growing.
To be Shariah compliant, these funds cannot take interest or riba from their investments. They also prohibit investments in companies that generate a large percentage of their income from alcohol, pork, gambling and nightclub activities, or pornography. They must have an appointed Shariah board and donate any interest or dividend income that is derived from prohibited sources to charitable organizations.
A Shariah-compliant fund can be managed through the use of sukuk, an asset-backed securities similar to conventional bonds, but with a few key differences. A sukuk is not a debt, but instead guarantees the return of an underlying asset (for example, real estate). This allows Muslim investors to avoid any form of interest in their investment. Sukuks are also often backed by government-guaranteed assets, which is a benefit to investors in uncertain times.
It is a type of investment fund
Islamic investment funds promote ethical and moral values in the worldwide capital market. They are also a valuable tool for economic development, reducing poverty and promoting shared prosperity. They connect financial markets with real assets, emphasize risk sharing and sustainable growth, and are based on equity-based investments.
These investment funds can be of a variety of types, including an ijarah fund, which invests in tangible assets like real estate or motor vehicles and leases them to end users. They also invest in equities, leasing and commodities, and may require an appointed Shariah board to ensure compliance with religious principles.
The growth of Islamic finance over the past decade is a sign that it is becoming mainstream in major financial markets. However, it is still relatively small in comparison with global financial assets. The most significant sectors include banking, leasing, Sukuk (Islamic bonds) and investment funds, although Shariah-compliant securities account for only about one percent of the world’s securities.
It is a type of insurance fund
Takaful operates according to cooperative principles and is based on Islamic notions of sharing, mutual responsibility, joint indemnity and solidarity. Its structure distinguishes it from conventional insurance. It is a pool of funds contributed by participants who share the risk and losses. Any surpluses are returned to the participants and are not the property of a takaful operator.
The growing demand for Islamic finance products has increased the availability of takaful, an investment vehicle that pools resources and risks to provide financial protection to individuals. Its operation is similar to that of a mutual insurance company, with a difference that the surpluses are not the property of the takaful operator.
The development of Islamic financial assets has raised specific policy issues for economies with significant Islamic financing and insurance activities, such as those related to the treatment of income on Islamic financial instruments that are similar to deposits, loans and debt securities. This new SNA/BPM chapter aims to provide comprehensive and consistent guidance to incorporate these unique constructs into national accounts and external sector statistics. For more details please visit Apex Fund
It is a type of ijarah fund
Ijarah funds are mutual or unit trust funds that invest in Shariah-compliant equities, bonds and other instruments. They are also required to pay zakat (charity) on their capital gains. The rest of the profits can be kept by the fund or channelled to charitable bodies.
The basic principles of Islamic finance are the prohibitions on interest (riba), gharar, and maysir, and the requirement to link financing to real assets and a clear social or development goal. In addition, financial leverage is to be limited and returns should be linked to risks.
There are many challenges facing Islamic investment funds, including the need to reduce information asymmetry and improve transparency. For example, investors must be able to access information about the actual and potential financial performance of their investments in various capital markets. This can enhance their confidence in Islamic investment funds. The ijarah and murabahah funds offer virtually fixed returns because they are based on lease charges and cost-plus profit rates. In contrast, equities are more volatile and require a higher risk tolerance.