Concept Islamic equity funds (IEFs) are similar to traditional equity funds in that investors pool their funds

to invest in shares. However, the main difference between IEFs and standard equity funds is that investors in IEFs earn halal profits in strict conformity with the precepts of Islamic shariah. Returns are achieved largely through the capital gains earned by purchasing shares and selling them when their price increases. Profits are also achieved from the dividends distributed by the relevant companies. Of course, these funds are not allowed to invest in certain areas. They cannot, for example, invest in companies involved in areas that are not lawful in terms of shariah, such as alcohol, gambling, or pornography. They also have a restricted ability to invest in areas such as financial companies and fixed-income securities, due to the shariah ban on usury. These funds generally avoid bonds and other interest-bearing securities, while seeking protection against inflation by making longterm equity investments. The first IEF was the Amana Income Fund, established in June 1986 by members of the North American Islamic Trust, the historical Islamic equivalent of an American trust or endowment, serving Muslims in the United States and their institutions. The fund is still in existence today. Prior to the growth of IEFs, few investment alternatives were available to Muslim investors. A wide variety of investment managers, including major financial institutions, now offer these funds. Examples include Citibank, Deutsche Bank, HSBC, Merrill Lynch, and UBS. Following the growth of IEFs, credible equity benchmarks have been established, including the Dow Jones Islamic Market (DJIM) index and the FTSE Global Islamic Index Series. Fund managers can use indices, such as the DJIM index , to screen stocks. The DJIM tracks shariah-compliant stocks from around the world. It eliminates those that fail to meet shariah guidelines, including financial ratio filters. The Islamic equity funds industry had grown to around US$20 billion in assets under management by February 2008, according to Failaka Advisors, a fund-monitoring company. Failaka Advisors said that the IEFs had grown rapidly, tripling over the previous five years,

driven by Gulf Cooperation Council investors. Saudi Arabian funds and fund managers dominate the industry, accounting for nearly 75 funds out of around 300 IEFs worldwide. Bahrain has become the favored center for fund registrations in the Gulf.

principles of islamic equity investment In an equity fund the amounts are invested in the shares of joint stock companies. The profits are mainly achieved through the capital gains by purchasing the shares and selling them when their prices are increased. Profits are also achieved by the dividends distributed by the relevant companies. It is obvious that if the main business of a company is not lawful in terms of Shariah, it is not allowed for an Islamic Fund to purchase, hold or sell its shares, because it will entail the direct involvement of the share holder in that prohibited business. Similarly the contemporary Shariah experts are almost unanimous on the point that if all the transactions of a company are in full conformity with Shariah, which includes that the company neither borrows money on interest nor keeps its surplus in an interest bearing account, its shares can be purchased, held and sold without any hindrance from the Shariah side. But evidently, such companies are very rare in the contemporary stock markets. Almost all the companies quoted in the present stock market or in some way involved in an activity which violates the injunctions of Shariah. Even if the main business of a company is halal, its borrowings are based on interest". On the other hand, they keep their surplus money in an interest bearing account or purchase interest bearing bonds or securities. The case of such companies has been a matter of debate between the Shariah experts in the present century. A group of the Shariah experts is of the view that it is not allowed for a Muslim to deal in the shares of such a company, even if its main business is halal. Their basic argument is that every share-holder of a company is a sharik (partner) of the company, and every sharik, according to the Islamic jurisprudence, is an agent for the other partners in the matters of the joint business. Therefore, the mere purchase of a share of a company embodies an authorization from the share-holder to the company to carry on its business in whatever manner the management deems fit. If it is known to the share-holder that the company is involved in an unIslamic transaction, still, he holds the shares of that company, it means that he has authorized the management to proceed with that un-Islamic transaction. In this case, he will not only be responsible for giving his consent to an un-Islamic transaction, but that transaction will also be

