Product innovation in the islamic arena

More than 500 Sharia-compliant investment funds are currently available globally, with assets estimated at $30-35bn (€27bn) by Cerulli Associates. Mutual funds alone have grown at a compound annual rate of 22 per cent since 2003 with a big leap between 2005 and 2007, when product numbers doubled. Discretionary mandates account for a similar figure, taking the total to $65bn. The biggest growth is in retail and high net worth markets. Private banks are selling Sharia capabilities to offshore clients from Swiss centres and in local markets such as the Arab Gulf. They are investing in both Ucits III funds and private placements, where structured notes are used or there is a desire to control liquidity. This year, investor risk appetite has reduced, and the challenge is to organise fixed payout products that are Sharia-compliant. In shukuk - Islamic certificates similar to bonds - the universe of available investments is much smaller although issuance has risen recently and secondary liquidity has become a challenge. BNP Paribas, for example recently launching a riba-free private placement fund including both Sukuk and Murabaha, a type of transaction where the cost is transparently declared upfront. Islamic structured products are widely used, although the market developed from a standing start three years ago. Manufactured by western investment banks, most are fairly simplistic buy and hold products. First into this space was Deutsche, followed by BNP Paribas, Société Générale and RBS via ABN Amro. Product development tends to rely on sophisticated technology of western investment banks. “Not long ago, it was impossible to offer a Sharia-compliant fund in the property sector or in fixed interest,” says Farley Thomas, global fund sales chief at HSBC. “But vibrant innovation and modern techniques make it much more feasible to put together products which hitherto were available only in traditional format.” The next stage is likely to be a raft of socially responsible funds. “So far we have observed Islamic funds that are mostly Sharia-compliant, but the emphasis on social responsibility and sustainability has been rather limited,” says Dr Humayan Dar, CEO of BMB Islamic. “Investors are now becoming more aware of these issues. Existing funds may find it difficult to change but a new generation of funds will use this as a point of differentiation.” In Saudi Arabia there has been a massive shift away from traditional funds by the retail base. “It’s partly a question of availability,” says Mr Thomas. “As awareness grows that Sharia investments are possible, then specialist providers come into the market and the greater availability attracts investors.” In the Middle East, both conventional and Islamic banks offer Islamic investments but the very best asset managers are not always represented. “There is a realisation of the limitations of the industry and investors in the Middle East often feel compelled to look outside the Islamic space and ask other managers to set up a Sharia-compliant fund for them,” says Tom Connolly, head of asset management for the Middle East at BNY Mellon. “Our understanding is that demand from private clients has increased because from a financial performance perspective these funds have done well and they suit risk aversion,” says Mats Berggren, vice president, client services at Advent Software. The biggest challenge in this steadily growing market is to deliver specific solutions adapted to local markets and “tailored to suit” offerings for the different types of clients’ segments, rather than offering a global approach, says Anthony Finan, head of marketing at BNP Paribas. “Clients are very different and don’t share the same analysis of what Islamic funds are. It’s a universe in progress in terms of concept definition and validation processes and not always easy to find common ground.” Islamic investments have also contributed in a small way to the explosion in Exchange Traded Funds. The first was listed on Euronext in 2007 by BNP Paribas, the EasyETF DJ Islamic Market Titans 100, and it will soon be rolled out across Europe.

Dr Humayan Dar, BMB Islamic