Islamic Wealth

Islamic Wealth Managment

Management

Paul McNamara

Copyright

Copyright
Yasaar Media
Published by
Yasaar Media
DIFC
The Gate District
Precinct Building 3
607 Level 6 East
PO Box 506765
Dubai, UAE
Tel: +971 4 370 0701
Fax: +971 4 370 0702
Website: www.yasaarmedia.com
First published 2009
All rights reserved.
This book may not be lent, resold, hired out or otherwise disposed of by way of trade in
any form of binding or cover other than that which it is published, without the prior consent
of the Publishers. Neither the publisher nor the author make any legal representation or
warranty with respect to the contents of the book, and they do not accept liability for any
inaccuracy in the material in the book.
Design and Layout: James S. Naval II

Islamic Wealth Management 2009

Paul McNamara

Islamic Wealth Management 2009

Thanks to

The publishers would like to thank the following for their help during
the preparation of this report:
Andrea Weidemann and Sybille Reitz, Dow Jones Indexes
Mittal Dave, FTSE Group
Ghada Essam, IFIS
Carolyn Makin
Iqbal Asaria, Yasaar Limited
Zawya

Islamic Wealth Management 2009

Foreword from Paul McNamara

Room for improvement

he area of Islamic wealth management has been sadly neglected by analysts and
commentators in spite of the fact that it is a growth area of finance. One reason
for this in the recent past has been the fact that many Islamic wealth management
portfolios have declined by 15-20 per cent since the advent of the global financial
crisis. There have been few asset classes that have held up well demonstrating
perhaps that more work needs to be done in structuring a wider palette of instruments for
ultra rich Muslims to take advantage of.
These instruments will need to be highly diversified in order to overcome the seeming
systemic interconnectedness of all traditional asset classes that became evident as equities
collapsed, real estate values plummeted, currencies see-sawed and alternative investments
virtually disappeared across the world.
The report that follows is an attempt to place Islamic wealth management initiatives in their
proper context which is within that of the greater realm of wealth and asset management
as a whole. But the critical point to note is that these initiatives take Shariah compliance as
their start point rather than Shariah compliance being seen as something that is slapped
over conventional instruments at the last minute.
Perhaps Islamic wealth management portfolios will always offer slightly reduced returns
when compared to their conventional counterparts. But if the financial crisis has hammered
home any single lesson it is that with greater reward comes greater risk. Shariah compliant portfolios should be more conservative than aggressive conventional portfolios for the
simple reason that they have to be approved at every step by a Shariah board and this
always tends to remove elements of excessive risk.
If this is the case then why have Shariah compliant portfolios not escaped the worst ravages
of the crisis? The answer to this has more to do with the all pervasive nature of the financial
crisis than weakness in the system of Shariah compliance. Pretty much any portfolio that
held assets of any sort was bound to be affected. The question is how Islamic wealth managers make sure that the same thing does not happen again.
The mistake might lie in presuming that the Islamic wealth management industry has time on
its side to devise a new set of products to ride out the next downturn. If some economists
and market observers are correct then we are only biding our time at present waiting for the
second collapse of the W-shaped recovery. There could be more of the same to come.
In any event smart Islamic wealth managers are already learning valuable lessons from
the last 18 months and making sure that the future is more secure than the immediate
past. Sadly this cannot mean simply parking all of a clients assets in US dollars or British
pounds sterling and waiting until the future has some certainty. Apart from anything else
good old inflation will soon erode such savings presuming they are parked in non-interest
bearing accounts.

Islamic Wealth Management 2009

Foreword from Paul McNamara

The future of Islamic wealth management has to lie in being smart, being international, and
perhaps most importantly of all, in being nimble. The wait and see approach simply does
not work in the current environment: insight and foresight are what is needed.
Conventional wealth managers have been doing this for generations with a great deal of
success. The Islamic wealth management industry has to learn to do the same. We hope
that the report that follows will prove valuable for wealth managers and investors alike.
Our hope is that by the time we come to publish Islamic Wealth Management 2010 there
will be a battery of new products to discuss together with the beginnings of some impressive track records.

Paul McNamara is the editorial director of Yasaar Media

Islamic Wealth Management 2009

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Introduction
Nowhere to run, nowhere to hide

The events of last year, meaning the credit crunch, the financial crisis, and the ensuing panic
wiped trillions of dollars off investors wealth. Some of the worst hit were retail investors and
the segment of retail investors that bore the brunt were those with most to lose: the rich and
the very rich. Tried and true investment wisdom that they had accumulated over the prior
decades proved to be worthless and misleading.
Immediately prior to the crash investors had access to a pool of investment vehicles and asset classes previously unheard of. And perhaps this was part of the problem. In the old days
investors would have been happy simply to place their funds on deposit knowing they were
safe but the plethora of new exotic instruments available caused many level headed investors
to believe that they were missing out and that they should jump on board the high-returns
ship for fear of missing out. This holds equally true of Islamic investors wishing to capitalise
on the fact that the economic tide was rising although in retrospect one of the effects was to
push people into illiquid assets that they perhaps did not fully understand.

Some of the hardest hit by the crisis were the wealthy families and individuals in the Middle
East as the regions stock markets took a hammering amid the biggest property slump for a
very long time. According to the Capgemini-Merrill Lynch 2009 Wealth Report the net wealth
of this group dropped by over 16 per cent in 2008. This may not have been the biggest drop
of all time but it was big enough to be very painful for those involved and one of the overriding lessons they learned from this pain was to treat debt with more care and attention. The
days of excessive gearing have gone.

Islamic Wealth Management 2009

Introduction
Taken in a global context, a study by the Boston Consulting Group found that overall wealth
managed by the asset and wealth management industry dropped by 11.7 per cent to
$92,400 billion over the same period. One of the worst hit regions was North America which
saw a drop of almost 22 per cent. The Middle East may not have been hit that bad, but it was
bad enough.
Clearly those worst affected were those who made risky investments during the boom.
The hope for Islamic investors is that since they shun excessive risk they should have been
spared the very worst of it. Nevertheless it is an undeniable fact of life that the financial crisis
has changed everything. Many governments have discovered that their incomes have been
trashed as global wealth levels have fallen and unemployment has skyrocketed.
One of the follow-on effects of this has been to make governments more determined to
ensure that everyone who should be paying tax is doing so. Naturally this is relatively easy
on the domestic front, but where governments run into problems is when their citizens are
resident abroad or when their citizens have savings and investments in offshore jurisdictions.
This has caused these same governments to put pressure on offshore centres and so-called
tax havens to come clean and divulge more information about their clients. Such track-andtrace measures affect the ultra high net worth (UHNW) and high net worth (HNW) investor
whether his savings are conventional or Islamic: in the eyes of the tax man money has no
colour or religion.
Mercifully many Islamic investors in these categories are citizens of the GCC and they already
live in zero-tax or low-tax environments and so their use of offshore financial centres has little
to do with tax avoidance and more to do with secrecy and confidentiality. The undeniable
truth is that secrecy and confidentiality are being eroded in the name of the greater good as
uncooperative tax havens are brought into line. The OECD has made sure that the net has
been closing on these havens since 2002.
Lichtenstein came to heel by signing an accord with the UK tax authorities in mid-2009 which
the UK government hopes will generate an extra 1 billion in tax revenues immediately and
further significant amounts on an ongoing basis. Lichtenstein is now in talks with Germany to
do the same. The spat between the Swiss authorities and the US tax authorities has also become the stuff of headlines and the net fallout is that there is a fast diminishing pool of areas
where the whole idea of banking secrecy in its old form remains.
It is against this background that we take a look at the wide area of Islamic wealth management and what it means for both UHNW and HNW Muslim investors. In the recent past there
was no such thing as Islamic wealth management services available to Islamic investors and
this simply meant that rich Muslims either had to forego the perks of being rich, such as
watching their money grow rather than being eroded by inflation, or they could take advantage of conventional wealth management services in the full knowledge that these services
were not Shariah compliant.
It would be a naive wealth manager who thought that their new wealthy Muslim client would
be looking to park all of his wealth in a Shariah compliant way. The truth is that many such
investors will not invest more than 25 per cent of their net wealth in this manner. The allure
of exotic financial instruments, where the sky is the limit in terms of returns, is simply too
appealing to those with the means to take advantage of them.
The future for the Islamic wealth management industry lies in trying to secure more than simply the 25 per cent that many clients are comfortable relegating to the Islamic finance sector.
The only way this will happen is when there is a much wider palette of instruments available
for the wealthy Muslim to use and when the returns promised by these instruments is compa-

10

Islamic Wealth Management 2009

Introduction
rable to their conventional counterparts. The alternative is for UHNW Muslim investors to pay
a premium for their faith which is something that they have never accepted in the past and are
unlikely ever to want to do.

One saving grace

The global financial crisis has pushed Islamic finance more to the fore as pundits and analysts
recognise the reality that Shariah screens mean less risk and therefore less exposure to subprime debt. Doubtless this has meant that some Muslim investors were spared some of the
worst excesses of the crisis but it is not likely that the Muslim investor with billions to invest
would have found much respite for the reasons that we have already outlined.
It is a useful rule of thumb to estimate that the average investor lost around 20 per cent of his
net wealth during the crisis: this holds for Muslim investors as well as conventional investors.
The singular focus of these investors going forward is in getting their money back somehow,
but in general this means looking at products that are capital guaranteed for the simple reason that having been once bitten these investors are twice shy.
Taking these factors together means that the Islamic wealth management industry is facing
perhaps its most challenging period and at the same time it is facing its biggest opportunity,
both for investors and service providers. Investors want to spread their risk across asset
classes and across currencies for fear of being caught on the hop again. Diversity and caution
are the new watch words of these investors.

What about the kids?

Presuming that these clients managed to

hang onto their wealth through the recent
tribulations, they will next be faced with
the issue of generational wealth management and this is another area where they
will need expert advice and guidance. So
complex are the requirements of many
Muslim investors in this category that
they may need to establish family offices
to help them with asset management,
business management, and possibly also
with legal issues.
There are issues of helping their children
cope with the problems typically associated with inheriting large sums of money.
These issues can range from managing
reputational risk, being alert to fraud,
structuring a portfolio, to philanthropy
and giving. There is an old saying that
the hardest part of the wealth equation
is not making it but hanging onto it. The
problem of hanging onto it is doubly true
for the children of the wealthy. While
many wealthy parents would not dream
of passing on their great wealth to their
children for fear that it would corrupt
them, change them, or ruin their lives,
there are many parents who will pass on
such wealth.

Islamic Wealth Management 2009

11

Introduction
These investors may be parents who themselves inherited the family fortune and feel
obliged to pass it on in a suitably augmented fashion but equally they might be the builders
of the wealth who simply want their children to have that which they did not when they were
growing up. Parents themselves can hope to teach their offspring basic values like honesty
and courage but they may be much less well equipped to teach their children how to
manage their money once they have it to do with as they please. This is where real expert
advice can be indispensable.
Thankfully this is not a new dilemma and it is one that has been addressed by a number of
banks, predominantly conventional private banks, over the years. Such a service is unlikely
to be driven purely by philanthropic motives alone. Once the children of the wealthy have
had a greater exposure to the working of a private bank they are much more likely to stick
with that bank, presuming that their experience has been favourable. From the banks perspective, it simply makes sense to look after their future best customers.
Equally importantly it is not in the banks interest to have their new generation of high net
worth clients fritter their money away on super yachts and gambling. Better that they nurture
their wealth and grow it in order that the bank can continue to charge management fees on
an ever increasing bank balance.
Some conventional banks offer courses for the children of their UHNW clients. The core
of such courses looks at: spending and budgeting, investing, the history and function of
the City, basic economic principals and trends, types of assets and how to invest, how to
read the financial press, how to set up an enterprise, philanthropy, human assets including
career and educational advice, personal brand, reputational risk and personal safety.
The aim of these courses is to help ensure smooth succession by making sure that the next
generation understands wealth management objectives and opportunities.
There can be differences of opinion about how family wealth is invested and how it is transferred from one generation to the next. Where there is the added complication of managing a
family business, there are often different opinions about how to grow or divest the business,
or on succession planning and leadership structures.
Without doubt these boot camps for the children of the ultra rich can play a pivotal role in
preparing the next generation of wealthy youngsters with the basic building blocks that they
will need in order to be both forearmed and forewarned about what lies ahead. Young wealthy
people are prime targets for the unscrupulous and the criminal. Without a proper appreciation
of the nuances of the financial markets, these kids are also a danger to themselves without
the proper guidance.
Unfortunately there remains one strand of opinion that thinks that todays rich kids have
grown up in a cocoon of privilege which leaves them unprepared for todays increasingly
competitive job market. They are not good investors and they have a lack of reference
points that the rest of the world takes for granted. They are not hungry for success like
many others.
What seems clear is that there is a vast opportunity for private banks and wealth managers
in the Islamic finance sphere to capitalise on this growing niche by offering seminars, conferences and boot camps to the children of their top clients. The main advantage is that it
will help the next generation of wealthy clients feel a real affinity with the bank. Another key
advantage is that they could help in a very real way to ensure that young people afflicted
with great wealth do not end up ruining their lives because of it.

