This standard is the fourth amongst the DFM’s series of Shari’a-compliant standards, following the Standard on Shares in 2007, the Standard on Sukuk in 2014 and the Standard on Hedging in 2017.
His Excellency Essa Kazim, Chairman of DFM said: “This significant step underlines DFM’s effective role in providing Shari’a -compliant standards considering the market’s status as the first Shari’a-compliant exchange globally since 2007. It also underlines our constant efforts to further strengthen Dubai’s leading position as the capital of Islamic economy globally, as part of the initiative launched by His Highness Sheikh Mohammed bin Rashid Al Maktoum, UAE Vice President, Prime Minister and Ruler of Dubai. This initiative has achieved tremendous successes on various levels, with capital markets and Islamic finance at the forefront, since its launch early 2013.”
“Investment funds are amongst the most prominent investment vehicles that many Islamic financial institutions seek to establish in order to facilitate investment in stocks, real estate, currencies and others. Considering the necessity to regulate these funds in line with Shari’a rules and principles, DFM’s Fatwa and Shari’a Supervisory Board has initiated the process to issue the most comprehensive Shari’a standard for investment funds. This Standard will provide investors and regulators an important reference on the key guidelines, applications and disclosures for investment funds in order to evaluate the fund’s efficiency for the protection of investors’ rights,” H.E. Essa Kazim added.
Dr. Hussein Hamed Hassan, Chairman of DFM’s Fatwa and Shari’a Supervisory Board said: “This Standard aims to clarify the Shari’a requirements and the technical aspects pertaining to the establishment and management of an investment fund that is structurally and operationally Shari’a-compliant. The Standard also complements the Securities and Commodities Authority’s Decision No. 9 of 2016 regarding the special governance of Investment Funds as well as other investment regulations through a more comprehensive and detailed approach in regulating Islamic investment funds.”
“The draft of this standard has raised many key points including; how the Shari’a rule for trading the fund units depends on the purpose of its establishment, emphasizing the necessity of issuing a fund prospectus that provides investors the essential information to make their decision whether to invest in the fund or not. The Standard also complements the DFM Standard for Issuing, Acquiring and Trading Shares. It comprehensively explains the two ways of Shari’a-compliant fund management, Mudaraba or an investment agency contract (Wakala bil Istithmar) and the circumstances stipulating that fund management is responsible to pay Zakat on behalf of the shareholders as well as the key disclosures that should be included in the financial statements,” Dr. Hussein Hamed Hassan added.
According to Dr. Hussein Hamed Hassan, the key advantages of the Standard are:
- The Standard opens the way for the establishment of funds that are either temporary or subject to review and termination. This provides valuable protection to investors, and brings in a measure of institutional innovation, in response to the common complaint that some funds are not subject to adequate control.
- The Standard allows to constitute a committee of subscribers from a certain segment that is entitled to terminate or restrict the Fund Manager.
- According to the standard, units of funds that include real assets, usufruct and receivables, are tradable as long as 10 percent of its assets are real.
- The Standard focused on the ramifications of ownership in the fund units, like common ownership of assets as opposed to specific entitlement to rights and/or return, in addition to entitlement to profit and bearing property risks.
- The Standard makes Shari’a rules related to trading, redemption, exit and liquidation, mandatory.
- The Standard prohibits conventional borrowing. When necessary, only permissible liquidity instruments must be used. When other currencies are required, reciprocal loans are allowed under relevant rules.
It is noteworthy that the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in Bahrain has issued an Accounting Standard (No. 14) that focuses only on the financial statements of funds and the disclosures relating to these statements, which has proven particularly useful in the area of disclosure. Accordingly, the DFM new standard will address the issue of Shari’a-compliance for dozens of investment funds.