By Lahem al Nasser
When Islamic investment funds first emerged the objective was to help rid the Muslim society of usury by creating [religiously] permitted investment channels. Another aim was to contribute towards developing Muslim societies through the redistribution of wealth from the class with financial surplus to the class facing financial deficit in a just and balanced manner that would ensure the fairness of the process of loss and gain.
Shariah provisions stipulate that there are "no rewards without risks" and that "profits must be accompanied with liability", in accordance with the Islamic hadith. Shariah law also ensures that securing returns is dependent upon the outcome of the return question [in terms of revenue]. An investor's capital is only insured in the case of transgression* which is why investors seek to invest their money in productive projects that aim at bettering society and answering to its needs whilst creating job opportunities away from the parasitical activities that offer no added value to societies or economies.
So, have investment funds fulfilled their function? And have they achieved the purpose on which they were founded?
A quick review of the list of Islamic funds in any Gulf market, abundant with immense financial resources and monetary surplus, would indicate how some of these funds have deviated from achieving societal aspirations and expectations (in which they operate). Instead, maximizing profit without any considerations for Shariah law and societal needs has been rampant heedless of societal needs, with most investors investing in stock markets or Murabaha* funds.
For example, the Saudi stock market, which is ranked second in terms of Islamic asset management according to the Global Competitiveness report issued by Mackenzie and Associates, constitutes 76 percent of the total existing funds which are approximately US $13.7 billion. Most of these assets are invested in Murabahat [funds] in collaboration with international companies in international markets or in stock markets – all of which are unproductive activities.
Perhaps some might say that this is what investors want! To which I would say: Were investors given the choice between various types of investment and have they rejected those? The answer is 'no'.
The best indicator for this is the investors' keen interest in real estate funds; shares were bought in record time. As for the banks that claim that investors do not accept the risks entailed in investing in productive projects or creative ideas, I would say that there is nothing more dangerous than stock markets; however notwithstanding, the number of investors in Saudi Arabia in 2006 was estimated at 663,000 with total investments exceeding 138 billion Saudi Riyals (SAR) – however, many investors lost their money as a result of the so-called unsuccessful investments.
So, how can we then say that investors are unwilling to take investment risks?
The inescapable truth that we must confront is that some Islamic funds have lost their identity and the basis on which they were founded upon because of attempts to seek fast and easy profits made through commissions of circulation, management and arrangement fees, in addition to other fees. As such, profits are reaped while investors suffer losses, in addition to the finance profits that are guaranteed through the clients' investments in the fund.
Another reality that cannot be overlooked is that fund trustees and managers are incompetent in the field of investment both in theory and in practice – they lack innovative abilities and do not keep up with developments in the industry on an international level. There are thousands of active funds worldwide in diverse fields that may be appropriated to conform to Islamic Shariah requirements, such as risk capital funds. It is funds such as these that would contribute to nurturing innovation.
Suffice it to mention that companies such as Microsoft and Google are products of risk capital, in addition to investment funds in infrastructure projects and private investment funds, whether in the freight sector, real estate financing or the investment funds of private companies.
Today, Islamic investments funds are in more need than ever to return back to the foundation on which they have been established so that the purposes of Shariah may be fulfilled by qualified parties in the contemporary world.
Society is in need of these funds and it is shameful to see that traditional funds are more productive and effective in our societies than Islamic funds.
Lahem al Nasser is an Islamic banking adviser.
* Commercial insurance is prohibited by Shariah law, according to the majority of Muslim scholars because it contains the following elements: 'riba' (usury), 'al gharar' (uncertainty) and 'al maisar' (gambling).
* Murabaha: financer, such as a bank, buys a commodity and sells it to the purchaser at a higher price.
Thursday, April 3, 2008
Islamic Investment and Development
By Lahem al Nasser