Winter 2012

ROUNDTABLE: A matter of interpretation

The lack of standardisation has created a situation where one sharia adviser can claim its fund is ‘holier’ than others, say the participants of the Funds Global Asia roundtable held in Kuala Lumpur. They also discuss the challenges of reaching a critical mass and marketing to non-Muslim investors.Chaired by Stefanie Eschenbacher.

Rountable mena win12

Angelia Chin-Sharpe
(CEO, BNP Paribas Investment Partners Malaysia)
Akmal Hassan (CEO, Asian Islamic Investment Management (AIIMAN)
Zulkifli Ishak (CEO, Eastspring Al-Wara’ Asset Management)
Abdul Jalil (CEO, Aberdeen Islamic Asset Management)
Mohd Farid Kamarudin (executive director, AmIslamic Funds Management)
Sandeep Singh (CEO, Franklin Templeton GSC Asset Management)

Funds Global Asia: Muslims represent a quarter of the world’s population yet only about 1% of global financial assets are sharia compliant. How do you explain this disparity? Where do you see the growth opportunities and how can these be capitalised?

Zulkifli Ishak, Eastspring Al-Wara’ Asset Management: It is estimated that 75% of the wealth of the Middle East and North Africa resides in Europe, held in investments that are not sharia compliant. But with the Arab Spring that see people’s power pushed for change in the leaderships in the regions, we expect to see the newly elected governments to put more effort to change the investments from non-sharia compliant to sharia compliant investments. An example is Egypt, where the new president elected by the people is someone who memorised the whole Koran by heart and had made a target to grow Egypt’s Islamic finance to respectable level in five years time. Apart from targeting a Muslims only, we can also market it as one category of ethical investments, as even in the Bible Christians are prohibited to be involved in usury, use alcohol and indulge in gambling. These are the same sectors filtered out by Islamic finance. About 60% of our investors in our sharia compliant funds are not Muslims.

Sandeep Singh, Franklin Templeton GSC Asset Management: Over a quarter of the world’s Muslim population lives in Bangladesh, India, Indonesia and Pakistan. In those four countries, including other countries in Asia, a significant part of the population has low per head income, resulting in less money available for savings. The industry as a whole is in a nascent stage and still evolving; there are few products to choose from, the distribution network is not yet established and often there is little awareness of what products and services are available in the first place.

Abdul Jalil, Aberdeen Islamic Asset Management: Many asset managers are not just targeting a Muslim population. The Middle East, a predominantly Muslim region, has probably one of the lowest penetrations of Islamic products. Much of the wealth is held in conventional funds. We need more time to develop the sharia asset management industry and keep in mind that the target market goes beyond just the Muslim population.

Akmal Hassan, Asian Islamic Investment Management (AIIMAN): Islamic Investment Management: It only started gaining momentum post-2008 global financial crisis, hence, it is at its nascent stage. Out of the $1.2 trillion of the Islamic assets globally, about $150 billion are held in Asia. Only 30% of our customers are Muslims, based on the average figure from funds that AIIMAN externally-managed and our direct clients.

Mohd Farid Kamarudin, AmIslamic Funds Management: Whether investors are looking at sharia compliant conventional funds, they also look at performance. Most of these products are relatively new and have not established a track record. This, however, will happen over time.

Anglia Chin-Sharpe, CEO, BNP Paribas Investment Partners Malaysia: Investors should not benchmark sharia compliant investments against conventional ones. They need to ask themselves what sharia compliance it is about and what they want to achieve. The equities space is well-established and can deliver results in terms of performance; this is less the case for sukuk because the sukuk market is still developing and the depth and liquidity is not yet there as compare to conventional. Institutional investors in particular are increasingly seeking investment grade securities and, from a regional perspective, those issued by multinational companies and investment grade countries. The development of the sukuk market will affect how far we can go in terms of meeting the kind of risk profile, investment objectives and return expectations of investors.

Jalil: Sukuk issuance is concentrated in Malaysia and in the Middle East. Only in the past ten or 15 years sharia advisers suddenly became important market participants. It took years for them to develop and get where they are now. People in, say Latin America, may not know about the possibilities of issuing sukuk. They may not know the process and may, therefore, not have a sharia adviser.

Funds Global Asia: Sharia compliant investment products are already well established in the equity and real estate space, less so in fixed income. Do you see demand for new, innovative products? If so, which ones?

Singh: Fixed income is a large and popular segment in the conventional fund space, but it is missing in the Islamic finance. The choice of global sukuk products, for example is currently very limited.

