Shariah Governed Asset Management

The Shariah asset management industry is small but growing. Shariah investment products are found most easily on the equity side of the business. The Shariah committee screens or filters listed securities according to the restrictions and requirements of Shariah law. Portfolio managers then use the approved list of securities to construct an investment portfolio. For the bond and derivative asset classes, an entire industry has yet to be developed, and capital market participants are just gearing up to the market’s demand for products.

Shariah investing requires trained religious scholars who combine an understanding of Islamic law with a firm grasp on the financial markets. It is a unique combination, particularly given the relatively young industry of Shariah investments and a still new capital market. Global estimates claim that there are about 250 qualified religious scholars and only about two dozen or so that are internationally known, and who are therefore coveted to help design and approve investment products. Portfolio managers must have trades approved by the Shariah committee.

Islamic institutions and governments are now advocating the training of additional scholars to create a broader base of available and qualified individuals and to create a future pipeline of scholars. Several have set up funds to develop more scholars.


Standards and Promotion

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has about 140 members from 30 countries. AAOIFI introduced a Certified Islamic Public Accountant (CIPA) programme, and is developing a certification and fellowship programme for Internal Shariah Supervisors. The number of standards set by AAOIFI currently stands at 68, including 30 Shariah standards. However, there is still more work to be done, and since Shariah is an interpretative law that has variance among countries and people, this will take some time.

The Islamic capital markets are an innovative market whereby financial institutions are defining the product framework according to Shariah-compliant routines. However, that said, the Islamic industry still uses common terms with the conventional market, for example the instrument representative of a swap simply becomes an Islamic swap. Generating awareness and understanding in the global markets will be key to the success of a secondary market in Islamic finance. Several organisations in the Middle East and Southeast Asia have been formed to promote Islamic investments worldwide.

Islamic Finance Centres

As a result of evolution in the Islamic financial markets, the swell of oil money in the Gulf, and a somewhat more guarded interest in US financial and property markets, the region’s financial services industry is coming of age. Further, governments looking to diversify their countries’ economic base from the oil industry are supporting more amenable business regulation, improvements in market infrastructure, and increased consumer opportunities. Financial services is an ideal industry, given the oil-rich cash flow of the Gulf region.

To date, there are three high profile Islamic financial hubs, numbering Malaysia in Southeast Asia; Bahrain in the Middle East and the UAE. In Europe, London is aggressively advancing its cause to become a global centre for Islamic finance and something of a gateway to the western world’s Islamic population.

Asset Management Industry in the Middle East

There is a wide variety of asset managers operating and investing in the Middle East. They run the gamut of large international banks and independent money managers to local entrepreneurial firms that are gaining assets and attention.

There is believed to be more than US$15 billion in assets in about 125 Islamic funds worldwide. The asset managers with the highest number of funds include Wellington Management Co, Pictet & Cie, Worms & CIE/SEDCO, Al Rajhi Banking & Investment and Azzad Asset Management. Some estimates place the number of funds overall in equities, structured products and real estate at more than 500, including both open and closed funds.

Prominent local financial institutions in the Middle East and Southeast Asia include Dubai Islamic Bank, Global Finance House (Bahrain), National Commercial Bank (Saudi Arabia), Bank Islam Malaysia and Bahrain Islamic Bank, among many others. Asset management firms active in Shariah fields include international money managers such as Société Générale Asset Management Alternative Investment and numerous entrepreneurial asset managers in the local markets. Although the Islamic asset management market has existed for some time, progress has only really occurred in this decade, specifically with advancements in the capital markets, coupled with Middle Eastern and Asian governments updating regulation and formalising greater acceptance of a foreign presence in their countries. These changes have created a market considered ripe with opportunity, attracting multinational foreign firms.

A few foreign, conventional, multinational firms that focus on the capital market side of the business have extended their participation into Shariah asset management through their firms’ money management divisions active in the capital markets or asset management. Two notable firms with Shariah-compliant asset management products are HSBC, which works through its Amanah Capital division, and UBS, which operates under Noriba Bank. Barclays wealth division launched a presence in Dubai in 2007.

Benchmarking: Islamic Indices

The growing availability and diversity of benchmarking is a sure sign of the growth and staying power of a niche business. Standard, market accepted benchmarks are a metric that provides the cornerstone of investment management best practices. The diversity and continual growth of available indices are a testament to the development of Shariah-governed investments as its own market. The Islamic investment community now has Shariah-compliant indices that either alone or in combination with other indices can benchmark a wide variety of investment approaches.

Dow Jones started its Islamic indices in 1999 and this has now expanded to more than 60 types of index. Other index providers include Global Investment House and Citigroup. FTSE has five indices: Islamic All World, Islamic Americas, Islamic Europe, Islamic Asia-Pacific and Islamic South Africa. Yassar, based in Dubai, teamed up with FTSE to launch the FTSE Asia 100 Shariah Index. Yassar provides independent screening of the securities by its Shariah Committee.

