Asset Management
Shariah-compliant unds: A whole new world o investment*
pwc.com
Contents
Introduction
02
Overview
03
Why target the Shariah-compliant unds sector?
05
The second wave: institutional money on the move
08
Launching a und range: the rules o the game are not the same
10
Demand or new products intensiying
14
Marketing and distribution: creating a presence
17
Challenges persist, but sector is maturing
20
Conclusion
21
How PricewaterhouseCoopers can help
22
Glossary
23
Contacts
24
Introduction
Overview
The concept o Shariah-compliant investing goes back our decades and yet the sector has only really taken o in the last ve years.
Why target the Shariah-compliant unds sector?
Launching a und range: the rules o the game are not the same
Muslims represent nearly a quarter o the world’s population and yet less than 1% o nancial assets are Shariah-compliant2. There seems to be a disconnect here that is likely to be rectied in the coming years. Indeed, the unds industry is growing at 15-20%3 a year already, and this may rise as young Muslim populations and communities start to save or later lie and as their investment preerences expand. The impetus or the sector is currently being provided by excess savings rom oil, which is held in both government and private hands, but also by wider increases in productivity and prosperity. Opportunities or innovative asset management companies have rarely been better.
There are a number o specic issues that und managers need to be aware o beore they can enter this ast-growing market. These include: proscribed investments, the necessity o appointing a Shariah board and carrying out an audit, the purication o income, asset screening, and custody arrangements and trading agreements. None o these should pose insurmountable problems i the right expertise is employed at an early stage in the und’s development.
A number o structural and behavioural changes in Islamic countries have produced this take-o and the probability is that the sector will now go rom strength to strength.
Written by PricewaterhouseCoopers’1 experts rom around the world, this is the third paper in a series aimed at brieng mainstream nancial services companies about opportunities in Islamic nance.
Many asset management rms are currently sizing up the opportunities and this paper aims to help them deepen their knowledge o the sector, understand current developments and navigate through the main challenges o creating a Shariah-compliant und range.
The second wave: institutional money on the move Large sukuk issues in recent years have awakened investor interest and created the conditions or much increased institutional investment. There is now both subtle and overt pressure or institutions to support the sukuk market and this has led pension unds and sovereign wealth unds to look at Islamic investment more closely. The dramatic increase in the takaul market and the dearth o products to service it should also present opportunities or asset management rms.
1
PricewaterhouseCoopers’ reers to the network o member rms o PricewaterhouseCoopers International Limited, each o which is a separate and independent legal identity.
2
3
This calculation is based on total global nancial assets o $140trn (‘Mapping Global Capital Markets’, McKinsey & Company, 2009) and $729bn total assets in the Islamic nance industry (‘Islamic Finance 2009’, International Financial Services London, February 2009). ‘Islamic Investment’, FTSE Group, 2008.
Demand or new products intensiying The relative immaturity o the sector is evident in the incomplete product set. Although most conventional asset classes exist, some require urther development to ensure they are ully Shariah-compliant and viable as investment propositions. So while equities and real estate are well established, xed income unds suer rom a lack o liquidity and inadequate valuation modelling. Some o the techniques used in hedge and private equity unds are also open to question. But solutions are being developed and market participants that are involved in the development phase o unds are likely to derive signicant benets.
Why target the Shariah-compliant unds sector? Marketing and distribution: creating a presence Establishing a brand in the Shariah-compliant marketplace is arguably more challenging than in the conventional sector.
Fragmentation o client groups and geographical markets presents diculties, as does the lack o standardisation o und types and regulation. But the deepening o markets in the Gul Cooperation Council (GCC) region and Malaysia, combined with the gradual launch o unds in many other jurisdictions – such as Ireland, Hong Kong, Luxembourg and the United States – should lead to greater integration and a more homogeneous global market. In addition, global rms have a rst-mover opportunity to exploit a certain lack o credibility that pure play Islamic und managers have in the eyes o central banks and other large institutions. Recognised brand names are likely to attract substantial assets.4
4
Evidence gathered rom conversations with PricewaterhouseCoopers client base.
Challenges persist, but sector is maturing There are a number o structural issues in the industry that only time and persistence can resolve. These include the critical issues o und costs and valuation o assets. Costs are elevated by the need to appoint and remunerate Shariah boards, the necessity o asset screening and a lack o scale in unds, while valuation is clouded by a lack o liquidity in some instruments. As the sector matures, other issues such as attracting and retaining personnel with the appropriate expertise will become paramount. Asset management rms will need to review and renew their approach as the industry develops.
