Asset management industries in Asia and the Middle East may find a surprising boost to growth in the form of Islamic pension funds. Although most are state-run, a shift in their holdings from public to private could bring expansion to the tune of between $160 billion and $190 billion, according to Ernst & Young, which looked at the recent experience of Malaysia, Pakistan and Turkey.
The key could be coming up with sharia-compliant products and services, to take advantage of what appears to be a growing hunger for such things, according to Ernst & Young. Ashar Nazim, Islamic financial services leader at Ernst & Young, characterized the challenge to meet all the "pent-up demand" as "how to create a supply-side mechanism to cater to that latent demand."
Creating a supply-side mechanism is exactly what companies are doing, since growth in sharia-compliant outlets and products is crucial to luring pension fund money. Governments are also actively seeking to develop private pension sectors as a means of growing their financial markets.
The transformative process is already underway. Growth in sharia-compliant products, from bonds (known as sukuk) to insurance (known as takaful), began after Sept. 11, 2001 (9/11) when many Arab countries moved money away from the West. Sharia-compliant retail funds, however, suffered considerably during the economic downturn. But they have recently begun to recover.
All three countries mentioned above have devoted time and attention to increasing the availability of sharia-compliant schemes, even putting new regulations in place to ensure consistency and compliance, and the resulting growth has encouraged further movement in that direction.
Turkey's efforts have included working to craft regulations that will recognize sharia compliance in a variety of structures. That will make it easier for it to offer cross-border sukuk and attract outside investments. Its rating elevation earlier this year to investment grade status has encouraged it to pursue the development of an Islamic financial market. It also began to make a 25% contribution to private pension premium payments; that factor, along with cuts in charges for fund management, has encouraged participation rates in private pensions to rise substantially.
In 2005, Pakistan launched a voluntary pension system (VPS) that after eight years boasts Islamic assets totaling 3.4 billion rupees ($32.4 million); that's 61% of all VPS assets. That may not sound like much in terms of dollars, but percentagewise, Islamic pension assets outpace Islamic bank deposits in the country by a handy margin; the latter only amount to 10% of all bank deposits there. Also, Islamic assets under management are double what they were just last year, according to Ernst & Young.
Malaysia is pushing employers in the country to participate in Islamic pensions; its own Securities Commission is contributing on behalf of its own staff.
Malaysia, Saudi Arabia, Qatar, the United Arab Emirates and Bahrain, along with other countries, could eventually create sharia-compliant tranches from state-owned pension funds, according to Nazim.
John Blank, chief equity strategist at Zack's, said that a move toward private pensions would be "good for these countries. A lot are statist; every corporation in Indonesia is a state-owned company. [It's] a way to stop being statist [that] will drive the growth rate up. They have to make growth work for the younger population."
Meanwhile, in March, the National Bank of Bahrain and a local pension fund together bought a 51.6% stake in Bahrain Islamic Bank after the country had embarked on a series of mergers designed to strengthen its banks and make them more competitive.
There is now stiff competition in the Gulf region for dominance in Islamic finance. While Bahrain currently leads the pack, competitors now include Dubai and Qatar. The latter has declared its intention to become an Islamic financial hub, and Bahrain, the base for the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)—one of the dominant organizations to set standards for Islamic finance—has said it is prepared to cooperate with Dubai.
Tunisia's Islamist government has made developing an Islamic financial industry a priority. Although currently sharia-compliant business, at $1.4 billion, makes up only 2.5% of the country's financial sector, a study released in June estimated that Islamic financial assets in the country could reach $17.8–$28.5 billion by 2018. It too is planning to offer sukuk.
Oman, which started to put Islamic finance in place in 2012, received regulatory approval for its first-ever corporate sukuk at the end of June, with both pension funds and insurance firms showing interest in the issue. It was also expected to draw considerable investment from Qatar. Sovereign sukuk is not expected till 2014.
A number of other countries have been getting in on the act as well. In March, the Nigerian Securities and Exchange Commission approved new rules that make it easier to issue sukuk. Then, at the beginning of October, the Nigerian state of Osun issued a 10 billion naira ($62 million) sukuk yielding 14.75%. It was the first Islamic bond to be issued by a major economy in sub-Saharan Africa. The sukuk, rated A by local credit rating agency Agusto & Co., was to be listed on the Nigerian Stock Exchange, and bankers said that the state hoped pension funds would be among the purchasers. Nigeria has the largest Muslim population in sub-Saharan Africa; they make up about half of its population of 160 million.
Kenya, Senegal and South Africa have also begun to plan sukuk offerings, and for several years Gambia has been selling Islamic debt in small amounts. Kenya Reinsurance Company also announced the introduction of reinsurance for Muslims. Re-takaful was unveiled in February. The country already had takaful—Muslim insurance products—in place, but this is the first reinsurance product that is compliant with sharia.
And Morocco is considering issuing sukuk, either in addition to or instead of conventional bonds, to raise some much-needed capital to cover some of its budget deficit.
It's not only concerns in the region that are interested in getting in on the Islamic market. The Dow Jones Islamic Market Titans Index tracks the 100 biggest Islam-compliant businesses in Asia, but also in Europe and the U.S. It has almost doubled over the last five years. And earlier this month Threadneedle Investments, owned by Ameriprise Financial and the fourth largest retail fund manager in the U.K., announced that it would begin to offer a range of sharia-compliant funds in Malaysia. Threadneedle plans to target institutional investors, pension funds among them.
Germany beat them to it last year, although in its case the products went the other way with the introduction of Islamic finance into Germany by Malaysia-based CIMB-Principal, the only registered Islamic investment fund in the country. Germany has about four million Muslims among its population. German firms also offer Islamic products, but mostly in Arab countries.
Still earlier to the starting gate was HSBC, which entered the Islamic financial market in 2004 with the introduction of an Islamic pension fund in the U.K. The HSBC Life Amanah Pension Fund is offered by HSBC Amanah Finance, the global Islamic financial services division of HSBC. It was established in 1998 to provide Islamic alternatives to conventional banking, and offers Shariah-compliant personal financial services in Bangladesh, Malaysia, Saudi Arabia, the United Arab Emirates, Indonesia, Brunei, the U.K. and the U.S. It also offers Islamic services for corporate and institutional banking.
More than 50 countries offer some form of Islamic finance. That's plenty of opportunity.
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