12

Islamic Wealth Management 2009

Introduction
The year ahead

The next 12 months could be a crucial time for

the Islamic wealth management industry as it
grapples with the twin opportunities of how to
capitalise on the fallout from the financial crisis
while at the same time helping clients claw back
some of the ground they have lost over the past
year. As ever in the wealth management business this will have little to do with luck and a lot
to do with planning.
These are strange times and it appears
that an investor in a quality rare car would
have done better during the downturn than
an investor in almost any other asset. While
it seems that the turnover at classic car
auctions has fallen since the financial crisis
started, these auctions have still seen significant business. In early August 2009 a 1965
Shelby Daytona Cobra Coupe that had been
driven by Bob Bondurant in Reims sold in
Monterey for a massive $7.25 million which is
the highest price paid for an American car at
auction. Such sales are hardly unique in this
most unusual of environments.
That is why only very clever banks will continue
to thrive and do well. Understanding the very
complex needs of the client will be of paramount importance, as will offering them solutions that meet or exceed their expectations.
These expectations will be built, amongst other
things, on the sorts of products and the sorts
of returns levels that the conventional world of
finance can offer them.

The future for the Islamic wealth

management industry lies in trying to secure more than simply the
25 per cent that many clients are
comfortable relegating to the Islamic
finance sector.

While Islamic finance is a maturing industry it

is still young and relatively naive and product
structurers need to ensure that they have cast
iron Shariah sign-off on products before they
come to market. The industry cannot afford
any more second thoughts from scholars who
retrospectively change their minds and rule that
prior structures are no longer to be deemed
Shariah compliant.
Investors, especially rich investors, are invariably sophisticated. Investors in Islamic finance
are no exception to this rule. Clients will be looking for strong and impartial advice now more
than ever and this could be the opportunity that
the Islamic wealth management industry has
been waiting for. The industry had better make
the most of the opportunities presented.

Islamic Wealth Management 2009

13

Equities

Equities

Nothing simple and

straightforward about
direct equity investing

quities have long been the mainstay

of many investors around the world
therefore it is hardly surprising that
they feature heavily in the realm
of Islamic wealth management.
One reason for their appeal is that they can
offer returns that are very rewarding when
compared to many other forms of investment
and another is that they can offer diversification for the individual investor across a
wide range of geographies and industries
thus providing something by way of investor
protection. Of course this latter benefit has
proven to be less certain over recent times
when geographically and sectorally unconnected equities have all fallen in unison as
global markets collapsed.
However, the Islamic investor cannot simply
invest in any equity in any event and must restrict
his investment activity to those equities that are
considered to be Shariah compliant according
to expert third party opinion. Thankfully there are
a range of indices that can be used to establish
whether or not an equity is Shariah compliant,
and these come from FTSE, Dow Jones, MSCI,
and S&P among others. Dating from as far back
as 1998 these indices effectively constitute the
total universe of Shariah compliant stocks.
Islamic investors are not allowed to invest in
a company that makes most of its revenues
from non-Shariah compliant business activities
or in companies that are highly leveraged.
Shariah indices typically screen companies
for Shariah compliance through two separate
screens: one based on business activities and
the second on financial ratios. Business activities that are forbidden typically involve dealing
with pork, pornography, alcohol, gambling,
firearms, financial services and tobacco.
Clearly it is much easier to tell if a company
falls foul of these rules if it is the companys
primary activity, but when its involvement comes
from interaction with these areas in a secondary capacity then the application of the screen
becomes much more difficult. A classic example
would be an hotel chain that happens to sell pork

products, pornographic movies on an in-house

channel, and alcohol as part of doing business
but not as its main focus.
A rough 5 per cent rule seems to have become
the accepted level of exposure to such haram
activities: if a company earns less than 5 per
cent of its revenues from haram activities then
it can be considered for inclusion in the list of
Shariah compliant equities. Because this can
be a fairly tricky calculation to make, there is
inevitably some difference of opinion as to which
stocks make the grade and this in turn means
that some fund managers have composite
portfolios that rely on stocks across a range of
indices. Doing this can help increase the total
number of investable companies in the fund
managers universe although caution must be exercised when assessing the Shariah compatibility
of some of the equities included. In practice it
can be hard to strip out how much profit an hotel
chain makes from the sale of pork products
since this is typically not the sort of information
that the hotel chain would monitor.

FTSE Indices

The chart overleaf shows the comparative

performance of the FTSE NASDAQ Dubai
Shariah Qatar 10 Index, the FTSE Shariah

Islamic Wealth Management 2009

15

Equities
The real surprise, however, lies
in the five year performance
chart below which shows how
Shariah compliant Malaysian
stocks have fared compared to
both the All-World Index and the
Shariah All-World Index. Both
FTSE Malaysian Shariah indices
show that Malaysia Shariah compliant stocks performed better
in both bad times and good than
global stocks as a whole and
Shariah compliant global stocks.

3 Year Chart (USD Total Return)

Index Level Rebased (31 Aug 2006 = 100)

200
180
160
140
120
100
80
60
40
06

g-

Au

31

b-0

Fe

28

07

g-

Au

31

b-0

Fe

29

FTSE NASDAQ Dubai Shariah Qatar 10 Index

FTSE Shariah All-World Index

08

g-

Au

31

09

g-

Au

28

09

g-

Au

31

FTSE NASDAQ Dubai Shariah Kuwait 15 Index

FTSE All-World Index

Source: FTSE Group, data as at 31 August 2009

The key for Islamic investors

will lie either in
putting their faith
in an Islamic index or indices or
in cherry picking
Shariah compliant stocks of
their own.

Index Level Rebased (31 Aug 2004 = 100)

5 Year Chart (USD Total Return)

350
300
250
200
150
100
50

04

g-

Au

31

b-0

Fe

28

05

g-

Au

31

b-0

Fe

28

FTSE Bursa Malaysia Hijrah Shariah Index

FTSE Shariah All-World Index

06

g-

Au

31

b-0

Fe

28

07

g-

Au

31

b-0

Fe

29

08

g-

Au

31

b-0

Fe

28

09

g-

Au

31

FTSE Shariah Malaysia Index

FTSE All-World Index

Source: FTSE Group, data as at 31 August 2009

All-World Index, the FTSE NASDAQ Dubai

Shariah Kuwait 15 Index, and the FTSE All
World Index for the three year period ending
31 August 2009.
The non-Shariah compliant FTSE All-World Index
has undoubtedly shown less volatility over the
last three years but it undoubtedly performed
worse than any of the other indices on almost
all occasions. The second worst performer was

16

Islamic Wealth Management 2009

the FTSE Shariah All-World Index whose performance closely mirrored the All-World Index.
The two GCC-centric Shariah compliant indices
were both tremendously volatile but still managed
to outperform the other indices, with the FTSE
NASDAQ Dubai Shariah Kuwait 15 Index performing best in the good times although recovering
more slowly in the bad times than its sister index
the FTSE NASDAQ Dubai Shariah Qatar 10 Index.

Equities

The following methodological explanation of Shariah screening comes from Iqbal Asaria, who is an expert on the issue of
Shariah screening for FTSE/Yasaar Shariah Indices.

Shariah screening methodology

The Shariah screening process has been designed to satisfy

three core principles. These principles are that the screening process should be:

1. Conservative The process is responsible for en-

suring Shariah compliance of the stock universe covered.

This responsibility is undertaken with the utmost seriousness both for the comfort of the users of the indices
derived by FTSE from the screened universe but also as
a core component of the groups business strategy. As
a result the burden of proof is laid upon the process to
demonstrate Shariah compliance for a company before
it becomes part of the eligible universe. If the data to
establish Shariah compliance is unavailable, no assumptions regarding the Shariah status of a company is made
under any circumstances. In essence, all companies are
non-compliant until shown otherwise.

2. Consistent We strongly believes that for the

process to be valid it must be consistently applied over

time and across geographies. With this in mind, Yasaar
has sought to remove as much subjectivity from the
process as possible. A rules-based approach achieves
this by keeping to strict, unchanging guidelines and not
relying on the opinion of an individual at any particular
time. To ensure consistency across the global securities universe, it is also necessary for these rules to be
applied to a consistent global database. To achieve
this, we work with an experienced company using
some of the most respected sources of global data
available.

3. Auditable The comfort of users of the screens is

derived in part from the robust processes established but

also from the knowledge that this process has been overseen and monitored by our Shariah Board. The Shariah
Board monitors, reviews and audits the process at regular
intervals. The screens are updated daily and audit trails
of any changes in the Shariah status of companies are
available to the scholars for review as well.

Shariah principles

The screening process is managed in a manner that complies

with written guidelines relating to the Shariah. These guidelines have been set by the Shariah Board who also monitor

compliance. The Shariah guidelines can be grouped into two

separate components: business activity and financial ratios.

Business activity

The guidelines ensure that the screened universe of Shariah

compliant securities does not contain securities where the
issuers core activity or activities relate to any of the following sectors:
Interest bearing investments including loans and deposits based on interest;
Forward currency transactions;
Securities issued by companies whose income is
derived from any of the following activities:
w Manufacture or distribution of alcohol or tobacco
products
w Gaming or gambling;
w Manufacture or distribution of weapons and defence related products
w Production, processing, packaging or any other
business activity relating to pork products;
w Conventional banking, insurance or any other interest-based financial services activity;
w The production or distribution of pornographic
materials; or
w Any other activity that is not permitted by the
Shariah as determined by the Shariah Board;
Derivatives, including futures, options and contracts for
differences; and
Any other transaction that is not permitted by the
Shariah Board.
Business activity within the screening process is defined
according to SIC (Standard Industrial Classification) code.
The SIC code list is one of the most detailed classification
system available on a global basis with 1009 separate business activity descriptions. Within the data sources sourced
by Yasaar, all companies have had their business activities catalogued according to this system. Each company
may have up to eight SIC codes allocated to it in order of
materiality with associated data giving information as to the
percentage of revenues derived from each segment.
The business activity screened universe utilises these SIC
codes. The criteria is that any stock which has a SIC code
allocated to it which is deemed to imply a non-compliant activity is excluded unless it is clear that the sum of all revenues
within these segments is less than 5 per cent of all revenues.
We have set a pre-determined list of SIC codes that are
considered to be non-compliant activates. In instances where

Islamic Wealth Management 2009

17

Equities

the activities cannot be fully determined

to be compliant or not, we have taken the
conservative approach and disallowed
the entire classification, i.e. wholesale of
livestock is not allowed on the grounds
that this does not preclude hogs.

Positive screening

Where adequate information is unavailable via SIC codes, our scholars have
considered further investigations on
the companies activities. These include
contact with the companies concerned
to determine the exact nature of the
activities and their materiality. If upon
these further investigations the level
of non-compliant activity is found to be
below 5 per cent then the companies can
be screened as Shariah compliant on a
case by case basis.

