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Islamic finance gets competitive

New products are attracting non-Muslim investors to the world of Islamic finance

The Islamic financial services sector has grown considerably since the 1990s when there were only a few products available to investors. Today there are plenty of interesting products to choose from and more are expected following the government's recent announcement of further steps to cement Britain's position as a western hub for Islamic finance.

At present sharia-compliant products and Islamic fixed income offerings are becoming more popular with non-Muslims who are wanting to invest more ethically, put off by the eurozone debt and global financial crises. Although some of Islamic financial products are for the more sophisticated investor, they are definitely worth a try.

 

Islamic finance facts

The Islamic Finance sector is now worth over $1.8 trillion (£1.13 trillion), and is continuing to grow by 20 per cent a year according to the Islamic Financial Services Industry Stability Report 2014.

Global consultants Ernst & Young are forecasting that global demand for Sukuk will grow three-fold by 2017 to $900bn as investors continue to show interest in investing in real assets with relatively high yields and low risks.

 

Mohamed Damak is global head of Islamic finance at Standard & Poors (S&P). He says: "The main differentiating factor between Islamic and conventional banking stems from the principles of Islamic finance. These are: prohibition of interest, prohibition of speculation, prohibition of the financing of illicit sectors, and obligation to share profit and losses, obligations to have an asset backing the transactions."

According to Mr Damak, a number of non-Muslim investors have been attracted to Islamic finance due to its ethical and socially responsible nature.

In June the UK government was the first outside the Islamic world to issue a sovereign sukuk, raising £200m, and this was heavily oversubscribed with orders totalling around £2.3bn. Sukuk is the plural of the Arabic word Sak, literally translated as title deed. They are financial certificates structured to comply with Islam's prohibition of the charging or paying of interest (known as Riba) that grant an undivided interest or share in an underlying asset along with the profits, cash flows and risk commensurate with such ownership. Sukuk are often referred to as the Islamic equivalent of bonds.

    

Current and deposit accounts

Imran Pasha, head of sales and service at the Islamic Bank of Britain (IBB), says sharia-related financial products have become increasingly popular amongst non-Muslims in the UK, partly because they offer competitive rates. Nearly 83 per cent of customers who joined IBB between 1 January 2013 and 15 August 2014 and opened a Fixed Term Deposit (FTD) account, were non-Muslim.

IBB has launched a series of sharia-compliant products this year, including the UK's first sharia-compliant cash individual savings account (Isa) which offers a return of 1.81 per cent. It has also just launched the first Sharia Compliant Home Purchase Plan under the government's "Help to Buy Scheme". The plan allows homebuyers to purchase their homes with a deposit of 10 per cent.

Other banks, including UK high street bank, Lloyds Banking, offer Islamic accounts for customers who cannot receive credit or debit interest due to their religious beliefs. Laura Ellman, media relations manager at Lloyds Bank says: "All of our Islamic accounts comply with Islamic law and are available to anyone regardless of background or faith." With the Islamic current account there is no planned overdraft, no minimum balance required and no charges for everyday transactions.

The Bank of London and the Middle East (BLME), a sharia-compliant bank based in London offers a Premier Deposit Account (PDA) which allows potential customers to deposit £25,000 over various fixed terms. Its highest rate is 2.8 per cent gross AER over a five-year term.

  

Pensions

More interestingly in June of this year, IBB teamed up with Carey Pensions UK to launch a sharia-compliant auto-enrolment pension scheme for Muslim workers to tap into the growing population of UK Muslim adults which at present stands at 1,530,000 according to figures from the IBB.

Christine Hallett, the chief executive officer of Carey Pensions says this product differs from other pension-related products as it has been purpose-built, obtained Fatwa certification and been reviewed by the sharia council of IBB.

Carey Pensions UK is planning to work with IBB to produce a sharia-related self-invested pension plan (Sipp).

  

Funds

Last year saw the launch of 94 sharia-compliant funds, the highest number in three years, while there were 22 liquidated funds, according to Thomson Reuters/Lipper Global Islamic Asset Management Report 2014. Geographically, the sector remains concentrated within three dominant markets: Saudi Arabia, Malaysia and Luxembourg; these three domiciles alone hold over 71 per cent of total Islamic funds. Investors remain conservative, allocating $3.2bn of fund flows to money market funds, making it the largest asset class in 2014.

Fund managers such as SWIP (formerly owned by Lloyds Banking, now part of Aberdeen Asset Management) want to continue to invest in the global Islamic finance market despite the challenges associated with faith-based investing. Islamic fund managers have to screen their portfolios according to religious guidelines - for example, bans on tobacco, alcohol and gambling - in much the same way as socially responsible funds.

 