rightfully attributed to himself, because the management of the company is working under his tacit authorization. Moreover, when a company is financed on the basis of interest, its funds employed in the business are impure. Similarly, when the company receives interest on its deposits an impure element is necessarily included in its income which will be distributed to the share-holders through dividends. However, a large number of the present day scholars do not endorse this view. They argue that a joint stock company is basically different from a simple partnership period. In partnership, all the policy decisions are taken by the consensus of all the partners, and each one of them has a veto power with regard to the policy of business. Therefore, all the actions of a partnership are rightfully attributed to each partner. Conversely, the policy decisions in a joint stock company are taken by the majority. Being composed of a large number of share-holders, a company cannot give a veto power to each share-holder. The opinions of individual share-holders can be overruled by a majority decision. Therefore, each and every action taken by the company cannot be attributed to every share-holder in his individual capacity. If a share-holder raises an objection against a particular transaction in an annual general meeting, but his objection is overruled by the majority, it will not be fair to conclude that he has given his consent to the transaction in his individual capacity, specially when he intends to withdraw from the income attributable to that transaction. Therefore, if a company is engaged in a halal business, however, it keeps its surplus money in an interest-bearing account, wherefrom a small incidental income of interest is received, it does not render all the business of the company unlawful. Now, if a person acquires the shares of such a company with clear intention that he will oppose the incidental transaction also, and will not use that proportion of the dividend for his own benefit, how can it be said that he has approved the transaction of interest and how can that transaction be attributed to him? The other aspect of the dealings of such a company that it sometimes borrows money from financial institutions. These borrowings are mostly based on interest. Here again the same principal is relevant. If a share-holder is not personally agreeable to such borrowings, but has been overruled by the majority, these borrowing transactions cannot be attributed to him.

Moreover, according to the principals of Islamic jurisprudence borrowing on interest is a grave sinful act for which the borrower is responsible in the Hereafter; however, this sinful act does not render the whole business of the borrower as haram impermissible. The borrowed amount being recognized as owned by the borrower, anything purchased in exchange of that money is not unlawful. Therefore, the responsibility of committing a sinful act of borrowing on interest rests with the person who willfully indulged in a transaction of interest, but this fact does not render the whole business of a company as un-lawful.

difference between equity investment and musharakah and mudarabah Managing and structuring Islamic equity funds take up a considerable part of the paper where both equity and trade funds are covered. However, the bulk of the paper focuses on evaluating a number of existing Islamic Investment Funds, both equity and trade. Being the largest market for Islamic Funds, Saudi Arabia draws about 10 pages, where Funds and distributors are examined. The historical review is very useful and in fact quite novel. No doubt that a major effort was exerted by the writer, with valuable insights on the subject, especially the practical side of Islamic Investment Funds. I believe we are lucky to have scholars like Prof. Wilson, benefiting us with their knowledge and expertise on the subject. Nevertheless, being among a very small group so involved with Islamic Investment Funds, I see other areas I wished they were covered. 1. The writer had set for himself a very clear (and extremely worthwhile) objective for this paper: how investment funds can be managed in a manner acceptable from an Islamic perspective. One would expect that the Shari'ah aspects of Investment Funds will be the core of the paper. This is because the raison dtre for there Funds is the Shari'ah restrictions on investment. Nevertheless, this part of the paper is hardly two pages.

2. The Shari'ah basis of Investment Funds is not just avoiding alcohol and pork products. Rather, it addresses the very essence of modern corporate finance where capital structure of corporations is examined and standards for equity investment based on both Shari'ah and financial facts are developed. For example: What is so special about the 1/3 limit on debt, what is the significance of the argument for market capitalization Vs book values in screening company shares and how major purpose of companies as he called it, is translated into workable criterion for investment, what is the Shari'ah basis of the 15% (if there is any)?etc. More importantly purification, which constitutes an important element of the Shari'ah acceptability of these funds (particularly equity funds) was not given its due importance.

3. Very little attention is given to Shari'ah boards. Although most Shari'ah boards are not exactly in the limelight, their role is important, particularly in the Islamic equity funds.

More important, is the role of these boards in making sure that the manager follows, on a continuous basis, the Shari'ah requirements, and their relationship with fund managers..

4. Prof. Wilson identified two approaches to Islamic equity investment. The first is to screen companies for Shari'ah capability, the other, is to select companies in Muslim countries (P.1). I know of no investment fund of the second approach.

I.

In his comparison between Musharakah, Mudarabah and conventional equity, the writer appears to ignore the contemporary forms of Musharakah and Mudarabah contracts. Contrary to what Prof. Wilson depicts, both can be liquid, divisible and create capital gains. In fact the whole idea of limited liability and the corporation is being assimilated into Islamic jurisprudence via these two contracts. The Islamic jurisprudence Academy of the OIC has taken a decision permitting Mudarabah certificates, which negotiable.

II.

Two aspects of Islamic Funds are left by Prof. Wilson. Those relating to leasing funds. There are a number of them and they pose different and extremely interesting issues. Secondly, the introduction of the Dow Jones Islamic Market Index (DJIMI). This benchmark represent a very significant development in the field of Islamic equity investment.

Advantages 1. These funds have obvious advantages to Muslims, who can invest their money safe in the knowledge that the fund will not compromise any of their religious beliefs.

2. Many funds have been around for a long time and have a good track record of generating healthy returns for their investors.

3. It can be argued that, over the long term, IEFs will tend to perform better than conventional funds, since the former avoid investing in heavily leveraged companies.