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Tuesday, 16 April 2013

Understanding basics of Shariah investing

We all have different reasons to invest our hard-earned money. It might be for a short-term purpose like the purchase of a car or a house, or a long-term goal such as funding our children's education or ensuring a more comfortable retirement.
Investing can take on a religious significance, too. For a growing Muslim audience, investments must not only be able to achieve their goals, but also be compliant with the Islamic law.
The principles of Shariah investing dictate that to be considered acceptable, companies must pass a certain set of criteria. Among them, the balance sheet structure should contain neither too many liquid assets nor debt, and the company should not engage in "haram" (forbidden) industries such as alcohol, tobacco, gambling as well as specific foods considered non-halal or impure.
Advisers who are considered experts in Islamic law are integral to the investment selection and review process. At Franklin Templeton Investments, for instance, portfolios are independently reviewed and endorsed by the Amanie International Shariah Supervisory Board, which is highly regarded for its extensive Shariah and technical expertise.
The Amanie scholars provide initial approval on investment objectives and strategy, as well as ongoing supervisory and monitoring services to ensure continuous adherence to internationally accepted Shariah principles and standards.
Implementation of these standards can be subjective at times, as it depends on the interpretation of different Shariah boards - a challenge to portfolio managers. In addition, this can lead to a lack of homogenized investment approach as well as confuse potential investors.
Shariah Investing 101
Generally, a company that holds too many liquid assets may have Shariah restriction on eligibility. So one would think, this will result to the elimination of the company.
However, this is not always straightforward. It can depend upon the Shariah screening methodology applied by the fund adviser in the review process in which one calculates the company's financial ratio.
If a company classifies a large portion of its liquid assets as long-term, certain Shariah benchmarks will not include it as part of their liquid asset calculations. In addition, some benchmarks will use market capitalization as the denominator while others will use total assets - both of which could provide different results.
Using market capitalization as the denominator is particularly difficult for value investors (like us) because as a stock gets cheaper and hence provides more long-term value, it could suddenly become ineligible as the market capitalization falls relative to the liquid assets or debt.
Stocks that were compliant at one time but then later deemed non-compliant must be disposed of, but once again it's all about details. For example, the frequency at which the company pays its dividends (once a year, semi-annually or annually) could make a difference to eligibility.
Depending on the Shariah screening methodology, a company that accumulates large amounts of cash throughout the year before paying it out in the form of dividends runs the risk of becoming non-compliant. Once it pays the dividend, it may become compliant and hence an eligible investment once again.
The grace period given to dispose a stock (once it becomes non-compliant) is also different from one benchmark or adviser to another. For instance in as far as dividend is concerned, if the grace period to sell non-compliant stocks is short, one may be forced to sell it before it pays the dividend. Conversely, if the grace period is long, the stock could remain compliant by paying the dividend and reducing cash on the balance sheet.
Opportunities abound
Such are the challenges of Shariah investing. But despite the constraints, we are able to find plenty of potential opportunities.
In managing Shariah portfolios, we leverage the same investment team and research process. So Muslim investors essentially get a subset of our broader portfolio, which is compatible with specific Shariah principles.
Overall, our team is finding potential opportunities in the healthcare, energy, and telecommunications sectors. European financials represent a sector our Shariah portfolios cannot invest in, but we've been finding a lot of value over the past year there in our other portfolios.
By country, Malaysia represents one of the biggest markets right now for Shariah investing, and is growing because of its advanced national pension scheme. There is a mandatory monthly contribution into the national pension fund that grows with population and income levels.
Other emerging centers include Middle East financial hubs like Dubai and Abu Dhabi. I think the natural interest in Shariah investing is likely to be confined to Muslim nations, but it would not be surprising to find other countries that are also keen to offer an Islamic investment vehicle. This is due in part to a large and growing Muslim diaspora globally.
Our potential investment opportunities could likewise continue to expand, and we think it's an exciting time to be an investor in this growing space.
Alan Chua is a Singapore-based EVP and portfolio manager at Templeton Global Equity Group.

(Zawya / 15 April 2013)

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Turkey offers Islamic banking opportunities

