06Feb

Muslim millennials growing wealthy and demanding impact investing

February 6, 2019 hejazfs 41

15Aug

Awaiting innovation in the Islamic retail asset management space

August 15, 2018 hejazfs 35

18Jun

Australia Islamic finance blooms under the radar

June 18, 2018 hejazfs 43

While Islamic finance centres in Southeast Asia and the Middle East keep dominating core developments in the sector, and news are currently almost exclusively focused on upcoming Shariah-compliant financial markets in Northern and Sub-Saharan Africa, Central Asia and Europe, activities elsewhere are quite out of the limelight, but unjustifiably so.

An upcoming Islamic finance forum, the IFN Australia Forum 2018, to be held on March 27 in Sydney, serves as a reminder that Shariah-compliant finance is a quite active segment of the financial industry in Down Under, and also a sustainably growing one. Even though the country of 25mn people – of which 2.6% or around 650,000 identify themselves as Muslims as per the latest census in 2016 – does not have dedicated Islamic finance laws and regulations, the Shariah-compliant finance scene is blooming in line with Australia’s strong economic fundamentals.

The country in fact has a substantial number of Islamic finance service providers which offer a broad scope of Shariah-compliant finance products ranging from house financing, Islamic pensions, wealth management to halal superannuation funds and takaful. Major industry players include Hejaz Financial Services in Thomastown, Victoria, one of the largest Islamic finance institutions in Australia; Melbourne-based MCCA Islamic Finance & Investments (formerly Muslim Community Cooperative of Australia); Islamic Co-Operative Finance Australia in Parramatta, Islamic home financing provider Iskan Finance and Islamic investment firm Crescent Wealth, both based in Sydney; Amanah Islamic Finance Australia based in Coburg, Victoria, as well as Islamic finance divisions of National Australia Bank and Westpac Banking Corp, which are mainly designing Muslim-friendly mortgage products to cater to the burgeoning real estate market where one of the most popular Shariah-compliant products is diminishing musharaka for home financing.

In addition, there are institutions such as the Australian Center for Islamic Finance in Melbourne, which offers Islamic finance skills training, the Islamic Financial Services Council of Australia, an industry body providing analysis, advice and advocacy for the Australian Islamic financial services industry, also based in Melbourne, and the National Center of Excellence for Islamic Studies funded by the Australian government and operating in a collaboration between the University of Melbourne, Griffith University and Western Sydney University.

The growth of Islamic finance in Australia is, first of all, owing to a growing number of Muslim immigrants over the past decade or two. Among the Muslim communities Down Under, the largest are originating from Bosnia, Bangladesh, Egypt, Iraq, Lebanon, Turkey and Somalia. There is also a Kurdish Muslim community, and more than 1,000 people identify themselves as Aboriginal Muslims, being descendants of Afghan cameleers who arrived in Melbourne in 1860, or have Indonesian ancestry.

Most of the growth in the number of Muslim Australians occurred in the recent past, with a 15%-growth between the 2011 and 2016 census alone and a 40% growth from 2006.

“The Australian Muslim community has experienced rapid growth since the 1990s, both in number and wealth,” explains Hakan Ozyon, CEO of Hejaz Financial Services and Chairman of the Islamic Financial Services Council of Australia.

“I decided to establish Hejaz back in 2014 to provide complete Islamic financial services solutions under one roof. Meanwhile, Hejaz is competitive with existing banks and is set to reach $1bn in assets by 2021,” he adds.

Apart from demand from domestic Muslims, as of late there is also strong interest from Shariah-compliant investors from Southeast Asia and the Middle East, particularly in Australia’s booming real estate sector.

For example, Malaysia’s Lembaga Tabung Haji, a fund that facilitates savings for the pilgrimage to Makkah through investments in Shariah-compliant vehicles, is one of the biggest Islamic investors into Australia. Institutional investors from the UAE and Saudi Arabia are also on the outlook for Islamic property investment in the country’s real estate hot spots Sydney, Melbourne, Brisbane, Adelaide, Perth, Darwin and Cairns.

The growing inflow of Shariah-compliant funds has propelled Australia among the non-Muslims jurisdictions with the largest amount of Islamic assets under management besides the UK and Luxembourg. Analysts forecast the Australian Islamic investment fund industry to grow up to $22bn in assets by 2020.

