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Monday, 16 September 2013

Sustainable investing: Opportunity awaits Islamic finance industry

Islamic finance and the forms of finance generally referred to as sustainable and responsible investing (SRI) are yet to actively collaborate with each other. One would think that to strengthen their position in a market dominated by conventional finance, Islamic finance and SRI would be sharing their successes and failures, coming together for joint ventures, and supporting each other on issues where they have similar views. But such collaboration has not occurred. Building bridges between the two remains an opportunity that is waiting to be seized upon by the industry leaders from the two sides.
Islamic finance and SRI share some obvious similarities in their objectives (do good; avoid harm), methods (e.g. exclusionary screening) and claims (such as emphasis on ethics). Both seem to trigger similar expectations among their proponents of being ethically different from conventional finance. They also face similar criticism of not being able to live to up to these expectations as shown by the ‘form versus substance’ debate in Islamic finance and ‘green washing’ debate in SRI. Although SRI is older and larger than Islamic finance, which is estimated between $1 to $2 trillion in terms of global assets, both are relatively small and growing segments.

(Gulf.News.Com / 16 Sept 2013)

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Islamic pensions make inroads among asset managers

SYDNEY/KUALA LUMPUR (Reuters) - Islamic pensions are making inroads in several majority-Muslim countries, and their success may help the growth of asset management industries across much of Asia and the Middle East.

Most pension plans around the world are state-funded. But many countries are trying to develop private pension sectors as a way to deepen their financial markets, and the experience of Pakistan, Turkey and Malaysia suggests Islamic finance can become a significant part of this effort.

If state-owned pensions in major Islamic markets shifted a portion of their money into sharia-compliant schemes, that could add between $160 billion and $190 billion to the sector, according to consultants Ernst & Young.

"So you've got a pent-up demand - your challenge is how to create a supply-side mechanism to cater to that latent demand," said Ashar Nazim, Islamic financial services leader at E&Y.

Pakistan launched such a mechanism in 2005, creating a voluntary pension system (VPS) which now holds 3.4 billion rupees ($32.4 million) of Islamic assets, or 61 percent of all VPS assets.

While modest in absolute terms, Islamic pension assets account for a much larger proportion of the VPS sector than Islamic bank deposits' 10 percent share of all Pakistani bank deposits.

All seven VPS managers offer Islamic pensions and the largest, run by a unit of Meezan Bank , is triple the size of its conventional peer. Islamic assets under management have doubled in the last year.

Growth was initially stagnant until 2010, when changes in the tax regime, favorable market conditions and a wider product range boosted the sector, said Muhammad Afzal, a director at Pakistan's Securities and Exchange Commission.

"The popularity of Islamic pension funds can be attributed to demand from the general public for retirement products designed in accordance with the Islamic precepts," said Afzal.

"This money can be retained for a very long-term basis given 70 percent of the country's population is under 35 years of age," said Wasim Akram, fund manager at HBL Asset Management, a VPS provider and a unit of Habib Bank .

"With time, I believe that the performance of the already-launched funds will attract more and more members as the opportunities for growth are enormous."


Islamic fund managers screen their portfolios according to religious guidelines such as bans on tobacco, alcohol and gambling, in much the same way as socially responsible funds in Western markets.

They have an additional constraint, Islam's ban on interest payments, which confines them to sukuk in the fixed-income space - a relatively small market globally where demand has exceeded supply in many countries.

Islamic fund managers see potential, however, in countries such as Turkey, where a 2001 private pension law has been energized by government reforms introduced this year. The number of contributors to private pensions has reached 3.8 million, up from 3.1 million in December, after the Turkish state began making a 25 percent contribution to private pension premium payments and fund management charges were cut.

The vast majority of private pension assets in Turkey are conventional financial instruments. But Cuneyt Cicek, chief financial officer at Asya Emeklilik, the Islamic pension unit of Bank Asya , predicted customer preferences could help Islamic pensions reach the target of 15 percent market share by 2023 that the government has set for Islamic banks overall.

Islamic pension products reached $175 million in assets as of September, according to Turkey's Capital Markets Board. That is equivalent to about 1.5 percent of the industry.

"The asset volume and number of participants in the system are likely to grow significantly with the incentives," said Cicek.

Asya Emeklilik is one of 17 conventional and Islamic pension firms in the Turkish system; it is the only full-fledged Islamic firm, although a few others offer sharia-compliant products.

(Chicago Tribune Business / 15 Sept 2013)

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