Financial ratios

Once business compliance is established,

the stock universe is screened for a set
of financial ratios. These comprise of:
5 per cent tolerance for non compliant activities, including any interest
income
Debt to total assets ratio to be less
than 33 per cent
Receivables and cash should be less
than 50 per cent of total assets
Cash and cash equivalents (liquid
instruments like CDs) should not
exceed 33 per cent of total assets.
On changes of a transient nature for companies with financial ratios which are on
the borderline of compliance, we seek the
opinion of our Shariah Board. After full presentation of the facts and financial history,
the Shariah Board may decide that the
breech is an aberration and not a change
in the business profile of the company. In
such cases the Shariah Board, at their discretion may allow the stock to be deemed
compliant until the next set of results.
For a stock/security to be deemed Shariah
compliant it must pass both the business
compliance and financial ratios tests.

18

Islamic Wealth Management 2009

The future for equity

investing

Since the market turmoil of the last quarter of

2008 equity markets around the world have
been volatile and unpredictable. While there
were doubtless some bright spots to be found,
the general trend across equity markets had
been downward for many months, with some
markets collapsing completely. The markets
of several Muslim countries, including those
of the GCC, saw huge falls and markets lost
as much as 70 per cent of their value in a
relatively short space of time.
While the summer of 2009 saw something of
a break in the downward trend, stock market
commentators have almost universally agreed
that it is premature to call an end to the
decline and they have gone on to warn that
further market falls could happen anytime.
The Muslim investor looking to take advantage
of the equity markets for superior performance
will have been disappointed of late, although
those investors who chose to invest solely in a
spread of Shariah compliant stock have fared
better than others.

Equities
Dow Jones Indexes

Performance of the Dow Jones Islamic Market World Index vs.

the Dow Jones Global Index over the past 5 years

According to Dow Jones Indexes on 10 September 2009, Based on the close of trading on
September 22, the global Dow Jones Islamic
Market Titans 100 Index, which measures the performance of 100 of the leading Shariah compliant
stocks globally, gained 4.25 per cent month-todate, closing at 2011.06. In comparison, the Dow
Jones Global Titans 50 Index, which measures the
50 biggest companies worldwide, posted a gain
of 4.80 per cent, closing at 167.25.

180
160
140
120
100

Dow Jones lslamic Market World Index (Price/USD)

6/16/2009

4/16/2009

21/16/2009

12/16/2008

8/16/2008

10/16/2008

6/16/2008

4/16/2008

2/16/2008

12/16/2007

8/16/2007

10/16/2007

6/16/2007

4/16/2007

21/16/2007

12/16/2006

8/16/2006

10/16/2006

6/16/2006

4/16/2006

2/16/2006

12/16/2005

8/16/2005

10/16/2005

6/16/2005

4/16/2005

2/16/2005

12/16/2004

8/16/2004

60

10/16/2004

80

Dow Jones Global Index (Price/USD)

Source: Dow Jones Indexes

All data is as of August 14, 2009

As we might expect, some geographic markets

fared better than others. According to Down
Jones Indexes, The Dow Jones Islamic Market
Asia/Pacific Titans 25 Index, which measures the
performance of 25 of the leading Shariah compliant stocks in the Asia/Pacific region, increased
6.49 per cent, closing at 1813.40. The Dow
Jones Asian Titans 50 Index, in comparison, posted a gain of 4.66 per cent, closing at 133.06.

Performance of the Dow Jones Islamic Market World Index vs.

the Dow Jones Global Index over the last month
120
115
110
105

Dow Jones lslamic Market World Index (Price/USD)

All data is as of August 14, 2009

8/14/2009

8/13/2009

8/12/2009

8/11/2009

8/9/2009

8/10/2009

8/8/2009

8/7/2009

8/6/2009

8/5/2009

8/4/2009

8/3/2009

8/2/2009

8/1/2009

7/31/2009

7/30/2009

7/29/2009

7/28/2009

7/27/2009

7/26/2009

7/25/2009

7/24/2009

7/23/2009

7/22/2009

7/21/2009

7/20/2009

7/19/2009

7/18/2009

7/17/2009

7/16/2009

7/15/2009

7/14/2009

7/13/2009

100
95

Recent experience has shown that while investing in Shariah compliant stocks is not a hedge
against equity market declines, at least the
declines have been more modest than those
from the market at large. It appears that much of
the time gains are also less modest than those
of the market as a whole.

Dow Jones Global Index (Price/USD)

Source: Dow Jones Indexes

Recent experience has shown that while

investing in Shariah compliant stocks is not
a hedge against equity market declines, at
least the declines have been more modest
than those from the market at large

While in Europe the same trend was in evidence,

Measuring Europe, the Dow Jones Islamic Market Europe Titans 25 Index, which measures the
performance of the 25 of the leading Shariah
compliant stocks in Europe, closed at 2066.95,
a gain of 6.67 per cent, while the pan-European
blue chip Dow Jones STOXX 50 Index gained
6.11 per cent, closing at 2731.15.
In the USA meanwhile the opposite trend can
be seen, Measuring the performance of 50 of
the largest Shariah compliant US stocks, the
Dow Jones Islamic Market US Titans 50 Index
increased, closing at 2012.86. It represents a
gain of 2.89 per cent. The US blue-chip Dow
Jones Industrial Average increased 3.51 per
cent, closing at 9829.87.
Finally, in the GCC, Measuring the performance of Shariah compliant stocks of five of
the Gulf Cooperation Council (GCC) member
states, the Dow Jones Islamic Market GCC
Index closed at 1473.51, a gain of 2.38 per
cent. The conventional Dow Jones GCC Index
was up 2.02 per cent, closing at 1520.71.

Islamic Wealth Management 2009

19

Equities

Where to from here

Occasional rallies in equity markets around

the world are generally welcomed with open
arms since the recent problems that markets
have witnessed have been not of liquidity but of
valuations. Valuing any kind of asset in a time
of uncertainty is remarkably difficult to do: only
markets themselves can determine true values.
To that end many investors are choosing to stay
liquid, remaining wary of risk while keeping an
eye out for opportunities as they arise.
In late July 2009 Dow Jones Indexes announced that Argentina, Colombia, Croatia,
Lebanon, Mauritius, Nigeria, Peru, Saudi
Arabia, Serbia, Tunisia and Ukraine would
be added to the Dow Jones Islamic Market
Index universe. This effectively increased the
total number of countries in the Dow Jones
Islamic Market Index universe to 68 from 57
and demonstrated that the world of Shariah
compliant stocks is an ever expanding one.
Michael Petronella, president, Dow Jones
Indexes said, The inclusion of these 11
thriving and competitive developing countries in the Dow Jones Islamic Market Index

20

Islamic Wealth Management 2009

130
120
110
100
90
80

8/7/2009

8/14/2009

7/31/2009

2/24/2009

7/17/2009

7/3/2009

7/10/2009

6/26/2009

6/19/2009

6/5/2009

6/12/2009

5/29/2009

5/22/2009

5/8/2009

Dow Jones lslamic Market World Index (Price/USD)

All data is as of August 14, 2009

5/15/2009

5/1/2009

4/24/2009

4/17/2009

4/3/2009

4/10/2009

3/27/2009

3/20/2009

3/62009

60

3/13/2009

70
2/27/2009

In September 2009 Dow Jones announced

that in their review of the first three quarter of
2009 that 111 components had been added
to the Dow Jones Islamic Market World Index
while 84 components were deleted. This
increased the number of components in the
index to 2,410 from 2,383. The total free-float
market capitalisation of the reconstituted Dow
Jones Islamic Market World Index decreased
to $11,320 billion from $11,370 billion. It is
not possible to establish how much of this has
been invested because of the Shariah compliance of the companies in the index.

140

2/20/2009

Size of the market

Performance of the Dow Jones Islamic Market World Index vs.

the Dow Jones Global Index over the past 6 months

2/13/2009

The inescapable conclusion is that investing in

Shariah compliant equities is a good strategy in
volatile markets to minimise the downside for
the investor, but even this may be cold comfort
to those investors who have seen their portfolio
shrink nonetheless. There is no guarantee that
investing in Shariah compliant equities will lead
to enhanced performance when global stock
markets are in a rebound phase and indeed
geography seems to play a greater role than
Shariah compliance when markets are finding
their new equilibrium levels.

Dow Jones Global Index (Price/USD)

Source: Dow Jones Indexes

universe is a reaction to market demand but

also reflects the growing importance of these
countries for Islamic investors.
The current market uncertainty could remain
for some years to come but it is likely that
individual stocks will manage to beat the trend.
The key for Islamic investors will lie either in
putting their faith in an Islamic index or indices
or in cherry picking Shariah compliant stocks
of their own. The former might yield modest
returns for some time to come and the latter
might carry too much risk for the investor to
stomach but there seems little doubt that equities will underlie many Islamic wealth management portfolios for some years to come.

Stock market commentators have almost

universally agreed that it is premature to
call an end to the decline and they have
gone on to warn that further market falls
could happen anytime.

Real estate

Real estate
Versatility is the key

here would the typical Islamic

investors portfolio be without real estate? There is no
denying that real estate has
become the object of much
attention by Islamic investors either directly
or indirectly through a fund or other derivative instrument. Whether each of the different
investment avenues is uncorrelated to the
others remains to be seen. Real estate that
features prominently on the radar screens of
many Islamic investors as a direct investment
vehicle, where properties of varying sizes,
values, and locations are secured as part of a
Shariah compliant portfolio, are by their nature
illiquid and until recently were viewed as the
non-speculative part of a portfolio. The pricking of the property bubble globally has led to
a reassessment of the proper place of such
investments in a balanced portfolio.
No matter how specialist and focused the real
estate investment, the fact is that the performance of these sorts of investments is necessarily at the whim of the local market. Such
issues as the prevailing domestic interest rate
and domestic supply and demand clearly affect
the continued value of any real estate investment. While this can mean that such investments are uncorrelated to performance of the
global real estate market, this is not always a
positive. The reality, however, is that some sectors of the real estate market are more volatile
than others with unit/flat developments often
the most volatile and commercial premises
rented on long-term leases the least volatile.
The message from this may be that international diversification of property investments as well
as diversification across sectors makes sense
when trying to even out local property market
fluctuations.

Direct investing

One of the key elements to be considered

here, particularly when the Muslim investor is
considering properties overseas, is whether the
investor fully understands the property rights
that are associated with the investment. Are
foreigners allowed to buy property there? Are
there restrictions on the resale of the property?
And perhaps most important for the Muslim
investor, is the property investment Shariah
compliant?

22

Islamic Wealth Management 2009

Clearly the purpose of the real estate investment will be important in structuring the
holding: was the investment made to preserve
capital or to grow capital? Or is the investor
looking for a regular income stream? Has the investor fully appreciated the management time
and expertise required to retain the value of the
investment? Is the location of the property up
and coming, well established, or is it going to
the dogs?
What is beyond doubt is that direct property investing for the HNW Muslim investor could be a
full time job and it is not something that should
be undertaken lightly. While the rewards for getting it right can be enormous the risks involved
in getting it wrong can be equally large.

Shariah compliant real

estate funds

As the following pie chart from IFIS shows,

there is no shortage of Shariah compliant real
estate funds for the investor.
Islamic Funds

2%
5%
7%
54%
17%

15%

54% Equities
15% Mixed assets
17% Money market

7% Real estate
5% Sukuk
2% Other
Source: IFIS

Seven per cent of all of Islamic funds are real

estate orientated which means that there are a
total of 43 funds that are purely focused on this
area. This figure does not include some of the
private equity funds and other funds that also
have a property exposure. The average amount
invested in those funds for which IFIS has data
is $119 million which would suggest that the
total invested in all funds is around $5 billion for
all 43 funds.

Real estate

As the table overleaf shows, the performance

figures that are available show that the performance of the funds is very volatile. Apart from
anything else this means that it is extremely
difficult for the Muslim investor to pick
a winner.
Since the first fund dates from August 2002
this means that over the past seven years
an average of just over five funds per year

have been launched and are still in existence

although the reality of the situation is that
the number of funds launched per year has
been increasing each year, with eight funds
launched in 2008 and most of them in the first
half year. The relatively modest Inovest Real
Estate Investment Trust of $80 million is the
only fund to have been launched since August
of 2008 when the financial crisis swung into its
most debilitating phase.

