Have assets under management (“AUM”) Islamic funds been increasing in recent years, both regionally and globally?
Islamic Funds AUM have increased in recent years, but while the appeal of global Islamic Finance is growing overall, structural issues inhibit its potential and broader market appeal, which could be alleviated with advancements towards uniformity. However, propelled by positive trends in some core markets, Islamic finance assets are poised for growth through 2024. Prior to this, in the decade leading up to the beginning of 2022, the global Islamic funds market expanded by approximately 300%, with AUM growing by nearly 14% in 2020, despite the challenges posed by the Covid-19 pandemic. Sukuk issuance in the Gulf Cooperation Council was USD $9.75 billion in 2022 and grew to almost USD $30 billion the following year in 2023, with the first quarter of this year heading toward a figure of USD $15 billion.
The perceived and tangible alignment of Islamic Finance with current-day concerns around ESG-related matters may well broaden the appeal of this sector beyond Muslim nations and markets, bringing an opportunity for notable growth in Islamic Funds that could play a visibly large part in their future uptake.
Another factor that has influenced the market is the post-pandemic and continuing acceleration of technology in the sector. With products and services increasingly available via digital platforms, and the younger, more technologically familiar demographics in many core or traditionally Islamic markets, further growth in AUM and the usage of general Islamic finance services seems set to increase.
Can it be assumed that a Sharia fund has an automatic selling advantage in Islamic cultures?
There is no inherent advantage. Although there are several Sharia funds available in Islamic cultures and nations, they lack the size and diversity to appeal to multiple segments. For example, Sharia funds are often assumed to be easily marketable due to their Sharia-based nature. However, this perspective is quite limited; Sharia funds compete with various other fund types in the market, amidst competition within the entire asset management industry for investor dollars. Therefore, assuming that Muslims will automatically invest in a Sharia fund is not accurate. This is one of the reasons why the Sharia fund market has not grown. The level of automatic advantage can be assessed based on the client segment and marketing strategies employed. Retail customers are mostly swayed by this fact. However, as client sophistication grows, the importance of the Sharia factor reduces. Additionally, due to the small range/size of Sharia funds, they gradually become less appealing. As a result, institutional investment in Sharia products is limited. For instance, Waqfs—Islamic charities or endowments—rarely serve as a source of liquidity or capital for Sharia funds, representing an untapped pool of capital. This is where there will be an automatic selling advantage for Sharia funds, but the entire ecosystem has to be developed and improved for Waqfs to invest in Sharia products for philanthropic reasons.
Given the increasing demand for sustainability and ESG-related products among asset managers, is Islamic Asset Management uncovering an innate advantage? Attempts to align Identity and Access Management (“IAM”) with ESG have been longstanding. On the face of it, both are ethical or sustainable investing and therefore should be quite easy to promote. The amount of assets seeking ESG deployment is substantial.
The issue arises from the difficulty of aligning ESG taxonomies, structures, regulatory requirements, etc. with the very nature of Sharia funds. The absence of an industry-standard, globally acceptable, regulatory-based Sharia investment framework, along with limited investable opportunities and ticket sizes (European Pension and Institutional funds require substantial liquidity for investments), lack of independent validation of investments like ESG Due Diligence, and absence of case law for ESG/Sharia fund investments all present challenges. If IAM can address these factors, significant institutional transfers will likely occur.
In terms of professional function or oversight, does the Islamic asset management market need further development?
All elements of this area can gain from improvements, such as fund marketing, fund investments, fund platform developments, product development, and fund distribution. Many recent technological developments should be considered, such as the application of artificial intelligence to blockchain and tokenisation, which can assist in improving the efficiency of these funds. Focusing on improving the entire distribution mechanism will go a long way to further increase the AUM of this sector.
*Article reposted with permission from MEA Finance (https://mea-finance.com/april-2024/)
