Managing Investors’ Expectations With Shariah Compliance: An Exploration of Saudi Investment Fund Managers’ Viewpoints

Abstract

Shariah-compliant investment as an ethical business strategy requires substantial and adherent practices that can be sustained and viable for people who prefer this investment type. Contractual relationships between investors and public fund managements call for effective and transparent investor engagement to meet the latter’s Shariah compliance expectations. This thesis aims to explore Management of Saudi Shariah Compliant Investments Equity's (MSSCIEF) perceptions of disclosure and governance practices taken to engage investors with their Shariah-compliance expectations. It also seeks to discover their understanding and responses to meet those expectations. This thesis develops a theoretical lens based on combining agency, modern portfolio, and pragmatic legitimacy theories will be used to interpret fund management practices that have sought to engage investors with their expectations. The qualitative comparative analysis will serve as a methodology for exploring the perceptions of Saudi fund managers. A mixed methods approach is employed to gather the data from semi-structured interviews with 20 managers, and analysis of documents covering all MSSCIEF through samples of their funds’ official publications (268 documents). This thesis asserts the importance of SBs in validating what fund managers understand about ISCE. Concerning the issuing Shariah opinions, this thesis revealed that obtaining Shariah accreditation for new and impure investment products in SSCIEF is the most challenging. Responses to issues focus on meeting investors' expectations at the minimum, as stipulated by regulations only. Concerning investor engagement in SSCIEF, this research finds that the impact of investor engagement does not exceed the tokenism level which means that investors do not influence disclosure practices. Referring to governance practices, MSSCIEF perceive that investors trust them when they want to hire the SB for its input. Also, they do not prefer conducting audits being conducted by an SB itself, but by a third or outsourced party. The theoretical framework of this research links those expectations to investors' interests and management engagement practices, and the legitimacy that it would ultimately gain. Comparing findings with the theoretical framework reveals that meeting ISCE has been not satisfactory and MSSCIEF do not gain any moral or consequential legitimacy. However, less satisfactory ISCE results from: 1) understanding of Shariah-compliant investments is still incomplete and there is a need to improve qualifications and experiences to earn cognitive legitimacy; and 2) symbolic engagement is what grants pragmatic legitimacy to MSSCIEF. This research seeks to contribute to updating the Islamic investment literature, especially about what is happening in Saudi Arabia, and help to improve the management of investors’ engagement in managing such expectations.