Research

2014 Overview: Key Trends in Islamic Funds

Introduction

Islamic finance plays a key role in the global economy, covering the financial needs of the currently underserved Muslim population. With Muslims forming a quarter of the world’s population, this is potentially a very large market, yet less than 1% of financial assets are Shariah-compliant. Indeed, there appears to be a clear supply imbalance and the Islamic fund industry has been growing steadily over the years to accommodate this demand. While it does not seem likely to have reached a peak, the industry is projected to grow significantly larger driven by a younger generation of Muslims who are more open towards investing in financial assets, and also by wider increases in productivity and prosperity.

Current consensus estimates puts the current size of the global Islamic finance industry somewhere in the region of US$2.0 trillion, which is further subdivided among Islamic banking, sukuk, takaful and Islamic funds, of which Islamic banking and sukuk issuances dominate the sector with 80% and 15% of total Islamic assets respectively. The sector has adjusted to the changed landscape post-financial crisis and has attracted attention from various quarters including western banks and investors. The sukuk market is a fast growing sector with total sukuk issuances of around US$300 billion, of which sovereign and government related entities form the largest proportion of issuances.

The primary goal of Islamic funds is to engage in 'ethical investing' into products and companies that are compliant with Islamic guidelines. As such, Islamic funds are wealth management vehicles that cater to investors who want exposure to capital markets inside a Shariah framework, which is the key distinguishing factor from other conventional funds. While there have been much progress and advances made in Shariah compliant funds over the decades since they first appeared, they are still estimated at less than 5% of Islamic finance assets, with a comparatively more limited and incomplete selection of products.

Figure 1 displays the growth of the Islamic fund industry beginning from 2007. Shariah compliant funds continued their long term trend of growth in 2014 despite running into difficulties in the second half of the year, with current assets under management (AUM) standing at US$90.03 billion managed by a total of 877 Shariah-compliant investment vehicles. The AUM of the industry grew another US$1.80 billion during 2014, driven largely by net investor flows totalling US$3.2 billion – the Eurekahedge Islamic Fund Index rose 2.89% for December 2014 year-to-date.

Figure 1: Industry growth since 2007
 

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