Islamic funds begin to take hold

Date: Sunday, September 28, 2008
Author: Olivia Glauberzon, Investment Executive

The Shariah-based investment industry is flourishing and expected to
double in assets in less than two years, said experts in Islamic
finance during a presentation at the Investment Funds Institute of
Canada's annual conference in Toronto on Thursday.

Currently with assets of US $700 billion worldwide — and growing at a
22%-a-year pace — Shariah-compliant funds will grow to US$1.4 trillion
in assets by 2010, said Rehan Saeed, a Shariah liaison with the
Mississauga, Ont.-based Islamic Finance Advisory Board.

Shariah, otherwise known as Islamic religious law, governs all Islamic
banking and investing practices. To comply with Shariah, stocks and
bonds within a portfolio need to be screened for the types of
businesses they are associated with.

For instance, investments related to alcohol, tobacco, gambling,
banking and pornography are not allowed, said Imtiyaz Ahmed,
representative for Shariah capital markets at frontierAlt.

"Think of it as a socially responsible fund," Ahmed added. "There are
a just a few extra controls."

Besides business screens, Shariah-compliant funds also restrict
investments in companies with excessive debt. Ahmed explained that
"excessive" is a debt to equity ratio above the 30% range.

However, Shariah regulators recognize it's not a perfect world.
Inevitably, regardless of how hard fund managers try to create
products in line with the framework, some companies may have a small
revenue stream coming from interest or from a black-listed activity.

To solve this problem, funds can be "purged of their sins" by donating
a company's revenue stream from non-Shariah compliant activities to
charity, said Habib Mejhee, associate partner at Deloitte & Touche
LLP. For example, if a fund invests in a company that earns $10 a
share, but has 10% of its revenue coming from interest income, the
fund managers would donate $1 a share to charity in order to be 100%
Shariah compliant, Mejhee said.

A growing Muslim population demanding more Shariah-compliant funds in
Canada has driven the demands for these investments in North America,
said Ricky Pinto, also a partner with Deloitte & Touche.

"There's only a sprinkling of funds in Canada," said Pinto. "Around
the world, people are seeing these opportunities."

Currently, the $3 million frontierAlt Oasis Canada Fund is the only
Shariah-compliant fund in Canada. The fund has doubled since last
year, according to Les Young, vice president of frontierAlt.

And with the Muslim community expected to grow to 4.9% from 3.7% of
the Canadian population by 2017, Ahmed said, the Shariah-compliant
based fund industry is still largely untapped.

Similarly, the U.S. Islamic finance market is also dominated by one
product, the Amana Income Fund. Managed by Saturna Capital, It has
US$1.5 billion in assets and has won the 2007 Lipper Fund Award for
the fund's three-year performance in the U.S. equity income category.

Islamic finance began in the 1960s, staring with two funds in Egypt
and Malaysia. Today, the industry has grown to include a number of
funds and governing bodies around the world. The organizations include
the Accounting and Auditing Organization for Islamic Financial
Institutions, the Islamic Financial Services Board and the
International Islamic Rating Agency.