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Saturday, 27 September 2008

Investment Funds Institute of Canada (IFIC): Islamic funds begin to take hold

The market is surging worldwide and assets are expected to double to US$1.4 trillion in less than two years

Friday, September 26, 2008

By Olivia Glauberzon (Investment Executive)

The Shariah-based investment industry is flourishing and expected to double in assets in less than two years, said experts in Islamic finance during a presentation at the Investment Funds Institute of Canada’s annual conference in Toronto on Thursday.

Currently with assets of US $700 billion worldwide — and growing at a 22%-a-year pace — Shariah-compliant funds will grow to US$1.4 trillion in assets by 2010, said Rehan Saeed, a Shariah liaison with the Mississauga, Ont.-based Islamic Finance Advisory Board.

Shariah, otherwise known as Islamic religious law, governs all Islamic banking and investing practices. To comply with Shariah, stocks and bonds within a portfolio need to be screened for the types of businesses they are associated with.

For instance, investments related to alcohol, tobacco, gambling, banking and pornography are not allowed, said Imtiyaz Ahmed, representative for Shariah capital markets at frontierAlt.

“Think of it as a socially responsible fund,” Ahmed added. “There are a just a few extra controls.”

Besides business screens, Shariah-compliant funds also restrict investments in companies with excessive debt. Ahmed explained that “excessive” is a debt to equity ratio above the 30% range.

However, Shariah regulators recognize it’s not a perfect world. Inevitably, regardless of how hard fund managers try to create products in line with the framework, some companies may have a small revenue stream coming from interest or from a black-listed activity.

To solve this problem, funds can be “purged of their sins” by donating a company’s revenue stream from non-Shariah compliant activities to charity, said Habib Mejhee, associate partner at Deloitte & Touche LLP. For example, if a fund invests in a company that earns $10 a share, but has 10% of its revenue coming from interest income, the fund managers would donate $1 a share to charity in order to be 100% Shariah compliant, Mejhee said.

A growing Muslim population demanding more Shariah-compliant funds in Canada has driven the demands for these investments in North America, said Ricky Pinto, also a partner with Deloitte & Touche.

“There’s only a sprinkling of funds in Canada,” said Pinto. “Around the world, people are seeing these opportunities.”

Currently, the $3 million frontierAlt Oasis Canada Fund is the only Shariah-compliant fund in Canada. The fund has doubled since last year, according to Les Young, vice president of frontierAlt.

And with the Muslim community expected to grow to 4.9% from 3.7% of the Canadian population by 2017, Ahmed said, the Shariah-compliant based fund industry is still largely untapped.

Similarly, the U.S. Islamic finance market is also dominated by one product, the Amana Income Fund. Managed by Saturna Capital, It has US$1.5 billion in assets and has won the 2007 Lipper Fund Award for the fund’s three-year performance in the U.S. equity income category.

Islamic finance began in the 1960s, staring with two funds in Egypt and Malaysia. Today, the industry has grown to include a number of funds and governing bodies around the world. The organizations include the Accounting and Auditing Organization for Islamic Financial Institutions, the Islamic Financial Services Board and the International Islamic Rating Agency.

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