Modern Islamic Investment Management (eBook)

Dedication 5
Foreword 6
Preface 8
Acknowledgements 11
Contents 13
About the Author 15
List of Figures 16
List of Tables 17
Introduction 18
Part I: An Overview of Islamic Investment 20
Chapter 1: An Islamic Investment Paradigm 21
1.1 Introduction 21
1.2 Elements of Islamic Investment 22
1.3 Shari’ah Guidelines for Investment 23
1.4 Stocks in Shari’ah Rulings 23
1.5 Islamic Investment Funds 24
1.5.1 Equity Funds 24
1.5.2 Ijarah Funds 25
1.5.3 Commodity Funds 26
1.5.4 Al-Murabahah Funds 27
1.5.5 Mixed Funds 27
1.6 Shari’ah Rulings on Investment 27
1.7 Treasury Products and Services on the Islamic Money Market 29
1.7.1 Al-Mudharabah General Investment Account (GIA) 29
1.7.2 Al-Mudharabah Special Investment Account (SIA) 30
1.7.3 Negotiable Islamic Debt Certificate (NIDC) 30
1.7.4 Islamic Negotiable Instrument of Deposit (INID) 30
1.8 Treasury Products and Services: Islamic Fixed-Income Securities 31
1.8.1 Government Investment Issue (GII) 31
1.8.2 Bank Negara Negotiable Notes (BNNN) 31
1.8.3 Islamic Private Debt Securities (IPDS) 31
1.8.4 Sell and Buy-Back Agreements (SBBA) 31
1.8.5 Islamic Acceptance Bills (IAB) or Islamic Banker’s Acceptance (IBA) 32
1.9 Takaful Funds 32
1.9.1 Types of Takaful Investment 33
1.9.2 Takaful Investment Policies 33
1.10 Conclusion 34
Chapter 2: Islamic Fund Management 35
2.1 Introduction 35
2.2 How to Manage an Islamic Fund? 36
2.2.1 Investor’s Funds 36
2.2.2 Types of Investor 39
2.2.3 The Divine Ethical View on Investment 39
2.2.4 Islamic Funds versus Mutual Funds 41
2.2.5 Risk versus Rate of Return 41
2.2.6 Why Should Investors Outsource Investment? 42
2.2.6.1 Fiduciary Responsibilities 43
2.2.6.2 Lack of Time 43
2.2.6.3 Lack of Interest 43
2.2.6.4 Inability to Control Emotions 43
2.2.6.5 Insufficient Knowledge 43
2.3 Conclusion 44
Part II: Principles of Islamic Investment 45
Chapter 3: Shari’ah Frameworks of Investment 46
3.1 Introduction 46
3.2 Rational Outlook 47
3.3 Divine Guidance 47
3.3.1 Wealth Management 47
3.3.2 Abstain from Being a Spendthrift 48
3.3.3 Invest for the Benefit of Others 48
3.4 The Essence of Shari’ah Compliance 49
3.5 Shari’ah Rulings 49
3.5.1 Investment Shall be Limited to Halal Activities 49
3.5.2 Prohibitions 50
3.5.2.1 Fixed Interest/Usury (Riba) 50
3.5.2.2 Gharar (Uncertainty or Speculation) 51
3.5.2.3 Maisir (Gambling) 51
3.5.2.4 Rishwah (Corruption) 51
3.5.2.5 Jahl (Ignorance) 51
3.6 Every Contractual Party Must Honour the Contractual Terms 52
3.7 Every Transaction Shall Be Performed with Utmost Good Faith 52
3.8 Preserve the Unity of Mind and Sincerity in Investment 53
3.9 Ethical Principles of Islamic Investment 53
3.9.1 Making Money from Money Is Not Permissible 53
3.9.2 Profit and Loss Sharing 53
3.9.3 Segregation of Funds 54
3.9.4 The Existence of a Shari’ah Supervisory Board 54
3.10 Management Committed to Islamic Financial Concepts 54
3.11 Compliance with the Standards of the AAOIFI 54
3.12 Shari’ah-Recognised Investment Instruments and Structures 55
3.13 Shari’ah Rulings on Unit Trusts (Micro-investment Plans) 58
3.14 An Industrial Experience: RHB Mudharabah Fund 60
3.15 Islamic Bond (Sukuk) Fund 60
3.16 Mechanisms of Investing in the Islamic Unit Trust 60
3.16.1 Lump Sum Purchases 60
3.16.2 Regular Savings 61
