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Ashar Nazim

Islamic pension fund demand seen at $190bn

Dubai, November 10, 2013

The pent up global demand for Islamic pension funds is currently between $160 billion and $190 billion, a report said, adding that most of these funds are parked under conventional sovereign pension funds due to lack of investing options.

“Several fast-growth emerging markets including Malaysia, Saudi Arabia and UAE are seeing strong demand for retirement plans that are Shari’a compliant,” said Ashar Nazim, partner, Global Islamic Banking at EY, commenting on the estimates released EY’s Global Islamic Banking Center.

“With the maturity of the Sukuk market and Shari’a compliant equity indices, as well as technology available to screen conventional indices to carve-out Islamic sub-indices, there appears to be sufficient assets available for many of the pension funds to take the first step towards Shari’a compliant propositions.”

According to the EY Global Islamic Banking Center, Greenfield operations would take too long to satiate market demand.

Nazim added: “Speaking to several of our clients, it appears that a more practical approach is the partial transformation of existing pension funds to carve out Shari’a compliant tranches. However, this carving out further involves the valuation of pension funds’ assets as of the date of transformation, which in turn may have legal, financial and tax implications.”

The transformation will need to be carefully planned to choose the right business model and operational framework. The choice of business model will determine the governance structure, the complexity of financial reporting, tax implications, and go-to-market timeframes.

“There is a clear preference by individuals in these markets to manage their financial affairs in a Shari’a compliant manner. This segment represents anywhere between 10 and 70% of the overall market, which is sizeable,” said Nazim.

“Traditionally, the focus had been on switching their banking relationship from conventional to Islamic.  Only now we are beginning to see a greater awareness regarding wealth management and retirement planning, which in turn is encouraging public pension funds to consider offering Shari’a compliant alternatives.”

A key decision is whether to allow members of the fund to transfer their existing account balance to the Shari’a compliant fund, or if only the future contributions should be segregated as conventional or Islamic.

Additionally, timing for the desired transfer is important. The fund would model the expected outcomes based on scenarios built around the number of members, their selection, and product restrictions.

“We believe that the emerging demand for Shari’a compliant retirement plans offers significant opportunities for financial institutions to diversify their products and strengthen fee income. This in turn will help improve profitability which is clearly under stress for many Islamic banks,” said Nazim.

Indonesia and Turkey are two other rapid growth markets with strong prospects for Shari’a compliant pension programs. The development, however, is likely to be a gradual evolution due to the relatively smaller size of the Shari’a compliant asset management industry.

“Regulatory impetus will be critical for successful roll-out. Countries that are able to move swiftly are likely to strengthen their global leadership in Islamic finance,” concluded Nazim. – TradeArabia News Service




Tags: Sovereign funds | Shari’a | EY |

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