Shariah compliant asset management shares values and principles with multiple other faith-based and ethical investment approaches. So why has its growth not matched that of other ethical paths to investment – and why have these various strategies not yet converged? REHAN PATHAN explores.
Faith-based investing is not a new concept. It began as a tool to support the investment requirements of Christian organizations looking for options compatible with their moral and religious convictions. As early as the late 18th century, the Methodist Church was advocating investing and creating wealth without harming one’s neighbor. In the late 19th century there are examples of Quakers aligning their faith and investment choices by applying a sector-based exclusion strategy. Faith-based investing begin to shift to what can be considered ‘socially responsible’ in the early 1900s. In 1928 the US Federal Council of Churches launched the Pioneer Fund, the first SRI fund, and since then many church groups in Europe and the US have followed suit. In 2011, the Pope praised the Islamic finance system as something that may have averted the financial crisis, highlighting that faith-based investments could be considered as a positive and viable option for investors of any belief system.
For the past 10 years I have been involved with the Shariah asset management industry, initially through sales and distribution of Shariah funds for a single asset manager and more recently for several international managers who offer Shariah and SRI/ ESG funds. Whilst the appetite for the Shariah asset class has evolved considerably over these last 10 years and the sales landscape has matured, its growth has not matched that of SRI. There are many similarities between Shariah and SRI or similar investing. The differences are found in the screening applied to the underlying investment universe. For example, SRI would exclude industries and companies whose practices are not considered socially responsible or are un-ethical (although ‘ethical’ is relative and a matter of opinion and its parameters may differ from investor to investor). ESG filters would exclude a further level of stocks, and finally faith-based, in particular Shariah compliant, would exclude the most industries and companies.
The oft-asked question and the puzzle of the Shariah asset management industry is why has the uptake been so slow and why have the AUM expectations not been realized? Muslims make up 25% of the world’s population; however the Shariah asset management industry still struggles in the range of less than US$100 billion (with only around half of that in the fund universe, the rest is a guess in discretionary money). Conversely, the estimated AUM of the SRI universe sits at US$14.3 trillion.
Having been involved with making Shariah compliant investment solutions available to institutions, banks and distribution companies, I have seen the challenges that surround the uptake of these funds and products. In some cases, the investors and distribution hubs have embraced the asset class to investment management and tried to work with it, but in most cases investors and distribution hubs treat it as a trend, keep a majority of their investments with conventional managers, shy away from giving money to professional asset management firms in preference of doing it themselves, many times on a Libor-based system which itself is questionable; or do not distribute as a core evergreen product offering.
The main reasons for the slower institutional and distribution market update of the funds revolves around the size of Shariah fund managers’ assets under management, the structural difference between domestic and cross border offerings, the brands, teams and track records and the various human resources involved.
The challenge on the distribution side is that most of the Islamic funds offered today are domestic offerings in two major centers — Saudi Arabia and Malaysia – and available in those local currency and local fund structures, clearly not suited to cross-border sales. Also, they are distributed within a closed network, in many cases of just the direct clients of the asset manager itself, especially if the asset manager is owned by a bank.
On the institutional side, the large global institutional investors are process-driven, always guided by consultants and asset allocation guidelines, run strict RFP processes and have little or no knowledge of anything branded Shariah compliant. Even the large sovereign wealth funds in the GCC region are not Shariah investors
In order to attract both channels, the industry has to improve its processes and transparency and begin to align itself to the structured investment requirements of institutional and global distribution houses.
Labelling of this industry as Shariah compliant has made it exclusionary, where investors would question its suitability for anyone other than Muslims. On the other hand, sustainable investments are flourishing globally and a convergence taking place between all asset classes deemed sustainable, including SRI, Ethical, ESG etc. It’s almost an issue for investment managers if they are not signed up to the UN-PRI and the UN Global Compact. Shariah compliant asset management can take advantage of this convergence, as it is essentially the same thing with a set of extra filters suitable to Muslims.
It begs the question, does the snail’s pace progress of the Shariah funds industry come down to packaging? If faith-based investing such as Christian and Shariah compliant investing as well as principles-based methods such as socially responsible investing, ethical investing and ESG investing are almost all the same thing, why haven’t they converged already – and if they had, would faith-based investing such as Shariah compliant asset management also be a few trillion in AUM? Food for thought.
Rehan Pathan is the chairman and managing partner of Takseem. He can be contacted at
[email protected]
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