Introduction
Emergence of the New Global Investment Alternative
What is proven at one time shall perpetuate, unless there is a contrary clue.
(Islamic legal maxim)
A Muslim friend of mine who was then a CEO of an Islamic Bank in Malaysia happens to be a 6-foot Caucasian with blue eyes and blonde hair. He was asked to meet senior representatives of the U.S. State Department for discussions, as the Americans were visiting Malaysia on a fact-finding mission regarding Islamic finance. They met in the lobby of a hotel in Kuala Lumpur after work one evening.
“Hello,” he said, “My name is Daud Vicary Abdullah and I’m due to meet you.” In a state of shock, the senior representative from the U.S. State Department looked him over from head to toe and said, “You don’t look like an Islamic banker!” Daud responded, “Who were you expecting? Osama bin Laden?” It was obvious that based on his name, the Americans had clearly expected to meet someone who looked like what they thought a Muslim should be—someone of Middle Eastern or Asian descent.
In May 2012, I was invited to speak at BaFin’s (German market regulator) second Islamic Finance Conference in Frankfurt. While in Germany, we also took the opportunity to launch three of the company’s Irish-based Islamic Undertakings for Collective Investment in Transferable Securities (UCITS) Equity Funds (registered in Germany), having educated the media for half the day. The funds were being offered to meet the investment appetite of about 4 million German Muslims. A German newspaper reporter headlined his article with “Malaysians to bring Islamic banking to Germany,” and within the first two paragraphs described my disposition as (1) “a confident and professional female chief executive. . . .” and my appearance (2) “with uncovered hair, red lipstick and silver earrings,” as if to dispel the popular preconception of how a female Muslim would act and appear even in Germany.
These stories highlight outdated misconceptions that persist in the Western world about Islamic bankers and finance professionals. However, it turns out that they can be Caucasian men who do not go around dressed in long white robes (thawb) and headgear (agal) and progressive women who are not covered from head-to-toe in long black robes (abaya) and headscarves (hijab) with no makeup on. This carries over to the myth that Islamic finance products are only appropriate for Muslims, when the reality is that everyone can invest in them.
The book Investing in Islamic Funds is inspired from my experience as a speaker at international conferences over the last four years. As a result of my interaction with participants across the globe, whether they were Muslims or non-Muslims, it became apparent that there was a need to deepen the awareness and understanding of the benefits and advantages of Islamic investing. As the many unexpected financial shocks and crises rocked the world over the last six years, Islamic investing has shown itself to be a prudent alternative that exhibits similar results to conventional investing, making this topic a timely and relevant one for investors. Writing this book will allow me to impart this experience to a broader audience in a more effective and scalable manner.
It is my hope that this book will help convince the industry that Islamic investing is a long-term business, not an opportunistic initiative. The conviction to develop and offer a wide selection of Islamic investment solutions is like building a school that will be there to educate this and future generations of students.
WITNESSING THE RISE
Islamic finance is a global phenomenon embraced by modern and progressive bankers and finance professionals in Asia and the Western world internationally. The global economy is now in the process of formally integrating Islamic finance into the existing international finance regulatory framework, as the legal jurisprudence, the Islamic finance talent pool, and the Shariah interpretations harmonize and internationalize across countries and regions. This is providing a sense of dynamism and is speeding up product development and innovation. However, despite the involvement of global banks and asset management companies in this space, there is still a lack of awareness and education on its benefits.
Some of the pioneer Western global banking groups have entered and exited the space. A recent example is HSBC Amanah, which has recently closed down its Islamic retail banking operations in six markets, leaving it with a presence only in Malaysia, Saudi Arabia, and Indonesia due to its own internal strategic challenges1. However, we appreciate that there are new entrants especially in Europe, like Sarasin Bank, Deutsche Bank, Commerz Bank, and Dexia BIL, who have started offering Islamic products. In the United States, Guidance Financial Group has provided more than USD2.3 billion of Islamic home financing2, while in the United Kingdom, the long-term players remain Gatehouse Bank and Bank of London & Middle East. Since 2008, a number of well-known asset management houses have located their global Islamic asset management headquarters in Malaysia. Examples of the larger players among the 17 licensed companies in Malaysia include CIMB-Principal Islamic Asset Management (a boutique firm of United States–based principal global investors), BNP Paribas Asset Management, Amundi Asset Management, Aberdeen Asset Management, and Templeton Asset Management.