Islamic Wealth Management 2009

23

Real estate

IFIS Real Estate Funds Table

Date
04/08/2009
09/04/2009
25/08/2008
01/07/2008
11/06/2008
27/05/2008
13/03/2008
13/03/2008
28/02/2008
18/02/2008
02/02/2008
01/10/2007
22/08/2007
11/07/2007
30/05/2007
23/05/2007
01/05/2007
27/02/2007
15/02/2007
31/12/2006
01/12/2006
30/11/2006
16/09/2006
01/08/2006
01/05/2006
01/03/2006
24/01/2006
24/07/2005
01/07/2005
01/07/2005
01/07/2005
14/06/2005
17/04/2005
01/02/2005
01/11/2004
30/05/2004
01/05/2004
20/04/2004
01/03/2004
01/10/2003
28/05/2003
01/02/2003
29/08/2002

24

Fund Name

Fund Domicile

Real Estate Musharakah Notes

Inovest Real Estate Investment Trust
SHUAA Saudi Hospitality Fund
Global GCC Real Estate Fund II
Al Imtiaz Real Estate Fund
Waed Real Estate Investment Fund
Emirates Islamic Global Property Fund- Retail
Emirates Islamic Global Property Fund- Institutional
Danat India RIA Fund
Islamic Turkey Real Estate Fund
Taibah KSB Real Estate Fund
Global Real Estate Ijarah Fund
OSK-UOB Asian Real Estate Fund
Amar Real Estate Fund
US Retail Realty Fund
Markaz Real Estate Opportunities Fund
Al Islami US Properties III Fund
4-Year Capital Protected Global REIT Note
Samba Real Estate Fund
Boubyan Real Estate Sukuk Fund
U.S. Development Opportunities Fund
Islamic European Real Estate Fund
Boubyan Global Real Estate Fund
Global Asia Real Estate Fund
Asian Real Estate Fund
Prime Industrial Real Estate Fund 2
China Realty Modaraba Fund
Global US Real Estate Fund
Emirates Real Estate Fund - AED
Emirates Real Estate Fund - Income
Emirates Real Estate Fund- Accumulation
GCC Real Estate Fund
Awaed Real Estate Fund
Amlak First Real Estate Fund
Solidarity European Real Estate Fund
Islamic Asian Real Estate Fund
Al Islami French Property Fund
Solidarity International Real Estate Fund
Shuwaikh Real Estate Fund
The U.S. Commercial Properties Portfolio Fund
Makaseb Real Estate Fund (Previously Aayan
1st Real Estate Fund)
Markaz Real Estate Fund
Al Dar Real Estate Fund

United Arab Emirates

Bahrain
Saudi Arabia
Bahrain
Kuwait
Kuwait
Jersey
Jersey
India
Cayman Islands
Saudi Arabia
Bahrain
Malaysia
Kuwait
United Arab Emirates
Kuwait
United Arab Emirates
United Kingdom
Saudi Arabia
Bahrain
Cayman Islands
Cayman Islands
Kuwait
Cayman Islands
Kuwait
Kuwait
Cayman Islands
Cayman Islands
Jersey
Jersey
Jersey
Bahrain
Kuwait
United Arab Emirates
Bahrain
Cayman Islands
United Arab Emirates
Bahrain
Kuwait
United Arab Emirates

Islamic Wealth Management 2009

Kuwait
Kuwait
Kuwait

Geofocus
UAE
Gulf Cooperation Council (GCC)
Saudi Arabia
Gulf Cooperation Council (GCC)
Gulf Cooperation Council (GCC)
Gulf Cooperation Council (GCC)
Global
Global
India
Turkey
Saudi Arabia
Middle East and North Africa
Asia Pacific
Kuwait
United States
Middle East and North Africa
United States
Global
Global
Saudi Arabia
United States
Europe
Global
Asia
Asia
United States
China
United States
UAE
UAE
UAE
Gulf Cooperation Council (GCC)
Gulf Cooperation Council (GCC)
UAE
Global
Asia
France
Global
Kuwait
United States

Gulf Cooperation Council (GCC)

Kuwait
Gulf Cooperation Council (GCC)

Real estate

Asset
Type

Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate
Real Estate

Base
Currency
USD
BHD
SAR
USD
KWD
KWD
USD
USD
AED
USD
SAR
USD
MYR
KWD
USD
USD
USD
USD
SAR
USD
USD
EUR
KWD
USD
USD
USD
USD
USD
AED
USD
USD
USD
KWD
USD
EUR
USD
EUR
USD
KWD
USD

Fund Size
(US$m)

N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A

Real Estate

KWD

N/A

Real Estate
Real Estate

KWD
KWD

N/A

50
79.81
240
500

57.18
52.01
75.4
47
200

150
48.42
100
250
150
100
262
100
75
10.07
39.6
15.65
30
103.15

Fund Manager

Type

Mayfair Wealth Management

Inovest
SHUAA Capital Saudi Arabia
Global Investment House
Al Imtiaz Investment
Al Dhow Investment Company
Emirates Fund Managers (Jersey) Limited
Emirates Fund Managers (Jersey) Limited
Khaleeji Commercial Bank
Wafra Investment Advisory Group
KSB Capital Group
Global Investment House
OSK-UOB Unit Trust Management Bhd
Amar Finance and Leasing
Investcorp Bank B.S.C
Kuwait Financial Centre (Markaz)
Investcorp Bank B.S.C
Dubai Islamic Bank
Samba Asset Management
Boubyan Bank
Shamil Bank
Wafra Investment Advisory Group
Boubyan Bank
Global Investment House
Kuwait Finance House
Kuwait Finance House
CIAM-Shamil Asset Management Ltd.
Global Investment House
Emirates Fund Managers (Jersey) Limited
Emirates Fund Managers (Jersey) Limited
Emirates Fund Managers (Jersey) Limited
Global Investment House
Aayan Leasing & Investment Co
Amlak Finance
Solidarity BSC(c)
Wafra Investment Advisory Group
Dubai Islamic Bank
Solidarity BSC(c)
Al Madar Finance & Investment
Dubai Islamic Bank

Closed Ended

Closed Ended
Closed Ended
Open Ended
Open Ended
Open Ended
Open Ended
Closed Ended-(Renewable)
Closed Ended
Closed Ended
Closed Ended
Open Ended
Closed Ended-(Renewable)
Closed Ended
Closed Ended-(Renewable)
Closed Ended
Closed Ended
Open Ended
Closed Ended
Closed Ended-(Renewable)
Closed Ended
Open Ended
Closed Ended
Closed Ended
Open Ended
Closed Ended
Closed Ended-(Renewable)
Open Ended
Open Ended
Open Ended
Closed Ended-(Renewable)
Closed Ended-(Renewable)
Closed Ended
Open Ended
Closed Ended
Closed Ended
Open Ended
Open Ended
Closed Ended

Aayan Leasing & Investment Co

Closed Ended-(Renewable)

Kuwait Financial Centre (Markaz)

Al Dar Asset Management

Closed Ended
Closed Ended
Source: IFIS

Islamic Wealth Management 2009

25

Real estate
Performance figures are not available for many
of the funds which makes comparison between
funds difficult and comparison with other asset
classes more difficult still. According to Ernst &
Youngs Investment Funds & Investment Report
2009 average returns from Islamic real estate
funds fell from 8 per cent in 2007 to minus 11
per cent in 2008 and minus 5 per cent in the
first quarter of 2009. It is clear that these funds
have been badly affected by the downturn in
real estate asset prices.

The benefit of holding such units from the

individual investors point of view is that these
collective investments can offer exposure
to larger commercial or industrial properties
that individual investors would otherwise not
have access to. Such investors may also find
that these units are far more liquid that the
underlying real estate assets themselves. In
other words investors can invest in real estate
through Shariah compliant capital market instruments that are easily tradable.

Islamic Real Estate Funds - Average Returns

30%
25%

28%
21%

20%
15%
10%

13%
11%

8%

5%
0%
-5%

2006

2007

-5%

-10%

-11%

-15%
Top Quartile Average Return

Note: Data includes returns of 17 funds

Real Estate Investment

Trusts

Islamic Real Estate Investment Trusts (REITs) are

capital market vehicles for owning real estate and
deriving income and they can begin to overcome
some of the illiquidity issues presented by real estate funds. These collective investments will pool
money from a variety of investors to buy, manage,
and sell real estate assets of one sort or another.
A REIT can invest in income producing Shariah
compliant real estate or Shariah compliant SPVs
that hold Shariah compliant assets. Investors or
unit holders in an Islamic REIT typically receive a
proportion of the rental income generated from
these assets as their reward for holding the units.

Islamic Wealth Management 2009

Average Return

Source: Ernst & Young Islamic Funds & Investments Report (IFIR 2009)

Islamic real estate funds can be a useful tool

for UHNW Muslim investors although they can
prove to be rather illiquid.

26

Q1 2009
-5%

2008

In many regards the Securities Commission

Malaysia is a leading light in issuing guidelines
on Islamic REITs and their treatment. As far
back as 2005 the commission issued a set of
guidelines for Islamic REITs. A brief summary of
these guidelines would include:
Rental income is derived from permissible
business activities. Where a portion of the
rental is from non-permissible activities,
these rentals cannot exceed 20 per cent of
the total turnover of the Islamic REIT
Islamic REITs cannot own properties where
tenants operate non-permissible activities
Islamic REIT cannot accept new tenants
whose activities are fully non-permissible
Only 20 per cent of the floor area of a
property can be occupied for non-permissible activities
All forms of investment, including deposit

Real estate
and financing instruments, are Shariah
compliant
Property insurance must be based on Takaful except where Takaful schemes do
not operate
Each Islamic REIT must have a Shariah board
responsible for ensuring that the Islamic REIT
complies with Shariah principles. According
to the Securities Commission Al-Aqar KPJ
healthcare REIT was the first Islamic healthcare REIT listed on Bursa Malaysia Securities
in August 2006. The second was an Islamic
plantation REIT called Al-Hadharah
Boustead REIT.

requirements appear to provide better historical returns. However, Shariah compliance does
not mean that Shariah compliant real estate
mutual funds necessarily under-perform relevant
indexes when relevant risk factors are considered and allowing for differing sensitivities to
benchmark returns.
The authors concluded with the final word on
the subject, the acid test will be empirically
possible only with time and as more Islamic
REITs and real estate funds become established. What experience over the past three
years since the research study was undertaken shows is that REITs as a whole have
not performed well in the cold light of the
financial crisis as the following chart
makes clear.

A research study called Shariah Compliance in

Real Estate Investment was undertaken by Muhammad Faishal bin Ibrahim and Ong Seow Eng

Global REIT Index

250
200
150
100
50

2/3/2009

2/1/2009

2/11/2008

2/9/2008

2/7/2008

2/5/2008

2/3/2008

2/1/2008

2/11/2007

2/9/2007

2/7/2007

2/5/2007

2/3/2007

2/1/2007

2/11/2006

2/9/2006

2/7/2006

2/5/2006

2/3/2006

2/1/2006

Source: Global Business Monitor International, Eurekahedge, Zawya, Ernts & Young analysis

of the Department of Real Estate of the National

University of Singapore in 2006 to establish
whether Islamic REITs underperform conventional REITs in terms of returns. The exercise had
to be theoretical since Islamic REITs were such
a new breed that there were not enough real
life examples to undertake empirical research.
To simulate this exercise Ibrahim and Ong
constructed a synthetic portfolio and analysed
the returns. They concluded, The key result
is that Shariah compliance seems to create a
return trade-off and less restrictive compliance

Further thoughts

There is no escaping the long term appeal

of real estate as an asset class for Islamic
investors. The suitability of real estate for the individual portfolio of a Muslim investor, however,
will depend on a large number of variables. In
many ways the performance of a real estate investment in any of its guises will be dependent
upon local market issues. As a consequence it
can be difficult for a wealth manager or private
banker to advise a client on these areas except
in a very general way.

Islamic Wealth Management 2009

27

Real estate
Without doubt REITs and many Islamic real estate funds mitigate the effects of some of these
variables although for investment purposes
more work has to be done to provide benchmark indices for investors and advisers to use.
In particular, the lack of data publicly available
on the performance of Islamic real estate funds
is an issue that needs to be addressed urgently.

28

Islamic Wealth Management 2009

Shariah compliance does not mean that

Shariah compliant real estate mutual
funds necessarily under-perform relevant
indexes when relevant risk factors are
considered and allowing for differing
sensitivities to benchmark returns.

