Islamic fund management industry set to gain momentum
Published: Dec 20, 2010 00:17 Updated: Dec 20, 2010 00:17
The Islamic fund management industry, long considered to be the Cinderella asset class of the Islamic finance sector, is set to gain momentum especially in Southeast Asia and Saudi Arabia. The Kingdom and Malaysia are the two largest markets by far for Islamic investment funds, both in terms of net asset value (NAV) and number of funds.
Indeed, Zarinah Anwar, chairman of the Securities Commission Malaysia (SC), the securities and fund regulator, confirmed at the International Shariah Investment Convention 2010 which was held in early December in Kuala Lumpur and organized by the SC; Bursa Malaysia, the stock exchange; and Amanie Business Solutions, that Malaysia’s Islamic fund management industry is the fastest growing segment of Malaysia’s Islamic capital market (ICM) with an annual compounded growth of more than 25 percent over the last 5 years.
However, statistics can be very misleading given that the base is very low and the Islamic investment fund industry still constitutes the smallest portion of the overall market which has been dominated by products such as Murabaha (cost-plus financing), Bai Bithaman Ajil (deferred payment), Ijara (leasing), Tawarruq (cash management) and sukuk (Islamic trust certificates) over the last decade or so. At best, the Islamic investment fund universe totals no more than an estimated $30 billion compared with an estimated $130 billion for sukuk.
Given the volatility of the stock markets, especially in the GCC countries where ordinary investors lost life savings on the equity markets a few years ago, GCC investors are cautious about investing in stocks. But with the real estate bubble bursting in the aftermath of the credit crunch and the global financial crisis, confidence especially in the GCC markets such as Dubai, Bahrain, Kuwait and Qatar in the traditionally favored real estate investment asset class has also taken a hit. Whether the Gulf preference for "bricks and mortar" investment continues remains to be seen.
The opportunity for Islamic asset management companies and investment banks to come up with innovative products that carry an element of capital preservation and decent returns is clear and present. Bankers very often complain about GCC investors wanting high returns with low risks that go against the grain of investment dynamics and the ethos of Islamic investment.
Nevertheless, according to Zarinah, “The Islamic fund management segment has been fully liberalized with attractive tax incentives offered by the government. We now have 15 full-fledged Islamic fund managers operating in Malaysia, including some of the biggest names in the international fund management industry. We have 152 Islamic unit trust funds with a total Net Asset Value of 23.02 billion Malaysian ringgits ($7.1billion).”
In order to further develop Malaysia’s Islamic fund management industry and to enable Malaysian investment products to be offered abroad and foreign products to be offered to Malaysian investors, the commission has actively pursued mutual recognition arrangements with other strategically important markets such as the Dubai Financial Services Authority and the Securities and Futures Commission of Hong Kong. These agreements, according to the SC, help to widen the industry's distribution network and promote exchange of ideas to enhance product offerings, especially for funds meant for regional distribution.
Earlier in December, the SC signed a Memorandum of Understanding (MoU) with the Qatar Financial Markets Authority (QFMA) in Kuala Lumpur whereby the two capital markets regulators would strengthen cooperation and cross-border enforcement to enhance overall investor protection including in the Islamic investment fund and asset management sector.
The MoU was signed by Zarinah and QFMA Chief Executive Officer Nasser Ahmad Al-Shaibi. According to Zarinah, "In an increasingly complex financial environment, it is important for regulators to continue to strengthen their cooperative networks through greater information-sharing and collaboration in capacity building."
Al-Shaibi similarly explained that "the MoU clarifies the importance of the exchange of technical support between the authorities in matters relating to the regulation of the securities industries. The authorities will also work together to determine the training and technical needs for the development of the stock markets for both countries, subject to the availability of the appropriate expertise and resources."
The SC is committed to strengthening international cooperation in securities regulation and has signed 29 such MoUs with foreign capital markets regulators since 1994.
Malaysia, stressed Zarinah, is also fast becoming a center for Islamic fund and wealth management services and for international Islamic banking services, as well as a center for Islamic finance education, training, consultancy and research. All these sectors are supported by facilitative policies and underpinned by clear and robust regulatory as well as Shariah governance frameworks.
In terms of equities, Bursa Malaysia, with 961 listed companies, offers the widest and largest selection of companies in ASEAN. Currently, 88 percent of the stocks listed on the exchange making up 62 percent of total market capitalization are Shariah-compliant. Dividend yields for Malaysian stocks are currently estimated at 3.4 percent that places it among the highest in the region. This is supported by sustainable earnings growth with returns on equity estimated at almost 20 percent. The Malaysian equity market also offers investment opportunities in Malaysia's best and largest companies, some of which have strong regional presence.