Kamarudin: GE Capital issued a dollar-denominated sukuk that was over-subscribed. The consideration for multi-national companies such as GE Capital is always what cost is involved in issuing a conventional bond, a sukuk or a dim sum bond. Issuing a sukuk is either cheaper or the same cost as a conventional bond, but the problem is how to structure this sukuk. We need to educate these companies what the options are and where they can sell their sukuks. There are various structures that are sharia compliant. There are a lot of foreign issuers issuing a sukuk in Malaysia and it is likely that a company from Hong Kong will soon issue a Malaysian ringgit sukuk here.  

Hassan: Demand for sukuk by far exceeds supply so it is likely we will see further issuances. We need to come up with more products and become more innovative. In Malaysia there has been talk from the government about agro-sukuk, for example.

Chin-Sharpe: We want to see not only Malaysia or the Middle East issuing sukuk, but other developed countries and global companies. The total sukuk market amounts to roughly $200 billion, with between $42 billion and $45 billion domestic sukuk, meaning those were domestically issued and are denominated in local currencies.

Hassan: When it comes to product innovation, the lack of standardisation can be an opportunity for us. In 2010 we launched a product that can invest directly into the Chinese A-shares market. While there are conventional products that invest in the A-shares market, there are none that are sharia compliant.

Chin-Sharpe: Products that are currently available are core products such as sukuk and equities. Therefore, they are important in terms of asset allocation. However, it has been challenging to raise assets in these products.  As the asset management environment remains challenging and costs management is key. We should focus in raising assets on current products rather than developing too many products.

A lot of swaps and derivatives are not in the market yet or may not be deemed sharia compliant, which means creating alternative products is difficult. When it comes to currencies, we prefer to keep it to dollar issuances rather than local currencies because we cannot manage currency exposure.

Kamarudin: There are other challenges, too, for example when it comes to custodians and managing surplus cash. While global custodians tend to have higher ratings than their sharia compliant counterparts. One way around it is to manage our own cash, but that involves a lot of operational issues, including transferring money.

Jalil: The implication of managing surplus cash is an important one. If surplus cash of a sharia compliant fund is not properly invested, it will lose out  The effect would be that people might just stick to conventional asset management because the infrastructure on sharia  asset management is not yet developed, on the back office functions.

Funds Global Asia: A number of sharia compliant funds have been created as Ucits products, but this means they had to convince the European regulator that the underlying investments are sufficiently liquid. What fund structures are best suited for a regional or global distribution strategy?

Singh:The global unit trust industry on the Islamic side is quite fragmented. Though many countries have reciprocal agreements – as it is the case in Malaysia with Dubai and Hong Kong – which allows asset managers to easily register funds in one jurisdiction and sell them into various others, one would need a wider platform to leverage if funds have to be distributed across multiple jurisdictions to attain scale. The Ucits structure does provide that avenue as we have seen from our experience on the conventional side.

Hassan: Ucits is probably one of the most suitable ones when it comes to distributing regionally or globally because it is a brand.

Jalil: It also depends on the individual fund houses and what their target market is. If it is a global product and its investments are sufficiently liquid, an asset manager would probably choose a Ucits structure to give it an international appeal. If, however, it is country-specific, a different structure might be more suitable. We are working on a retail product at the moment and we will domicile it in Malaysia because the regulators understand the product better and the market is Malaysia.

Ishak: The differences in sharia interpretations in various countries can be obstacle for us to sell our funds in other countries.

Malaysia being a multiracial population with multireligion has versatile sharia advisers who are open to accepting other schools of thought views in interpreting sharia principles for the innovation of Islamic finance products and services.

Furthermore, in Malaysia, we have the Shariah Advisory Council (SAC) of Bank Negara Malaysia as the sole sharia  authority to be referered to by court of arbitrator in disputes involving sharia issues in Islamic banking, finance and takaful issues.

We had launched a sharia fund to be distributed in Dubai but we found it quite challenging to get approval from the distributors there as each distributor’s sharia  advisers have the final say on the sharia interpretations. In contrast, Malaysia has the SAC of Bank Negara which has the final say on the sharia products or services. Having the SAC eliminates the ambiguity in sharia interpretations.

Chin-Sharpe: Malaysia wants to be the fund platform to register funds. But in order to be able to distribute funds in Europe and most international platforms, Ucits is still the more widely acceptable structure. It is cheaper to use a domestic structure because Ucits is comparatively expensive, but if an asset manager expects the fund to gain international traction, it may be worth it.