Could your

Annual Report
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out on time and on budget
If you need to produce an Annual Report for your bank or Takaful house and if it has to be even better than
last years then perhaps you need a fresh set of eyes to look at it.
Because very often producing great marketing isnt good enough you need to produce brilliant
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Sukuk

Sukuk
The place of fixed income
in a balanced portfolio

ixed income has always played a

part in any diversified portfolio, and
particularly so for ultra high net worth
individuals. Bonds, both corporate and
sovereign, can offer investors a fixed
rate of return over a specified period that is often
comfortably in excess of the prevailing rate of
interest. As a result such instruments can offer a
significant element of stability and predictability
to a portfolio that helps to offset the risks represented by more speculative elements of
the portfolio.
Traditionally the appeal of such instruments was
underpinned by a couple of important factors:
whether the bonds were rated by a reputable
rating agency; and whether they were listed
on an exchange and were therefore tradable.
Many huge investment vehicles, such as pension
funds, can only invest in investment grade debt,
basically A grade and above, and this may be

good advice for private investors too, especially

if they are looking only for modest and predictable returns.
The rating of Islamic debt instruments, or Sukuk,
in the past has not been a mandatory pre-requisite for many investors and indeed many unrated
Sukuk have been massively oversubscribed. This
might, in the past, have led issuers to believe
that a rating was an unnecessary extra expense
that they did not need to incur.
The same might be said of listing a Sukuk on an
exchange where it could be traded. Often, in the
past, investors in Sukuk held their investment
to maturity simply because there were so few
other Shariah compliant avenues open to them.
This had begun to change as Sukuk issuance
grew to the heady levels that the market witnessed in 2007 and 2008 and trading became
slightly more commonplace. HSBC, for instance,
became a market maker in Sukuk although the
volumes traded were generally rather thin.

Islamic Wealth Management 2009

31

Sukuk
Malaysia was always a different proposition altogether. In Malaysia there has been a very active
primary and secondary market for Sukuk in part
because of the strong government and central
bank backing of the Islamic debt capital market
and in part because every Sukuk issued in
Malaysia must have a rating, although generally
the rating for ringgit denominated Sukuk would
come from one of the domestic rating agencies,
RAM or MARC.

New realities

The financial crisis has been very useful in raising

the level of the debt markets of the world. In the
first eight months of 2009 global corporate bond
issuance went through the $1,000 billion mark
for the first time in any single year. According to

investment grade, further demonstration that

investors are very concerned about finding
safe havens for their funds.
The other side of this coin is that syndicated
bank loans for the first eight months of 2009 are
well down on previous years: 52 per cent down
on 2008 and 69 per cent down on 2007. These
figures reflect the reluctance of banks to lend as
they struggle to repair the balance sheet damage inflicted by the credit crisis.
According to figures from Zawyas Sukuk Quarterly Bulletin for the third quarter of 2009, Sukuk
issuances in Q3 2009 were up 15 per cent
from the previous quarter and almost double
compared to Q3 2008.

Global Sukuk Issues ($m) - 3Q09 vs. 3Q08

9,000
8,000
7,000

6,176

6,000

2,534

5,000
4,000

3,369

3,000

1,638

3,642

2,000
1,731

1,000
0

3Q08
Mena

3Q09
Other

Dealogic $1,103 billion in debt was issued in

the first eight months of the year. There are
various reasons for the surge in borrowing
levels but undoubtedly the two main reasons
are the difficulties that corporates have experienced in borrowing from their traditional bank
lenders coupled with the fact that there has
been a significant increase in investor interest
because of the attractive rates of return offered by corporate bonds. Of greatest interest
to prospective issuers and investors alike
is the fact that 90 per cent of this debt was

32

Islamic Wealth Management 2009

Source: Zawya Sukuk Monitor

The Nakheel conundrum

Dubai government-owned developer Nakheel has

a $3.52 billion Sukuk which matures in midDecember 2009, together with a roughly $500
million profit payment on the Sukuk. Nakheel
has been very hard hit by the financial crisis,
particularly since the value of property in Dubai
has halved since the crisis struck. There have
been reports of Nakheel delaying payments to
contractors and this has led to speculation that
the developer might try to restructure its debt
ahead of the maturity date.

Sukuk
Developments through the summer of 2009
have suggested that these early concerns were
overblown and that Nakheel will repay Sukuk
holders in full and on time but this did not stop
the price of the Sukuk dropping to 63.5 cents on
the dollar in February 2009, although it recovered to around 90 cents by August 2009 and
finally leapt to 102.5 cents by mid-September
after Dubais ruler, Sheikh Mohammed bin Rashid
Al Maktoum, offered assurances that everything
was OK. However this tightening of spreads is
indicative of the Sukuk market as a whole as the
charts overleaf illustrate.

The financial crisis has been

very useful in raising the
level of the debt markets of
the world. In the first eight
months of 2009 global
corporate bond issuance
went through the $1,000
billion mark for the first
time in any single year.

Islamic Wealth Management 2009

33

Sukuk

HSBC/DIFX HSBC Amanah Sukuk US Dollar Bond Index (HASI)

The HSBC/DIFX HSBC Amanah US Dollar Sukuk Index (HASI) is designed as a replicable benchmark tracking the return of
an emerging HSBC Amanah sukuk portfolio. It consist of USD/JPY/EUR-denominated fixed/floating rate vanilla sukuk.

896

2009 Year to date

809
722
635
548
461
374
Feb

Mar

Apr

May

Jun

Jul

Aug

HSBC/DIFX HSBC Amanah Sukuk US Dollar Bond Index (HASI)

The HSBC/DIFX HSBC Amanah US Dollar Sukuk Index (HASI) is designed as a replicable benchmark tracking the return of
an emerging HSBC Amanah sukuk portfolio. It consist of USD/JPY/EUR-denominated fixed/floating rate vanilla sukuk.

562

3 months to 23 August 2008

498
470
442
414
386
358
Jun

Some weeks before the Nakheel Sukuk matures

the government of Dubai will have to repay the
$1 billion Dubai Global Sukuk, which was a five
year Sukuk from 2004 issued on behalf of the
Dubai Civil Aviation Authority that matures early
in November 2009. While some observers have
speculated that refinancing the Sukuk will be
expensive the Dubai Department of Finance
advised Zawya Dow Jones in September 2009
that defaulting on the Sukuk isnt an option.

Other question mark

around the industry

There have been a few other remarkable developments that have spurred increased interest in
the Sukuk market. One has been the bankruptcy
filing by East Cameron Partners in the USA which

34

Islamic Wealth Management 2009

Jul

Aug

was the entity behind the issuance of the USAs

first and only Sukuk. How the courts deal with
the bankruptcy will be crucial in determining what
happens in to Sukuk under these circumstances
in legal terms, since this is largely uncharted
territory, and Sukuk holders will be keen to see
where they appear on the list of creditors.
Of equal interest is the default by Investment
Dar of Kuwait on a payment on its Sukuk that
matures next year. What these developments
show is that Sukuk are no longer viewed as a
safe haven that offer predictable returns with
minimal risk.
Add to this the media-enhanced furore that broke
out when it was reported that Sheikh Taqi Usmani

Sukuk

The reality of the situation is that Usmani said no

such thing, and his remarks
were confined to non-Ijarah
issues, but this seemed to
matter little as critics and
investors alike scrambled to
find out what this meant for
the market.
declared that 85 per cent of Sukuk were not Shariah compliant and it becomes evident that the industry as a whole still has a lot of growing up to
do. The reality of the situation is that Usmani said
no such thing, and his remarks were confined to
non-Ijarah issues, but this seemed to matter little
as critics and investors alike scrambled to find
out what this meant for the market.

The year to date for Sukuk

According to a report from Standard & Poors

released in early September 2009 new issuance
of Sukuk dropped to $9.3 billion in the first seven
months of 2009 compared with $11.1 billion
during the same period in 2008.

Islamic Wealth Management 2009

35

Sukuk

Total Sukuk Issuance (2001-2009)

(Bil. $)
100
90
80
70
60
50
40
30
20
10
0

2001

2002

Total sukuk issued

2003

2004

Sukuk cumulative total

2005

2006

2007

*First seven months of 2009.

2008
Source:

2009

Standard & Poors 2009

Total Sukuk Issuance by Country in 2009*

Bahrain
9.79%

United Arab
Emirates 4.26%
Saudi Arabia
22.03%

Brunei Darussalam
0.71%
Gambia
0.08%
Indonesia
16.05%

Pakistan
2.04%

Malaysia 45.03%

The geographic spread of spread of Sukuk

issuance shows a marked resurgence of Asia in
general and Malaysia in particular.
Equally fascinating from S&Ps research was
the slide in significance of the US dollar in favour of domestic currency issues. Perhaps this
says more about the prospective audiences
for the various Sukuk issues, but nonetheless
points to an upsurge in domestic rather than
international borrowing.
This latter factor has great significance for those
watching the Sukuk space from a wealth management perspective since investors are unlikely
to be attracted to non US dollar foreign currency

36

Islamic Wealth Management 2009

*First seven months of 2009.

Source:

Standard & Poors 2009

Sukuk for the simple reason that such Sukuk

leave the investor open to foreign exchange risk.
As an example, only wealthy Muslim investors in
Indonesia are likely to want to invest in a rupiah
denominated issue since the currency itself may
collapse quite independently of the issuer.

The GCC

According to Markaz, most of the issues seen

in the GCC so far in 2009 were either sovereign
or by corporates that are fully or largely owned
by their governments. Indeed such issuance
accounts for 92 per cent of the total issuance
during the period. As Markaz said, It is interesting to note that all of the Sukuk issuances
raised during H12009 were sovereign Bahraini

Sukuk

Total Sukuk Issuance by Currency in 2009*

Bahraini dinar
1.81%

Bruneian dollar
0.71%
Gambian dalasi
0.08%

US dollar
19.16%

Indonesian rupiah
45.03%

Saudi Arabian riyal

22.03%

Malaysian ringgit
45.03%

Pakistan rupee
2.04%
*First seven months of 2009.

Source:

Standard & Poors 2009

issuances, except for one which was issued by

the Saudi Arabia-based Dar Al-Arkan Real Estate
Development Company in May 2009. During
H12009, sovereign issuances dominated the
majority of the amount raised, raising $12.7
billion with a 69.0 per cent share of the total
volume; continuing with the trend observed since
2003 except for the peak years of 2006-2007,
in addition to 2008, where corporate issuances
dominated the market.
In part these sovereign issues can been seen
as genuine attempts by regional governments
to raise much needed funds and in part as
an attempt to breathe some life back into the
moribund fixed income sector. Aside from the
fully sovereign issues in the first half of 2009
there was also a significant amount of activity
from government-linked entities. According to
Markaz, Of the $5.7 billion raised by corporations, 74.6 per cent was raised by corporations that are either fully or largely owned
by governments, the remaining amount was
raised by Dar Al-Arkan Real Estate Development Company and Aldar Properties PJSC;
nonetheless, 26.3 per cent of the latter is
owned by government entities.
In terms of geographic spread $6 billion, or 38.1
per cent of the total amount raised came from
the UAE, $5.8 billion, 31.3 per cent came from
Kuwait; Qatar issued $4.5 billion; and Bahrain
issued $920 million. Saudi Arabia was the least
active among the GCC issuers with only one
issue raising $200 million however, according to
Markaz, Saudi-based Saudi Electricity Company
launched and sold a Sukuk, but did not close the
books nor issue the Sukuk, during the last week
of H12009.
According to S&P there are still significant issues
facing the Sukuk industry in the year ahead.
These include:
Difficult market conditions, which are
slowing the planned issuance of
numerous Sukuk;
The lack of standardisation, notably when it
comes to Shariah interpretation; and
The low liquidity of the Sukuk market, which
constrains investors trying to exit the market
in times of turbulence or access the market
looking for distressed sellers.
While these undoubtedly represent significant
concerns it is likely that they will form only

Islamic Wealth Management 2009

37

Sukuk
background noise when the industry takes
off, which is unlikely to happen until general
market conditions improve and the position
of Sukuk when faced with a default is clarified significantly.

