Evolution of an Islamic fund administration ecosystem
The Islamic fund management industry has seen considerable growth over the last six years. Further exponential growth is forecasted, as reported in the 2017 Islamic Finance Development Report1, with the MENA (Middle East and North Africa) and South Asia regions contributing to the bulk of this growth.
The below figures highlight this growth:
- From USD45 billion in assets under management (AUM) in 2012, AUM of Islamic funds grew to USD115 billion in 2017 and is projected to grow to USD403 billion by 2022
- MENA (including the Gulf Corporation Council [GCC]) accounts for approximately 50 per cent, while South-east Asia constitutes close to 20 per cent of Islamic fund AUM.
Whilst the fund management industry has seen growth and investment, the same level of evolution and investment has not been seen in back-office funds services. With this in mind, industry specialists got together in Kuala Lumpur in March to analyse the evolution of fund administration services and determine how a specific jurisdiction could position itself as a hub for Islamic fund administration.
Shikkoh Malik, Head of Fiduciary & Fund Services at Standard Chartered, was one of the panellists and provided his analysis concerning the fundamental factors that are required to enable this viable Islamic administration hub:
- The regulatory framework must cover the complete chain and encompass fund management, legal, and through to middle and back-office support. The development of this holistic regime is critical for fund administration and custody.
This element becomes even more important within the Islamic space, and specifically in markets where there are two separate regulatory bodies
(i.e. one for capital markets and the other for banking activities). It’s often seen that while tremendous evolution has taken place on fund and investment management-related guidelines, fund administration-related guidelines may not have evolved at the same pace. - Talent development is an area that could clearly differentiate one hub from another, and in general, the demand for talent in the Islamic fund industry is much higher than the supply. Jurisdictions that establish both credible academic institutions and corresponding programmes, and put in place specific incentives to ensure focus on financial services would be able of churning the right type and number of fund administration profiles – and would subsequently attract additional business flows.
- Shariah boards and the development of Shariah scholars is a fundamental element, to be considered separately from talent at the operational and product- management level. A market also needs an indigenous crop of Shariah scholars who not only act as advisors but also as a second layer of regulators to the Islamic industry.
- A well-developed conventional fund administration landscape forms the base of any development on the Islamic front. Jurisdictions with mature regulatory regimes and developed conventional fund administration services will always have a head start compared to their peers, simply because the knowledge of fund accountancy, transfer agency and other ancillary services forms the base of Islamic fund administration too.
- Evolution of systems and service providers is an area that has been neglected, to a certain extent, by aspiring key jurisdictions. Currently, either there are no locally developed systems, or most of the global providers have been pushed to develop platforms and solutions that fulfil the specific requirements of the industry.
- Tax and other fiscal incentives also act as stimulants and could add to the attractiveness of a jurisdiction.
There are multiple jurisdictions trying to establish themselves as hubs for end-to-end servicing of Islamic banking, or for Islamic asset management, yet most have not specifically focused on becoming a specialised fund administration hub. Hence, we believe that doing so would create a real first-mover advantage in this space.
With comprehensive Islamic banking services offered by Standard Chartered Saadiq, the Bank is well positioned to work with regulators, market players and infrastructure entities on the development of these specialised services, and we look forward to contributing to the industry.
¹https://www.salaamgateway.com/en/story/report_icdthomson_reuters_islamic_ nance_development_report_2017-SALAAM07122017110850/