UAE: Shariah-compliance boosts business value by 25%

Issac John
25 February 2012
DUBAI – Converting a conventional business to a Shariah-compliant entity can increase the value of a company by 18-25 per cent due to the scarcity of genuine Islamic investments, but the process involves various risks, said Swiss banking group, Bank Sarasin.The bank, releasing its Islamic Wealth Management Report, said while the conversion process is arduous, “extending from the design to distribution and beyond, to how the company spends its profits,” the market potential is massive, with the global Muslim population expected to increase by 26 per cent to 2030, to 2.2 billion, rivalling China and India in terms of market size.

“The Muslim market segments in India and China alone are larger than some countries’ populations, estimated at 140 million and 40 million respectively.  Demographics are also compelling, with 43 per cent of Muslims under the age of 25,” the Swiss bank observed.

According to Sarasin, conversion is “complicated by the need to address every aspect of a business, the lack of broadly accepted standards and regulations, and differences in the Muslim world itself.”

“Questions from an Omani businessman sparked this report.  We found there was almost no information on this topic, so, with the benefit of our practical expertise given our unique Islamic Wealth Management services, we wrote this report.  We’re providing our clients and other investors with much needed information and advice.  As Muslims become an increasingly important segment of the global economy, the conversion of a company to Islam will become a greater issue – for entrepreneurs, executives and investors,” said Fares Mourad, Head of Islamic Finance, Bank Sarasin & Co. Ltd.

The bank said conversion also involves social, political, and financial risks.  “Extra costs may be associated with Shariah compliance, since a religious audit is required.  Marketing is also complex, given the differences in interpretation of Islamic law and observance by Muslims globally.  Beyond market factors, governance, legal and financial implications must be considered.  “

The bank also called for the GCC to take a leadership role by establishing standards for the registration of Islamic investment products with one regulator.  “This would allow asset managers to market products to clients across the Gulf without the lengthy and costly registration process now required since products must now comply with different regulations in Bahrain, Kuwait, Saudi Arabia, Qatar and the UAE. “

The bank’s report noted that the leadership demonstrated by Malaysia, not only in terms of Islamic finance, but also with regard to halal production.

Sarasin noted that 2011 saw   Islamic finance making big stride driven by vigorous underlying trends.  “While the volume, geographic reach and quality of Islamic fiance increased in 2011, the eyar also witnessed the resurgence of the Sukuk market. “The Shariah-compliant investor gained halal alternatives to conventional bonds as yields surged.  Market size increased almost 45 per cent to $180 billion. In 2012,  volumes are expected to increase, with new issuers and those who delayed in 2011 coming to the market this year,” it said.

The report noted that while most Islamic indexes fell in 2011 many outperformed conventional indexes because Islamic criteria screens out most financial stocks. “ As an example, the Dow Jones Islamic Market Pakistan Index, while down 1.06 per cent, beat the conventional Dow Jones Pakistan Index by more than 16 per cent.  Muslim investment criteria may lower risk.”