Islamic Banking

Index Providers Launch Shariah Products

Bob Reynolds, 25 April 2007

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Standard & Poor’s has launched a new index for Shariah products in the Gulf Cooperation Council states.

The S&P GCC Shariah Series has been designed to include the largest and most liquid stocks across the GCC. It will create a framework for the deployment of mutual funds, exchange traded funds and structured products across the Gulf’s highly concentrated equity markets.

The new indices – S&P Saudi Shariah, S&P Bahrain Shariah, S&P Kuwait, Shariah, S&P Oman Shariah, S&P Qatar Shariah, S&P United Arab Emirates Shariah – in addition to a S&P GCC Investable Shariah and a S&P GCC Composite Shariah Index - include only those stocks which comply with Shariah law.

The indices exclude businesses that offer products and services that are considered unacceptable and non-compliant according to Shariah law, such as stocks of companies that operate in alcohol, entertainment, financial services, pork-related products and tobacco, as well as companies whose financial ratios may violate the compliance measure.

As this announcement was made, S&P published two reports which argued that Islamic finance is booming. "Mounting demand around the world for Shariah-compliant financial products and services is fuelling the Islamic banking industry's buoyant expansion," said S&P credit analyst Anouar Hassoune.

The reports, Chief Drivers Behind Islamic Finance's Global Expansion and Islamic Finance To Expand Slowly But Surely In The Maghreb, point to areas of future growth.

Shariah-compliant assets worldwide are estimated to be worth $500 billion and have been growing at more than 10 per cent per year over the past 10 years.

In the Gulf and Muslim Asia, S&P estimates that 20 per cent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile. The market share of Islamic banks currently stands at 12 per cent in Malaysia and 17 per cent in the six GCC countries.

Retail banking services and issuance of Islamic notes, or sukuk, will continue to be frontrunners in the global Islamic finance boom.

Separately, MSCI Barra, a global provider of benchmark indices and risk management analytics products, is developing a global family of Islamic indices, designed to reflect Sharia investment principles while retaining replicability for international investors.

The MSCI Global Islamic Indices will incorporate dividend purification rules, resulting in a more relevant benchmark for Sharia portfolios.

MSCI Barra will introduce a set of flagship indices in July 2007, and the full global index family in October 2007.

The MSCI Global Islamic Indices may be licensed for use by investors around the world for portfolio management and benchmarking purposes, as well as to serve as the basis of structured products and other index-linked investment vehicles such as ETFs.

Morgan Stanley is the majority shareholder of MSCI Barra.

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