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Islamic funds seek socially responsible roadmap

´╗┐May 31 The Islamic investment sector can widen its customer base by adopting a socially responsible model, according to industry experts, but distribution channels, a sophisticated investor base and incentive schemes need to be enhanced first. The links between Islamic finance and socially responsible investments (SRI) are not new, but the former needs a similar transformation which brought SRI into the mainstream."The common synergy between the two investor classes should be exploited," said Lynette D'Souza, head of investment strategies group at Saudi-based NCB Capital, at an Islamic conference held in Manama last week. This can lead to greater economies of scale, she added. Islamic banks are keen to build such scale in order to reverse downward trends in efficiency and profitability, according to an April report by A. T. Kearney. Islamic finance, with strong roots in the Middle East and Southeast Asia, adheres to religious principles which forbid investing in gambling, tobacco and alcohol. This resembles the screening methodology used by the SRI industry, which has strongholds in North America and Europe. The limited geographical overlap has caused problems for Islamic banks with little international distribution capability, frustrating both established and new fund managers seeking critical mass to make their products economically viable.

DISCRETION AND INCENTIVES Assets in Islamic funds, estimated at $58 billion, have marginally changed in the last two years reaching a ceiling of 800 products."The industry can break out of these figures by going cross-border," said Sohail Jaffer, deputy chief executive at Dubai-based FWU Global Takaful Solutions. But managers need to get their "international marketing act" together, he said. Fund houses such as AmInvestment, NCB, and Al Rajhi have sought distribution using UCITS, a passport for investment products, with mixed results. Instead of a regional canvas, they "should focus on two or three markets", Jaffer said.

Others have opted for incubation, investing four to five years to build a track record, according to Noripah Kamso, chief executive of Malaysia's CIMB-Principal Islamic Asset Management. SRI had a similar slowdown a decade ago which ushered in the era of discretionary mandates - currently over 90 percent of SRI assets are managed this way, according to Eurosif. This business model is making inroads in Islamic finance, with some fund managers outsourcing the advisory skill-set. In March, Saudi-based NCB Capital signed two leading asset managers, TCW and Amundi, to manage seven international equity funds worth a combined $550 million.

An established track record was key to the proposition, Fadi El Khoury, head of Middle East distribution at Amundi, told Reuters. The firm manages $1.4 billion in Islamic assets, across 10 mandates and three funds. Growth in SRI is also linked to institutional backing from pensions and endowments. There is no equivalent in Islamic finance, but takaful (Islamic insurance) is a contender."Takaful is one of the most important trends emerging in the Islamic investment industry," Ruggiero Lomonaco, executive director for Middle East and Africa at the Royal Bank of Scotland, told Reuters. But takaful alone might not be enough."You need drivers, a pension incentivize people to go into the markets," said Ken Owens, partner at PWC Ireland. Incentives such as pension disclosure regulation, enacted across Europe over the last decade, boosted allocation into SRI. Institutional investors cite such directives as a key reason for investing ethically, according to the Social Investment Forum. Such schemes are absent in Islamic finance and the industry lacks a champion to promote the cause, while information portals like Eurosif and the Social Investment Forum have taken the role in SRI. This lobbying is unmatched in Islamic finance, but by drawing parallels, a cohesive voice is gradually emerging.

Money markets ecb borrowing rises despite cash glut

´╗┐LONDON Jan 17 Euro zone banks stepped up weekly borrowing from the European Central Bank on Tuesday, indicating some banks are still keen to build cash buffers in the face of sovereign debt concerns despite a surfeit of liquidity in the system. Banks' demand for short-term loans was widely expected to fall as the ECB is set to relax on Wednesday the cash buffers it requires banks to place with it and after they loaded up on cheaper longer-term funds from the central bank in December. The ECB move, which will halve the reserves ratio to 1 percent, is one of a swathe of support measures the ECB announced last month and one which it calculates will free up around 100 billion euros for banks. The banks borrowed 126.88 billion euros at the weekly tender, about 16 billion euros more than their take-up last week and above the 100 billion euros forecast by a Reuters poll. They also took up nearly 39 billion euros in 28-day funds, slightly less than the 41 billion euros maturing. This will still boost the liquidity surplus in the market - currently estimated at 424 billion euros according to Reuters calculations - by around 14 billion euros, keeping interbank rates subdued. The ECB's offer of cheaper three-year funds, the second of which is due on Feb. 29 after an injection of nearly half a trillion euros in December, was also having the unintended consequence of keeping banks hooked on the central bank funds."The ECB has made it so much more attractive to borrow from the central bank than from the market so the trend of increased reliance on its funds is not going to go away any time soon," said JP Morgan strategist Seamus Mac Gorain.

"In the February LTRO (long-term refinancing operation) banks will likely pre-fund a significant proportion of their maturing liabilities for the rest of the year on the basis that they have to assume they won't be able to fund in the market."Standard & Poor's downgrade of Italy and Spain's credit ratings to closer to non-investment grade also doused some of the optimism that had been growing in the market as it compounded their banks' ability to tap funding markets.

A survey by Fitch Rating also warned that a possible retreat from southern Europe by covered bond investors may prolong the reliance of the region's banks on central bank support."There may be unease after the S&P downgrade and going into this new regime with lower reserve ratios and so people want to play it safe and are returning to the ECB," said Commerzbank strategist Benjamin Schroeder. Both Libor and Euribor - benchmark rates for unsecured lending between banks - fell to new 9-1/2-month lows on Tuesday, maintaining their downward trek since the ECB's injection of three-year funds in December. The three-month Libor fixing fell to 1.15071 percent from 1.15786 percent while the equivalent Euribor rate fixed at 1.213 percent with both seen edging closer to the ECB's refinancing rate of 1 percent in coming weeks. The overnight rate however bucked the trend, nudging up to 0.386 percent, as it typically tends to at the end of the ECB's reserves period.