Al Baker: Islamic investment grows to over $1.5 trillion

compliant products globally stands at over $1.5 trillion. These include equities that conform with Islamic principles, sukuk and Islamic funds, said the Executive Director of Financial Institutions Supervision, Central Bank of Bahrain. Delivering the inaugural keynote address at the 7th World Islamic Funds and Financial Markets Conference at the Gulf Hotel in Bahrain, Abdul Rahman Al Baker, the Executive Director of Financial Institutions Supervision, Central Bank of Bahrain (CBB), said Islamic asset management industry is an area that has grown to an increasingly substantial segment within the financial markets.” It has gained significant interest as a viable and efficient alternative model of financial intermediation, he added. Furthermore, Islamic financial products represent a class of investment which appeals to those looking for a socially responsible or ethical investments, added the financial head. “Currently there are more than 500 global funds complying with Islamic principles, a third of which were launched during the past five years and the figure is projected to double in another five years,” said Al Baker. The global sukuk market at the end of 2010 was estimated to exceed $190 billion – a revival mainly due to government incentives. Global sukuk issuance in the year returned to pre-crisis levels, with the overall figures touching the $45 billion mark, he added. He was optimistic that the growth prospects in the Islamic securities market are largely positive despite the recent credit crunch, increase in commodity prices and a widespread global economic slowdown. This growth reflects the windfall from higher commodity prices and rapid expansion of the GCC financial markets, said the financial chief. The geographical spread of Islamic securities products and activities is likely to grow in the European quarters of the UK and France, Asia Pacific region, North Africa and energy rich Central Asian states, said Al Baker. In Bahrain, he said, the mutual funds industry is among the fastest growing segments, with around $9 billion assets under management in over 2,800 funds. The growth, he said, is at an average rate of 15 per cent. Overall there are 101 Islamic finds incorporated and registered in Bahrain with total assets of $1.6 billion in June alone. The CBB promotes the development of new products in both Islamic and traditional finance, while at the same time providing credible regulations in both areas, he added. Existing regulatory framework for collective investment undertakings (CIUs) has provided for a complete range of investment funds that cater to various categories of investors, said Al Baker. To further enhance the existing CIUs framework, the CBB is in the final stages of incorporating new rules for Islamic real estate invesmtne trusts (Reits) and private investment schemes which will be finalized and incorporated in such framework by year-end. The CBB is active in the sovereign sukuk market with a total of $2.9 billion medium to long term sukuk issues, complemented by a regular program of short term issuance. The bank has also issued five year Islamic leasing sukuk in the local market with a value of BD200 million in April 2011. Such initiatives are expected to harmonise market practices and create a deep and vibrant Islamic capital market, added Al Baker. To enhance the growth of the Islamic investment industry and to create deep and vibrant Islamic investment markets, he said, several factors need to be considered. There is a primary need to build a system that would facilitate effective and efficient capital and trade flows. To aid this he called for development of a financial system with the following infrastructure – Islamic institutions ranging from banking, takaful, capital market, fund and wealth management entities, a conducive legal and Sharia framework and a system tht has a comprehensive range of Islamic financial products and services. “An active Islamic financial market can accelerate the growth of Islamic investment industry. A vibrant market can facilitate fund raising and investment activities and promote the creation of primary and secondary markets for Islamic financial instruments,” said Al Baker. The ED called for the adoption of corporate governance to improve investor confidence and ensure that markets are fair, efficient and transparent. The need here, he said, is for proper disclosure requirements, adequate disclosure of all terms and conditions of Islamic products and transparency in disclosing financial information and indicators. The creation of adequate straightforward regulations can further strengthen the foundations of Islamic investment markets, he added. Such regulations should create the framework for products targeting small, medium and accredited investors. Developing the industry, he said, would require capital market professionals with a deep understanding of Shariah laws. Only they can enhance product development and improve investor services, he said. The ED also called for creating a robust rating process to strengthen the capital market. Rating agencies need to fully appreciate the unique features, characteristics and risk profile of Islamic instruments, he added. A more holistic rating process encompassing fiduciary aspects and credit risk has to be adopted, said Al Baker.