Muhammad Arif:

Muhammad Arif
Muhammad Arif: Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan.


Islamic Mutual Fund Industry

Overall the mutual funds sector in Pakistan remained in flux with volatile investment trends from different segments of investors in 2018, showing a decline of over Rs. 12.5 billion in asset values managed by various companies.

In contrast to the decline in asset values in 2018, the mutual fund sector gained a whopping Rs. 131 billion in assets values of its various funds in 2017 mainly on the back of bullish trend in the equity market, which also gave impetus to funds related to stock exchange.

In 2018, the values of asset managed by different companies reduced from Rs.622 billion to Rs. 609 billion in the outgoing year which even continued to decline even in the starting months of 2019 standing now nearly Rs. 607 billion.

The open-ended mutual funds saw a reduction of Rs. 10 billion in its assets’ values which stood at Rs.563 billion whereas the values of close-ended fund declined to Rs. 19.6 billion by end of 2018.

The number of asset management companies has been reduced to 19 from 20. These companies introduced various open-ended funds in order to retain and attract old and new investors of the mutual fund sector; hence the number of overall funds managed by assets management companies surged to 281.

Equity funds witnessed reduction in the assets values whereas the funds invested in the money market recorded whopping growth in the values of assets.

The number of investors accounts increased to 0.34 million by end of 2018 as compared to 0.30 million. Investors of various categories including corporations, groups, and individuals make investment in mutual funds of different categories.

The aggregate size of the industry stood at Rs. 25 Billion in 2002 which has now grown to around 607 billion, i.e. over US $4billion, spreading over some 275 funds that are managed by 19 asset management companies.

The total assets under management are, however, only 2% of GDP or equal to 6-7% of market capitalization. By way of comparison India’s mutual fund industry stands at US$ 328 billion in size, it is 13.6% of GDP, and around 20% of market cap, whereas in the United States mutual funds aggregate about $ 19 trillion, they are about 70% of GDP, and about 25% of market cap.

According to Chairman Mutual Funds Association of Pakistan, Farid Ahmed Khan the mutual fund sector is still in a nascent state in Pakistan and stands poised to grow tremendously given the right kind of support and guidance.  The future of the mutual industry is dependent on increasing awareness across the country, efficient means of distribution and innovative product development. The need of the hour is for the industry, the regulator and the government at large to work together for collective and public interest.

Establishing a brand in the Shariah-compliant marketplace is arguably more challenging than in the conventional sector. Fragmentation of client groups and geographical markets presents difficulties, as does the lack of standardization of fund types and regulation.

But the deepening of markets in the Gulf Cooperation Council (GCC) region and Malaysia, combined with the gradual launch of funds in many other jurisdictions –such as Ireland, Hong Kong, Luxembourg and the United States – should lead to greater integration and a more homogeneous global market. In addition, global firms have a first-mover opportunity to exploit a certain lack of credibility that pure play Islamic fund managers have in the eyes of central banks and other regulators.  The concept of Shariah-compliant investing goes back four decades and yet the sector has only really taken off in the last five years.

Coming to Islamic side it must be remembered that Islamic finance industry has expanded rapidly over the past decade, growing at 10-12% annually. The total assets under management in the global Islamic finance industry now nearly amount to USD 2 trillion, with the potential, according to Standard & Poor’s, to rise to USD 5 trillion by 2020. But this looks like a dream with prevalent status quo prevailing in the industry. Lack of products, lack of liquidity, lack of research, lack of capacity building and far most general perception that it is not different from conventional side are the main problems.

Considering our economy is entering the growth phase with CPEC and other infrastructure projects spearheading the development, one can expect young investors to enter the market to increase their investment profile. We call it “real and physical” economy, making it an ideal time for investing in Islamic funds as they are most likely to benefit from such growth. But this cannot be done without aligning Islamic finance with macro objectives of the country basically alleviating poverty and accelerating growth rate.

Performance of 3 prominent Islamic Mutual Funds in 2017/18
  Benchmark Returns 2017% Returns 2018%
Meezan Equity Islamic Fund KMI-30 Index 18.8% -10%
Open-end Islamic Income Fund


Benchmark6 months average deposit rates of 3 A- rated Islamic Bank 2.78 2.44
Alhamra Islamic Stock Fund   29.97 -12
Islamic Income Fund ALHIIF Shariah compliant avenues with minimum credit rating of A+ (A Plus)


6.49 4.96
NIT  Islamic Equity Fund cash dividend of Rs 0.19
NIT Income Fund cash dividend of Rs 0.9122

Wakeup calls for Islamic Finance

Islamic finance has come a long way over the past few decades, maturing into a $2.4 trillion industry, but some long-term problems remain and the recent wrangle over a Dana Gas sukuk shows credibility is still an issue. When is a bond not a bond or, to be more specific, when is an Islamic bond (sukuk) not what everyone thinks it is?  It was a question in many investors’ minds in the summer of 2017 when UAE-based Dana Gas shocked the market with an announcement that a $700 million sukuk was no longer deemed to be Shariah-compliant and would be replaced by new debt with far lower yields. At the time, investors had started to think they could treat sukuk just like a conventional bond but, as one investment adviser said at the time, the move by Dana had thrown that sense of comfort “up into the wind”. All of a sudden there was a new risk factor – religious approval – that simply did not exist with conventional debt. Some were scared off and a number of western pension funds were said to have stopped making any sukuk investments, concerned about their complexity. A costly legal battle followed between Dana Gas and its investors, involving courts in the UAE and the UK, before a settlement was agreed in May 2018.