There will be an Asean passport soon where asset managers can register their fund in Singapore or Malaysia and then distribute it among the Asean countries, namely Brunei Darussalam, Cambodia, Indonesia, Lao, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

Hassan: There are still a lot of obstacles in our industry, but some asset managers have managed to put their funds into a Ucits structure and distributed them into the Eruopean market.

Funds Global Asia: While specialist Islamic houses may have more in-depth knowledge about religious principles and local markets, established global players have systems, processes and practices that are more consistent with the needs of large, sophisticated investors. How do you see the industry evolving?

Hassan: Nikko Asset Management Asia acquired a stake in AIIMAN to build a multilocal approach. This means we are specialists in the local market and we have the autonomy to run the business as we think best suit for AIIMAN. But we can also tap into their global footprint. It does not really matter whether it is a local player or a global player, it is what is the best approach for a particular market.

Chin-Sharpe: We are financial specialist in our field, even for Islamic financial institutions, but not an Islamic specialist. Hence, why we rely on sharia advisers and scholars to provide us with the guidance and advice to develop our products to be sharia compliant, advising us on our principles, philosophies and systems to ensure that our whole process of managing our clients’ assets are sharia compliant.

Singh: With more global and regional players entering the market, overall standards are bound to rise. Islamic asset managers  can leverage on a lot of functions from the conventional side and build expertise over the years.

Chin-Sharpe: A prerequisite for the growth of the asset management industry is that regulators allow global institutions to enter the Islamic finance market, to leverage together the whole established global infrastructure.

Jalil: The biggest advantage global asset managers have is their footprint, sometimes covering 30 to 40 countries. In most cases, they will have a standard distribution strategy and new products will immediately become available  within This distribution platform. This may be a disadvantage to small local players who may not have the distribution footprint.

Singh:E conomies of scale are crucial. According to an Ernst & Young report, 70% of all  Islamic asset managers globally have less than $100 million of assets under management.   

Funds Global Asia: How is Malaysia positioning itself as competition from the Middle East – Bahrain and the United Arab Emirates – as London is stepping up?

Jalil: We need more than one centre. London might have a competitive advantage because the global banks are already there, but that does not necessarily mean they
will be more successful because a lot of the guidelines and regulatory framework is probably stronger here in Malaysia.

When it comes to sukuk innovation and regulation, Malaysia probably takes the lead. Having more centres in the world will accelerate growth because it spreads the industry wider. Every region or country has a role to play and offer something different but most importantly innovation must be reasonable without losing essence of the fundamentals of sharia investing.

Chin-Sharpe: Malaysia ticks all the boxes of an international Islamic hub, but in order to attract more money it needs to move away from being just a local hub to facilitate other services. This means becoming a booking and trading platform, easing the registration of funds, supporting asset managers with the aim to establish a local presence.

Ishak: Malaysia is at the forefront of Islamic finance whereby Islamic finance penetration rate is 25% to 27% of the total banking market.  Meanwhile, our neighbour, Indonesia, with very large Muslim population has a tremendous opportunity to grow its Islamic finance. It is often considered a sleeping giant in this respect.

Despite the large Muslim population in Indonesia, the Islamic banking market share penetration rate is only around 3%. The Malaysian government had formed the Malaysia International Islamic Financial Centre which operates under the slogan “Shaping Islamic finance together”. This slogan symbolises Malaysia’s commitment and collaborative approach in enhancing regional and international participation from global financial centres to develop Islamic finance.

Malaysia welcomes participation from other countries and views this competition as healthy to promote the growth of Islamic finance. Hence, we are not worried if a sleeping giant like Indonesia overtakes us one day.

Kamarudin: We need different hubs because different regions interpret sharia differently. Malaysia has made it easy because the rules for those who wish to do business here are clear; a company that wants to issue a bond can select an approved sharia adviser from the Securities Commission’s website.

Funds Global Asia: Is a common code of ethics and more standardisation necessary to ensure a minimum standard and greater efficiency in the industry, ultimately opening the door to more opportunities?

Kamarudin: While a common code of ethics and more standardisation would help, they would not succeed in standardising products. Today it is widely accepted that there are different interpretations. In Malaysia this role falls to the Securities Commission Sharia Advisory Council and the Bank Negara. Everything that goes either into the capital market has to go through these two main bodies. This seal of approval means nobody will question it.

