ISLAMIC FUNDS IN PAKISTAN BROADENING INVESTMENTS...

PROF. DR. KHAWAJA AMJAD SAEED*
Email: principal@puhcbf.edu.pk

Mar 12 - 18, 2007

Islamic Funds existing in Pakistan:

* Meezan Islamic Fund.
* Meezan Islamic Income Fund.
* Atlas Islamic Fund.
* UTP Islamic Fund.
* United Composite Islamic Fund.
* Pakistan International Element Islamic Fund.

MEEZAN ISLAMIC FUND (MIF)

Meezan Islamic Fund (MIF) is a Shariah Compliant open-ended fund, launched with a defined investment objective invests only in Shariah compliant instruments.

INVESTMENT OBJECTIVE

The objective of MIF is to provide the maximum total return to the unit holders from investment in "Shariah Compliant" investments for the given level of risk, while abiding by the Non-Banking Finance Companies Rules, 2003 and any other prevailing rules and regulations. Total return refers to returns from capital gains, realized and unrealized, and dividend income (from investment in secondary and primary equities - Musharika), rental income (from operating leases - Ijara), mark-up (from cost-plus sales - Murabaha), and other Shariah Compliant investments.

INVESTMENT POLICY

MIF will follow an investment strategy whereby more than 50% investment will be made in listed securities, as required under NBFC Rules. However, MIF may also invest in other Shariah Compliant instruments as and when they are available for investment. Specifically:

FEATURES

MIF will invest in shares, Participation Term Certificates, Modaraba Certificates, Musharika, Murabaha, Term Finance Certificates and all other asset backed securities; also invest in contracts, securities or instruments of companies, organizations, and establishments issued on the principles of Bai'Mu'ajjal, Bai' Salam, Istisna'a, Mudaraba, Murabaha and Musharika.

SHARIAH ADVISORS

The reputable Shariah Supervisory Board of Meezan Bank Ltd. comprises learned scholars, namely, Justice (Retd.) Muhammad Taqi Usmani from Pakistan, Dr. Abdul Sattar Abu Ghuddah from Saudi Arabia, Sheikh Eassam M. Ishaq from Bahrain and Dr. Muhammad Imran Usmani from Pakistan.

MEEZAN ISLAMIC INCOME FUND (MIIF)

Meezan Islamic Income Fund (MIIF) is the Pakistan's first Shariah Compliant open end mutual fund which falls in the category of Income Fund. The objective of MIIF is to provide Halal and consistent stream of income with long-term capital preservation in a Shariah Compliant manner.

INVESTMENT OBJECTIVE

The Fund's primary objective is to provide investors with a high and stable rate of current income consistent with long-term preservation of capital in a Shariah compliant way. A secondary objective is to take advantage of opportunities to realize capital appreciation. The Fund shall seek to provide the investors with a rate of total return consistent with a broadly diversified portfolio of long, medium and short term, high quality Islamic income Instruments.

INVESTMENT POLICY

The purpose of launching an Islamic Income Fund is to provide investors with a safe and stable stream of halal income on their investments and to generate superior long term risk adjusted returns. The Fund shall also keep an exposure in short-term instruments for the purpose of maintaining liquidity and to capitalize on exceptional returns if available at any given point in time. The portfolio shall be geared towards maximizing annual income to the extent consistent with preservation of capital. The portfolio shall comprise of short-term, medium-term and long- term investments.

ISLAMIC BANKING AS PART OF TOTAL BANKING ASSETS, PERCENT

 

2001

2002

2003

2004

2005

Bahrain*

17

14.7

14.7

15.7

14.4

Indonesia

0.3

0.4

0.6

1.2

1.4

Kuwait

15.8

15

16.2

18.1

21.6

Malaysia

8.2

8.9

9.7

10.5

11.3

Qatar

12.4

12.5

12.5

13.7

14.4

UAE

7.2

9

9.4

10.9

11.8

* On-shore banks only

Source: Central banks; Banks Annual Reports; Capital Intelligence Reports; Zawya; McKinsey analysis

FEATURES

It provides potential to the investors for capital gains as well as regular income by investing in a diversified portfolio of good quality Islamic Instruments. The instruments in which MIIF will invest are Sukuks (Islamic Bonds), Musharika and Morabaha instruments, Shariah-Compliant spread transactions, Certificate of Islamic Investments and other Islamic income products.

It provides diversification of portfolio resulting in lower risk and competitive return on your investment. All investments of the Fund would be as per the guidelines of the Shariah Advisor of the Fund. Investment avenues shall include fixed, floating, and hybrid investment instruments. The fund would invest in the following instruments with broad allocation restrictions:

SHARIAH ADVISORS

All investments in MIIF are screened for Shariah Compliance based on the criteria approved by the Meezan Bank's Shariah Advisory Board, which is headed by eminent Shariah scholar Justice (Retd.) Mufti Muhammad Taqi Usmani. The other respected members of the board are Dr. Abdul Sattar Abu Ghudda, Sheikh Essam M. Ishaq and Dr. Muhammad Imran Usmani. The Central Depository Company of Pakistan (CDC) is the Trustee of MIIF.

