Investors can invest their surplus money to earn profits, in what is called an ‘Islamic Investment Fund’. It is a joint pool of funds that complies with the Shariah principles.
An Islamic Investment Fund can function as any of the following legal forms:
The fund manager will take on the role of the Board of Directors (BoD), while the investors will act as shareholders that provide instructions to the BoD regarding the management of the invested funds. What governs the fund is the company law stated in the jurisdiction, where the fund has been incorporated.
The fund manager is appointed as a Trustee by the investor, in order to manage and invest the funds from the trust. The Trustee will have a fiduciary responsibility in managing the trust fund and is also governed by the trust law.
In this arrangement, the fund manager takes on the role of a General Partner who is responsible for managing the funds and providing returns to the investors, while the investors assume the role of an Ordinary Partner.
Malaysia has been at the forefront in structuring Shariah-compliant financial products and Islamic fund management, which were expected outcomes given the rise of the Islamic Capital Market (ICM). The Security Commission Malaysia (SC), a regulatory authority, was instrumental in developing the ICM by setting standards for the classification of products and participants as well as composing a legal framework in terms of the Shariah guidelines. At the end of 2015 following a newfound demand in Shariah-compliant products, Malaysia’s ICM had risen by a 10% CAGR throughout the last few years, standing at RM 1.7 billion, representing over 60% of the total capital market. Around 64% of this amount consists of equities while the rest are Sukuks.
As per statistics recorded post 2015, malaysia is leading the islamic finance world in several aspects: more than half (54%) of global sukuk outstanding, around 314 shariah-compliant investment funds amounting to rm 100.6 billion and an icm that comprises of 60.1% of the total malaysian capital market.
Apart from sukuks, 32% of unit trusts are shariah-compliant, yet represent only 15% of the net asset value which is expected to rise as demand increases. About 22% of real estate investment trusts are shariah-compliant, accounting for 43% of net asset value whereas 50% of exchange traded funds are shariah-compliant representing 21% of the market value. Local funds are showing signs of interest in moving into the icm arena and offering islamic fund management services to their customers due to a positive future growth potential. As of august 2016, aminvest’s total assets under management (aum) totaled to rm 38 billion, of which rm 8.8 billion was in compliance with the shariah. In malaysia as a whole, the total aum reached a cagr of 12.1% annually over a period of five years and is ranked as the second-largest country for islamic aum, representing a one-third of islamic funds worth us$ 58 billion worldwide.
Malaysia’s icm and asset management industry are highly supported by the government, which provides tax incentives to attract capital into the islamic finance realm, as well as capacity building and a shariah advisory council (sac). It is focused on promoting malaysia as a major islamic finance hub in the initiation, distribution and trading in the icm and asset management industries. Malaysia also possesses foreign fund management expertise due to global players choosing to consider the country as a center for islamic asset management procedures.
In terms of the equity market, malaysia and saudi arabia constitute the largest percentages, representing rm 310 billion to rm 354 billion of the islamic equity market, from which malaysia accounts for rm 132.4 billion.
A five-year Islamic Fund and Wealth Management Blueprint has been launched as a tool to accomplish three strategic thrusts:
The blueprint sets out eleven recommendations for the desired goals to be achieved by 2021. They focus on the continual growth and innovation of the industry, shedding light on opportunities for domestic and international collaborations, widening the scale, as well as promoting private equity growth and facilitating efficient market access. The plan also involves adapting to new digital business models, products, services of asset management, the development of an effective market infrastructure for alternative strategies and enhancing talent potential for wealth management.
The blueprint states that in order to develop Malaysia’s Islamic fund managers’ global capability and appeal to various investors, an investment fund is to be established for which the details will be key. The Securities Commission has also made mention of sustainable and responsible investing (SRI) in Malaysia which does not require a vast amount of effort; Shariah-compliant and SRI portfolios generally intersect, with the exception of Islamic banks’ prohibition on interest.
The Malaysian government has recently made an announcement of its plan to create the first ever capital fund for Islamic ventures to support Muslim entrepreneurs globally. The fund will be under the responsibility of Malaysia Venture Capital Management Bhd (MACVAP), the state finance arm, in association with the Islamic Development Bank (IDB), both of which will sign a memorandum of understanding in Indonesia. An initial fund size of US$ 100 million is being sought. This has the potential to raise Malaysia’s per capita income.