Shariah Investments Gain Further Ground

Shariah Investments Gain Further Ground
Malaysia remains Asia’s biggest Shariah funds market, followed by Indonesia

July 2018, Singapore. Asia’s Islamic asset management industry is making progress, thanks to supportive government policies. It continues to be concentrated in Southeast Asia, with most of the activity coming from Islamic finance powerhouses Malaysia and Indonesia.

Malaysia remains very much ahead in the region—it recorded US$28.4 billion in Islamic mutual fund assets under management (AUM) in 2017, according to data from the Securities Commission (SC). The industry continues to grow robustly, thanks in part to a drive by the government to further develop the country as an Islamic finance center. Last year, the SC launched a five-year blueprint to grow the Islamic fund and wealth management sector.

Indonesia grew its Shariah mutual fund market by 90% to nearly US$2 billion in AUM in 2017. The market has benefited from the 2015 lifting of the 15% limit on overseas investments of Shariah funds, which paved the way for the launch of nine foreign-invested funds as of December 2017. The funds saw their total AUM soar to IDR7.8 trillion (US$546 million) in 2017, from only IDR945.2 billion in 2016.

Besides allowing Shariah funds to fully invest overseas, market regulator Otoritas Jasa Keuangan (OJK) recently introduced a framework requiring fund managers to carve out dedicated units to manage existing Shariah funds. However, the market remains small and has few strategies to offer institutional investors, besides domestic and Asian Shariah fixed income and equities.

In the retail segment, despite the positive outlook for the launch of global Shariah funds the past two years, some Indonesian fund managers told Cerulli that selling agents are not marketing these products aggressively. Some agents apparently see limited appetite for these funds. With the OJK expected to issue a regulation this year allowing conventional funds to fully invest offshore, global Shariah mutual funds are expected to lose some of their luster to global conventional funds.

Much of Asia’s Shariah asset management growth will continue to come from Malaysia. While significant opportunity to manage Shariah-compliant assets will continue to come from state funds, Malaysia’s retail market is large and offers asset-gathering opportunity for fund managers.

Meanwhile, Indonesia will continue to play catch-up. A 2018 survey by Cerulli shows that asset managers in the country expect demand for Shariah investments to come mostly from insurers and pensions over the next few years. With anticipated low demand from mass retail and mass affluent investors, appreciation of Shariah funds has to be increased across all retail segments.

These findings and more are from The Cerulli Edge—Asian Monthly Product Trends Edition, July 2018 issue.

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