Research

Overview of 2009 Key Trends in Islamic Funds

Introduction

The growth of Shariah-compliant funds over the last decade is one of the many manifestations of the dynamic development in the Islamic finance sector. The rapid expansion in the number of managers offering Shariah-compliant investment vehicles across the world demonstrates the increasing diversity of the industry in terms of asset classes and geographies. Currently, Islamic funds across the world are estimated to manage assets of about US$70 billion while the number of funds is about 680.

To discuss the various unique aspects of this sector, it is important to develop an understanding of the basic characteristics of Islamic banking and wealth management. The issues which drive the capital allocations to Islamic finance are further applied to developing, managing and investing through Islamic funds. As such, it is prudent to first elaborate on the key characteristics of Islamic funds before analysing the key trends that are shaping the industry.

Overview of the Islamic Fund Industry

The first Islamic fund was launched during the 1970s in the Middle East to manage the assets of a new class of Arab investors in a culturally-aware and socially responsible manner. The primary goal of the earlier funds was to engage in “ethical investing” into products and companies that were acceptable to the Islamic faith. While the main criterion for investment has remained more or less the same throughout the years, Islamic funds have expanded at a rapid pace, especially in the last decade, to include the various new Islamic finance products that have been developed over the years. Furthermore, the industry has also widened its clientele base to include a significant number of non-Muslim investors.

Figure 2: Growth in the Number of Islamic Funds

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Islamic funds have evolved into wealth management vehicles that cater to investors who wanted exposure to capital markets inside a Shariah framework. The main characteristic which distinguishes Islamic funds from other conventional funds (as well as other socially responsible investment funds) is...

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