3.17 Concept of an Islamic Unit Trust Fund 61
3.18 Screening Process Adopted in Evaluating Investments (Fig. 3.11) 62
3.19 Debate on Islamic Bonds 63
3.20 Securitisation: The Creation of a Bay’ al-’Inah Underlying Asset 63
3.21 Issuance of Islamic Debt Certificate (Shahdah al-Dayn) 64
3.21.1 Islamic Coupon Bond 64
3.21.2 Islamic Zero-Coupon Bond 64
3.22 Trading of Debt Certificate 64
3.23 Application of Bay’ Al-Muzayadah Principle 65
3.24 What Do the Opponents of Malaysian Islamic Unit Trusts Say? 65
3.25 Bay’ Al-‘Inah: Why It Is Not Allowed 65
3.26 Bay’ al-Dayn for Immediate Payment and Deferred Payment: Are They Allowed? 66
3.27 Conclusion 66
References 68
Chapter 4: Islamic Investment Policies 70
4.1 Introduction 70
4.2 Islamic Investment Paradigm 71
4.3 Types of Islamic Investment 74
4.3.1 Equity 74
4.3.2 Commodity Funds 75
4.3.3 Ijarah (Leasing) 76
4.3.4 Musharakah (Partnership) 77
4.3.5 Mudharabah (Profit and Loss Sharing) 78
4.3.6 Other Types of Islamic Investment 78
4.4 Islamic Investment Criteria 79
4.4.1 Qualitative Screening 79
4.4.2 Quantitative Screening 80
4.5 Trading and Investment Practices 82
4.6 Misconceptions and the Truth about Islamic Investment 83
4.7 The Future of Islamic Investment 85
4.8 Conclusion 85
References 86
Part III: Islamic Investment Products and Practices 88
Chapter 5: Islamic Personal Investment 89
5.1 Introduction 89
5.2 Types of Personal Investment 90
5.2.1 Mudarabah (Profit and Loss Sharing) 90
5.2.2 Mudarabah (Cost Plus Mark-Up) 91
5.2.3 Ijarah (Leasing) 91
5.2.4 Musharakah (Partnership/Venture Capital) 92
5.2.5 Investment in Stocks or Shares 93
5.2.6 Wadiah (Deposit) 94
5.2.7 Bay Al-Dayn (Sale of Debt) 95
5.3 Terms and Conditions 95
5.4 Conclusion 96
References 97
Chapter 6: Musharakah Venture Capital 98
6.1 Introduction 98
6.1.1 Musharakah (Venture Capital or Partnership) 99
6.2 Rules of Musharakah 99
6.2.1 Distribution of Profit 99
6.2.2 Sharing of Risk (Loss or Liability) 100
6.2.3 Nature of Capital 100
6.2.4 Management of Musharakah 101
6.2.5 Termination 101
6.3 Modern Operation of the Musharakah Model 102
6.4 The Practical Scenario 103
6.5 Conclusion 104
Chapter 7: Islamic Micro-Investment: The Experience of Tabung Haji Malaysia 105
7.1 Background of the Company 105
7.1.1 Objective 105
7.1.2 Goals 106
7.1.3 Core Activities of Tabung Haji 106
7.2 Services Provided by Tabung Haji 106
7.2.1 Savings 106
7.2.2 Withdrawal 107
7.2.3 Products Offered 107
7.2.3.1 EPF Member Investment Scheme 107
7.2.3.2 Savings Scheme for Monthly Allowance 108
7.2.3.3 Salary Deduction Scheme for the Individual and His or Her Family 108
7.2.3.4 Incentive Scheme for Malaysian Schools 108
7.2.4 Annual Bonus 108
7.2.5 Other Services 108
7.2.5.1 Fund for Senior Citizens 108
7.2.5.2 Friendly Counter 109
7.2.5.3 Investment 109
7.2.5.4 Hajj (Pilgrimage) 110
7.3 The Development of Tabung Haji 111
7.4 Impact of Company Operation to Society and Nation 112
7.5 Function of Divisions 113
7.5.1 Internal Audit Management Division 113
7.5.2 Corporate Planning Division 113
7.5.3 Human Resources Division 113
7.5.4 Corporate Communication Division 114
7.5.5 Administration Division 114
7.5.6 Property Development Division 114
7.5.7 Investment Development Division 114
7.5.8 Investment Management Division 114
7.5.9 Share Trading Division 115
