Investment managers are chasing the Halal premium, but the road is riddled with hurdles. Islamic investors from across some of the most exciting Islamic financial markets share their assessment of the Shariah opportunity. VINEETA TAN reports.
Palpable excitement Like many who gauge an economy’s health through its stock market, one may also gauge the wellbeing of the Islamic investment market through the performance of Islamic indices.
The S&P Global BMI Shariah Index was up 8.6% in Q1 2024, and in the last 12 months, it rose about 25%. S&P 500, the leading single gauge of large-cap US equities, was even beaten by its Shariah counterpart; albeit by a narrow 0.5%, this David and Goliath rivalry still underscores the appeal of Islamic investments.
“It’s a fascinating time, especially in the last few years,” shared Fahd Chaudry, the director of client coverage for MENA, CIS and Turkiye at S&P Dow Jones Indices, at IFN Investor Middle East Forum, adding: “We are seeing a high rate of momentum, investment and growth in a short space of time — it is indeed a great time to be in the industry.”
Fahd’s optimism is shared by his peers.
“We are seeing changes in market dynamics such as the opening up of Saudi Arabia where they are making it easier for foreign investments. Regulations changes are coming along the way — Saudi is getting better than it was 10 years ago especially within the Vision 2030 mandate,” Frederick Wijsenbeek, the partner and chief investment officer of Ethos Invest, observed.
The signals are indeed positive.
Islamic fund assets under management (AuM), excluding Iran, in Q1 2024 expanded 2.9% quarter-on-quarter to over US$100 billion spread across 1,483 funds, according to data from IFN Investor. Include Iran, and the number of Halal funds nearly hits the 2,000 benchmark, and AuM triple to US$315 billion. Most noteworthy is the meteoric rise of Islamic exchange-traded funds (ETF), whose AuM surged five-fold in two years. In 2021, Islamic ETF AuM (under S&P Dow Jones) were approximately US$1.1 billion; that figure has rose to around US$5.7 billion year-to-date.
Investment managers are seeing similar upward trajectories also for Islamic mutual funds, hedge funds as well as pension funds.
“The two billion Muslims in the world are starting to recognize their power as a consumer — they want products and services that are genuine [ethically and faithful to their religious beliefs],” observed Hakan Ozyon, CEO of Hejaz Financial Services, who added that this is driving supply.
But first…
But let’s not let such excitement cloud our rationality. It has taken a long while for the Islamic investment sector to be on such a promising footing — such success was not built overnight, and product suppliers still face challenges.
“There are too many small players in the industry — it is too fragmented,” lamented Hakan who noted that unlike in the conventional commercial space, the Islamic sphere does not have “real” global players. Even after almost half a century of modern Islamic banking and finance, standardization is still a bane.
“Before anything else, there is a need for a more standardized regulatory landscape as well as harmonization of Islamic finance documentation and structures globally,” emphasized Arsalan Tariq, a partner and the head of banking and finance at BSA Law. “There is certainly room for more harmonization.”
Mariam Veronica Abu Bakkar Seddek, the director of group head institutional and Islamic asset management at Kenanga Investors, agreed. “Technically, there is a lot of distribution so we should be able to invest across the globe, but it can only be possible if we have standardized Shariah treatments or Fatwas.”
Take for example the experience of Kenanga Investors attempting to export its Malaysian-designed Islamic fund to the Middle East — while the structure and composition of the fund are embraced as fully Halal in the Southeast Asian nation, it only passed a 30% Shariah compliance mark for Saudi investors. Such discrepancies in Shariah interpretation greatly dampens cross-border growth. It also limits the universe of investable assets, which is already a challenge in the domestic market, and especially since the Islamic sector is taking on an ESG mantle.
To illustrate: the FTSE4Good Bursa Malaysia Index comprises 200 companies, out of which, about 70% are Shariah compliant. But out of the 70%, only about half qualify for Kenanga’s Shariah ESG portfolio.
“The pool is not big enough for us to manage so we need to do our own screening and internal ratings,” shared Mariam.
Slowly but surely
Seeing how Islamic indices are outperforming their non-Halal equivalents and weighing that against the fact that over US$13.5 trillion was indexed or benchmarked against the S&P 500, the most optimistic may believe that Shariah benchmarks could also do the same — attract trillions of dollars.
“But it isn’t going to be US$13.5 trillion overnight, although we are in the right direction toward a good place — there’s a global market for it and the appetite is growing,” believes Fahd.
Yes, there are cracks in the flawed system, but very few believe it warrants a complete overhaul.
“We should not reinvent the wheel,” stressed Shah Fahd, BTD International Fund House’s deputy director-general. “The foundation is there, and based on this, we should clean our houses and come up with a clear strategy.”
