Is­lamic mar­ket presents chal­lenges

But ma­jor ben­e­fit in de­vel­op­ing such prod­ucts

Finweek English Edition - - Creating Wealth - MARC ASH­TON

SOUTH AFRICAN FI­NAN­CIAL Ser­vices com­pa­nies have set their sights on the US$200bn global Is­lamic fi­nance mar­ket. How­ever, Shahid Su­laiman, an as­so­ci­ate at law firm Bow­man Gil­fil­lan, says there are still many chal­lenges that SA banks and in­vest­ment firms need to ad­just to when mar­ket­ing prod­ucts to this sec­tor. Su­laiman was speak­ing at a re­cent pre­sen­ta­tion on Is­lamic fi­nance in Jo­han­nes­burg.

Prod­uct de­vel­op­ment re­mains a core prob­lem for the sec­tor. Com­mer­cially ac­cept­able main­stream prod­ucts – such as money mar­ket funds and in­sur­ance – don’t com­ply with the def­i­ni­tions of prod­ucts suit­able for the Is­lamic mar­ket.

Is­lamic Shariah law has strict rules re­gard­ing the earn­ing of in­ter­est. That pre­vents di­rect in­vest­ment in money mar­ket type in­stru­ments. The fact that the As­so­ci­a­tion of Col­lec­tive In­vest­ments is cur­rently ex­pe­ri­enc­ing record in­flows into money mar­ket funds in­di­cates the con­straints un­der which in­vest­ment man­agers op­er­ate in this sec­tor.

Com­pa­nies in­volved in lend­ing, in­sur­ance, gam­bling, al­co­hol or the pro­duc­tion of pork are also pro­hib­ited, mean­ing fund man­agers are forced to ex­clude blue chip in­vest­ments such as Rem­gro, Richemont, SABMiller and bank­ing stocks, all of which have been top per­form­ers in re­cent years.

As an ex­am­ple, Fraters Is­lamic Fund’s top hold­ings in­clude Gold Fields, AECI, Sa­sol, Telkom, Ton­gaat Hulett and Nam­pak and the fund has only re­turned 3,29% over the past year, ac­cord­ing to unit trust web­site Equinox.co.za. The top-per­form­ing fund over the same pe­riod was the Cadiz Eq­uity Lad­der Fund, which in­cluded First Rand, Stan­dard Bank and Richemont among its eq­uity hold­ings.

Com­pli­ance with Is­lamic le­gal prin­ci­ples isn’t a black and white is­sue, as dif­fer­ent cul­tures have dif­fer­ent lev­els of flex­i­bil­ity with re­gard to fi­nan­cial con­cepts. For that rea­son many com­pa­nies have de­vel­oped their own teams of Is­lamic law schol­ars to as­sist in de­vel­op­ing and mar­ket­ing such prod­ucts.

The in­sur­ance in­dus­try was an­other area that Su­laiman touched on to high­light the chal­lenges. Be­ing a rel­a­tively new con­cept in the Mus­lim com­mu­nity, it’s still be­ing vig­or­ously de­bated. Many Is­lamic schol­ars agree that from a so­cial per­spec­tive the con­cept of in­sur­ance makes a lot of sense. How­ever, more con­ser­va­tive com­mu­nity mem­bers feel that tak­ing out in­sur­ance is a “chal­lenge to divine will”.

“Many South African com­pa­nies of­fer­ing bank­ing and fi­nan­cial ser­vices are now mov­ing into places like Nige­ria as well as the Far and Mid­dle East,” Su­laiman said. With many of those re­gions be­ing gov­erned by Shariah or Is­lamic law prin­ci­ples, com­pa­nies will need to have a sound knowl­edge in struc­tur­ing prod­ucts ap­pro­pri­ately.

There’s a ma­jor ben­e­fit to the suc­cess­ful de­vel­op­ment of such prod­ucts. “Is­lamic fi­nance in­sti­tu­tions are faced with a prob­lem of ex­ces­sive liq­uid­ity. Those in­sti­tu­tions are sit­ting with cash and are bat­tling to find ar­eas to in­vest those funds,” said Su­laiman.

Many are mov­ing into place. Shahid Su­laiman

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