7.5.10 Legal and Secretariat Division 115
7.5.11 Finance Division 115
7.5.12 Fund Management Division 115
7.5.13 Information Technology Division 115
7.5.14 Property Management Division 115
7.5.15 Welfare Division 116
7.5.16 Hajj Consul Office 116
7.5.17 Guidance Division 116
7.5.18 Private Package Division 116
7.5.19 Health Division 116
7.5.20 Operational Division 117
7.5.21 Savings and Withdrawals Division 117
7.5.22 Marketing Division 117
7.5.23 Branch Office Operational Division 117
7.6 Sources of Fund 117
7.6.1 Deposit from Depositors 117
7.7 Terms and Conditions 118
7.8 Insurance (Takaful) Group Division 119
7.8.1 Objective of Insurance (Takaful) Group Division 119
7.8.1.1 Coverage 120
Takaful for Pilgrims 120
Takaful for Staff 120
Takaful for Construction Contractors and Private Companies 120
7.9 Conclusion 120
Reference 120
Chapter 8: Islamic Investment in Stocks 121
8.1 Introduction 121
8.2 Islamic Investment 122
8.2.1 Central Idea 122
8.2.2 Overview 122
8.2.3 Parties 123
8.3 Stock Market 124
8.3.1 General Overview 124
8.3.2 Investment in the Stock Market 124
8.3.3 Shari’ah Compliance 125
8.3.3.1 Filtering 125
8.3.3.2 Shari’ah Board or Shari’ah Advisor 125
8.3.3.3 Shari’ah Principles 126
8.3.3.4 Islamic Index 128
8.3.3.5 Fatwa on Investment in the Stock Market 128
8.3.3.6 Qualitative Screens 128
8.3.3.7 Quantitative Screens 129
8.4 Conclusion 130
References 131
Chapter 9: Investment in Sukuk 132
9.1 Introduction 132
9.2 Phenomena 132
9.3 The Modern Bond Market 134
9.4 Market Participants 135
9.4.1 Dealers 135
9.4.2 Brokers 135
9.4.3 Investors 136
9.5 Types of Bond 136
9.5.1 Convertible Bonds 136
9.5.2 Extendible or Retractable Bonds 136
9.5.3 Foreign Currency Bonds 136
9.5.4 Government Bonds 137
9.5.5 Corporate Bonds 137
9.5.6 High-Yield or Junk Bonds 137
9.5.7 Inflation-Linked Bonds 138
9.5.8 Zero-Coupon Bonds 138
9.6 Valuation of Bonds 138
9.6.1 Present Value 138
9.6.2 Yield to Maturity (YTM) 139
9.6.3 Duration 139
9.6.4 Coupon Interest Rate 139
9.6.5 Market Interest Rate 139
9.7 The Sukuk (Islamic Bond) Market 140
9.8 Three Main Steps Involved in the Bond Issuance (Supra) 140
9.8.1 The Creation of a Tawarruq (Special Purpose Vehicle) Underlying Asset 141
9.8.2 Issuance of Islamic Debt Certificate (Shahdah al-Dayn) 141
9.8.3 Trading of Debt Certificate: Discounted Bay’ al-Dayn 141
9.9 The Nature of Bay’ al-Dayn 142
9.10 Sale of Al-Deen (Debt) to a Third Party 143
9.11 Types of Islamic Bond (Sukuk) 144
9.11.1 Sukuk al-Ijarah (Lease Bonds) 144
9.11.2 Sukuk al-Istisna’ (Manufacturing Bonds) 144
9.11.3 Sukuk al-Musharakah (Partnership Bonds) 144
9.11.4 Difference Between Musharakah Certificate and a Conventional Bond 145
9.11.5 Sukuk al-Muqarada is an Alternative to Sukuk al-Dayn (Debt Bonds/Debenture Certificates) 145
9.12 Prospects of Sukuk in the Non-Muslim World 146
9.13 Process and Issuance of Sukuk (Tawarruq) 147
9.14 Investors Shall 147
9.15 Risk Factors in Sukuk 148
9.15.1 Market Risk 148
9.15.2 Credit Risk 148
9.15.3 Risks to Shari’ah Compliance 149
9.15.4 Management and Operational Risk 149
9.15.5 Organisational Rigidity Risk 150
9.16 Managing the Sukuk Risks 150
9.16.1 Organisational Challenges 150
9.17 Sukuk and Its Rating Formula 153
9.17.1 Credit Rating 153
9.18 Appointment of Credit Rating Agency 153