The sustained growth of Islamic finance in Australia is even more interesting to observe because the government did do much to support the industry. In September 2008, Canberra commissioned a report into how to position Australia as a financial services hub in the Asia-Pacific region, and the analysts came up with a number of recommendations, including the development of Islamic finance. However, the government, although encouraging Muslim communities to set up their own financial services ecosystem, has been overall slow in responding to the booming Shariah-compliant finance scene and is also hampered by weak institutional support from most large conventional banks and by the fact that most financial regulation and legal issues are handled autonomously by Australia’s federal states. While this will not necessarily curb further growth of the industry for the Muslim clientele, it remains a challenge for the expansion of Islamic finance into the non-Muslim financial market in Australia, which, like elsewhere, requires clear investment rules and regulations for legal reasons.

03Jun

Demand for Islamic pensions set to grow but can fund managers overcome the challenges?

June 3, 2018 hejazfs 31

Statistics show that the global population is aging rapidly with exponential increases expected in the coming decades. Figures from the UN show that, compared with 2017, the number of persons aged 60 or above is expected to more than double by 2050 and to more than triple by 2100, rising from 962 million globally in 2017 to 2.1 billion in 2050 and 3.1 billion in 2100. In Europe, 25% of the population are already aged 60 or over. That proportion is projected to reach 35% in 2050 and to remain around that level in the second half of the century.

This segment of the market now accounts for an ever-increasing proportion of investment assets, as global institutional pension fund assets in 22 major markets grew to US$36.4 trillion at the end of 2016, representing an increase of 4.3% in the 12-month period, according to the Global Pension Assets Study 2017 conducted by Willis Towers Watson.

The global Muslim population is no exception to this as their demand for Shariah compliant, consistently performing and secure pension funds increases. There is no denying the fact that since the early 2000s, Islamic finance institutions have become a force to be reckoned with, as their capital grew from US$200 billion in 2000 to close to US$3 trillion in 2016. This figure is expected to go up to US$4 trillion in the 2020s. There are now more than 300 banks and 250 mutual funds around the world complying with Islamic principles.

Despite the impressive growth of capital in Islamic finance institutions, uptake for Islamic pension products has been restricted due to several factors which include the following:

1. Limited financial literacy: The average level of financial literacy among Muslims seeking Shariah compliant products is lower than those consumers seeking conventional financial services. This holds true for those seeking Islamic pension products as well as other Islamic financial products and services. This deficiency exists due to limited exposure to the teachings and principles of Islamic finance throughout most schooling and tertiary education systems.

2. Higher costs: Investors in Islamic pension funds often find that the fees charged by compliant funds are higher than their conventional counterparts. Generally, Islamic pension fund managers encounter greater costs as they need to appoint and remunerate Shariah boards, the necessity of asset-screening and a lack of scale in funds, while valuation is clouded by a lack of liquidity in some instruments. However, the impact of such costs should start to reduce as the average fund size increases and economies of scale are found across the industry.

3. Limited access to quality financial advice: The concept of seeking sound financial advice regarding one’s finances is somewhat foreign to many Muslim pension investors, hence, they often opt for a conventional product as a result of not seeking advice. Furthermore, many Muslim investors may not have access to the tailored advice capabilities they need to make informed decisions in choosing their pension funds.

One of the greatest challenges faced by Islamic pension funds and their managers is their ability to structure portfolios that perform consistently while managing risk exposure within these portfolios and successfully selecting investment assets with the limited universe. Investors in pension funds are often more mature in age and are therefore classified as conservative or defensive investors. Many fund managers overlook this crucial point and overexpose investors to growth assets such as compliant equities and property which are better established in the conventional finance industry. Generally, fixed income assets suffer from a lack of liquidity and inadequate valuation modeling.

Islamic pension fund managers rely heavily on fixed income investments and Sukuk bonds to manage the risk profiles of their respective funds. Unfortunately, fixed income is relatively immature in the Shariah context, chiefly because there are so few Sukuk bond issues. A report by PwC on Islamic asset management found that money market funds are in greater use than fixed income funds, within the Islamic pension space. There is also a lack of clarity about the duration of instruments in some Shariah compliant fixed income funds. Funds often invest in a wide range of maturities, with no clear information for investors on the overall
aims of the fund.

There is no doubt that the demand for Islamic pensions globally will continue to grow. Stimulated by an aging population and the ever-growing profile and awareness of Islamic finance, the coming decades will experience exponential growth in the Islamic pension segment. Islamic finance institutions must continue to innovate and create products and services that mirror the conventional alternatives while delivering positive outcomes to members in a manner conforming to their ethics and values.