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 S hariah-compliant products have hit terest, not just from the Muslim world but also from the Western world, into islamic the global market in a big way - new types of products that eventually could of- funds are launched almost every week and non-IMuslim interest in the fer much more competitive, higher yields," explains Mena-facing Investor Slim FerianI, sector has increased exponentially CIO and CEO, Advance Emerging Capital. as companies and individuals from out- side the region attempt to gain access to a But what seems to be most attractive wealth of new opportunities. to non-Muslim investors are new areas of SLIM FERIANI According to TheCityUK's Global Islamic opportunity they wouldn't otherwise have CIO and CEO, Advance Emerging Capital Finance Report 2011, the islamic finance access to. Watts says: "If you are a non-Muslim In- industry Is valued at $1.14trn across more than 70 countries and it is growing at an vestor and you want to get access to the annual rate of 10%. This expansion has ban market in this region, then an Ijara wa ktina fund is a great way to do that." accelerated In the past few years within emerging econom.ies around the world, Sukuk funds are also a popular option. Including non-Muslim majority regions like "Most Investors aren't actually allocating to Europe. the Mena region specifically so sukuk funds are a great way of ensuring that they can," The size of the global Muslim population adds Watts. - 1.3 billion people - contributes to its at- JONATHAN LAWRENCE tractiveness in the eyes of financial Institu- Islamic finance, therefore, is exposing the partner, London office, K&L Gates tions, but, more recently, firms have begun Mena region to a whole host of new op- to realise that Islamic finance Is not only portunities: another key trend is emerging relevant for Muslim Investors. from Islamic banks outside the region. "We are now getting calls from people as far afield as Chile about investing in the "If you want to have a wide portfolio Mena region," Mark Watts, head of fixed In- come, National Bank of Abu Dhabi (NBAD) and you aren't ultra-religious then a says. As such, Mena is clearly In the spot- light for such opportunities - a position that split's probably the way to go" could not come at a better time for a region struggling to attract Interest from nervous investors following the Arab Spring. - Jonathan Lawrence As Jonathan Lawrence, partner at the London Office of K&L Gates, points out: "There's a huge amount of oil wealth In GLOBAL DISTRIBUTION OF ISLAMIC FINANCIAL ASSETS Source: The Banker 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 L. WLL^ u^HL looking for safer ways to generate returns. Iran S.Arabia Malaysia U A E Kuwait Bahrain Qatar Turkey U K Others "There seems to be a belief that Islamic- compliant investments are safer because AUM OF GLOBAL ISLAMIC FUNDS Source: Ernst & Yom they're based in the real economy and the rules require that you avoid speculation," S- 50 killlll says Martin Engdal, director, business de- velopment and product marketing. Advent Software. Yield-hungry investors are also choosing Islamic products for their potentially higher 1 1 0 returns. "We live In a world of very low yield globally and that is helping the growing in- 2004 2005 2006 2007 2008 2009 2010 JUNE • 12 WWW.MENAFM.COM
FEATURE ISLAMIC FINANCE managing an international asset manage- For example, firms in the UK approach businesses such as Rolls Royce and try ment firm, we just don't really see the mer- its for why we would go and invest mainly to deliver Islamic structures so that Rolls in Shariah-compliant products because we Royce can then sell those instruments into the Middle East. don't have a problem investing in brewer- ies, for example, or banks for that matter," "It's great for Middle Eastern investors points out Feriani. because they get access to risks Islamical- ly they wouldn't normally have been able Other challenges are also apparent in MARTIN ENGDAL to get access to," explains Watts. "But it's the sector. Islamic finance in its current, director, business great for Rolls Royce too, because they more modern format, is a part of the re- development and product marketing, get name recognition in this region where gion's market which has yet to mature - the Advent Software they may not have had so much in the first consensus seems to be that standards and place." professionalism must be improved to make the time and expense involved in launching a product in Mena more efficient. A cautious view "One of the challenges is the lack of pan- For best investor results, Lawrence advo- country standards for Shariah contracts," cates a portfolio split between conven- says Watts. tional and Islamic products as it is still a Additionally, most financial institutions relatively small market with only 1% to 2% have their own in-house Shariah boards, of global capital invested in Islamic finance structures. "If you want to have a wide and, from a practical point of view, the fact MARK WATTS that most Shariah scholars only speak Ara- head of fixed income, portfolio and you aren't ultra-religious then National Bank of Abu bic, creates barriers for non-Muslim devel- a split's probably the way to go." says Law- Dhabi (NBAD) opment teams. This seems to be playing a rence. part in putting off some non-Muslim inves- tors, who are also used to the diversity of "We are now getting calls from people Western products. as far afield as Chile about providing Development ahead This lack of choice is slowly shifting. De- Islamic products" velopments are taking place that allow for a greater variety of strategies - according - Mark Watts 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- As such, although there are a number of ing investors to hedge some exposures. opportunities, not all are rushing to jump Growth in AUM for Shariah-compliant, as on the bandwagon. opposed to conventional, products is also Restrictions inherent In Islamic finance several times higher - bearing in mind the serve to put off some foreign investors, Islamic finance sector is still very small in particularly those focusing on emerging comparison. But, clearly, it is an area of the and frontier markets. "As a foreign investor market that is not to be sniffed at - interest is growing, not only among non-Muslims in Mena, but non-Muslims globally. V A L U E O F G L O B A L ISLAMIC F U N D S Some: Ernst & Young Looking ahead, greater commercialisation is expected within the sector, as Islamic prod- ucts become ingrained in mainstream finance. - I 25 Number of funds 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. S.Arabia UAE Malaysia Kuwait WWW.MENAFM.COM JUNE • 12
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