The pent up global demand for Islamic pension funds is currently valued between $160 billion and $190 billion, according to the Global Islamic Banking Centre at Ernst&Young (EY).
According to EY’s estimates, most of these funds are parked under conventional sovereign pension funds due to a lack of investment options.
“Several fast-growth emerging markets including Malaysia, Saudi Arabia and UAE are seeing strong demand for retirement plans that are Shari’a compliant,” said Ashar Nazim, Partner, Global Islamic Banking at EY.
“With the maturity of the sukuk market and Shari’a compliant equity indices, as well as technology available to screen conventional indices to carve-out Islamic sub-indices, there appears to be sufficient assets available for many of the pension funds to take the first step towards Shari’a compliant propositions.”
EY estimated that greenfield operations would take too long to satiate market demand.
However, Nazim said that a more practical approach would be to work on a partial transformation of existing pension funds to carve out Shari’a compliant tranches. But that involves the valuation of pension funds’ assets at the time of transformation, which could lead to legal, financial and tax implications, he added.
Nazim said that there is a clear preference by individuals to manage their financial affairs in a Sharia compliant manner.
With the focus mainly on shifting from conventional banking to Islamic, the awareness of wealth management and retirement planning schemes in Islamic finance have only picked up pace recently.
The Islamic finance expert said that this has in turn encouraged public pension funds to offer Shari’a compliant alternatives.
“We believe that the emerging demand for Shari’a compliant retirement plans offer significant opportunities for financial institutions to diversify their products and strengthen fee income. This in turn will help improve profitability which is clearly under stress for many Islamic banks,” said Nazim.
“Regulatory impetus will be critical for successful roll-out. Countries that are able to move swiftly are likely to strengthen their global leadership in Islamic finance,” he said.