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Tuesday, November 25, 2008

Are Shariah funds, Islamic funds better positioned?

Many global banks are struggling to stay afloat even as Central banks are trying to resuscitate them with the much needed oxygen. In this scenario, the Islamic banks that manage $ 1 trillion worldwide as well as the shariah funds are seemingly in much better shape.There has been a huge rise in investments in shariah mutual funds and other investments. But the fate of Islamic banks is very much tied to the boom in the Middle-East for housing and real estate.

Confidence in the Gulf property market has been hit by the global financial turmoil, and there are signs that a five-year property boom is set to slow. Dubai house prices rose 16 percent during the second quarter -- but that compared with 42 percent in the first, according to real estate consultancy Colliers International.

The other day the United Arab Emirates government more than doubled its initial rescue package for banks to almost $33 billion on Tuesday, and bankers say its promise to guarantee banking. UAE Government has sought to allay the fears expressed in international circles about the financial soundness of Islamic banks and said Islamic banks are sheltered from the financial storm. Bahraini Finance Minister Sheikh Ahmed al-Khalifa said that most of the country's banks had invested in the booming Gulf Arab region rather than complex foreign assets, and Islamic banks had no exposure at all to the global crisis.

“The risk rating under Islamic banking and finance evaluates real term business potential and growth trends, instead of evaluating manipulated asset values which has caused recent damages to the credit market. Thus the regulators and credit rating agencies should now adopt principles of Islamic banking to safeguard the financial sector from any more turmoil,” Syed Zahid Ahmad Assistant Secretary General,AICMEU Trust.

However, independent analysts feel sliding commodity and property prices in predominantly Muslim countries in the Middle East and Southeast Asia are likely to have a particularly strong impact on the sharia market due to the industry's heavy reliance on those assets to support deals.

Shariah Funds
Shariah funds comply with Islamic laws. Quran prohibits paying or receiving interest; investments in financial services firms are generally eliminated from Shariah-based funds too. Firms with large amounts of debt on their balancesheets are also largely avoided — which has kept these funds mostly safe from the credit crunch and tumultuous markets that have rocked many mainstream mutual funds. Shariah, the religious law of the followers of Islam, has strictures regarding finance and commercial activities permitted for believers. Arab investors only invest in a portfolio of ‘clean’ stocks. They do not invest in stocks of companies dealing in alcohol, conventional financial services (banking and insurance), entertainment (cinemas and hotels), tobacco, pork meat, defence and weapons. According to experts in Islamic investments, Muslims are only allowed to invest in companies where interest bearing income is less than 10% in any condition.

According to media reports, though economic turmoil has also hit the returns on Shariah funds, their five-year total returns have also managed to fare better than the S&P 500 and their peers.

However, for most of these newcomers in Shariah fund it is not religion which driving them to this sector. In fact, they are desperate to survive turmoil in the market. Amana Trust Income Fund (AMANX) and the Amana Trust Growth Fund are the largest funds that invest according to Shariah law in the United States. Other Islamic funds include the Azzad Ethical Income (AEIFX) and Azzad Ethical Midcap funds (ADJEX). However, Shariah funds aren’t perfect, and when the financial sector inevitably picks up, participating investors may be left out in the cold. To combat this, advisers have looked at various ways to increase clients’ involvement in financials without leaving the Shariah mutual fund, such as finding an exchange traded fund with participation in that sector. Analysts say Shariah-based investing will become more popular. However, some clients may have ethnic or political sensitivities that might keep them from being interested in a Shariah fund.

Dr Rowan Williams, Archbishop of Canterbury recently said Christians and Muslims should work together to decide what might constitute a fairer system of borrowing, and suggested an alternative to the current banking system.

The pro-Islamic banking community feels strongly that it has been unhurt by sub-prime mortgage crisis. “Interestingly, Islamic banks are unaffected by the sub prime mortgage crisis; rather many non-Muslims are turning up to Islamic banking as the customers spooked by turmoil in the interest based banking system are feeling Islamic banks as a safer haven because they are immune against such crisis due to inherent business ethics within Islamic banking, according to Syed says Zahid Ahmad Assistant Secretary General,AICMEU Trust.

There are two reasons why islamic banks are insulated from the crisis: The first is security from liquidity problem due to inter banks lending in the money markets, merger and resales of debted companies. The second reason is rating of complete investment risks instead of mere credit risks. Principally Islamic banks acts as custodians, advocates or managers for depositors funds and thus they cannot transfer public deposits to other banks without permission of their depositors. Thus Inter bank liquidity transfer on debt finance basis is not permitted in Islam, which takes care of liquidity related problems in the market, Syed Zahid Ahmad said.

Sukuk market
The Islamic bond, or sukuk market has already taken a beating due to global financial crisis, according to reports. The Standard and Poor’s reported in September that global sukuk issuance stood at $14 bn for the first eight months of 2008 compared to $23 bn in the corresponding period in 2007. Analysts said that the present downturn for Sukuk market was temporary and that investors are just waiting for the right time to place their deals. In recent weeks both the equity and commodity markets have taken a beating. This has resulted in investors liquidating their stocks and commodities plunging both developed and emerging economies into recessionary phase.

Prices for most commodities such as crude oil, metals and grains have fallen to multi-month lows as investors pulled billions of dollars from the sector. Bankers estimate that about $50 billion-$60 billion of value has been wiped off commodity markets in the last quarter. The sharia bond market has been hit as companies from Japan to Kuwait and Malaysia cite tough market conditions and high borrowing costs as reasons for either aborting or delaying issue plans. The launch of at least one shariah hedge fund has been shelved and even oil-rich Gulf economies, which are global hubs for Islamic finance, have not been spared.

Shariah Funds in India
With regards to compliance, the current share of Indian Shariah-compliant market capitalisation (at 61%) is highest even when compared with the number of Islamic countries such as Malaysia (at 57%), Pakistan (51%) and Bahrain (6%). Despite the fact that 250 companies listed in BSE are Shariah-compliant, India’s efforts to launch shariah compliant mutual funds have hit a road block following lack of investor interest and delay on the part of Securities and Exchange Board of India to give approval. Among the majors planning shariah mutual funds are Anil Ambani led Reliance Mutual Fund, Taurus Asset Management, UTI Mutual Fund and Edelweiss Mutual Fund.

However, it will take some efforts of the part of these funds to get necessary approvals from the market regulator. According to sources in the fund industry, the regulator is not very happy to approve these funds as it feels, these schemes — intentionally or unintentionally — solicit only a class of investors to invest in them. Moreover, SEBI is still uneasy about the conduct of such funds, the screening process (of investible stocks) and the method to weed out ‘impurities’ as charity, sources said.
Meanwhile, the Anil Ambani-owned Reliance Money has started a Shariah-compliant portfolio management service (PMS) for high net worth individuals (HNIs).

(Commodity Online/by Ziad PS)
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