Perhaps the single most important actor behind the powerul growth o the Shariah-compliant unds industry lies in the simple act that Muslims represent about a quarter o the world’s population. Yet, at the same time, less than 1% o global nancial assets are Shariah-compliant in an era o enhanced religioussensibilities. 5 This implies a great many rst-time investors potentially interested in Shariah products as well as many who have dipped a toe in the water and may be ready to invest more. The ast-expanding investor base consists o three main groupings. Most o the existing assets are sourced and managed in the GCC and Malaysia. Both represent opportunities or asset management companies, although Malaysia is a well-established and largely sel-contained market. The second grouping encompasses Islamic countries or countries with large Islamic populations – such as Indonesia, India and Pakistan – where there is a sizeable, but largely untapped, potential market. Ater that, Europe and the US, with signicant, relatively wealthy Muslim populations are also potentially lucrative markets or
5
This calculation is based on total global nancial assets o $140trn (‘Mapping Global Capital Markets’, McKinsey & Company, 2009) and $729bn total assets in the Islamic nance industry (‘Islamic Finance 2009’, International Financial Services London, February 2009).
Islamic-compliant product providers. While the number o opportunities is small compared to Muslim-dominated countries, this grouping tends to have high levels o disposable wealth. Banks and wealth managers are starting to launch in the US and Europe to tap latent demand.6 Not only is the investor base large and growing, but the types o assets investors are attracted to are also expanding. While assets used to be invested largely in the Middle East region, the economic growth o Islamic countries and the network o business relationships that have developed in recent years have opened investors’ eyes to new investment opportunities. Figures or the growth o the Shariah-compliant asset management industry reveal how quickly this interest is turning into concrete action. The market or Islamic investment products is growing at about 15-20 per cent a year and equity und assets alone are orecast to jump rom $15bn in 2008 to $53bn by 2010. 7
6
7
‘Islamic banks in the United States: breaking through the barriers’, NewHorizon, April-June 2009. ‘Islamic Investment’, FTSE Group, 2008.
Besides the sheer volume o potential investors, a number o other actors have driven the industry orward in recent years. In the GCC, the demand or oil has produced record sales in the last ve years and created large amounts o excess cash. But growth in the region is not predicated on oil alone: signicant structural changes have taken place in many countries that have encouraged entrepreneurship and investment. The inrastructure development in many parts o the region in recent years has been little short o breathtaking. This wave o investment has led to powerul growth in the retail and institutional nancial services sector as wealth has trickled down rom governments and government agencies to private business owners and individuals. Some o the wealth that has built up in public and private hands has already been deployed in Shariah-compliant assets.
Promisingly, Muslim communities and populations have a high proportion o young people in t he workplace 8 and this group is among the most enthusiastic adopters o Islamic products. This augurs well or the long-term growth o Shariah nance in general and Shariahcompliant unds in particular as this group o new ‘baby boomers’ starts to save or retirement. And positive structural changes have helped produce a benecial economic cycle in the region. So while the International Monetary Fund predicts a contraction in the global economy in 2009, growth in the MENA region is orecast to be a healthy 2.6% in 2009 and 3.6% in 2010. Alongside this huge potential demand, there is a dearth o suitable products, as demand or well-managed and genuinely compliant products outstrips supply.
8
The World Bank estimates that India and the other South Asian countries will be the second-largest suppliers o migrant labour b y 2050 with, respectively, an increase o 68 million and 89 million people in the labour orce o th ose between the ages o 15 and 39. In the Middle East and North Arica (MENA) region, the increase in the labour orce in the same age group is estimated to be 44 million.
The global nancial crisis has proved a setback or asset gatherers o all kinds in all marketplaces, but it is possible Shariah-compliant unds may derive a long-term benet. Conventional Western unds are less trusted by some investors ater their managers ailed to stem losses, and it is likely that more money will be invested with local institutions. Some o this will undoubtedly fow to Shariah-compliant unds.
