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At a recent investment conference which was held in Riyadh, Saudi Arabia, Director of iShares, Robert Broadwell talked about the scope for ETFs in 2012. He said: “iShares currently has three Shariah-compliant ETFs in the market, that track the Islamic MSCI indices: iShares MSCI Emerging Markets Islamic, iShares MSCI USA Islamic and the iShares MSCI World Islamic, domiciled in Ireland.”
He further added that “Currently the assets under management in these three ETFs are around US$160m. The turnover in them during the last 18 months was half a billion dollars” and that in the last three weeks “US$20m was invested in [our Shariah-com- pliant] ETFs.”
The global ETF market currently stands at $1.3 trillion dollars worldwide, including con- ventional ETFs and Islamic ETFs, which are building up their presence in this highly com- petitive market. The advantage that Islamic ETFs have over conventional ETFs is the fact that it follows the very attractive principles of Shariah law, which is why many investors choose to use Islamic instruments and ETFs rather than conventional ones.
Major Banks Opening up Opportunities in Islamic ETFs Many major banks, such as HSBC, alongside Islamic banks, have opened up the oppor- tunities for investors interested in Islamic ETFs. One such example is HSBC Holdings Plc, the second largest underwriter of Is- lamic bonds, who opened up the opportu-
nity for Islamic ETFs in the Persian Gulf in 2010. ETFs can help the local markets to at- tract some of the US$49.4 billion that EPFR Global says poured into emerging market stock funds in 2010. However as there were restrictions on international participation in Gulf markets it was slightly difficult to attract the major market share. Investors have side- lined most countries in the Middle East and North Africa due to a recent surge in capital inflows to emerging markets caused by debt restructurings, according to an International Monetary Fund report.
The National Bank of Abu Dhabi PJSC start- ed the Gulf’s first non-Shariah-compliant ETF in March 2010, followed by Falcom Fi- nancial Services’ Islamic fund in Saudi Ara- bia that same month. However, many peo- ple feel that Islamic ETFs have a significant edge over conventional ETFs due to their widespread market capacity and the ability to track investors from around the world in attracting them to its Shariah-compliant ETF mechanism. “We are at an advanced stage of launching Islamic ETFs in the fourth quar- ter,” said Razi Fakih, Deputy Chief Executive Officer of HSBC Islamic Unit in Dubai “ETFs will make up as much as ten percent of the Islamic fund industry in the coming five years”.
ETFs have much opportunities and scope from foreign participants. Dow Jones Is- lamic Market World Index is unprecedented in providing tracking shares that comply with Shariah principles. Dow Jones Islamic World Index has a market capacity of over
Figure 2: Islamic ETF Structure and Processes Shariah Adviser/Commitee
Advisory on Shariah Matters
Basket of
securities
Basket securities In-kind creation
Investors ETF units
Buy ETF units
Stock Exchange Source: Financial Islam 68 Global Islamic Finance April 2012
Sell ETF units
Basket of
In-kind creation securities
Buy/Sell basket of securities Buy/Sell ETF units
New ETF units
Existing ETF units
Liquidity Providers
Basket of
securities In-kind creation Participating Dealers Manager Islamic ETF
New ETF units
Existing ETF units
Basket of
securities Trustee
US$12 trillion dollars, which is a staggering number. ETFs which are index-based invest- ment products can provide the opportunity for investors to buy or sell shares of entire portfolios of stock in a single security. The funds are unique in that they combine the opportunities of indexing with the advantag- es of stock trading and Islamic ETFs have an edge by following the principles of Shariah financing.
The Potential for Islamic ETFs The scope for Islamic ETFs is growing at an unprecedented rate with many opportunities expanding in the sector. There have been many Islamic financial institutions and banks that have received demand for Islamic ETF, and many investors have looked into the al- ternative of investing in Islamic ETFs, as op- posed to conventional ones, because of the benefits of Shariah-compliancy. It had been reported that the total number of assets invested in Asia ex-Japan exchange-traded funds (ETFs) hit US$55.1 billion in October 2010, with the number of ETFs totalling 188 with 293 listings, according to iShares.
To date, the growth momentum of ETFs has yet to benefit the Islamic sector, with just three Islamic ETFs listed on Asian bourses. These three Islamic ETFs-listed in Malaysia, Singapore and India-have attracted US$217 million in assets, or just 0.4 percent of the total market.
Raja Teh Maimunah, head of Islamic mar- kets at Bursa Malaysia, says the Bursa imposes the same set of rules governing
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