Sustainable finance, specifically impact investing, has gained considerable momentum over the past few years and shows no sign of slowing down. Investors are looking for ways to build up communities and put money to work responsibly. At the same time, demand for Shariah-compliant products is growing, not just among faith-based investors, but also among non-Muslim, ESG-minded investors.
To take a glimpse into the Shariah-compliant financial services potential requires consideration of both the consumer and corporate demand and activity. The largest group of consumers using Shariah-compliant wealth management solutions currently are in the 50-70 age bracket, according to research published by Jersey Finance, The Evolution of Wealth Management in the World of Islamic Finance 2019.
It is expected, however, that in the next few years, 60% of the demand for Shariah-compliant products will come from those aged between 25 and 50 years. Individuals are forecast to account for more than half (55%) of this increase, versus 33% from family offices and 12% from institutions. Similarly, in 2019, US$145.7 billion of sukuk (the Shariah-compliant and structured bond equivalent) were issued globally, according to the International Islamic Finance Market. This represents an increase of 18.3% from 2018 and a staggering 499% from a decade ago.
Socially responsible investing (SRI) and the trend towards products offering environmental, social and governance (ESG) standards are among the drivers of increasing demand for Shariah-compliant wealth management solutions. An overwhelming majority (92%) of Jersey Finance’s respondents said that incorporating new investment principles such as SRI and ESG would help boost the Shariah-compliant wealth management market. This creates the potential for an alignment of the demand for ESG investments and the Shariah-compliant products and services offering.
Shariah-compliant financial products and services are perceived, primarily due to complexity in structuring, of potentially increased marginal cost deferential with similar conventional products. Similarly, potential additional regulatory oversight, and limited choice also restrict the development and have slowed progress across the continent. The industry is, however, growing and evolving all the time. Broader trends in innovation, fintech, and impact investing have made Shariah-compliant products and services more accessible to all classes of investors, while enhancing their attractiveness – especially for those looking for a social return on their investments; particularly the tech-savvy, ESG conscious ‘NexGen’ population. Similarly global multilateral Islamic Finance infrastructure organisations are working towards standardisation of key structures to address issues on consistency and complexity.
In the corporate and sovereign/quasi-sovereign sectors, there is also particular interest in sukuk, which are frequently significantly oversubscribed, including by conventional investors. Conventional bonds are loan instruments, with investors putting their money in interest-only instruments. With sukuk, by contrast, investors are putting their money into the underlying asset, construction project or in a leasing arrangement for a defined asset or asset class, making it more secure and lowering risk. As the UK government moves ahead with its sophomore sovereign sukuk issuance, we anticipate governments across the continent will also look at raising further sukuk to finance critical post-Covid projects and initiatives aimed at reviving and reinvigorating national economies. ESG and impact investing will form a key consideration in these sukuk structures across the continent.
Innovative fintech approaches are also lowering the costs of these products. For instance, a new Shariah-compliant UK fintech platform focussed on property investments via equity is now available – with no debt, no interest, and full voting and financial rights. Emerging technologies have the potential to disrupt the market and create change, with greater efficiency, accountability, and transparency, while serving a previously unbanked population. In Kenya, investors are developing a fintech platform to assist farmers in accessing funding, while online shariah banks now offer transactional products for retail investors.
While investors in the Middle East and Malaysia are largely driving the trend towards Shariah-compliant products and services, this sector is also of interest to the rest of the world. Africa is home to around 250 million Muslims, and Sharia-compliant products and services are available in more than 21 African countries, according to Nigeria’s Premium Times. These include Kenya, Morocco, Niger, Nigeria, Senegal, South Africa, Sudan and Uganda. Increasingly, Muslim families across the continent use Shariah-compliant trusts and foundations to structure their private wealth for estate planning and succession planning. Similarly, on the philanthropic side, waqfs are a common tool for charity endowments. Families are using the waqf structure, whether as a foundation or trust, to direct their philanthropic endeavors directing resources where the greatest impact can be achieved. This sits within the prism of ESG but increasingly on commercial terms, ensuring longevity, self-sustainability, and self-sufficiency for their impact investments.
Several infrastructure projects in the region have been funded through Shariah-compliant financing, and the African Development Bank suggests that Shariah-compliant finance could also be used to help strengthen the SME and microfinance sectors.
