Appetite for islamic finance growing

With around 700m Muslims and including Indonesia, the most populous Muslim nation, South and Southeast Asia comprise one of the largest potential markets for Islamic finance. Global Islamic bond, or sukuk, issuance remains centred around Malaysia, despite a growing market in the Middle East, but the Islamic funds industry remains relatively small despite what many believe to be an enormous latent demand. As the industry shows signs of warming up, a number of global and local players are manoeuvring themselves into position, mainly around the emerging financial centre of Kuala Lumpur. The Malaysian International Islamic Finance Centre was created by the country’s central bank as a means to give the global Sharia finance industry a single focal point. This involved creating a capital markets regime with rules specifically tailored to meet Sharia guidelines, and crucially, a framework for arbitration in disputes involving Islamic products. The initiative comes at a time of great competition in the space, with Dubai in particular trying to wrest control over the nascent market. Malaysia once commanded 90 per cent of global sukuk issuance, and its share has slid to just over 60 per cent. The monetary authorities in Singapore and Hong Kong have also made moves to capture some of the funds industry. Dato’ Noripah Kamso, CEO of CIMB-Principal Asset Management in Kuala Lumpur believes Malaysia is a natural centre for the funds industry because of the diversity of Islamic capital markets companies that already operate there. Singapore may be able to retain some of the wealth management business, but investment banking, insurance and funds should be attracted by the MIFC regime. Dispelling the myths Many of the bigger managers and service providers in the region have Islamic finance on the radar but some more education is needed before it becomes more widely accepted within the financial community, Ms Kamso says. There are a number of myths that need to be dispelled. Sharia-compliant funds are forbidden from investing in companies that are classified as haraam, which includes anything related to gambling, alcohol or pornography, for example. The ratios on debt, cash and receivables are also assessed and highly leveraged companies – defined a business with leverage exceeding 33 per cent of its market cap – are also forbidden. Contrary to what many managers and potential investors believe, the halaal universe is enormous. “If you have got to do a stock pick, there are thousands in the universe,” Ms Kamso says. “They say [Islamic funds] are too complicated – but the only difference is the Islamic screening process – and that this means a restricted universe of stocks.” In Asia Pacific only the Japanese market, with its weighting towards financials has a relatively small halaal segment. Examining the halaal universe gives a compelling argument for why the Islamic screened indices have actually outperformed the conventional. Excluding heavily leveraged and financial stocks, given the uncertainty in the global stock markets and the continuing fallout from the US subprime crisis, is no bad idea in itself. But the technology, resources, consumer products and telecommunications stocks that form the basis of most Islamic equity funds have benefited from the growth of these sectors, as population growth in Asia fuels a local consumption boom. That many of these funds, either through regulation or the home region bias of investors, remain invested in the emerging markets that have been the key beneficiaries of these demographic, consumption and industrial growth stories, only adds lustre to what could be seen as an eminently sensible investment thesis. “At least for the next one and half years, the Islamic index will outperform the conventional index,” Ms Kamso says. “That is why in the long term it will become a widely accepted style that is open to non-Muslims and Muslims.” Mixing the growing global appetite for Islamic finance with the growth opportunities in Greater China seemed like a fairly safe bet, according to Christina Tung, founder of Mayfair Pacific. The fund is being prepared for distribution in across Asia and the Middle East, Ms Tung says, with Pakistan, the Gulf States and Malaysia likely to be key markets. “To protect our investors we’d rather not go to the Shanghai markets for the time being, unless there is more disclosure, more transparency, more liquidity.” To match the international reach of the fund, Mayfair Pacific’s board is composed of three scholars from different regions, although it will use the stricter Gulf Cooperation Council standards to ensure that it is most widely accepted. “I think it is very important to establish a sound and solid infrastructure, and we want to make a strong commitment to investors,” says Ms Tung. If they are able to get the brand right, and the Islamic finance space expands to fill its potential, it could well be a smart investment.