All Islamic financial products are compatible with Shariah Islamic principles. These products include equity, Sukuk, investment funds and so on. It should be noted that the lion’s share of this market belongs to Sukuk assets irrespective of banking (according to the IMF). Islamic finance assets have grown from US$1.95 trillion in 2014 to US$3.37 trillion in 2020. In 2020, Iran, Saudi Arabia and Malaysia have the largest value of these assets at 26%, 26% and 19% respectively (IFDI, 2021).
The first Shariah compliant fund was back in the 1960s in Malaysia and in the mid-1970s in the Middle Eastern region. These funds were launched by individuals, who were attracted by the idea of faith-based investments (PWC). In 2020, 5% of Islamic finance assets belong to funds with about US$178 billion in value. Assets under management (AuM) of Islamic funds saw an approximately 170% growth from 2014 to 2020 (about 18% per year) and exchange-traded funds (ETFs) account for about 11% of Islamic finance assets (IFDI,2021).
Review of 2022
On this note, let’s take a look at ETF trends in some regions, such as Malaysia and Iran. These two countries were used as an analysis of Islamic markets for the period between November 2021 and October 2022.
In Malaysia, AuM of ETFs saw a 0.8% increase month-over-month, a slight growth although it decreased from RM2.13 billion (US$482.56 million) to RM2.09 billion (US$473.5 million) during this period. Malaysia is known as an Islamic market but only some of the ETFs are Shariah compliant. ETFs in Malaysia are divided to 77.4% of fixed income ETFs, 17% of Shariah equity ETFs and other types of ETFs as of October 2022 (Bursa Malaysia, October 2022).
In Iran, ETFs’ AuM increased about 67% between November 2021 and October 2022. About 90% of these ETFs are equity- and fixed income-based while others are energy- and commodity-based. The average growth of ETFs AuM in the Iranian capital market was approximately 4.5% each month during the year.
More than 45% of funds’ portfolios belong to fixed income securities and about 20% of their investments are in equity. In the Iranian capital market, as an Islamic financial market, other types of ETFs are categorized under alternative investments such as exchange-traded venture capital (VC), private equity (PE) funds and REITs which are on the verge of evolution too. Last year, two VC ETFs, two PE ETFs and one REIT were listed on the Iran Fara Bourse. Saudi Arabia has now seven listed ETFs on the Tadawul Stock Exchange.
Many asset managers around the world, though not placed in the Islamic market, have launched Shariah compliant ETFs. Furthermore, many non-Islamic countries have listed Shariah compliant ETFs in their capital markets. In the London Stock Exchange, seven ETFs belonging to the Islamic category of the UK are listed. Singapore launched Islamic ETFs in the previous years and Jersey is known as an Islamic ETF hub, with about 13 funds.
Preview of 2023
The total market cap of all Islamic finance assets grew about 71% from 2014 to 2020; this amazing growth shows that this is an emerging market. The Islamic Finance Development Report forecasts an 8% growth in the next three years. Even in non-Islamic countries like in the European region, the Muslim population is increasing and the markets are looking for new sources such as Islamic finance products that will satisfy investors and other participants.
According to Fitch Ratings, the annual growth rate of Islamic funds is about 13%; however, the global mutual fund industry is growing 11% annually. The Islamic fund industry is growing rapidly because most countries are trying to acquire the largest share of this emerging market, even non-Islamic countries.
Apart from the different types of Islamic financial products, ETFs are growing globally in Islamic and non-Islamic markets. ETFs are an investment intermediary with high liquidity that will attract more investors globally.
Economic fluctuations and crises like wars or pandemics especially after the COVID-19 pandemic have increased investment risks for direct investment in capital markets, so it is predictable that indirect investment intermediaries like ETFs are raised all around the world and the significance of financial instruments can be more obvious.
About 30% of asset/fund managers invest 26–50% of their AuM in ETFs and 84% of ETF investors will increase their asset allocation to ETFs (2022 Global ETF Investor Survey).
Conclusion
By reviewing ETFs in Islamic and non-Islamic countries, it is notable that Shariah compliant ETFs and other funds are expanding globally. Each year, a new country is added to the Islamic ETF industry. In line with the advancement in technology, a new class of ETF can be seen in the Islamic finance ecosystem and each ETF has its own benefits and opportunities. For example, in recent years, the launching of fintech ETFs and digital economic ETFs are surely an attraction for the Islamic markets.
Nafiseh Shahmoradi is the expert of investment funds at Iran Fara Bourse. She can be contacted at [email protected].
Aref Aligholipour is the head of financial institutions at Iran Fara Bourse. He can be contacted at [email protected].