In 2011, Islamic Finance Country Index (IFCI) was launched, with 42 countries being monitored in terms of their involvement and leadership role in Islamic finance. High-potential international markets, in different stages of development and requiring different penetration strategies, include Saudi Arabia, Malaysia, Qatar, Turkey, and Indonesia.3 The Turkish government embraced the acceptance of Islamic finance in 2010 and will potentially be more proactive. More Sukuk issuance is expected in 2013 as the government changed tax laws towards the end of 2011 to introduce a neutral tax regime for the treatment of Sukuk. The maiden USD350 million Sukuk issued by Kuyeit Turk Bank was subscribed to by global investors, signaling a keen interest for Turkish-run entities.
London is using Islamic finance to compete with New York as a global financial center. Luxembourg is using Islamic asset management to compete with Dublin as a global funds platform. Dubai is using Islamic finance to compete with Bahrain as a regional financial center. Finally, Singapore is using Islamic wealth management to compete with Hong Kong as Asia’s leading private banking hub.
THE PULL OF PETRODOLLARS
The oil wealth in the Middle East has revolutionized the global fund management business. This excess liquidity has seen the emergence of a number of cash-rich corporations and ultra-high-net-worth individuals. Although this trend can be expected to continue in the next decade, the excess liquidity, from the perspective of the Middle Eastern investors, needs to be invested impactfully beyond the traditional U.S. Treasury bills and properties. In the past, the United States was the primary market of choice for investors from this region.
Boston Consulting researched the estimated wealth of ultra-high-net-worth Middle East investors and where their monies are invested.4 The largest geographical beneficiaries are concentrated in the United Kingdom, Channel Island, and Dublin, with a significant total of USD520 billion. The second largest beneficiary is Switzerland, specifically Geneva and Zurich, with monies totaling a commendable USD490 billion. The biggest challenge is to convert the mind-set of the private bankers managing this money on behalf of their clients so that they come to accept that Islamic investments are a viable alternative with investment track records similar to conventional investments.
THE LONG-TERM OPPORTUNITIES: FINANCIAL CENTERS
To distinguish themselves in the finance arena, global financial centers have embraced Islamic finance to make themselves relevant to a new and emerging investor base. The growth potential is hard to ignore given a report by the Pew Forum on Religion & Public Life titled “The Future of the Global Muslim Population,” which projects that the number of Muslims in the world is set to double from 1.1 billion in 1990 to 2.2 billion in 2030.
Who Are the Drivers, Followers, and Agents of Change for This Evolution?
Outside the Middle East, London has been aggressively advancing its cause to become a global center for Islamic finance in Europe. It is already operating as a gateway for the Western world’s Islamic population and aspires to be known as the Islamic Finance Gateway of Europe. With a supportive government, a deep capital market, and a population of two million resident Muslims, London is using its Islamic capital market industry platform to compete with New York as the world’s leading financial center. London has chosen to build a strong Islamic capital markets platform, with Islamic asset management having a pivotal role. To demonstrate the demand for Islamic investing, a U.K. pension house, The National Employment Savings Trust (NEST), has committed to offer Islamic portfolios for workers whose employers do not run their own pension plans.5
Shariah-compliant UCITS funds were first made available to international investors throughout Europe on global fund platforms like Ireland and Luxembourg since 2000, with the majority launched from 2008 onward. Global banks such as Citibank, Barclays, and Deutsche Bank, as well as indexing houses like Dow Jones Islamic Market Index (DJIM), MSCI Islamic, Standard & Poor’s Islamic, and FTSE Islamic, have created “windows” to enter the Islamic space.
From the standpoint of internationalizing Islamic finance education, the United Kingdom continues to cement its position as an Islamic financial education center in Europe and the West through programs offered by its universities. In the United States, an annual Harvard University Islamic Finance conference has brought together academics from all over the world.
How Are Other Financial Centers Doing in Tapping These Opportunities?
