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Constant rise in Islamic Finance set to grow

Constant rise in Islamic Finance set to grow

Interview with Mr. Faizan Saleem – Head of Shariah Compliant Income Portfolios Al Meezan Investment Management Limited


Mr Faizan Saleem is a highly accomplished portfolio manager who has achieved over 15 years of success in investment advisory and portfolio management. He has extensive knowledge in managing both conventional and Shariah Compliant Income and money markets portfolios. Currently, Mr. Saleem holds the position of Head of Shariah Compliant Income Portfolios at Al-Meezan Investments, where he is also a member of the Investment & Leadership Committees. In his current role, he manages the company’s fixed-income portfolios, which account for almost 87% of the total assets under management in various categories. Mr. Saleem is actively involved in various aspects of the business, such as developing business strategies, creating new products, building portfolios, and trading various money market and fixed-income securities. Prior to joining Al-Meezan Investments in 2019, he served as the Head of the Fixed Income department for organizations like HBL Asset Management and ABL Asset Management Co. Limited. He also has experience working as a core member of the investment team for companies like UBL Fund Manager and Akhai Capital Management Limited.

PAGE: Since the inception of the Islamic Finance industry in the 1970s, there has been steady growth in the demand for Shariah-compliant products and services. What is your perspective about it?

Faizan Saleem: It is true that since the inception of the Islamic Finance industry, there has been a significant increase in the demand for Shariah-compliant financial products and services. The growth of Islamic finance can be attributed to several factors, including the increasing number of Muslims worldwide, who seek financial solutions that align with their faith and values. Furthermore, the industry has gained more prominence due to the stability it has shown in the face of financial crises and economic downturns. The principles of Islamic finance, which prohibit interest, excessive speculation and promote ethical investing, have helped to mitigate the risk of financial instability. In addition, governments and financial institutions worldwide have recognized the potential of the Islamic finance industry and have taken steps to develop it further. As a result, there has been a steady increase in the number of Islamic financial products, transactions and services available, ranging from banking and insurance to investment and asset management. I strongly believe that this trend is expected to continue in the future, as more people seek financial solutions that align with their religious and ethical values.

PAGE: The Islamic finance industry faces unprecedented challenge to its development in the wake of Covid-19 pandemic, the volatility in oil prices and the uncertain macroeconomic environment. What is your standpoint?

Faizan Saleem: I agree that the Covid-19 pandemic has had a significant impact on the global economy, including the Islamic finance industry. Like other industries, Islamic finance has also faced several challenges, including high market volatility, reduced economic activity, and liquidity constraints.

Due to high volatility we have witnessed instability or fluctuation in the prices of financial assets, such as stocks, bonds, and commodities. The volatility has led to sudden and sharp movements in financial asset prices, which affected the value of investment portfolios and the ability of financial institutions to manage risk. The volatility has also created challenges for market participants in executing trades and pricing financial instruments accurately.

Additionally, the volatility in oil prices, which is a critical source of revenue for several Islamic finance markets, has created uncertainty in the industry. The fluctuation in oil prices has affected the stability of the economies of several countries that rely heavily on oil exports, leading to a reduction in demand for Islamic financial products and services globally. The uncertain macroeconomic environment, which includes factors such as global trade tensions, geopolitical risks, and regional conflicts, has further added to the challenges faced by the Islamic finance industry. However, the study also finds that Islamic banks faced larger losses than their conventional peers when the crisis hit the real economy due to weakness in risk management. These factors have led to a decline in investment flows, decreased consumer confidence, and reduced economic growth in several markets. However on positive front, despite these challenges, the Islamic finance industry has shown resilience and adaptability in responding to the crisis. Financial institutions have taken several measures, such as increasing liquidity, implementing cost-cutting measures, and providing financial relief to their clients during pandemic to reduce the impact on financial health and stability.

PAGE: Islamic banks were able to demonstrate resiliency in surviving the 2008 global financial crisis with minimal impact. They may withstand the forthcoming challenges as well. Your views:

Faizan Saleem: Islamic banks did indeed demonstrate resiliency during the 2008 global financial crisis. One of the main reasons for this was the fact that Islamic finance operates under a different set of principles compared to conventional finance. Islamic banking prohibits interest-based transactions, speculative behavior, and investments in businesses that are considered unethical or harmful to society. This means that Islamic banks were not heavily invested in the types of assets that caused the crisis in the first place, such as subprime mortgage-backed securities.

