Islamic Wealth Planning

Islamic funds in Malaysia have been widely accepted by both Muslim and non-Muslim investors who find its ethically conscious concept appealing, and see it as a viable alternative to conventional instruments for growing their money.
In an interview with the iFAST Content Team, RHB Investment Management Sdn Bhd’s Managing Director Sharifatul Hanizah Said Ali says that the outlook for the local Islamic fund management industry is positive.
“Looking at the increasing number of products being developed and launched to satisfy the growing appetite for these products, and the expanding acceptance for Islamic products indicates that the Shariah-driven financial system is here to stay,” she shares.
According to the Securities Commission’s statistics (as at end-July 2009), 143 out of the 541 funds launched in the country are Islamic-based funds. Islamic funds have grown at a steady rate from the 63 funds available in 2004.
Sharifatul Hanizah also foresees that a future trend for the industry would include domestic Islamic funds expanding their investment universe into the regional markets as it continues to emulate and play catch-up with the conventional fund management industry.
In this article, she explains the basics of Islamic funds, its attraction and performance during the subprime crisis.

The Basics
The whole idea about Islamic funds, according to Sharifatul Hanizah is that the money in the fund is sourced from a pool of investors with the purpose of investing in Shariah-approved investments, such as equities, bonds or index funds, to earn halal profits.
“The fund is managed by a professional management company in accordance to Shariah principles, which states that there shall be no investing into investments or companies that are involved in interest generating, gaming, liquor or other activities that are frowned upon,” she explains.
Investors should be aware that with Islamic funds, risks and rewards are shared and the fund’s return is tied to the actual profit earned or loss suffered. There is no principal or specific profit guaranteed. Similar to conventional funds, Islamic funds are safeguarded by trustees and statutory controls.
Islamic funds are overseen and governed by a group of Islamic scholars – the Shariah Advisers – who are in charge of due diligence and the establishment of the Islamic investment policy for the specific fund. “Their sources for interpretation are from the Quran (words of Allah verbatim to Prophet Muhammad), the Hadith (rules from the Prophet’s sayings and actions), and Qiyas (scholarly legal deductions) and Ijma (consensus from scholars of a particular issue),” shares Sharifatul Hanizah.
Another misconception about Islamic funds, albeit a rapidly dissipating one, is that Islamic funds are only for Muslims. In fact, Islamic funds are for all types of investors regardless of their religious beliefs. Investments should be based on one’s investment horizon, objectives and risk appetite and there are many products, Islamic and conventional, available in the market that cater to these specific requirements.

Islamic Plus Points
Sharifatul Hanizah says that apart from fulfilling the needs of Muslims, one clear advantage of Islamic funds to investors regardless of their faith is that securities selected for Islamic investments adopt ethical investing principles.
“Investors can take comfort knowing that the securities selected have gone through a screening process that emphasises on a healthy balance sheet. The process covers a comprehensive financial ratio screening including gearing level. One key factor why the [investment bank] Lehman Brothers failed is that the company was geared up to 50 times of its capital, thus posing excessive risks to depositors, as well as to the bank itself,” she notes.
However, Islamic funds are not without risks. Risk sharing is a fundamental tenet of Islamic finance as the profit and loss is shared between the parties involved in a financial transaction. It is also a requirement that each financial transaction be tied to a physical or identifiable underlying asset.
“Thus, investors of an Islamic funds can be assured that the securities selected in the fund represent companies whose activities are tangible and contribute to the real economy,” says Sharifatul Hanizah.

During the Crisis

One of the reasons why Islamic funds have garnered attention during the subprime crisis is that its Shariah-compliant nature ensured minimal exposure to the badly-hit financial sector.
However, Sharifatul Hanizah says that not much difference in the performance of the conventional and Shariah funds were seen during the recent crisis.
She explains that this is because the FTSE Bursa Malaysia (FBM) Shariah Index performance benchmark is more volatile at 1.1 times the performance of the FTSE Bursa Malaysia KLCI (FBM KLCI), due to the higher weightings of plantation stocks (in the absence of financials) which are usually higher beta stocks.
“Therefore, during the crisis the FBM Shariah Index declined more, at 46.8%, compared to the FBM KLCI’s decline of 42%. Likewise, during the current recovery period, post the market bottom in October 2008, the FBM Shariah Index recovered at a faster rate of 1.1 times of the conventional benchmark of FBM KLCI,” Sharifatul Hanizah notes. The FBM Shariah Index had gained 39.9% against FBM KLCI’s 36.3% from 1 November 2008 to mid-September 2009.