Do Fund Managers Keep Their Promises?: The Case of Shari’ah Equity Funds

36 Pages Posted: 19 Sep 2011 Last revised: 2 Oct 2012

See all articles by Yunieta Nainggolan

Yunieta Nainggolan

Queensland University of Technology - QUT Business School

Peter Verhoeven

Queensland University of Technology - QUT Business School; Financial Research Network (FIRN)

Janice C. Y. How

Queensland University of Technology; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: September 16, 2011

Abstract

This paper examines the compliance of a large sample of faith-based ethical funds – Shari’ah equity funds (SEFs). SEFs screen their investment for compliance with Islamic law, where riba (conventional interest expense), maysir (gambling), gharar (excessive uncertainty), and non-halal (non-ethical) products are prohibited. Using a set of stringent Shari’ah screens similar to those of Morgan Stanley Capital International (MSCI) Islamic, we find less than one-third of the equity holdings of SEFs are Shari’ah-compliant. While most (95%) of the fund holdings pass the business screens, only about 42% pass the total debt to total assets ratio screen. This finding suggests that, in order to overcome a significant reduction in the investment opportunity set, Shari’ah principles are compromised, with SEFs adopting lax screening rules in an attempt to achieve financial performance. An implication of our results is that SEF investors may be exposed to Shari’ah compliance risk since the fund managers do not always fulfill their fiduciary obligations as promised in the prospectus. While younger funds and funds that charge higher fees and are domiciled in more Muslim countries are more compliant, funds that have greater disclosure of the Shari’ah compliance framework are not necessarily so.

Keywords: Shari’ah Compliance, Shari’ah Equity Funds, Ethical Funds, Religious Funds, Socially Responsible Investments

JEL Classification: G11, G20, G23, M14

Suggested Citation

Nainggolan, Yunieta and Verhoeven, Peter and How, Janice C. Y., Do Fund Managers Keep Their Promises?: The Case of Shari’ah Equity Funds (September 16, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1929187 or http://dx.doi.org/10.2139/ssrn.1929187

Yunieta Nainggolan

Queensland University of Technology - QUT Business School ( email )

GPO Box 2434
Brisbane, Queensland 4001
Australia

Peter Verhoeven (Contact Author)

Queensland University of Technology - QUT Business School ( email )

GPO Box 2434
Brisbane, Queensland 4001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Janice C. Y. How

Queensland University of Technology ( email )

2 George Street
Brisbane, Queensland 4000
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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