Lack of scale, lower returns in Islamic finance need addressing

Sultan Nazrin highlights 4 key areas that need to be addressed for Islamic nance to move forward

By NG MIN SHEN / Pic By MUHD AMIN NAHARUL

Islamic finance needs to address the lack of scale, volatility in Islamic equity markets and lower returns for Islamic investing, to continue thriving globally, said Perak Regent Sultan Dr Nazrin Muizzuddin Shah Sultan Azlan Muhibbuddin Shah.

In his keynote speech at the Franklin Templeton 2018 Islamic Forum in Kuala Lumpur yesterday, he highlighted four key areas that need to be addressed for Islamic finance to move forward.

“First, the Islamic equity asset class needs to explore solutions to the challenge of scale, with the aim of achieving critical mass volume in order to remain competitive,” Sultan Nazrin said.

While the overall sukuk market has posted growth in recent years, the resilience of Islamic equities and funds cannot be taken for granted as most of them lack scale.

Almost three quarters of the 1,100-plus Islamic funds in existence have less than US$25 million (RM100 million) in assets under management, while conventional funds have an average size of US$394 million.

Sultan Nazrin, who is also Royal Patron for Malaysia’s Islamic finance initiative, cautioned that this sale issue has serious complications, including the risk of Islamic funds being considered less competitive than conventional ones, thus potentially resulting in the closure of smaller, struggling Islamic funds.

Another issue to be addressed is the greater volatility seen lately in global Islamic-listed equity markets — as measured by the performance of Islamic equity indices — due to international developments as well as region-specific events.

“Returns to Islamic funds must be stabilised in order to reinvigorate investor confidence. For the first time in many years, Islamic equity indices have recently been yielding lower returns compared to identical conventional equity indices,” the Perak Ruler said, noting that this goes against the pattern of Islamic equities generally outperforming conventional instruments.

He added that an unparalleled benchmark for governance must be established that balances financial and ethical considerations.

A crystal-clear roadmap of proper governance is essential to maintaining the integrity of Islamic assets, ensuring that Islamic finance retains its relevance to global finance, while remaining anchored to Shariah principles and values.

Sultan Nazrin further said innovation represents a challenge and an opportunity for the industry, thus Islamic finance must embrace the modern era of disruption, with a continued strong focus on product innovation.

“Indeed, it seems that there are ways in which recently developed financial products might actually have a certain synergy with the key principles of Islamic finance,” he added.

As sustained innovation is essential for progress, it is imperative that Malaysia stays ahead of the techno- logical disruptions that are reshaping the way people live Given this context, Islamic finance should embrace fully the new and emerging approaches to finance, while concurrently maintaining the core principles that set it apart from conventional finance.

“While Islamic investing has made significant progress in recent years, both domestically and globally, the next phase of growth will require players within the industry to reflect, recalibrate and rethink their approaches to certain aspects of conducting business in order to respond to the challenges of the present financial climate.

“Following a period of terrible financial uncertainty on an international level, I truly believe that the world now needs Islamic finance, and the sustainable, responsible financial practices enshrined at its spiritual core. This is the moment for Islamic investing to realise its full, global potential,” Sultan Nazrin added.

Meanwhile, Franklin Templeton South-East Asia regional head Adam Quaife said the outlook for Islamic finance is encouraging, with Malaysia set to continue playing a major role in the sector.

“Globally, total investment in Franklin Templeton Shariah-compliant strategies grew 32% last year to reach nearly US$2.4 billion at the end of 2017. This level of investment demonstrates the opportunity for Shariah-compliant strategies to continue to be attractive to investors,” he said.