Europe domiciled Islamic equity funds

FundLaunch datePromoterDomicile1-year total return (%)3-year total return (%)5-year total return (%)
Mashreq Al-Islami Arab Tigers26/08/08MashreqbankIreland32.8 76.4 86.3
SC US Equities Passive Fund B31/05/12SEDCO CapitalLuxembourg24.4
SC US Equities Fundamental Indexing Fund B31/05/12SEDCO CapitalLuxembourg23.6
JPM Islamic Global Dynamic Equity USD A Acc5/02/07JPMorganLuxembourg22.5 40.9 72.0
HSBC Amanah Global Equity Index AD USD1/03/04HSBCLuxembourg22.0 50.9 71.2
Amundi Islamic Global Resources - C (C)19/01/10AmundiLuxembourg21.4 33.5
Oasis Crescent Global Property Equity A22/09/06OasisIreland20.9 40.5 85.7
Amundi Islamic Bric Quant - C (C)15/12/08AmundiLuxembourg19.6 -5.7 11.9
ALTAIRA Funds - Islamic Global High Dividend USD R3/10/11AltairaLuxembourg19.0
Oasis Crescent Global Equity A29/11/00OasisIreland18.6 48.0 63.9
HSBC Amanah Global Equity AD USD18/08/08HSBCLuxembourg18.1 36.2
BNP Paribas Islamic Fund - Equity Optimiser C5/04/06BNP ParibasLuxembourg17.3 37.7 60.2
SC Global Higher Dividend Yield Fund B31/05/12SEDCO CapitalLuxembourg17.0
BBGI Islamic Share Energy (USD)12/06/08BBGI (Promoter)Switzerland16.4 1.4 37.7
Pyrford Shariah Global Equity A USD Acc30/11/11Pyrford InternationalIreland15.9
F&C Sharia Sustainable Opportunities X USD22/03/2011F&CLuxembourg15.9 46.5
Templeton Shariah Global Equity A (acc) USD10/09/12Franklin Templeton InvsLuxembourg15.5
SC Global Emerging Markets Relative Value Eq Fd B27/07/12SEDCO CapitalLuxembourg15.3
SWIP Islamic Global Equity B USD21/11/05Scottish WidowsLuxembourg15.0 44.4 79.8
SC Global REAL ESTATE EQUITIES FUND B27/07/12SEDCO CapitalLuxembourg14.5
Islamic ASEAN Equity USD A Acc13/04/12CIMB IslamicIreland14.1
Islamic Asia Pacific Ex-Japan USD A Acc13/04/12CIMB IslamicIreland13.3
Islamic Global Emerging Markets USD A Acc13/04/2012CIMB IslamicIreland10.7
Comgest Growth Europe S Euro8/12/10ComgestIreland10.2 51.9
Templeton Shariah Asian Growth A (acc) USD27/08/12Franklin Templeton InvsLuxembourg10.0

Source: Lipper, a Thomson Reuters company, as at 31 August 2014

Performance data is on a % total return basis, in years and in USD

 

Performance of SWIP Islamic Global Equity Fund

Fund performance - calendar years (%)

Fund/Index1 month3 monthsYear to date1 year3 years (pa)5 Years (pa)
SWIP Islamic Global Equity Fund-0.331.64.5110.7615.9412.19
Dow Jones Islamic Market index-0.53.787.7713.5314.5910.58

Source: Aberdeen Asset Management

  

Franklin Templeton also launched a trio of sharia-compliant funds last March, bringing its sharia-compliant assets under management (AUM) to $1bn as at 31 December 2013. The funds include the first ever UCITS-compliant global Sukuk fund, which focuses on sharia-compliant bonds issued by governments. This type of product has also been popular internationally and outside the traditional Islamic financial heartlands of Malaysia, Bahrain and Saudi Arabia. For international issuers, Sukuk offerings are seen as a way of diversifying their fund base and boosting their profile in the Muslim world, while non-Muslim governments are keen to foster potentially lucrative domestic Islamic finance industries.

Below is a table of the top five Europe domiciled Islamic Equity Funds ranked by performance over one year. Not all of these are available to UK investors, though. Those available include Mashreq, JPM and HSBC. The best performing fund is the Mashreq Al-Islami Arab Tigers, which seeks long-term capital appreciation through equities of companies in the S&P Pan Arab Composite Shariah Index. This index includes equities from issuers located in Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia and the United Arab Emirates.

  

Top performing Islamic funds

FundDomicile% total return
Mashreq Al-Islami Arab TigersIreland 32.8
SC US Equities Passive Fund BLuxembourg 24.4
SC US Equities Fundamental Indexing Fund BLuxembourg 23.6
JPM Islamic Global Dynamic Equity USD A AccLuxembourg – registered for sale in UK22.5
HSBC Amanah Global Equity Index AD USDLuxembourg – registered for sale in UK22.0

Source: Lipper, a Thomson Reuters Company, as at 31 August 2014

  

A fund that allows investors to invest in prime central London residential property market and is compliant with sharia principles is the London Central Apartment II fund. Chief executive officer Naomi Heaton says: "Our fund is the only sharia-compliant residential fund available in the UK. We decided to structure our offering in this way to allow it to be globally accessible to conventional, sharia conscious and ethical investors. The costs, objectives and strategies are the same as conventional finance products, but sharia makes us inclusive and keeps us ahead of the game in providing innovative investment offerings."

The property fund's objective is to build a portfolio of high performing one and two bedroom properties with a target return of 14 per cent a year. Although the legal minimum subscription for LCAII is set at £85,000 for direct investors, smaller subscriptions can be made through a newly launched consolidation scheme with Kleinwort Benson Corporate Services Limited. Investors can also access the fund through various conventional tax efficient "wrappers" such as Sipps, QROPS and offshore portfolio bonds, where there are no minimum investment restrictions, says Ms Heaton.

She explains: "The closed-ended structure does mean investors need a medium-term horizon (the fund will run for five years with a long stop date of seven years). By 2019, however, the projected return is £12,150 on a £15,000 investment."

  

CONTACTS

Islamic Bank of Britain: www.islamic-bank.com

Lloyds Banking: www.lloydsbankinggroup.com

Bank of London and the Middle East: www.blme.com

Beaufort Securities: www.beaufortsecurities.com

Aberdeen Asset Management: www.aberdeen-asset.com

London Central Portfolio: www.londoncentralportfolio.com

Mashreq Asset Management: www.mashreqassetmanagement.com

SWIP Islamic Global Equity Fund: www.swip.com