FTSE launches Islamic Equity Index Series

Arab News)- Despite the recent upheaval and uncertainty in the global stock markets, Islamic equity indexes are flourishing, with the London-based FTSE Group, the global index company, and Dubai-based Yasaar Research, the Shariah-compliant research company, launching the FTSE Shariah Global Equity Index Series a few days ago.

The series comprises a family of some 96 new Shariah-compliant indices, 12 of which are calculated in real-time. They include the FTSE Shariah Developed Index Series, the FTSE Shariah Emerging Index Series; the FTSE Shariah All-World Index Series; and FTSE Shariah Multinationals 150 Index.

The two main rivals to the FTSE Shariah Global Equity Index Series are the Dow Jones Islamic Market (DJIM) family of Islamic indexes and Standard & Poor's (S&P's) smaller suite of Islamic indexes. In fact, S&P two weeks ago launched three new benchmark indices, which the index company stressed are "designed to help investors track the performance of the largest global universe of more than $20 trillion of Shariah-compliant equities."

The three new indexes � S&P Large Cap World Sharia; S&P Small Cap World Shariah; S&P UK Shariah � cover 26 developed markets. Similarly, Dow Jones Indexes in the last few weeks have added two new universes to its family of Islamic indexes � the Dow Jones Islamic Market (DJIM) India Index and the Dow Jones Islamic Market (DJIM) Malaysia Index.

All three index providers claim that the launching of their respective Islamic index series underline their commitment to providing Islamic investors with the widest possible universe of investment options that have been screened for Shariah compliance, and equipping them with the tools they need to quantify their performance.

However, the reality is the market size of the global Islamic equity funds industry is modest compared to its conventional counterpart � $15 billion to $20 billion for the Islamic equity market compared to well over $1 trillion for the conventional market.

The question that beckons is: "Are these Islamic Equity Indexes Series really justified from a market point of view? If not, why are the index providers prolifically launching families of over 96 Shariah-compliant indices?"

Mark Makepeace, Chief Executive of FTSE, is confident that the FTSE Group "is continuing to provide solutions for investors and the launch (of the FTSE Shariah Global Equity Index Series) is a positive step forward into a rapidly growing Shariah-related investment market.

There is a worldwide appetite for Islamic financial products and these new FTSE Shariah indices will provide Islamic investors with an accurate set of Shariah benchmarks, as well as help providers create structured investment products tailored to the global Islamic market."

To Majid Dawood, CEO of Yasaar Ltd. and president of Yasaar Research Inc, the launch of the FTSE Shariah Global Equity Index Series is a question of giving investors a choice in the Islamic investment asset class portfolio.

"The growth of the Islamic market is such that the investors have come to demand an availability of choices," he stressed at the launch of the FTSE Shariah Global Equity Index Series at the Dubai International Financial Center (DIFC).

"The FTSE Shariah index series serve those growing demands in a transparent, timely and Shariah compliant manner, enabling the creation of products based on these indices which will give greater beneficial choice and thereby engender the Islamic finance industry generally."

The signs in reality are that the Islamic equity market is not showing the same growth as the general Islamic finance market, which is supposedly growing by an annual rate of between 20 percent to 40 percent, depending on which Islamic banker you speak to.

Similarly, the number of index-linked Islamic equity products are paltry � not enough to make a business case for the launch of such huge Islamic index series.

Even value-added products such as Islamic exchange traded funds (ETFs) have been slow to get off the ground.

One reason is that Islamic investors are in general conservative by nature. They prefer to invest in bricks and mortar products, hence the overwhelming exposure of Islamic bank assets in real estate investments.

As such, equities and bonds have been slow to take off in the Islamic space. True in countries such as Malaysia and Saudi Arabia, the two countries with the largest number of Islamic equity funds, these products have been around since the early 1990s.

But apart from National Commercial Bank's Al-Ahli Global Trading Equity, by far the single largest Islamic equity fund, which in its heyday had assets totaling nearly $1 billion -- modest by conventional standards -- the majority of Islamic equity funds are embarrassingly small with assets ranging from US$10 million to $100 million.

This investment cultural barrier has been difficult to overcome, especially when some markets such as Kuwait and Qatar also had religious reservations about investing in equities, although these are now slowly receding.

However, they may be hope for equities, given what is happening in the Islamic bond (Sukuk) market in the last two years. The global Islamic Sukuk and securities market has been proliferating at such a rate that the market is now estimated at $200 billion - far exceeding equities as an investment asset class.

The Sukuk market is still nascent and once the issue of market maker and secondary trading are resolved, the market could well exceed the trillion-dollar figure over the next five years.

The FTSE Shariah Global Equity Index Series, unlike other competitor methodologies, claims to use "asset-based debt screening, a more conservative approach to Shariah compliance. This ensures that companies do not pass the screening criteria due to market place fluctuation, allowing the methodology to be less speculative and more in keeping with Shariah principles."