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Experts call for Socially Responsible Model in Islamic finance

Published: 09/06/2012 08:55:00 AM GMT
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Manama: Adoption of a socially responsible model can add to a great deal in customer base of the Islamic investment sector but for this, proper distribution channels are required.

By Farhan Iqbal

Manama: Adoption of a socially responsible model can add to a great deal in customer base of the Islamic investment sector but for this, proper distribution channels are required.

These views were expressed by the Islamic finance industry experts in an Islamic conference held in the Bahraini capital, Manama, last week. The experts emphasized on the enhancement of a sophisticated investor base and incentive schemes at the first stage.

They said that the Islamic finance and Socially Responsible Investments (SRI) have old bonding with each other, but the Islamic finance needs a similar transformation which brought SRI into the mainstream.

The Head of Investment Strategies Group at Saudi-based NCB Capital, Lynette D'Souza, addressed the conference, “The common synergy between the two investor classes should be exploited.” She believed that this can lead to greater economies of scale.

According to a report by A.T. Kearney in April this year, Islamic banks are keen to build such scale in order to reverse downward trends in efficiency and profitability.

The region of Middle East and Southeast Asia are the strongholds of Islamic finance based on the religious principles forbidding investment in gambling, tobacco and alcohol. The principles of Islamic finance carry resemblance to the screening methodology used by the SRI industry having strong roots in North America and Europe.

Islamic bank are facing problems due to limited geographical access as it has small international distribution capability which is frustrating established and new fund managers alike in seeking critical mass to make their products economically viable.

As per estimated figures, there are $58 billion assets in Islamic funds across the globe bringing a little change during the last two years in which 800 products have been introduced so far.

The Deputy Chief Executive at Dubai-based FWU Global Takaful Solutions, Sohail Jaffer, said, “The industry can break out of these figures by going cross-border but managers need to get their ‘international marketing act’ together.”

“Fund houses such as AmInvestment, NCB and Al Rajhi have sought distribution using UCITS, a passport for investment products, with mixed results. Instead of a regional canvas, they should focus on two or three markets,” he added.

However, Chief Executive of Malaysia's CIMB-Principal Islamic Asset Management, Noripah Kamso, said that others have opted for incubation, investing four to five years to build a track record.

The Executive Director for Middle East and Africa at the Royal Bank of Scotland, Ruggiero Lomonaco, stated, “Takaful is one of the most important trends emerging in the Islamic investment industry but Takaful alone might not be enough.”

“You need drivers, a pension incentivize people to go into the markets,” commented Ken Owens, a partner at PWC Ireland.

Incentives such as pension disclosure regulation boosted allocation into SRI across the Europe over the last decade. According to the Social Investment Forum, Institutional investors cite such directives as a key reason for investing ethically.

Islamic finance industry lacks these incentives and a champion to promote the cause, while information portals like Eurosif and the Social Investment Forum have taken the role in SRI. This lobbying is unmatched in Islamic finance, but by drawing parallels, a consistent voice is gradually emerging.

Manama, the host of Islamic conference