The Islamic funds universe continues to expand, but still lacks coverage across certain asset classes and geographical mandates. Saudi Arabia and Malaysia remain the two largest markets for Islamic asset management in the world.
SWFs in the GCC and Far East are estimated to hold assets worth almost $1.3 trillion while pension funds in the GCC have estimated assets of over $46 billion.
The Islamic Funds and Investments Report 2008 (IFIR 2008), released today at the World Islamic Funds and Capital Markets Conference by Ernst & Young, states that Shari’ah sensitive investable assets in the GCC and Far East have reached $267 billion as a result of strong economic expansion, increased government expenditure and high levels of liquidity. This translates into a potential annual revenue pool of $1.34 billion for the Islamic asset management industry. The report focuses on markets in the GCC, Malaysia and Indonesia.
At the end of March 2008, there were over 500 Shari’ah compliant funds in the world, 153 of which were established in 2007 alone. According to projections contained in the report, the total number of Islamic funds could reach 1000 by 2010.
IFIR 2008 includes an analysis of the Islamic investment patterns of Sovereign Wealth Funds (SWFs) and of pension funds. SWFs in the GCC and Far East are estimated to hold assets worth almost $1.3 trillion while pension funds in the GCC have estimated assets of over $46 billion. SWFs in the GCC are financed by soaring oil revenues while those in the Far East tend to be financed through reserves or debt. Although they were not originally set up to be Shari’ah compliant, both pension funds and SWFs often engage in ethical investment strategies, which fit in neatly with Islamic instruments.
The report highlights some of the contrasts between Saudi Arabia and Malaysia, the two largest markets for Islamic asset management in the world, explaining why they need to be approached with differing investment strategies. Many investors in Saudi Arabia consider Islamic products to be ‘preferable’, meaning that they will often choose an Islamic option over a conventional alternative even if the projected returns are not quite as favourable.
While there are 120 Islamic mutual funds in Saudi Arabia, accounting for 55 per cent of the total, investment strategies in Saudi Arabia have, until now, remained focused on equities. In Malaysia, Islamic products are ‘accepted’, meaning that investors are prepared to consider both conventional and Shari’ah compliant products. However, the enhanced depth of offerings across asset classes in Malaysia allows for competitive Islamic investment that attracts even non-Muslim investors. There are 134 Islamic mutual funds in Malaysia, accounting for just 10 per cent of their total assets.
According to Sameer Abdi, Head of Ernst & Young’s Islamic Finance Services Group, “At a time when the GCC is enjoying unprecedented oil revenues, Islamic asset management will only gain more significance on the world stage. The industry is still in its early growth stages as the Islamic funds landscape exhibits a number of gaps and lacks depth in some asset classes. But there are many ways in which market participants can prepare themselves to benefit from this sector as it matures.”
Touching upon the risks faced by Islamic asset managers as outlined in IFIR 2008, Omar Bitar, managing partner of business advisory at Ernst & Young Middle East, said, “While competitive pressures on the Islamic financial services industry are compounded by the open-market nature of asset management, human resources continues to be a key risk to Islamic asset managers. In addition, they need to develop the sort of coverage in terms of geographies and asset classes held by their conventional counterparts