Attractiveness of Investing in Islamic Mutual Funds - Research Proposal Example

The Attractiveness of Investing In Islamic Mutual Funds The Attractiveness of Investing In Islamic Mutual Funds Introduction A significant contemporary subject for financial organizations as well as financial marketplaces is Islamic monetary services, a sensation that is quickly growing globally. Islamic law compliant resources are projected to have developed by 37% reaching 729 billion dollars in 2007. They were projected to reach the1 trillion-dollar mark in 2010 but this mark was surpassed when the stipulated period was reached. While numerous assets are grounded in nations such as Saudi Arabia or Kuwait, numerous western financial organizations and administrations have also established a strong concentration in Islamic finance. The British government acclaims that United Kingdom is the principal hub for Islamic economics out of the Gulf Cooperative Council (GCC) region. Countries such as Malaysia have distinct clear policy intentions for growth. In retrospect, studies have confirmed that Britain is the global pioneer for Islamic business education. Islamic pecuniary services are obtainable in Britain by approximately two dozen commercial banks comprising of Barclays, HSBC, as well as RBS. HSBC’s Islamic business department Amanah, which is predominantly the market leader, realised an almanac asset evolution of over 50% in 2007 and 2008 period. Later down the line, the bank had grown its Islamic investment return to almost ten times this amount by the year 2013. This growth is owed to the fact that as Shari’a rule forbids many high-risk doings. Islamic fiscal services have overtime been less influenced by the credit catastrophes than their orthodox counterparts, which swells this appeal. Western nations like the US or Switzerland are also endorsing their Islamic fiscal services to appeal to investors. As a multibillion-dollar business within Islamic economics and Islamic share, Islamic mutual funds stand as a gold mine to both Muslims and non-Muslims in the global economic sphere. Over seven hundred Islamic joint funds are presently offered, which concentrate on a diversity of different resources for instance equities, asset finance, as well as real property. Despite the fact that this section of the investment market holds so much potential little information on why it is attractive to investors have been done. In this paper, a sample of Saudi Arabian investors and Islamic mutual funds executives was made to make sense of the phenomenon Problem Statement Despite the fact that Islamic investment has been viewed as a growing and a potentially gold mine venture, the reason why venture is related to the industry’s restricted nature by a couple of sharia laws is not known. Hence, it is limited in the sense of the word in investment terms. Islamic finances are described by their amenability with Islamic law, regularly referred to as Shari’a law (Abdullah, Hassan & Mohamad, 2010). ‘While Islam endorses the idea of improving an individual’s finance condition, it must be attained within rules of good standards and decent financial and commercial repetitions’. Inter alia, Shari’a rule forbids mutual funds achived through Riba al Nasiah, Haram Maysir, as well as Gharar, merchandises or services and it necessitates Haram purification. Riba al Nasiah signifies the receipt of gaining on capital. Therefore, Islamic mutual reserves cannot be invested in predictable bonds securities, certificates of deposit, preferred stock, as well as some derivatives. Maysir and Gharar can be interpreted as betting and ambiguity and their exclusion commonly averts Islamic treasuries from advantage, short term selling, and any religiously impure merchandise. Additionally, to Riba al Nasiah, Maysir, and Gharar, merchandises or amenities that unfavourably affect self-respect or promote the misuse of one another are Haram interpreted as outlawed (Arun & Turner, 2012). Clear unholy examples include pork and pornographic activities, non-medicinal alcohol, betting, non-Islamic financial amenities, tobacco, or arms. Given the absolute size of concurrent multinational establishments, numerous of them obtain small sizes of their income from a forbidden activity. Contemporary Shari’a scholars permit investment in stocks with supportable proportions of returns from prohibited deeds under the state of Haram purification. This condition requires investors to donate the equivalent proportion of their distributions from such companies to charities to purify their earnings from prohibited activities. As stated above, it is hard to trade in the financial market while following sharia laws and if one takes part in them, then an amount of their return has to be taken from them for purification (Ramady, 2010). Despite this, the industry is growing at a rate that many common investors cannot comprehend. As a means to shade light to the matter, this article has taken up a study in showing why this venture is lucrative to some individuals. Objective of the Research As stated above, Islamic investment is restricted