Dubai: Islamic funds are a $60 billion (Dh220 billion) industry forecasted to grow to at least $77 billion by 2019, while the underlying demand for Islamic funds is projected to grow to $185 billion over the next five years according to The Global Islamic Asset Management Outlook published by Thomson Reuters.
The study based on a survey of key asset managers, investors, and other market players such as regulators, consultants, and financial institutions says there are substantial growth opportunities but the industry will struggle to reach its potential in the near-to midterm.
“The report highlights the current and forecasted demand-supply gap, which is projected to grow to $108 million by 2019, and suggest strategies and areas of focus that the industry should consider to grow to its full potential,” Dr Sayd Farook, Global Head of Islamic Capital Markets for Thomson Reuters.
Despite the financial crisis, the Arab Spring in the Mena region and the Euro crisis, the majority of investors and asset managers still believe that performance and efficiency during the past five years remained the same or surpassed expectations. Building on this momentum, most asset managers are willing to increase their Islamic investment holdings in the next 12 months.
While the GCC has emerged as the most preferred investment destination for investors and asset managers sukuks and equities are the most the preferred asset types for 2015 and 2016. Most asset managers also highlighted a preference for a more supportive Sharia framework within their markets.
The key areas of opportunity available to the Islamic asset management industry include Islamic wealth management, private equity, crowd funding, sustainable investing, and socially responsible investments. “Almost 70 per cent of Middle Eastern wealth is transferred overseas. To attract this wealth, Islamic asset managers need to compete with institutions overseas by providing both attractive yields and a superior level of service quality and product customisation,” said Nadim Najjar, Managing Director, Middle East and North Africa, Thomson Reuters.
The overall trend for the industry remained positive for the industry in 2014 with the Assets under Management (AUM) of total global Islamic funds grew 5.3 per cent from the previous year and the number of funds jumped by 11 per cent. Additionally, the year saw the lowest number of liquidated funds since 2008 at $127 million compared to $315 million in 2013 and the total size of new funds launched increased to $2.27 billion from $1.52 billion in 2013, representing a 49 per cent rise. Mutual funds dominated in 2014 with $53.17 billion making up 88 per cent of total global Islamic funds mostly driven by diversification and liquidity.
The industry is heavily concentrated in core markets. In 2014, 84 per cent of total Islamic AUM was held in eight countries, with Saudi Arabia and Malaysia accounting for 69 per cent of total AUM. Outside of Saudi Arabia and Malaysia, the industry continues to work within a largely unsupportive regulatory framework, suffering from a lack of government support and absence of clear Sharia-compliant investment avenues.
In 2014, 12 funds, each with AUM in excess of $1 billion, made up 43 per cent of total AUM while 50 per cent of total AUM was held in funds smaller than $10 million each
Outside of core markets Malaysia and Saudi Arabia, there are other growth pockets on the horizon for Islamic funds. Pakistan and Indonesia currently enjoy stable political climates and a renewal of efforts to expand and deepen their respective Islamic finance industries across all sectors.