Nigeria’s Debt Management Office has issued three sovereign sukuk bonds, the most recent of which, in 2020, was oversubscribed by 446%. All three sukuk are project-based and, through raising funds for much needed roads and bridges, are making a positive impact in line with President Muhammed Buhari’s commitment to infrastructural development and economic growth.
Nigeria has the fifth-largest Muslim population in the world and rising government support for Shariah finance, Fitch Ratings said earlier this year. Currently, however, Nigeria has a less than 0.5% share of the global sukuk market and Shariah-compliant banking is in its infancy. Assets of the two Shariah-compliant banks in Nigeria is estimated at US$564 million, or less than 1% of total banking industry assets, according to the Islamic Financial Services Board. While Shariah-compliant banking progress is expected to be delayed in the short term, there is still scope for Islamic fintech products to grow – especially with Nigeria’s largely unbanked population and increasing smartphone penetration.
Kenya, on the other hand, is looking to enhance its position as a hub for Shariah-compliant finance and plans to put in place a regulatory framework to govern its Shariah-compliant industry. The Nairobi Stock Exchange has also pushed for Kenya to issue its own sukuk and put enabling infrastructure in place to further support the industry.
In South Africa, there are plans to issue a second sovereign sukuk in 2021/2022. The country previously issued a US$500m sukuk in 2014, when it became the first African nation to do so, and received subscriptions worth US$2.2 billion – showing the strong appetite among investors for this type of product. It’s also testament to the vital role sukuk can play in financing South Africa’s post-pandemic recovery.
Shariah-compliant products and services, although originally were created to serve the needs of unbanked Muslims, have in recent years aligned with the values of socially conscious, ESG-focussed investors, regardless of religion. A core principle of Shariah-compliant finance is that money and financing should be directed and put to use in the real economy, directly promote economic activity, and should ultimately benefit society as whole. With social cohesion and community development at the heart of Shariah-compliant finance, these solutions are ideally suited to the movement towards sustainable finance and impact investing.
The Global Impact Investing Network recently estimated that the worldwide impact investment market sat at US$715 billion in 2020 – a figure which is expected to increase in coming years. In line with this, it’s quite fitting that Jersey Finance recently launched its new sustainable finance strategy. Entitled Jersey for Good – A Sustainable Future, the strategy makes the case for Jersey’s finance industry to support the transition to a more sustainable future and sets out a vision and a number of objectives for where Jersey intends to be by 2030. The report also includes an initial two-year ‘pathway’ to deliver on those objectives.
For international finance centres (IFCs) such as Jersey, the shift towards Shariah-compliant finance, sustainable finance and ESG investment has resulted in a growing interest from both financial institutions and high net worth individuals (HNWIs) – particularly from Asia and the Middle East and increasingly from Africa, fuelling growing interest mostly from wealthy African investors.
Shariah-compliant products and solutions emphasise partnership and shared risks over conventional borrowing and interest-led investments. Industries and activities are carefully vetted to exclude sectors perceived to be harmful, such as gambling or tobacco industries. This ethos of responsibility and collaboration makes Shariah-compliant products and solutions suitable for investors across the spectrum who want their funds to provide direct impact within the overarching objective of ethical and socially responsible commercial investments.
Jersey offers Shariah-compliant investors a flexible legal system, a forward-thinking regulatory regime, and a tax-neutral environment. In Jersey, Shariah-compliant products and structures are regulated and administered on the same basis as conventional products and structures – providing true parity under the law. This positions the jurisdiction as a clear leader for Shari-compliant financial services.
Unlike other jurisdictions, Jersey does not need to amend its laws to accommodate all shariah-compliant structures and contracts, including waqfs, sukuk, and other special purpose vehicles. Instead, the Island provides a robust international platform for private, institutional and sovereign Africa-based investors to realise their diverse impact driven investment ambitions and objectives.
As interest in the Shariah-compliant finance sector continues to grow and develop in Africa, coupled with a growing emphasis on responsible investments with real, measurable impact, investors will continue to search out and partner with fiduciaries, intermediaries and financial institutions that understand their requirements and have the necessary experience and expertise. As such, Jersey, with its decades of experience and deep expertise in dealing with both Shariah-compliant structures and wider ESG-focussed investments, will be best positioned to serve the needs of these investors, helping them achieve their sustainable objectives at an internationally recognised standard of excellence.
Faizal Bhana is the Director – the Middle East, Africa and India, Jersey Finance.