Islamic Finance, Islamic Funds, Islamic Banking, Funds, Banking, Finance, Wealth.

1. Islamic Funds
BY: CAMILLE PALDI
CEO OF FAAIF

2. Introduction
 As of 2012, more than 750 Islamic Investment Funds have been established
globally managing total assets of approximately USD$60 Billion.
 Currently, a broad spectrum of asset classes are available including equity, Sukuk,
real estate, commodities, leasing, trade finance, private equity, structured
products, REITS, and exchange – traded, murabahah, ijarah, balanced, index, and
hedge funds.

3. Islamic Funds
 Hot spots for global Islamic investment funds include Luxembourg and the
Cayman Islands, with Luxembourg offering 3.5% of the total of Islamic funds and
the Cayman Islands with 5.5% of the total Islamic funds offering.
 In fact 12 % of the total of Islamic funds are available in Luxembourg, Dublin, and
the Cayman Islands.
 In terms of distributing investment products, international fund managers offer
offshore funds in the Middle East by using Bahrain, the UAE, and Qatar as
distribution platforms.

4. Islamic Funds
 Bahrain is a good platform for investors in the Middle East and Africa to source
foreign funds.
 The Islamic asset management industry is also growing at a rapid pace in the Asia-
Pacific region including Malaysia, Brunei, Singapore, Japan, South Korea, China,
and Indonesia.

5. Islamic Funds
 According to Noripah Kamso, author of Investing in Islamic Funds, A Practitioner’s
Perspective, Islamic investment funds are no longer seen as an alternative
investment, but regarded as competitive to conventional.
 Indeed, Kamso points out that a matured and fully functioning Islamic financial
market must contain asset management to compliment the demand side of the
value chain.
 Kamso points out that financial centers from Malaysia, Singapore, Hong Kong,
Bahrain, Dubai, and London are leading the global Islamic Investment fund
initiative.

6. Why Non-Muslims Invest in Islamic Funds
 Socially-responsible investment.
 Comparable Returns to Conventional Investment Over Longer Periods.
 Greater Stability of Returns – Shari’ah compliant equities are less volatile than their
conventional counterparts (excessive financial leverage prohibited);

7. Embedded Risk Management
 In order to meet Shari’ah compliancy, equities must pass a rigorous screening
process, which ascertains whether the companies are sufficiently capitalized to
weather difficult times and liquid enough to meet short-term obligations.
 For this reason, these companies are better capitalized and more liquid than
conventional counterparts.

8. Bonds Backed by Real Assets
 Sukuk are asset-based or asset-backed.
 There is an asset underlying every transaction and the ownership of the asset is
transferred to the investors.
 Their return is income generated from the underlying asset.
 Sukuk-holders have recourse to the underlying assets.

9. Greater Transparency
 Terms and conditions are more clearly defined allowing Shari’ah compliant
investments more predictable results.

10. Diversification
 During the period of September 2007 – December 2009, Islamic funds fared better
than conventional portfolios did, declining less, experiencing lower volatility, and
recovering nearly as much ground lost as the markets have recovered.

11. Sukuk
 Sukuk grant investors a share in the underlying asset along with the associated
profit and risks rather than paying interest as in conventional bonds.
 In addition, proceeds from sukuk issuance must be used in Shari’ah compliant
activities, which reflect their usage for productive real economic activities.

12. Islamic Investment is Popular
 Muslims – No interest (riba)
 Non-Muslims – same reason and -
 Socially responsible and ethical investments
 Fiscal Conservatism
 Higher Returns than Conventional Funds
 More Stable than Conventional Funds
 Diversification
 Transparency
 Embedded Risk-Management with the screening process

13. Socially Responsible Investing (SRI)
 SRI gives investors the opportunity to invest their money in alignment with their
core beliefs.
 This is increasingly popular for people who want to support and promote social
good while achieving a good financial return on their investment.

14. Ethical Investing
 No alcohol, pork, gambling, pornography, weapons, etc.
 Environmental technology, recycling, wind power generators, pollution, waste
disposal, public transport, safety and protection, alarm systems, protective
clothing, life jackets, health care, hearing aids, housing, food, and clothing.

