Reuters Arabic Service is reporting that the Malaysian government’s retirement fund, the sixth largest in the world controlling assets exceeding $160 billion, is considering establishing an independent fund to concentrate on investments in Islamic finance.
If initial studies go well and the fund goes ahead with the proposal, Malaysia would become the first government to offer a shariah-compliant retirement fund. [In the financial industry context, “shariah-compliant” is a term used to denote any product which has been approved by specialists in Islamic law to ensure that the product does not violate Islamic principles.] The move highlights the growing importance of the Islamic finance sector, which grew 150% between 2006 and 2011 to reach a total estimated size of $1.3 trillion.
Islamic law prohibits the payment of interest. Instead, those who want to invest in “sukuk” (Arabic meaning “a certificate showing ownership of an asset”) – for example to help fund the building of an airport – gain a share in owning the asset and are entitled to share in the airport’s revenues. The rise of sukuk is driven by customers who want investment and savings products compliant with Islamic law and principles.
Malaysia, a country of more than 29 million people, is considered one of the two poles of the Islamic finance industry, the other being the Gulf Region. The growing global economic importance of both the Gulf and Association of Southeast Asian Nations (ASEAN) regions as a whole provides further impetus for those interested in international finance to familiarize themselves with the Islamic finance industry, if not the specific details of shariah-compliance. The Malaysian initiative, even if it is never adopted in Malaysia, may very well serve as a model for other Muslim-majority countries, especially those in the Gulf States, with significant interest in Islamic finance.
The United Kingdom is in plans to become the first sovereign government outside the Islamic world to use sukuk, which shows that sukuk will be an important part of global finance. London is targeting cross-border transactions, helped by its status as a financial center, and a legal system which is recognized internationally. Sukuk issues on the London Stock Exchange have already raised more than $49 billion.
American enterprises are taking note. American International Group (AIG) is plotting its entry into Malaysia’s Islamic insurance market, lured by the country’s economic expansion and an industry that has grown fivefold in less than a decade. AIG will start a shariah-compliant reinsurance business by June and may eventually offer a fuller range of services.