Understanding basics of Shariah investing

We all have different reasons to invest our hard-earned money. It might be for a short-term purpose like the purchase of a car or a house, or a long-term goal such as funding our children's education or ensuring a more comfortable retirement.

Investing can take on a religious significance, too. For a growing Muslim audience, investments must not only be able to achieve their goals, but also be compliant with the Islamic law.

The principles of Shariah investing dictate that to be considered acceptable, companies must pass a certain set of criteria. Among them, the balance sheet structure should contain neither too many liquid assets nor debt, and the company should not engage in "haram" (forbidden) industries such as alcohol, tobacco, gambling as well as specific foods considered non-halal or impure.

Advisers who are considered experts in Islamic law are integral to the investment selection and review process. At Franklin Templeton Investments, for instance, portfolios are independently reviewed and endorsed by the Amanie International Shariah Supervisory Board, which is highly regarded for its extensive Shariah and technical expertise.

The Amanie scholars provide initial approval on investment objectives and strategy, as well as ongoing supervisory and monitoring services to ensure continuous adherence to internationally accepted Shariah principles and standards.

Implementation of these standards can be subjective at times, as it depends on the interpretation of different Shariah boards - a challenge to portfolio managers. In addition, this can lead to a lack of homogenized investment approach as well as confuse potential investors.

Shariah Investing 101

Generally, a company that holds too many liquid assets may have Shariah restriction on eligibility. So one would think, this will result to the elimination of the company.

However, this is not always straightforward. It can depend upon the Shariah screening methodology applied by the fund adviser in the review process in which one calculates the company's financial ratio.

If a company classifies a large portion of its liquid assets as long-term, certain Shariah benchmarks will not include it as part of their liquid asset calculations. In addition, some benchmarks will use market capitalization as the denominator while others will use total assets - both of which could provide different results.

Using market capitalization as the denominator is particularly difficult for value investors (like us) because as a stock gets cheaper and hence provides more long-term value, it could suddenly become ineligible as the market capitalization falls relative to the liquid assets or debt.

Stocks that were compliant at one time but then later deemed non-compliant must be disposed of, but once again it's all about details. For example, the frequency at which the company pays its dividends (once a year, semi-annually or annually) could make a difference to eligibility.

Depending on the Shariah screening methodology, a company that accumulates large amounts of cash throughout the year before paying it out in the form of dividends runs the risk of becoming non-compliant. Once it pays the dividend, it may become compliant and hence an eligible investment once again.

The grace period given to dispose a stock (once it becomes non-compliant) is also different from one benchmark or adviser to another. For instance in as far as dividend is concerned, if the grace period to sell non-compliant stocks is short, one may be forced to sell it before it pays the dividend. Conversely, if the grace period is long, the stock could remain compliant by paying the dividend and reducing cash on the balance sheet.

Opportunities abound

Such are the challenges of Shariah investing. But despite the constraints, we are able to find plenty of potential opportunities.

In managing Shariah portfolios, we leverage the same investment team and research process. So Muslim investors essentially get a subset of our broader portfolio, which is compatible with specific Shariah principles.

Overall, our team is finding potential opportunities in the healthcare, energy, and telecommunications sectors. European financials represent a sector our Shariah portfolios cannot invest in, but we've been finding a lot of value over the past year there in our other portfolios.

By country, Malaysia represents one of the biggest markets right now for Shariah investing, and is growing because of its advanced national pension scheme. There is a mandatory monthly contribution into the national pension fund that grows with population and income levels.

Other emerging centers include Middle East financial hubs like Dubai and Abu Dhabi. I think the natural interest in Shariah investing is likely to be confined to Muslim nations, but it would not be surprising to find other countries that are also keen to offer an Islamic investment vehicle. This is due in part to a large and growing Muslim diaspora globally.

Our potential investment opportunities could likewise continue to expand, and we think it's an exciting time to be an investor in this growing space.

Alan Chua is a Singapore-based EVP and portfolio manager at Templeton Global Equity Group.

(Zawya / 15 April 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Turkey offers Islamic banking opportunities

PETALING JAYA: New investment opportunities for foreign companies have come to the fore in Turkey with the announcements of the creation of new Islamic banks by the government.