Although growth was slow to take o in Shariahcompliant unds in the 1970s and 1980s, the industry has produced a commendable annualised growth rate o 26% per annum9 in terms o the number o unds launched over the last decade. An infection point can be observed between 2002 and 2003. There are multiple reasons or this, both tangible (an increase in petrodollar liquidity, an investment shit avouring reinvestment in the GCC, as well as maturing capital markets) and intangible (customers’ greater understanding and acceptance o the products, and a generational change in terms o market participants). The exact size o the industry is not clear since many unds are distributed by private placement. But we do know that unds are being launched across the globe by a wide variety o und providers as Islamic populations and Islamic communities in non-Islamic countries begin to make their purchasing power elt. There is ample reason to believe this trend will continue.
9
‘Key Trends in Islamic Funds’, EurekaHedge, June 2008.
The second wave: institutional money on the move
Shariah-compliant unds have a long history. They rst appeared in the late 1960s in Malaysia and in the mid-1970s in the Middle East region.10 Their creation was driven mainly by individuals, who were attracted by the idea o aith-based investments.
High net-worth individuals (HNWs) were among the early adopters, and this group still has a high propensity or Islamic products today. Since the size o this group is orecast to grow aster in the MENA region than elsewhere, this bodes well or Islamic investing. 11 Institutional investment, which dominates infows into the conventional und sector, has been relatively slow to ollow. However, there is now strong evidence that institutions – such as sovereign wealth unds, central banks, pension unds, takaul, wealth management rms and private banks – will provide a second wave o investment in the sector. They are led by governments, which have launched a number o recent sukuk issues: Indonesia launched a $650m sukuk in April 2009; Singapore had a $200m issue in January and nearly $14.9bn in total was issued in 2008. This includes issues rom public sector entities and rom a small number o private companies. So there is subtle political pressure to support these issues and increase their liquidity. Thereore, public pension unds and endowments are starting to invest in Shariah-compliant unds. For similar reasons, sovereign wealth unds – whose main nonnancial investing criteria used to be ethical investing – are also sizing up the opportunity. Takaul companies are also a potential driver o uture growth. Moody’s predicts that global takaul premiums will rise to $7bn by 2015. 12 The market now comprises some 130 companies 13 in both Muslim and non-Muslim
10
http://www.usc.edu/dept/MSA/economics/islamic_banking.html
11 12 13
‘12th Annual World Wealth Report’, Merrill Lynch and Capgemini, J une 2008. ‘Middle East Insurance set or continued expansion’, Moody’s, Feb 2008. ‘Islamic Finance Outlook’, Standard & Poor’s, April 2007.
(including Western) countries. Takaul insurers are required to invest in Shariah-compliant products where possible. With the dearth o short-term Shariahcompliant assets, however, many takaul insurers are orced to invest in conventional assets in order t o meet the regulatory constraints o the countries they are domiciled in. The opportunity to attract these assets is clear. Governments have not always been so helpul in promoting Shariah investment. Kuwait, or instance, did not permit the licensing o Islamic products until 2004.14 So changes that have taken place at government level are signicant. In short, there is growing pressure or banks, insurers, pension unds and sovereign wealth unds to include Shariah products in their portolio mix. Asset management rms that can oer them not only gain entry to a high-growth market, but also gain a oothold in a new region into which conventional products may also be sold. At the same time, they will be able to meet demand rom non-Islamic investors or Shariah-compliant unds. This category o investor is interested in gaining access to some less accessible geographical markets that are not covered in the conventional und universe, but which may oer substantial growth potential.
14
‘Islamic Banking: a unique dierentiation strategy or Gul’, Stand ard & Poor’s, November 2004.
Launching a und range: the rules o the game are not the same
As we have seen, the market environment is potentially benecial or Shariah-compliant unds and the prospective client base is expanding. Many asset management rms are now launching, or planning to launch unds.
This process does, however, involve increased complexity vis-à-vis the creation o a conventional und. The und promoter needs to acquire knowledge o Shariah law, o the processes involved in appointing a Shariah board, and a number o other issues. And, as is oten the case with a young and growing industry, the rules and regulations are oten ill-dened and require a skilled hand to navigate. But those rms that persevere and come to terms with the complexities are likely to be well rewarded.
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Alcohol;
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Tobacco;
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Pork;
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Adult entertainment industry;
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Gambling;
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Weapons;
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Conventional banks and insurance companies.
