Sukuk & Capital Market - Islamic Finance News

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feature Investment preferences amongst conventional and Islamic investors Alternative assets 5% Emerging market bonds 20% Global bonds 15% Emerging market equities 25% Global equities 35% conventional and Islamic markets by AmIslamic showed an almost identical breakdown in terms of investment preferences amongst conventional and Islamic investors - 25% in emerging market equities, 35% in global equities, 15% in global bonds, 20% in emerging market bonds, and 5% in alternative assets. The difference between the Islamic and conventional market lies in the need for investments in Shariah compliant alternatives, and the Islamic fund management industry will continue to struggle as long as there is a lack of Shariah compliant solutions in the market. In the equities space for instance, the report by AmIslamic said: “It is not possible to have an Islamic version available for every conventional (non Islamic) investment product/ strategy out there. For example, a typical equity asset allocation includes an allocation to Smart Beta and when it comes to the Islamic space, there are almost no Islamic Smart Beta funds available.” On the fixed income side, the report commented: “A global Sukuk fund will have significant exposure to emerging markets and minimal exposure to developed markets as there are hardly any Sukuk issues from developed markets. Therefore, it is not possible to get a global Bond fund’s geographical allocation with a global Sukuk fund. One of the solutions is to seek other alternatives that replicate the payoff of a Sukuk (periodic return and lower risk). We have developed an equity-based solution that exhibits lower volatility and yields periodic income (high dividend) to replicate the payoff profile of a Sukuk fund. This solution supplements the allocation to global Sukuk and addresses the geographical coverage/diversification issue.” Monem Salam, the president of Saturna Capital, highlighted the challenges currently facing the Islamic asset management industry: including limited opportunities in the cross-border space, higher fees and lack of competitiveness with the conventional markets: “Most Islamic funds are currently domiciled in Malaysia, and there is very limited opportunity for cross-border distribution of funds. The Malaysian Securities Commission is working hard to facilitate this with Dubai and Hong Kong, but there are many other markets fund managers are interested in. The opening up of other markets has to be done on a regulatory level. Second, fees tend to be much higher across the board in Asia compared to those in the west; particularly the US and Europe. If you can access an Asian fund in Europe which you can buy at less than a 1% expense ratio, then why would you come to Asia to buy the same product at 1.5 – 2%? We have to be competitive on a global level in terms of fees. Although the cost of running funds is a lot cheaper in Asia, expenses are lower in US and Europe.” In terms of Islamic exchange-traded funds, education still remains a key issue, says Mahazir Othman, CEO at i-VCAP. “The Islamic ETF market is still underdeveloped, and education is still a main concern. There also needs to be more understanding on how investors actually use Islamic ETFs in their portfolio to enable them to meet their investment objectives. The current mentality in Asia is: ‘Why do we need to go beta when we can do our own stock-picking?’ and most Asian investors are stock-pickers. Another challenge is product depth. There are currently not enough Islamic ETFs in the market for investors to asset allocate their portfolios using this instrument. It is important to get managers to roll out more products to address this challenge.” There are Shariah compliant equities in the Middle East which you simply do not have access to The ongoing debate on the use of derivatives to hedge risk in the Islamic finance space has also brought about challenges in the Islamic fund management industry; with the divide between the proponents of derivatives and those who disagree becoming more apparent. From a fund manager’s perspective, Monem believes that it is possible to avoid the use of derivatives all together, simply by picking the best stocks to invest in. “It depends on the mandate of the portfolio. When we look at the fundamentals of derivatives and their purpose, it is essentially to transfer the risk from you to someone else. Islamic finance is about sharing risk, whilst derivatives are about transferring risk. In Islamic finance, the gains and losses are shared. “The way you can fundamentally do that is by going back to the fundamentals of investments – i.e. plain vanilla structures. We have managed to provide our clients with high returns and low volatility investment products without derivatives, simply by buying companies that pay you back in dividends so you can utilize the gains in your portfolio, and by holding cash if you don’t like a certain investment. If you stick to the fundamentals, you will realise that the use of derivatives simply add cost to your portfolio and lower your returns - and that doesn’t really help. In the conventional space for instance, normal indexes actually outperform hedge fund indexes, so what is the point of doing that (derivatives) except for someone lining their pockets with money?” he added. It is absolutely vital for the Islamic industry to develop effective products with competitive returns to enable the efficient management of Islamic liquidity, in order to create a robust investment environment and attract more investors to ensure consulting www.IslamicFinanceConsulting.com www.IslamicFinanceEvents.com the health and sustainability of the Islamic capital markets. www.IslamicFinanceNews.com www.IslamicFinanceTraining.com www.MIFmonthly.com www.MIFtraining.com 26 www.REDmoneyBooks.com November 2012 www.MIFforum.com
