Shariah investment: a global slowdown
Written by Peter Davy
Jan / Feb 2010
When International Financial Services London published its report on Islamic financial services last year it showed that the UK already had a bigger share of Shariah-compliant assets than countries such Pakistan and Turkey, where Islam is the main religion. In January, the importance of the sector was underlined again, with the report outlining a further growth of 25%. Worldwide, the value of assets had reached $951bn.
Despite a slight slowdown from the previous year, which saw growth of 37%, it remains the fastest growing subset of world banking. Back in 1975, there was one Shariah-compliant financial institution; now there are over 300.
A number of factors are driving that in Europe, not least immigration and demographic changes. Mapping the Global Population, published in October by The Pew Forum on Religion and Public Life, estimated its Muslim population to be 38 million, around 5% of the population, and it is expected to grow steadily in future years.
It is also to do with short-term performance. As Shaher Abbas, a director of IFAAS, which advises financial institutions on Shariah compliance, the restrictions on Islamic funds, for example, benefited their performance at the start of the crisis, since they are prohibited from investing in conventional financial institutions. "Sometimes restrictions can help rather than constrain a fund," Abbas points out.
Finally, there have been the moves by European governments to ensure their regulatory and tax systems don't disadvantage Islamic finance products. That's most obvious in Britain, where the government's pre-Budget report in December reiterated its desire to establish London as a "global gateway to international Islamic finance". It has already made several adjustments to the tax code (such as adjusting the rules to avoid double taxation on those taking Islamic mortgages), and it remains open to issuing a Shariah compliant bond (a sukuk), although for now it argues that this does not represent value for money.
Meanwhile, the UK's Personal Accounts Delivery Authority says it is still "assessing the appetite" for a Shariah compliant option for the National Employ-ment Savings Trust to be launched next year. Similarly, there's an increasing focus on public sector pension funds, particularly in local government. In the past, says Abbas, many Muslims have tended to avoid pensions and have instead opted to put money in alternatives such as real estate for their retirement. That should be put right for the next generation: "We're putting pressure on local government to start treating their staff equally and provide them with the option of a pension that meets their requirements.
"If that happens it will have huge impact on the market."
It all points, he says, to a need for employers to seek to understand the needs of the Muslims in their workforces and provide suitable options to cater for them.
One step at a time
Despite its increased market share, it is easy to overstate the growth of Shariah finance, and certainly in Europe. For a start, it is still largely restricted to the UK. Despite the beginnings of efforts in France to facilitate Shariah finance with amendments to its legal system (efforts that have not run entirely smoothly), a sukuk issued by one of the German länder earlier in the decade, and some funds established in Luxembourg, the UK remains the only Western country within the top ten of the IFSL report. Furthermore, HSBC Amanah, which accounts for the majority of the Shariah-compliant assets in the UK, has no plans as yet to expand into Europe. Outside the UK, the market remains almost entirely based in the Middle East and Malaysia.
"There is very little in terms of measurable assets elsewhere in the world," says Duncan McKenzie, IFSL director of economics.
And what is there is mostly in the shape of retail banking and Islamic mortgages. Even in the UK, there is just one pension - The HSBC Life Amanah pension fund - and funds that hoped to attract institutional money have had mixed results. When Insynergy launched its UK Shariah Growth fund in December 2008 as the first UK equity fund, it had high hopes from a market in which it expected to gain first-mover advantage. Even if just one per cent of the two million UK Muslims in the UK decided to invest in collectives and it took a ten per cent market share, it would be a market of
Today, though, a spokesman admits that demand has been slower than anticipated and the fund is not a focus for marketing. "It's a market that is proving tough, to be honest," he says.
Over the years, other funds have had similar experiences. Some, such as Al-Madina Equity Fund and the Al-Safa Equity Fund have closed; others, such as the Parsoli Global Equity Fund, have simply failed to have much of an impact.
On the pensions side, particularly, it's still a very limited market, says Mohammad Qayyum, director general of the Institute of Islamic Banking and Insurance in London. "It is very slow progress."
The industry has also been hit by the downturn. The figures for the total value of Shariah-compliant assets in the IFSL report only take us to the start of 2009, so the impressive growth figures are actually for the previous year. When he comes to look at it for next year McKenzie expects to see a pause for breath. "I don't think we'll see anything like the same growth."
The IFSL report notes that some Shariah-compliant banks suffered higher rates of non-performing loans than conventional banks due to their exposure to falling real estate markets, and the same is true of some Shariah-compliant funds. Others had exposure to areas like the energy sectors that took a knock as well.
"Even if an Islamic fund did not invest in banks and financial services in general, it still has to invest somewhere," points out Usman Hayat, director of Islamic finance at the CFA Institute.
Similarly, the trouble around Dubai World, which in November said it needed a six-month standstill on repayments of $26 billion in debt, hasn't done any favours for the sukuk markets either. As Rod Ringrow, senior vice president of State Street, says, it came at a bad time. "The market was just beginning to come back quite nicely," he notes.
The slow performance, though, is likely to only be a hiccup. The bigger question is simply on the demand.
On the one side, this doesn't have to be from Muslims. Ringrow, for instance, reckons the performance of many funds is still such that they could be of interest to pensions and other investors as part of an SRI allocation, given that the distinction is often a fine one (many Islamic funds simply rely on negative screens excluding the likes of pornography, alcohol and gambling). It could also give them some exposure to emerging markets, since that's where the majority of the funds are based.
Indeed the extent to which Islamic finance can broaden its appeal is a key issue. Amjid Ali, senior manager of HSBC Amanah Global, has said his company hopes to attract a wide range of customers with ethical concerns, not just Muslims.
However, as Hayat notes, it's a tricky one to pull off: there's a significant number of Muslims who are sceptical of whether the products and services that are being offered to them are really Shariah authentic as it is, particularly since in the UK there are only five fully Islamic banks, while the remaining 17 are conventional banks operating Islamic business lines or "windows". Go too far in broadening the appeal of Islamic products and you risk losing your primary customer base. "How you strike that balance is a question that still remains to be answered," says Hayat.
Written by Peter Davy, A FREELANCE JOURNALIST