ATLAS ISLAMIC FUNDS (AIF)

Atlas Islamic Fund (AISF) is an open-end Shariah Compliant fund, with defined investment objective as per Shariah compliant gadget.

INVESTMENT OBJECTIVE

The Fund will invest in a diversified portfolio of Shariah-Compliant securities and Islamic modes of instruments, in Pakistan as well as internationally (upto 30% of its net assets subject to a cap of US $15 million) with a view to optimise returns balanced with risk.

INVESTMENT POLICY

In selecting the equity securities, the Fund shall select such companies that meet the Shariah Compliance criteria, are consistently dividend paying, have growth prospects, are actively traded.

FEATURES

The Shariah Compliance criteria for selecting equity securities are as follows:

* Basic business of the investee company should be Halal;

* The total debt of the investee company should not exceed 45% of its total assets

* The total illiquid assets of the investee company as a percentage of its total assets should be at least 10%

* The total investment of the investee company in Shariah non-compliant business should not exceed 33% of its total assets

* The income from Shariah non-compliant investment should not exceed 5% of the gross revenue of the investee company. (Gross revenue means net sales plus other income)

* The net liquid assets (current assets minus current liabilities) per share should be less than the market price of the share.

SHARIAH ADVISORS

The Shariah Board of the Fund consists of eminent Islamic economic and financial scholars. Board of the Fund will be comprised of Mr. Javed Ahmed Ghamidi and Dr. Khalid Zaheer.

UTP ISLAMIC FUND (UTP-ISF)

The main focus of the UTP-Islamic Fund is to provide an outlet to investors who want 'Riba-free' returns. In addition, the aim is to provide to the investors an optimum rate of return, reasonable concern for safety of capital and to provide to the investors liquidity to join or leave the fund at their convenience.

INVESTMENT OBJECTIVE

The main objective of the UTP Islamic Fund is to provide an avenue of investment to those who want to invest their savings in such schemes, which are Shariah compliant. In addition the aim is to provide to the investors an optimum rate of return, reasonable safety of capital and to provide to the investors liquidity to join or leave the Fund at their convenience. The main focus of the UTP Islamic Fund is to provide an outlet to investors who want 'Riba-free' rate of returns.

INVESTMENT POLICY

Fund will follow an investment strategy that makes it a 'balanced' fund. A balanced fund will carry a reasonable mix of equity and non-equity securities, and will seek both growth and income, remaining within the guidelines of Shariah at all times.

FEATURES

Fund will invest primarily in Shares, Participation Term Certificates, Mudarabah Certificates, Musharakah, Murabahah, Term Finance Certificates, Preference Shares, Convertible Preference Shares, and other asset backed or mortgaged based securities;

Fund will also invest in contracts, securities or instruments of companies, organizations and establishments issued on the principles of Bai'Mu'ajjal, Bai'Salam, Istisna'a, Mudarabah, Murabahah and Musharakah;

The weightings of the investment mix of the portfolio shall be managed in a manner that reduces the risk of loss in market value of the investment as a result of prevailing market situation, remaining within the guidelines of Shariah at all times, and shall depend on the availability of Shariah based investment securities. In the view of this, initially the investment will mainly be in listed securities.

SHARIAH ADVISORS

Shariah Advisory Council is from the Aleemiyah Islamic Missionary University, and is composed of Mr. Wasiul Hasan Ansari, Chairman and Secretary, Prof. Maulana Abu-Faheem Anwarullah Bin Wali and Mr. Mustafa Fazil Ansari, Members.

UNITED COMPOSITE ISLAMIC FUND (UCIF)

UCIF is the first Shariah Compliant fund launched by UBL Fund Managers. UCIF is an open-ended fund that offers its investors an opportunity to invest in a diversified portfolio of Shariah Compliant investments with the objective of maximizing medium to long term returns for a given level of risk.

INVESTMENT OBJECTIVE

UCIF offers its investors an opportunity to invest in a diversified portfolio of Shariah Compliant investments with the objective of maximizing medium to long term returns for a given level of risk. The investments in the Fund will be diversified both in terms of securities within an asset class as well as across asset classes. The Fund would strictly follow Islamic Shariah in selection of investments under the supervision of its Shariah Advisory Board.

INVESTMENT POLICY

The investments in the Fund will be diversified both in terms of securities within an asset class as well as across asset classes. The Fund would strictly follow Islamic Shariah in selection of investments under the supervision of its Shariah Advisory Council.

