Monday, January 13, 2014

RUSHDI: Malaysia’s role in facilitating cross-border investments

The most common Islamic investable asset classes include compliant equity funds, sukuk, commodity murabaha and real estate, then trade finance funds, micro-finance, and SME (small and medium enterprise), and finally, very little venture capital. What about the US$685 billion (RM2.19 trillion) halal-agrofood sector as an investment class?

Today, where is Islamic crossborder investing?

1. Commodity murabaha is on the London Metal Exchange and not Malaysia’s Suq Al-Sila.

2. About 85% of the market capitalisation of a global Islamic index is in the Group of 20 (G-20) non-Muslim countries with bias in three economic sectors, technology, healthcare and energy. These sectors have very little publicly listed company representation in the Organisation of Islamic Cooperation (OIC).

3. Real estate acquisitions are typically in Europe, Australia, the US, etc.

4. Islamic venture capital only exists at conference presentations by academics and Islamic microfinance is a rounding error in the US$1.3 trillion Islamic finance industry.

Thus, at one level, there is crossborder Islamic investing, but it’s about Shariah-compliant capital flight from Muslim countries, ex- Malaysia? Furthermore, the other major export from Muslim countries is talent, hence, there is a link between (outbound) capital flight and brain drain!

For example, if Malaysia can establish the Talent Corp Malaysia Bhd to address brain drain, then a comparable entity needs to be established address to guide OIC capital flight within the cluster! Thus, an OIC, not just Islamic, wealth management hub is a pressing need of the hour.

Malaysia, How You Get the Vision, Will and Means to Lead?

Islamic cross border investing is timely topic, as certain markets, like Malaysia have financially matured Islamically, especially on the Islamic debt capital markets and retail, and overseas expansion may be the only way forward. But, today, Malaysia is an island onto itself as counterpart jurisdictions with Islamic finance do not have the comparable enabling infrastructure, including Dubai and London.

Furthermore, for less mature Islamic finance markets, from Africa to MENA to Centre of Islamic Studies (CIS) to G-20, the lessons from Malaysia may be the best case study for their road ahead. Malaysia’s experiment with Islamic finance started in 1983, nearly 10 years after the (alleged) first Islamic Bank, Dubai Islamic Bank, and today, many countries and international lending agencies look at Malaysia’s blueprint for developing this niche market.

Thus, the easiest place to better understand the challenges with cross border Islamic investing may be start with Shariah-compliant equity investing.


Malaysia has a comprehensive infrastructure for Islamic investing, as Securities Commission Malaysia introduced Shariah screening before the launch of Dow Jones Islamic Market Index in 1999. It recently added financial ratios to the Shariah screening, but international Islamic portfolio investors still have not flocked to Bursa Malaysia to invest in the compliant companies!

The first take-away lesson is Shariah- compliance is only one factor for cross-border equity investing.

The analysis for investing includes examining all opportunities, currency risk, liquidity of company, performance, growth prospects of sector/company, including dividend yield, purification, which reduces returns, etc. For example, Islamic emerging-market funds may look at compliant listed companies on OIC exchanges, especially if they are part of MSCI Emerging Market Index, but will by default focus on markets like China, India, Russia, etc.

The second lesson is better posed as a question: why are Shariah-compliant Malaysian investors not investing in compliant companies listed in Saudi Arabia, United Arab Emirates, Pakistan, Turkey, Egypt, Nigeria or other OIC countries with stock exchanges?

Furthermore, the same question applies to investors in these countries for opportunities in Malaysia.

Is it because they know their listed companies and markets better than overseas? Or is it because the information has not been presented in a dash-board manner?

In June 2012, S&P/OIC COMCEC 50 Shariah Index was launched, and it was designed to measure the performance of 50 leading Shariah compliant companies from the 19 OIC markets/territories. As expected, Malaysia, Indonesia and Saudi Arabia comprise nearly 60% market capitalisation of index with 23 of the 50 companies.

But, have there been press releases on funds or an exchangetraded fund launched off this index?


Now, as a local investor in Malaysia, I know S&P/OIC COMCEC 50 Index companies like Maxis Bhd, IOI Corp Bhd and Sime Darby Bhd. For me to better understand overseas compliant companies, I would like to see an information dash board of such Malaysian companies compared to listed counterparts like Mobile Telecomm (Kuwait), Telekomunikasi Indonesia, Industries Qatar, Saudi Basic Industries, etc.

Furthermore, if I’m interested in agro-food companies, I would like to see a graph that captures a world index, Islamic world index and food product index. If you look at a graph of MSCI World Food Products index of agro-food companies and compare it to MSCI World and MSCI World Islamic Index, you will see world food product index has better returns than world Islamic and more stable/linear growth than World Index for the time period.

Thus, agro-food as an asset class addressing OIC food security. What if the food index happened to be halal agro-food companies from the OIC?

Today, there is cross-border Islamic investing, but its mainly outbound from Muslim world to safe, liquid and diversified asset classes in the non-Muslim world. To redirect some of the capital flight requires: 1) dashboard home and host country opportunities; 2) introducing new asset classes, like halal agro-food; and 3) establishing an OIC Wealth Management Hub. Thus, the challenge is the opportunity.

[Rushdi Siddiqui, former global director at Dow Jones Indexes and global head at Thomson Reuters in Islamic finance, is now president/ED of a (halal) US-based agro-food company.]