Now industry figures insist there is nothing to be concerned about and the episode was simply a tale of a company unable or unwilling to pay its debts rather than something specific to Islamic finance. Certainly, it was no coincidence that, in May 2017, Dana Gas said it was facing cash flow problems.  “Reputationally, the industry in the Middle East took a short-term hit when the Dana Gas case first hit the headlines,” says Debashis Dey, a Dubai-based partner at White & Case. “However, as time went by, investors and the industry realized that the issue was not about Islamic finance but rather about whether a company – which could be any debtor, whether conventional or Islamic – was willing to pay its investors back.”  Such concerns do of course hit conventional institutions too, but it was still a shock to an industry that prides itself on being ethical, and no one can escape the fact that it was a Shariah-compliant instrument that Dana Gas attempted to use as leverage.

The episode was a setback for what has been one of the successes in the development of Islamic finance. According to the most recent Islamic Finance Development Report (IFDR) compiled by Thomson Reuters, sukuk is the second largest part of the Islamic finance industry, accounting for $426 billion of the industry’s total asset base of $2.4 trillion in 2017.  It is easily overshadowed by the Shariah-compliant banking sector, which has assets of $1.7 trillion, but is ahead of other areas such as Shariah-compliant funds ($110 billion) and insurance or takaful ($46 billion).

The development of the sukuk market did not happen overnight. Bashar Al Natoor, global head of Islamic finance at Fitch Ratings, worked at the Islamic Development Bank in 2003, when it issued the first Islamic bond backed by a pool of assets. (The five-year, fixed-rate $400 million Eurobond took Citigroup 22 months to arrange). He remembers a very different world to that of today.  “If you were talking to international investors and you said the word ‘sukuk’, you would just get questions,” he says. “Now you still have questions, but at least people understand the terminology.” Building up trust and familiarity with novel financial products takes time, but that trust is fragile and the Dana Gas episode acted as a useful wake-up call for the industry, which has been trying to get its house in order since then.  “Just like any other emerging industry, Islamic finance has seen disputes and issues that have been resolved through negotiations or the legal system,” says Wasim Saifi, deputy chief executive, consumer banking and wealth management at Emirates Islamic Bank.

“These incidents, however, have helped shape more robust policies and structures.” Among recent initiatives, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) published a proposal on better sukuk governance in December.  “We believe this proposal can help minimize the risks of non-Shariah compliance after a transaction closes,” says Mohamed Damak, head of Islamic finance at S&P Global Ratings. “Standard Shariah requirements and legal documentation is the key to provide clarity for investors on the risks they are taking. This is still lacking.” This goes to the heart of the difficulties with the Islamic finance industry, which has spent decades trying to develop workable standards everyone can agree on – a process that has taken place in the face of a fair amount of scepticism.

In the early days, Euro money wondered how viable the idea of Shariah-compliant finance was, asking in April 1979 ‘Is an Islamic bank a contradiction in terms?’ That needed to examine some of the underlying religious principles – such as a prohibition on interest (riba) – before concluding: “Western financial institutions and methods now seem so firmly entrenched that they appear to be under little threat from this competition.” Islamic finance has gone from being an exotic niche product to something considered throughout parts of Asia and the Middle East as a fairly normal way of financing

 Despite some of the scandals along the way – which have included a multi-million dollar fraud at Dubai Islamic Bank (DIB) in the late 1990s and a default by Kuwait’s Investment Dar on a $100 million sukuk in 2009 Islamic banks are now the dominant form of banking in markets such as Saudi Arabia and, according to the IFDR, there are 1,389 Islamic finance institutions around the world. The scale of today’s industry and the fact it has managed to carve out a sizeable niche for itself, is certainly a notable achievement.  “When you now look at the banking and finance landscape in the UAE and the wider region, people talk about Islamic banks and windows just as much as they may discuss conventional banks,” says Qasim Aslam, head of Islamic finance at law firm Dentons, which has been active in the UAE since the country’s earliest days.

 “While Islamic banking has become globally acceptable, the challenge is to develop more products and services,” says Adnan Yousif, chief executive of Bahrain’s Al Baraka Banking Group. “Islamic banking needs to differentiate itself completely from conventional banking. It is not enough that the services provided by the Islamic banking are Shariah-compliant. They need to be genuinely innovative and align with the highest ethical principles.” The fortunes of Middle East economies are closely tied to the price of oil. When times are tough – as they were in the late 1980s, when oil prices were often below $20 a barrel – banks suffer, and Islamic banks have some particular vulnerabilities, as Euro money reported in October 1986.

“It’s not easy being a bank in Saudi Arabia,” we wrote in ‘Saudi bankers have their backs to the wall’. “Your customers are apt to stop paying interest on their loans. If you take them to court, you’re met with the intractability of Shariah law… which states that no interest should be given or taken on financial transactions. This means that you end up paying back all the interest you may have received – often more than the loan.” Lack of integration other issues more specific to the sector have also been apparent from the early days.  By December 2001, the industry had grown into a $200 billion venture, but at the time Euro money pointed out that regulatory and accounting standards were still weak, the quality of management was patchy, the product range was limited and the talent pool rather shallow.  These issues remain at play today and often feed off each other. Among the trickiest to deal with is standardization. A lack of agreement about what constitutes Shariah-compliance – highlighted so vividly in the Dana Gas case – is one reason why institutions find it hard to launch new products, for example. That helps to explain why other potential areas of business, such as funds, have yet to really take off. There have been occasional signs of activity – in August 2008 Euro money reported: “This could be the year when foreign institutions finally see enough interest in Shariah products to launch their own” – but in general there remains a shortage of investable assets.



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