Proscribed investments A Shariah und must ensure that the underlying businesses in which it holds securities are Shariahcompliant. A Shariah und’s oering document will spell out the Islamic-based investment restrictions. The und may not invest in any businesses whose underlying activities are involved in any non-halal items. The investment manager o a Shariah und cannot, or example, include any companies involved in the ollowing sectors:
In addition, a Shariah und may not invest in interest– bearing instruments. It may not invest in conventional derivatives (although there is ongoing debate over this) 15 and may not sell short. These restrictions will clearly impact certain strategies.
15
‘Derivatives in Islamic Finance’, Andreas Jobst, Vol 15, No 1, September 2007.
Islamic Economic Studies,
Shariah boards
Shariah audit
Screening
Custody
Shariah unds must also appoint a Shariah board to provide guidance to the directors o the und and to the investment manager on matters o Shariah law and, in particular, whether the proposed investments o the und are Shariah-compliant. This is oten not a simple matter because dierent scholars hold sway depending on the jurisdiction. It is important or the branding o the und to select the appropriate scholar. In essence, this selection is part o the marketing mix. For new or sophisticated types o unds, the best-known names are oten sought. But with just 20 or 30 well-known names worldwide, obtaining access to them can be problematic. However, i a rm is launching a vanilla equity und, the selection o scholars is less critical since the underlying securities are less likely to prove controversial.
Shariah-compliant unds have to be audited on an annual basis to ensure that t hey are adhering to Shariah principles. The audit is carried out either by the scholars or an outside party, although best practice leans towards the latter because o the perceived confict o interest. Indeed, some investors have started to question i potential conficts o interest may impact the integrity o the assets and the whole und strategy.
Securities screening is a urther issue. It is important or all unds, but a particular issue or index unds that invest in large numbers o securities. The aim o these unds is to make t he process systematic so that mistakes are avoided and resources conserved. Much resource is currently being devoted to developing a global automated system. The challenge or such a system is that all stocks are deemed non-compliant until proven otherwise. Screening methodology and processes need to be transparent and auditable i they are to be accepted by the Islamic community. Quantitative methods are oten used to analyse a wide range o business and nancial variables aecting Shariah status, ranging rom the company’s issuance o preerence shares to its holding o derivatives instruments. The second stage usually involves the manual analysis o a rm’s accounts and reports where the nancial data providers give insucient inormation. With so many variables and so many possible methodologies or assessing them, the issues are ar rom clear-cut and some screening methodologies exclude companies that others would allow. Is it acceptable, or instance, or an airline to earn 2% o its prots rom selling duty-ree alcohol to passengers?
Although the custodian o a Shariah-compliant und does not itsel need to operate along the lines o an Islamic bank, it must service the Shariah-compliant und without violating Shariah principles. Funds are not allowed to receive interest oered by time deposits or to enter into repo contracts. So the assets must either be placed in a non-interest-bearing account or in a commodities contract with a bank. This involves a simultaneous purchase and sale, which allows the und to earn a return.
There is a minimum o three and sometimes ve scholars on a board. Scholars don’t always agree, as there are many dierent schools o thought within Islam and each has distinct viewpoints on Islamic principles. However, these dierences are resolvable within the und context and are unlikely to impede the growth o the industry overall. Another challenge is that o language, as many Middle Eastern scholars work solely in Arabic while the global marketplace requires scholars fuent both in Arabic and Western languages such as English or French.
Purifcation Income generated by a Shariah-compliant und must also be ‘puried’ as it is oten unavoidable that some o the income generated by the underlying companies in which a Shariah und invests will include some orm o non-halal income such as interest.16 The Shariah board’s input is again necessary in determining the types o income that need to be puried. The amounts puried should, under Islamic nance principles, be donated to charity. There are a number o dierent ways to puriy ‘tainted’ income. One way that purication is achieved in the unds industry is where und administrators calculate a Shariah-compliant net asset value (NAV), where the proportion o non-Shariah-compliant income is determined at each valuation point. This non-compliant income is then disbursed to an Islamic charity that has been chosen by the investment manager and approved by the Shariah board.
16
‘Understanding Islamic Finance’, Muhammad Ayub, John Wiley and Sons 2008.
Custody issues are complicated by the lack o shareholder registers or many Shariah-compliant securities. In the post-Mado era, custodians are wary o being held legally responsible or assets o which the existence is not completely assured. This demands an innovative approach to the und-custodian relationship.
