The slow rise of Shariah funds
Islamic finance, providing financial services compliant with Islamic jurisprudence, faces hurdles.
Last April, staff of the International Monetary Forum provided a note on opportunities, challenges and policy options in Islamic finance.
It described a market that had “grown rapidly over the past decade and its banking segment has become important in a dozen countries in a wide range of regions.”
“Islamic finance is projected to continue to expand in response to economic growth in countries with large and relatively unbanked Muslim populations,” reported the authors.
Bernard Caralp (pictured), CIO and head of Asset Management of Sedco Capital, an independent Saudi asset manager with $4.5bn AUM (€4bn) managed under Shariah compliance suggests that Islamic finance faces two key challenges in its development.
“It must be scalable as today the industry is heavily reliant on the retail sector with more volatile investment behaviour.
“Attracting institutional investors is a key challenge for its sustainable development in reaching a critical size in terms of assets and in raising clients’ interest,” he says.
The second challenge is related to the distribution side. “The demand for Shariah compliant funds remains huge according to recent research. The potential of the
global Islamic finance industry has been valued at $6.45trn (€5.76trn) but its current size only reaches $1.98trn (€1.77trn).”
“This large gap can be explained by the fact that the current offering in Shariah compliant funds does not fit the needs of the demand yet and even does not reach the demand itself,” Caralp adds.
Jean-Baptiste Santelli, senior manager of the structure division at French law firm De Gaulle Fleurance & Associés, assesses that “the Islamic finance market is a recent industry, many changes have occurred and each year new challenges appear.”
“As a promising sector of Islamic economy, Islamic finance is projected to continue to expand in response to economic growth in countries with large and relatively unbanked Muslim populations. It is also fueled by the large savings accumulated by many oil-exporting countries that are seeking to invest in Shariah-compliant financial products.
“Now, Islamic finance investors have begun to look at Africa as a new market of investment. A lot of countries like Morocco, Ivory Coast or Senegal are new actors in this market. In this context, the main challenge for those countries is to create a stable and beneficial environment to attract Islamic finance investments,” says Santelli who underlines that “strong developments have to be done in Shariah regulation” in terms of Islamic banking.
Santelli considers that “the market of Islamic funds/sukuk is still immature in comparison with the traditional equities/bonds sector”, reminding that the first sukuk was issued in Malaysia only 15 years ago.
“However, there is a growing interest from non-Muslim countries for sovereign sukuk (e.g. in the UK, Luxembourg, Japan, South Africa, or Hong-Kong) to finance debt capital markets and serve as a new source of investments seen as more secure and profitable.”