gif Islamic Finance
Sohail Jaffer, Part- ner at FWU Inter- national Branch, Luxembourg
What is the most lucrative sector for Islamic investment? The fundamentals of Islamic finance are based on Shariah law and principles that prohibit in- vestments in certain industries such as finan- cial services, gambling, tobacco and weapons. The ethical and socially responsible nature of Islamic finance restricts the investment universe to certain activities and sectors that go through a specific screening to ensure that there will be no exposure to the proscribed industries under Shariah law. Hence, those activities or sectors are an exception to the list of lucrative sectors, everything else is promising.
Given the fact that Islamic investment hasn’t opened itself for all economic sectors yet, both regionally and globally, I believe the attractive- ness of a sector is also a function of its goal set- ting and opportunities on hand. For example, Qa- tar is going to host FIFA 2022 World Cup, which will trigger significant investments in infrastruc- ture and real estate projects and spur demand for financial services including activities like cap- ital rising and hence there will be opportunities for Islamic Finance to participate. Another high growth regional sector is tourism and the invest- ments made in hotels, leisure and sports facili- ties, theme parks, museums and other cultural attractions. Within the BRIC economies, India is witnessing the restructuring of its aviation indus- try. So, the airlines sector in India is lucrative, be- cause it requires capital and financial services.
Generally speaking, health care, tourism, edu- cation, IT, renewable energy, aviation, shipping, railways, waste management, development of natural resources, real estate and infrastructure projects are key sectors to be watched over the next few years in connection with Islamic Fi- nance. The industry has set itself a goal to quad- ruple its assets by 2020 few years ago. If we are looking to meet the goal, we need every sector to perform above expectations and eventually make itself lucrative, if it is not currently.
Which sector of the Islamic finance do you per- sonally feel will be successful in the upcoming years? In three decades, Islamic finance managed to become a trillion US dollar industry, spreading geographically beyond its borders and expand- ing its activities across diverse financial seg- ments. Demand for Shariah compliant wealth management and private banking as well as takaful (the Islamic version of insurance) has in- creased significantly. The regional Islamic capi- tal markets have grown in sophistication and Shariah compliant forms of product structuring, project financing, brokerage, asset management and venture capital services are becoming wide- ly available.
22 Global Islamic Finance May 2012
Within Islamic Finance, sukuk is already the most successful story as of now and I believe it will be even more successful in upcoming years. Countries are issuing sukuk (sovereign sukuk), companies are issuing sukuk (corporate sukuk), Islamic Financial Institutions are issuing sukuk and a few Western Banks are issuing sukuk. So, there is a huge amount of interest at the political level and senior leadership level of Institutions (both conventional and Islamic) in sukuk, which could potentially transform a present linear growth to an exponential growth in due course of time.
Islamic finance is well poised to enhance its value proposition to SMEs and microfinance and extend its offerings across different customer segments especially in the high growth econo- mies, emerging and frontier markets.
Pension Funds is another area where Islamic Fi- nance can make a distinct impact. People earn in a way that is Sharia compliant, people spend in a way that is Sharia compliant, therefore, post retirement, they also want their pension to be Shariah compliant. This should be an exciting space to watch.
Retail banking, provided it improves the service levels, could also be an attractive area of growth. Relationship between banks and customers in the MENA region on an average is observed to last for five years.
During the past few years the valuations of cer- tain real estate in the MENA region is rising. Since prices have risen, asset valuations are recovering and there is a category of affluent Muslims in the region who so far have managed their assets themselves. However, due to the growing valuation of their assets, there is poten- tially a demand for professional asset managers. Therefore, Shariah compliant asset manage- ment should grow regionally and globally.
What do you personally feel are the major chal- lenges faced by Islamic Investors? The young Shariah compliant invest- ment segment faces several key challenges, including but not limited to:
1 Restricted product menu due to insufficient .
focus on product innovation and market re- search. Customers need a solution accord- ing to their preference based on weight- age associated with risk, return, liquidity, compliance of religious principles etc. and if none of the available products fits their requirements, there are chances of losing the opportunity. 2. A shortage of appropriately qualified Sha- riah scholars to serve on Shariah Supervi- sory Boards (SSB) of the Islamic Financial Institutions. 3. The lack of harmonization of Shariah inter- pretation with regard to financial products, and a lack of standardization for transac- tion structuring and processing. 4. The current concentration of products, par- ticularly around equities and real estate, and the lack of private equity options as well as the shortage in sukuk issuance in the Middle East, has also highlighted vul- nerability in the existing product range. 5. Mutual funds are also likely to be exposed to regulatory, political, legal, economic, and financial risk in cross-border investments. Efficient management of these risks is vital for keeping costs low and funds prof-
itable.The Islamic fund industry is highly fragmented, and high management fees prevent the achievement of economies of scale. Proper controls must be established to en-
6.
sure that investments have been done in line with Shariah principles and profits are made based on Islamic investing. Moreo- ver, distribution channels must be expand- ed to reach out globally.
Besides, improved transparency, disclosures and corporate governance are the key to minimize challenges. Post global crisis, investors need to be assured about delivery of the promise made and avoiding unexpected surprises.
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