7A.7 Operational Aspects of Shariah-Compliant UTS and PRS and the Shariah Contracts Between the Parties
Key Takeaways
A Shariah-compliant fund's deed and prospectus or disclosure document must avoid terminology inconsistent with Shariah, such as interest-based instruments and interest income.
UTMCs and PRS Providers offering Shariah-compliant schemes must appoint a Shariah committee or Shariah adviser to supervise compliance.
Fund reports of a Shariah-compliant scheme include the Shariah adviser's opinion on whether the fund was managed in line with Shariah rulings and that its holdings are classified as Shariah-compliant by the SAC of the SC or of BNM.
A musyarakah contract exists among the unit holders or members, who share profit by capital contribution or an agreed ratio and share losses by capital contribution.
There is no contract between the UTMC or PRS Provider and the Trustee, but both act as agents of the investors under wakalah.
Same Structure, Shariah Rules
A Shariah-compliant UTS or PRS is very similar to a conventional one; the key difference is that all activities must comply with Shariah. The study guide treats Shariah-compliant UTS (Chapter 7A) and PRS (Chapter 7B) in almost identical terms, so they are covered together here.
| Operational area | Shariah-compliant requirement |
|---|---|
| Documentation | The deed and prospectus or disclosure document must be drafted according to Shariah; terms such as interest-based instruments and interest income must be avoided |
| Objective and strategy | Capital and income growth within the scope of Shariah, with a strategy to match |
| Excess cash | Liquid assets and cash must be placed in Shariah-compliant instruments |
| Daily compliance | The compliance manager or officer ensures operations meet both SC and Shariah requirements |
| Supervision | The UTMC or PRS Provider must appoint a Shariah committee or Shariah adviser (required by the UTF and PRS Guidelines) |
| Reporting | Fund reports include the Shariah adviser's opinion on whether the fund was operated in line with the SC's Shariah rulings and a statement that its holdings are classified Shariah-compliant by the SAC of the SC or the SAC of BNM; for instruments not classified by either SAC, a statement that their status was determined under the Shariah adviser's ruling |
Chapter 2 covers screening by the SAC, reclassification and disposal of non-compliant securities, and Shariah non-compliance risk.
The Four Shariah Contracts
The relationships between the parties rest on Shariah contracts reflecting each party's obligations:
| Relationship | Shariah contract | What it means |
|---|---|---|
| Among unit holders (or PRS members) | Musyarakah | A partnership to deal in specified investments; profit shared by capital contribution or an agreed ratio; loss shared by capital contribution |
| UTMC (or PRS Provider) and Trustee | No contract between them | No direct relationship, but both are agents of the investors |
| Investors and UTMC (or PRS Provider) | 1. Wakalah (agency) | The manager acts for and on behalf of investors to invest and manage the scheme |
| 2. Bai (sale) | The contract of sale and purchase of units between investors and the manager, usually for cash | |
| 3. Wadiah yad dhamanah (guaranteed custody), before units are created | Investors own the money; the manager is the custodian; the contract arises when the manager receives payment | |
| Investors and Trustee | 1. Wakalah (agency) | The Trustee acts for investors as custodian of the trust fund and safeguards their interests |
| 2. Wadiah yad dhamanah, after units are created | Investors own the units; the Trustee is the custodian of all fund assets (money and investments); the contract exists once units are bought and the manager deposits the investments with the Trustee |
Conventional vs Shariah-Compliant: Side by Side
| Feature | Conventional UTS or PRS fund | Shariah-compliant UTS or PRS fund |
|---|---|---|
| Trust structure, Trustee, NAV pricing | Yes | Yes, identical |
| Permitted investments | Any authorised under the deed and Guidelines | Only Shariah-compliant instruments approved by the SAC and/or the Shariah adviser |
| Cash placements | Conventional deposits | Islamic deposits or investment accounts |
| Income from non-compliant sources | Not applicable | Cleansed and usually donated to charity |
| Extra oversight | Compliance officer and other oversight functions | Plus a Shariah adviser or committee (at least three advisers for a committee) |
| Extra report | — | Shariah adviser's report in the fund reports |
| Extra risk | — | Shariah non-compliance (reclassification) risk |
Remembering Which Custody Contract Applies When
The wadiah yad dhamanah contract moves with the money:
- Before units are created, the investor's payment sits with the UTMC or PRS Provider, so the manager is the guaranteed custodian.
- After units are created, assets sit with the Trustee, so the Trustee is the guaranteed custodian.
Worked Scenario
Puan Zainab invests RM5,000 in an Islamic balanced UTS.
- Her payment reaches the UTMC: bai (she is buying units) and wadiah yad dhamanah with the UTMC as custodian until units are created.
- The UTMC invests on her behalf: wakalah with the UTMC.
- Units are created and investments lodged with the Trustee: wadiah yad dhamanah with the Trustee, which also acts under wakalah to safeguard her interests.
- She shares the fund's profits and losses with all other unit holders: musyarakah.
- The fund's surplus cash goes into an Islamic deposit, and the annual report carries the Shariah adviser's opinion.
Exam Pointers
- Musyarakah = among investors. Wakalah = agency. Bai = sale. Wadiah yad dhamanah = guaranteed custody.
- No contract between the manager and the Trustee.
- Losses in musyarakah are shared by capital contribution.
Which Shariah contract exists among the unit holders of a Shariah-compliant UTS?
Wadiah yad dhamanah
Bai
Wakalah
Musyarakah
What is the Shariah contractual relationship between the UTMC and the Trustee of a Shariah-compliant UTS?
A wadiah yad dhamanah guaranteed custody contract
A musyarakah partnership sharing profit and loss
A bai contract for the sale and purchase of units
No contract; both are agents of the unit holders
Before units are created, who acts as custodian of the investor's money under wadiah yad dhamanah?
The Trustee
The SC's Shariah Advisory Council
The Shariah adviser
The UTMC
Sections you finish are checked off in the contents.