Islamic market presents challenges
But major benefit in developing such products
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