Islamic Money Management : A Western View

This article provides a synoptic analysis of Islamic investment principles within the framework of socially responsible investing with a focus on the risk attributes in the practice of liquidity management.Three types of collective investment schemes offered to Shariah-compliant investors are examined: Islamic liquidity funds established under commodity Murabahah, Wakala and Sukuk agreements. One of the main results of our analysis is that the Shariah-imposed restrictions reduce the universe of investable securities and, consequently, give rise to additional risks due to operational complexity and lack of transparency. Furthermore, investment screenings and third-party involvements add to the management cost, resulting in Islamic liquidity funds being placed in a relatively disadvantaged competitive position in terms of risk and reward characteristics, which, in turn, make them less attractive to investors.In brief, Islamic liquidity management vehicles, including Islamic money market funds would carry either a higher risk for similar returns or lower returns for a similar level of risks in comparison to non-Islamic money market funds.This conclusion shows the challenges in creating investment products of genuine low risk for a broad consumerist market