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17 May '16

What are Islamic Investments?

Posted by Priyanka S in Basic Concepts of Islamic Finance

Various Islamic financial institutions, especially in Islamic countries offer various types of investment products that are free of Riba or interest. An Islamic investment fund is usually one in which a number of people pool their money and the money is in turn invested in an Islamic legal manner.

Investment funds have been defined by the Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI) as follows:

"Funds are investment vehicles, which are financially independent of the institutions that establish them. Funds take the form of equal participating shares/units, which represent the shareholders’/unitholders’ share of the assets, and entitlement to profits or losses. The funds are managed on the basis of either mudaraba or agency contract."

The definition continues by setting out the Shari’a ruling that governs Islamic investment funds:

"Investment funds are permissible by Shari’a. Because funds are a form of collective investment that continue throughout their term, the rights and duties of participants are defined and restricted by the common interest, since they relate to third parties’ rights. Hence, in cases where the fund is managed on the basis of agency the shareholders/unitholders waive their right to management, redemption or liquidation except in accordance with the limitations and conditions set out in the statutes and by-laws."

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an Islamic international autonomous non-profit making corporate body that prepares accounting, auditing, governance, ethics and Shari'a standards for Islamic financial institutions. This organization was established in accordance with the Agreement of Association which was signed by Islamic financial institutions in Algiers. AAOIFI was registered in 1991 in the State of Bahrain. (aaoifi.com)

Some of the modes for Islamic investment include the following:

  • Equity Fund
  • Investment in (Halal) Shares
  • Ijarah funds (leasing funds)
  • Commodity funds
  • Etc.

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