PETALING JAYA: New investment opportunities for foreign companies have come to the fore in Turkey with the announcements of the creation of new Islamic banks by the government.
The nation’s Deputy Prime Minister Ali Babacan indicated that he gave directives to the two biggest state-owned banks – Ziraat Bank and the Halk Bankasi – to establish two new participation banks.
Muhammed Islami Onal, the economic counsellor of Turkey in Malaysia, said foreign investors can apply for new licences to start the new participation banks, adding that the investment should be no less than 30 million New Turkish liras or US$17 million (RM51.7 million).
“With their background, knowledge, experience and pioneer roles in Islamic banking and finance, the Malaysian investors are more than welcomed to get involved in the growing Islamic banking- finance market in Turkey,” Muhammed Islami told The Malaysian Reserve.
The third top ranking bank in Turkey, Garanti Bankasi, announced that it too had plans for a new participation bank, thus offering greater opportunities for foreign investors.
Muhammed Islami said Turkey should be a market to invest for Malaysians with the very close relationship between the two nations and between Bank Negara Malaysia and the Central Bank of Turkey, and the Securities Commission and the Capital Markets Board.
Between December 2011 and June 2012, the participation bank’s growth rates of assets, loans and deposits were about 8.7%, 13% and 8.4% respectively while the same rates were 4.6%, 8% and 3.3% for the whole banking sector, while the average growth rate of the assets rose to a total of 26.1% for the past four years.
Turkey has 49 banks, four of which are participation banks. Participation banks are interest free banking banks, being Syariah-compliant and are not called Islamic banks in Turkey.
So far nine conventional and two participation banks are listed in Turkey’s Stock Exchange with market capitalisation of US$96.7 billion and US$2.09 billion respectively.
Ziraat Bank has aspirations abroad with the largest international service network of any Turkish bank comprising many service points in numerous countries.
Halk Bankasi is listed as an active player in structured finance deals, participating in syndication and securisation deals in favour of other banks.

(F.M.T News / 15 April 2013)

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Insights into Islamic Investment Management from a CFA Charterholder in Pakistan

To gather insights into Islamic investment management from experienced CFA charterholders from different countries, we will be conducting a series of interviews. In the first interview of this series, we discuss Islamic investment management with Mohammad Shoaib, CFA.
Shoaib is the chief executive officer of Al Meezan Investment Management Limited based in Karachi, Pakistan. He earned his CFA Charter in 1999. In addition, he holds an MBA from the Institute of Business Administration, Karachi, which is now a program partner of CFA Institute. He has 23 years of work experience, including 10 years in Islamic investment management.
CFA Institute: Tell us about your market and how it has evolved over the years.
Shoaib: The first conventional fund was launched in Pakistan in 1962, and the first Islamic fund was launched in 2002. The Islamic fund management industry is about 12% of the overall fund management industry. All types that are available in the conventional arena, are also available on the Islamic side also. For example, we have Islamic equity, money market, sovereign, corporate fixed income, index tracker, capital protected, and defined contribution pension funds. The market is concentrated; of the total size of USD520 million managed by Islamic funds, about USD400 is being managed by Al Meezan Investment Management Limited
How has the market for Islamic investment management grown relative to that of conventional investment management?
While the market for Islamic funds is relatively new, the annual growth rate of Islamic funds is about 24% as compared to 12–14% growth for conventional funds.
The appeal to the Muslim population and the competitive returns offered by Islamic funds are two predominant factors leading to high growth for Islamic funds. Conventional funds on the other hand have focused more on institutional money.
How do fees charged on Islamic funds compare with conventional counterparts?
The fees and charges applicable to mutual funds are regulated and capped by the SEC in Pakistan. Due to the very competitive market, the fees charged by Islamic funds are same as those by conventional funds. The extra cost related to the Shariah board are borne by an asset management company instead of being charged to the fund.
Describe the screening process employed in your market? What are the effects on the investable universe and portfolio turnover?
It is basically a negative screening process based on nature of business and financial ratios whereby those companies that do not meet screening criteria are excluded from the permissible investment universe.
Most Islamic funds follow the screening criteria developed by a prominent seminary located in Karachi. While the investment universe is somewhat reduced, it does not much affect diversification of portfolio across sectors as most companies with large market cap are Shariah compliant as per the screening criteria.
How have Islamic investments performed in your market?
The only Islamic index available is KSE Meezan Islamic Index (KMI-30), which was launched about four years ago. The leading conventional index is KSE 100 Index. It is interesting to note that KMI-30 has consistently outperformed KSE 100 every year since launch of KMI-30.
How does the CFA Charter help investment professionals in Islamic investment management? What are the preferred sources of continuing professional development (CPD)?
Yes, employers value the CFA charter. However the curriculum does not cover Islamic finance, so employers need to train or arrange for the training of Islamic finance in addition to CFA program. There are not many CPD opportunities available in Islamic investment management.
What are the major challenges and opportunities for Islamic investment management in your market? How do you see its future prospects?
Two major challenges are: (a) creating awareness and understanding of Islamic finance and its principles; and (b) limited number of investible products (assets) on the debt and money market side. Because about 95% of the total population of about 180 million in Pakistan is Muslim, there is lot of untapped potential for growth in Islamic financial markets, which is expected to grow at twice the pace of the growth in conventional financial markets.
If you are interested in Islamic investment management, please consider joining the CFA Institute Islamic Investment Management subgroup on LinkedIn. If you are an experienced professional investor working in Islamic Investment Management and you would like to share your insights with us, please contact the manager of the Islamic Investment Management group on LinkedIn.

(Interprising Invester / 26 March 2013)

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