Prudential is optimistic about prospects for the Islamic finance industry due to the government’s efforts to spur growth.

Prudential is confident about the outlook for the Islamic finance sector. This is particularly evident in Malaysia where the government has played a key role in creating a conducive environment for the Islamic finance industry to thrive.

Malaysia has a comprehensive regulatory, legal and Shariah-compliant infrastructure, which has helped in facilitating the robust development of the Islamic finance industry.

Mark Toh, Regional Head of Islamic Fund Management, Prudential Corporation Asia, bases his optimism on statistical evidence that Malaysia plays a leadership role in Islamic finance – the country accounts for 62% or US$62.1 billion of the world’s Sukuk as at August 2009, according to Bank Negara Malaysia.

Toh is also CEO of Prudential Al-Wara’ Asset Management Bhd (PRU Al–Wara’), which is the regional head for Shariah investment for the Prudential Group.

Industry Challenges

Nonetheless, there are challenges that the industry will face both on a macro scale and specifically individual Islamic asset management companies such as PRU Al-Wara’. This includes issues such as cross-border distribution and management, different interpretations of Shariah law at various jurisdictions increasing the time and cost involved in developing a product for different markets or even different companies.

PRU Al-Wara’’s business model is to garner and manage institutional Shariah mandates, both onshore and offshore. With Prudential’s resources and the global network to serve clients’ needs in Shariah-compliant investments, the company can leverage on this experience, major strategic partnerships globally and also its global network of fund managers. Prudential also has a presence in Dubai to cover GCC countries.

Opines Toh: “Overcoming the challenges will be both an ongoing internal effort just like how we are faced with and tackle, daily business issues stemming from conventional retail business. Our attitude is no different. Externally, governments around the global have an important role to play and provide a common standard for the industry to operate in both for their local markets, and internationally.”

In his view, greater standardisation in the Islamic finance industry could have many benefits, including reducing the burden on Shariah scholars, of which there is currently a pressing shortage.

Aside from this, such measures could help improve documentation standards and reduce the risk of legal challenges as well as improve confidence in the Islamic finance industry. Standardisation could also help in reducing transaction costs for firms, thereby enabling the lowering of prices for investors and consumers.

It may help reduce the time to market for new products, thus lowering the cost of products that will ultimately benefit investors. He adds that most of the products offered today are Shariah-compliant rather than Shariah-based products.

Shariah-compliant products will start with the conventional product as a benchmark. Then Islamic contracts will be used to construct an “Islamically” accepted product, which functions similarly to its “original” conventional product.

Says Toh: “The formulation of Shariah-based products would not involve any of the conventional products as a benchmark. It may or may not resemble some of the conventional features of conventional products, but there is no intention to follow the product or its features. So, the products will use Islamic contracts.

“However, Shariah-compliant products may not be able to serve the real motivation behind the establishment of Islamic finance itself.  Islamic finance may remain a follower forever. The conventional product will always be a leader and the source of replication.  It will also make Islamic products look compliant in form, not so much in substance.”

Successful Manager

Prudential Fund Management Bhd (PFMB) has been successfully managing seven retail Shariah-compliant funds since 2002. It has grown its expertise and its reputation through a value-driven investment approach, collecting a number of awards along with the venture in the Islamic fund area.

Toh says it is a re-assuring testament to the quality of its investment team and our knowledge in Islamic finance. With the concerted effort by the Malaysian government, Bank Negara, Securities Commission and Bursa Malaysia, Malaysia offers a conducive and dynamic regulatory Shariah framework that provides a core foundation for fund management companies to establish and grow their Islamic fund management businesses.

He points out that the government has a series of incentive measures that include the relaxation of foreign equity ownership rules allowing global and regional fund managers to set up Islamic fund management operations in Malaysia up to 100% foreign equity ownership in 2008.

Besides the flexibility in equity ownership, Islamic foreign investors will enjoy withholding tax exemption on profit or income derived from both ringgit and non-ringgit investment originated in Malaysia.

“This liberalisation fits into PFMB’s plans to offer Shariah funds globally and become the global Islamic hub for the Prudential group. From the internal factor of utilising our expertise, together with the external driving force to bolster the position of Malaysia as the global and regional Islamic Financial Centre, we believe there are encouraging opportunities and growth potentials in the Industry,” says Toh.

“PRU Al-Wara’ was set up to match the growing anticipated demands in the industry. The company will serve to provide customised asset management services to our institutional clients who are more and more interested in Shariah-compliant investments,” explains Toh.

As the CEO of PRU Al-Wara’, Toh aims to position the company as a leading player in Islamic asset management and contribute to Malaysia’s vision to be the global Islamic hub.

He adds that during the initial phase, local institutional business is what it is focusing on. At present, its largest market is Malaysia, as it manages both the Shariah Investment Linked funds for PAMB as well as the PRUBSN’s Takaful funds.

PFMB also manages mandates from Indonesia and Singapore. “These mandates are private mandates; therefore we are unable to divulge details of our customers’ portfolio.  We can, however tell you that collectively; we manage RM463 million in offshore Shariah mandates as of 30 September 2009,” discloses Toh.

In terms of international collaboration, PRU Al–Wara’ has signed a cross border distribution agreement with its sister company in Dubai, allowing it access to the Middle East market.