In an Islamic Commodity fund, the funds raised from investors are used in purchasing different commodities for the purpose of their resale at a profit. The commodities could be Gold, Silver, Grains, Sugar, Rice, Tea, coffee, beef etc, which are tradable in recognised commodity exchanges like Dubai Multi Commodity exchange etc. The profits generated by the sales are the income of the fund which is distributed pro rata among the investors.

In order to make this fund acceptable to Shariah, it is necessary that all the rules governing the transactions of sale are fully complied with. This includes:

  1. The commodity must be owned by the seller at the time of sale, because short sales, in which a person sells a commodity before he owns it are not allowed according to Shariah principles.
  2. Forward sales are not allowed except in the case of salam and istisna based transaction. Salam relates mainly to agri-financing and istisna to manufacture/construct/build finance.
  3. The commodities which are to be bought must be halal. Therefore, it is not permissible for to purchase wines, pork or other prohibited materials.
  4. The seller must have physical or constructive possession over the commodity he wants to sell. (Constructive possession includes any act by which the title and risk of the commodity is passed on to the purchaser). This could include Tea Warehouse receipts, Gold depository receipts etc.
  5. The price of the commodity must be fixed and known to the parties. The price which is uncertain or is tied up with an uncertain event renders the sale invalid e.g. fluctuates based on certain condition is not allowed.

In view of the above conditions, it should be clear that some of the  transactions prevalent in the contemporary commodity markets, specially in the futures commodity markets do not comply with some of these conditions. Therefore, an Islamic Commodity Fund cannot enter into such transactions. However, if there are genuine commodity transactions observing all the requirements of Shariah, including the above conditions, a commodity fund may well be established. The units of such a fund can also be traded in with the condition that the portfolio owns some commodities at all times.