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Development of Islamic Funds Industry. Mir Muhammad Ali, CFA – Chief Executive, UBL Fund Managers. Founded in 2001, UBL Fund Managers is the largest Asset Management Company in Pakistan – managing assets of over Rs. 25 billion (as of Sep 30, 09)

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slide1

Development of Islamic Funds Industry

Mir Muhammad Ali, CFA – Chief Executive, UBL Fund Managers

slide3

Founded in 2001, UBL Fund Managers is the largest Asset Management Company in Pakistan – managing assets of over Rs. 25 billion (as of Sep 30, 09)

  • UBL Funds Siraj is the Islamic investment division of UBL Fund Managers dedicated to offering Shariah-compliant investment solutions to investors
  • United Islamic Income Fund (UIIF)
  • United Composite Islamic Fund (UCIF)
slide4

Global Overview

  • It is estimated that over $500 billion in assets are managed around the world in Shariah-compliant investments
  • According to Standard & Poor’s, Islamic investments have been growing about 10% per year for the past decade
  • Currently more than 300 Islamic financial institutions are operating in over 75 countries
slide5

Local Overview

  • Islamic asset management is one of the fastest growing sectors within the Islamic finance Industry today
  • The growth in AUM of Islamic Funds is commendable as just in 9MCY09, the assets have grown by over 39% to PKR 17.6 Billion.
  • However, Islamic Funds still in the infancy stage constitute around 7.5% of the total Mutual Fund Industry which is a total pie of PKR 236 Bln.
slide6

Challenges facing Islamic Funds

Operational Threats

Sector Threats

Coverage

Distribution

Competition

Human Capital

Liquidity

Global Financial Shocks

Macro Threats

slide7

Challenges facing Islamic Funds

  • Human Resource
    • The demand for human resources across the entire Islamic financial services industry is high
    • As the Islamic Funds Industry grows, the demand for seasoned human resources will only increase
slide8

Challenges facing Islamic Funds

  • Expertise
    • While many scholars are trained in Islamic schools where the emphasis on finance may have been limited or due to lack of exposure to financial markets, they may not have a complete grasp of financial markets
    • On the other hand, financial practitioners, even though knowledgeable about Shariah standards, do not have the authority to rule on religious laws
slide9

Challenges facing Islamic Funds

  • Liquidity and Shariah Compliant Instruments
    • With the growth of the Islamic Funds Industry, the management of liquidity is a challenge due to scarce Capital Markets instruments and Secondary Markets
slide10

Challenges facing Islamic Funds

  • Investors Increasing Needs
    • On its own Shariah compliance may not be an absolute competitive advantage in the asset management industry as investors also require a diverse and competitive product offering that can match conventional benchmarks
slide11

Challenges facing Islamic Funds

  • Limited Product Offering
    • Presently, there is much discussion about the need for new products, ranging from commodity funds, sector specific funds, REITs and various other hedge fund strategies in the conventional market. In hindsight, the development of Shariah compatible inter-bank markets, liquid financial instruments and risk management mechanisms is the need of the hour.
    • On the other hand, gaps remain in terms of plain vanilla products in the Islamic Funds Industry
slide12

Challenges facing Islamic Funds

  • Lack of Awareness
    • Limited education on long-term benefits of savings
    • Lack of realization of ‘safety’ offered by Islamic investments as opposed to conventional counterparts
    • Questions on Shariah compliance
slide13

Challenges facing Islamic Funds

  • Measuring Performance
    • Given the unique Shariah-compliant structures, the process of measuring the performance of Islamic financial products can be tough
    • Current conventional rating methodologies may not suffice
slide14

As is true in every field - for every challenge there lies the possibility for innovation and improvement.

slide15

Overcoming the challenges

  • Enhanced Liquidity Management
    • Establishing appropriate risk and liquidity management techniques
    • The sustenance of any primary market depends heavily on the development of a sustainable and robust secondary market. Islamic investors, like conventional ones, portray varying risk preferences and a well structured and well regulated secondary market should be developed to reflect this.
slide16

Overcoming the challenges

  • Development of Proprietary Benchmarks
    • Proprietary indexes need to be established to serve as a common benchmark for the industry as a whole
    • For example, Dow Jones Islamic Market Index
slide17

Overcoming the challenges

  • Tailor-made Islamic specific Ratings
    • The industry requires tailor-made rating standards and guidelines to rate the performance of Islamic Funds using a methodology and nomenclature that is consistent with the specificities of Islamic Finance
    • Specific rating standards also required for the rating of Islamic instruments – different from their conventional counterparts
slide18

Overcoming the challenges

  • Human Capital Development
    • Training and Education Program specific to Islamic Finance, Islamic Law and Islamic Fund Management need to be developed and utilized to keep pace with the growth of the sector, and overcome the current shortages throughout the industry
slide19

Overcoming the challenges

  • Product Development & Structuring
    • Islamic funds will have to compete against conventional institutions for certain investor segments
    • The competition can be met if Islamic asset managers commit to develop the sort of coverage, in terms of geographic and asset classes, that is held by their conventional counterparts
    • The strategy for Islamic funds must be to identify and deliver products that investors perceive as being different in ways that are important to them
slide20

Overcoming the challenges

  • Product Enhancement
    • Islamic Funds may have to seek product enhancements to appeal to investors by providing ‘extra benefits’
    • For instance value-added benefits like Takaful Coverage, scholarship programs etc.
slide21

Overcoming the challenges

  • Exposure to International Islamic Markets
    • Islamic Funds should offer their investors exposure to developed and sophisticated International Markets to offer greater diversification and growth potential to their investors
    • Regulatory frameworks for International investments need to be strengthened
slide22

Overcoming the challenges

  • Strategic Alliances & Partnerships
    • Islamic Funds as a product requires multiple parties to come together. As a result strategic and partnerships can be developed in seeking to achieve long-term objectives.
    • These alliances can take place in the form of joint ventures, co-branding, franchising, outsourcing, etc.
    • For instance, partnerships with global Islamic Institutions to benefit from their expertise & research
slide23

Overcoming the challenges

  • Raising Investor Education. Changing Mindsets.
    • It is here where the job of the Islamic Industry is twice as hard. Not only do the Islamic investors need to be educated on the need for matching long-term financial goals with appropriate investments, but they must also be explained the principles of Shariah compliant investing.
slide24

Overcoming the challenges

  • Focus on Retail Investor Base
    • While there is nothing wrong with an institutional / retail divide, it is important to develop the retail side
    • Both a ‘top-down’ and ‘bottom-up’ approach is required that assures that, in time, all sectors of a diverse market are served.
    • The overreaching goal, namely the development of a robust and mature market, can become jeopardized, if only the top-end develops.
slide25

Overcoming the challenges

  • Quality Assurance
    • At the end of the day, we cannot ignore the fact that investors, on top of fulfilling their religious obligations, will demand quality if they are to be attracted to Islamic Funds
    • Islamic investors also want to be assured that globally accepted standards and best practices in regulation and supervision apply to them
slide26

What we do today will determine the success

of the Islamic Funds Industry in the future.

The sustainability

of this industry is our

responsibility.

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