Demand for Sharia pension funds set to soar

The market for Sharia-compliant pension funds may be as much as US$190 billion.

Demand for such Sharia-compliant retirement offerings was particularly high in fast-growing emerging markets including the UAE, Malaysia and Saudi Arabia. Randi Sokoloff / The National

Global demand for Sharia-compliant pension funds could be as high as US$190 billion, a new report says.

Islamic banking customers in countries such as the UAE and Saudi Arabia are increasingly turning their attention to their retirement plans, the report from EY's Global Islamic Banking Center said.

Much of this capital is currently parked in conventional pension plans due to a lack of viable options. However, the growth and development in recent years of Sharia-compliant capital markets presents a new opportunity for pension funds, said Ashar Nazim, a global Islamic banking partner at EY.

“With the maturity of the sukuk market and Sharia-compliant equity indexes, as well as technology available to screen conventional indexes to carve out Islamic sub-indexes, there appears to be sufficient assets available for many … pension funds to take the first step towards Sharia-compliant propositions,” he said.

The level of outstanding global sukuk stood at $275.2bn at the end of August, according to figures from Malaysia’s finance ministry.

Sukuk issuance is expected to exceed $100bn this year, Standard & Poor’s said.

Demand for such Sharia-compliant retirement offerings was particularly high in fast-growing emerging markets, including the UAE, Malaysia and Saudi Arabia, said EY.

“There is a clear preference by individuals in these markets to manage their financial affairs in a Sharia-compliant manner. This segment represents anywhere between 10 and 70 per cent of the overall market,” said Mr Nazim.

Such demand provided opportunities for financial institutions to diversify products and strengthen fee income, he added.

However, the relatively small size of the global Sharia-compliant asset management industry means that the growth of Sharia retirement funds was likely to be “a gradual evolution,” said EY.

The most practical way to offer such plans was to partially transform existing pension funds, carving out Sharia-compliant tranches, rather than starting from scratch.

“This carving out further involves the valuation of pension funds’ assets as of the date of transformation, which in turn may have legal, financial and tax implications,” said Mr Nazim.

Key considerations for fund managers considering Sharia-compliant offerings include whether to allow existing members to transfer their existing balance to a new Islamic offering, or to only allow future contributions to be added to the offering, according to EY.