Islam is a an integrated
holistic system with universal character revealed by Allah SWT for the benefit
and protection of all creatures. Islam does not separate ibadah (worship) from socio-eco-political faculties of life. It is
derived from the meaning of Islam as ad-deen.
Ad-deen can be understood as a significant way of life and faith to Allah SWT.
The purpose of
human’s creation is to make a fullest submission to almighty Allah SWT. This obligation is not limited either
by the time or by the place, but it covers all aspects of human life. Every
activity of human being which is within the limit of Shari’ah is measured as
ibadah. The activities of ibadah will be rewarded by Allah SWT.
Today, Muslim is the
second larger group of religions after Christian. They have a lot of
wealth to invest. However, there are a few of Islamic counters offered for
Muslim. This scenario gives a bad impact to Muslim because Muslim' daily
activities should be within the limit of Shari’ah. Otherwise, it will be
rejected by the Allah SWT and the doers may be considered as ignorant.
Islamic fund
management is a solution for Muslim investors. This solution gives more chances
for Muslim to invest in accordance to the Shari’ah. This fund is basically similar
to the conventional fund except in the compliances with the Shari’ah rules and
regulations. For an Islamic fund, it is prohibited to invest in the companies
which involve in the haram (prohibited) activities such as gambling, alcoholic business, pornographic,
usury based (ribawi) institutions and the companies which financed by ribawi institutions.
These strict
rules and regulations enshrined by Islam is purposely to ensure that Muslim operate
within the limit of Shari’ah. In al-Quran 2:275, Allah SWT has mentioned as all businesses are
halal (lawful) but any transaction which is based on riba is considered
haram. When an activity is considered haram it will be rejected by Allah SWT and
will fall among sinful acts.
Every investment
deal is not free from risks. In Islamic fund, there are risks. The risks in
Islamic fund are various depending on counters chosen by the investors. Islam
accepts risk as its own but rejects any kind of speculations. This is because
speculation may bring to the gharar and maisir.
These two principles are among the haram which are clearly highlighted
by Islamic scholars. These concepts also may lead the stronger people depress
those weak.
As the time
changes, Islamic fund becomes a popular investment opportunity. This was proved
by the increasing in the number of Islamic counters. The growths of the Islamic
counters were occurred in every part of the world. As examples Saudi American
Bank in Saudi Arabia, Bank
Islam Malaysia Berhad in Malaysia
and many more.
At last, Islamic
fund is an alternative especially for Muslims at large and generally for the
whole population. The fund is purposely to enhance the economic status of the
ummah. At the same time, it will purify and get closer the Muslims to their
Creator. The fund will give the chance for a Muslims to avoid themselves
enrolled in haram’s counter. From the points, the activities of Islamic fund
are a Fardhu Kifayah. For the Muslims, they have to support this sacred
activity. Although, the efficiency of the organization is still debatable but
the task of Muslims to support the organization are still there. Allah SWT has
encouraged the Muslims to support the good deeds and prohibit the bad deeds.
Management Mechanism of Islamic Fund
INVESTOR money (investment) FUND
Investment
gain
Attitude of
investor
*attitudes of
the investor are being discussed in the text
Investment is an
activity involving a portion of money to allocate to the certain types of
business and seeking for profit. The investors will not do anything related to
the operation of the company. Since the investors are not involved in managing
the operating of the company, so he is not entitled for any salaries or wages,
he is only entitled for the profit gained by the company. Thus, the investors
have to have certain expertise in choosing which companies those have bright
prospect in gaining the profit.
In this section,
the paper will discuss some pillars of wisdom in investing the money. The
pillars were taken from the idea of conventional fund management but have been
taken into consideration by the writer regarding the Islamic point of view. The
writer tried to view them in the Islamic point of view. The pillars are:
1)
Successful
investing involves doing just a few things right and avoiding serious mistakes.
It means an investor has to beware. He has to plan and do the homework
regarding the strength, weaknesses, opportunities, and threats of the prospect
organization. He or she also has to know the activities of the company. He has
to know whether the company pros or cons the Islamic shari’ah. He has to be
careful in each step he moves. He has to avoid any serious mistake that will
give big impact to his investment.
2)
When there
are multiple solutions to the problem, choose the simplest one. Sometimes, an
investor will face a serious problem. This problem is usually difficult to
solve. Once the problem is clearly defined, there are multiple solutions to
this problem. So, the investor wills again facing the problem in choosing the
solution. Based on the prudent concept, the writer suggests the investor to
choose the simplest one. As an example, if an investor confuse whether to invest
in highly risk company or low risk company, the high risk company offered 5%
rate of return but low risk company only offer 2.5% rate of return, based on
this principle, the investor has to rely on the investment which is more
guaranteed.