The Fund seeks to achieve its investment objective by investing funds in Shariah Compliant securities listed on the Stock Exchanges in Pakistan and abroad, Islamic Funds overseas and other Fixed Income Islamic instruments like Morabaha/Musharika Certificates & Sukuk Bonds.

FEATURES

The basic business of the investee company should be Halal, by way of guidance, securities issued by entities whose core activities are or are related to the following are excluded:

* Banking, insurance or any other interest related activity
* Alcohol, tobacco, gaming (gambling)
* Any activity related to pork
* Activities deemed offensive to Islam

SHARIAH ADVISORS

The Fund would strictly follow Islamic Shariah in selection of investments under the supervision of its Shariah Advisory Council. Shariah advisory board comprise of Maulvi Mohd. Hassan Karim and Mr. Muhammad Najeeb khan.

PAKISTAN INTERNATIONAL ELEMENT ISLAMIC FUND (PIIF)

The Pakistan International Element Islamic Fund (PIIF) is an open-end fund, which is Shariah compliant, and is able to invest in capital markets both domestically and internationally. The Fund seeks to optimize total returns within the parameters of Shariah compliance, primarily from Pakistan's attractive capital market while having the ability to avail the opportunities in international markets as well.

INVESTMENT POLICY

PIIF is an Islamic fund, which shall invest only in Shariah compliant securities. The bulk of the investment will be in Pakistan's capital market, with the option of net assets of investing a sizeable portion (up to 30% or USD 15 million, whichever is less), internationally.

FEATURES

Shariah compliance - We adhere to the stringent criteria developed by a Shariah Council. Islamic investing principles generally prohibit investments in certain industries (e.g., alcohol, pornography, defense and casinos) and business with substantial interest bearing debt obligations or those which derive a substantial amount of interest income. Choosing stocks that fit Islamic investment (Shariah Compliance) criteria is a time-intensive, analytical, and continuous process.

Actively Managed Portfolio - The Fund's actively managed portfolio will enable the Fund Managers to take advantage of future opportunities in the market while staying true to Islamic principles. Among the securities that meet Islamic principles, the Fund Manager will determine a security's attractiveness for purchase based on a number of factors, including its fair value and record of earnings growth, among other things.

SHARIAH ADVISORS

Under the supervision of Justice (Rtd) Muhammad Taqi Usmani, the Shariah Council of the Fund will consist of: Maulana Mahmood Ashraf Usmani, Dr. Muhammad Imran Ashraf Usmani and Mufti Muhammad Zahid

PERFORMANCE OF DIFFERENT ISLAMIC MODES OF FINANCING FOR 3RD AND 4TH QUARTER OF 2006

 

SEP-06

DEC-06

%CHANGE

Murabaha

20,627,469

26,505,838

28%

Murabaha is a trading activity in principal. The bank will purchase the commodity required by the customer from the market and sell it to the customer at a mutually agreed profit margin. The customer will pay this price in installments.  Terms are fixed during the tenor of this agreement. 

Ijarah

17,618,377

19,633,599

11%

An Ijarah Agreement can be considered a "rent-to-own" transaction, where the benefits of the asset are transferred to the customer.  Under this agreement the bank allows usage of the asset under installment plans to the customer.  The installments consist of rentals for use and part payment.  At the end of the agreement period the customer can either purchase or return the asset to the bank.

Musharaka

351,535

533,029

52%

A joint venture where both parties inject capital to conduct a business, where partners share profits according to a predetermined ratio whereas loss is shared as per the ratio of investment. 

Mudaraba

-

-

-

This partnership is based on a Profit and Loss sharing agreement where one partner (Rabb-ul-Maal) invests his funds and the other partner (Mudarib) who has know how, manages the business.  The profit earned is shared between the parties on a predetermined ratio, after deducting the costs that the Mudarib has incurred to run the business. In case of a loss the Rabb-ul-Maal bears the loss and the Mudarib does not earn anything. 

Diminishing Musharaka

6,549,520

10,597,750

62%

Salam

2,365,729

464,755

-80%

Under this contract the seller undertakes to supply specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot.  The price is paid immediately in cash but supply of the purchase goods is deferred to a fixed date.

Istisna

642,547

899,919

40%

When a commodity is transacted before it comes into existence, the transaction is known as Istisna.  It is an order to manufacture a specific commodity for a purchaser.  The manufacturer uses their own material to manufacture the goods.  The price and product specifications are settled by mutual consent of all parties.

Qarz/Qarz-e-Hasna

6,874

7,486

9%

Others

5,000,131

7,099,640

42%

Total

53,162,182

65,742,016

24%

Amount of Non performing Finances

916,340

820,391

-10%

Provision against Non Performing Fin.

541,368

604,809

12%

Net Non performing Fin.

374,972

215,582

-43%

Gross Financing

53,162,182

65,742,016

24%

Source: SBP