LUCRATIVE RETURN MAKES ISLAMIC STOCKS IDEAL INVESTMENT OPTION

AMANULLAH BASHAR
(feedback@pgeconomist.com)

Aug 9 - 15, 2010

Despite worldwide financial turmoil the investment in Islamic stocks are offering lucrative returns in Pakistan, Sri Lanka and Thailand, source in financial circles said.

It may be noted that Islamic stock funds in Sri Lanka, Thailand, and Pakistan provide the biggest returns among global counterparts. Investing in Sharia-compliant securities accelerates economic growth and pushes shares higher.

According a breakup of performance in the region Al Meezan Mutual Fund of Pakistan gained 51 per cent while MFC Islamic Long Term Equity in Thailand increased 55 per cent and Namal Amana Equity Fund, based in Sri Lanka, rose 71 per cent in the last 12 months, beating all the other 299 funds.

While the official financial circles have predicted the fastest pace of Islamic financial industry in three years, the investor confidence is improving as Sri Lanka emerged from a 26-year civil war, Thailand prepared to lift a state of emergency in Bangkok and Sri Lanka and Thailand have yet to sell bonds that comply with the religion's ban on interest, limiting investment options for Muslims in those countries.

The National Asset Management of Sri Lanka said that Islamic stocks are doing extremely well as the climate is conductive for investment which would certainly boost investor interest in the face of lucrative returns. In fact, Al Meezan Mutual, Namal Amana, MFC Islamic beat the average return of 36 per cent among the top 20 funds.

It will not be out of place to mention that the asset management industry in Pakistan mainly is focusing on the corporate investors while a huge potential of the grass root level still remains untapped in Pakistan primarily due to lack of awareness about investment features in various funds.

It is due to lack of awareness the majority of the individuals prefer to deposit in the banks despite nominal returns and whatever they are getting is already swallowed by the double digit inflation persisting in the country.

DIVERSIFICATION IN ISLAMIC FINANCIAL PRODUCTS IMPERATIVE

The Islamic Financial System has the potential to provide better banking and financial services than the conventional system provides. It capitalises on its own inherent strengths and avoids following the conventional system. These remarks were made by Yaseen Anwar, Acting Governor State Bank of Pakistan at the Road show on Islamic Banking last week in Karachi.

The current Islamic banking paradigm, both in Pakistan and elsewhere, is based on replication of conventional banking products. "While the replication of conventional products to make them Shariah compliant does pass the Shariah permissibility test, it is insufficient to achieve the larger objectives of Islamic financial system, particularly the broad-based and equitable distribution of economic gains," he added.

The total reliance of Islamic banks on debt-based fixed income products and minimising the risks to almost close to those of the conventional system is not only blurring the distinction between Islamic and conventional finance but also making Islamic banks relatively less efficient than their conventional counterparts. "Thus to sustain the growth momentum, the industry will have to diversify its products mix by focusing on areas where it has comparative advantage rather than blindly following the conventional system."

In fact about 67 per cent of Islamic banks' financing in the country is concentrated in the corporate sector through Murabaha, Ijarah, and Diminishing Musharaka. With most of the corporate having banking relationships with conventional banks, the Islamic banks have to offer significant price discounts to attract the corporate clients, he said. While this improves the quality of their financing portfolio, it reduces their profit margins and inhibits their ability to offer better returns to the depositors, he emphasized. It also restricts the access to finance to the well established businesses and corporate and leaves the SMEs and startup businesses financially excluded. "This is contrary to the natural business model of Islamic finance, which promotes risk and reward sharing and encourages financing to promising startups that is critically important for promoting entrepreneurial culture.

The present scope of Islamic banks' business model is confined to that of conventional banks which generally cater to the short term financing needs of the real economy through interest bearing instruments/facilities. While this scope is in line with the business model and deposit streams of conventional banks, it is not sufficient for Islamic banks which were originally conceived for catering to the genuine financing needs of the real economy through risk and reward sharing instruments.

There are numerous areas/sectors which could be explored to sustain and even accelerate the growth momentum of the Islamic banking industry. He said that agriculture is strategically an important sector for Pakistan's economy having over 20 per cent share of GDP and a major source of livelihood for 65 per cent of the country's population living in rural areas. The sector is also largely un-served/under-served by banks; less than 20 per cent of about seven million farm households in the country have access to bank credit.

The Islamic banks can capture a sizeable proportion of this market by reaching out to the growers either directly or through NGOs/MFIs. The IBIs are likely to have better acceptance in rural areas as the rural population is believed to be relatively more faith sensitive. Presently IBIs are largely concentrated in large urban centers and they will need to expand their outreach to smaller towns and rural/semi rural areas and optimally leverage the technology to serve the rural markets. Similarly, he said there is also great potential in the SME sector while Islamic banks can also have partnership with federal and provincial governments in developing/building the low cost housing projects, which are on the active agenda of federal and provincial governments.

The central bank however plans to further improve legal and regulatory framework to provide the necessary support and flexibility to this budding industry and enhance its commercial viability. There are additional plans to strengthen the Shariah compliance framework to improve the Shariah compliance levels in the industry and give comfort to the masses about the Shariah permissibility of Islamic banks' operations.