Dec 03 2012
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Potential and pitfalls
The Shari'ah-compliant funds industry may prove to be the dark horse of Islamic finance as it gains ground outside the Muslim world
The Islamic funds industry may still be dwarfed by the likes of Takaful, Islamic banking and Sukuk but, after a troubled start, it is finally coming into its own. However, it will take a long time for the industry to recover from its tough upbringing. In 2007 173 funds were launched, then in 2008 the recession set in and the Islamic funds industry suffered alongside ailing Western markets, with the number of funds launched falling to 78. In 2009, that figure plummeted to just 29. Islamic equity funds, which make up 10 per cent of the market, returned 10 per cent in 2010, compared with the 15 per cent return on the global equity index and significantly less than the 22 per cent average of 2009.
Equity issuance remains rather flat, with investors still wary of equities globally, however there are other encouraging signs that the Islamic funds industry is on its way back up. Global asset managers, especially those in western markets, are taking a keen interest in offering Islamic services, and new Islamic asset managers are cropping up in places where other components of the industry have yet to tread.
"As with other forms of Islamic finance, the Islamic funds industry has grown to become an increasingly substantial segment within the global financial markets and has gained significant interest as a viable and efficient alternative model of financial intermediation. Growing awareness and increasing demand for investing in accordance with Shari'ah principles on a global scale have been the catalyst towards making the Islamic financial services industry a flourishing industry. This is also a reflection of the increasing wealth and capacity of investors, both Muslim and non-Muslim, to seek and invest in new investment products that serve their needs," explained Abdul Rahman Mohammed Al Baker, Executive Director - Financial Institutions Supervision at the Central Bank of Bahrain.
It is a development that Western markets appear to have welcomed in the wake of the recession. In August, the Irish Funds Industry attracted its first fund promoter from Malaysia, with the arrival of CIMB-Principal Islamic Asset Management. The Malaysian company is setting up a range of investment schemes that can operate throughout the European Union, authorised from Ireland.
"According to figures from PwC, Ireland accounts for 20 per cent of Islamic finance outside of the Middle East, making it the number one European jurisdiction for this business. As Islamic finance is one of the focus areas in the international financial services sector targeted for growth by the Government, we welcome the innovative offerings made available by CIMB-Principal Islamic, and we hope others will follow the example of CIMB-Principal Islamic," he added.
Noripah Kamso, Chief Executive of CIMB-Principal Islamic Asset Management said, "Ireland is right for us as we believe it will provide global flavour to our products and be the passport for international investors beyond Europe. Dublin is more cost-efficient due to our present relationship between Ireland and CIMB-Principal Islamic. This is also supported by existing successful conventional funds in Dublin by our shareholder, Principal Financial Group (PFG)."
The launch of the CIMB-Principal Islamic Irish UCITS funds range was subsequent to the establishment of CIMB-Principal Islamic Asset Management (Ireland), the first Malaysian-based international Islamic funds platform domiciled in Dublin, Ireland.
Islamic finance is one of the areas that Irish Prime Minister Enda Kenny and his Government have targeted for growth in international financial services, under plans to create 10,000 new jobs in the sector by 2016.
Ireland is far from alone in targeting Islamic finance. Luxembourg, which provides tax exemptions for some Islamic funds and allows some to be sold across European Union countries, had $1.9 billion of Shari'ah-compliant assets under management at the end of last year and this will increase to $3 billion by the end of 2012, according to Luxembourg for Finance.
In May, Luxembourg launched the SEDCO Capital Global Funds, which it says will boost the total assets held by Islamic investment structures and vehicles under Luxembourg law. The specialised investment fund, incorporated as a Luxembourg Sicav at the initiative of SEDCO Capital is a fund with multiple sub-funds and is set to reach over $1 billion within the first year after launch.
A recent study by Luxembourg for Finance showed that assets held by fund structures investing according to Shari'ah principles reached $2 billion at the end of last year. Just under half of this money was held in regulated investment funds with the balance in unregulated structures and securitisation vehicles. Consultants indicate that further projects are in the pipeline.
Luxembourg has been actively promoting its services to Shari'ah-compliant investment structures since 2008 and ALFI, the investment fund association, has a dedicated working committee.
While Islamic funds are a niche product compared to the EUR 2.2 trillion held in traditional investment funds, Luxembourg for Finance said that it is considered a market with important potential for the years to come.
