Investing In Islamic Funds

A Practitioner's Perspective

Noripah Kamso

• Éditeur: Wiley
• Année: 2013
• ISBN:
  9781118638880
• Édition: 1
• Sujet: Business
• Sous-sujet: Sistemi bancari e finanziari nei paesi islamici

A guide to Islamic investment opportunities from the CEO of the world's leading Islamic finance bank

Offering an insider's perspective on a rapidly growing sector of the financial industry, Investing in Islamic Funds details the basic principles of Islamic investing for Muslims and non-Muslims alike. It explains how Islamic equity and fixed-income products differ from traditional funds, and how they deliver excellent results while still conforming to Sharia principles. Using hard data from the last six years, the book also reveals how Islamic funds have offered predictable, reliable returns in volatile markets and turbulent financial times. For institutional investors as well as sophisticated individual investors, the book serves as an excellent introduction to the subject and surveys the full range of products available. Additionally, the book will arm financial services professionals with the knowledge they need to explain this new investment opportunity to clients.

• One of the few books available that offers comprehensive data on the performance of Islamic funds in addition to the underlying theory that governs them
• Written by the CEO of CIMB-Principal Islamic Asset Management, the world's leading Islamic finance bank
• Features charts, case studies, comparative analysis, and a tabular data format
• Debunks the misconceptions traditional investors may have about the profitability Islamic funds

For professional and institutional investors, as well as private investors looking for new opportunities, Investing in Islamic Funds offers a much-needed primer on this fast-growing market.

CHAPTER 1

The Growth of Shariah Investments

Preparing the Next Generation

Permissibility is the original state.

(Islamic legal maxim)11, 12

INTRODUCTION

When I was a speaker at the Islamic Finance News (IFN) Europe Conference in London in June 2011, a young European participant asked, “Why would Japan join the bandwagon and issue Sukuk when it does not have a sizable Muslim population?” I explained that whilst Japan itself has ample liquidity, its involvement in Islamic finance is to show the world that the Japanese remain relevant and innovative and are able to grant value to investors with the latest investment trend. We have seen AEON Credit Services and Nomura Holdings issue Sukuk (Islamic bond) in 2007 and 2010, respectively, and Daiwa Asset listed its first Islamic ETF in Singapore in 2008.

What is being done by Japan is reflective of active market players envisioning that over the next 10 years, the landscape of institutions offering Islamic financial services, including banks, nonbanks and microfinance institutions, Takaful (insurance), Re-Takaful operators, and capital market players, will evolve into a full-fledged system of Islamic financial services that coexist effectively and efficiently with conventional financial institutions.

The rapid pace of economic growth and the accumulation of wealth in the Middle East and among the Muslim populations of the Far East are the catalysts that have driven and stimulated the developments in Islamic asset and wealth management. I have observed that the second and third generation of Muslim immigrants in the United States, the United Kingdom, and Europe care deeply about practicing Islam in all aspects of their lives, including their investments. In addition to Shariah compliance, this emerging demographic also demands similar investment performance to that of conventional investing. This growing group also wants the option of choosing from a wide range of Islamic investment solutions.

The idea of Islamic investing is gaining popularity as it also offers distinct risk management advantages. For example, several years ago Islamic funds were little affected by the scandal-afflicted companies such as Enron and WorldCom, as Shariah-compliant investment funds were prohibited under Shariah investing principles from holding these stocks given these companies’ highly leveraged balance sheets. The creation and improvement of international Islamic capital markets’ regulatory frameworks have contributed to an improvement of governance, which has increased international investors’ confidence.

