Islamic Finance: Demand for more shariah-compliant products

  • Rohani: Product developers need to be solution providers. You need to know what people want and what their concerns are, instead of just launching new products for the sake of making money. They must make it a win-win situation. Mohd Izwan Mohd Nazam/The Edge
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on August 29 - September 4, 2016.


While the number of Islamic products has grown tremendously in the last 10 years, there still aren’t enough to cater for the needs of local investors, according to Rohani Mohd Shahir, president of the Association for Islamic Financial and Wealth Management Malaysia (AIFiWM).

She says the growing demand is due to a greater awareness of compliance for religious purposes, especially among high-net-worth investors. The demand also comes from those looking for investments aligned with their core principles and investment objectives.

But more needs to be done. There is a lack of Islamic real estate investment trusts (REITs) for one, says Rohani.

“REITs are less volatile than stocks, but they still provide good returns of between 6% and 8%. However, as there are not many Islamic REITs available, the transactions are not as liquid as the market. Considering how big a market the real estate developers are able to tap into, it is unfortunate that even industry giants such as Mah Sing Group Bhd are not offering Islamic REITs to investors.”

There are currently 17 REITs in Malaysia, only four of which are Islamic. They are Al-‘Aqar Healthcare REIT, KLCC Real Estate Investment Trust, Axis Real Estate Investment Trust and Al-Salam Investment Trust, which invest in shariah-compliant real estate and other assets.

Rohani says there are also fewer shariah-compliant stocks in Malaysia today due to the tightening of regulatory requirements. “Many years ago, 80% to 90% of the securities listed were shariah-compliant because the criteria were not as strict. As long as the companies’ core activities did not involve non-shariah activities, it could be accepted as shariah-compliant.

“But today, the Securities Commission Malaysia’s (SC) criteria is very strict. They also look at things such as the gearing ratio and deposits with conventional banks. Because of that, only 56% of the current listings are shariah-compliant.”

As the Employees Provident Fund’s (EPF) Simpanan Shariah and Islamic unit trust funds do not buy into non-shariah-compliant stocks, their investors have less exposure to the equity universe. So, to increase the number of listings available, AIFiWM is championing a move to restore the shariah-compliant status of companies that were once deemed compliant.

“As part of AIFiWM, I meet with all the listed companies that used to be shariah-compliant, such as AirAsia. We talk with their management and ask them to check their balance sheets. We ask them to correct those parts that do not comply with shariah law so that they can be shariah-compliant again,” says Rohani.

She adds that Islamic products in the capital markets have steadily gained market share. According to data compiled by the SC, sukuk had 54% share of the bond market last year, from 48.1% in 2014.

Islamic REITs had 43% share of the REIT market last year while Islamic wholesale funds had 37.5% share and the Islamic Private Retirement Scheme (PRS) funds had 32.2% share of their respective markets.

“The average annual growth rate of Islamic banking assets and deposits over the past nine years has been a remarkable 38% and 35% respectively,” says Rohani.


Addressing the problem

AIFiWM was established as Perwaris in 2006 by Amanah Raya Bhd as an association for will-writing and estate administration professionals. The name was changed to Persatuan Perwarisan Harta Islam Malaysia in 2010 to reflect its focus on inheritance issues. It took on its current name in 2012 as it adopted a more holistic approach.

The association’s core activities currently include organising a biennial conference and presenting the conference resolutions to the relevant ministers. “At the conference, we also look at the issues, discuss

Islamic approaches to existing funds and sort out any confusion about a fatwa,” says Rohani.

One issue that she is hoping to find a solution to is the naming of beneficiaries by Muslim contributors to the EPF. According to her, the beneficiaries sometimes take the money but fail to distribute it to the deceased’s Faraid heirs. Faraid is the distribution of a deceased’s estate in accordance with the Quran and the Hadith.

“We have cases where a young Muslim man names his mother as a beneficiary when he starts working. But after getting married, he forgets to name his wife as a beneficiary. So, if anything happens to him, his mother gets his EPF money while his wife and children get nothing. It is against Quranic law to deprive an orphaned child of his inheritance,” says Rohani.

AIFiWM is appealing to EPF to allow trust companies to serve as beneficiaries instead. This way, a deceased’s estate can be professionally managed.

“We think there is a need for trust companies to replace beneficiaries. On the other hand, we do realise that trust companies are profit-oriented and their services are not exactly cheap,” says Rohani.

“We are also aware that this will be a bit difficult to achieve since it involves access to millions of account holders. However, considering the numbers, we hope that the trust companies will be able to lower their prices.”

The EPF’s Simpanan Shariah option, which will be launched in January next year, was a proposal of the association. According to the provident fund, as at Aug 14, RM25.1 billion, or 25.09% of the RM100 billion allocated for this option, has been taken up since registration was opened to the public on Aug 8.

Rohani is optimistic that Simpanan Shariah will perform as well as, if not better than, the conventional account. She adds that Islamic unit trust funds tend to outperform their conventional peers over a five-year period, based on the Lipper Fund Table.

“I am positive that Simpanan Shariah will perform well because a RM100 billion fund would be more agile than a RM500 billion fund. Buying and selling assets should be a lot easier. If the fund manager’s timing is good and stock picking is correct, then God willing, it will give good returns,” says Rohani.

However, account holders should not expect Simpanan Shariah to be risk-free, she adds. “If you invest, there will definitely be risk; it is a legal maxim in Islam. The problem is that some Muslim bumiputeras do not appreciate risk. They are so used to Amanah Saham Bumiputera (ASB), which is a unit trust fund [and compare other investments against it].

“But it is not logical because the performance of ASB never goes up or down. So, I think instead of calling it saham (stock), Permodalan Nasional Bhd should call it tabungan (savings) so as not to confuse the public.”


Innovation and improving literacy

Although the Malaysian market is ready, shariah-compliant products need to be more “grassroots-friendly”, says Rohani. They should take into account the needs of investors.   

“Product developers need to be solution providers. You need to know what people want and what their concerns are, instead of just launching new products for the sake of making money. They must make it a win-win situation.

“For example, they should introduce products that cater for those who cannot afford to take high risks, such as pensioners, who want higher returns than those offered by fixed deposits. They could also add things like a medical card to attract investors. While this may sound difficult to do, I believe it is possible if the product developers put their heads together.”

She adds that shariah-compliant products should be more innovative so as to appeal to the non-Muslim market as well. “Nowadays, in the financial world, everyone is talking about philanthropic banking. For us Muslims, we believe that the more you give, the more you get back in the hereafter. But we don’t see such elements in local products. What about the giving concept in unit trusts? Not yet. So, product developers should think along those lines.”

In addition to her role at AIFiWM, Rohani is founder and principal partner of Hijrah Wealth Management Sdn Bhd. Her previous roles include being CEO of Abrar Group International Sdn Bhd and executive chairman of Hijrah Unit Trust Management Bhd.

As an industry veteran, Rohani observes that the financial literacy level of Muslims in general is low. To address this issue, the association has developed a professional training programme called Perundingan Kewangan Shariah to train more financial advisers. The programme was accredited by the Finance Accreditation Agency (FAA) in February.

“It is something like the Islamic Financial Planner (IFP) training and certification programme, but we developed the professional module from scratch. After two years of development, it was finally endorsed by the FAA. Unlike the IFP, the module is entirely in Bahasa Malaysia to cater for those who speak the language,” she says.