The Islamic asset management industry is expected to be worth about $125 billion (Dh458bn) in the next 10 years – a growth of more than 46 per cent from its current value of $67bn – as demand for shariah-compliant financial products continue to move upwards.
Datuk Noripah Kamso, Chief Executive of the Malaysian-based global shariah investment manager CIMB-Principal Islamic Asset Management, estimates a double-digit annual average growth rate for the industry in the next decade.
“In terms of growth percentage based on my interpretation, [Islamic asset management] will register a 15-per-cent annual average because the base is relatively small. After the fifth year, I would expect the growth performance to be 10 per cent annually for five years,” she said.
While Islamic asset management may hold huge potential – even attracting investors from outside the Arab world – it remains dwarfed by traditional financial instruments.
At the moment, there are only fewer than 400 managed funds worldwide offering investment services and tools that adhere to Islamic or shariah law. This figure is relatively meagre compared to the 63,000 conventional funds currently available in the market.
The CIMB-Principal Islamic chief executive admitted that the industry is very much in its infancy and remains an untapped venture, representing barely 1 per cent of the total volume of conventional funds professionally managed worldwide. However, future outlook for the industry is rosy as the potential it holds remains huge.
Noripah added that Islamic asset management has taken off internationally in the past five years and goes back even further in Malaysia, where it has been offered since 2000.
Shariah-compliant financial instruments have recently caught the attention of the international investment community due to the growing number of Muslim and non-Muslim investors, particularly high-net-worth individuals based in the Middle East.
As a result, major players in the global financial sector such as HSBC, Standard Chartered and Citibank have begun offering Islamic financing products.
However, distribution of shariah-approved products continues to pose a challenge to the industry. A possible solution that Noripah has been passionate about is the inclusion of these Islamic funds in offshore listings such as those based in Dublin and Luxembourg.
Noripah explained that the advantage of registering Islamic products in these offshore fund platforms is that it promotes investment track record transparency. Investors around the world can directly view the track record of the investment product and decide whether to invest or not.
“This will provide investors with a platform similar to that of a shop window, where they can conveniently view the fund and the asset manager. Investors can then decide to invest in the fund or, in the case of an institutional investor, directly appoint an investment manager for the relevant investment strategy,” she said.
Standardisation could influence global growth
Financial regulators around the world believe that Islamic finance in general will move to the next level if there is a set of globally accepted investment guidelines.
“Standardisation of global Shariah investment practices is something you cannot run away from, but there is a misconception that this must come with standardisation of shariah interpretation by different Islamic scholars. However, this is not necessarily the case.
“In fact, from a marketing perspective, non-standardisation is good because then [an asset manager] can actually custom-make a product just for the Saudi market [based on Saudi interpretation] or a shariah product dedicated only to the Malaysian market, for instance,” she said.
Noripah explained that traditionally, Islamic law comes from one divine source, namely Qur’an and Sunnah.
“It’s very clear what is permissible and what is not. What is not clear is how this divine law is interpreted for investment practices. And that’s when you start talking to shariah scholars who will do an analysis and analogy, and give guidelines as to how best you can actually create a shariah product,” she said.
Managing investment risks
Islamic finance, which is deeply grounded on shariah law and thus prohibits payment of interest as well as investing based on short-selling and speculation, has became even more popular during the global economic crisis because it has been assumed to be relatively immune from the meltdown.
However, in January, a top executive of Qatar’s financial regulator was vocal in debunking “the myth” of Islamic financial products as a safer investment alternative, saying that any kind of investment bears underlying risks.
While shariah-compliant instruments may not be totally shielded from crises, Noripah said the good thing about them, particularly when investing in the equity asset class, is that the risk management framework is embedded into the shariah screening process.
“In an uptrend market, they may not move as fast as conventional products. They may either outperform or underperform the conventional in a short period. However if you look at the last five year period ending December 2009, the Dow Jones Islamic Market World Index outperformed the conventional Dow Jones World Index by an average of 2.28 per cent per year,” she said.
Consider also reading:
Islamic finance short on wealth management: report
Global guidelines for Islamic bonds in pipeline
Scarce data on Islamic Finance impedes growth
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