İslamic Asset Management

Durham Islamic Finance Autumn School in Istanbul, 2011

Natalie Schoon, Islamic Asset Management 1

Islamic Asset Management Dr Natalie Schoon, CFA

Presented at the Durham Islamic Finance Autumn School 2011 jointly organised by Durham Centre for Islamic Economics and Finance and ISAR-‐Istanbul Foundation for Research and Education Istanbul Commerce University, Istanbul 19th-‐22nd September 2011

Agenda

•  Islamic asset management marketplace

•  Sharia’a compliance

•  Asset management processes

•  Types of funds



Islamic asset management market place

Investment

•  Purchasing any form of property and keeping it for a relaBvely long period to generate a return

•  ODen offered via asset and fund management vehicles

•  Investor ObjecBves –  Capital preservaBon –  MaximisaBon of yield –  Ensuring balance between liquidity and profitability



AAOIFI definiBon of a fund

‘Funds are investment vehicles, which are financially independent

of the ins9tu9ons that establish them. Funds take the form of

equal par9cipa9ng shares/units, which represent the

shareholders’/unitholders’ share of the assets, and en9tlements to

profits or losses. The funds are managed on the basis of either a

mudaraba or wakala contract.’ (AAOIFI Financial Accoun9ng

Standard 14, appendix B)

Assets under management

Below $50 million, 69%

$50 million -‐ $100 million, 13%

$100 million -‐ $500 million, 15%

In excess of $500 million, 3%



Geographical spread

Asia Pacific, 35%

Middle East and Africa, 30%

Global, 26%

North America,

6%

Europe, 2%

Emerging Markets, 2%

Sharia’a compliance



Sharia’a compliance

•  How is it achieved?

•  Approval process?

•  Sharia’a Board?

•  Role and responsibiliBes

•  Non-‐compliant investments

Islamic asset management structure

Sharia'a Supervisory Board

Fund Manager

Analysts

Fixed Income

Fund Manager

Analysts

Real Estate

Fund Manager

Analysts

Equity

Chief Investment OfficerCIO

Settlements Accounts Controllers IT

Chief Operating OfficerCOO

Managing Board



Sharia’a Supervisory Board (SSB)

•  Typically 3 – 5 members, meeBng (semi) annually

•  Responsible for Sharia’a compliance at incepBon (investment mandate) and on-‐going

•  Approval process:

•  Non-‐compliance of investments

Structuring product in-

house

Product/concept

approval from SSB

Legal Documenation

Internal sharia’a review SSB Review Finalise

Not Approved

Industry screen

•  ConvenBonal banking and insurance

•  Alcohol •  Pork •  Defence •  Gambling •  Adult Entertainment •  Other non accepted acBviBes as defined by the Sharia’a Board

Financial Screen

•  Total Debt / Total Market Cap < 30%

•  (Cash + interest bearing deposits) / Total Market Cap < 30%

•  (Interest + non-‐compliant income) / Total Revenue < 5%

Screening Criteria



Asset management processes

Asset management processes

•  SubscripBons, redempBons and switches

•  Payment and receipts

•  Seclement, accounBng and reporBng

•  NAV calculaBons

•  ProspecBng and markeBng

•  Liquidity and risk management



Fund management structures

•  Mudaraba –  Investor is rab al mal –  Fund manager is mudarib –  Profits are shared, losses distributed

•  Wakala –  Investor is rab al mal –  Fund manager is wakil –  Fund manager is paid a fee

Liquidity

•  Why liquidity?

•  Which instruments?

•  How to manage?



Interbank liquidity (commodity murabaha and tawarruq)

17

Deposit Given

Commodity Murabaha

Cou

nter

party

Isla

mic

Ban

k

Offer to sell warrants deferred

sent to client

Pay principal + mark-up on

deferred basis

Facilitate spot payment form end buyer to

client

Sell warrants as agent

Transfer warrants to client and send

invoice for deferred payment

Offer to sell warrants as agent at spotAccept offer

Accept offer

Types of funds



Types of funds

•  Range?

•  Instruments?

•  Challenges?

Fixed Income type funds

20

Deposit

Liquidity

Money Market

Enhanced Cash High Yield Cash

Wakala Commodity Murbaha CollecBve Schemes Sukuk Ijara



Lease funds

•  Higher risk, higher return potenBal

•  Lessor owns the asset

•  No residual risk on the asset

•  Daily amorBsaBons or accruals

Special Purpose Vehicle

Sharia’a compliant lease


Sharia’a compliant leases

Lease Fund Special Purpose Vehicle

Special Purpose Vehicle







Investment

Investment

Investment

PeriodicRental

PeriodicRental

PeriodicRental

Commodity funds

•  Commodity must meet acceptability criteria

•  Seller must have physical or construcBve possession

•  Commodity must be owned by the fund

•  No forward selling or buying

•  Sale price must be determined with certainty



Real Estate funds

•  Commercial and residenBal real estate

•  Income from rental and increase in value

•  Non-‐compliant use may lead to disposal

Equity funds

•  Private Equity

•  Public Equity

•  Equity Index

•  Exchange Traded Funds



Private equity

•  Screening criteria apply

•  Sharia’a compliance possibly easier to achieve

•  Venture capital

•  Direct investments

•  DiversificaBon

Public equity

•  Screening criteria apply

•  Sharia’a compliance less easy to achieve

•  Monitoring of non-‐compliance

•  PurificaBon of non-‐compliant income



Index trackers

•  Apply modelling techniques to reduce transacBon cost

•  DiversificaBon

•  Track a convenBonal or Sharia’a compliant index –  FTSE Shariah Global Equity Index Series (1998) –  Dow Jones Islamic Markets Indexes (DJIM – 1999) –  S&P Shariah Indices (2006) –  MSCI Islamic Index Series (2007) –  Russell-‐Jadwa Shariah Index (2009)

Exchange Traded Funds

•  Track an index, commodity, or basket of assets

•  Trade on an exchange

•  Fully invested

•  No NAV required

•  Variety of Sharia’a compliant ETFs available



Hedge funds

•  Risk diversificaBon

•  Long-‐short strategies not permiced

•  Use of salam, wa’d and arbun to mimic opBonality and short selling

•  Limited tracBon

QuesDons

İslamic Asset Management

Documents

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