3)
Try to earn
money every time even it is small. The investor has not left his money idle. He
has to gain something even the gaining is too small. In Islam the idle money is
entitled for zakat if it is over the certain limit or nisab and being passed
the haul or period of time. The idle is zakatable because Islam encouraged the
ummah to activate his wealth. And later he the wealthy peoples are being able
to help the poor.
4)
Today is
better than yesterday. This is the principle of the Muslims. A Muslim must be
today is better than yesterday. Based on this principle, an investor who has
been in investment field so long has to be more expert in choosing the
companies to invest. So, the Muslim investors are logically being able to gain
more after some time in investment field.
5)
An
investor has to diversify his investment. In investment, an investor is better
to invest in various types of businesses. He has to invest in multiple types of
risk businesses. Rather than stick on only one type of business. This is
because the diversification will help the investor balances his risk. In short,
an investor who invests in three companies will have more chances to balance
the risks rather than the investor who only invests in one company. The lost of
a company can be covered by the profit of the other two companies. However, for
single company the lost will solely from that company and there is no company
which is available to bring the investor to the equilibrium point or more.
6)
Cost-benefit
analysis is the best in determining which companies are the best places to
invest. Cost-benefit analysis is prepared by taking into consideration all the
costs those be incurred when the investor invests. These costs will be deducted
from the expecting benefits those be receipt after the investment. If the
receipt is higher than the expense so the investor may decide to invest, if not
is vice versa.
7)
Know the
operating of the business. Before investing in any business, an investor is
required to know at least basic information regarding the activity of the
business he or she wants to invest. This is to ensure that, an investor wills
not do the blind imitation and blind investment. The blind investment may lead
to the loss of capital. This lost of capital can be avoided if the investors do
the homework in studying the prospect types of the businesses. He or she can
rely on the current users’ behaviors, environments, status of the economy and
other financial and non-financial data. He or she also can rely his or hers
assumption based on the rating provided by rating agencies such as RAM in Malaysia.
8)
The
investors have to have balance estimation. It means, not to be overestimates
and be underestimates. Usually, the investors will do the prior estimation
before doing any analysis and later accept or reject to invest. This prior
estimation is so important whether the investors will choose it or not for
further analysis. Overestimates and underestimates will lead the investor to
the state of frustration if he or she failed to achieve his or hers estimation.
9)
Beware of
the last year achievement. An investor should not totally depend to the last
year achievement of the company. The situation and environment are always kept
on changing. Therefore the past year achievement is only the basis. It can be
used as a rough glance, not totally depend on it. The past achievement is good
for checking the reliability of the internal control of the management, but it
is not good to measure the future prospect.
10)
The
financial market is related to the fears, hopes, knowledge and greed of all
investors everywhere. The environment situation moulds the feeling of all
investors. Sometimes the feeling may boost the market and lead the market be
bullish, if not the market will lead to bearish. For Muslim investors, all of
these feeling should not be there. This is because; they will lead to serious
speculation which is haram.
11) An investor
should have long term planning. To be as a good investor, he or she to have
long term planning. The investors should not grab a chance which is short term
based. This is because patience and consistency are valuable assets for the
intelligent investors
Classes of Investors
THE
TYPES OF THE INVESTORS
AGGRESSIVE MODERATE CONSERVATIVE
EXTREMELY CONSERVATIVE
Actually, the
types of funds to invest are depending on the objective of the investors. The
investors have to decide how big the risks they are going to accept. The
acceptance is based on how much and how long they are going to accept the
risks. The ultimate purpose of investment is the income the investors are going
to receive.
Here, the writer
will state four basic types of investors who are dealing with the risks for the
investment; aggressive, moderate, conservative, and extremely conservative.
Aggressive investor is the person who is not interested to the current income
but he is interested to the capital appreciation; capital appreciation is the
value increases when the company’s capital growth as the impact of the
company’s business success. This type of person is willing to accept high
market risk.
The second
groups of investors are who willing to accept moderate market risk. He or she
views current income as a subordinate to capital appreciation. For them,
current income is a second important receipt after capital appreciation.
The third groups
of peoples are conservative. The conservative is the person who is willing to
accept only limited market risk. For them, current income is highly important
rather than capital appreciation. Meanwhile, extremely conservative are not
willing to accept any risk. He or she tries to greatly reduce the market risk
and extremely increase the market return or current income. He is not
interested most on capital appreciation.
