The move by Dubai Islamic Bank (DIB) last week to launch a Sharia-compliant investment fund linked to the performance of non-Sharia-compliant hedge funds has sparked controversy within the Islamic finance industry.Created in partnership with two of the world's biggest financial institutions, Deutsche Bank and Goldman Sachs, the DIB fund aims to tap into the huge investment potential of conventional hedge funds, but still abide by Islamic law.No money is actually invested directly in conventional hedge funds. Through what DIB describes as a "Sharia-compliant mechanism", the bank's fund is benchmarked against an index that measures the performance of a group of hedge funds. DIB's attempt to open up conventional hedge funds to Islamic investors, however, has met with criticism from a leading scholar in the industry.
Sharia advisor and Islamic scholar Yusuf Talal DeLorenzo has lambasted the fund, claiming that just because money is not being directly invested, it does not make the fund Sharia-compliant."It is a sad day for Islamic finance when an industry leader falls victim to the mistaken notion that just because a Muslim customer's money will never go into a potentially non-Sharia-compliant investment, the returns to the customer will actually be halal," DeLorenzo, chief Sharia officer at Shariah Capital, tells Arabian Business."Equally saddening is the notion that because the Muslim's investment returns will ‘reflect the performance' of funds that operate in a non-Sharia-compliant manner, and which invest in non-Sharia-compliant stocks, those returns can somehow be made lawful; as if the reflection of unlawful performance somehow differs from actual performance," he adds."It is one thing if an investment ‘reflects' a prohibited transaction in terms of its characteristics. It is another matter entirely, however, if an investment ‘reflects' a prohibited transaction by actually having its returns determined by that transaction," DeLorenzo argues.
Full article on Arabian Business.