Development of Islamic Funds Industry
Mir Muhammad Ali, CFA – Chief Executive, UBL Fund Managers
Founded in 2001, UBL
Fund Managers is the
largest Asset Management
Company in Pakistan –
managing assets of over
Rs. 25 billion (as of Sep
30, 09)
• United Islamic Income Fund (UIIF)
• United Composite Islamic Fund (UCIF)
UBL Funds Siraj is the
Islamic investment division
of UBL Fund Managers
dedicated to offering
Shariah-compliant
investment solutions to
investors
Global Overview
• It is estimated that over $500 billion in assets are
managed around the world in Shariah-compliant
investments
• According to Standard & Poor’s, Islamic investments
have been growing about 10% per year for the past
decade
• Currently more than 300 Islamic financial institutions
are operating in over 75 countries
Local Overview
• Islamic asset management is one of the fastest
growing sectors within the Islamic finance Industry
today
• The growth in AUM of Islamic Funds is commendable
as just in 9MCY09, the assets have grown by over
39% to PKR 17.6 Billion.
• However, Islamic Funds still in the infancy stage
constitute around 7.5% of the total Mutual Fund
Industry which is a total pie of PKR 236 Bln.
Challenges facing Islamic Funds
Operational Threats
Sector Threats
Distribution
Coverage
Competition
Human Capital
Liquidity
Global
Financial
Shocks
Macro Threats
Challenges facing Islamic Funds
• Human Resource
• The demand for human resources across the
entire Islamic financial services industry is high
• As the Islamic Funds Industry grows, the demand
for seasoned human resources will only increase
Challenges facing Islamic Funds
• Expertise
• While many scholars are trained in Islamic
schools where the emphasis on finance may have
been limited or due to lack of exposure to financial
markets, they may not have a complete grasp of
financial markets
• On the other hand, financial practitioners, even
though knowledgeable about Shariah standards, do
not have the authority to rule on religious laws
Challenges facing Islamic Funds
• Liquidity and Shariah Compliant Instruments
• With the growth of the Islamic Funds Industry, the
management of liquidity is a challenge due to
scarce Capital Markets instruments and Secondary
Markets
Challenges facing Islamic Funds
• Investors Increasing Needs
• On its own Shariah compliance may not be an
absolute competitive advantage in the asset
management industry as investors also require a
diverse and competitive product offering that can
match conventional benchmarks
Challenges facing Islamic Funds
• Limited Product Offering
• Presently, there is much discussion about the
need for new products, ranging from commodity
funds, sector specific funds, REITs and various
other hedge fund strategies in the conventional
market. In hindsight, the development of Shariah
compatible inter-bank markets, liquid financial
instruments and risk management mechanisms is
the need of the hour.
• On the other hand, gaps remain in terms of plain
vanilla products in the Islamic Funds Industry
Challenges facing Islamic Funds
• Lack of Awareness
• Limited education on long-term benefits of savings
• Lack of realization of ‘safety’ offered by Islamic
investments as opposed to conventional counterparts
• Questions on Shariah compliance
Challenges facing Islamic Funds
• Measuring Performance
• Given the unique Shariah-compliant structures,
the process of measuring the performance of
Islamic financial products can be tough
• Current conventional rating methodologies may
not suffice
As is true in every
field - for every
challenge there lies
the possibility for
innovation and
improvement.
Overcoming the challenges
• Enhanced Liquidity Management
• Establishing appropriate risk and liquidity
management techniques
• The sustenance of any primary market depends
heavily on the development of a sustainable and
robust secondary market. Islamic investors, like
conventional ones, portray varying risk preferences
and a well structured and well regulated secondary
market should be developed to reflect this.
Overcoming the challenges
• Development of Proprietary Benchmarks
• Proprietary indexes need to be established to
serve as a common benchmark for the industry as
a whole
• For example, Dow Jones Islamic Market Index
Overcoming the challenges
• Tailor-made Islamic specific Ratings
• The industry requires tailor-made rating
standards and guidelines to rate the performance
of Islamic Funds using a methodology and
nomenclature that is consistent with the
specificities of Islamic Finance
• Specific rating standards also required for the
rating of Islamic instruments – different from their
conventional counterparts
Overcoming the challenges
• Human Capital Development
• Training and Education Program specific to
Islamic Finance, Islamic Law and Islamic Fund
Management need to be developed and utilized to
keep pace with the growth of the sector, and
overcome the current shortages throughout the
industry
Overcoming the challenges
• Product Development & Structuring
• Islamic funds will have to compete against
conventional institutions for certain investor segments
• The competition can be met if Islamic asset
managers commit to develop the sort of coverage, in
terms of geographic and asset classes, that is held by
their conventional counterparts
• The strategy for Islamic funds must be to identify
and deliver products that investors perceive as being
different in ways that are important to them
Overcoming the challenges
• Product Enhancement
• Islamic Funds may have to seek product
enhancements to appeal to investors by providing
‘extra benefits’
• For instance value-added benefits like Takaful
Coverage, scholarship programs etc.
Overcoming the challenges
• Exposure to International Islamic Markets
• Islamic Funds should offer their investors
exposure to developed and sophisticated
International Markets to offer greater diversification
and growth potential to their investors
• Regulatory frameworks for International
investments need to be strengthened
Overcoming the challenges
• Strategic Alliances & Partnerships
• Islamic Funds as a product requires multiple
parties to come together. As a result strategic and
partnerships can be developed in seeking to achieve
long-term objectives.
• These alliances can take place in the form of joint
ventures, co-branding, franchising, outsourcing, etc.
• For instance, partnerships with global Islamic
Institutions to benefit from their expertise & research
Overcoming the challenges
• Raising Investor Education. Changing Mindsets.
• It is here where the job of the Islamic Industry is
twice as hard. Not only do the Islamic investors
need to be educated on the need for matching
long-term financial goals with appropriate
investments, but they must also be explained the
principles of Shariah compliant investing.
Overcoming the challenges
• Focus on Retail Investor Base
• While there is nothing wrong with an institutional /
retail divide, it is important to develop the retail side
• Both a ‘top-down’ and ‘bottom-up’ approach is
required that assures that, in time, all sectors of a
diverse market are served.
• The overreaching goal, namely the development
of a robust and mature market, can become
jeopardized, if only the top-end develops.
Overcoming the challenges
• Quality Assurance
• At the end of the day, we cannot ignore the fact
that investors, on top of fulfilling their religious
obligations, will demand quality if they are to be
attracted to Islamic Funds
• Islamic investors also want to be assured that
globally accepted standards and best practices in
regulation and supervision apply to them
What we do today will
determine the success
of the Islamic Funds
Industry in the future.
The sustainability
of this industry is our
responsibility.
Thank you.