The nation’s Deputy Prime Minister Ali Babacan indicated that he gave directives to the two biggest state-owned banks – Ziraat Bank and the Halk Bankasi – to establish two new participation banks.

Muhammed Islami Onal, the economic counsellor of Turkey in Malaysia, said foreign investors can apply for new licences to start the new participation banks, adding that the investment should be no less than 30 million New Turkish liras or US$17 million (RM51.7 million).

“With their background, knowledge, experience and pioneer roles in Islamic banking and finance, the Malaysian investors are more than welcomed to get involved in the growing Islamic banking- finance market in Turkey,” Muhammed Islami told The Malaysian Reserve.

The third top ranking bank in Turkey, Garanti Bankasi, announced that it too had plans for a new participation bank, thus offering greater opportunities for foreign investors.

Muhammed Islami said Turkey should be a market to invest for Malaysians with the very close relationship between the two nations and between Bank Negara Malaysia and the Central Bank of Turkey, and the Securities Commission and the Capital Markets Board.

Between December 2011 and June 2012, the participation bank’s growth rates of assets, loans and deposits were about 8.7%, 13% and 8.4% respectively while the same rates were 4.6%, 8% and 3.3% for the whole banking sector, while the average growth rate of the assets rose to a total of 26.1% for the past four years.

Turkey has 49 banks, four of which are participation banks. Participation banks are interest free banking banks, being Syariah-compliant and are not called Islamic banks in Turkey.

So far nine conventional and two participation banks are listed in Turkey’s Stock Exchange with market capitalisation of US$96.7 billion and US$2.09 billion respectively.

Ziraat Bank has aspirations abroad with the largest international service network of any Turkish bank comprising many service points in numerous countries.

Halk Bankasi is listed as an active player in structured finance deals, participating in syndication and securisation deals in favour of other banks.

(F.M.T News / 15 April 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Insights into Islamic Investment Management from a CFA Charterholder in Pakistan

To gather insights into Islamic investment management from experienced CFA charterholders from different countries, we will be conducting a series of interviews. In the first interview of this series, we discuss Islamic investment management with Mohammad Shoaib, CFA.

Shoaib is the chief executive officer of Al Meezan Investment Management Limited based in Karachi, Pakistan. He earned his CFA Charter in 1999. In addition, he holds an MBA from the Institute of Business Administration, Karachi, which is now a program partner of CFA Institute. He has 23 years of work experience, including 10 years in Islamic investment management.

CFA Institute: Tell us about your market and how it has evolved over the years.

Shoaib: The first conventional fund was launched in Pakistan in 1962, and the first Islamic fund was launched in 2002. The Islamic fund management industry is about 12% of the overall fund management industry. All types that are available in the conventional arena, are also available on the Islamic side also. For example, we have Islamic equity, money market, sovereign, corporate fixed income, index tracker, capital protected, and defined contribution pension funds. The market is concentrated; of the total size of USD520 million managed by Islamic funds, about USD400 is being managed by Al Meezan Investment Management Limited

How has the market for Islamic investment management grown relative to that of conventional investment management?

While the market for Islamic funds is relatively new, the annual growth rate of Islamic funds is about 24% as compared to 12–14% growth for conventional funds.

The appeal to the Muslim population and the competitive returns offered by Islamic funds are two predominant factors leading to high growth for Islamic funds. Conventional funds on the other hand have focused more on institutional money.

How do fees charged on Islamic funds compare with conventional counterparts?

The fees and charges applicable to mutual funds are regulated and capped by the SEC in Pakistan. Due to the very competitive market, the fees charged by Islamic funds are same as those by conventional funds. The extra cost related to the Shariah board are borne by an asset management company instead of being charged to the fund.

Describe the screening process employed in your market? What are the effects on the investable universe and portfolio turnover?

It is basically a negative screening process based on nature of business and financial ratios whereby those companies that do not meet screening criteria are excluded from the permissible investment universe.

Most Islamic funds follow the screening criteria developed by a prominent seminary located in Karachi. While the investment universe is somewhat reduced, it does not much affect diversification of portfolio across sectors as most companies with large market cap are Shariah compliant as per the screening criteria.

How have Islamic investments performed in your market?

The only Islamic index available is KSE Meezan Islamic Index (KMI-30), which was launched about four years ago. The leading conventional index is KSE 100 Index. It is interesting to note that KMI-30 has consistently outperformed KSE 100 every year since launch of KMI-30.

