Financial products based on renewable energy and sustainable agriculture are emerging in Islamic finance as asset managers seek a crossover opportunity between ethical and sharia-compliant investing.
Islamic finance follows religious principles which forbid involvement in activities such as gambling, tobacco and alcohol, but the industry has only recently begun to stress themes of wider social responsibility, such as protecting the environment.
Last week, Malaysia announced guidelines for issuance of socially responsible sukuk (Islamic bonds), aimed at helping firms raise money for projects ranging from renewable energy to affordable housing.
In April the Dubai Supreme Council of Energy, a government planning body, and the World Bank signed an agreement to develop funding for the emirate's green investment programme, including "green" Islamic bonds. Dubai aims to derive 5 percent of its energy from sustainable sources and retrofit buildings to reduce energy consumption.
Meanwhile, firms in Britain, Canada and Hong Kong are offering sharia-compliant investments in sustainable farming ventures, which may attract money from Islamic investors in the Gulf and southeast Asia as well as from local investors.
The reasoning is that green investment products can tap a wider range of demand if they are made sharia-compliant to appeal to Muslims. At the same time, non-Muslims who might normally shy away from Islamic investments - because of concerns about pricing, complexity and lack of familiarity - may embrace them if they are green.
It is not yet clear how much success these efforts will have. In past years, Islamic mutual funds made forays into the market for socially responsible investments, but those efforts have struggled, partly because of limited distribution channels.
Fund houses from the Gulf and southeast Asia sought to distribute some of their Islamic funds to European investors using UCITS, a "common passport" for investment products, but they have had only mixed success, and a high-volume business has not developed.
The new crossover products are not mutual funds but instruments tailored specifically to invest in a certain type of asset in a specific country or region. They combine Islamic screens - lists of criteria for sharia compliance - with other practices required by sustainable investment firms.
In June, Ontario-based AGInvest Properties developed a sharia-compliant investment product providing ownership of Canadian farmland, supervised by Bahrain-based advisory firm Shariyah Review Bureau (SRB).
The venture would buy prime agricultural land which the firm would manage to ensure sustainability through soil preservation, crop rotation and selection of farm operators, said Robbie Duncan, Dubai-based vice president of AGInvest.
The company, which currently manages 70 million Canadian dollars ($64 million) worth of agricultural land, has begun marketing its sharia-compliant product to investors in the Gulf.
A Saudi firm has expressed interest in setting up a similar fund with AGInvest as adviser, said Duncan, without naming the Saudi firm.
"We have found that three main trends have promoted this agri-business: the need for a stable ethical investment, an investment which promotes and aids the betterment of a community, and the need for food security."
It is the third agriculture-based investment screened by SRB since December, said Yasser Dahlawi, SRB's chief executive.
"There are only finite amounts of agricultural resources available to the Islamic investor community," Dahlawi said.
British-based SCS Farmland is offering a sharia-compliant investment programme for Argentinian farmland, while Hong-Kong based Treedom Group is offering Islamic investors an agarwood venture.
Success for all of these ventures is by no means guaranteed, and it is too early to say whether this form of crossover investing will have more success than the Islamic mutual funds previously marketed in Europe.
One environmentally friendly, sharia-compliant investment project in Britain failed to go through earlier this year.
British-based Islamic financial advisory firm Simply Sharia planned to raise 3 million pounds ($5 million) by the end of June to build a solar energy plant, using tax relief from the government's Enterprise Investment Scheme to create a wakala funding structure.
But the project was unable to reach its funding target by the deadline, partly because as a sharia-compliant structure it could not use leverage like conventional financial products, which limited the returns that could be offered. The project was too small to be financed with sukuk.
"There was a performance differential between conventional solar EIS products (target return 1.15 pounds per pound invested) and the sharia-compliant product (target return of 1.10 pounds per pound invested)," said Anas Hassan, managing director of business finance at Simply Sharia.
"This differential was mainly due to the high level of debt in the structure of the conventional product, whereas the sharia-compliant version was a pure equity play.
(Reuters / 02 September 2014)---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com