15. Screening for Ethical Investing
 Animal testing;
 Genetic engineering;
 Health and safety breaches;
 Human rights and basic social and economic rights;
 Intensive farming with antibiotic residue;
 Military and nuclear power;
 Pesticides
 Pornography
 Human Cloning

16. Screening Process for Ethical Form of
Investing
 Sustainable timber/deforesting
 Third world concerns; profits before principles
 Community involvement; donations
 Corporate governance for accountability
 Disclosure of sufficient information
 Equal opportunities
 Positive products and services to build a safer world
 Supply Chain Issues, including working conditions

17. Similarities: Ethical and Shari’ah
 Share an ethical investment philosophy, which is a value-based approach to align
an investor’s portfolio with his/her beliefs.
 Focus on real economic activities, such as improving living conditions and well-
being, establishing social equity and preventing injustice in trade and commerce.
 Focus on protection of natural and environmental resources.
 Invest in the same economic sectors, namely industrials, healthcare, consumer
goods, utilities, consumer services, and basic materials.
 Both reject investing in tobacco, gambling, pornography, nuclear power, and
weapons.

18. Similarities Ethical and Shari’ah
 Follow a more profound investment principle.
 Create more profound effect on organizational culture and behavior and mankind
as a whole.
 Recognize that compliant companies are less subject to legal issues related.
 Proven to deliver comparable returns to mainstream investment in the long-term,
exceeding five years.

19. Established Ways of Investing Ethically
 Negative Screening: This means avoiding some types of investments, for example,
gambling and weapons.
 Positive Screening: A preference for activities or characteristics deemed desirable.
 Best of Sector: Leading Firms in every business sector are selected based on their
environmental and social performance or sustainability.
 Social Responsibility Overlay: Shares for a portfolio are selected in the usual way,
but a process is added for addressing issues related to social responsibility.

20. Ethical Funds
 Ethical funds tend to hold a higher percentage of shares in small to medium-sized
companies and a smaller percentage in large companies than their non-ethical
equivalents.

21. Types of Islamic Funds
 Equity
 Sukuk
 Money Market
 Gold
 Real Estate
 Private Equity
 Infrastructure
 Commodities

22. EQUITY FUNDS
 The oldest equity fund, the Al Ahli Group Trading Equity Fund, was first offered in
1995 by the National Commercial Bank of Saudi Arabia.
 Its AUM has grown to USD255 Million as of November, 2012.

23. Equity Funds
 Among available Islamic funds, equity funds with market share of 46.9% hold the
largest investment portion.
 This is due to the easy availability of broad Shari’ah indices offered by Dow Jones
Islamic Markets, Standard & Poor’s, FTSE, MSCI, and Russell.
 Islamic equity funds are widely available from onshore funds to offshore funds
registered in Luxembourg, Ireland, and the Cayman Islands.

24. Equity Funds
 The challenge is to offer Islamic equity funds internationally so that investors in
various regions of the world are able to invest.
 An investor can look at Islamic global emerging markets or can source for Islamic
funds that invest in more specific emerging markets like Islamic Asia Pacific ex-
Japan, registered on an offshore platform.

25. CIMB Islamic Asia Pacific ex-Japan Fund
 The top five holdings of CIMB Islamic Asia Pacific ex-Japan Fund were Samsung
Electronics, China Mobile, Taiwan Semiconductor Manufacturing, BHP Billiton, and
Petro China Company.
 The benchmark for this fund is the Dow Jones Islamic Markets Asia/Pacific ex-
Japan Index.
 Since its inception in June 2006, the fund has outperformed the benchmark on a
cumulative basis of 5.17%.

26. Oasis Crescent Global Equity Fund
Available on the Irish Funds Platform;
AUM of USD151.4 million as of March 31, 2012.

27. Equity Funds
 Islamic equity funds were initially led by Malaysia and Saudi Arabia, with domestic
equity funds.
 However, the range of available funds has grown to include more broad
investment capabilities, from global equity to emerging market equity.
 The Irish funds platforms have been managed by investment managers from
France, the USA, Germany, South Africa, and Malaysia.

28. Equity Funds
 The majority of the top 20 Islamic funds were based in Pakistan, Malaysia,
Thailand, and South Africa.
 There is a transparent and credible investment performance track record since
2007 (8 years).

29. Sukuk
 The first sukuk funds were established in Malaysia in 1990 and were Ringgit-
denominated.
 Global Sukuk Funds: The fund invests in sukuk that are denominated in an
international currency like the dollar or the euro.
 These funds are available on offshore funds platforms.
 Sukuk issuance has grown rapidly in the GCC since 2004 and in 2011, the value of
sukuk issuance reached USD26 Billion.

30. Sukuk
 In March 2012, Al-Hilal Bank of Abu Dhabi, UAE established the Al-Hilal Global
Sukuk Fund.
 The portfolio is composed primarily of US dollar sukuk from the GCC, with a
smaller portion made up of non-US Dollar Sukuk from Malaysia, Indonesia, and
Singapore.