chapter Diverging Models Shape The Growth Prospects For Takaful The growing need for insurance that complies with Shariah law means that the global Takaful sector is becoming an increasingly significant niche within the wider insurance industry. In the following Q&A, Standard & Poor’s Ratings Services (S&P) compares the Takaful markets in the Middle East and Asia, and discusses the outlook for the sector amid the global economic slowdown. What’s fueling the growth of Takaful globally? Global Takaful growth was about 20% in 2011, although actual rates varied widely between regions. Sharp spikes in growth in countries such as Saudi Arabia were triggered by regulatory action to expand compulsory insurance covers, particularly medical insurance. For Asia, the family sector was boosted by the customers’ needs and growth of agents and bank channels distribution. Is such growth sustainable? We expect to see generally strong growth over the long-term, however, we don’t anticipate that the sector will sustain 20% growth over the next few years, given the stuttering global economy and the relative maturity of some of the larger Takaful markets. Nevertheless, Takaful has developed most fully in countries that have relatively high economic growth rates, and where the state follows Islamic principles. Economic growth can support greater personal wealth, leading to an increase in insurable asset risk. In addition, if sufficient wealth is created, we expect the longer-term family (life) insurance sector will also expand, especially in the GCC region. Connie How does the Takaful market in Asia compare to that in the Middle East? Takaful has developed most in the Gulf Cooperation Council (GCC) region and Southeast Asia, but individual countries in each region have taken different routes to develop the sector. Malaysia is the most well-established Takaful market, which is reflected in its size and relative sophistication. It contributes over 17% to global contributions and has grown five-fold over the past decade. In Malaysia’s Takaful market, family business was about 63% of total contributions - the remainder comprised general business. Most family business is linked to mortgage lending (about 47% of total family contributions in 2011), which perhaps reflects linkages between Takaful companies and banks. For general business, mirroring the conventional market, motor is the dominant business line, accounting for 55% of total general contributions in 2011. The market in Saudi Arabia is larger but less seasoned. All insurers have to operate to a cooperative model broadly comparable with the various Takaful models used elsewhere. While the country has seen very high growth recently, the main source of growth over the past five years has been regulatory action to introduce compulsory medical and motor insurance. As a result, over 50% of global Takaful sector contributions derive from Saudi Arabia. We do not expect the industry to maintain the growth levels it saw after these changes, but it is likely to remain high relative to global levels. Is the investment approach similar between Asian and Middle East Takaful companies? A fundamental requirement of Takaful companies is to provide a fully Shariah compliant service to both fund members (policyholders) and investors. Southeast Asia makes greater use of Sukuk for Islamic finance than the GCC region. Its more developed market provides meaningful volumes for the Takaful sector to invest in. In Malaysia, more than half of Takaful insurers’ portfolios are invested in Sukuk, with the remainder invested in cash & equivalent, equities and other assets. In contrast, a shortage of Shariah compliant rated instruments in the GCC region means that Takaful companies tend to invest in equities and real estate at a higher portfolio than in Malaysia. Such investments can carry high levels of value volatility and illiquidity and can drag on Takaful companies’ balance sheets. However, the Sukuk portfolio for GCC Takaful operators is increasing, reflecting the increase in Sukuk issuance in recent years. Many Takaful companies, particularly in the GCC region, were set up during the boom years of the early 2000s. The historically high investment valuations that operated when they purchased their assets subsequently resulted in realized losses. The current low investment yields strain bottom-line results further. In our analysis, we consider the limited range of acceptable instruments in which Takaful companies can invest November 2012 27
Page 1: November 2012 Sukuk & Capital Marke
Page 4: contents feature COVER STORY 4 Suku
Page 7 and 8: Cover story From a foreign issuer
Page 9 and 10: ASEAN RAtiNg ScAlE UNlEAShEd: locAl
Page 11 and 12: interview What the market needs, Af
Page 13 and 14: feature Islamic Private Equity and
Page 15 and 16: chapter A Bright Path Ahead The out
Page 17 and 18: feature Secondary Markets Stalemate
Page 19 and 20: IFN FORUMS 2013 The most recognized
Page 21 and 22: chapter Global Sukuk makes a high q
Page 23 and 24: chapter Profile CIMB-Principal Isla
Page 25: chapter In a bid to create an effec
Page 30 and 31: chapter of the companies involved w

Sukuk & Capital Market - Islamic Finance News

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