The Islamic finance industry is a niche market predominantly serving the needs of the world’s Muslim population. Products marketed under the umbrella of Islamic finance comply with a different investment philosophy as opposed to traditional investment philosophy which the rest of the world are familiar with. Under a Shariah-compliant framework, transactions which are considered to be unethical under Islamic law are prohibited and instead, fund managers invest in products which are compliant with Islamic guidelines. Islamic financial products are accessible to all investors, some of whom choose to allocate into Islamic funds for purposes of portfolio diversification or their preference in investing in products which deemed as socially responsible. In recent years, Islamic finance has been catching on with traditional finance institutions as international banks have expanded into providing Islamic finance services. As the use of derivatives, options and futures are deemed to be speculative; Shariah-compliant products tend to exclude their use, thus making the structure of Islamic finance products different from those found in conventional finance. Though appearing to be esoteric, Islamic finance has been garnering the attention of the broader global investment community as attempts at harmonising the difference between conventional and Islamic finance offers both familiarity and stability to participants of Islamic finance.
The Islamic fund industry ended 2017 with their best performance since 2013, as indicated by the 6.20% gain posted by the Eurekahedge Islamic Fund Index. Globally, equity markets rallied with major equity indices posting new record highs. Asian economies posted incredible growth in contrast to their weak performance over 2016, while European countries exhibited strong recovery from the Eurozone crisis, and Brexit talks were heading to positive direction with ‘soft Brexit’ deals that might dampen the economic impact to the region. Middle East economies also enjoyed the crude oil price rally throughout the second half of the year, which brought oil prices to levels last seen before the price crash in 2015. However, even though Islamic funds posted their best performance since 2013, they underperformed the Dow Jones Islamic World Index, which gained 25.19% over 2017, and the underlying market as represented by the MSCI AC World IMI Index (Local) which gained 17.51% over the same period.
Figure 1: Industry growth over the years
Figure 1 shows the industry growth of Islamic funds since 2007 with its assets under management (AUM) currently standing at US$95.16 billion overseen by a total number of 853 funds. The conservative approach of Islamic finance investing has worked in the favour of the Islamic funds in some cases. The 2008 financial crisis which had its epicentre in speculative and highly-leveraged investments is one such instance where Islamic funds have managed to avoid the repercussions of the collapse of asset prices. The Eurekahedge Islamic Fund Index fell only 28.62% in 2008, compared to the MSCI World Index1 which plummeted 41.12%. Growth picked up in the following year as equity markets began to recover, and the number of Islamic funds peaked around 2013 and 2014 before showing a trend of decline.
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1 MSCI AC World Index All Core (Local)