The Roles of Islamic Investment Funds Beyond Screening-Based Practices: A Survey on Malaysian Practice

Abstract

Islamic investment funds have emerged as an important class of institutional investor in the Malaysian funds management industry. This reflects a rapid rate of growth in demand for such investment vehicles from Muslim investors. In following Islamic principles, these funds (through their fund management companies) should take responsibility for their investment practices as they are acting as agents on behalf of their fund holders and other stakeholders. However, Islamic investment funds practices are claimed to focus only on the use of negative-based screening in assessing potential investments for their portfolios. This is even though Islamic guidelines also stress preservation the benefits of other parties. Thus, on the surface, their investment practices do not seem to suggest corporate governance principles dissimilar to those suggested by the standard theory of the firm under which shareholder value is pursued on the basis of profit maximisation. Thus in this paper, the corporate governance practices of Islamic institutional investors in Malaysia are surveyed. The results are then analysed in relation to their roles as outside shareholders under Islamic principles in protection of the benefits of their fund holders and stakeholders. Results suggest that practice does still fall short of that required in theory.