31. Sukuk
 The top five Sukuk make up 38.37% of the total portfolio (as of October, 2012).
 1 – Hazine Mustesarligi Varl (Turkey)
 2-Emaar (UAE)
 3-DP World
 4-Dubai Dof (UAE)
 5-SQQ (Qatar)

32. Sukuk v Conventional Bonds
 A comparison of sukuk performance, represented by the HSBC/DFIX USD Sukuk
Index versus traditional bonds, represented by the Barclay’s Capital Aggregate
Bond Index, shows that the relative performance of Sukuk against conventional
bonds is comparable over the past few years.

33. Sukuk and UCITS Framework
 It is still not possible for investors to invest in a global Sukuk fund that is
Undertakings for Collective Investment in Transferable Securities (UCITS) –
compliant.
 This is due to the stringent liquidity requirements specified under the UCITS risk
framework, which states that investors should receive their investment proceeds
easily upon redemption.
 This issue should be resolved as the Sukuk market grows and matures.

34. Exchange-Traded Funds (ETFs)
 Similar to conventional ETFs, Islamic ETFs are generally managed on a passive
basis in which the fund manager aims to replicate the returns of an Islamic index,
like the Dow Jones Islamic Markets Indices, FTSE Global Islamic Index Series, S and
P Shari’ah Indices, and MSCI Global Islamic Indices.
 Since an ETF is traded on a stock exchange, it is able to offer greater flexibility and
convenience in trading the units and higher liquidity than most types of unit trust
funds.
 In addition, it generally has a lower overall cost of investing relative to an actively
managed fund, making them a desirable investment option.

35. Exchange-Traded Funds
 As of 2011, there were 13 Islamic ETFs with total AUM of USD$382 Million.
 The largest contributor is the Malaysian based MY ETF with USD $197 Million.
 These 13 ETFs are listed on the UK, France, Turkey, Singapore, India, Malaysia, and
South African Stock Exchanges.
 They are invested in the equity asset class on a global (developed and emerging
markets), regional (Europe), and single country (India, South Africa, Japan, and
Malaysia) basis.
 The first US Islamic ETFs were listed in 2008.

36. Exchange-Traded Funds
 As of 2011, the global pool of conventional ETFs totaled USD1.25 trillion.
 Increasingly, gaining in popularity.
 The demand comes from both retail investors and asset managers who will use ETFs
for cash equitization as demand for actively managed Islamic funds grow.
 ETFs can be used to "equitize" cash, allowing investors an easy way to put their money
in the stock market until a long-term investment decision is made.
 In this way, investors can ensure they do not miss out on price rises or forego income
while their money is parked temporarily.

37. Money Market Funds
 Islamic money market funds are domestic-centric and only available in Malaysia
and Saudi Arabia.
 They comprise 22.2 % of the assets under management of global Islamic funds.
 Limited supply of short-term Shari’ah investment instruments means not available
globally.

38. Money Market Funds
 Islamic money market funds can provide higher returns than bank deposits.
 Islamic money market funds are able to be utilized for a company’s working
capital needs.
 Islamic money market funds invests in short-term investment instruments with a
maturity date of less than one year.
 i.e. Government Investment Certificate (GIC) issued by the Malaysian Government.
 Islamic money market funds generally have lower risk than Islamic equity and
sukuk funds.

39. Alternative Funds
 They reduce the volatility of the overall investment portfolio returns.
 Therefore, it is advisable to include alternative funds in an investor’s overall
investment portfolio in addition to the typical mainstream Islamic equity and
sukuk funds.
 There are two primary challenges when investing in alternative funds: opaque
pricing and the relative illiquidity of the assets.
 Therefore, these funds may not be easily accessible.

40. Alternative Funds
 Alternative funds generally requires a larger investment amount that can be
locked in for an extended period of several years.
 Alternative funds are generally for high-net-worth individuals or institutions.

41. Real Estate Investment Trust Funds
 REITs invest in real estate securities that sell like stocks and also invest in real
estate based on Shari’ah guidelines.
 Special tax considerations, better yields, and potentially high payouts to investors.
 Shari’ah compliant REITs do not invest in properties that involve non-permissible
activities.

42. Real Estate Investment Trust Funds
 Malaysia is the only country with guidelines for REITs.
 Listed in Malaysia in 2006, the Al-Aqar KPJ REIT is the fist listed Islamic Healthcare
REIT in the world and first Islamic REIT in Asia. (oversubscribed 4.13 times)
 Listed in Malaysia in 2007, The Al-Hadharah Bousted REIT is the world’s first
Islamic plantation-based REIT.

43. Real Estate Investment Trust Fund
 The Sabana Shari’ah Compliant Industrial Real Estate Investment Trust is
Singapore’s first Islamic REIT, listed in 2010. (oversubscribed 2.5 times)
 USD833 Million in total assets in 2011.
 Emirates REIT – Dubai Islamic Bank.
 Emirates REIT invests in residential and commercial properties in Dubai and its
asset size grew to USD68.3 million in 2011.