from engaging in certain investment packages yet the venture is growing at an exponential rate. More Muslim and non-Muslim individuals are taking part in it every day; however, a larger part of the business is left out in playing a vital role in the industry’s undertaking (Abderrezak, 2010). This research is set to understand why Islamic investment is achieving such a status in the greater community unlike conventional or somewhat secular investment, which has been a dominant factor in the financial district. Research Questions In the quest to understand the degree to which Islamic investment has caught on in such a short stint, it is significant to have relevant questions on why this phenomenon is taking place. Specifically, we investigate the following research questions: (1) Why do most investors believe that Islamic investment has a great potential over conventional investment yet it has many ethical and religious constraints? This part of the question is set to understand why the practice is attractive in investment terms yet its environment is limited. (2) Which investment classes are favoured by Islamic equity mutual funds? This set to understand which investment package is considered most lucrative to many investors. (3) Lastly, if national differences exist in Islamic equity funds’ financial presentation and investment style, then what is the preeminent explanation? This question is set to understand where investment Islamic mutual funds more attractive. Methodology In the quest to find information used in this research, it was more realistic to use qualitative questionnaire in order to get relevant information on the study. This strategic model made it possible to attain firsthand information from major players in the Islamic investment environment (Best, 2014). As viewed from the research questions, a wider variety of questions had to be used to both Islamic mutual funds investors and Islamic mutual fund executives from different countries and companies respectively (Ebrahim, 2010). It should be taken to note that this was done so because at countrywide level, Islamic funds show a slope towards growth and small capital stocks (Iqbal, 2011). Nonetheless, Islamic mutual treasuries from one country tend to capitalize in a diversity of dissimilar global regions (Morris & Ingram, 2011). Therefore, we cannot amply assess their financial presentation and investment moves without regulating their revelation to local, global equity market standards, and investment styles. To regulate these local and global issues, the research team had to fashion a three level Carhart ideal, which uses twelve aspects to governor equity market and reserve model contact at three stages of investments. This was done using data from a nation in this case the UK (Girard & Hassan, 2012). All other nations mostly America and Japan are gradually playing a role in the practice. Data Collection Bases of data about Islamic mutual treasuries are still very partial associated to their ethical or conventional equals. The use of qualitative questionnaires addressed both shortages. In the collecting of data, a sum number of 300 Saudi Arabian investors and 5 Islamic managers accepted to participate in the practice (Hong & Kacperczyk, 2010). In terms of investors, the more relevant questions were based on what attracted them towards Islamic investments unlike conventional or secular forms of investment ventures (Jamaldeen, 2012). Furthermore, the overriding question would seek to establish what division of the investment sector stood as the most lucrative venture towards their liking (McKenzie, 2012). In terms of mutual fund executives, the questions placed as more relevant were regional based, companies such as Barclays, HSBC, Lloyds, and RBS may hold British headquarters but they have major Islamic investment branches taking part in business in both the UK and the Gulf Cooperative Council (Meesok et al., 2011). Data Analysis Due to the reason of using a qualitative questionnaire in data collection, the information gathered was analysed by SPSS AND SEM software. A Structural equation modeling (SEM) is a universal term used to define binary computer based arithmetical fit software set up that most commonly include PLS-PA and LISREL or AMOS software (Campbell & Vuolteenaho, 2011). The approaches were established as substitutes to the broadly used schemes of progression calculation advances employed in econometrics and enable the more cultured three-level Carhart ideal to give considerable outcomes at the end of the test (Meesok et al., 2011). It should also be taken to account that the ideal may necessitate some modification in order to advance the right fit, thus approximating the most probable relationships amongst variables (Christoffersen & Sarkissian, 2010). Results or Findings This section of the paper is set to comprehend the analysis found from the 300 Saudi Arabian investors on answering the research questions. As a parameter in the modified SEM model software, the answers given were related to a second faction of the test that showed most investors were angled