Trading Similarly, in the case o a ailed trade, an interest charge would normally apply to the client in a conventional und structure. But this cannot take place in Shariah nance, so an alternative process is required, such as the imposition o a ee.
Demand or new products intensiying
A ull set o products has yet to be launched in either the retail or institutional marketplaces. This is because techniques are still at a relatively early stage and many products are still in development.
This is an opportunity or asset management rms to enter the market at this early stage and help to develop new products that could drive the sector to greater heights. The types o products available mirror, unsurprisingly, those in the conventional und market. Real estate is a signicant part o asset allocation in the Islamic world and accounts or some o the largest Shariah-compliant unds. Some real estate unds are structured as company vehicles in which shareholders can participate. These are seen by some rms as a simpler and more eective way to attract investors. It is hard to predict with certainty which products could take up the slack i real estate suers a prolonged slowdown. We may see investment unds putting more emphasis on commodities, or example. As recovery (and possibly infation too) gets underway, equities may also return to avour. Equity investment represents over hal o the total o all Shariah unds already and this may rise.
This, in turn, may give a boost to the growing exchangetraded unds (ETFs) sector, which seems to have been less troubled by the recent global nancial crisis than many other sectors. Although asset values have allen as a result o alling markets, new money continues to pour in. This is mainly due to the act that exchange-traded unds have high transparency, low costs, high liquidity and high risk diversication. They are also tax ecient. ETFs are small in terms o assets but have made signicant inroads and there are now over a dozen available. Indexation is an area that will see urther growth as there has been a wide array o sector- and country-specic indices developed recently (rom many o the major index providers). Fixed income, a staple o the conventional und space, is immature in the Shariah context, mainly because there are so ew sukuk issues. In act, money market unds are in greater use than xed income unds. There is also a lack o clarity about t he duration o instruments in some Shariah-compliant xed interest unds. Funds oten invest in a wide range o maturities, with no clear inormation or investors on the overall aims o the und.
Marketing and distribution: creating a presence Private equity is emerging as a viable vehicle but there are issues concerning carry that have not been entirely resolved. In mainstream private equity unds, a und manager is paid a ee on the committed capital and also receives a perormance ee. This cannot apply under Shariah law, but other ee structures are available and the private equity model is starting to gain traction.
For example, in the US, large private equity unds are currently showing an interest in creating platorms that will appeal to both Western and Islamic investors, while meeting stated internal rates o return and hurdle rates on returns.
Hedge unds are probably the most controversial und structure o all. In act, opinions range rom total opposition to the concept o a hedge und under Shariah law to those who believe not only that hedge unds are legitimate but that most strategies are admissible. Reports suggest that just a small handul o single strategy unds have actually been set up. Those hedge unds that do exist do not disclose their short-selling methods (where employed), so doubts over their credibility remain. Short-selling is a dicult technique in a Shariah und and, unlike or conventional unds, represents intellectual property – a competitive edge in itsel. In general, scholars will only agree to short-selling i it is clear that t he und is merely mitigating risks – and this is hard to prove. However, using constructive thinking, a number o promoters have been able to develop hedge unds in partnership with Shariah scholars that oer eective investment techniques while abiding by Shariah law.
In the conventional unds market, a number o rms have been successul in creating recognisable brands with global reach. In the Shariah-compliant und market ew, i any, rms have managed to overcome the challenges in launching and sustaining a widely recognised brand. Any rm achieving this would undoubtedly lay claim to leadership in the sector. The obstacles lie in the ragmented nature o the markets and the lack o standards and regulation that would enable unds to be distributed across borders and to be readily comparable to investors. There is, or instance, as yet little real segmentation between retail, high net worth and institutional unds. Fund structures are loose – and it is not always clear i a und oering is in act a joint venture (Musharaka) created by a bank or a pooled und. A handul o very large real estate unds exist, but creating a large xed income und or distribution across a region would be troublesome because o the sparse secondary trading in sukuk issues.
Distribution across borders is urther complicated by the dierences in interpretation o Shariah laws between the dierent Islamic schools. Where there are major dierences o interpretation between countries, separate unds with bespoke Shariah boards may be needed to meet investor requirements in those countries. In the Middle East, or example, securities regulations vary rom one Emirate to the next. There are some nascent industry bodies – such as t he Accounting and Auditing Organization or Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) – but large entrants to the industry will need to become active in the development o these bodies to urther the standardisation that is necessary or the industry to continue to fourish.