9.19 Issuer’s Obligations 154
9.20 Non-application of Requirements 154
9.21 Conclusion 155
References 155
Chapter 10: Wealth Investment Under Shari’ah 157
10.1 Introduction 157
10.2 Protection in Islam 159
10.2.1 Basis of Co-operation 160
10.2.2 Basis of Responsibility 160
10.2.3 Basis of Mutual Protection 160
10.3 Accumulation of Wealth in Islam 160
10.4 Wealth Preservation 162
10.5 Wealth Distribution 162
10.6 The Financial Planning Process 162
10.6.1 Establish Financial Goal 163
10.6.2 Gather Relevant Data 163
10.6.3 Analysing the Data 163
10.6.4 Develop a Plan for Achieving the Goals 163
10.6.5 Implement the Plan 163
10.6.6 Monitor the Plan 164
10.7 Recommendations 164
10.7.1 Wasiyah 164
10.7.2 Waqf 165
10.7.2.1 Advantages of Waqf 166
10.7.3 Hibah 167
10.7.3.1 Advantages of Hibah 169
10.8 Conclusion 170
References 170
Chapter 11: Investment in Islamic Unit Trusts 171
11.1 Introduction 171
11.2 Overview of the Unit Trust Industry 171
11.3 The Concept of a Unit Trust 173
11.3.1 Central Idea 173
11.3.2 Mechanism of the Unit Trust 173
11.3.3 Differences Between Unit Trust and Mutual Fund 174
11.3.4 Types of Funds 175
11.3.5 Shari’ah Rulings 175
11.3.6 Example of Islamic Unit Trusts 176
11.3.7 Future of the Islamic Unit Trust Industry 177
References 178
Chapter 12: Halal Investment in Sustainable Development Goals 179
12.1 Introduction 179
12.2 Low-Income Group 181
12.3 Determinants of the Low-Income Group 181
12.4 Poverty: An Islamic Perspective 182
12.5 Islamic Financial System 184
12.6 How Does Islamic Finance Help to Grow the Low-Income Group Towards Sustainable Development? 185
12.6.1 Musharakah (Venture Capital) 185
12.6.2 Mudharabah (Profit and Loss Sharing) 186
12.6.3 Murabahah (Cost-Plus Financing) 187
12.6.4 Ijarah (Lease) 188
12.6.5 Al-Qard (Loan) 189
12.6.6 Mode of Financing Through Bailtulmal 190
12.6.7 Distribution of Income 191
12.7 Conclusion 192
References 192
Chapter 13: Investing Takaful Funds 194
13.1 Introduction 194
13.2 Shari’ah Guidelines 195
13.3 Classifications of Investment Policies of a Takaful Fund 196
13.3.1 Financing 196
13.3.2 Financial Instruments 196
13.3.3 Government Investment Certificates (GIC) 197
13.3.4 Investment Accounts 197
13.3.5 Unit Trust 197
13.3.6 Foreign Investment 197
13.4 Investment Process (Fig. 13.1) 198
13.4.1 How Does It Function? 198
13.5 Products for Investment 199
13.5.1 Types of ILP 199
13.5.1.1 Growth Fund 199
13.5.1.2 Stability Fund 200
13.5.1.3 Balanced Fund 200
13.6 Takaful Dana Saham: Investment-Based Product of Takaful Malaysia 200
13.7 Avenues for Investment of Takaful Funds 200
13.8 Examples of Islamic Investment Instruments 201
13.8.1 Short-Term 201
13.8.2 Medium- to Long-Term 201
13.9 Functions of the Investment Department 201
13.10 Future Role and Prospect of Takaful Investment 202
13.11 Conclusion 202
References 204
Chapter 14: Experiencing in Investing of Takaful Funds 205
14.1 An Overview 205
14.2 Investment in Property 206
14.3 Investment in the Equity Market 206
14.4 Investment in Credit Facility 207
14.5 Online Investment 207
14.6 Investment in IT 208
14.7 Investment in Professional Development 208
14.8 Market Participants’ View 209
14.8.1 Issue 1 Takaful Nasional 209
14.8.2 Issue 2 Shari’ah View 210
14.8.3 Issue 3 Elements of Takaful Nasional 210
