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‘Untapped’ endowments may boost Shariah funds

DUBAI - Managers of Islamic endowments with $105 billion in assets are seeking to diversify out of bank deposits, providing Shariah-compliant funds with the chance to capture new business, Ernst & Young LLP says.

These “largely untapped” endowments, or awqaf, have as much as $40 billion of cash parked at commercial banks, Ashar Nazim, Manama-based executive director and head of Islamic financial services for Ernst & Young, Bahrain, said in a telephone interview. Awaqf typically consists of cash or assets, including land and buildings, donated by individuals or institutions for charitable and religious purposes.

“Over the next 18 months, the Islamic endowment segment could prove to be a major stimulus for growth in the Islamic funds industry,” Nazim said. “They realise that they cannot manage it on their own and they need to involve the formal financial industry.”

Assets held by Islamic funds have stagnated at around $52 billion since 2008, according to Ernst & Young in its Islamic Funds & Investment Report published in May. The combined wealth of the Middle East’s more than 400,000 millionaires grew 5.1 per cent in 2009 to $1.5 trillion, Cap Gemini SA and Bank of America Corp’s Merrill Lynch unit said in June.

Islamic endowment institutions should diversify their real estate holdings into government sukuk and other products, Nida Raza, senior vice president of capital markets at Bahrain’s Unicorn Investment Bank BSC, said in telephone interview from Manama.

Property slump

Real-estate prices have tumbled more than 50 per cent since their 2008 peak in Dubai and 30 per cent in neighboring Abu Dhabi as banks tightened mortgage lending and speculators fled the market. Property is used as collateral for Shariah-compliant bonds, which are backed by assets and pay a share of profit instead of interest.

“The demise of real estate in the global market has woken a lot of people up,” Raza said. “For the awqaf, a long-term investment meant real estate, but as more and more products are realised in the Gulf region, more longer-dated sukuk and sukuk funds, you’ll start seeing the diversification from the endowment fund perspective.”

Global sales of Islamic bonds fell 29 per cent to $13.7 billion this year from the same period in 2009, according to data compiled by Bloomberg. Shariah-compliant bonds returned 12 per cent this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, compared with a 15.5 per cent gain in developing markets, JPMorgan Chase & Co’s EMBI Global Diversified Index shows.

As much as 80 per cent of assets owned by Islamic endowments are donated real estate, Ernst & Young’s Nazim said. Islamic mutual funds account for 5.5 per cent of the estimated $939 billion Shariah-compliant industry, according to the company’s May report.