How does the CFA Charter help investment professionals in Islamic investment management? What are the preferred sources of continuing professional development (CPD)?

Yes, employers value the CFA charter. However the curriculum does not cover Islamic finance, so employers need to train or arrange for the training of Islamic finance in addition to CFA program. There are not many CPD opportunities available in Islamic investment management.

What are the major challenges and opportunities for Islamic investment management in your market? How do you see its future prospects?

Two major challenges are: (a) creating awareness and understanding of Islamic finance and its principles; and (b) limited number of investible products (assets) on the debt and money market side. Because about 95% of the total population of about 180 million in Pakistan is Muslim, there is lot of untapped potential for growth in Islamic financial markets, which is expected to grow at twice the pace of the growth in conventional financial markets.

If you are interested in Islamic investment management, please consider joining the CFA Institute Islamic Investment Management subgroup on LinkedIn. If you are an experienced professional investor working in Islamic Investment Management and you would like to share your insights with us, please contact the manager of the Islamic Investment Management group on LinkedIn.

(Interprising Invester / 26 March 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Halal creates an opening for Thai firms in Malaysia

KUALA LUMPUR : Thai food makers are being urged to enter the Malaysian market to capitalise on the neighbouring country's vision of becoming a global hub for halal food.

Petch Chinabutr, director of Thailand's National Food Institute (NFI), said that despite a population of just 30 million, Malaysia has a high per-capita income compared with other countries in the 10-member Asean group, ranking only behind Singapore and Brunei.

"Furthermore, the Malaysian government has a policy to turn the country into a global hub of halal products, and the country also has established free-trade deals with many partners, especially in the European Union, so this is a good opportunity for Thai businesses to penetrate this market," he said.

His comments were made on the sidelines of the 10th Malaysia International Halal Showcase. The NFI brought 10 Thai companies to showcase their halal-certified products at the event.

Ugrid Chitcharoentham, assistant export manager of General Candy Co, the maker of Heartbeat candy, said most of General's confectionery, fruit snacks and jelly are certified halal, with two more items on the way.

General exports 70% of what it makes, half of which goes to South Africa, Dubai, Qatar, Yemen, Kuwait and Jordan. The company has begun shipping to Malaysia as well.

General makes some products especially for the Middle East markets, as some countries in the region have laws banning the use of food colouring.

Alak Pramernchamaen, director of Siamsurplus Co, has expressed interest in exporting her crispy fried salmon products to Malaysia since last year.

Under the brand SeaRun, the product is sold in 700 7-Eleven stores in the southern region of Thailand. Still, 70% of production goes to mom-and-pop stores and street vendors.

This year, the company expects to produce 200,000 packets a month, up from 100,000 a month last year, 50,000 in 2011 and 20,000 the year before.

Sarif Lohhama, manager of Budu Yiseng (Saiburi Pattani) Ltd, sends most of his instant khao yam sets to Malaysia.

Called nasi kerabu in Malaysia, khao yam consists of rice, budu fish sauce and vegetables.

The company, which has made and exported food for five years, ships 20% of its production to Malaysia, Egypt and Saudi Arabia. Revenue per year is 45 million baht, with 14 million baht in profit.

Last year, Malaysia was Thailand's sixth-biggest export destination and eighth-biggest import source. Exports to Malaysia totalled 33.7 billion baht, with imports reaching 14 billion baht.

(Bangkok Post Business / 15 April 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

The prospect for Islamic banking in India

The era of Islamic banking has finally arrived. India’s Minister for Minority Affairs K Rahman Khan recently said India could soon be implementing an Islamic banking system.

This is a welcome move for all Indians in general and 250 million Indian Muslims in particular, who do not fully participate in the interest-based financial institutions because under the Sharia (Islamic law) any return on money employed should be linked with the profit of an enterprise.

Citing the example of 75 countries which have already adopted Islamic banking, the minister very cogently argued that India could no longer afford to stay away from the $1.5-trillion Islamic financial market, which could even help address the country’s huge fiscal deficit.

Minister of State for Finance Namo Narain Meena said Rs 1.6 trillion ($27.8 billion) is lost annually due to lack of Shariah-compliant banking.

