Nov 27 2012
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Islamic funds have come through a difficult period, registering a growth of seven per cent last year; however, compared to the conventional market, they remain a poor relation
Currently, there are more than 500 funds globally that comply with Islamic principles, a third of which were launched during the past seven years. According to the Ernst & Young's Islamic Funds and Investments Report 2011, the liquid wealth of Islamic investors in the GCC is expected to add more than $70 billion to Islamic funds by 2013. Islamic funds registered a growth of seven per cent in AuM last year - putting a period of shaky performances behind them. Does this indicate a good opportunity to harness the full potential of Shari'ah-compliant investments?
FUND TIMES AHEAD
"This positive trend can be attributed to the rapid expansion and increasing sophistication of the GCC financial markets, as well as the geographical spread of Islamic securities products and services that record remarkable growth in Europe, Asia Pacific countries, North Africa and the energy rich Central Asian states," he added.
"On its part, the Central Bank of Bahrain (CBB), having pioneered the development of Sukuk, remains active in the sovereign Sukuk market, with a total of $1.2 billion medium to long term Sukuk issued, complemented by a regular programme of short term issuance," continued Baker. "Furthermore, the CBB had successfully issued a five-year maturity Islamic leasing Sukuk in the local market with a value of BHD 200 million. It is the CBB's hope that such initiatives will go a long way in harmonising market practices and creating a deep and vibrant Islamic capital market."
Baker said that the potential size of the Islamic finance market is vast, and the accelerated establishment of Islamic finance hinges on attracting the flow of these potential funds into Islamic investment. "However, it is important to ensure that the Islamic funds and investment industry have solid and strong foundations for future development and growth," he warned.
"In order to further enhance the growth of the Islamic investment industry and create deep and vibrant Islamic Capital Markets, there are several factors that need to be taken into consideration," Baker said. "First, there is a need to build a system that would be able to facilitate effective and efficient capital and trading flows. This requires further development of an Islamic financial system which has the entire required infrastructure that includes: Islamic financial institutions ranging from banking, Takaful, capital market, fund and wealth management entities; creating a conducive legal and Shari'ah framework; and a financial system that has a comprehensive range of Islamic financial products and services.
Baker believes that having an active Islamic financial market is one of the contributing factors that will further accelerate the growth of the Islamic investment industry. "Basically, a vibrant Islamic financial market will facilitate fund raising and investment activities and will enhance the creation of primary and secondary markets for Islamic financial instruments," he said. "In this regard, some progress has been achieved. We have seen the primary issuance of globally accepted Islamic financial instruments such as Sukuk. In turn this global issuance of Sukuk has played its role in building the linkages between the parties of the financial markets such as the issuers and investors and has paved the way for the creation of a supply of Islamic financial instruments; however, it has not led, as yet, to the promotion of active and efficient secondary markets. A greater focus is needed, therefore, in this regard.
"Second, it is important to adopt proper corporate governance in the Islamic investment industry in order to enhance the confidence of the investors and to ensure that markets are fair, efficient and transparent. This includes having proper disclosures requirements, adequate disclosure of all terms and conditions of the Islamic products, as well as transparency in disclosing financial information and indicators.
"Creating adequate straightforward regulation for Islamic investment products is another factor to further strengthen the foundations of Islamic investment markets. Such regulation should create the necessary framework for investment products targeting small, medium size, as well as accredited investors, who wish to invest their funds in accordance with Shari'ah principles. This regulatory framework should also cater for wide range of Shari'ah-compliant investment products that include equity, Sukuk, various types of Islamic funds with moderate risks, as well as high risk funds.
"Fourth, it is important to have sufficient number of professionals that are well-versed in both the capital market and Shari'ah knowledge to further develop the Islamic investment industry. This, in turn, will further enhance the product development and improve the services to investors in the Islamic capital market.
According to Baker, another critical issue that needs to be addressed is related to the development of robust national and international liquidity infrastructure, which is currently still underdeveloped in most of the jurisdictions in which Islamic financial services are offered. "The development of such framework is necessary not only to reduce the cost of intermediation, but also will enhance the availability of liquid Shari'ah-based Islamic financial market instruments in the financial system and achieve efficient money market operations for Islamic financial players," he said.
Last but not least, Baker believes that "it is important to further enhance the innovations of new Islamic instruments and encourage more spending in research and developments, as well as to strengthen the efforts for capacity building and talent development for the Islamic financial services in order to enhance the contribution of the Islamic financial industry in the global market."
Baker's address set the tone for the conference, with many echoing his cautiously optimistic view. Fernand Grulms, Chief Executive Officer of Luxembourg for Finance, said, "2011 was a bumper year for the issuance of Sukuk, at $85 billion, that is, two and a half times the pre-financial crisis record of $33 billion issued in 2007. This huge increase indicates that the Islamic capital markets are back in the game. Nevertheless, we should set the figure in context. In the conventional debt markets, in 2011, $5.4 trillion were issued in the US alone and the Sukuk market in 2011 was driven largely by Malaysia. In other words, the short answer to the question of 'are Islamic investments building international reach and scale' is a yes and a no. Shari'ah-compliant capital markets activity currently still remains a niche market; but certainly can and will build international reach and scale."
He added, "Islamic finance is no longer limited to the countries in which it began, or to the early adopters and one of the key hurdles to achieving international reach and scale is a lack of transparency in the product development area. The absence of a consistent published set of legal rules can be perceived by the market as uncertainty, inefficiency, increased time to market and increased costs, which are elements that markets dislike."
A similar view was expressed by Salah Addeen A Qadar Saeed, General Manager for Credit & Risk Management at Bahrain Islamic Bank. "The burgeoning global interest in Islamic finance, particularly Sukuk, represents a unique opportunity for Islamic finance to effectively and efficiently channel the sizeable pool of surplus funds towards the vast productive investment opportunities within and across the emerging economies," he said. "The Islamic funds and investments markets have facilitated the raising of funds by businesses, while providing investors with a range of instruments for investment, thereby facilitating the mobilisation and allocation of funds to productive economic activity, beyond local boundaries."
According to Datuk Noripah Kamso, Chief Executive of CIMB-Principal Islamic Asset Management, greater education is needed to promote the benefits of Islamic investing. "Whilst investors are now aware of the wide choice of Shari'ah investment products available in the market, they should now learn to appreciate the benefits that come along with Shari'ah investing," she said. "There has also been articulation by investors that the asset classes made available to the investors are not as broad and deep as what is made available to them in the conventional investment space. This concern could be the result of lack of visibility of the track record of these investment products by virtue that the various asset classes are structured using home-based currencies for their domestic sandbox."
It seems that Sukuk is paving the way to happier times for the Islamic funds industry; however, it cannot do it alone, and unless the demand for more Islamic investment instruments is met the industry will remain small change to the wider world's markets. While the atmosphere at the conference was one of excitement, even pride, the participants were right to raise the tricky issues they did - acknowledging a problem is a step towards solving it.
© Islamic Business and Finance 2012
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