The FTSE SGX Asia Shariah 100 Index is the first index of a planned series. The index includes Shariah-compliant companies from Asia-Pacific markets: Japan, Singapore, Taiwan, Korea and Hong Kong. The index is calculated in real time and published in US dollars. The index is 50% weighted in Japan and contains well-known brands such as Toyota Motor, Samsung Electronics, Matsushita Matsushitia Electric and Nippon Steel. Korea makes up 19% of the index, Taiwan 15%, Hong Kong 14% and Singapore 2%.

Challenges in Product Design and Distribution

As global capital market participants forge ahead with new security issuance and creative product design, a secondary market for Islamic securities grows. In turn, the asset management community will increasingly develop and distribute portfolio management products. However, currently, financial institutions still face several hurdles in reaching full market capacity.

Islamic cleric shortage
In order to comply with Shariah law requiring design and oversight by properly trained scholars, a greater number of individuals are needed with dual training in Shariah and financial markets.

Which comes first – secular law or Shariah law?
With exceptions such as Saudi Arabia, Yemen and Iran, where secular law is Shariah law, most governments uphold national law, not Shariah law, as the final law to be applied in litigation. This can create potential litigation or lack of recourse issues.

Lack of regulation, oversight and consumer protection in developing countries
Some market participants feel that the regulatory environments in developing countries are severely deficient in oversight and consumer protection, and that Shariah products may not always serve the general population well. An example could be the potential for an exorbitant mark-up in profit-sharing lending schemes. Generally this would apply to banking products rather than long-term investment portfolios. However, the issue is conceivable, and underlying Islamic investments might need to be screened for such activities.

No standard Shariah law
Shariah law interpretations vary by country, particularly in the Middle East as against Southeast Asia. Although the efforts of organisations such as the Islamic Financial Services Board (IFSB), International Islamic Financial Market (IIFM) and International Development Bank (IDB) are making strides in opening up communications, differences may continue to exist. Therefore, products may not be universally accepted by all Muslims.

No standard documentation
The operational aspects of product origination, trading and settlement can be quite complex with fixed income and derivatives instruments. This is true of non-Islamic products as well as Islamic products. However, as the industry as a whole grapples with these issues, Islamic securities are included in the process. The International Swaps and Derivatives Association (ISDA) and Bahrain-based IIFM are active on this front.

Lack of investment education
While the public in western countries is generally bombarded with investment education, which some tap and some ignore, such resources are not always available in other parts of the world.

Lack of savings
In addition to a general lack of savings, with negative savings rates and a state welfare system in the Gulf Arab region, the broad adoption of such a scheme may be difficult. For many, there is cultural dependence upon extended families for financial resources. According to the World Bank, savings rates are only relatively better in South Asia.

Foreign firms: present, needed but welcome?
While Islamic countries are dependent upon the global powerhouses to help build a thriving secondary market for securities, their presence is not necessarily welcomed. Some Shariah scholars will not recognise an “Islamic window,” where a conventional financial institution sets up a product, division or private company to launch an Islamic product. The feeling is that the firm itself does not comply with Shariah, and therefore by association an Islamic window will not be in compliance.


Islamic finance centres are slowly opening up to global financial institutions, which will further efforts in support of strong secondary markets in Islamic debt and equity. Similarly, large, well-resourced and creative institutions are and will continue rapidly to develop the capital markets across asset classes. In turn, this will arm money managers with a deeper well to draw from in creating managed portfolios. The securities markets in the Gulf are not as large as in western markets, which means that there are far fewer security selections for asset managers. Southeast Asia is also light – Malaysia with 1,000 listed companies is considered a large selection. Countries in the Middle East and Southeast Asia must attract listings and new securities products to promote growth in the financial services industry.

On the investor front, market studies have repeatedly shown that if given the option to invest in Shariah products with competitive performance, Muslims would prefer to do so. As the Shariah sector moves forward, advancing investor financial education and improving product distribution, the mass retail sector will respond. Today, the institutional market and the ultra high net worths in numerous family offices already deploy assets according to the Shariah, many in the real estate and private placement market.

Celent believes that a breakout opportunity for the Islamic asset management business is possible, particularly after 2007, which is a “stage-setting” year for many financial institutions in both the capital markets and asset management businesses. While general market consensus suggests growth rates in the 15-20% range, Celent feels the global market could average 38% over the 2007-2010 period, with greater momentum in 2009.

Equity fund assets are expected to jump from US$15.5 billion to US$53.8 billion by 2010, excluding the vast amount that will make its way to private placements in alternative investments by institutions and family offices. More financial firms implementing investment programmes, a growing awareness of investment options and cash-rich investors will be the drivers of this growth.

The Shariah-compliant industry is formalising its infrastructure, amassing assets quickly, and will become a significant and profitable component of the financial services industry, globally.


This article is an extract taken from a report “Socially Responsible Investments-Shariah Governed Investing” (February 2007) and was first published in Islamic Finance news (Volume 4, Issue 15).

The author is a senior analyst in Celent’s securities and investments group, New York. Her research focuses on institutional asset management, hedge funds and the intermediary market, evaluating systems in the front, middle and back office, as well as general industry trends.