The Islamic banking industry has picked up steam across the world. This system stamped its mark in Europe when the Islamic Bank of Britain opened in London in 2003. The European Union is emerging as a major centre of Islamic finance. To cite just one example, more than 80 out of 2,000 German financial institutions provide Sharia-complaint services.

The Credit Rating & Information Services India Limited (CRISIL) says the equity-based Islamic banking system, as opposed to the system based on interest-bearing debt, would be appealing to all Indians and not just the Muslims. The reason is that debt finance leads to greater instability than equity finance. Risk-sharing in Islamic finance makes transactions more equitable.

Broadly speaking, Islamic banking products and services are based on owning and handling of assets, risk sharing transactions, leasing and commodity trading. As a mature country, India realises that Islamic banking, which deals with customers on investment grounds, will be a boon for the nation. Moreover, these banks also apply Islamic moral and ethical criteria in their financing and therefore do not invest in unhealthy industries.

The Sharia-based financial system has grown across the world particularly after the 2008 global financial crisis. During the global financial crisis, a number of big banks in the West collapsed and had to be bailed out by taxpayers' money, while Sharia–compliant banks continued outstanding growth. The key reason is that Islamic banking deals with real economy with no possibilities for speculation.

Islamic finance includes a requirement for transactions to be backed by tangible assets, profit sharing, and prohibits speculation, Riba (interest) and Gharar (excessive risk or uncertainty), the latter two (Riba and Gharar) are the reasons why Islamic banking weathered the continued global financial crisis better than its conventional counterpart.

Interest and derivative transactions, such as forwards, futures and options, as well as short selling, and speculation, which produce instability, are not part of the Islamic banking.

Islamic banking system leads to more prudent lending by encouraging financiers to invest directly in an entrepreneur's ventures. Also, by avoiding the need for enticing interest-based loans, people are encouraged to keep spending within their limits in contrast to the consumerist society that depends heavily on a financial system that continually encourages a ‘buy today, pay tomorrow’ philosophy. Islamic banks do not encourage overdraft facilities.

The 2008 financial crisis of the capitalist system, which is based on usury and securities rather than commodities in markets, shows that it is undergoing a crisis and that the integrated Islamic finance, if properly applied, can replace capitalism, says Shaikh Yusuf al Qaradawi, a leading scholar.

Islam provides the only true path to an economically just society because it exalts a social contract over wealth generation for a few, places strict limits on risk-taking and does not deal in debt trading. Also, silent partners receive no more profit than is proportionate to their investment, while the working partners get more profit, reflecting an emphasis for reward on work than merely possessing capital.

To sum up, Islamic banks offer higher rate of return; lower risk exposure and better risk management compared to conventional banking.

(Oman Daily Observer / 15 April 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Turkey to allow deeper use of sukuk

ISTANBUL: Turkey is working on new regulations to allow wider use of Islamic bonds, a closely watched move which could see sukuk issues employed by the government and corporations for project finance and infrastructure development.

Turkish institutions and the Treasury currently only issue the ijara type of sukuk, which is among the most widely used internationally; the new regulations would approve the use of istisna, murabaha, mudaraba, musharaka and wakala bonds.

Banking sources said the Capital Markets Board would complete its work on the regulations within a couple of months, and was seeking to ensure the new types were in line with internationally accepted standards for Islamic finance.

"Turkey's preparing the legal framework for the sector to use whenever it needs. These issues will not become widespread in the short term," a senior official in the sector said.

"The regulation will include both the Treasury and corporates, and will allow any company or the Treasury to issue them whenever there's demand for such an issue. That way, we'll be able to meet the global demand whenever we need to."

The development of Turkey’s sukuk market is of interest to countries around the world, since the fast-growing economy could become a major issuer of Islamic debt and influence trends throughout the industry.

After proceeding only slowly with the development of Islamic finance for years, partly because of the sensitivities of its secular political system, Turkey issued its first sovereign sukuk last September. It has now issued three sukuk, two of them lira-denominated totaling 3.14 billion lira ($ 1.75 billion) and one dollar-denominated worth $ 1.5 billion.

Turkish banks have issued several sukuk, and the Treasury has announced it will issue lira denominated sukuk twice a year.

The new regulations will give Turkish issuers more flexibility to take advantage of investor demand for various types of sukuk at certain times.

