May 31 (Reuters) - The Islamic investment sector can widen its customer base by adopting a socially responsible model, according to industry experts, but distribution channels, a sophisticated investor base and incentive schemes need to be enhanced first.
The links between Islamic finance and socially responsible investments (SRI) are not new, but the former needs a similar transformation which brought SRI into the mainstream.
"The common synergy between the two investor classes should be exploited," said Lynette D'Souza, head of investment strategies group at Saudi-based NCB Capital, at an Islamic conference held in Manama last week. This can lead to greater economies of scale, she added.
Islamic banks are keen to build such scale in order to reverse downward trends in efficiency and profitability, according to an April report by A.T. Kearney.
Islamic finance, with strong roots in the Middle East and Southeast Asia, adheres to religious principles which forbid investing in gambling, tobacco and alcohol. This resembles the screening methodology used by the SRI industry, which has strongholds in North America and Europe.
The limited geographical overlap has caused problems for Islamic banks with little international distribution capability, frustrating both established and new fund managers seeking critical mass to make their products economically viable.
DISCRETION AND INCENTIVES
Assets in Islamic funds, estimated at $58 billion, have marginally changed in the last two years reaching a ceiling of 800 products.
"The industry can break out of these figures by going cross-border," said Sohail Jaffer, deputy chief executive at Dubai-based FWU Global Takaful Solutions. But managers need to get their "international marketing act" together, he said.
Fund houses such as AmInvestment, NCB, and Al Rajhi have sought distribution using UCITS, a passport for investment products, with mixed results. Instead of a regional canvas, they "should focus on two or three markets", Jaffer said.
Others have opted for incubation, investing four to five years to build a track record, according to Noripah Kamso, chief executive of Malaysia's CIMB-Principal Islamic Asset Management.
SRI had a similar slowdown a decade ago which ushered in the era of discretionary mandates - currently over 90 percent of SRI assets are managed this way, according to Eurosif. This business model is making inroads in Islamic finance, with some fund managers outsourcing the advisory skill-set.
In March, Saudi-based NCB Capital signed two leading asset managers, TCW and Amundi, to manage seven international equity funds worth a combined $550 million.
An established track record was key to the proposition, Fadi El Khoury, head of Middle East distribution at Amundi, told Reuters. The firm manages $1.4 billion in Islamic assets, across 10 mandates and three funds.
Growth in SRI is also linked to institutional backing from pensions and endowments. There is no equivalent in Islamic finance, but takaful (Islamic insurance) is a contender.
"Takaful is one of the most important trends emerging in the Islamic investment industry," Ruggiero Lomonaco, executive director for Middle East and Africa at the Royal Bank of Scotland, told Reuters.
But takaful alone might not be enough.
"You need drivers, a pension culture...to incentivize people to go into the markets," said Ken Owens, partner at PWC Ireland.
Incentives such as pension disclosure regulation, enacted across Europe over the last decade, boosted allocation into SRI. Institutional investors cite such directives as a key reason for investing ethically, according to the Social Investment Forum.
Such schemes are absent in Islamic finance and the industry lacks a champion to promote the cause, while information portals like Eurosif and the Social Investment Forum have taken the role in SRI. This lobbying is unmatched in Islamic finance, but by drawing parallels, a cohesive voice is gradually emerging.
(Reuters / 31 May 2012)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia: