The global Islamic finance industry currently manages more than $840bn worth of assets, an impressive figure given the industry is only 30 years old. With the value of assets held thought to be growing at 15-20 per cent a year, the rapid rise in demand for sharia-compliant investment products and structures has generated considerable innovation.
There is still room for the sector to develop further. MEED estimates that about three quarters of sharia-compliant institutions’ assets are held in cash. This is testament to the fact that there is great potential for diversifying investment portfolios in the evolving Islamic finance industry.
In December 2008, Kuwait Finance House estimated that 78.6 per cent of all sharia-compliant assets were held in banks, a further 13.9 were held in the form of sukuk (Islamic bonds), followed by Islamic mutual funds with 4.2 per cent of assets, Islamic equity funds with 2.9 per cent and takaful (Islamic insurance) accounting for 0.4 per cent.
Islamic finance market
- $840bn – Value of assets under management by Islamic institutions in 2008
- $100bn – Value of commodity murabaha market
- 608 – Number of Islamic investment funds globally
Sources: MEED; Eurekahedge
According to research conducted by Singapore-based data provider Eurekahedge, there are now more than 608 Islamic investment funds globally, valued at $60bn.
US-based asset management and property developer HDG Mansur Capital Group has invested billions of dollars in sharia-compliant products: $5.9bn in international real estate investments, $4.2bn in real estate financing and $1.3bn in planned and managed equity.
“In 2002, there were very few sharia-compliant property funds out there,” says Harold Garrison, chairman and chief executive officer (CEO) of HDG Mansur. “Over the past five years, that has changed and there are now structures for Germany and other European countries. I think that is where we are going to continue to see the growth, with property fund structures being prepared for Eastern Europe, China and India.”
In May 2008, the Bahrain-based International Islamic Financial Market (IIFM) – one of three globally recognised development institutions in the industry, along with Bahrain’s Accounting & Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) – announced it had created standard documentation for commodity murabaha (trade finance), the most common Islamic market transaction, in an attempt to regulate the growth of new products.
“In terms of sharia compliance, we have eight prominent scholars on our panel, so when they approve something it carries weight,” says Ijlal Alvi, CEO of the IIFM. “Most institutions have only one or two scholars on their board.”
The lack of standardised documentation and practices in the Islamic finance sector has been repeatedly highlighted by the Islamic finance industry as one of the key constraints to the growth of the sector. “To enhance confidence in the international Islamic finance system, there must be consensus on the basic features of Islamic finance practices, especially in reference to sharia permissibility of products and services,” says Mohamad Nedal al-Chaar, secretary general of AAOIFI.
AAOIFI has now issued more than 30 sharia standards that cover a broad range of international Islamic finance practices.
Despite the efforts of such organisations, the difficulty in gaining approval from sharia scholars for new products remains one of the main barriers to the future growth of the industry.
In this respect, the Islamic finance institutions have been heavily criticised for not providing enough training programmes by which sharia scholars can gain experience.
However, Keith Leach, head of UK-based Islamic mortgage provider Alburaq, a subsidiary of the Arab Banking Corporation, warns against trying to address the issue too quickly.
“Should we try to rush the issue, one potential problem would be the possibility of an increased variety of opinion and divergence of standards, which could hold back development,” says Leach.
However, while the industry’s prevailing talent shortage may require a long-term solution, the reality is that product innovation will be hampered until it is fully resolved.
“There is a lot of room for innovation in the Islamic finance industry, especially in the capital market area,” says Alvi.
In developing new products, it is no easy task to ensure that the core values of Islam not only remain intact but also add value to the financial services sector. But the difficulties facing conventional banks mean that Islamic institutions, especially the newer ones with liquid assets and clean balance sheets, now have a unique chance to grow.
This is an opportunity for the Islamic finance industry to gain a larger global market share and explore the possibility of growth in new markets, which they should take.