The chapter 2 provides a detailed review on the characteristics, background and the performance analysis of Islamic funds, in addition, there is a brief discussion on a few essential matters concerning the Islamic funds.
2.1 Background, Definitions and Concept.
Either it is been simulated by the great desire to accomplish religious duty for the Muslims or with the aim of targeting marketing purposes , there is a massive emergence of the Islamic finance as a complement or even as a viable alternative to conventional finance. The development of Islamic finance is very important in particular to Islamic population and communities in a way that Islamic teachings are not limited to only ritually-oriented relationship between God and humans, however, it also create the role of people as the representative of the God in this world. Hence, in addition to the religious rituals, teachings of Islam distinguished the relations among people taking into account their economic, social, and political affairs. Moreover, as it had been mentioned in the previous chapters, Islamic teachings in their best attempt outline the environment in which the harmonious relations among stakeholders are ensured. The Shariah, in fact, is central in Islamic teachings and comprise Islamic laws that are well-known from the chapter 1. There is an essential fact that the Shariah is derived from the Holy Quran and the Sunnah. Moreover, in the two main sources, the
Shariah laws are also taken from other two independent sources such as the ijma which means consensus and the ijtihad or qiyas which means people reasoning according to analogy of the ulama – Muslim scholars. This subjective and distinct source of references provides dynamism in the Shariah laws with the opportunity for further development, adaptation and interpretation to take in the circumstances (Hourani, 2004).
It is very important to note once again that Islamic finance is a system, in which the main purpose is purportedly to follow the teaching of the Holy Quran as opposed to reaping maximum interest and returns on wealth and financial assets (Zaher and Hassan, 2001: 158). There exist three basic and distinct factors, Islamic finance from its conventional counterparts as highlighted by Presley and Sessions (1994), Hourani (2004) and Usmani (2005), such as:
(1) the strict prohibition of interest – Riba in all financial transactions no matter of percentage rate applied,
(2) the profit and loss equal distribution concept as the verified and justified average for distributions of income,
(3) the strict prohibition of Gharrar which means speculation or uncertainty activities are banned.
Subsequently, the kind and way of financing used by Islamic finance is the method of backing assets by tangible ones comparatively to debt-based instruments that are commonly preferred in conventional finance.
One of the quickest developing subjects in Islamic finance is the Islamic Investment Fund management services. The biggest rise of the Islamic funds sector clearly seen in the surprising growth in Islamic equity funds from only 29 – 30 funds with US$800 million of total assets worth in 1996 up to 98 funds with almost US$5 billion in early 2000 (Ayub 2007, 203).
Islamic fund management expands and the need of the services arises according to the Shariah laws that allow investments and other operations in an entitys stocks, equity or fixed income. Nevertheless, there is an explicit distinction in terms of the definition of firms stocks between the Shariah laws and the conventional finance rules and the theory. It should be pointed out that the Fiqh Academy of the Organization of Islamic Countries had in 1992 defined share or stock as elements representing an undivided portion of assets in companies? which is distinguishable in notably from the conventional definition that a firm stock represents residual claim to future cash flows in other words dividends and liquidation proceeds of an enterprise. Hence, from the Islamic Shariah point of view, when there is a sale of a firms stock in an effective way, there is a sale of undivided ownership parts of its assets. (Elgari 2002, 155).
The definition is in coherence with the viewpoint of Islamic finance stating that each and every financial instrument should be backed by tangible assets by the issuing firm. However, the definition looks to be used only for just investment in company shares as its real meaning, in particular concerning accounting treatment and shareholders rights, is in some ways unclear. Nevertheless, there are Shariah-compliant companies, for which their simple stocks are listed on the equity and liabilities part of the accounting balance sheet while their