Until that happens, unds will tend to be launched on a country-by-country basis t o serve local marketplaces. Currently, about 40% o unds are domiciled in Saudi Arabia (18%) and Malaysia (22%). 17 Malaysia is the only country with a robust unit t rust industry, ollowing the creation in the 1970s o a national unit trust or indigenous people. It has also developed industry inrastructure, such as the Shariah Advisory Council (SAC) established by the country’s Securities Commission. Its screening criteria are applied to the FTSE Bursa Malaysia EMAS Shariah Index. Middle East states such as the UAE and Saudi Arabia also have thriving und sectors, but inrastructure is ar rom complete. A host o new entrants, such as Singapore, Indonesia, Bahrain, Hong Kong and Pakistan, have also launched oerings, and Luxembourg and Ireland started Islamic und listings in 2007 and 2008. The listings in Luxembourg and Ireland ollow the enthusiastic take-up in Europe o a number o sovereign sukuk, which have stimulated interest in Shariahcompliant products. And in Hong Kong, the government will this year submit a proposal clariying the arrangements or stamp duty, prots tax and property tax on Islamic products to acilitate their expansion.
17
Key Trends in Islamic Funds, EurekaHedge, 2008.
In addition, a number o asset management companies in India are launching Islamic mutual unds in 2009. The Securities and Exchange Board o India (SEBI) is still concerned over a ew issues, such as the conduct and the screening process o these unds, but this should not impede the launches. There are also strong capital fows into the MENA region rom Islamic investors.
This spread o activity and the growing synergies between the various regions bode well or the eventual integration o the industry globally. By way o evidence, rms are already starting to use Malaysia as a hub to serve the south-east Asian market. A number o Kuwaiti unds have been licensed in Malaysia to sell unds, mainly to HNWs. Singapore is also looking at the opportunity; or example, an Islamic ETF has gained a listing in Singapore.
There is also the potential to build upon structures that have been developed in the conventional und world. A number o Shariah-compliant unds have been created as Undertakings or Collective Investments in Transerable Securities (UCITS) products, or instance. UCITS is a strong retail brand, which was developed in the EU but is recognised throughout the world – with the current exception o North America. But unds need to convince the European regulator that the underlying securities are suciently liquid, which is not always the case. Also, in the Middle East, equities in some jurisdictions cannot be owned by outside investors so a oreign-domiciled und cannot own them directly. However, there are methods to overcome this, such as the use o swaps, which are permissible under some schools o thought, and capital guaranteed notes.
As synergies are created and the shape o the industry comes to resemble more closely t he conventional und sector, so existing asset management brand names are likely to come to the ore. One o the main reasons or this is that central banks and other large institutions have indicated that some existing Islamic unds and und providers lack credibility.18 While pure play Islamic houses are sometimes ahead o the game in terms o local knowledge and religious principles, there is some doubt over their ability to run unds on a large scale with all the incumbent inrastructure. Existing brand names, many o which are headquartered in the US and Europe, have developed systems, processes and practices that are more consistent with the needs o large, sophisticated institutions. Increasingly, they are likely to leverage their brands to market themselves to such large investors and, potentially, attract t he lion’s share o new assets fowing to the sector.
18
Evidence gathered rom conversations with PricewaterhouseCoopers client base.
Challenges persist, but sector is maturing
Conclusion
As would be expected in a young industry, a number o structural issues remain that asset management rms and their clients alike need to recognise and address.
It can be argued that the challenges in launching and developing a Shariah-compliant und business mirror those in conventional asset management.
Two o the most critical revolve around the cost o running unds and the diculty o valuing assets. Concerning und costs, there are ew relevant studies to date on the Islamic und universe, but anecdotal evidence suggests that Shariah-compliant unds add single-digit basis points to the cost o unds. The costs relate partially to the setting up and nancing o Shariah boards. The best-known scholars can receive total compensation in the millions o dollars per year – a cost that the conventional und industry does not have to bear. The screening process can also be expensive, depending on the type o asset the und invests in. In addition, the lack o scale in many unds magnies the eect o costs. However, the impact o such costs should start to reduce as the average und size increases and economies o scale are ound across the industry.
