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Monday, 15 November 2010

Untapped $105 Billion Endowments May Boost Shariah Funds

Managers of Islamic endowments with $105 billion in assets are seeking to diversify out of bank deposits, providing Shariah-compliant funds with the chance to capture new business, Ernst & Young LLP says.
These “largely untapped” endowments, or awqaf, have as much as $40 billion of cash parked at commercial banks, Ashar Nazim, Manama-based executive director and head of Islamic financial services for Ernst & Young, Bahrain, said in a telephone interview Nov. 9. Awaqf typically consists of cash or assets, including land and buildings, donated by individuals or institutions for charitable and religious purposes.
“Over the next 18 months, the Islamic endowment segment could prove to be a major stimulus for growth in the Islamic funds industry,” Nazim said. “They realize that they cannot manage it on their own and they need to involve the formal financial industry.”
Assets held by Islamic funds have stagnated at around $52 billion since 2008, according to Ernst & Young in its Islamic Funds & Investment Report published in May. The combined wealth of the Middle East’s more than 400,000 millionaires grew 5.1 percent in 2009 to $1.5 trillion,Cap Gemini SA and Bank of America Corp.’s Merrill Lynch unit said in June.
Islamic endowment institutions should diversify their real- estate holdings into government sukuk and other products, Nida Raza, senior vice president of capital markets at Bahrain’s Unicorn Investment Bank BSC, said in telephone interview yesterday from Manama.
Property Slump
Real-estate prices have tumbled more than 50 percent since their 2008 peak in Dubai and 30 percent in neighboring Abu Dhabi as banks tightened mortgage lending and speculators fled the market. Property is used as collateral for Shariah-compliant bonds, which are backed by assets and pay a share of profit instead of interest.
“The demise of real estate in the global market has woken a lot of people up,” Raza said. “For the awqaf, a long-term investment meant real estate, but as more and more products are realized in the Gulf region, more longer-dated sukuk and sukuk funds, you’ll start seeing the diversification from the endowment fund perspective.”
Global sales of Islamic bonds fell 29 percent to $13.7 billion this year from the same period in 2009, according to data compiled by Bloomberg.
Shariah-compliant bonds returned 12 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, compared with a 15.5 percent gain in developing markets, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
Markets in Bahrain, the United Arab Emirates, Dubai, Kuwait and Qatar are closed Nov. 16-18 for the Eid Al-Adha holidays, Nov. 16-17 in Saudia Arabia and Nov. 17 in Malaysia.
Bahrain’s Research
As much as 80 percent of assets owned by Islamic endowments are donated real estate, Ernst & Young’s Nazim said. Islamic mutual funds account for 5.5 percent of the estimated $939 billion Shariah-compliant industry, according to the company’s May report.
“These are prime properties, with huge scope for enhancing value through professional investment management of the portfolio,” Nazim said. “While awqaf institutions have been successful in mobilizing donors’ money and disbursing it for the defined causes, they typically don’t possess asset management capabilities.”
Bahrain’s Waqf Fund, started in 2006 with $4.6 million from the central bank and Islamic financial institutions, provides money for training and research on the industry, according to the bank’s website.
Malaysian Program
Maybank Islamic, the Shariah-compliant unit of Malaysia’s largest lender, started a awaqf program in July that will allow Muslims to make religious donations through the bank, Abdul Wahid Omar, chief executive officer of Malayan Banking Bhd., said on Aug. 20. Maybank Islamic will then work with awaqf to manage the funds, he said.
The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 climbed 12 basis points today to 2.79 percent, according to prices provided by Royal Bank of Scotland Group. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s was little changed at 368, according to data compiled by Bloomberg.
The difference between the average yield for sukuk and the London interbank offered rate widened 1.5 basis points to 333 points on Nov. 12, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
“Any kind of infusion of new opportunities, whether it’s in the form of cash or human resources, that’s significant for the industry,” Shaykh Yusuf Talal DeLorenzo, Dubai-based chief Shariah officer and board member of Shariah Capital Inc., said in an interview in Dubai on Nov. 11. “Asset managers really haven’t had the opportunities to interface and work” with endowment institutions.



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