Ishak: In Islam, there are four main mazhabs [schools of thought] – Hanafi, Maliki, Shafii and Hanbali practiced by the muslims. Malaysian follows Shafii. When Malaysia enacted its law on Islamic banking in 1983, it was kept broad, that is, do not just follow one mazhabs. As such, Malaysia is flexible to all sharia  interpretations from the four schools of thought as long as it is under the ambit of Quran and Sunnah. The dynamic nature of sharia interpretations has led to a wide diversity of product offerings in Malaysia. This is why sharia products from Middle East or other countries are easily accepted here.  

Chin-Sharpe: While funds from the Middle East are accepted here, this does not mean funds from Malaysia are accepted in the Middle East. There is no harmonisation.  

Ishak: The lack of standardisation has created a situation where one day a sharia adviser can say, “My fund is holier than yours”. Furthermore, this will also make it more difficult for sharia funds to be distributed globally as each and every region or country come up with their own standards. Unless we sell a private discretionary mandate where we can discuss and tailor each client’s sharia interpretation separately, selling retail sharia funds to the global market without standardisation is challenging.

Kamarudin: What is important is that if there is a judge required to decide over a product, the judge must refer it back to the sharia adviser at either the Securities Commission or Bank Negara. Having such a process is also part of standardisation.  

Funds Global Asia: Will common standards hinder the ability to adapt products for local preferences, considering sharia is an interpretative law that has variances among countries and people?

Jalil: Just like in the conventional asset management space, it does not make sense to have one product and one guideline for every single product. We still need to be able to adapt a product to clients’ needs – that is where we have sharia scholars who help us to understand that regulation.

Hassan: When it comes to interpretations and standardisation, the problems cannot be solved easily. The Accounting and Auditing Organization for Islamic Financial Institutions and the Islamic Financial Services Board will help to push Islamic finance into the right direction. Opinions will differ; we set up a sharia supervisory board, which consists of scholars from different jurisdictions. This helps us if we want to sell our funds globally.  

Kamarudin: Everyone must accept different interpretations and know there can be different standards. Supposedly there is an unspoken agreement between sharia advisers at the moment to not criticise each other, although there have been conflicts.

Jalil: Sharia advisers need to have a sound understanding of the Koran, written in ancient Arabic, and know how to interpret it. Having a sharia adviser is like having an Imam who can structure a derivative around those teachings.

Chin-Sharpe: While we have now seen more sharia advisers graduating, there is also a need for sharia advisers to have a good understanding of finance, capital market and investments, which takes time for them to reach that level of expertise.

Jalil: This kind of qualification is not about sitting for an exam. One of the biggest challenges is therefore how to qualify for this role. There is a shortage of people with the right qualifications and some prominent sharia scholars sit on as much as 15 different boards which tend to overstretch themselves. Its important to ensure that this shortage does not lead to advisors becoming rubber stamps but to closely look and products and ensure it falls within guidelines.

Hassan: This situation will change. Malaysia has already established INCEIF, touted as the Global University of Islamic Finance. When this programme was first launched in 2005 by Bank Negara, it was only a short one. Today it offers certificates for all levels, up to doctorate.

Jalil: At least most of the courses are tailored to create sharia scholars. It is no longer about going to Egypt to study religion and then coming back and learning finance. The industry has evolved and there are more specialised courses.

Kamarudin: We must not get confused between a person who understands Islamic finance and a sharia adviser; a sharia adviser is more than just an expert in Islamic finance. Graduates from the Global University of Islamic Finance are not necessarily ready to become sharia advisers – an Islamic finance expert, yes; but for a sharia adviser, the requirements are different. This is not just about studying finance, they need to be able to make important decisions – they need to decide what is right and what is wrong.
 
Jalil: The older scholars are here to stay and the younger ones will need a lot of time to qualify, which leaves a big gap.

Kamarudin: What is required is an intermediary between financial experts and sharia experts. This is where graduates can help: they can be an intermediary between the financial experts and the sharia experts; they will be able to talk financially to the sharia adviser and speak to financial experts in the financial manner.

Hassan: Sharia advisers are human. It takes time to gain knowledge, to be an expert in that particular field. Setting up the Association of Shariah Advisers in Islamic Finance will help to develop a global code of ethics and a professional development for scholars to address all these standardisation issues.

Chin-Sharpe: The scholars as well as everyone else in the industry will need to be pragmatic to allow Islamic finance and capital markets to develop.

©2012 funds global asia

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