The Growing Demand for Islamic Funds

ibf_current.jpgFor religious reasons, Islamic mutual funds shun nearly half of the stocks in the market, yet they still are among the top-performing U.S. funds. With Annual Growth rate of 15% and more in the recent years, the Islamic banking and Investment Industry ranks as one of the faster growing segments of the world’s financial services industry.

Estimates of the total value of assets managed according to Shari’a-compliant principles range as high as $750 billion, in other words Islamic finance is now a worldwide phenomenon.

The Islamic funds market has developed at a slower pace, but its potential is clearly huge. There are now more than 400 Islamic funds – four times the number at the turn of the century.

On the whole, the performance of Equity funds has been positive. Studies have shown that excluding financials, defense, tobacco, alcohol, leisure and entertainment stocks – as these funds must do if they are to remain Shari’a compliant – is no big disadvantage. The range of asset classes has mushroomed; a few hedge funds have also been launched.

The pace of product innovation has picked up in recent years; there are now a number of multi manager products on the market. Unit linked savings and retirement plans began to emerge few years ago, but the market is expanding fast and as many as 39 Banks have applied to distribute insurance in Saudi Arabia alone.

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The growth in this market has attracted many of the leading names. The likes of AXA, Allianz, AIG, Aviva to name a few have are already offering financial products in a number of markets.

As in any upcoming venture there are hurdles to overcome. One is lack of uniform regulation and there are no rules for certifying financial planners and investment advisers in the region.

In a study produced earlier this year by the Islamic Research and Training Institute, the Islamic Development Bank and the Islamic Financial Services Board has predicted that more than half of all financial services delivered within the Gulf Cooperation Council will be Shari’a compliant by the year 2015. Given estimates that suggest Islamic finance products are currently reaching only 10% of their potential target market, a considerable expansion looks justified.

Shari’a compliant funds have the potential to appeal to a wider constituency of investors keen to pursue socially responsible investment (SRI) principles. The Shari’s market may still be small but it offers big potential over time.

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3 Responses

  1. Ron Robins says:

    Shariah compliant investing has many similarities to ethical and socially responsible investing. Your readers might like to know that I cover the latest global news in these areas at http://www.investingforthesoul.com

    A free e-newsletter is also offered.

    Best wishes, Ron Robins

  2. Mbongwe says:

    Good study… 15% yearly is quite good, but how long can this trend continue? I am missing the fundamental reason for their good performance.

  3. ChampDog says:

    Originally, I thought islamic funds shouldn’t as performing as non-islamic funds but I was wrong. In fact, one of the highest fund returns from my investment is from islamic fund.

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