In the wake of the 2007 U.S. credit crisis and subsequent global financial crisis in 2008, the Islamic financial system not only survived; it has also grown. The size of the Islamic financial services industry was USD 1.14 trillion of banking assets as of 2010, a 78 percent increase over 2007.1 What helped Islamic banking and finance during the financial crisis was the absence of exposure of derivatives, which ruined the balance sheets of most conventional banks. A situation like American Insurance Group (AIG), which had an unsustainably highly leveraged balance sheet due to high-risk debt instruments, is not likely to occur in Islamic finance. While many hedge funds and other financial instruments took significant risks and fell hard in the late 2000s, the Islamic finance, in many cases, remained conservative and generic in its product offerings and investments and as a result, became one of the fastest-growing segments in the global financial service sector.

The viability of Islamic finance is derived from its capability to meet the changing demand of the capital market. It is worth noting that the McKinsey Islamic World Conference 2008–2009 report highlighted that among the high-net-worth individuals, between 10 and 20 percent were ready to sacrifice investment return for Shariah compliance, thus providing a reasonable market demand to drive the development and expansion of Shariah-compliant investment products and solutions.

THE GLOBAL ISLAMIC FUNDS INDUSTRY: WHERE IS IT NOW?

Islamic finance is gaining importance in asset and wealth management. As of 2011, according to the data from the Global Islamic Finance Forum magazine, there are more than 700 Islamic investment funds managing total assets under management of USD60 billion to USD65 billion.2 These funds are dominated by equity funds, followed by money market funds.

Islamic investment funds are being offered by emerging asset management companies to meet the changing appetite of the investors. While equity funds remain most popular, Sukuk, money market, commodities trading, and real estate are also catching up. The available selection of Islamic funds has evolved from being domestically invested to being diversified regionally and internationally. Investors’ growing interest, added to the availability of diversified offerings across various asset classes, are no doubt creating choices for all investors, Muslim and non-Muslim. Currently, a broad spectrum of asset classes—including equity, Sukuk, real estate, commodities, leasing, trade finance, private equity, and hedge funds—are available. The number of global asset management companies offering a broad range of Shariah-compliant investment funds across the world demonstrates the increasing diversity of players. These companies are headquartered in the strategic Islamic finance hubs of Malaysia, Saudi Arabia, Kuwait, United Arab Emirates, Bahrain, and United Kingdom.

During its infancy stage from 2003 to 2009, the global Islamic funds industry produced a commendable annualized growth rate of 25 percent.

Examining the trend of new launches over the last 10 years, there are two key inflection points. The first inflection point in 2002 saw the beginning of a five-year growth trend in the number of new fund launches which peaked in 2007. In 2008, the trend reversed sharply, with investors prioritizing capital preservation and fleeing the markets, bringing demand for new funds to a halt. There was healthy industry attrition and consolidation as asset management companies had to rationalize their range of offerings with the impact of the global financial crisis. Therefore, the year 2010 saw 23 fund closures, followed by 46 fund launches.3 Slow growth of 3.5 percent in 2011 has not deterred the establishment of new asset classes.4

A decade ago, investors who wanted to invest in Islamic funds had to turn to established markets with strong domestic market demand for Islamic investments, like Saudi Arabia and Malaysia. In 2011, Saudi Arabia led with a 33.2 percent market share of funds offered, followed by Malaysia, which domiciled 21.8 percent of funds (see Table 1.1). However, there is more asset class diversity in Malaysia versus other countries. Observing the rapid growth of new funds from 2002 to 2006, new market participants from different countries rallied to enter the industry to drive the establishment of the 180 new funds in 2007.

Table 1.1 Islamic Funds by Country (2011)

Fund Manager Country	Percentage (%)
Saudi Arabia	33.2
Malaysia	21.8
Kuwait	7.1
United States	6.4
Cayman Islands	5.5
Luxembourg	3.5
Ireland	3.3
Jersey	2.9
Bahrain	2.6
Indonesia	2.4
Others	11.3
	100.00
Source: Global Islamic Finance Forum magazine (2012)

Malaysia and Saudi Arabia were pioneers in the development of Islamic funds. The world’s first Islamic fund, LembagaTabung Haji or The Pilgrims Fund, was created i...