Islamic Mutual Fund: A ‘halal’ approach to earn a living

Most common problem faced by practicing Muslims when it comes to invest their life long savings is difficulty in find suitable Shariah compliant avenues. Conventional banking system is based on capitalist principles of interest based banking system, which is riba (usury) prohibited in Islam. The investment avenues based on Shariah compliance available to a common practicing Muslim are very limited.

With increasing Muslim population, there was dire need of developing products in compliance with the rules and regulations of the Shariah laws. The rules and regulations set under the Shariah law state that a practicing Muslim should invest his hard earned money in a right place, i.e. in a company whose objective isn’t against the teachings of Islam. To further illustrate it, it means that the mutual funds should not invest in those companies indulged in prohibited activities such as gambling, liquor, pork based products, and interest based lending. Whereas the conventional mutual funds invest in any company or industry whether it may be comply with Shariah principles, but Islamic mutual funds firmly follow the strategies to ensure that investments are placed in right place in alignment with Islamic laws which is often approved by the independent Shariah advisors.

Islamic mutual fund operates in a similar method as a conventional fund except that the Islamic mutual fund are only allowed to make investments in only Shariah-Compliant investments. Shariah-compliant investments strictly follows the rules and regulations set forth by Islam, i.e. they are not classified as Riba (interest) or Gharar (uncertainty). Islamic Mutual funds are under the oversight of Shariah Advisors of The Securities and Exchange Commission of Pakistan (SECP).

Unlike interest based investment products where amount invested is subject to a fixed rate of return, the returns of Shariah compliant mutual fund products do not guarantee fixed rate of return, as the Modarba (form of partnership where one party brings capital while the second party brings expertise and labour) Musharaka (form of partnership with both parties investing capital) and Ijarah (a leasing structure where one party leases asset to another party in exchange for rental payments)

Shariah compliant Mutual funds are based on Islamic principles as required under Shariah laws and local regulations, which makes it an attractive investment avenue for Muslims to earn ‘halal’ earnings.