towards numerous hypothetical suggestions and results from Shari’a bylaws and demographics of Islamic capitals (Cihák & Hesse, 2010). Findings showed that their notions as from the test done suggested that their major or greatest attraction to invest came from the fact that Islamic mutual reserve executives are limited in their capability to use superior evidence or winning markets. Nevertheless, the ordinary mutual trust executive has not been documented to show greater skills in this perspective. Therefore, the conflicting argument may also suggest that Shari’a bylaws limit the possible damage triggered by a manager (Derigs & Marzban, 2009). Additionally, the Shari’a compliance of merchandises and services are probable to prompt financial benefits to markets whose clienteles and mediators experience a greater utility from obedience to Shari’a bylaw. Therefore, Islamic mutual capitals might experience an improved financial presentation in less principally Muslim markets such as the UK (El-Gamal, 2012). Moreover, the findings showed that Islamic mutual trusts’ investment classes are perhaps more standardized than their orthodox counterparts’ classes due to Shari’a bylaw’s narrow outline of eligible doings (El-Gamal, 2012). Islamic treasuries could have rather lesser betas than conservative leveraged reserves. Islamic assets also probably invested over-proportionally in lesser stocks as bulky stocks have a greater possibility of receiving unbearable revenues from forbidden activities (Kosowski et al., 2013). Similarly, there the expectation that Islamic reserves will be additionally exposed to growing stocks than value stocks as the prior is reflected to have a lesser advantage than the second. Conversely, there is no hypothetical motive why Islamic reserves should be additionally exposed to external or prohibited forces than conservative investment strategies or vice versa (Fama & French, 2010). Supplementary analysis exhibited that Shari’a obedient investment do not peruse profits as socially accountable investment. On the other hand, some claim that such a disturbance by anxieties about accountability would be harmful to financial presentation since they are reinforced by proof suggesting habitual sin stocks such as alcohol, betting, and tobacco omitted by Islamic treasuries to deliver meaningfully positive abnormal yields (HM Treasury, 2011). Conversely, others consider answerable non-financial asset criteria to characterize advanced risk management. Proof to support this dispute comes from the trials on Enron, and Worldcom. Before their disgraces, these establishments were de-listedfrom the Dow Jones Islamic Market Index (Elton et al., 2013). Recommendations It can be argued that questionnaires are neither among nor the most prominent approaches in qualitative research since they commonly necessitate subjects to respond to a motivation, which is not natural (Lee & Faff, 2012). For instance, where certain evidently defined evidences or views have been recognized by more qualitative approaches, a questionnaire can sightsee how generally these relate if that is a matter of concern (Ferson & Schadt, 2012). Preferably, there would then be a qualitative cross reference on a portion of questionnaire feedbacks to see if participants were inferring items in the way requested. On the other hand, a questionnaire could be used in the first case, followed by qualitative methods on a part as a check as well as filling out particular features of the questionnaire feedbacks. Interaction among methods in this way is characteristic of qualitative investigation (Ferson & Schadt, 2010). Conclusion Today, Islamic investment Assets have turned out to be an unquestionable fact. The number of Islamic organizations and Reserves is ever growing. Innovative Islamic Funds with aggregate amount of capital are being recognized. Orthodox banks are intergrating their functions to the Islamic windows for the processes of Islamic Funds such as Barclays, RBS, Lloyds, and HSBC in UK (Ghoul & Karam, 2012). The UK is the global leader for Islamic finance training. In order, to understand why Islamic investments are becoming more lucrative a qualitative questionnaire was used to comprehend this phenomenon, which involved 300 hundred Saudi Arabian investors and five Islamic mutual fund executives (McKenzie, 2012). The results were comprehensive and gave a clear reason why Islamic funds have become a vital part of the global finical markets. References Arun, T., & Turner, J. (2012). Corporate governance and development: Reform, financial systems and legal frameworks. Cheltenham, UK: Edward Elgar. Abderrezak, F. (2010). The performance of Islamic equity funds. Falaika. Abdullah, F., T. Hassan & S. Mohamad (2010). Investigation of performance of Malaysian Islamic unit trust funds. Managerial Finance, 33, no. 2: 142-153. Best, J. W. (2014). High-powered investing all-in-one for dummies. Hoboken, NJ: John Wiley & Sons. Campbell, J. Y. & T. Vuolteenaho. (2011). Bad beta, good beta. American Economic Review, 94, no. 5: 1249-1275. 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