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
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 attractiveness in the eyes of financial Institutions, 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 Income, National Bank of Abu Dhabi (NBAD)
says. As such, Mena is clearly In the spotlight 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.
S
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 Instruments.
Recent global economic woes seem to
have encouraged Western investors to diversify 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 Islamiccompliant 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 in-
terest, not just from the Muslim world but
also from the Western world, into islamic
types of products that eventually could offer 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
opportunity they wouldn't otherwise have
access to.
Watts says: "If you are a non-Muslim Investor 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.
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
L.
Iran
S.Arabia
Malaysia
UAE
Kuwait
Bahrain
Qatar
WLL^
Turkey
UK
u^HL
Others
AUM OF GLOBAL ISLAMIC FUNDS Source: Ernst & Yom
S- 50
1
10
killlll
2004
JUNE • 12 WWW.MENAFM.COM
SLIM FERIANI
CIO and CEO, Advance
Emerging Capital
2005
2006
2007
2008
2009
2010
FEATURE
ISLAMIC FINANCE
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 Islamically 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."
MARTIN ENGDAL
director, business
development and
product marketing,
Advent Software
A cautious view
For best investor results, Lawrence advocates a portfolio split between conventional and Islamic products as it is still a
relatively small market with only 1% to 2%
of 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 Lawrence.
MARK WATTS
head of fixed income,
National Bank of A b u
Dhabi (NBAD)
"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
opportunities, not all are rushing to jump
on 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
VALUE OF GLOBAL ISLAMIC FUNDS Some: Ernst & Young
Number of funds
S.Arabia
UAE
Malaysia
Kuwait
- I 25
managing an international asset management firm, we just don't really see the merits for why we would go and invest mainly
in Shariah-compliant products because we
don't have a problem investing in breweries, 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 pancountry 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 Arabic, creates barriers for non-Muslim development 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. Developments 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 allowing investors to hedge some exposures.
Growth in AUM for Shariah-compliant, as
opposed 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 successful area of the market in its own right, a more
commercial attitude must be adopted.
WWW.MENAFM.COM JUNE • 12