Socially Responsible Investments: Shari'ah Governed Investing
Abstract
Shari'ah-compliant investing is flourishing and will become a significant and profitable component of the financial services industry globally due to formalized infrastructure and growing assets.
The market for financial products that comply with Islamic principles is taking root in the global economy as a result of an increasing number of Islamic organizations and international investment banks working to formalize the market. The Financial Times recently reported that London has established the world's first secondary market for trading bonds that comply with Shari'ah principles. Similar plans and product developments are underway across the globe. Celent predicts equity fund assets alone will jump from US$15.5 billion to US$53.8 billion by 2010, as a result of new investment programs, growing awareness of shari'ah governed products and cash rich investors according to a new report from Celent, Socially Responsible Investing: Shari'ah Governed Investing.
Shari'ah-governed products include everything from banking products to residential mortgage-backed securities, commodity based financing, currency swaps, and Malaysian securitization, as well as investment and equity linked products. The list keeps growing as demand becomes more apparent. According to the report, one of the main areas of innovation is derivatives. Creative financial institutions are seeking to replicate derivative securities within Shari'ah governed principles. There will be announcements regarding collateralized debt obligations, swaps, FX options, and structured products.
Shari'ah principles are applied to the spectrum of living an Islamic life. In general, Shari'ah principles are concerned with the distribution of wealth in society, how income is generated, and how profit and loss is shared. Some rules pose a particular challenge to financial institutions because a very large percentage of the modern securities market is not investable by those wishing to abide by Islamic law.
Islamic Finance Centers are slowly opening up to global financial institutions, which will further efforts in support of strong secondary market in Islamic debt. Similarly, large, well-resourced, and creative institutions are and will continue to rapidly develop the capital markets across asset classes. As a secondary market for Islamic securities grows, the asset management community will increasingly develop and distribute portfolio management products. However currently, all financial institutions still face several hurdles in reaching full market capacity and these items are discussed in the report:
| Islamic cleric shortage |
| Which comes first? Secular law versus Shari'ah law |
| Lack of regulation, oversight, and consumer protection in developing markets |
| No standard Shari'ah |
| No standard documentation |
| Lack of investment education |
| Low savings rates in the retail sector |
| Foreign firms: present, needed but welcome? |
| Source: Celent |
According to a study by Merrill Lynch and Cap Gemini, the Middle East has the world's highest concentration of high net worth individuals, whose collective wealth is estimated at over US$1.2 trillion. General consensus is that there is a growing desire for many individual investors to invest assets on a more local basis. This vast wealth and the 1.5 billion Muslims worldwide point to huge growth potential for Islamic asset management.
"Celent believes a break out opportunity for the Islamic asset management business is possible, particularly after 2007, which is a 'stage setting' year for many financial institutions in both the capital markets and asset management businesses," saysDenise Valentine, senior analyst and author of the report. "Market studies have repeatedly shown that, if given the option to invest in Shari'ah products with competitive performance, Muslims prefer to do so."The report provides an orientation to Shari'ah along with developments in the region, active firms in Shari'ah investing, and challenges financial institutions face in building out this category.
The 28-page report contains three figures and eight tables. A table of contents is available online. Members of Celent's Institutional Securities & Investments and Retail Securities & Investments research services can download the report electronically by clicking on the icon to the left. Non-members should contact info@celent.com for more information.