Will U.K.’s Entry Into Islamic Finance Help Boost Growth?

The new Islamic index is also intended to draw Islamic investors by indicating which companies fulfill the conditions required by sharia law.

There is more to the story than sukuks, and growth is spurring ventures into other areas of finance in Islamic countries. Islamic pension funds are on the rise, as are other sharia-compliant products such as takaful (insurance) and banking that does not rely on interest. In an earlier look at the growth of Islamic pension funds, Nazim said that a number of countries could eventually create sharia-compliant tranches from state-owned pension funds.

 “Islamic pension and retirement plans are an important component of the Islamic finance ecosystem. As Islamic finance goes mainstream in several rapid-growth, emerging markets—such as Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey—we are seeing increased demand-led pressure on state-owned and private pension funds to diversify to offer sharia-compliant programs,” Nazim said.

Other non-Islamic countries have already ventured into offering sharia-compliant investments including Germany, Britain, and Australia, and Dow Jones already has the Islamic Market Titans Index, which tracks the 100 biggest sharia-compliant businesses in Asia, Europe, and the U.S. But the move into sukuk, and the creation of a new index specifically for Islamic investments, could be a big move.

 “Currently, a dominant part of the pension assets in high growth and other emerging Islamic finance markets are parked under conventional schemes,” Nazim said. “A key constraint is the nascent state of the Islamic asset management industry that provides only limited avenues for compliant investing. Notwithstanding the above, we expect at least one key market to transition to [a] compliant pension program within the next 12 months. Success of this pilot project could see more funds following suit. The other game-changing initiative would be sufficient supply of quality fixed income instruments.”

Britain’s entry into the fray with its planned sukuk could certainly be part of that picture, and it may not be the only one. “We are aware of several private and sovereign initiatives currently on [the] drawing board; 2014 could see a major pilot project materialize,” Nazim said. While he expects that the six “high-growth” Islamic countries mentioned above “will lead the emergence of this industry,” they are by no means the only ones.

International investors stand to benefit the most. “The emergence of Islamic pension industry would offer international investors access to some of the high growth emerging markets, and will help further diversify their portfolio,” Nazim said. “Given that Islamic asset management is still in its infancy, there are less than 100 international Islamic fund managers and [approximately] 700-800 Islamic funds globally. Hence there is a good opportunity for conventional pension fund managers to tap into this fast-growing sector leveraging their conventional know-how of the asset management industry. We are already seeing some of the world’s best managers entering this market and setting up compliant operations in Malaysia and UAE,” he said.