gif Interview
management industry is still underdevel- oped, and more innovation and new product offerings are needed in the sector, both in the US and abroad.
By using their structure of efficiency and transparency, ETFs can bring down the cost of investing for those investors seeking Sha- riah-compliant opportunities.
Innovation has often been regarded as a neglected aspect of creating Shariah-com- pliant products. Has this becomes a chal- lenge when trying to promote fresh new investments for investors? Shariah-compliant ETFs have received Fat- was from some major Shariah boards. Basi- cally, an ETF is a basket of securities which are traded on an exchange. Since the basket is linked to an index and the index is indeed Shariah-compliant, then there are no issues with that. Shariah-compliant ETFs have had no challenges in securing Fatwa from Sha- riah boards and scholars.
Which regions and countries do you feel have the highest scope for Shariah-compli- ant exchange traded funds, and how will you be targeting them? The worldwide Shariah mutual funds and ETF industry had assets under management worth USD58 billion at the end of 2010, according to the EY Islamic Funds Report 2011. The Islamic asset management in- dustry is expected to grow by 25% per an- num until the end of 2013, according to MayBank Report.
The largest markets for Shariah-compliant funds and ETFs are in the Gulf Cooperation Council countries (GCC) and Malaysia. The largest global market for Shariah funds is the Kingdom of Saudi Arabia (KSA). Shariah- Shares estimates that USD16 Billion is cur- rently invested in the Shariah-compliant mu- tual funds sector in KSA. The second-largest market for Shariah funds is Malaysia.
The US market is another market we will be targeting. ShariahShares estimates that the Shariah-compliant mutual funds market in the US is worth approximately USD3.8 bil- lion. It has seen a very rapid growth in the past five years. Shariah-compliant indexes have outperformed conventional indexes, and this has attracted socially responsible and ethical investors to the sector. We will be partnering with major financial institu- tions globally for distribution of our ETF of- ferings.
How has your previous role, working at the Islamic Development Bank as senior investment officer, helped to achieve your accomplishments so far? During my tenure at the Islamic Develop- ment Bank in Jeddah, Saudi Arabia, I learned
38 Global Islamic Finance May 2012
about Shariah-compliant asset manage- ment industry. The various areas I worked in included evaluating Shariah-compliant investments and investment managers in equities, Sukuk and Real Estate Investment Trusts. This experience, together with my previous professional and education, quali- fies me to understand and develop products for the Shariah-compliant asset manage- ment industry.
What do you personally feel is the state of the market for global Shariah-compliant ETFs? According to BlackRock, the Global Exchange Traded Products industry assets under man- agement reached a value of USD1,720 bil- lion at the end of February 2012. ETF in- dustry assets were worth USD74 billion in 2000, and the industry has had an amazing growth rate of 28% per year since then. The real drivers of rapid growth in the ETF indus- try have been the lower total expense ratio which these funds provide, their greater transparency, instant execution, and greater tax efficiency.
According to the Financial Research Corpo- ration, ETF industry assets will grow by 23% per year until the end of 2014. Furthermore, it is expected that ETF assets under man- agement will pass a value of USD2 trillion by the end of 2012.
According to the latest E&Y Islamic Funds re- port, published in 2011, the Shariah funds industry had USD58 billion in assets under management at that time. The Islamic asset management industry is one of the fastest growing sectors in the financial services in- dustry. MayBank expects that the sector will grow by 25% per year until the end of 2013. Currently, the Shariah-compliant ETF as- sets have a value of less than USD500 mil- lion. The Shariah-compliant ETF industry is massively underdeveloped, both in terms of product offering and in terms of assets un- der management.
We expect that the Shariah ETF industry will comprise, at an absolute minimum, 10% of the Islamic funds industry during the next five years. This translates to a prediction of Shariah ETF assets under management reaching a value of at least USD10 billion. The ETF industry is bound for very rapid growth (20% per year at a minimum) for the next five years, according to various analysts. The Shariah assets management industry will see solid growth (20% per year at a minimum) as well, again according to various analysts. Shariah ETF products are really a hybrid of these two fast-growing sec- tors.
Do you feel that only high-net-worth fami- lies can invest in Shariah-compliant ETFs,
and will there be opportunities for retail investors? Exchange Traded Funds appeal to all inves- tors. In the US market, institutional investors comprise 50% of the total investors, with retail making up the other 50%. Retail inves- tors can purchase ETF as easily as they can purchase stocks. So ETFs are for all inves- tors, and not necessarily only institutions and high-net-worth families. Shariah-compli- ant ETFs will be used mostly by retail inves- tors within the US market.
In Europe, institutions comprise the largest portion of the total investors, in terms of assets under management and trading vol- ume. Banks and pension plans are the ma- jor investors in the ETF products. The retail market comprises a small proportion of the European ETF market.
What do you feel is the future for Shariah- compliant ETFs in the US market? Do you feel that there is global demand for Shari- ah-compliant ETFS? There are currently no Shariah-compliant ETFs in the US market. We believe that there is a large market in the US for Shari- ah-compliant ETFs. According to the Invest- ment Company Institute, a US industry trade group, ETF and mutual fund investors have, on average, a higher income and education than the general population.
The demographic of Muslims in the US is strong:
I. It is estimated that there are between six and ten million Muslims in the US. US-resi- dent Muslims are highly educated, especially south Asian Muslims from Pakistan and In- dia. They work as engineers, doctors, finan- cial analysts, and in other highly paid pro- fessions. Some 45% of immigrant Muslims report an income in excess of USD50,000 per year, and 19% report an income greater than USD100,000.
ShariahShares estimates that the assets un- der management within Shariah-compliant funds in the USA are currently worth USD3.7 billion. We expect that Shariah ETFs will be able to compete effectively with Shariah mu- tual funds, since they are associated with many unique benefits.
As I have discussed, we believe that there is an excellent market for Shariah ETFs glo- bally. Here are some additional reasons for the growth of Shariah funds and ETFs:
• The petrodollar boom in GCC countries has fuelled great interest in Shariah fi- nance since 2003. GCC economies are booming. GCC will continue to be the largest market for Islamic funds, and so as long as oil and natural gas are sell-
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