In addition to Europe, Asian countries are strategically building Islamic finance platforms—namely, Malaysia, Brunei, Singapore, Japan, Hong Kong, China, Turkey, and Indonesia. Of course, countries in the Middle East—namely, UAE, Saudi Arabia, Bahrain, Qatar, Oman, and Kuwait—have been proactively developing Islamic finance offerings across the value chain, from Sukuk origination to Takaful to asset management over the last six years as well.
Uniquely, Malaysia has helped Islamic finance survive and thrive post-global financial crisis in its quest to become the global hub for Islamic finance. The country has fully developed its own Islamic finance framework as a tool to help internationalize and create financial linkages between emerging markets in particular. Will it able to maintain its pole position in Islamic finance? In the short term, yes. Malaysia has consciously led the global Islamic finance platform with comprehensive infrastructures.6
Incentives have been grabbed by many firms to use Singapore as their base for their Islamic private banking and wealth management. The Island Nation also neighbors several countries with large, wealthy Muslim populations.
The internationalization of Islamic finance has thus contributed to more efficient allocation of funds across borders from centers with surplus funds to regions with investment opportunities and to better diversify investment risk.
With the view that Islamic finance must be a dedicated business for the long term, in 2011 the Qatar central bank announced that conventional banks had to close Islamic operations to reduce any chance of mixing of funds and obtain a separate Islamic banking license7. The FIFA 2022 World Cup will take place in Qatar and many analysts are speculating that construction and development for that will be financed through Sukuk.
The South African government has been proactive in promoting South Africa as a regional Islamic financial center, with reports that the country’s National Treasury was planning to issue a debut sovereign Sukuk in 2013.
With its population approaching 250 million and a positive stable economic outlook, Indonesia is likely to be the next major growth market. As the world’s most populous Muslim country, it is looking to Islamic finance to embark on many infrastructure projects and is courting Middle Eastern banks to invest. The government has issued a seven-year USD1.0 billion global Sukuk in 2011, which was oversubscribed by six times, with strong demand from Middle East and Asia.8
FAIR DISTRIBUTION OF WEALTH: THE NEXT GENERATION
The combined effect of the 2008 global financial crisis, 2009 Dubai property crisis, 2011 Arab Spring, and the Eurozone crisis resulted in an unprecedented push by these investors to seek out ways to diversify their assets offshore to global financial centers, as well as to invest in other regions like the Asia Pacific to seek higher returns. In addition, there is now a clear preference for transparent and risk-managed investment solutions with a proven investment track record that can be monitored and assessed. At the same time, there is increased demand and sensitivity that these monies be invested responsibly in a Shariah-compliant manner, provided that similar returns can be achieved to those of conventional investing. This emerging trend is irreversible and will result in the long-term viability and success of Islamic investing as a credible and ethical alternative to conventional investing.
At first, the global market upheavals over the last five years seemed to herald the downfall of the nascent international Islamic asset management industry as it was just graduating from the domestic sandbox. Instead, it provided a perfect storm that thoroughly tested the investment track record of Islamic equity indices through one complete market cycle. Not only did Islamic indices slightly outperform conventional indices in a down-trending market, they also kept pace with conventional indices in up-trending markets, on which this book will provide a detailed analysis.
The need to narrow the gap of “haves” and “have-nots” in America today has been forcefully argued by Joseph E. Stiglitz in his book The Price of Inequality.9 Despite the perceived progress, he argued that the income inequality in the United States is at historic levels not seen since before the Great Depression. Here, the community lacks the shared destinations, common opportunities, and fair distribution of wealth that clearly is the principle practiced by Islamic finance. It is interesting that his empirical evidence showed that before 2008, the top 1 percent seized more than 65 percent of the gain in total national income, but in 2012, as the nation struggled to emerge from a deep recession, the 1 percent gained 93 percent of the additional income created in the so-called recovery.
As those at the top continue to enjoy the best health care, education, and benefits of wealth, they often fail to realize that, as Stiglitz highlights, “their fate is bound up with how the other 99.0% live.”10 He lays out a comprehensive agenda to create a more dynamic economy and a fairer and more equal society being the way forward, which in my opinion is preparing for the next generation. He argued that the world should curb excesses at the top corporate financial system with less likely abusive practices, and encourage a system that offers justice for all. Maintaining the kind of society and the kind of government that serves all the people—consistent with principles of justice, fair play, and opportunity—this doesn’t happen by itself. But a new social compact has to be established for a better balance of globalization. There is tremendous potential to draw on economic value that Islamic finance has to offer to even the Americans, considering that it promotes sustainable growth through productive and responsible innovation that will be resilient to shocks and less prone to crisis.
