MALAYSIAN ISLAMIC FINANCE Issuers and Investors Forum 2006

Growth and Potential of Asset Management
and Islamic Funds

Haisam Arabi started this session by briefly introducing SHUAA Asset Management as a player in both the conventional and the Islamic asset management markets.

He acknowledged the fact that in the last six to twelve months, the demand for Islamic-based products had increased, but supply had not matched this demand. Capitalizing on the strong demand for Islamic finance products, SHUAA had developed the GCC Equity Fund, but had not been able to put it on the market, as it had encountered several Shariah related problems.

The lack of standardization in Shariah rulings, which Haisam identified as being due to multiple Shariah scholars of different schools of thought, was one of the problems faced by the industry. Haisam believed that products could not get a wider range of distributors, as each bank had its own Shariah advisory council.

Interestingly, he noted that SHUAA had a Shariah scholar who had approved a product, but at the same time he also sat on the boards of two different banks that rejected the same product being marketed by those banks.

Sharing Hong Leong Islamic Bank’s experience, Daud Vicary Abdullah noted that Malaysia had a competitive advantage in that each bank had its own Shariah council, in addition to being subject to the Central Bank’s as well as the Security Commission’s Shariah Advisory Council. He said this “double layered” Shariah advisory approach adopted by Malaysia made it easier to obtain approval, thus meaning that a product could be effectively marketed nationwide at a faster pace.

While acknowledging the benefits of the dual Shariah advisory approach adopted by Malaysia, Dr Omar Marwan Kamal was of the opinion that each bank should also have its respective Shariah scholars in order to provide a healthy and competitive environment, thus encouraging product innovation.

Haisam was not in total agreement with Omar’s suggestion, as he said that this model would force asset managers to reside in banks while commercial banks were moving away from product manufacturing. A stand-alone asset management company, he added, would rely on the distribution platforms of all the banks, and if the company had to face different Shariah views of its products, then asset management companies would be deterred from participating in Islamic finance. “The Malaysian model will give the competitive edge and the ability to penetrate the industry,” he said.

As a provider of important information to investors, Jamal Abbas Zaidi noted three things that an Islamic investor wanted. The first was capital protection, as well as a reasonable return from the investment. Secondly, the income must be from a halal source; and last but not least the type of service rendered must be of a high quality.

Jamal stressed that the role of the Islamic International Rating Agency (IIRA) was to provide comfort to investors in two different ways, namely by the Shariah Quality Rating and the Fund Stability Rating.

Under the Shariah Quality Rating, IIRA would assess and evaluate the level of compliance with the principles of Shariah and an opinion would then be expressed in simple lettering as in AAA or AA, like conventional rating agencies. He noted that the level of compliance covered both the issue and the issuer. As for the Fund Stability Rating, based on economic and financial reasoning, he said that investors would get an opinion as to what to expect from the investment.

Jamal also said that the necessity of informing people of the level of compliance to Shariah was a kind of service offered to investors. It is then basically up to the investors themselves to decide whether their priority was solely economic value or Shariah compliance.

According to Jamal, the rating exercise could help to increase the number of new products, and that could only be possible if there was an ample supply of rated tradable instruments. Agreeing on the importance of the rating exercise, Haisam said rating could also be perceived as a kind of approval, which would solve the problem of product distribution.

In enticing non-Muslims to Islamic finance products, Daud said that apart from the economic value proposition, the Shariah compliant nature of the products would also add some value to the products, as it indicated that the products were structured based on strict requirements.