Malaysia's Securities Commission has awarded three new foreign Islamic fund management licenses to Aberdeen Islamic Asset Management, BNP Paribas Islamic Asset Management and Nomura Islamic Asset Management. That brings to eight the total number of fund houses allowed to operate Islamic fund operations in the country.
The three fund houses already have a presence in the traditional asset management industry in Malaysia, as part of the five licenses issued under a special scheme announced in 2005 that allowed foreigners to gain access to the local market after eight years of strict capital controls.
The securities commission believes that the growing interest among foreign fund houses in the Islamic licenses up for grabs in Malaysia reflects their confidence that the country can be a global hub for Islamic fund and wealth management activities. Malaysia has an equities market that is more than 85% sharia-compliant, is the world's largest issuer of Islamic bonds, and has more than 13 Islamic unit trust funds. Sharia principles generally preclude investment in businesses such as conventional financial services, alcohol, pork-related products, gambling, leisure and entertainment. Sharia principles also preclude interest-bearing investments and investments in companies with unacceptable levels of debt.
"Despite the global slowdown, the coming on board of these three international players reflects the strong growth potential in niche areas like Islamic fund management," says securities commission chairman Dato' Sri Zarinah Anwar. "This will help add depth and breadth to the Islamic finance industry, of which Malaysia commands a leadership role."
The Malaysia government allows 100% foreign ownership of Islamic fund management companies, in line with its bid to attract more key fund players to the country. The incentive is part of ongoing liberalisation measures in Malaysia's capital market as well as being aimed at complementing the broader Malaysian International Islamic Finance Centre (MIFC) initiatives of positioning the country as a hub.
Islamic fund management companies are allowed to invest all their assets overseas and will be given income tax exemption on fees received until 2016. They will also be able to tap into M$7 billion ($2.1 billion) in seed money from the Employees Provident Fund, the national pension fund for the private sector in Malaysia. Tax incentives are also being offered to existing stockbrokers that set up Islamic subsidiaries.
Fund management companies are hungry for a portion of the wealth of the Islamic community - especially those communities in the oil-rich Middle East - and Malaysia is creating the platform for them to be able to do just that. The opportunities are vast. The world's Muslim population is estimated at around 1.5 billion, that's around 22% of the world's 6.7 billion population.
There are more than $202 billion in Islamic bank deposits worldwide growing by around 10% to 20% annually and around 300 Islamic financial institutions with assets of more than $560 billion, according to modest industry estimates. Boston-based financial services research firm Cerulli Associates notes that there are around $65 billion in sharia-compliant investments worldwide. Around 53% of those assets, or $35 billion, are held in mutual funds. Specifically, $33.6 billion is managed by local fund managers, while $1.4 billion is managed by foreign fund managers.
Islamic fund management is expected to sustain the growth of Malaysia's asset management industry. Other countries in Asia are attempting to be an Islamic hub of sorts, either in banking or asset management. Malaysia is ahead of the pack in Asia and other markets in terms of manufacturing Islamic funds and this is among its main attraction for fund houses that want to set up shop there. The industry is still growing at a considerable pace and demand for unit trust products continues to be strong.
In granting the approval to the three fund houses, the securities commission considered, among other things, the scope of operations that will be established by each of the firms in Malaysia, their fund management experience, brand value, expertise in various markets, geographical presence, and compliance and risk management capabilities.
Atsushi Yoshikawa, president and CEO of Tokyo-based Nomura Asset Management says Islamic fund management is one of the fund house's "most important strategies".
Vincent Camerlynck, global head of business development and member of the executive committee at BNP Paribas Investment Partners in Paris, confirms that Malaysia will serve as a strategic hub for the fund house's Islamic business and complements its Europe and Middle East centres.
The launch of BNP Paribas Islamic Asset Management Malaysia complements the fund house's overall exposure to the Islamic fund industry through partnerships such as the SAIB BNP Paribas Asset Management in Saudi Arabia; products such as the BNP Paribas Islamic Equity Optimiser Funds, Easy ETF DJ Islamic Market Titans 100; advisory services such as the i-VCap's listing of the MyETF Dow Jones Islamic market Malaysia Titans 25, Asia's first Islamic ETF; and developments in setting up sukuk (Islamic bonds) and murabaha (Islamic financing) private placement funds.
BNP Paribas Islamic Asset Management Malaysia will be led by executive director Hisham Abdul Rahim, who has 12 years of experience in the financial services industry, including Islamic finance and asset management.
Gerald Ambrose, managing director of Aberdeen Asset Management in Malaysia, says the Islamic fund license is key to the firm's expansion in the country. Aberdeen Asset Management was the first foreign fund house to set up operations in Kuala Lumpur to manage portfolios for institutional clients in 2005. That made Aberdeen, through its Aberdeen Asset Management Sendirian Berhad entity in Malaysia, the first foreign fund manager to have a presence in Malaysia in eight years.
Having an Islamic fund management license will allow Aberdeen to tap the retail market in Malaysia. Aberdeen manages an 'Amanah' or an Asia ex-Japan equity fund that is sharia-compliant, which has around $100 million in assets, for a client. The client has a set of advisors and sends Aberdeen a list of stocks that it can't invest in. It is a unit trust with Middle Eastern subscribers, run by a bank there that has given Aberdeen the mandate to manage the fund from its Singapore office.
Islamic fund management licenses were previously granted to Kuwait Finance House (Malaysia), DBS Asset Management, CIMB-Principal Asset Management, Global Investment House and Reliance Asset Management.