Salman Ahmed Shaikh
Islamic finance industry over the past three decades has diversified itself from banking to other sectors as well and now it comprises institutions such as Islamic banks, Islamic insurance companies and Islamic mutual funds. Growth has been impressive during the last decade despite the crisis that had hit global financial markets.
Islamic mutual fund industry has also enjoyed success in attracting investment funds from Muslim investors and also from non-Muslim investors due to their impressive performance. Islamic mutual fund industry has grown by leaps and bounds globally and in Pakistan as well.
However, despite growth and profitability, since these institutions have a mandate to work as per Islamic principles and philosophy, it allows us to question and study their performance in upholding Islamic ideals, principles and philosophy, especially with regards to promoting productive and real sectors of the economy and entrepreneurial culture. In this context, below, we present few observations on their performance and operations so far.
Taking on entrepreneurial risk is at the heart of Islamic economics. This risk can only be eliminated at the cost of compromising the basic distinctions of Islamic economic principles. Effective institutions are required to perform financial intermediation that promote entrepreneurial culture rather than circumvent it.
To place short term funds, one investment alternative commonly used is known as ‘Commodity Murabaha’ or ‘Tawarruq’. Taking inspiration from the opinion of scholars that ‘Murabaha is allowed, even if not ideal’, the Islamic fund managers took the allowance to the extreme whereby in Commodity Murabaha transactions, the subject matter is not genuinely required by both financial institutions. But, each of them takes ownership literally for some seconds and execute a complex sale resulting in a profit for one and fulfillment of liquidity requirement for the other.
In addition to that, ready buy-future sale is a financial transaction used to circumvent same day trading restriction. By taking unilateral undertaking which is binding, a two-leg transaction is executed which enables the fund to invest for very short term by buying and selling on the same day. To circumvent the requirement of possession before sale, Islamic funds do not execute the sale. But, they lock the price through a unilateral undertaking which defers the actual sale transaction, but locks all transaction details and features including price at the time of buying in the first leg of transaction. This not only encourages shortsightedness and promotes speculation, but also disregards the concept of meaningful long term risk sharing relationship.