gif Investment
The Amana Developing World Fund, for instance, reflects the profit and loss sharing principles of Islamic finance by warning
prospective investors to only consider investing in the fund if they are willing to accept the risk of losing money
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SEI Islamic Investments Fund Plc (SIIF), an umbrella UCITS III fund launched in 2007. It is noteworthy that SIIF is SEI’s first foray into the Islamic finance market; by includ- ing emerging markets as a sub-fund, SEI show an understanding of the importance of emerging economies to Islamic investment.
Challenges to investing in emerging
markets As with all Islamic investment, when invest- ing in emerging markets, you must be pre- pared to accept the possibility of risk and re- ward equally, in accordance with sharia’a. Of course, developing markets carry a number of added risk factors. Foreign risks tend to be magnified in the smaller and more vola- tile securities markets of emerging econo- mies and include:
• Risk of confiscatory taxation • Seizure or nationalisation of assets • Establishment of exchange controls • Adoption of government restrictions • Adverse political or social developments that affect investments.
The Amana Developing World Fund, for in- stance, reflects the profit and loss sharing principles of Islamic finance by warning pro- spective investors to only consider investing in the fund if they are willing to accept the risk of losing money. The risks do not come about merely as a matter of principle, but also a result of circumstance. The prospec- tus points out that, “The Developing World Fund involves risks not typically associ- ated with investing in US securities. These include fluctuations in currency exchange rates, currency devaluation, less public in- formation about securities, less governmen- tal market supervision, and lack of uniform financial, accounting, social and political standards”. Furthermore, as the prospec- tus explains, “The Developing World Fund’s restricted ability to invest in certain market sectors, such as financial companies and fixed-income securities, limits opportunities and may increase the risk of loss during eco- nomic downturns”.
The biggest example, in recent times, of Muslim investors losing money is of course the property slump in the GCC region during the global financial crisis. Real estate inves- tors found out exactly what it meant to risk loss. As a result of this, Islamic investors have been demanding increasingly sophis- ticated Islamic investment products for the
52 Global Islamic Finance October 2010
past few years (Ford, 2006). This demand is yet to be answered with sufficient sup- ply and therefore the accompanying risk of Islamic investment in emerging markets is something investors need to be continually wary of.
Figure 1: Asset Allocation of SEI Islamic Emerging Equity Fund
1.3% Asia/Pacific Equities
2.8% Money Market
1% International Equities
order to take advantage of what could be a potentially lucrative Islamic investment market in Brunei. The firm has the intention of “creating sharia’a funds which originate from Brunei” and to be marketed overseas via the firm’s distribution network, according to Kamal Hj Muhammad, general manager of the company. UOB is also interested in potentially issuing sukuk in Brunei, as this would “bring in foreign direct investments” for Brunei, says Kamal.
94.9% Global Emerging Market Equities
The new Islamic finance order If developing markets do not whet your ap- petite, or you are not prepared to accept quite such a high level of risk, consider those countries with more stable economies but that are relatively new Islamic finance centres. As above-mentioned, these include Brunei, Hong Kong and Singapore.
The demand from Islamic investors for in- vestment opportunities in Brunei is increas- ing. As a result, several Islamic finance in- stitutions are considering setting up Islamic funds in Brunei. Asian Finance Bank Bhd (AFB), the Malaysian unit of Qatar’s big- gest Islamic bank, has been mulling over the possibility of establishing a presence in Brunei and establishing Islamic funds there (The Brunei Times, 2009). Datuk Mohamed Azahari, Chief Executive of the Islamic bank, tells The Brunei Times that AFB is hoping to work with Islamic banks in the Sultanate to set up funds for the shipping of oil and gas; environment projects; and aviation; as well as establishing sovereign funds.
UOB Asset Management (B) similarly has plans to set up a sharia’a fund in the Sul- tanate (Begawan, 2010). The Brunei-based investment management entity was spe- cifically set up by its Singaporean parent company UOB Asset Management Ltd in
One reason why an Islamic investment mar- ket in Brunei is seen as such a viable op- tion is because of the respectability and good reputation of the Sultanate’s National Sharia Financial Supervisory Board. Formed in 2006, the board adds immensely to Bru- nei’s credentials as an Islamic finance cen- tre (Oxford Business Group, 2010). Invest- ment products and services approved by the board are recognised internationally as being truly sharia’a-compliant. Hamel Shah, a partner at UK-based Islamic global in- vestment management group Amiri Capital agrees that the Sultanate is a “great place to develop an asset management industry” because of this strong network of expertise and regulatory support. Shah told an Islamic finance seminar in 2009 that Brunei’s pool of talent and knowledge of international in- vesting is actually more advanced compared to Gulf countries.
Another new Islamic finance hub ready to attract investors is Singapore. The Asian country signified its entry into the Islamic fi- nance market only recently, by amending its regulatory framework and tax legislation in order to gradually start introducing sharia’a- compliant financial products in the past decade (Khan and Bashar, 2008). As early as 2001, the leading Malaysian banking in- stitution Maybank set up the sharia’a-com- pliant Singapore Unit Trusts Ethical Growth Fund. This fund is still going strong today. The investment objective of the fund, ac- cording to the company itself, “is to achieve medium to long term capital appreciation by investing mainly in the global markets in equities that comply with the principles of sharia’a. Its portfolio will mainly consist of equities that are considered by the Manager as growth stocks”. In the fund’s most recent factsheet, however, the Manager does have a warning about risk, pointing out that risks factors connected to investment in the fund include:
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