14.8.4 Issue 4 Takaful Differs in Terms of Insurance 210
14.8.5 Issue 5 Central Bank Participation in Takaful Investment 211
14.8.6 Issue 6 Ownership of Takaful Fund 211
14.8.7 Issue 7 Payment in Takaful Plan 211
14.8.8 Issue 8 Takaful Model Function 211
14.8.9 Issue 9 Takaful Plan’s Contribution in Needs 212
14.8.10 Issue 10 Takaful Plan’s Contribution in Family Needs 212
14.8.11 Issue 11 Takaful is Complemented by the General Organisation for Social Insurance (GOSI) 212
14.8.12 Issue 12 Additional Benefits of Takaful Funds 213
14.8.13 Issue 13 Participation in Takaful Schemes 213
14.9 Effort in Marketing Family Takaful Products 214
14.10 Conclusion 215
References 215
Chapter 15: Investment in Halal Cryptocurrency 216
15.1 Introduction 216
15.2 Objectives 219
15.3 Governing Principles 219
15.4 Ethical Principles 220
15.5 Model and Structure 220
15.6 Operational Mechanism 221
15.7 Technological Model 221
15.8 Scope and Limitations 222
15.9 Products and Services 222
15.10 Backing Assets 223
15.11 Decision-makers 223
15.12 Shari’ah Advisory Board 224
15.13 Board of Advisors 224
15.14 Management 224
15.15 The Public Statement 225
15.16 The White Paper 225
15.16.1 Introduction to Shari’ah Coin 226
15.16.1.1 Shari’ah Coin 226
15.16.1.2 Emergence of Blockchain 226
15.16.1.3 Background of Shari’ah Coin 226
15.16.1.4 How Shari’ah Coin Could Help to Solve Certain Problems 227
15.16.1.5 The Meaning of Shari’ah Coin 227
15.16.2 Shari’ah Coin Branding and Definition 227
15.16.2.1 Shari’ah Coin Structural Analysis 228
15.16.3 Application of a Shari’ah Cryptocurrency 228
15.16.3.1 Financial Assets Exchange (Backing Asset) 228
15.16.4 Pass-up Plan 229
15.16.4.1 Total Volume 229
15.16.4.2 Digital Asset Ratio 229
15.16.4.3 Shari’ah Cryptocurrency Appreciation Logic 229
15.16.5 Project Progress and Team 229
15.16.6 Operation 229
15.16.7 Market 229
15.16.8 Accounts 230
15.16.9 Significant Results 230
15.16.10 Humanitarian Concern Through Tabarru’at 230
15.17 Conclusion 231
References 231
Chapter 16: Foreign Investment Under Shari’ah 233
16.1 Introduction 233
16.2 Foreign Investment Policy Under Shari’ah 234
16.3 Experience of Foreign Investment in Malaysia 236
16.4 Foreign Direct Investment 239
16.5 The Experience of the Islamic Republic of Iran 239
16.5.1 General Overview 239
16.5.2 Procedure 240
16.5.2.1 Finding a Suitable Iranian Partner 240
16.5.2.2 Obtaining an Agreement in Principle 240
16.5.2.3 Application for Participation 240
16.5.2.4 Review of Application by Supervisory Board for Attraction and Protection of Foreign Investments (The Board) 241
16.5.2.5 Issuance of Decree of Council of Ministers 241
16.5.2.6 Formation of the Joint Company 241
16.6 Financial Mechanisms and Instruments Facilitate Foreign Investment 241
16.6.1 Instruments 242
16.6.1.1 Mudarabah 242
16.6.1.2 Musharakah 242
16.6.1.3 Murabahah 243
16.6.1.4 Ijarah 243
16.6.1.5 Istisna’a 243
16.6.1.6 Al-Bay’mu’ajjal 243
16.6.1.7 Bay’ al-Salam 243
16.6.1.8 Qardh al-Hasan and Zakat 243
16.7 Conclusion 244
References 244
Chapter 17: Rate of Return in Islamic Investment 245
17.1 Introduction 245
17.2 Shari’ah Principles Governing Rate of Return 246
17.3 Socio-economic Benefits 250
17.4 Rate of Return: Profit Sharing Versus Interest 251
17.5 Conclusion 252
References 253
Index 254