Intervie gifw
ing at attractive prices, Islamic funds should do well.
• Various surveys conducted in recent years have shown that Muslims are in- terested in investing in line with their faith. Investors are often seeking to save for retirement and for their chil- dren’s education. This is another po- tential area for the growth of Islamic funds.
How much involvement do Shariah schol- ars have when it comes to determining which shares are viable and Shariah-com- pliant? Shariah scholars are heavily involved in en- suring that any given index is indeed Sha- riah-compliant. They work closely with all of the index providers to screen prohibited securities from the index. The major Shariah index providers are:
Dow Jones, FTSE, MSCI, Russell Jadwa and S&P. Shariah scholars determine which se- curities within the index are permissible, and review and update the index on a quar- terly basis.
The FTSE Shariah indexes are constructed in the following manner:
I. Prohibited industries: 1 Alcohol, tobacco, pork and non-Halal
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foods. 2. Defence contractors, manufacturers or distributors of weapons. 3. Conventional financial services (banks, insurance companies). 4. Inappropriate entertainment (pornog- raphy, casinos and other forms of gam- bling).
II. Asset-based debt screening ratios:
5. Total debt/total assets cannot exceed 33%. 6. Cash plus accounts receivables /total assets cannot exceed 50%. 7 Cash plus interest-bearing assets /total
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assets cannot exceed 33%. 8. Total interest and non-compliant in- come/total revenue cannot exceed 5%. 9. Various index providers have different asset-based debt screening ratios. Dow Jones uses a trailing 24 months’ aver- age market capitalisation in the denom- inator, rather than total assets. (For ex- ample, a total debt/trailing 24 months’ average market capitalisation.)
What do you believe are the benefits to investors of choosing Shariah-compliant exchange traded funds? • Performance: Shariah-compliant ETFs and mutual funds have produced ex- cess return compared to conventional
indexes, for the past three to five years. As per the table below, the S&P 500 Shariah outperformed S&P 500 over the past three to five years. However, past performance is no indicator of fu- ture performance.
• Lower risk (volatility): Shariah-compliant mutual funds and ETFs have exhibited lower volatility in the past five years, due to their lack of exposure to conven- tional financial services and highly lev- eraged companies, as required by the indexes. Shariah asset-based screens eliminate poorly performing companies prior to becoming highly leveraged, and sometimes go into financial distress. Shariah indexes remove highly lever- aged companies before they face finan- cial distress and bankruptcy. Enron and WorldCom were two companies elimi- nated from the Shariah indexes, due to their high debt levels, before their bank- ruptcies; however, they continued to be part of the conventional indexes. This is an especially important factor during periods of downturn and recession, as evidenced in the period between 2008 and 2009.
• Investing according to their faith and principles: Shariah ETFs enable Muslim and ethical investors to invest accord- ing to their faith and religious or social values.
Where do you see the future of Shariah- Shares Inc in ten years’ time? As a newly established firm and start-up, our top priority is to secure venture financing for ShariahShares. As soon as the venture financing is arranged, we will seek to launch our ETFs on various exchanges in Europe and North America.
We are planning to partner with world-class financial institutions to deliver Shariah-com- pliant investment products and solutions to our investors. Our long-term goal is to be the leading provider of Shariah-compliant ETFs in the world.
What products and services do you feel will be beneficial in developing Shariah- compliant share products? Innovative exchange traded funds and ex- change traded commodities products, which offer value to investors, will be beneficial in developing Shariah-compliant share prod- ucts.
Investors seeking to act according to Sha- riah laws continuously compare the Shariah funds industry’s offerings with those of their conventional counterparts, in terms of fees, depth of offering, transparency and other features. Shariah funds must continuously
develop products and services in order to be able to compete with their conventional counterparts.
Why do you think that the Islamic finance industry has been slow to introduce Shari- ah-compliant ETFs to a global market? Education is a major factor, as has been explained by various industry participants. However, more action is needed. We agree that education is lacking, and suggest that one reason for that is the lack of attention by the current ETF providers.
After extensive research and analysis of the Shariah-compliant ETF market, we were surprised to discover that none has satis- fied the demand. Deutsche Bank, iShares and other ETF sponsors control a few of the listed Shariah-based ETFs, but their assets under management are trivial compared to other ETF strategies.
Most ETF firms have hundreds of ETFs listed, but it is clear their Shariah product sales ef- forts have either been lacking or ineffective - at least in comparison to the current most popular ETFs, such as those in the areas of emerging markets and in the gold trade. This has left the Islamic investment commu- nity badly catered for.
One lesson learned from the growth of the US and European ETF markets is that educa- tion is a crucial catalyst, acting powerfully for AUM growth. In order to succeed, a consist- ent message was needed, delivered over a lengthy period of time.
ETF sales forces used to visit many financial advisory offices, promoting not only the per- formance of their own specific products, but the concepts and values that the ETF struc- ture could bring to the market. This process needs to be repeated for the Islamic finance community.
Any final words regarding the scope for Shariah-compliant exchange traded funds on a global investment market? There are tremendous opportunities avail- able within the Shariah-compliant ETF in- dustry. The industry is young and under- developed globally. There are currently no Shariah-compliant ETFs in the US market.
The ETF sector has seen huge growth over the past ten years, and growth is expected to continue into the future. The Shariah asset management industry is set for rapid growth according to MayBank, Eureka Hedge and others. Shariah ETFs are a hybrid of these two rapidly growing sectors. ShariahShares aims to become the leading global provider of the Shariah ETF family in the future.
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2012 May Global Islamic Finance 39
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