A common standard for Islamic funds
Standardization remains a buzzword in Islamic fi nance. It appears logical that a common legal framework and
common standards will make the industry fl ourish and grow. If we look at the Islamic fund industry, in particular,
the total size of the industry remains relatively small with total global Islamic assets under management (AuM)
at US$70.8 billion and the number of Islamic funds at 1,535 at the end of the fi rst quarter of 2017. Malaysia, Saudi
Arabia and Luxembourg remain as the key domiciles contributing to the largest market share of the global Islamic
fund industry. Overall, the global Islamic fund industry has good opportunities for growth in the next years.
BISHR SHIBLAQ explores.
However, a crucial element of that
growth is distribution-model access,
which remains a key structural
weakness of Islamic funds. According
to Islamic fund managers in the GCC,
the Islamic fund industry cannot grow
substantially unless the institutional
sector such as sovereign wealth funds,
pension funds and Takaful companies
invest all in Islamic funds. In order for
institutional investors to invest, they
require more transparency and a more
uniform legal framework.
Currently, there is no globally accepted
standard for Islamic funds, with the
consequence that even the most basic
standards on disclosure, such as fund
size, types of assets held, investment
policy, management objectives, fi nancing
and such remain voluntary.
Some Islamic funds that are subject to
national fund regimes disclose very
detailed information, while other funds
sometimes only disclose their contact
details and the types of fi nancial products
off ered. Investor protection thus remains
subject to the legislation of the host
country. In order to att ract a certain type
of investor, such as institutional investors,
you have to establish an Islamic fund in a
jurisdiction known by the investor to have
a reliable legal framework.
Aware of these defi ciencies, regulators
in the GCC have been in discussions
to create passporting possibilities for
investment funds in general. A number
of projects have also been launched in
South Asia, but none of them have yet
been established as a global or regional
standard. GCC countries, as well as
ASEAN countries, are seeking inspiration
from the harmonization eff orts of the
EU. The idea of an EU passport for
investment funds was initiated there
in 1985 with the introduction of the
Undertakings for Collective Investment
in Transferable Securities (UCITS). It
aimed at introducing a unifi ed legal
framework for mutual funds in Europe
with the goal of facilitating distribution
of funds in one member state across all
other EU member states and to off er
investors in UCITS a consistent level of
protection. This UCITS brand has become
a global standard for investment funds
and is distributed around the world.
Islamic fund managers are very familiar
with the UCITS framework since it is also
used for Shariah compliant funds with
Luxembourg being its main domicile.
At times when there is growing interest
and awareness toward a Shariah
compliant investment asset class across
jurisdictions, having a global standard
for Islamic funds would allow increasing
not only the number of Islamic funds and
assets under management but also cross-
border distribution of these funds.
Currently, there are no common standards
for these funds and thus it is easier to
distribute conventional UCITS established
in any EU country in the GCC and
Asia, than distributing an Islamic fund
in another Islamic country. Instead of
introducing measures to harmonize the
legal frameworks, we have seen more
regulation recently, in particular in the
GCC countries, making cross-border
distribution increasingly difficult.
In the meantime, the EU has been
introducing and improving new
passporting rights for alternative
investment funds, infrastructure funds
and venture capital funds. It is only a
question of time when these fund types
will become global brands like UCITS
that will also be able to be distributed
across countries. In addition, socially
responsible investing has also risen to
prominence on the global investment
landscape as a growing number of
investors, individuals and institutions
alike, are seeking out investment avenues
and instruments that support ethical and
sustainable development in both
developing and high-income nations
while providing competitive returns.
This increased interest would be the
opportunity for governments to
introduce standards for Islamic funds
that provide for minimum key
information on the fund type, fi nancing
methods, Shariah board, investment
policy, type of assets held and so forth.
This would be the fi rst step toward the
harmonization of standards and could
eventually lead to passporting rights in
the future. This would certainly help in
building confi dence and transparency
and could lead to stronger growth of the
industry.