Additionally, Islamic finance is based on the principle of risk-sharing, which means that both the bank and the borrower share the risks and rewards of an investment. This encourages the bank to take a more prudent approach to lending and investing, as they are invested in the success of the investment alongside the borrower. This helped Islamic banks to avoid some of the riskier investments that led to the collapse of many conventional banks during the crisis.

IMF survey which was issued in 2010 also finds that Islamic Banks on average, showed stronger resilience during the global financial crisis. As for the forthcoming challenges, it is difficult to predict with certainty how Islamic banks will fare. However, given the principles of Islamic finance, it is possible that they may be better equipped to deal with economic downturns and financial crises compared to conventional banks. This is because Islamic finance emphasizes ethical and responsible investing, and encourages banks to take asset backed positions and a long-term view of their investments. Additionally, the risk-sharing principle means that the bank and the borrower are in it together, which can help to mitigate the impact of any losses. In a nutshell, Islamic banks are not immune to economic challenges but their unique principles and approach to finance may make them more resilient in the face of adversity.

PAGE: There is ample room for growth of Islamic banking. How would you elaborate it?

Faizan Saleem: Globally, Islamic finance is growing at one of the fastest rates and there is indeed ample room for its further growth. Islamic Banking has become systemically important in some countries and too big to ignore in many others. One of the key factors driving the growth of Islamic banking is the increasing demand for Sharia-compliant financial products and services, particularly in Muslim-majority countries because of growing and improving financially literacy, there is a growing demand for financial services that are aligned with Islamic principles.

In addition, the global financial crisis of 2008, Pandemic of 2020 and recession of 2023 highlighted the limitations and risks of the conventional banking system, leading many individuals and institutions to seek alternative forms of banking and finance. Islamic banking, with its emphasis on risk-sharing and asset-backed financing, offers an attractive alternative to conventional banking for those seeking greater stability and transparency in financial transactions.

Furthermore, the increasing globalization of the economy has led to the expansion of Islamic banking beyond traditional Muslim markets, with many Western financial institutions establishing Shariah-compliant products and services to cater to the growing demand for Islamic finance. To further elaborate on the potential for growth in Islamic banking, it is worth mentioning that the Islamic finance industry is currently estimated to be worth around $3.06 trillion, with an annual growth rate of around 11.3%. This growth rate is expected to continue in the coming years, driven by factors such as demographic changes, rising incomes in Muslim-majority countries, and increasing awareness of Islamic finance among non-Muslims.

PAGE: Your views on Sukuk:

Faizan Saleem: First we need to understand, what is Sukuk and how it is different from Conventional bonds? Sukuk are a type of Islamic financial instrument that comply with the principles of Islamic finance, which prohibits interest-based transactions.

Sukuk represent ownership in an underlying asset and provide a return to the investor based on the income generated by the asset. They are becoming an increasingly popular financing option for both corporate and government entities seeking to raise funds in a Shariah-compliant manner. The global market for Sukuk has grown significantly over the past decade, with a total issuance of $155.8 billion in 2021, according to a report by S&P Global Ratings.

The largest issuers of Sukuk are Malaysia, Saudi Arabia, and the United Arab Emirates, with a combined share of more than 74% of the global market. One of the advantages of Sukuk over conventional bonds is that they are structured to comply with Islamic principles, which may appeal to investors seeking to invest in accordance with their religious beliefs.

Additionally, Sukuk offer greater transparency and risk-sharing than traditional bonds, as the underlying assets are typically identifiable and the risks are shared among the investors. However, there are also some limitations, including higher issuance costs (due to Shariah fees & Takaful) and a more complex legal structure than conventional bonds. Furthermore, the underlying assets of Sukuk may be subject to market fluctuations, which can affect the returns to investors.

Overall, Sukuk represent a growing segment of the global debt market, and their popularity is likely to continue to increase in the coming years as more issuers seek to tap into the demand for Shariah-compliant investments.

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