1. Introduction

Over the last two decades, the Islamic financial services industry has grown rapidly worldwide and Shari’ah-compliant assets were estimated to have reached the $1 trillion mark in the years 2010/2011, with most of these assets based in the Gulf Cooperation Council (GCC) countries and Malaysia (Stanton, 2008). In regards to the Islamic unit trusts industry, Islamic funds have experienced a dramatic growth during the second half of the 1990s. The equity Shari’ah-compliant investments have increased from fewer than 10 funds in 1995 to 264 funds in 2007, and are being managed by primary investment houses that manage a total of $16 billion in assets (Failaka, 2007). The economic reasons behind this increase can be explained by the extreme growth of the GCC stock markets, led, in particular, by Saudi Arabia (Smyth, 2006). In the 1980s, the Saudi Commercial Bank and National Commercial Bank pioneered these collective investment schemes. At first, these financial institutions established joint ventures with experienced Western investment houses that provided the skills to structure and manage the Islamic unit trusts (Cox, 2007). Many primary Western investment houses, like the UBS, Schroders, HSBC, and Deutsche Bank, are now managing Shari’ah-compliant unit trusts and are also trying to attract Muslim retail investors who want to screen their investments according to their religious beliefs.

In terms of the industry growth and composition, currently, there are more than 700 Islamic unit trust funds, of which more than 50 per cent are equity funds (Eurekahedge, 2008; Hoepner et al., 2010). Rapid growth has been seen in the Islamic equity funds in recent years due to the increasing investors’ interest from the GCC resulting in the market size of the Islamic equity funds tripling in the past half-decade (Stanton, 2008). For example, in 2007 alone, 158 funds were launched in the GCC region particularly in Kuwait, Saudi Arabia, the UAE, and Bahrain. The reasons for this rapid growth in the Islamic investments are petrodollar liquidity, investment shift favouring the GCC region, maturing capital markets, customers’ greater understanding and acceptance, as well as generational changes in terms of the market participants (Eurekahedge, 2008).

For comparison, in Malaysia, the number of Islamic unit trusts launched in Malaysia as at December 2004 was 65 with RM13.155 billion of units in circulation. By December 2009, the funds grew up to RM144 billion with 56.848 billion of the units in circulation. During the same period, the net asset value (NAV) of the Islamic unit trust surged from RM9.761 billion at December 2004 to RM22.080 billion at December 2009. This is equivalent to a growth of 126.20 per cent during the period 2004-2009 or approximately 25.24 per cent per annum (Securities Commission Malaysia, 2010).