Updates on the Public Asia Ittikal Fund (PAIF) Syariah Compliancy Issue

About a couple of weeks back, I wrote an entry about Public Asia Ittikal Fund’s (PAIF) syariah compliancy status. Read about it here.

I did get a response from a unit trust agent a few days after that.

Here’s the excerpt:

“Our investments are looked at by the Securities Commission. Any investment that is not compliant to syariah based, can [be] penalised by the Securities Commission. The Trustee for PAIF, if I am not mistaken, is CIMB.

Public Mutual cannot make an error like that as it would jeopardise the good name of the company and the trust that many Muslim investors have in Public Mutual.”

My response:

Unfortunately, that doesn’t really answer my question.

I would gladly appreciate if my concerns are addressed based on the issue laid out in my original article, which was the total debt versus market capitalisation issue. If I am wrong, then I need Public Mutual to explain to me based on that argument, rather than claiming “Oh, somebody is watching over us, so, whatever we’re doing is fine.”

Also, I highly doubt the Securities Commission (SC) monitors companies from around the world. I don’t think they have the time to monitor companies in China, Australia, Japan, Taiwan, and the rest of the world for that matter, and still maintain order in Malaysia’s financial market.

I did have a look at SC’s syariah guideline, and there are these benchmarks of allowed non-Islamic activities in a company. The maximum, I believe, is 25%. As I have stated, the company mentioned in my previous article utilises more than 50% of debt (conventional debts that has interest components in it which ultimately amounts to Riba’).

Furthermore, in the fund prospectus itself, it was stated that there are risks of investments under their portfolio not being syariah-compliant. If it was stated like that in the prospectus, then the risks are indeed present right?

Again, if I’m wrong, do educate me.

Any other unit trust agents out there, feel free to chip in as well.

While we wait, let’s enjoy a song by Dafi entitled “Bila Terasa Rindu”… The song is dedicated to my business partner. I know you like this song! Haha.

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Disclaimer: This article is not a specific nor general advice on managing or investing your money. This article does not constitute a recommendation nor does it take into account your investment objectives, financial situation nor particular needs.

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This blog is about the journey of a 28-year-old Malaysian towards financial freedom. This blog was started back when the blogger was 21 years old. However, his journey towards financial freedom had begun way before that. Materials such as investing, business, entrepreneurship, equities, and real estate are presented. The author also posts his thoughts and observations on life in general.

Comments

  1. Hi Nadlique,

    I understand where you are coming from. Unfortunately I don’t have the answer for you right now but am certainly interested to know more about this.

    I will go find out the answer (hope it doesn’t take my too long to do so) and share with you the same.

    Cheers!

  2. Hi Nadlique,

    Would like to contribute here…..

    If you have gone through the SC guidelines, the limitations are on income derived from permissible and non-permissible activities. The guidelines are tolerent on income derived indirectly from non-permissible activities.

    where in ABC’s case, loan was taken to finance its operations. However not all of the debt taken are borrowings from the bank and the nature of the borrowings are not listed out fully. Some could be without the influence of interest (do update me on this if you could find the nature of borrowings).

    Borrowings here are used to operate the business to derive profit.

    Meanwhile the guidelines are focussing on direct activities like giving loans by charging interest as a business activity or directly involved in non-permissible activities as a core business activity to derive income/profit.

    Therefore borrowings in ABC’s case are not core business activities but just means of funding to support the business. Eventhough to a certain extent interest is involved, this is still allowable.

    According to shariah, interest (riba) is not allowed as most of the time profits the lender. Indirectly borrowers are not encouraged to take money from the lenders. However, having an objective view of the world today. What are ABC’s options, is there a Islamic Financing market to support ABC’s debt requirements in Australia?

    ABC is doing a legitimate business and it brings goodness to the community at large (one of the Shariah requirement) and it has a good standing in the community (another requirement) – these two requirements fullfils the criteria of being a shariah compliant security. Taking a loan is non-avoidable here therefore looking at the situation, it is still within the permissible limits.

    The limitations – 5, 10, 15, 20, 25% are on the profit deriving based activities of a firm.

    Taking a debt is just a small indirect (among the many other activities done by ABC) and unavoidable part of the ABC’s activities

    my humble views….open for comments.

    Thank you
    have a nice day.
    Vaanan

  3. Finally, a nice valid answer from somebody. Thanks Vaanan!

    Just to share some info:

    Talking about ABC’s borrowings, as far as I know, based on what I read and heard, most of the borrowings are utilised to fund its acquisitions and expansions.

    Recently, the company got into trouble and the stock price plummeted like there’s no tomorrow, and its creditors were nervous of its ability to service its debts. About a year ago, the price was hovering around 7 bucks. Yesterday, it closed at $1.32.

    Yes, it is true that outside Malaysia, the chance of getting an Islamic-compliant debt is pretty much… zip.
    However, assuming one is outside of Malaysia, does that mean that he can dive into non-Islamic debts as much as he wants? That’s also with the assumption that there’s no Islamic alternative.

    If I’m not mistaken, Dow Jones syariah council will only label companies as syariah-compliant with one of the criterias being, the total debt of the company versus trailing market capitalisation must stay at 33% and below. Now, of course, Malaysia is not subjected to this.

    Whatever it is, I accept Vaanan’s explanation in this matter.

    Now, I’m still waiting for my unit trust consultant to respond to me. It’s been a month plus now. I am seriously considering changing my unit trust consultant.
    Any takers out there? 😉

  4. arimanjaya says:

    Sorry just read this blog while searching for syariah compliant ETF.

    Just to share and reinforce Vaanaan statement!

    Yes, the SC Syriah Advisory Councill does not take into account the debt equity ratio in the criteria for syariah compliant, unlike Dow Jones Syariah Councill.

    The criteria is more of the activities and source of its derived income.

    I am a consultant myself, that’s how I will answer you if asked! But it is unethical for me to pinch somebody else clients.

    But I will always offer my help if required!

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