Islam is a religion that ordained
by Allah SWT since the creation of mankind. Islam is an integrated holistic
system with universal order, which is integrated with ibadah or ritual and method or manner of life. It is derived from
the meaning of Islam as ad-deen. Ad-deen
can be defined as a way of life and faith to Allah SWT.
The purpose of creation is to make
the creatures to be obliged to 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. This activity will be rewarded by Allah SWT.
Muslims are the second larger
group of religions after Christians. These peoples have a lot of wealth to
invest. However, there are a few of Islamic counter offered for Muslims. This
scenario gives a bad impact to Muslims because Muslims’ daily activities should
be within the limit of shari’ah. Otherwise, it will be rejected by the Allah
and the doers will be considered as ignorant.
Islamic fund management is a
solution for Muslim investors. This solution gives more chances for Muslim to
invest 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 involved in the haram activities such as gambling, alcoholic business, pornographic,
ribawi institutions and the companies which financed by ribawi institutions.
These strict rules and
regulations made by Islam is purposely to be sure that Muslims operate within
the limit of shari’ah. In Al-Quran Allah SWT has mentioned as
Business is halal for a Muslim
but any transaction which is based on riba is considered haram. When an
activity is considered haram it will be rejected by Allah and will be grouped
among sinful people. Of course these groups of people will be not entitled for
the rewarded.
Every investment deals with the
risks. In Islamic fund also 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.
HOW TO MANAGE THE ISLAMIC FUND
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
THE TYPES OF THE INVESTORS
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.
INVESTMENT IN ISLAMIC POINT OF VIEW
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 compliance 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.
Methodologies of Best Selection of Funds
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, 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.
WHY THE INVESTORS OUTSOURCE
THE INVESTMENT?
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 advisers. 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.
- Fiduciary responsibilities
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 outsourcing of the investment activities are better for them.
- Lack of time
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.
- Lack of interest
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 advisory. 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 advisers as their investment agents.
- Insufficient knowledge
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 advisers are the expert in this field.
CONCLUSION
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.
