The pursuit of better returns, when the US Federal Reserve (Fed) starts cutting rates later in 2024, is expected to drive major investment flows into public Islamic funds globally. Islamic funds with higher-yielding assets under management (AuM) are expected to bounce back to the 2021 peak of about US$140 billion in the next two to three years, with Malaysia having the highest concentration of such funds, Fitch Ratings said in its 2024 outlook report.
“We forecast lower interest rates (US policy rate 2024F: 4.75%; 2025F: 3.5%), which will likely increase appetite for investments in emerging markets, including Islamic funds. However, macroeconomic fluctuations and geopolitics could bring volatilities.”
Another aspect of such fund inflows would be local currency upticks against the US dollar, reversing recent exchange rate slumps and further boosting AuM valuations. As the Fitch report noted, the largest public Islamic funds by AuM were equity funds (36.3%), money market funds (20.9%) and Sukuk funds (10%).
Impact will be mixed as in the GCC countries, Islamic funds were close to 80% of total public funds at end-2023, supported by demand from Shariah-sensitive investors, with balance by conventional funds.
In comparison, Islamic funds’ share reached 49% in Pakistan, 33% in Malaysia and 8% in Indonesia.
A further boost for Malaysia is the income tax exemption for Islamic fund management companies and for companies managing SRI funds, which has been extended until 2027.
“In 2023, Abu Dhabi Global Market issued its sustainable finance regulatory framework, covering funds. Saudi Arabia’s Ministry of Finance issued Zakat collection rules for investment funds,” Fitch noted.
“The fund management industry is still in the relatively early stages of development in the GCC and underdeveloped in most OIC countries with the exception of Malaysia. Islamic funds are even at an earlier stage of development due to limited products, lack of economies of scale, differences in Shariah interpretation and shortage of human capital.”
Public Islamic funds globally held over US$111 billion in AuM at end-2023, up 3% year-on-year. These are concentrated in Malaysia (28.3%), Ireland (18.1%) and Saudi Arabia (17.2%).
However, Islamic funds, by count, are more granular, with Malaysia’s share at 36.8%, followed by Indonesia (16.9%), Pakistan (15.3%) and Saudi Arabia (12.8%). This classification is based on the funds’ domiciled country and Lipper data, which may not capture all private funds.
Fitch expects private Islamic funds to be much larger than public funds, with real estate being one of the key asset types.
