Ian Morley, Isle of Man Funds Association
Few people outside a specialist group of bankers and investors are aware that one of the tenants of the Quran and a key principle of the Islamic faith is the idea that usury (Riba), lending money for interest is not acceptable.
In a secular sense this would make the idea of Sharia finance close to that of Socially Responsible Investing (SRI). Sharia finance excludes a number of investments such as armaments, tobacco, alcohol, pork related products, pornography, financial services, gambling, etc. The evidence post the financial collapse of traditional markets in 2008 is that Sharia finance remained fairly resilient and somewhat immunised from the generic collapse that engulfed so much of the traditional markets that had incorporated massive speculation and false credit analysis. Sharia investments remained sound because you cannot lend based on hypothetical interest (Riba) levels, enter into speculative trades (Masir)or investments with uncertainty (Gharar). There were some failures in 2007, 2008 and 2009. However, these numbers were small in comparison to the large number of failures in secular markets and the generic falls experienced in those markets.
There is also some academic evidence (Omar Al-Shakfa and Gregory Lyny) writing in The Journal of Investing point out that while restricted portfolios such as Sharia based ones are subject to limited diversification and greater idiosyncratic risk, their risk adjusted returns are comparable to more traditional un-restrained portfolios. They site other research (Bauer, Koedijk, Otten Guerard Statman, and Sauer and Schroder) who have also compared ethically screened investing, a proxy for Sharia, with traditional investing and come to similar conclusions. It would seem for those that are devout there is no reason why they have to forego returns for the sake of their beliefs.
The Economist magazine (Savings and Souls, Sept 6 2008) seems to slightly challenge the growth possibilities of Sharia finance claiming that “It rests on the maintenance of the tenuous balance between Sharia compliance and the need to offer Muslims investment opportunities that compare favourably to those enjoyed by secular investors.” However, it seems from the academic research that although Muslims face the same issues as SRI investors, does their voluntary adherence to investment restrictions hurts portfolio performance? The evidence available indicates that it does not.
There are other factors as well that distort the picture. Islamic scholars are yet to agree upon a single set of rules. The industry is somewhat fragmented. While primarily focused in the Middle East and the Muslim communities in the Far East, many of the providers are quite small with over 70% of Islamic fund managers (according to the Ernst and Young Islamic Funds and Investment Report 2011) having less than $100m assets under management (AUM) and less than 10% have AUM in excess of $500m.
Rent from properties as well as some, but not all, commodities are permissible investments, as are Sharia screened equities and even today some specialist hedge funds and Exchange Traded Funds (ETFs) are allowed. Interestingly, while there is a problem using gold or silver for liquidity management structures, physical gold is acceptable and I have also seen one Sharia compliant gold ETF.
Sukuk, is the Arabic word for a legal instrument or deed. These are sometimes in short hand referred to as Islamic bonds. This is not correct as Sukuk is similar to an obligation backed by an asset but is not really a bond because it is not based on debt. It is better understood as a commercial certificate that gives the owner a share in an underlying pool of assets. In recent times in order to overcome previous difficulties the tendency is to have more assets backed rather than asset based, as asset based often requires supplementary obligations from the issuers.
As Islamic finance has grown the need to measure performance and return has become more precise. In the early days traditional indices were used as benchmarks. Today, these have been replaced by a number of specific indices. These include The Dow Jones Islamic Market Indexes (DJIMI), The FTSE Global Islamic Index Series (with Yasaar Research Inc), the MSCI GCC Islamic Index and the S&P Sharia Indices (with Ratings Intelligence Partners) just to name a few of the main ones.
The growth of the Muslim communities in the Diaspora combined with a concurrent interest in such communities in Sharia based investments has seen demand in Europe and the UK as well. The UK Treasury has a committee that looks closely at such activities and is supportive and encouraging. Stella Cox, (a European Christian woman, hardly a stereotype) is the Managing Director of DDCAP Limited, one of the UK’s leading players in the Islamic finance market and active in the Middle and Far East as well as supporting UK government inspired activities.
On a personal level I have been involved in Sharia finance for a number of years. I serve as Director of a company called Condor Trade which is involved in commodity facilitation in sharia investment structures. I also served on the London Metal Exchange Index committee.
The Isle of Man (IOM) has been looking at the Islamic Market most carefully. The Ethical basis of much of Sharia investing strikes an immediate chord with the leading role that the Isle of Man has played in opening up offshore markets to transparent, honest and good governance in all aspects of investing. Specifically the IOM has forged links with countries in the Middle East and sent high level Government Ministers and Civil servants out to explore business opportunities and open trade talks. Appleby Isle of Man, a leading law firm in the Island, has acted for ABC International Bank plc in connection with a £245m financing package, provided on a Sharia compliant basis. Capital International Group an IOM based financial services group has also worked with Boston, another IOM company that has provided UK property schemes for Sharia-based Middle East investors.
As can be seen from the above examples the IOM is welcoming to specialist and ethically structured investments such as Sharia and has locally based law, accounting, banking and administrators with the relevant experience to service sharia investment funds.
Ian Morley is the Isle of Man Funds Association’s London representative and works directly with the Isle of Man Department of Economic Development and the Isle of Man’s Funds industry to develop links and opportunities with the City of London, a prime source of business for the its funds sector