The Islamic
Development Bank

The Islamic Development Bank (IDB) has

often been the subject of discussions
concerning Sukuk since the institution has
a significant history of issuing landmark
transactions over the years. 2009 is no exception and the IDB came to market with a
$500 million issue in early September. The
roadshow for drumming up interest in the
Sukuk took in Saudi Arabia, UAE, Malaysia,
Brunei, Tanzania, UK, Singapore and Switzerland showing that oversubscription these
days is by no means automatic, even for
issues from an institution like the IDB which
has a triple A rating from all three of the
main rating agencies. According to the IDB,
Though the offering will be for a minimum
of $500 million, the actual size of issuance
will depend on the interest of investors
and market conditions, while pricing will
be benchmarked against other multilateral
development institutions.

The prospects for Sukuk

and the wealth management industry

There is no doubt that the Sukuk market has

reappeared on the radar screens of many
investors over the past year. In part this is
because, in spite of the tribulations that the
Sukuk market has witnessed over the past 18
months, there is still a place for a fixed-income
type product in most portfolios.
What we are likely to see is a flight to quality which could mean that Sukuk from triple
A rated issuers that are listed on recognised exchanges are snapped up in favour
of issues with no rating and no listing. We
might also see a scramble to have nothing
but blue chip managers and lead managers
working on issues. While this will undoubtedly be good for some issuers and investors it could have the effect of knocking out
the smaller issuers that had come to typify
the Sukuk market.

38

Islamic Wealth Management 2009

In terms of pricing, it is likely that Sukuk will

be priced in a much more competitive fashion
in future as they compete with funds from
other Shariah compliant instruments, as well
as from non-Shariah compliant ones. Many
Islamic investors have maintained for years that
money has no religion and they refuse to pay
a premium for investing according to their faith.
Recent developments are likely to consolidate
these beliefs and indeed may even expand
the pool of investors who simply want a safe
haven for the funds and are prepared to turn a
blind eye to the fact that the investment itself
is haram.
What seems beyond doubt is that issues
from the GCC will start to look more and
more like those from Malaysia where a strict
cookie-cutter approach is taken to issuing Sukuk. One of the prevalent trends in
Malaysia is for Islamic Medium Term Note
programmes whereby one set of documentation can be used for multiple issues
from the same issuer. These are eminently
sensible and could make a useful addition to
the battery of dollar denominated instruments that we find in the GCC and the rest
of the world. The next six to 12 months are
likely to be fascinating for the Sukuk niche,
whether or not the much talked about pent
up demand of $50 billion of Sukuk in the
pipeline ever materialises.
Middle Eastern business portal Zawya
has taken some very interesting steps to
encourage debate and discussion on how to
encourage and enhance secondary market
trading in Sukuk. Zawya has set up a discussion forum that is already throwing up some
fascinating insights from market participants on how to bolster and boost
the industry.
If nothing else, initiatives such as this one
from Zawya give some indication that the
industry itself is ready to take the next step
towards maturity. If this leads to more rated
and listed Sukuk on the primary market and
therefore healthy trading on the secondary
market, then this can only be good news
for the UHNW Muslim investor looking for
a core of stability and predictability to
his portfolio.

The rating of Islamic

debt instruments, or
Sukuk, in the past
has not been a mandatory pre-requisite
for many investors
and indeed many
unrated Sukuk have
been massively oversubscribed.

Islamic funds

Islamic funds

40

Islamic Wealth Management 2009

Islamic funds
IFIS, the Islamic finance portal from Euromoney,
has one of the most extensive databases on
Islamic funds and as of the middle of October
2009 had 556 Islamic funds listed with a total
value of $22.8 billion. These funds are focused
on a variety of asset classes as the following pie
chart from IFIS shows:
Islamic funds by type

2%
5%
7%
54%
17%

15%

Its been a rocky road

erformance figures from Lipper, the

fund intelligence company, show that
both conventional and Islamic Arab
domiciled funds were worth a cumulative $64 billion in July 2008. By the
end of 2008 that figure had dropped to $50.4
billion and then recovered somewhat to stand
at $56.9 billion and the end of July 2009. While
nothing in these figures will surprise investors or
market watchers, they do indicate that funds can
be a very volatile beast and need to be handled
with care by the UHNW Muslim investor.
The problem with investing in any fund, conventional or Islamic, is that the success or failure
of the fund depends on the performance of the
fund manager. As recent experience has shown
past performance is not always a good guide to
future performance, particularly when markets
are collapsing in tandem all over the globe. Success in investing in funds, therefore, lies not so
much in picking the right fund as in picking the
right fund manager.
Still, investing in funds is often an easy way of
allowing investors access to a broad spread
of underlying assets without exposing them
to the vagaries in performance of any single
asset. To this end Islamic funds have for long
been a core part of many Islamic wealth
management portfolios.

54% Equities
15% Mixed assets
17% Money market

7% Real estate
5% Sukuk
2% Other
Source: IFIS

Since the start of the summer of 2009 hardly

a week has gone by without a new Islamic fund
being brought to market to capitalise on the
growing interest in Shariah compliant funds. New
funds are being launched at an unprecedented
rate with some of the most recent coming from
non-Islamic finance houses such as NBK which
announced the launched of its Islamic KD Ijara
Fund II which will offer investors the equivalent
of 6.25 per cent throughout the life of the fund.
Minimum investment in the Kuwait dinar denominated fund is around $100,000 which suggests
that the audience for the fund is certainly
amongst an affluent Muslim private investor
audience. The fund was fully subscribed within
one day of opening. According to NBK the fund
was launched as a result of the overwhelming
success of the first Islamic KD Ijara Fund which
was launched in June of this year and was fully
subscribed in a matter of days too.
Almost concurrent with this launch was the
Shamil Solid Return Fund, a Shariah compliant
multi-asset investment fund from Shamil Bank
of Bahrain. According to the bank the fund is

Islamic Wealth Management 2009

41

Islamic funds
designed specifically for the expert investor who
is looking to diversify investments in the current
market. Although only small, at $25 million, the
fund will invest in a mixture of assets: Islamic
equities, Sukuk, Mudaraba investments, and
crude oil.
QInvest from Qatar, meanwhile, is setting up a
$200 million five year mezzanine fund together
with Fortis Bank Nederland to buy shipping
assets to take advantage of falling prices in the
maritime sector. The Shariah compliant fund will
be invested over the next 18 months. International shipping has been knocked hard by the
global economic crisis, largely due to overcapacity caused by a construction boom that took
place before the slump began which shows that
Shariah compliant funds are being used in ever
more inventive ways to take advantage of the
current market opportunities thrown up by the
financial crisis.
Abu Dhabis The National Investors and Kipco Asset Management Company set up a $150 million
Islamic fund in early September 2009 as further
proof that the Islamic funds space is attracting players from outside the traditional Islamic
finance arena. The Shariah compliant fund will
be launched within three months and will make
six or seven investments with an average equity
of $25 million each in mid-size, family-owned
companies that require external funding in order
to cope with the pressures brought to bear by
the financial crisis.
In contrast to all of this growth news HSBC told
Reuters in mid-September that it had postponed
the launch of its first fund investing in Sukuk after
investors were put off by a four-year lock-up
period. HSBC Amanah had planned to launch
the fund in the summer of 2009. We decided to
take some time to redesign the product based
on feedback during the marketing phase, the
spokeswoman for HSBC Global Asset Management told Reuters. The lock-in period was not
attractive to investors at the time.
Naturally this phenomenal growth in funds is not
restricted to Islamic funds and indeed the latest
GCC Fund Market Insight Report from Lipper indicates that GCC equity funds moved into positive
territory for the first half of 2009 recording an
increase of over 21 per cent. This compares to
a 12.5 per cent loss in the corresponding period

42

Islamic Wealth Management 2009

for 2008. Of the GCC-domiciled funds, those

funds that invested in emerging markets and sector-based funds, such as information technology
and natural resources, were significant leaders.
Striking the right balance
In terms of a balanced Islamic wealth management portfolio it appears that exposure to Islamic
funds of different sorts, in different jurisdictions,
with differing underlying asset types and structures may continue to grow in significance and
importance as the world climbs out of recession
and into a new growth phase. The Ernst & Young
Islamic Funds and Investment Report for 2009
now seems almost prescient when it stated,
Despite this setback, the fundamentals of the
Islamic fund industry remain strong. With almost
$50 billion in fund assets under management
and a large, expanding and untapped Muslim
population, there are likely to be considerable
opportunities in the future. This is a time when
strategic choices have to be made and market
participants have to adapt to survive.
The following graph illustrates the remarkable
growth of the Islamic funds industry since it
first emerged as a significant part of the overall
Islamic finance industry:

investing in funds
is often an easy
way of allowing
investors access
to a broad spread
of underlying assets without exposing them to the
vagaries in performance of any
single asset.

Global Islamic funds industry

(Estimated AuM. (US$)

50
45
40
35
30
25
20
15
10
5
0

Number of funds

41

43

44

34

700
600

29
20

800

500

23

400
300
200
100

2003

2004

2005

2006

Assets under management (AuM)

2007

2008

Q1 2009

Number of Islamic funds

Source: Eurekahedge, Zawya, Ernst & Young analysis

What these figures are in danger of concealing,

however, is that the average returns on Islamic
funds over most of 2008 and the first part of
2009 have been far from spectacular. While it
is true to say that most asset classes suffered
badly over this same period, Islamic funds were

Islamic funds

certainly not been immune to the collapse in

asset values around the world. The following
graphs all come from the E&Y report and demonstrate the parlous performance of all Islamic
funds up to the end of the first quarter of 2009.

The fees debate

Few investors welcome paying fees to their fund

manager but are generally happy to do so if
they hold the belief that the returns offered by
the fund manager will be sufficient to outweigh
these costs. But when returns are below par or
below the expectations of the investor then questions start to arise over fee size. According to
research undertaken by Eurekahedge, average

management fees of Islamic funds have gradually increased, in particular with regards to equity
funds and this has been more pronounced with
mandates in Middle East (the average fee now at
1.7 per cent) and Asia Pacific (the average fee
now 1.59 per cent).
Logic would suggest that poor fund performance
would put fund management fees under pressure and the groups most able to resist such
pressures would be those groups with the most
market presence. In such a case then groups
like NCB Capital, with 21 funds to its name with a
total value of over $10 billion, are better placed
to resist fee pressures than those will less clout.

Islamic Wealth Management 2009

43

Islamic funds
The road ahead

The Islamic funds industry, like the rest of the

funds industry, seems to be filled with fund
managers more concerned about hanging onto
their job than producing stellar results. Indeed,
just matching an index these days is deemed
to be the important thing.
What seems clear is that the next 12 months
will show a lot more volatility and we can expect
to see the individual performance of funds
fluctuating in line with the markets. Islamic
funds can still play a central role in any risk balanced portfolio but the core consideration when
choosing a fund has to be track record rather
than asset class or investment philosophy.

Shariah compliant funds are being used in

ever more inventive ways to take advantage
of the current market opportunities thrown
up by the financial crisis.

