Some Observations on Operations of Islamic Mutual Funds in Pakistan


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.

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About Salman Ahmed Shaikh

PhD Economics, National University of Malaysia. Assistant Professor of Economics and Finance. Author, Researcher, Teacher and Consultant. He can be contacted at: salman@siswa.ukm.edu.my
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16 Responses to Some Observations on Operations of Islamic Mutual Funds in Pakistan

  1. Farooq I.A. says:

    It may not be fair to term fund managers at ‘fault’.

    Like

  2. Kashif says:

    There are many issues like lack of expertise and required level of faith/belief. We are used to conventional financial norms since last 300 hundred years or so. It will take time, but will happen In-Shaa-Allah and the natural forces will compel us to perform professionally (Islamic way).

    Like

  3. HayatCanada says:

    This is awesome. We didn’t know that in Islamic financial sector, we can get products such as mutual funds to be honest. This is first for us.

    Like

  4. Asim Hameed says:

    It is not true at all. Currently, “No” islamic mutual fund is entering into Commodity Murabaha and spread transactions. Moreover, Mudarabah companies will be marked as Shariah compliant very soon as SECP and Mudarbah association of Pakistan has drafted detailed rules for Shariah compliance and Shariah auditing for Mudarabah companies. Each Mudarbah company will be allowed to choose its own shariah advisor from a list of 15 recommended eminent shariah scholars of Pakistan. Hence, very soon everyone will see the difference.

    So, I think all above-mentioned observations seems not true and based on out-dated facts.

    We all must appreciate the efforts of this industry.

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    • Your message has contradiction. You said it is not true at all. Then, you yourself admit that Commodity Murabaha (according to your own words) was used in past and as well as Mudarabah companies were prohibited for investments as per Meezan Bank’s and Al-Meezan’s own Shariah Advisors. What about Ready-Buy future sale transactions, what about profiteering from Engro, FFBL and such other leveraged companies by financing them and depriving investors of equity investments (preferable than debt as per Quran and Ahadith) in those companies due to self-manufactured guidelines.

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      • Asim Hameed says:

        1, 2, 3, 4, 5, 6, ….. 10 and then he talks about billions. A child start with 1 , 2 , 3 , 4, 5 and 6. If he attempts to jump directly onto 10, everyone will discourage him. Also, there is incremental learning process. Things are getting towards best-practices with the passage of time.

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      • Brother Asim Hameed, it is completely another story to learn new things with progression and to adopt wrong things first knowingly and admittedly and then claiming to get on the right path one day.

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    • Progression towards achieving a higher end is different than choosing wrong things first and then correcting them later on. The chance is that if we defend the wrong today, we will defend it tomorrow as well.

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  5. khadija says:

    How many total mutual funds in Pakistan and how many Islamic and how many conventional among them?

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