More than 600 Islamic funds now cater for the 1.4bn Muslims around the world, the majority launched in the last few years. Assets held by fully Sharia-compliant banks or the Islamic arms of conventional banks totalled $822bn (€600bn) last year, according to The Banker’s Top 500 Islamic Financial Institutions survey. The market grew at an annual compound rate of 27.86 per cent between 2006-2009, a striking contrast to conventional asset growth of just 6.8 per cent per anum.
While the potential for the Islamic investment market is much hyped, take-up varies considerably by region and reality may lag the marketeers’ dreams. “I’ve been to a number of presentations down here in the Gulf in the last year that would lead you towards a belief that the market is exploding, but I don’t see that yet,” says Tom Connolly, head of asset management for the Middle East at BNY Mellon, who is based in Dubai. “It is exploding, but only from a low base.”
While Saudi Arabia, sitting on mountains of oil-generated cash, remains a huge potential market, relatively unscathed by the credit crunch, there are core issues which have put off some industry players. “The concentration of wealth in relatively few hands means these families invest heavily in fixed income, and that is difficult to achieve in a Sharia-compliant way,” says Mr Connolly.
Institutional investors in the region are showing little interest in Sharia-compliant investments. “The political pressure is not sufficient to push investors in that direction,” says Mr Connolly. “Most mandates aim to invest around the world, not to restrict the potential universe. For instance, it is hard for Islamic investors to invest in fixed interest or private equity, because of the leverage, and in equities investors may be excluded from buying some of the best managers.
“The conventional fixed interest universe is so much bigger,” he adds. “Sharia compliant fixed interest is limited to sukuk [Islamic-style bonds], and is even smaller than the Sharia equity industry. For example in the Dubai credit crisis, if you had been holding sukuk and Sharia compliant investments, you would have been highly undiversified.”
European market
That said, the European market for Islamic investments has potential, particularly in the UK, France and Germany. Most wealthy families do not want to have all their money in home nations that may lack political stability, and Islamic investors are increasingly aware of diversification.
Swiss banks or Western firms offering the capability to invest in Europe can also capitalise on the improved credibility of Sharia investments, which outperformed traditional investments during the crisis, largely because they shunned the banking sector.
European governments need new investor groups to buy their debt and are eyeing liquidity in the Middle East and Asia. The UK, for example, came close to launching an Islamic compliant government gilt in 2008, before it was overtaken by events. However, a lack of regulatory support remains an obstacle. The UK has the most accessible approach to Sharia law in Europe, and the Islamic Finance Council is working to promote Sharia-compliant finance.
Indonesia and Muslim countries in Central Asia are seen as the next target markets. “The big areas of growth are Malaysia, Pakistan, India and Turkey, and all need further mutual fund development,” says Dan Rudd, head of MENA wholesale at HSBC Global Asset Management.
“The mentality is changing and slowly diversifying away from property. In the mutual fund arena, we’re very focused on our Sicav as a platform we’re leveraging off globally. We’re seeing demand from local Islamic banks offering more cautious balanced portfolios, along with aggressive strategies, such as emerging markets.”
HSBC’s Islamic-compliant brand, Amanah, includes four equity funds as well as a range of Sharia-compliant strategies domiciled in Saudi Arabia, which the group is looking to expand in the Middle East, Europe and Asia. Mr Rudd believes there would be demand from clients for cautious balanced fund of funds strategies run from Luxembourg and Saudi Arabia.
The consensus is that big banks with a strong conventional presence have an enormous advantages over independent specialists, particularly if they have developed expertise in socially responsible investment.
“I can see niche players trying to build themselves up as an Islamic business manager, but I would say that a sophisticated buyer would look at the conventional capacity, the massive analyst teams and the big systems that a niche player can’t deliver,” suggests BNY Mellon’s Mr Connolly. The cost of scholars, where the supply/demand balance is extreme, can also be difficult for small groups and hedge funds to bear.
Distribution prowess
“Innovation has been led primarily by companies such as Deutsche, RBS, UBS and BNP Paribas,” says Dr Humayon Dar, CEO of specialist house BMB Islamic. “When it comes to structuring capability, the big groups have the resources, brainpower and R&D to come up with new ideas, but small and local players may be better in distribution. For example RBS and Merrill Lynch have good products but lack distribution.” The major names will continue to use regional banks to sell their products.
