Funds Management, Islamic Finance, Middle East - Saturday, July 2, 2011 9:51 - 0 Comments

Cerulli: Islamic funds still ignored by Middle East institutions

Cerulli Asia Pacific Edge, July 2011

On first glance, the dynamics supporting the Islamic fund management industry look very strong. In the GCC markets of the Middle East in particular, the region is galvanized by high oil prices so that at both an institutional and an individual level, wealth is growing. As that wealth requires a greater range of products to be invested in, and since these are all Muslim countries, shouldn’t that be the spur to a dramatic increase in Islamic asset management?

Well, yes and no. It’s true that retail investors in the Middle East and in Malaysia have firmly embraced Islamic funds. This is nowhere more true than in Saudi Arabia, where the mutual fund industry is overwhelmingly Islamic: about 80% of funds sold in the country are Shariah-compliant. The degree of penetration varies elsewhere from market to market – entrenched in Kuwait, popular but not dominant in Malaysia (where Islamic unit trusts are 10.6% of the market in volume terms) and Bahrain, limited in the United Arab Emirates – but it is certainly true to say that many individual investors have welcomed the opportunity to invest in a way consistent with their faith.

For institutions, though, it’s a different story. The Middle East is best known, in institutional terms, for its vast sovereign wealth funds: the Abu Dhabi Investment Authority, believed to be easily the biggest of them all; the Kuwait Investment Authority; the Qatar Investment Authority; the parts of the Saudi Arabian Monetary Agency that fulfill sovereign wealth duties; and several other smaller funds. But none of these invests in a Shariah-compliant way. They might well consider Shariah-compliant mandates if there was a demonstrable advantage in doing so in terms of returns or risk diversification. But just for the sake of religion? Not at all.

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