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This paper aims to propose a liquidity management solution for Islamic financial institutions (IFIs) that concurs with sustainable development and financial stability.

The study is a qualitative research. It uses the exploratory research methodology, specifically the content analysis approach, to gather primary data and identify and interpret relevant secondary data and Sharīʿah concepts. The purpose is to develop a liquidity management solution for IFIs. The proposal is based on the Unleveraged Green Investment Trust (UGIT) model, which is consistent with Basel III regulatory requirements. In developing the UGIT model, the exploratory research was complemented by a case study to examine the UGIT solution for the particular case of renewable energy.

The model demonstrates how financial innovation can meet both financial stability and sustainable development objectives, thereby achieving the spirit of Islamic finance. The structure further highlights the importance of regulatory and fiscal frameworks to enhance liquidity management and investor appeal for green financial instruments.

This study suggests a structure of UGIT to enable IFIs to meet their liquidity management needs while promoting sustainable development.

This paper empirically investigates the performance of Islamic funds, which have been praised for weathering the 2008 financial storm relatively well and compares it to a European product designed to protect the most vulnerable of investors, UCITS funds.

This paper builds on 128 time-series regressions using various factor models to analyse the risk-return relationship of 242 Islamic and UCITS funds relative to a market benchmark, over a 10-year period starting January 2006, to capture severe bear and bull market conditions.

Islamic funds do not face a competitive disadvantage arising from their strict compliance with Sharīʿah principles, and their performance and investment style is relatively similar to UCITS schemes.

Islamic funds represent a low risk investment due to their very mild betas. Therefore, when forming part of a diversified portfolio, they can act as a hedging tool against adverse market movements.

Muslim investors are not punished relative to conventional retail investors when following their own beliefs. Other investors can consider Islamic funds in their portfolio allocation, especially those who seek socially and ethically responsible investments.

This paper fills a lacuna in the existing literature, because the sample is made up of Islamic funds established worldwide and includes not only equity, but also fixed income and mixed allocation funds.