This potential is underlined by new Islamic fund houses cropping up to harness Muslim wealth. Oasis Crescent United Kingdom, a subsidiary of South African's Oasis Crescent Global Group Holdings, opened for business in London on 30 June. The company had taken offices in Knightsbridge in March and its unit Oasis Crescent Advisory Services (UK) had obtained its licence to provide financial services advice from Financial Services Authority in May.
Adam Ebrahim, Founder and CEO/CIO of Oasis Crescent, said at the time of launch, "We are delighted to finally launch our UK business and make our funds and products available to the UK's Muslim investors. This represents an exciting time for us and the UK Muslims. We genuinely feel the current needs are being undersupplied and Oasis Crescent sees great potential in offering tailored products and services for this market.
"The current size of the Islamic investment market in the UK is under GBP 1 billion and has the potential to be between GBP 120-160 billion. There is massive demand and Oasis Crescent sees the opportunity to meet this demand through providing its products directly to the UK Muslims."
According to Kamso, the appeal of Islamic funds isn't restricted to Muslim investors. "The interest in Islamic investing that we see today has nothing to do with it being faith-driven, but due to the change in trend for investors' monies to be invested responsibly in an ethical form. Shari'ah-compliant products are for everyone, not for Muslims only, and they are competitive in terms of performance, innovation and diversity."
As the Islamic finance industry continues to be one of the fastest growing components of the global financial system, with an estimated growth rate of 15 per cent - 20 per cent, it seems that international markets are cottoning on to the demand for Islamic financial products and services - even beyond the traditional markets of Southeast Asia and the Middle East.
According to Ernst & Young, the Islamic funds and investments industry has been steadily growing over the past decade as investors search for alternatives to the traditional market, evidenced by a significant increase in the number of institutions structuring Islamic investment products. The Islamic funds industry increased 7.6 per cent to $58 billion in 2010. The figures may not seem so impressive compared to the rest of the industry, but it hints at the sector's potential.
And this potential is also being recognised by global asset management companies, such as Franklin Templeton Investments, which announced that will be starting its first Islamic funds in July. The world's third-largest asset-management company said that it will start three Sukuk and stock investment vehicles in Luxembourg.
Franklin Templeton is following in the footsteps of Eastspring Investments, an Asian arm of London-based Prudential, London-based Aberdeen Asset Management, Japan's Nomura Asset Management Co., India's Reliance Capital Asset Management and Paris-based BNP Paribas, all of which now offer Shari'ah-compliant services.
Standard Charted Private Bank announced that it too would be joining the trend in June, and now offers a suite of Islamic financial solutions for its clients including fiduciary deposits, property financing, equities, Islamic fixed income instruments, mutual funds, third-party structured products and discretionary services.
Khalid El Gibaly, Regional Head of Consumer Banking, UAE and Middle East, Standard Chartered Bank, said, "We have identified a latent demand among our existing and prospective private banking clients for Islamic private banking solutions."
Stephen Richards Evans, Regional Head of Private Banking, Europe, Middle East, India, Africa and Americas, Standard Chartered added, "In the GCC alone, there are more than 500,000 High Net Worth Individuals with net investible assets of over $1.7 trillion and this number is rapidly growing in light of relatively better economic conditions in the region compared to other parts of the world. However, this segment remains one of the most underdeveloped and underserved amongst all the Islamic banking client segments."
According to Abas A. Jalil, Chief Executive Officer of Amanah Capital Group, we are likely to see more asset management firms entering the fray. "More non-Islamic players are coming in because there is an interest to tap the growing amount of Islamic wealth. By having more Shari'ah-compliant fund managers, investors will have more options and access to other markets," he said.
However, the young industry still has much to overcome. A lack of standardisation remains an obstacle, as it does for every segment of the industry, to truly global asset management. Proper legal and tax frameworks that incorporate Islamic finance are also somewhat lacking in many jurisdictions. As more Western companies eye Muslim wealth, there is also the worry that the industry will stray from its Islamic routes, especially after Goldman Sachs' ill-fated Sukuk sent shockwaves through the industry last year.
According to Kamso, better education is also need to dispel common myths and encourage investors into the space. "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."
The Islamic funds industry may have been born the runt of Islamic finance, but demand indicates it may yet grow into the strong, healthy industry it currently only has the potential to be.
© Islamic Business and Finance 2012
© Copyright Zawya. All Rights Reserved.
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