Islamic Equity Funds - Average Returns

60%

Islamic Fixed Income Funds - Average Returns

51.7%

9%

50%

9%

8%

8%

40%

27.0%

30%
20%

6%
4.8%

3.4%

10%
0%

2006

-10%

2007

2008

-3.7%
Q1 2009

-30%
Top Quartile Average Return

4%

0%

Islamic Cash Funds - Average Returns

25%
15%
10%

7.2%

5%

5.2%
3.4%

0%

0%

3.9%

-5%
1.8%

2%
0%

2006

2007

Top Quartile Average Return

Q1 2009

Average Return

23.2%

21.2%

10.5%

10.0%

2008

-15%

Q1 2009

-25%

Average Return

Islamic Wealth Management 2009

2.2%
2.2%
2006

1.8%
2007

2008

Q1 2009

-10%

0.7%

Source: Bloomberg, Eurekahedge, Zawya, Ernst & Young analysis

44

2008

20%

8%

4%

1%

Source: IFIS, Zawya Sukuk Monitor, Eurekahedge, Ernst & Young analysis

30%

10.5%

6%

2007

1%

Islamic Commodity Funds - Average Returns

12.2%

10%

2006

Top Quartile Average Return

Source: Eurekahedge, Zawya, Ernst & Young analysis

12%

4%
3%

3%

Average Return

14%

4%

1%

-39.0%

-40%

5%

2%

-20.9%

-20%

7%

7%

23.0%

-20%
Top Quartile Average Return

Average Return

Source: Merrill Lynch, Eurekahedge, Zawya, Ernst & Young analysis

Private equity and

venture capital

Private equity and

venture capital
The elephant in the room

n 2006 Abraaj Capital announced its $2 billion Infrastructure and Growth Capital Fund
(IGCF) as a Shariah compliant private equity fund that was to be co-sponsored by
Deutsche Bank and Ithmaar Bank. The very simple idea behind the fund was that the
GCC has a tremendous need for infrastructure investment and that a fund to address
this need that was structured to be compliant with Shariah would have no shortage of
takers. Infrastructure was defined to include not simply physical infrastructure like roads,
airports, desalination plants and so on but also soft infrastructure such as schools, universities, hospitals and the like.
When the fund closed in December 2007 it was fully subscribed and according Abraaj
Capital, The fund made a total of four acquisitions in 2007 deploying close to $1 billion
of fund capital. The fund made a further seven investments during 2008, reaching over
90 per cent deployment at year end. IGCF also made a distribution of $300 million in
July of 2008, representing 15 per cent of its capital.
According to Zawyas Private Equity Monitor no other Shariah compliant private equity
or venture capital fund comes anywhere near the size of the Abraaj fund. Indeed the
monitor shows that there are only 17 such funds in existence with a total value of just
over $4 billion.

Shariah Compliant Private Equity & Venture Capital Funds October 2009

Status

Full Name

Closing
Fund Manager
Date

Investment
Focus

Geographical
Focus

Fund
Size

Fund Raising

Al Fares Private Equity Fund

Al Mal Capital

Buyout

MENA

Investing

Al Mal Capital Market Funds L. P.

Apr 08

Al Mal Capital

Buyout

MENA

$ 40M

Investing

Alimtiaz Investment Fund

Alimtiaz Investment Company

Buyout

MENA

Fund Raising

CMH Enterprise Fund 1

Capital Management House

Buyout

GCC

Fund Raising

CORECAP Islamic Private Equity Fund I (CIPEF I)

CORECAP

Buyout

MENA

Investing

Eastgate MENA Direct Equity L.P.

Nov 07

Eastgate Capital Group

Growth Capital

MENA

$250M

Investing

GCC Real Estate Fund

2005

Global Investment House

Real Estate

GCC

$100M

Investing

Global MENA Financial Assets

Jul 08

Global Capital Management Limited

Buyout

MENA South Asia, Turkey

$500M

Liquidation

Gulf Spring Real Estate Fund

Unicorn Investment Bank

Real Estate

GCC

Investing

Infrastructure and Growth Capital Fund

16Oct07

Abraaj Capital

Buyout

MENA

$ 2,000M

Buyout

GCC

$ 150M

Real Estate

Kuwait

$ 84.41M

Mezzanine Capital

GCC

$ 199.92M

Announced

Kunooz Islamic Opportunities Fund

Investing

Markaz Real Estate Fund

Feb 03

The National Investor

KIPCO Asset Management Company
Kuwait Financial Centre

Investing

Mezzanine Investment Partners II Limited

30Oct08

SHUAA Capital
Amwal
QInvest

Fund Raising

NBD Sana Capital

Feb 08

Sana Capital

Buyout

MENA, Turkey

$ 500M

Investing

Rasmala MENA Private Equity Fund 2

30Nov08

Rasmala Investments Holding

Buyout

GCC

$ 120M

Investing

Shefa Healthcare Fund E.C.

Aug 07

Injazat Capital

Buyout

MENA

$ 60M

Investing

The Libya Fund

Q4 2007

Tuareg Capital

Venture Capital

Libya

$ 30M

Source: Zawyas Private Equity Monitor

For asset classes that could potentially offer the Muslim HNW investor double digit returns these twin avenues of private equity and venture capital remain sadly unexplored in
the world of Islamic finance. Indeed both private equity and venture capital have not been
the focus for the kind of exploratory rigour that many other areas of the industry have.
It is worth highlighting that the largest single Islamic PE fund was conceived, researched
and launched by Abraaj Capital, which is an acknowledged expert in the private equity
field but is demonstrably conventional in most of its operations.

46

Islamic Wealth Management 2009

Private equity and

venture capital

Islamic Wealth Management 2009

47

Private equity and

venture capital
The failure of Islamic venture capital

Venture capital investors are a very particular

breed and it is not likely that many UHNW Muslim investors will be unduly interested in direct
venture capital investing. Venture capital here
is defined as the provision of seed capital for
a new venture in the process of being established, rather than the provision of capital to a
small business to facilitate its growth.
If a potential investor understands a specific
sector, such as biotechnology, then he may
be drawn to speculate in that area but will not
consider other areas on the simple grounds that
he does not understand them. Rather like its
conventional counterpart, Islamic venture capital
appeals most to investors who understand a
sector or an industry intimately and are prepared
to risk a portion of their capital on the strength
of a business plan, the management team of the
proposed business, and their own ability to pick a
winner. Other similarities between Islamic venture
capital and conventional venture capital include
the fact that deal sizes are small when compared
to private equity transactions, since the start-up
capital that is required for a burgeoning small
businesses tends not to include monies for grandiose marketing and advertising plans but tends
to be much more conservative in its outlook.
What this should mean is that venture capital
funds are more appealing to UHNW Muslim
investors because they can offer a spread of
investment exposure albeit within a limited sector, again such as biotechnology. As the chart
above shows, there has been a great lack of
any Shariah compliant venture capital funds for
these investors to access. Funds that do exist
can tend to be misnamed private equity funds
or even straightforward real estate funds with a
venture capital gloss.
In this regards few governments of Muslim
countries have done much to encourage the
growth and development of Islamic venture
capital funds. The exception is the government of Malaysia which has take some steps
to promote the industry and has launched a
fund, albeit a small $10 million fund, to help
show the way. Rather like its cousin private
equity, venture capital is a mode of investing
that seems perfect for Islamic finance through
the application of various Islamic financing

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Islamic Wealth Management 2009

concepts, with the Mudarabah concept being

the most common.

Principles used

Mudarabah financing involves a contract

under which the investor, or rabal-maal, brings
financing to the table and the entrepreneur, the
mudarib, brings expertise, effort, and in the
case of Islamic venture capital, a business plan.
Collectively the parties share the proportionate
profit from the results of the enterprise as per
their pre-arranged agreement. The entrepre-

Private equity and

venture capital
In the context of Islamic venture capital
Musharakah financing is a partnership formed
between parties to finance a business venture
where the parties contribute capital either in
the form of cash or in kind. Profits are distributed based on a pre-agreed ratio. Losses are
shared on the basis of capital contribution to
the venture.
In Wakalah financing a contract from one party
gives the power and rights to another party to
act on his behalf, based on the agreed terms
and conditions.

Reasons for slow growth

neur cannot be placed at risk of losing money

since he has contributed only expertise. If
the business venture fails, then the most the
entrepreneur could lose is the investment he
has already made in the business and the time
and effort he had put into the venture. In other
words no one can come after the entrepreneur
for cash compensation. In a similar way, no one
should expect the venture investor to have any
say in the management of the company or any
responsibility for it, since his part of the deal is
to providing financing only.

The sector of Islamic venture capital had

been largely ignored in the GCC until recently
because of the lack of an entrepreneur class
which is essential for the development of a
healthy venture capital environment: young,
bright people with great business ideas and a
determination to make a success of their business. As the world becomes more of a global
marketplace, and as the education and skills
level of young people in the region increases,
then venture investing along Shariah compliant lines may become more common. On the
other hand countries such as Egypt, Lebanon
and even Turkey have long had an entrepreneur
class of their own and the VC industry is consequently more developed in these countries. In
much of the GCC there have been impediments
to foreigners or non-GCC nationals owning their
own businesses outright and this had naturally
led to an absence of such businesses in the
marketplace. As countries like the UAE have
introduced free zones such as Dubai Internet
City, Dubai Media City, Dubai International
Financial Centre, Jebel Ali Free Zone, and so
on where foreign nationals and corporates can
own 100 per cent of their own business then
the market for venture capital has opened up.
Naturally the business idea that will attract
Islamic venture capital has to operate within the
constraints of Shariah and must not dabble in
haram areas.
But having a young entrepreneur class is only
half of the equation. The other half of the equation is having venture investors with the risk
appetite to back the business plans presented
to them with hard cash. This is not simply a
matter of having the money, it is also about
having the tools to analyse the business plan,

Islamic Wealth Management 2009

49

Private equity and

venture capital
structuring a deal, and ensuring that the short,
medium, and long term investment interests of
both the entrepreneur and the investor are the
same. This requires a level of education and
expertise that had been lacking until relatively
recently but has arrived in the region on the
back of the tidal wave of oil revenues and
increasing globalisation.
While the Malaysian governments endeavours
are to be applauded it seems likely that the
sustained growth and development of a strong
and healthy Islamic venture capital an industry
will rest in the private sector. If the Malaysian
government can help to kick start such industry
domestically then so much for the good.
Perhaps what the industry needs more than
anything else is a catalogue of success stories
that will pique the interest of wealthy investors
with a penchant for backing small business. A
series of success stories in the Islamic venture
capital field could prove to be just the fillip that
the industry needs to spawn dozens of funds
from the private sector looking for the next big
Shariah compliant thing.
It seems a safe bet that successful Islamic
venture capital investing in the future will be the
speciality of Islamic investment banks rather
than specially focused Islamic venture capital
firms. The rationale here is that, as we have
already observed, the quantum of individual
venture capital investments tends to be small
and therefore may not be lucrative enough
in the short term to finance all but the most
boutique of firms. Early signs would suggest
that the industry is likely to flourish in Malaysia
before anywhere else, in large part because of
the initiatives of the government. What seems
beyond doubt is that the industry at present is
tiny, certainly smaller than $100 million, and
probably worth less than half of that. When the
global recession is over, Islamic venture investing could easily be one of the fastest growing
sectors of the industry, if for no other reason
than it is coming off a very low base.

Islamic private equity

There is a close relationship between Islamic

tenets of investing and private equity. By its
nature private equity is participatory in nature
and inevitably it must lead to the sharing of both
risks and rewards. As long as the company
seeking the private equity infusion is not operat-

50

Islamic Wealth Management 2009

ing in a haram area of business such as pornography or liquor, or is not heavily indebted, then
few forms of co-investing could be more pure
from a Shariah compliance perspective than
private equity. The reality of the matter is that
there is a close relationship between Islamic private equity and conventional private equity and
therefore as private equity has grown in size
across the globe then we might have expected
its Islamic counterpart to have done the same.

How big is big

Industry estimates suggest that the global

conventional private equity market is worth
around $2,200 billion. The volume of transactions completed in the first quarter of 2009
showed that the industry was in for a rough
ride. According to Greenpark Capital, a specialist secondary investor in private equity, deals
closed in the first quarter of 2009 amounted
only to $2 billion.
Figures for the Islamic private equity industry
are much harder to come by, but estimates
from Yasaar Media research coupled with
Zawyas Private Equity Monitor suggest that
the industry is around $4 billion in funds raised
and deals done, much of it in the MENA region
which is a far cry from the $40 billion that
observers suggested was the level that the
industry would reach by 2011. For an overall
Islamic finance industry whose size is estimated
at around $800 billion then it is not hard to see
that private equity does not play a very significant part in the industry yet.
The Islamic private equity industry is still in its
infancy both in terms of overall size as well as
numbers of players in the market. One of the
core developments that will be needed for the
mature development of the industry is for more
and better qualified human capital: more people
with a higher level of training. This is a requirement that afflicts much of the Islamic finance
industry and the same dilemma applies here:
does the private equity firm employ private
equity experts and teach them Shariah? Or
does it employ people who understand Shariah
and then teach them the art of private equity?
This applies both to those experts charged with
structuring products as well as those on the
marketing and relationship management side
of the business. In order to address this issue
fully, however, there needs to be a greater level

Funds that do exist

can tend to be misnamed private equity funds or even
straightforward
real estate funds
with a venture
capital gloss.

