Feb 26 2012
|more articles from|
Q&A with Ernest and Young
This Questionnaire is based on the Islamic Funds and Investment report submitted by Ernst & Young at the World Islamic Funds & Financial Markets Conference. The interview was held with Mr. Ashar M. Nazim, MENA Leader, Islamic Financial Services, Ernst & Young
1. The Islamic funds industry grew to $58 billion in 2010. Great but the size is still miniscule compared to the conventional fund industry where we are talking about trillions of dollars. a. What is the huge gap attributed to?
Unlike conventional funds, which have had presence in developed and emerging markets for many years, the Islamic finance industry is still a developing market. Lack of standardization in the Islamic industry poses cross border acceptability issues, which has affected its growth. Due to the industry being relatively new, there is also limited product innovation, with a small concentration of assets, a major factor behind investors choosing the conventional fund industry over Islamic funds. Investor attitudes in the region are also geared more towards direct investments than financial markets.
There is a strong case for a global Shari'ah standard setting body to enhance the credibility of the industry.
2. Commodities and equities together occupy $8 billion out of the $58 billion a. Are Sukuk less complex structures when it comes to investors and fund managers and thus more attractive? Are they more profitable?
Generally speaking, Sukuk are not seen as either complex or less complex investments for individual investors because they can invest in a fund and redeem their shares according to the fund prospectus.
3. What is the impact of the size of the Takaful market on Islamic fund activity?
The estimated investable assets for Takaful operators in the GCC and South-East Asia stood at a sizeable $8b in 2009. Even though Takaful operators are constrained in the sense that their investments have to comply with Shari'ah guidelines, it seems that they have a preference for investing through asset managers instead of directly in funds. Takaful executives cite a lack of products that meet their investment needs as a major reason for their lack of presence in the Islamic funds market.
4. Same question as in 4) for Exchange Traded Funds. Are the structures of Islamic financial markets keeping ETFs from growing or is it due to other factors?
There has been growth in the number of Islamic ETFs in recent years ranging from equity ETFs to commodity specific ETFs. There are no restrictions on ETFs under Shari'ah law, except the usual Shari'ah rulings which apply to all investments (i.e. asset backed, free of excessive speculation, investing in non-prohibited activities, etc.). Growth in ETFs has been affected in recent years largely due to general market conditions.
5. Is the sovereign debt crisis in Europe an encouraging sign or discouraging factor to the growth of the Islamic fund industry?
The European debt crisis is still ongoing, therefore it is difficult to make exact predictions on the impact, if any, that it has or will have on the Islamic funds industry. There are many external factors that could affect the growth of the industry, hence it is not thought that the crisis will have a notable direct impact on the industry, be it positive or negative, or cause investors to move their money into Islamic funds.
6. When 46 Islamic funds were liquidated in 2010, it shakes the confidence of investors, doesn't it? How did or can the 23 new ones gain that confidence back?
It is important to note that funds are not always liquidated due to bankruptcy, but also for other reasons such as having a limited life. This means that when a certain fund is launched, it is stated that the fund will be in existence for a certain number of years after which it will be liquidated and investors redeem their shares.
Furthermore, individual investors do not necessarily look at the statistics of the number of funds launched or liquidated at the industry level. They are more concerned with returns; a decrease in returns is what shakes investor confidence the most.
7. Why is the addressable universe for Islamic fund managers only $500 billion, because there must be more wealth than that in the hands of Islamic investors?
The $500b universe estimate is based on information of client segments along with quantitative and qualitative data regarding Shari'ah sensitivities within each client segment. This represents the potential Shari'ah sensitive assets that these segments have available to invest in and has been estimated using data for countries in the GCC and selected South-East Asian countries.
a. Are Muslim investors putting their money in conventional funds?
Yes, there are many Muslim investors who place their money in conventional funds.
b. Are returns more appealing in conventional funds?
