ISLAMIC UNIT TRUST FUND MANAGEMENT
SAAD AL HARRAN
An Islamic Unit Trust (IUT) is a new phenomenon in society. A large number of people still cannot make a distinction between investing in a unit trust or investing on the stock exchange. The former is relatively safer than the latter simply because of the strategy adopted by the efficient fund manager to diversify the investment to various portfolios in order to reduce risk. With the latter, the risk of exposure tends to be higher and so does the return.
The concept of the unit trust as a medium-and-long-term investment is not totally understood by a large number of investors.
There are more than 12-unit trust companies and 4 property trust companies managing a total of 34 funds presently in the Malaysian market, excluding Bumiputra unit trusts. Many others will follow suit and therefore competition will be intensified between sister institutions, but it tends to be more severe between IUTs and non-IUTs.
Since competition is considered to be a healthy environment in the corporate society, the main issue that will occupy the minds of investors is the performance of the IUT. Two questions should be asked:
1. Can an IUT perform well, and can it grasp a large enough market share?
2. Can the fund manager utilise the funds more efficiently in order to achieve the target?
Indeed, it would be premature to pass judgement about the performance of lUTs or the efficiency of the fun d managers. Therefore, the real test in the minds of the investors will be three important factors:
1. Capital appreciation.
2. Bonus to be given to the unit trust holders.
3. The declared dividends.
Since the level of sophistication in the minds of investors tends to be increasing, especially in the urban society, the main factors in evaluating the institution will be the capital gain that the unit trust holder can make, and the dividend paid to him.
Since the level of sophistication in the minds of investors tends to be increasing, especially in the urban society, the main factors in evaluating the institution will be the capital gain that the unit trust holder can make, and the dividend paid to him.
The selection of the right person for the right job needs to be carefully examined. The fund manager is considered to be a trustee and that concept is an important factor in the life of a Muslim, therefore his competency must be above question.
Trust will also be linked to accountability. A trustee not only takes care of the fund but he also has to utilise it efficiently in order to show an actual result to his client. If the fund manager achieves higher rewards, they will be distributed to the investors. The fund manager should select appropriate people to undertake research and development and more specifically, marketing research.
If fund managers are scarce, then the policy-makers of the unit trust industry should approach the higher learning institutions for advice. Selection of appropriate business students can be made by consultation between representatives of the industry and the learning institutions. This process should secure firm links between the two parties and benefit them both.
Training will give the students the skills to select a unit trust fund and manage it successfully. The selection of a unit trust fund can be looked at in a two-stage approach:
Firstly, determine the risk profile that is the tolerance for risk.
Secondly, determine the characteristics of the unit trust fund that is being considered.
Promoting the IUT will be made through the agency system. The agency’s role is to sell the unit trust product in order to receive commission from the institution, as well as other bonuses. IUT policy-makers need to refine the agency system and to re-define the rules and regulations to improve the effectiveness and efficiency of the agency system.
Generally speaking, the current Islamic funds institutions are facing a real challenge in the form of surplus funds. This is obviously a serious problem and will undoubtedly undermine the viability of all Islamic financial institutions. By the year 2000, the total assets of Islamic financial institutions will equal US$100 billion. Are these institutions going to utilise these funds efficiently or will the problem of surplus funds continue?
It is here that the policy-makers of Islamic financial institutions need to focus and initiate practical solutions. Th e answers to this problem will not arrive externally, (i.e., in the form of foreign consultancy), but internally, which is where a new challenge will commence. The experiences of developing countries who obtained credit from international financial institutions has taught their policy-makers that solving financial problems should primarily be initiated from internal sources.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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