Photographer: Dimas Ardian/Bloomberg

BNP Joins Schroder Taking Indonesia's Islamic Stock Funds Global

  • Manulife also setting up Shariah-compliant investment vehicle
  • Indonesian Islamic banking growth stalled in last two years

BNP Paribas SA, Manulife Asset Management and Schroder Investment Management Ltd. have set up global Islamic stock funds in Indonesia, a much-needed boost for the nation’s Shariah finance industry.

The money managers all started Jakarta-based plans last week targeting Islamic stocks worldwide, following a November ruling allowing local investment managers to run dollar-denominated Islamic vehicles. Saudi Arabia and Malaysia dominate the global Shariah funds industry, which grew by an annual average of 6.6 percent in the five years through 2013, according to a report by the Islamic Financial Services Board in Kuala Lumpur.

While Indonesia is a frequent issuer of sovereign sukuk, corporate sales are tiny and Islamic banking growth has stagnated at less than 5 percent of the total, compared with more than 20 percent in Malaysia. With a Muslim population in excess of 220 million, the world’s largest, the net asset value of the nation’s Islamic mutual funds is only 7 percent of Malaysia’s. Authorities in Jakarta abandoned a plan to merge four state-owned Islamic lenders earlier this month in a further setback for the nation’s ambitions.

“There’s great potential for these products to develop in Indonesia,” said Michael Tjoajadi, president director at PT Schroder Investment Management Indonesia in Jakarta. “We can see ourselves competing on a global level with Malaysia and other countries.”

Schroder is targeting a $150 million to $200 million fund and plans to tap demand from individuals and life insurers, Tjoajadi said.

Trailing Malaysia

Indonesia has a long way to go to catch up with Malaysia, which pioneered Islamic finance in the 1980s. The net asset value of the country’s Islamic mutual funds was 10.8 trillion rupiah ($806 million) at the end of August, compared with 49 billion ringgit ($11.7 billion) in its neighbor at end-June, according to a report by the Malaysia International Islamic Financial Centre.

Investment vehicles based in Saudi Arabia account for 40 percent of Shariah assets under management worldwide, followed by Malaysia with 25 percent and Jersey on 9 percent, figures from the Islamic Financial Services Board in Kuala Lumpur show.

Shariah law forbids investments in shares of companies involved in activities considered unethical such as gambling, prostitution, and alcohol or pork-related businesses.

The BNP Paribas Cakra Syariah USD Fund will invest mainly in Islamic stocks from the U.S., Europe and Japan, the French lender said in a statement. There’s demand for dollar-denominated investments locally and BNP is exploring the possibility of starting more plans including one that will focus in global sukuk, said Vivian Secakusuma, president director at PT BNP Paribas Investment Partners Indonesia in Jakarta.

Manulife’s Saham Syariah Asia Pasifik Dollar AS fund will focus on Islamic stocks in the Asia Pacific ex-Japan region, said Alvin Pattisahusiwa, chief investment officer at PT Manulife Aset Manajemen Indonesia in Jakarta.

Financial Illiteracy

After recording annual growth rates in excess of 20 percent in the earlier part of this decade, expansion in Indonesian Islamic banking has tapered off as the economy slowed. Assets shrank 0.5 percent in the first 11 months of last year, while those in Malaysia increased 14 percent in the year through August.

A lack of clarity on taxation has hindered the development of Indonesia’s corporate sukuk market, with local companies raising just $2.6 billion since 2002, less than 2 percent of the amount in Malaysia, according to data compiled by Bloomberg.

President Joko Widodo is chairing a committee set up in January to try and revive growth in the industry, although a blueprint for expansion has yet to be released. Indonesia’s inability to capitalize on its potential is partially due to a lack of education on Shariah-compliant finance and financial illiteracy, said Samina Akram, managing director of London-based consultancy Samak Ethical Finance Ltd.

“The Indonesian market holds the strongest potential as it’s home to the largest Muslim population in the world,” she said. “With continued commitment from its authorities on regulatory, legislative, legal and Shariah frameworks, there’s no reason Indonesia can’t compete with other countries to be a leading hub.”

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