Islamic investment funds are relatively big and varied in number but in terms of funds under management they are very modest compared to the conventional fund industry.
The single largest Islamic equity fund is the Al-Ahli Global Trading Equity Fund of National Commercial Bank of Saudi Arabia with funds under management of about US$600m. With the exception of one or two others, most of the Islamic mutual funds have funds under management of between US$10m to US$75m, which makes the Islamic fund industry marginal in the wider picture of the Islamic banking market.
Investment funds include equities, real estate funds, currency funds, Sukuk fund of funds, commodity funds, leasing funds, and private equity funds. Perhaps the most developed are the real estate and commodity funds.
Equities as an investment asset class vies with real estate and gilts (government bonds). But investors from the Middle East are traditionally more at home with real estate investment because of the "bricks and mortar" mentality. The government bond market in the region is virtually non-existent and in any case there is a dearth of Shariah-complaint treasuries worldwide, save Malaysia.
However, the stock market boom in the last few years in the GCC especially driven by "an irrational exuberance" has seen greater involvement in equities. But the 30 per cent market crash in 2005 has tempered caution. In contrast, the massive growth in real estate development in the region underlines the fact that investors remain more comfortable with the asset class.
Shariah governance and the lack of regulatory and legal frameworks in the GCC has also contributed to the stagnation of the mutual fund industry per se and the Islamic fund industry in particular. In Kuwait and other markets, there is still an underlying resistance to equity funds because of a misconceived Shariah interpretation.
Nevertheless, with a young demography, and huge liquidity, the mutual fund industry will persist and perhaps flourish with the right product offerings and expertise in structuring, marketing, stock selection, and portfolio and investment management.
Malaysia and Saudi Arabia are by far the two largest markets for Islamic mutual funds. Malaysia has over 90 such funds and two institutions in Saudi Arabia - Alrajhi Bank and National Commercial Bank by far dominate the industry in the GCC with the two largest families of Shariah-compliant funds.
The emergence of Islamic equity indexes such as the Dow Jones and FTSE has opened up new areas for innovation in this respect especially index-linked funds and other more exotic products such EFTs (Exchange Traded Funds).
There is also huge potential for private equity funds and for Takaful (Islamic insurance) funds. Although the sector has seen a proliferation of single private equity transactions, there are only a handful of Islamic private equity funds in the market. Takaful premiums have to be invested in Islamic instruments. Most are currently invested in commodity Murabaha transactions on the London Metals Exchange or the Commodity Murabaha Programme led by bank Negara Malaysia.
Structuring Islamic equity products is well established even amongst western fund managers. Structuring value-added Islamic equity funds is the real challenge!