Within certain asset classes such as hedge funds and derivatives, the returns might be more appealing in conventional funds due to Shari'ah laws limiting the scope of permissible activities within Islamic funds. However, in all other asset classes, the returns of conventional and Islamic funds are comparable.
The reason Muslim investors tend to choose conventional funds over Islamic funds is due to the track record and reputation of the fund manager.
8. What is the role of Shari-ah boards, fatwas, and lack of a centralised standards body in restraining the growth of Islamic funds? Is the application of Shari'ah too restrictive to allow more freedom in funds' trading?
Industry participants constantly cite the lack of a global standard setting body as a major factor that affects the growth of the industry. The two main Islamic finance hot spots, the GCC and South East Asia, have varying Shari'ah standards, which raises questions from investors when marketing products internationally. However, we are seeing increasing convergence in the industry.
9. Family businesses are not contributing to the growth of Islamic funds. Institutional investors are. How come? How can family businesses be encouraged to enter the fray? Do they have an aversion to risk with these types of funds?
Although family businesses show a preference towards established institutions, it is not accurate to say that they have an aversion towards financial investments. Some family businesses in the GCC do invest in financial assets, usually through an asset manager or private bank.
Islamic fund managers need to build up and showcase their track record and sell their funds through the current channels such as established asset managers and private banks in order to increase participation from family businesses.
10. What is the average amount invested in the portfolio of fund managers?
Technically, an average Islamic fund had $107 million in AuM in 2010. It is important to note that this average is skewed by several large funds and many smaller funds.
a. Who are these managers? Do they come from conventional finance?
The largest funds are managed by National Commercial Bank (an Islamic financial services provider), HSBC Amanah (the Islamic arm of HSBC) and CIMB (who began in conventional finance and opened up an Islamic arm).
b. Can they trade in both Islamic and conventional? Is that ethical towards Islamic investors?
As long as there is no co-mingling of funds, fund managers can trade in both Islamic and conventional funds. c. What is the reason behind the liquidation of certain funds, especially those with less than $100 million of Assets Under Management?
Some funds were liquidated due to having a limited life. Other funds have been liquidated due to the fund not being able to attract enough money to become profitable for the fund manager.
11. In your opinion, are we looking at a double dip recession, given the indicators coming from global financial markets, European debt and GDP growth crises?
The indicators suggest that a double dip recession remains a possibility, but the hope is that measures being taken by governments worldwide will help to avoid that.
12. Are Islamic funds safer with Islamic banks rather than with fund managers, explaining why the latter industry only contributes about 5.6% of the $1 trillion IF industry?
Generally speaking, people perceive their money to be safer in the hands of banks as compared to funds, as funds are usually smaller, more localized or lack the brand awareness that banks have.
a. What profit margins can be expected with banks as compared to Islamic funds?
For Mudarabah accounts, profit rates are indicative and are generally lower than fund returns due to the lower risk strategies.
13. Please give us your assessment about alternative, more complex Islamic fund investments outside of sukuk, commodities and equities, including hedge funds, derivatives, swaps, short selling options, etc.
There have been Islamic hedge funds which have been launched recently; however development has been slow due to discussion over their Shari'ah compliance (excessive risk and shortselling period). It must be noted that some Shari'ah scholars have begun to regard investment in hedge funds as acceptable, if the intention is to hedge against risk instead of gambling. For Islamic derivatives and swaps, there has not been much development, with the exception of the ISDA/IIFM agreement.
a. Has the Shari'ah standards been laid to these types?
The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association (ISDA) have recently created the ISDA/IIFM Tahawwut (Hedging) Master Agreement, which is the first globally standardized documentation for privately negotiated Islamic hedging products.
b. Is there an appetite for them?
There is definitely the need for continued financial innovation but it must be within the spectrum of Shari'ah principles. Irresponsible deviations in the name of innovation that ignore the real objectives of Shari'ah principles will do more harm than good in the long term.
About the author
Ashar M. Nazim, is MENA Leader, Islamic Financial Services, Ernst & Young
© Business Islamica 2012
© Copyright Zawya. All Rights Reserved.