Valuation issues centre on the act that not all issues trade on secondary markets, particularly in the xed income sphere. In that case, it is hard to evaluate what represents true and air value. There is certainly an opportunity or innovative investment rms to develop new models to help resolve this issue. However, as time goes on and the markets become deeper and more liquid, a solution should automatically present itsel. Equally, as the market develops and products expand, there will be increased demand or human resources, or people with key skills. At the same time, specic Islamic expertise – while still important – is likely to become subordinated to investing and business expertise as the sector matures. People skilled in sales, back oce and product development will be in demand, just as they are in the conventional und space. The ability to attract and retain such people is already becoming a key issue.
However, the solutions can sometimes be dierent and there is no substitute or experience in this market. For asset management rms with ambitions to enter this new, high-growth market, the market environment has rarely been as enticing. New customers are continually coming on stream, structural issues are being resolved and products are evolving rapidly.
The challenges are considerable in Shariah-compliant unds and the pace o change is appreciable. But the ride is likely to be exciting or those participating, and the rewards highly attractive.
How PricewaterhouseCoopers can help
Glossary
This paper has identied and explained a number o issues or asset management companies to consider when entering or expanding in the Shariah-compliant unds market.
Shariah: Islamic
law.
A panel o Shariah scholars that approves proposed new products and also reviews the operations o the company to ensure that its activities have been conducted in a Shariah-compliant manner. Shariah board:
Halal: Anything that is allowed in Islamic law.
PricewaterhouseCoopers has a diverse team o specialists with wide-ranging experience in helping asset management companies, administrators and custodians establish and develop businesses in the Shariahcompliant unds sector. We can oer the global resources o one o the world’s largest networks o Islamic und experts, with centres o excellence in Malaysia, the Middle East, Europe and the US. We have signicant experience on advising on launches o Islamic und structures, including equity, sukuk, murabaha, mudharaba, salam/hedge unds, Islamic exchange-traded unds and unds o unds. Our tax specialists can advise on the most appropriate tax structure or each und type. For und promoters we can oer guidance on eligible investments under Islamic principles and the monitoring o investment restrictions. We help companies create Shariah boards and help them monitor Shariah compliance unction eectiveness. Advice is also available rom our experts on the purication o nonIslamic income, cash management and the custody o Islamic assets. As companies start to develop their und ranges, we can oer sta training on Shariah principles.
For administrators, we can review the existing administration cycle o unds in order to identiy gaps and to implement changes required to be within the scope o Shariah precepts, covering custody, cash management, und accounting, nancial reporting, trustee/duciary oversight, transer agency, ancillary services and Shariah board support. PricewaterhouseCoopers is committed to bringing the best knowledge to asset management organisations across its global network. We resource projects with specialists rom our local oces within the PricewaterhouseCoopers network o rms to match the needs o our clients. This ensures that organisations obtain local expertise and the benet o our marketleading asset management expertise across the globe.
Sukuk: The Islamic equivalent o a bond.
The Islamic approach to insurance based on mutual principles. Takaul:
Mudharaba: A partnership between an
entrepreneur who contributes labour and one or more capital providers. Prots are shared, while losses are born only by the capital providers. Musharaka: A orm o partnership under Islamic law. Murabaha: A sale where the seller
expressly mentions the cost he has incurred on the asset to be sold and sells it to another person by adding a prot or mark-up which is known to the buyer. Salam: Advance payment or goods to be delivered at a
specied uture date.
Contacts I you would like to discuss any aspect o the issues raised in this paper, please speak to your usual contact at PricewaterhouseCoopers or any o those listed below: Our specialist Islamic asset management team: Mutahar Abdallah
Senior Director PricewaterhouseCoopers (Riyadh) Telephone: +966 1 465 424 0 Email:
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Partner PricewaterhouseCoopers (Hong Kong) Telephone: +852 2289 1833 Email: forence.k
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Our global Islamic fnance leadership team: Mohammad Faiz Azmi
Global Islamic Finance Leader PricewaterhouseCoopers (Malaysia) Telephone: +6 (03) 2173 0867 Email: mohammad.
[email protected] Mohammed Amin
Partner PricewaterhouseCoopers (UK) Telephone: +44 (0) 20 7 804 6703 Email:
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Partner PricewaterhouseCoopers (Dubai) Telephone: +971 (4) 304 3105 Email: ashru
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