The new investor Islamic finance, so long a niche sector, is heading - - PDF document

▶

Jan 05, 2024 482 likes •535 views

FEATURE The new investor Islamic finance, so long a niche sector, is heading for the mainstream and bringing new investments to the region as market players realise the sector not only relevant for Muslims Amy Andrew WWW.MENAFM.COM JUNE 12

SLIDE 1

FEATURE

The new investor

Islamic finance, so long a niche sector, is heading for the mainstream and bringing new investments to the region as market players realise the sector not only relevant for Muslims Amy Andrew

WWW.MENAFM.COM JUNE • 12

SLIDE 2

FEATURE

ISLAMIC FINANCE

hariah-compliant products have hit the global market in a big way - new funds are launched almost every week and non-IMuslim interest in the sector has increased exponentially as companies and individuals from outside the region attempt to gain access to a wealth of new opportunities. According to TheCityUK's Global Islamic Finance Report 2011, the islamic finance industry Is valued at $1.14trn across more than 70 countries and it is growing at an annual rate of 10%. This expansion has accelerated In the past few years within emerging econom.ies around the world, Including non-Muslim majority regions like Europe. The size of the global Muslim population

1.3 billion people - contributes to its at-

tractiveness in the eyes of financial Institu- tions, but, more recently, firms have begun to realise that Islamic finance Is not only relevant for Muslim Investors. "We are now getting calls from people as far afield as Chile about investing in the Mena region," Mark Watts, head of fixed In- come, National Bank of Abu Dhabi (NBAD)

says. As such, Mena is clearly In the spot-

light for such opportunities - a position that could not come at a better time for a region struggling to attract Interest from nervous investors following the Arab Spring. As Jonathan Lawrence, partner at the London Office of K&L Gates, points out: "There's a huge amount of oil wealth In the Middle East." He adds that the rise in Western institutions looking at investing In such opportunities reflects easier access to Mena through Shariah-compliant Instru- ments. Recent global economic woes seem to have encouraged Western investors to di- versify their portfolios - a policy that has sprung from a renewed global focus on looking for safer ways to generate returns. "There seems to be a belief that Islamic- compliant investments are safer because they're based in the real economy and the rules require that you avoid speculation," says Martin Engdal, director, business development and product marketing. Advent Software. Yield-hungry investors are also choosing Islamic products for their potentially higher

returns. "We live In a world of very low yield

globally and that is helping the growing interest, not just from the Muslim world but also from the Western world, into islamic types of products that eventually could of- fer much more competitive, higher yields," explains Mena-facing Investor Slim FerianI, CIO and CEO, Advance Emerging Capital. But what seems to be most attractive to non-Muslim investors are new areas of

pportunity they wouldn't otherwise have

access to. Watts says: "If you are a non-Muslim In- vestor and you want to get access to the ban market in this region, then an Ijara wa ktina fund is a great way to do that." Sukuk funds are also a popular option. "Most Investors aren't actually allocating to the Mena region specifically so sukuk funds are a great way of ensuring that they can," adds Watts. Islamic finance, therefore, is exposing the Mena region to a whole host of new opportunities: another key trend is emerging from Islamic banks outside the region. SLIM FERIANI CIO and CEO, Advance Emerging Capital JONATHAN LAWRENCE partner, London office, K&L Gates

"If you want to have a wide portfolio and you aren't ultra-religious then a split's probably the way to go"

Jonathan Lawrence

GLOBAL DISTRIBUTION OF ISLAMIC FINANCIAL ASSETS Source: The Banker S- 50 1 1 L. WLL^ u^HL Iran S.Arabia Malaysia U A E Kuwait Bahrain Qatar Turkey U K Others AUM OF GLOBAL ISLAMIC FUNDS Source: Ernst & Yom

killlll

2004 2005 2006 2007 2008 2009 2010 JUNE • 12 WWW.MENAFM.COM

SLIDE 3

FEATURE

ISLAMIC FINANCE MARTIN ENGDAL director, business development and product marketing, Advent Software MARK WATTS head of fixed income, National Bank of Abu Dhabi (NBAD) For example, firms in the UK approach businesses such as Rolls Royce and try to deliver Islamic structures so that Rolls Royce can then sell those instruments into the Middle East. "It's great for Middle Eastern investors because they get access to risks Islamical- ly they wouldn't normally have been able to get access to," explains Watts. "But it's great for Rolls Royce too, because they get name recognition in this region where they may not have had so much in the first place."

A cautious view

For best investor results, Lawrence advo- cates a portfolio split between conven- tional and Islamic products as it is still a relatively small market with only 1% to 2%

f global capital invested in Islamic finance
structures. "If you want to have a wide

portfolio and you aren't ultra-religious then a split's probably the way to go." says Law- rence.

"We are now getting calls from people

as far afield as Chile about providing

Islamic products"

Mark Watts

As such, although there are a number of

pportunities, not all are rushing to jump
n the bandwagon.

Restrictions inherent In Islamic finance serve to put off some foreign investors, particularly those focusing on emerging and frontier markets. "As a foreign investor V A L U E O F G L O B A L ISLAMIC F U N D S Some: Ernst & Young Number of funds

I 25

S.Arabia UAE Malaysia Kuwait managing an international asset manage- ment firm, we just don't really see the mer- its for why we would go and invest mainly in Shariah-compliant products because we don't have a problem investing in brewer- ies, for example, or banks for that matter," points out Feriani. Other challenges are also apparent in the sector. Islamic finance in its current, more modern format, is a part of the region's market which has yet to mature - the consensus seems to be that standards and professionalism must be improved to make the time and expense involved in launching a product in Mena more efficient. "One of the challenges is the lack of pan- country standards for Shariah contracts," says Watts. Additionally, most financial institutions have their own in-house Shariah boards, and, from a practical point of view, the fact that most Shariah scholars only speak Ara- bic, creates barriers for non-Muslim devel-

pment teams. This seems to be playing a

part in putting off some non-Muslim investors, who are also used to the diversity of Western products.

Development ahead

This lack of choice is slowly shifting. De- velopments are taking place that allow for a greater variety of strategies - according to Lawrence, for instance, there has been a technical development by the International Swaps and Derivatives Association (ISDA), which has developed a new product allow- ing investors to hedge some exposures. Growth in AUM for Shariah-compliant, as

pposed to conventional, products is also

several times higher - bearing in mind the Islamic finance sector is still very small in

comparison. But, clearly, it is an area of the

market that is not to be sniffed at - interest is growing, not only among non-Muslims in Mena, but non-Muslims globally. Looking ahead, greater commercialisation is expected within the sector, as Islamic products become ingrained in mainstream finance. At present, market participants are debating among themselves the best way forward, and it is clear changes will need to be made within the system to ensure ease of access to new instruments for non-Muslims and Muslims alike - if the sector is to become a success- ful area of the market in its own right, a more commercial attitude must be adopted. WWW.MENAFM.COM JUNE • 12