Bankers cited the case of a perpetual sukuk - one without a maturity date - issued by Dubai Islamic Bank in March; the $1 billion hybrid instrument was almost 15 times subscribed.

"It was one of the most demanded issues in sukuk history, but it's hard to know when there will be demand for different types of issues," an Istanbul-based banker said.

"Turkey's Capital Markets Board is trying to ensure that regulations are suitable for all issues, so the Treasury and corporates can swiftly issue these bonds when there's demand."

Sukuk avoid interest payments and instead pay returns based on investment in assets. The types of sukuk which Turkey plans to allow include istisna, which is used for project financing, primarily in infrastructure deals and for large construction and manufacturing projects.

Murabaha is seen as a structure which is relatively close to conventional bonds, while mudaraba involves the issuer appointing a manager (mudarib) to oversee the operations of a project or business activity.

Musharaka is a partnership contract akin to joint venture financing, and wakala is an investment agency agreement in which the issuer acts as an agent (wakil) of the sukuk holders to manage the sukuk assets.

Bankers said allowing such diversity in the Turkish market would help increase volumes, because the currently used ijara sukuk require the issuer to have income from a leased asset such as real estate, a limiting factor for many corporates.

"Ijara has a limit - real estate or leasing revenue is necessary and that is very limiting, maybe not for the Treasury but for the corporates," a banker close to the matter said.

(Arab News / 13 April 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Syariah products slowly growing popular

SINGAPORE - Investment products that adhere to syariah or Islamic principles are slowly growing in popularity in Singapore.

Franklin Templeton has launched another three syariah-compliant funds, as the asset manager recognises the growth of Islamic finance.

The three funds are the Franklin Templeton Global Sukuk Fund, Templeton Shariah Global Equity Fund and Templeton Shariah Asian Growth Fund, and will be made available to retail investors.

A syariah-compliant product is one that operates in accordance with the religious beliefs of Islam. For example, syariah-compliant funds are not allowed to invest in businesses associated with activities barred by Islam, such as gambling or alcohol.

Conventional financial services are also excluded as they go against the religion's ban on interest.

To ensure compliance with syariah guidelines, Franklin Templeton scrutinises the business activities of every company that it picks at a granular level, and the three new funds have been independently reviewed and endorsed by the Amanie International Shariah Supervisory Board.

The Global Sukuk Fund focuses on fixed and floating rate syariah-compliant securities issued by government, government-related entities and corporates. Sukuk means Islamic bond.

For those who prefer equity investments, the Templeton Shariah Global Equity Fund will invest in the most undervalued opportunities globally.

The Templeton Shariah Asian Growth Fund will invest primarily in syariah-compliant equity and equity-related securities listed in the Asia region, excluding Australia, New Zealand and Japan.

Dr Mark Mobius, executive chairman of Templeton Emerging Markets Group, who will manage the Templeton Shariah Asian Growth Fund, said: "Syariah-compliant strategies are an important and growing market in many parts of the developing world, and Templeton is pleased to bring its emerging markets expertise to bear on this new offering for syariah investors globally.

Singapore's market for syariah-compliant funds is not deep, with about 15 on the market, including the DWS Noor Precious Metals Securities Fund that is managed by Deutsche Asset Management, and the DBS Mendaki Global Fund.

HSBC Insurance also offers investment-linked plans (ILPs) that are invested in syariah-compliant funds. However, HSBC's ILP products and platforms are non-syariah-compliant.

Mr Wong Sui Jau, general manager of Fundsupermart.com, said that the market for syariah-compliant funds may still be considered a niche, and investors still do not see the funds as mainstream products.

"The bulk of the investors interested in such funds are still Muslim, because it is at the end of the day, compliant with Islamic law. It is slightly different from having a fund that claims to invest in socially responsible businesses," he explained.

However, Mr Wong added that there are still a few non-Muslim investors who have inquired about syariah-compliant funds.

Similarly, Aberdeen Asset Management Asia senior investment manager Christopher Wong said that most Singaporean investors still lack the awareness of such funds.

Aberdeen recently launched some syariah-compliant funds in Malaysia, but it does not sell such funds in Singapore.

"I don't think there is much demand for syariah-compliant funds at the moment, so it is hard to find a compelling investor base here to support the development of Islamic fund management in Singapore," he added.

(Asia One News / 09 April 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com