MOVING FORWARD: CHANGE IN MIND-SET
Contrary to popular perception that there are significant differences in Shariah interpretation between Asia and the Middle East, which has impeded progress, a recent study conducted by the International Shariah Research Academy for Islamic Finance (ISRA) on fatwas or Shariah boards reveals that there are more similarities than differences in Shariah resolutions between the two regions. I am hopeful that investors will take comfort in this research result and move forward in their adoption of Islamic investment solutions.
The majority of sovereign wealth funds (SWFs) based in the Middle East adopt ethical investment strategies but are not Islamic investors, according to primary research conducted for the Islamic funds and investment reports 2008 (IFIR08).11 Why is this, when Islamic investing is itself an ethical investment strategy?
The answer is that only now has it progressed to the point where Islamic asset managers are adopting global best practices. It is now indisputable that Islamic portfolios have undergone a valid stress test with the market gyrations over the last six years to show similar investment track records. With the improvement in its breadth of asset classes and across geographical regions, this group of investors is now interested in examining Islamic asset management further. There is now a clear opportunity to potentially influence this significant institutional investor base to migrate some of its ethical investment mandates to Islamic investment mandates. This book is my attempt to help facilitate this potential change in mind-set, and I am hopeful that a new generation of investors will choose to invest responsibly.
NOTES
1. Patrick Jenkins and Camilla Hall, “HSBC’s Islamic closures highlight dilemma.” Financial Times (2012). www.ft.com/intl/cms/s/0/bdb5f212-0f1c-11e2-9343-00144feabdc0.html
2. Guidance Financial case study: Guidance Residential. www.guidancefinancial.com/case_study/guidance-residential/
3. Ernst & Young. World Islamic Banking Competitiveness Report 2013: Growing Beyond: DNA of Successful Transformation (2012).
4. The Boston Consulting Group. Global Wealth 2011: Shaping a New Tomorrow: How to Capitalize on the Momentum of Change (2011).
5. Humayon Dar, Rizwan Rahman, Rizwan Malik, and Asim Kamal. Global Islamic Finance Report (GIFR). (Edbiz Consulting, 2012): 249.
6. Hon. Ahmad Husni Hanadzlah, Minister of Finance II, Malaysia. Speech at the official launch of Labuan IBFC Wealth Management Year 2013 (2013). http://askprof.mifc.com/index.php?ch=menu_med&pg=menu_med_spe
7. Sohail Jaffer and Kamar Jaffer. Investing in the Middle East & North Africa (MENA Region): Fast Track Opportunities. (Euromoney Institutional Investor PLC, 2012.)
8. Ibid.
9. Joseph E. Stiglitz, The Price of Inequality: How Today’s Divided Society Endangers Our Future (New York: W. W. Norton & Company, 2012).
10. Ibid.
11. Sohail Jaffar. Islamic Wealth Management: A Catalyst for Global Change and Innovation. (London: Euromoney Books, 2009): 257.
General Reading
Dar, Humayon Rizwan Rahman, Rizwan Malik, and Asim Kamal. Global Islamic Finance Report (GIFR). Edbiz Consulting, 2012.
Ernst & Young. World Islamic Banking Competitiveness Report 2013: Growing Beyond: DNA of Successful Transformation, 2012.
Mahbubani, Kishore. The New Asian Hemisphere: The Irresistible Shift of Global Power to the East (New York: Public Affairs New York, 2008).
Mirakhor, Abbas, Hossein Askari, and Zamir Iqbal. Globalization and Islamic Finance: Convergence, Prospects, and Challenges. Hoboken, NJ: John Wiley & Sons, 2009.
Nasr, Vali. Forces of Fortune. The Rise of the New Muslim Middle Class and What It Will Mean for Our World (New York: Free Press, 2009).
Vicary Abdullah, Daud, and Keon Chee. Islamic Finance: Why It Makes Sense: Understanding Its Principles and Practices. Marshal Cavendish Business, 2012.