44. Private Equity Funds
 The purpose of private equity is to provide working capital to a target company to
nurture expansion or new product development or to restructure the company’s
operations, management, or ownership.
 Shari’ah private equity investing encourages direct ownership of real and
productive businesses.
 It follows certain guidelines regarding the permissibility of the business activities
and means of financing.

45. Private Equity Funds
 In a private equity fund, the goal is to exit after a specified time period (typically
five years), having attained a targeted internal rate of return (IRR).
 Therefore, given the portfolio nature of private equity funds, they are usually long-
term and illiquid, require high initial amounts of investment, and are therefore
high-risk, high-return investment alternatives.
 Therefore, these funds are more appropriate for high net-worth investors and
institutions that have the knowledge, money, and time to stay invested over a
longer time horizon.

46. Private Equity Funds
 Arcapita, a Bahrain-based private equity firm, acquired Caribou Coffee, one of the
largest American specialty coffee chains through Islamic private equity.
 Investment Dar and Adeem Investment Company are Kuwait based companies
involved in the acquisition of Ford’s Aston Martin – based on Shari’ah compliant
private equity participation.
 Carlyle and Blackstone, leading private equity companies, increasingly invite Gulf
Investors for major investment opportunities.
 Unicorn Global Private Equity Fund launched in May 2006 can invest in the GCC,
Levant, Turkey, USA, and Southeast Asia.

47. Private Equity Funds
 It is a US dollar denominated fund with a minimum amount of USD100,000.00 for
individuals and USD1 million for institutional investors.
 The fund targets well-managed midcap companies across the consumer products,
health care, business services, and light manufacturing industries with near-term
growth potential and annual revenues in excess of USD10 million.

48. Hedge Funds
 Hedge funds were created to hedge (manage) risks against potential losses of
investments due to uncertainty in the market.
 The basic Shari’ah principles do not allow the sale of goods without legal
ownership of those goods.
 Also, the principles do not allow leveraging positions that are found in the
structure of the hedge funds.
 However, based on certain Islamic contracts, it is possible to structure a Shari’ah
compliant hedge fund.

49. Hedge Funds
 Shari’ah Capital, a US based firm, emerged as one of the leading companies that
provide technologies and advisory services to Islamic hedge funds.
 In 2008, Shari’ah Capital and Barclays Capital launched Al Safi Trust Platform for
hedge funds, in which Shari’ah Capital provides advisory service and Barclays
Capital is the prime broker and custodian.
 Newedge, jointly owned by Calyon and Societe Generale, which launched an
Islamic hedge fund in 2006 replacing short-selling with a salam-based Shari’ah
alternative.

50. Hedge Funds
 Hedge funds listed on its platform include Al Raed Emerging Markets Fund (Old
Mutual) and the Lucerne Shari’ah Isthimar Fund (Reach Capital Management).
 The Malaysian Securities Commission’s Shari’ah Advisory Council approved the
Ijarah-based structure to mirror short-selling.

51. Lease Funds
 Lease funds invest exclusively in lease obligations.
 The funds have a fixed tenure and regular income like bond funds, but have
shorter maturities.
 Shari’ah based ijarah funds must meet certain requirements.
 The asset used for leasing must be permissible under Shari’ah guidelines.
 The rental must be fixed and known to both the parties at the time of entering
into the contract.

52. Lease Funds
 Furthermore, the fund must hold all the responsibility following its ownership of
the asset.
 The Ijarah fund uses the subscription amounts to buy assets like properties,
vehicles, and machinery for the purpose of leasing.
 The fund owns the assets and the lessees pay the rentals.
 These rentals form the regular income streams for the fund.
 The first such aircraft leasing contract took place between Emirates Airlines and Al
Rajhi Banking and Investment Corporation raising USD$60 Million through Ijarah.

53. UCITS Framework
 The UCITS framework is the most globally recognized regulatory framework for
investment funds, and it is this framework under which most of these newer
international funds have been established.
 There are 26 Islamic UCITS funds, which are domiciled on the Luxembourg and
Dublin international fund platforms (as of May 2012).
 Therefore, despite the stagnation of the industry’s AUM growth at USD59 Billion
between 2010 and 2011, we now see a tipping point where there will be
significant AUM growth traction.
 Most of the funds in Dublin and Luxembourg in 2012 have shown a five year track
record, which is needed to convince institutional investors to invest.

54. UCITS Funds
 International investors can select from 26 Islamic UCITS funds, which are available
on the Luxembourg and Dublin international fund platforms.

55. THE END