Private equity and

venture capital
of standardisation across countries to ensure
common levels of compliance. In this way the
Gulf-based Islamic private equity practitioner
can engage staff from Islamic markets in Asia
and vice versa without the usual culture shock
that so badly affects Islamic retail banks trying
to ferry staff in from overseas to meet demand.

The future for Islamic private equity and venture

capital

When the recession is firmly behind us it seems

certain that the private equity industry will once
again take off. Unless the Islamic sphere wishes
to lose out then it will have to try to compete
with the conventional world in terms of invest-

ment from HNW and UHNW Muslim investors.

Islamic private equity and venture capital can be
appealing and alluring and investors love them
in part because they can offer stellar returns in
an otherwise moribund market.
There seems little doubt that the appetite will
be there for such investment avenues when
normalcy returns. The question will be whether
the talent bench of the Islamic private equity
sector is deep enough to be able to compete
or whether the Islamic finance industry will sit
back and watch as conventional investment
banks and private equity houses bring a string
of attractive Shariah compliant PE and VC funds
to market right under their noses.

Islamic Wealth Management 2009

51

Hedge funds

Hedge funds
The hedge funds debate

here has long been frustration over

the lack of Shariah compliant avenues
for investors to park their cash and
this has led financial engineers to
try to manufacture a bigger pool of
investment alternatives. Over the years this has
led down a number of paths but perhaps one of
the most controversial has been that concerning
the use of hedging structures in Islamic finance.
There have been a number of initiatives on this
front beginning in 1997 when The International
Investor launched the Al-Khawarizmi Market Neutral Fund which was followed by an offering from
SEDCO in Saudi Arabia with the Al Fanar Hedge
Fund, using a long/short strategy with a Salam
contract managed by a single manager.
Perhaps not the first but certainly one of the
highest profile attempts to introduce a hedge
fund into the mix was the black box introduced by Eric Meyer of Shariah Capital around
October 2004. The black box in question
purportedly replicated the effects of shorting
without actually doing so and thereby allowed
investors looking for hedge fund type returns a
Shariah compliant alternative.
The product was to be promoted through
Noriba, the Bahrain-based Islamic investment
bank from UBS. While the fund was still some
way from closing it ran into a roadblock that effectively meant that it had to be put on the back
burner and eventually shelved. Even before this,

as far back as January 2003, Meyer Capital

had tried to launch an Islamic hedge fund product proving that tenacity is a prerequisite for
survival in the Islamic hedge fund business.
In a Middle Eastern context Dubai Islamic Bank
in conjunction with both Goldman Sachs and
Deutsche Bank attempted to launch a retail-focused Islamic hedge fund replicator product in
June 2007. Structured by Deutsche Bank and
managed by Goldman Sachs Asset Management, the Dubai Islamic Bank fund used five-year
capital protected notes that were linked to a
hedge index. The idea of the product was to offer
investors a hedge fund type return while investing
in purely Shariah compliant equities. Through
what Dubai Islamic Bank described as a Shariah
compliant mechanism, the banks fund was to be
benchmarked against an index that measured the
performance of a group of hedge funds.
In the event the product caused some dissent
amongst Shariah scholars, some of whom felt
that the very act of trying to replicate a hedge
fund return was in itself not Shariah compliant
and therefore every subsequent attempt to
launch a product in this area has to be viewed
in the same light. Sheik Yusuf Talal DeLorenzo
told Arabian Business at the time, It is a sad
day for Islamic finance when an industry leader
falls victim to the mistaken notion that just
because a Muslim customers money will never
go into a potentially non-Shariah compliant
investment, the returns to the customer will
actually be halal.

Islamic Hedge Funds - Performance Year to Date 11/10/09

Date

Fund Name

Fund
Domicide

Geofocus

Asset
Type

Base
Currency

Fund Size
(US$m)

Fund
Manager

2009/05/13

LM Australian Alif Fund

Australia

Australia

Hedge Fund

AUD

N/A

LM Investment
Management Ltd.

2009/01/01

DSAM Global Resources &

Mining Fund

Cayman Islands

Global

Hedge Fund

USD

65.10

Dubai Shariah Asset

Management Ltd.

29.22%

Open
Ended

2009/01/01

DSAM Kauthar Energy Fund

Cayman Islands

Global

Hedge Fund

USD

350.00

Dubai Shariah Asset

Management Ltd.

25.60%

Open
Ended

2009/01/01

DSAM Kauthar Gold Fund

Cayman Islands

Global

Hedge Fund

USD

72.10

Dubai Shariah Asset

Management Ltd.

33.05%

Open
Ended

2009/01/01

DSAM Kauthar Natural

Resources Fund

Cayman Islands

Global

Hedge Fund

USD

46.30

Dubai Shariah Asset

Management Ltd.

0.25%

Open
Ended

Total Returns
(US$m)

Type
Open
Ended

Source: IFIS Islamic funds database

Islamic Wealth Management 2009

53

Hedge funds
This leads to the question of whether there
is a place for hedge funds in the world of
Islamic finance at all as well as whether there
is a place for Islamic hedge funds in the
portfolio of the UHNW Muslim investor. Conventional short sales involve selling a stock
which has been borrowed; as a result, such a
transaction would violate the Shariah rule of
do not sell what you do not own. However,
using a Salam contract can replicate a similar
economic outcome.
This mechanism was perhaps best described
in 2005 by Michael Gassner who explained,
(Salam) was used, for example, to sell wheat
on a future date against payment today. As
an exception to the general rule, it is subject to certain conditions, which the Shariah
scholars ... have accepted will be applied if
the contracts and documentation is properly
adjusted. Salam fixes the price I get for wheat
at 100, which I receive today. I could buy the
commodity in three months for 90 if prices are
falling, making a profit of 10. If the price goes
up, I have a loss.
To reach the high water mark, the high return
goals set, hedge funds typically use leverage
techniques; borrowing money from their broker. Money, however, cannot be accepted to
be lent against money. The way Islamic hedge
fund operators look at this point is to apply a
Murabaha contract for the long position, which
replicates the standard margin facility economically. Similar to normal margin finance,
the Murabaha deal gets liquidated with losses
if the price goes down below the level at which
the bank would no longer be protected. There
is no waiting period. The stocks are used as
collateral immediately.
The leverage for the short position is much
more delicate. A Salam contract requires that
the full amount be paid immediately and therefore leveraging does not take place and the
short position is not replicated as it would be
in a conventional hedge fund. The fund of fund
concept of Eric Meyer from Shariah Capital
therefore uses the Arbun contract. Arbun could
be translated as down payment. The buyer
pays 10 per cent of the price for the stocks as
a down payment. If the price in the future is below 90 per cent of the price on the transaction
date, the buyer will buy the stock cheaper in

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Islamic Wealth Management 2009

the market place. His down payment remains

with the seller. If the price goes up instead,
the seller has to buy the more expensive stock
and take a loss.
With Arbun there are two concurrent sayings of
the prophet (pbuh), one permitting and one forbidding Arbun and consequently the different
schools of thought interpret Arbun differently.
The Hanbali School generally accepts it while
the Hanafi school seems to declare it Haram.
Any Muslim investor seeking to look into such
a model should therefore ask for clarification
of how the majority of the school he aims to
follow interpreted this issue.

The urge to carry on trying

The prize of structuring a product that would
be acceptable to a discriminating set of very

Hedge funds
wealthy investors and that also offered hedge
fund type returns is the goal that has kept many
others trying to square this particular circle. In
late 2007 Ryada Capital tried to set up what it
claimed was one of the first Shariah compliant
hedge funds run out of the Middle East and that
was aimed specifically at high net worth individuals in the Middle East: the Siraj Global Fund.
According to the funds sponsors, The Siraj
Global Fund is a hedge fund that seeks capital
appreciation of above 20 per cent net annual
returns by combining extensive fundamental
research with market momentum analysis to
exploit opportunities in global equities and other
types of investments provided that they are in
compliance with Shariah law. Additionally, the
fund will maintain prudent risk management
parameters and portfolio diversification. Ryada
allegedly spent one year on structuring the fund
compared to the usual couple of months that a
non-Shariah compliant fund would take.
The fund was not allowed to invest in companies
involved in areas such as gambling, alcohol, or
pornography and it had to pass strict criteria laid
down by its Shariah board. The fund managers
used a non-refundable deposit from investors.
Laura Stone, vice president of alternative investments at Ryada told AME Info at the time, You
put down a deposit to have an option to buy at
a specific price. You are making a commitment
to purchase the stock but you have the right to
cancel if you decide not to exercise the option.

But is it all Islamic?

The truth is that many of the strategies

dreamt up by product structurers would be
difficult to implement properly because they
would simply be too expensive to structure in
a Shariah compliant manner or because the
tools themselves are haram. In April of 2009
Fares Mourad, head of Islamic finance Bank
Sarasin told Reuters You cannot have longshort hedge funds, because the idea of short
selling, or selling something that you dont
own, runs contrary to the principles of Islamic
finance. I have not seen a credible structure
that resolves this.
There is a prevailing view in some quarters
that the world of finance is complex enough to
keep product structurers busy for a very long
time and that the Islamic finance industry has
no need to waste time and resources developing highly controversial hedge fund structures
that might never see the light of day or which
might fall foul of the Shariah scholars at some
point in the future.
As ever with such matters the final word on the
success or otherwise of Islamic hedge funds
will rest with investors. If there is sufficient
demand for these products then no doubt
investment specialists will carry on developing
them. If there is insufficient demand hedge
fund managers will have to focus on the conventional sphere for future business.

Monthly Returns Siraj Global Fund performance

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

2007
2008

0.13%

1.27%

20.40%

0.68%

0.39%

1.00%

0.21%

2009

-1.00%

-0.84%

0.80%

3.03%

7.54%

3.22%

2.48%

-5.83%

-1.17%

-6.86%

-3.57%

Dec

YTD

-0.15%

0.15%

-3.14%

1.11%
15.98%

Source: SIRAJ Global fact sheet

As the chart shows the hedge fund went into

negative territory in August 2008 but has
recovered ground from March 2009 onwards.
The fund has $29 million under management.

Islamic Wealth Management 2009

55

About Yasaar Media

Yasaar Media is a specialist media house that focuses exclusively on the
Islamic finance domain. The founders of Yasaar Media recognise that there is a serious need for an information provider in the Islamic finance space: a provider that
produces in-depth reports and studies on specific market niches, asset classes and
countries. These reports are designed to be market-defining works that will become
the benchmark in their field. As the Islamic finance industry grows and expands
so too does the need for high quality analysis and comment that is produced in a
timely fashion.
The founders of Yasaar Media have, between them, decades of experience in talking
to and writing about the Islamic finance industry. By bringing these decades of experience together Yasaar Media offers a level of insight and knowledge that few could
match. The Yasaar Media team has first hand experience of publishing newsletters,
magazines and books focused specifically on the Islamic finance sphere. The products produced by Yasaar Media are aimed at filling a void in the Islamic finance data
set that is often overlooked by others. While magazines and newsletters can provide
news and views they often struggle to supply a comprehensive overview of a subject.
That is because there is no single data provider with the insight, the resources, the
experience and the market clout to deliver such an overview.

About the author

Paul McNamara is co- founder of Yasaar Media, the leading Dubai-based Islamic finance media entity.
In 2004 Paul co-founded CPI Financial, publisher of Islamic
Business & Finance magazine in Dubai after having spent
two years in London with Euromoney Institutional Investor
where he launched Islamic Finance Weekly, one of the first
Islamic finance periodicals in the world.
Prior to that he was publisher of Asia-Inc magazine in Singapore and Brunei and
also worked in Australia for eight years with Fairfax Business Publishing. Paul
started his career at the Financial Times in London where he worked for nine years.
He holds a BA Honours degree in
Politics, Philosophy and Economics from Christ Church, Oxford.
By the same author
Qatar Takes Off
Half a Century of Banking in the UAE with Philip Dew
The Mystery of the Old Soldier
Smart Marketing for Islamic Financial Institutions
Islamic Investment Banking 2009

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Islamic Wealth Management 2009