The rising affluence of investors who are keen to invest in Islamic financial products and the expansion of Islamic Capital Market products will underpin the growth prospects of the Islamic unit trust industry over the longer haul. In Malaysia, growing demand forIslamic unit trusts is evident. From a mere two Islamic funds in 1993, the number of Islamic funds in Malaysia’s private unit trust industry has increased to 146 and counting today.
The primary characteristic that distinguishes Islamic fund management from conventional investing is its conformity with Shariah law. Islamic funds and Islamic Banking in Malaysia must adhere to Shariah-compliant economic activities and invest only in companies that fulfill Shariah requirements. Additionally, Islamic funds cannot invest in conventional banks that offer products with fixed interest rates but can invest in Islamic securities and Islamic financial institutions. The funds must also keep away from making investments in companies that are involved in products restricted by Islamic laws, such as alcohol, tobacco, pork, gambling or pornography.
After eliminating companies with non-Shariah primary business activities, the quantitative filter, in the form of financial ratios, are used to ensure that a Shariah-compliant company makes its income with adequate financial resources and without excessive debt. Besides, an Islamic fund may only take part in leverage through the use of Islamic financing instruments and may not acquire or supply conventional loans nor invest in conventional interest-bearing products, plus conventional debt securities. Cash held by a fund may only be invested in Shariah-compliant, short-term investment products, such as Islamic money market instruments.
Per se, Islamic funds have been known to be more flexible than conventional unit trusts as their returns are generally less volatile. Meanwhile, there are also other benefits to “ethical” investing. For instance, Islamic funds were little affected by scandals afflicting companies such as Enron and WorldCom several years ago, as these companies’ highly leveraged balance sheets kept Islamic funds from buying them. Moreover, the quantitative filter adds to the resilient nature of Islamic funds because if interest rates were to increase in a rising inflationary environment, investments in non-leveraged companies are expected to surpass.
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