The alchemy of Islamic asset allocation

Despite the growth, the industry hasn't focused yet on defining a proper asset allocation framework for Islamic investments. Historically, the Islamic portfolio approach has been mainly "return driven", paying less attention to the risk and liquidity profile. The lack of some clusters may have justified this. Increasing allocation to sukuk, the selected use of Shariah-compliant derivatives and a risk parity approach to asset allocation can represent the base for a more effective Islamic portfolio management.

Over the past 10 years, the Islamic funds industry has grown to USD 60 billion at the end of 2011, with an annual increase of circa 4%. The outlook is still bright considering that the potential demand is at least 10 times bigger than the current size of the industry.

Over this period Islamic asset management experienced three main important trends: (a) an increase in the number of funds offered to investors (over 800 funds); access to a wider number of asset classes and strategies; and (c) the evolution of the business model from a simple offering of funds to a more comprehensive wealth management service.

Despite the significant growth, the industry hasn't focused sufficiently on identifying an appropriate framework for asset allocation of Islamic investments. The development towards a more comprehensive wealth management approach to Islamic portfolios and the consequences of the recent financial crisis highlighted the need for a more effective asset allocation to Islamic investments.

Historically, Islamic portfolios have been skewed towards alternative investments (in particular real estate and private equity) and local/regional equities. Reasons can be indentified in the intrinsic nature of Islamic investing with the preference for tangible assets, the absence, for a long time, of some clusters (the fixed-income component) and the "return driven" approach to investment (focusing only on the IIRR).

This allocation ended up creating a sort of "skewed Yale model" incorporating high liquidity and risk premiums that, in many cases, haven't been addressed properly at the time of the investment. 

(Zawya / 21 Nov 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

India: RBI Governor urges separate laws for Islamic banking

Reserve Bank Governor, D Subbrao said that separate legislation should be enacted in order to commence Islamic Banking in India.  Talking to media persons here today he said under the present banking laws, Islamic banking could not be permitted in India.

"There should be separate legislation for the purpose. The Kerala government had proposed to  permit Islamic banking as the inward remittance is  the highest here. Reserve Bank is not against the idea, but  we  can work only under the present legal frame work of the country," he added. 

He also said that RBI had studied Kerala’s  proposal in detail and there are some legal problems implied in it.  This can be got around through separate channel, so it is not possible under present banking frame work  which insists interest for both deposits and lending. Islamic banking is a totally different system which does not permit interest regime.  

He also said that RBI would take into account all information about the economic situation of the country and   will take decision on change in the interest rates. We will announce our decisions on the next review meeting scheduled on December 18. 

RBI planned to include financial literacy in the curriculum of primary schools and prepared study materials for teaching the subject. This had been translated into the regional languages and a pilot project had been started in Karnataka. State governments should take the initiative to include this in the school syllabus. 

Earlier, addressing the function to dedicate Ernakulam district as the first 100 per cent  meaningful financial inclusion district of the country he said that merely having a bank account is not sufficient for financial inclusion. People must use the account actively,  should get credit and micro insurance and should get other financial assistances through the banks.  Through this,  leakages from  the government assistance should be curtailed to a great extend. Banks should not see this as an obligation, but rather consider it as a business model. He added that financial exclusion is more in the urban areas than in  rural areas. 

The RBI governor also said that banks had been directed not to insist for collateral securities in order to give educational loans  up to Rs 4 lakh.

(Business Standard / 22 Nov 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Let’s explore Islamic finance models

ISLAMABAD - Stressing the need for continued collaboration amongst the D-8 central banks, Governor State Bank of Pakistan (SBP) Yaseen Anwar Wednesday said the member countries need to explore ways to promote Islamic financing in the wake of challenging global economic landscape.

While opening and chairing the 2nd meeting of central bank governors of the D-8 countries in Islamabad, Anwar said there was aneed for exploring sustainable models to promote Islamic finance in the Developing-8 (D-8) economies.

He said macroeconomic policies of D-8 countries must be balanced to check overheating pressures from strong recovery, high credit growth, volatile capital flows, elevated commodity prices, and renewed risk of inflation.

“We must continue to rebalance our economies to sustain growth through modulating domestic consumption, increase in trade and allow capital to flow freely between emerging and developing economies in search of better returns as against investment in debt ridden advanced economies”.

He noted that a sudden drop in the growth rate in 2009 immediately after the 2008 crises was perhaps the principal reason why the D-8 central bank governors in their first meeting agreed to set this meeting agenda on strengthening monetary and financial cooperation.

“The global growth is projected to further drop from 3.8 percent in 2011 to about 3.3 percent in 2012. As a result, the real GDP growth in the emerging and developing economies is projected to be further slower from 6.3 percent in 2011 to 5.2 percent in 2012. Therefore, we need continued collaboration to further strengthen our economies,” he added.

There was only one central bank in each country/monetary area, and therefore, it was very logical for central banks to look beyond their national borders for advice and collaboration, he said adding that in recent years, increasing globalization has further enhanced the need for central banks’ cooperation to tackle risks due to the cross border interdependencies and to make the most of emerging opportunities.

The central banks’ cooperation had been facilitated through collaborative multilateral forums such as the G20, the FSB and the meetings of the IMF, BIS and a number of bilateral and regional initiatives for cooperation. “The enhanced role of these forums also reflects the increasingly important role that the central banks of emerging and developing economies are playing at these international forums,” said the SBP governor. Stressing the need for strengthening cooperation amongst D-8 countries, Anwar said the D-8’s secretariat must be strengthened to collect and maintain information on our economies and their interconnectedness.

“This would serve the dual purpose as it would provide regular updates on the state of D-8 economies and would help us in reviewing and measuring progress of our economies on economic and financial cooperation,” he said. Anwar suggested that D-8 countries must collaborate and focus on the optimal use of monetary policy tools which are at best the first line of defence against the global crisis. The D-8 countries must collaborate on how to rebalance its growth model from export-led growth to diversifying demand through structural changes in their economies that would enable sustainable future growth and make their economies less susceptible to volatility in other financial markets, particularly by raising domestic demand and recycling more of the D-8 countries savings into investments at home.

(Pakistan Today / 22 Nov 2012)


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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com