For further
discussion, the writer is going to state about the acceptable risk for the
investment. The level of acceptable risk is referred as risk tolerance. The risk tolerances for the investors are differed
among the investors. Usually, the
investors will determine the risk tolerance based on the individual’s current
economic circumstances. The best measurement for risk tolerance is sleep quotient; sleep quotient is the
level of risk that a person thinks it is disturbing. If a person feels that he or she is not
comforted with the highly risky investment, he or she may start selling them
and move to the lower risky fund or counter.
It is simple to
say that, investment is the activity that involved most with the matter of
faith. The fluctuation of economics situation is determined by the environment
scenario. No one knows about the future economics scenario. There are many
external scenarios which will affect the economics fluctuation. Therefore the
investors have to be braved enough in practicing their investment.
Shari'ah Investment Paradigm
Saving refers to
a part of money that is not spent on consumption. Meanwhile investment refers
to the expenditure that is not for the consumption but for the purpose of
capital appreciation, and on creation of a new capital. The idle money cannot
be considered as an investment. This is because the idle money will loose it
purchasing power. Study has proven that the idle money will loose 93% of the
purchasing power over the last 200 years.
Islam encourages
Muslims to stream their income to the certain areas. The areas are defined by
Islamic priority. If the income or money is kept idle, this money is punished
by Allah SWT through the obligation to pay the zakat. This is because in the
idle money is the right of the eight asnaf (the zakat beneficiaries).
There are two
types of investment available for an investor. They can invest in physical
assets and financial assets. The
physical assets are gold, coins, and other touchable assets. Meanwhile,
financial assets are stocks, bonds, mutual fund and etc. Between these two
assets, financial assets are preferable to invest in. This is the effect of the
liquidity of the investment. The investment in the financial assets is more
liquid differ to the physical assets. An investor can easily pull out his or
hers capital in the financial assets. He or she can sell easily his or hers
stock certificate to the other buyers through the investment agents or stock
brokers.
What is the
stock? Stocks are the shares of the company that have being apportioned into
the units. The amount of the capital contributed by an investor is determined
by the numbers of units of company’s share. The vote power to the company also
determined by the number of shares. The dividend and the disbursement of the
income also distributed based on the number of units share hold by an investor.
Meanwhile, the
stocks of the company is divided into two types, one is ordinary and the other
one preference. The difference between two is the preference holders are
entitled for fix receipt over the years, regardless the company makes profit or
loss. Meanwhile the ordinary is determined by the decision of the management of
the company.
The fix return
receipt from an investment of stock preference is haram according to the Islamic
scholars. This is because of the concept of justice in Islam. In stock
preference, the investor has being promised to receive a certain fix rate
annually. In other words, the future dividends are determined prior to the
determination of the profit of the year. Therefore, Islam views stock
preference as haram since it involves with the uncertainty. The amount receipt
from stock preference is considered as riba
al-fadhl. As a solution, Muslim may invest in the common stock.
In other points,
an investor may reduce the liability of the investment through diversification.
Diversification means an investor invests in diverse industries and companies
rather than in the related companies and groups. Let say, if an investor
invests in the crude oil company which the company facing the economic downturn
in that particular year, at the same time he or she also invests in the motor
industries which is used oil as the main power. As the effect of
un-diversification, (not diversified the investment) the investor will stand
facing the high risk problem. However, this kind of problem can be avoided by
practicing the diversification. Diversifying the investment in various
industries may help the investor to reduce the risk. Although he or she will
incur loss in crude oil investment but this loss can be covered by the profit
he or she gains from an investment of the other unrelated industries.
Islamic Fund vs. Mutual Fund
Mutual fund is
the company that pools the money to invest in various counters and to buy the
portfolio of the securities. The managements of the company consist of the
investment expert. They have enough knowledge in studying the power of the
company and in planning the prospect of the future earning of the company.
The money that
pooled by the company is invested in buying various portfolios securities on
behalf of the whole group. All portfolio securities are eligible for the
conventional mutual fund. However, the scanning must be done for an Islamic
fund. The purpose of the scanning is to check the compliances of the operation
with the sharia’ah. The Syari’ah Supervisory Board of the company does the
scanning.
In conventional
mutual fund, the investors will share the profits and losses earned from the
investment. The ratio of the profit and loss is based on the amount of shares
they invested. Meanwhile, in Islamic fund investment, the profit and shares is
distributed based on modes of investment agreed by the investors; among the
modes of investment are Ijarah fund, equity fund, commodity fund, murabahah
fund, mixed fund and many more.
Dynamism in the Best Performance of Fund
Gaining the highest revenue from the
investment is the main objective of all investors. They hope that the fund
management company will invest properly their money. Although, the investment
and analysis were doing by the company, the investor also may prepare their own
analysis.
The academician,
money managers, and thoughtful individual investors have draft some formulas in
selecting the best performing fund. They agreed that the assets should be
measured based on risk and rate of return.
According to the
study the rate of return is a mix of any change in market value, any dividends,
interests, and other receive from the investment. All of these are expressed in
a percentage gain. After calculating the rate of return, the next is measuring
the level of risk. Based on the same study, the risk could be measured by
several different statistics. One of these statistics is beta coefficient. Beta
coefficient is a ratio of the average performance of a given stock or mutual
fund relative to that of some of market average. As an example, if a beta
coefficient of Company A is 2.0, it would indicate that the mutual fund tends
to move twice as rapidly as general market.
In viewing to
use this statistics, we have to find the company, which offers the Beta
coefficient equal to zero, or zero risk company. Then we have to know the rate
of return of the invested company. Let say the company’s rate of return is 5%
and the beta is 0. Therefore, an investor may select the other risky fund,
which offers the rate of return higher than 5%.
The next step is
an investor has to find the second higher risky than zero risk fund. Let say
the beta is 1 and the rate of return is 10%. An investor may invest is such 10%
but he or she has to face one level higher risk in gaining 10% rate of return.
If there is a fund, which offers higher rate of return than 10% but lower risk
(<1), or in other words, the rate of return is more than 10% per unit of
risk is called as outperformed the market and called as under performed if it
is vice versa.
Rationality for the Investors in Outsourcing Funds
There are a number of investors who pass
out totally the job of investment to the investment company. This kind of
investors normally did not care much on the revenue he or she going to gain.
However, there are also investors who are very meticulous in every cent he or
she invests. For these groups of people, they will try to evaluate the
performance of the portfolios by their own.
There are a
number of reasons why the investors try to avoid doing evaluation of the
invested portfolio. Here we are going to discuss a few reasons why an investor
prefers to outsource the evaluation to the outside advisors. Basically there
are four reasons why the investors try to avoid from evaluating the investment
by their own; a desire to avoid fiduciary responsibilities, a lack of time, a
lack of interest, an inability to control emotions, and insufficient knowledge.
There are some people who
have surplus money. They have an intention to invest their money but they do
not have enough time to invest their money by their own. They are the people
who have expertise in managing the money. However, they have other priorities
to do.
The group consists of a son, daughter, spouse, or other relative who
inherit the wealth of a late family, the individuals on the board of directors
of a school, mosque, or any foundation, and the trustees for retirement plans.
All of them do not have much interest on the activity of investment. Therefore,
the outsourcings of the investment activities are better for them.
This is the second group of investor who frequently seek outside
assistance. He or she does not have enough time to manage the investment
activities. Although they are the people who may do the excellent job but the
time constraint limit them from doing so. They realize that their time is
better spent focusing upon their business or career.
This is the third group of investor who simply lack the interest to
actively manage their own investment. As an example, upon retiring, many people
choose to enjoy their time by traveling, recreation, family, friends, and other
activities. At this time the income become the secondary motive of their life.
- Inability to control emotions
For the investors who fail to control their emotions are most in
need of an outside advisor. This is because an emotion plays the important role
in controlling the activity of a person. The investors may do the wrong doing
if they make the decision based on their emotion. In order to avoid the risk,
the investors may choose the outside advisors as their investment agents.
An investor is the outsider who has surplus money but not necessary
he or she must have sufficient knowledge. However in recent situation,
knowledge becomes a main pillar in investment. This is due to the complexity of
the transaction.
For the insufficient knowledge investors, they may assign the task
to the outside advisors. This is because the outside advisors are the expert in
this field.
Final Remarks
Islamic fund is
an alternative for an Islamic investor. The purpose of this fund is to
encourage Muslims to activate their wealth and avoiding from being idle. As we
all know that Islam will penalize the idle wealth by the obligation of zakat
payment. The most major question is whether the fund is truly complying with
the shari’ah or not.
In this century,
Muslim held surplus money for the consumption. However their wealth is not
properly invested in Islamic manner. Therefore the existence of Islamic fund is
the best solution for these investors.
As the addition,
the cooperation between the wealthy and the knowledgeable Muslims may empower
the society. The developed Muslim society is the final result of this
cooperation.
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