Sovereign wealth funds (SWFs) of Muslim countries, most of them managing the fiscal surpluses from oil and gas exports, are a key driver for Islamic finance and the halal economy, a new report released in March by Barcelona-based ESADE Business School and consultancy KPMG shows.
It is a first closer look at the role SWFs are playing for the growth of the Islamic economy and reveals their enormous potential. Of the current 92 SWFs in the world, with a total asset value in excess of $7tn, 39% are in Muslim countries, and 46.4% of the assets managed by such funds worldwide, or about $3.3tn, are in these countries’ funds. The biggest of the latter are the funds of the UAE’s Abu Dhabi Investment Authority and Saudi Arabia’s SAMA Foreign Holdings, managing $773bn and $744bn respectively. They are followed by SWFs in Qatar, Kuwait and Dubai, all having more than $100bn under management, as well as a number of other substantially endowed funds in the Gulf Cooperation Council (GCC) and Iran, and Muslim countries in North Africa, Central Asia and Southeast Asia.
While the management of those SWFs is not based on Islamic finance principles per se, the study shows that the governing bodies of 77% of Muslim countries’ SWFs have expressed the wish to increase the number of transactions carried out under Islamic finance significantly.
“In total, we estimate that currently 21% of investments of those SWFs can be considered Islamic,” says Tomás Guerrero, researcher for the report and head of the Madrid office of the Halal Institute of Spain, adding that “this figure is surprisingly high, bearing in mind that Islamic finance does not constitute a specific mandate for the SWFs.”
On the SWF’s domestic market or in other Muslim countries, approximately 87% correspond to investments in industries that fall within the Islamic category, namely Islamic banking, issuance of sukuk, halal food industry and agriculture, takaful and others.
Internationally, Muslim countries’ SWFs are increasingly carrying out transactions under Islamic finance, even in non-Muslim countries, the study says, citing the establishment of the Hyperion Australian Equity Islamic Fund through the Central Bank of Bahrain with the support of the country’s SWF as a recent example.
“With the economic crisis in developed countries, SWF transactions in emerging countries are growing in numbers, with new formulas of joint investment with other operators also being explored for these transactions,” says Guerrero.
“At the same time, the increasing development of Islamic finance has led to more and more resources being channelled into this alternative,” he adds.
Apart from Islamic banking, halal food is provoking big appetite of SWFs, which has to do with the dependence on food imports of many Middle Eastern economies. The objectives of such investments are to help supply the growing domestic demand for food, to gradually reduce the degree of dependence from foreign sources, as well as to create a halal food industry on the home soil as a measure of economic diversification.
According to the study, the best example for SWF investment in halal food were the $1bn the Qatar Investment Authority spent in 2008 on setting up Hassad Food, a government-owned agricultural holding established with the aim to attain food self-sufficiency for Qatar. Hassad Food has since entered partnerships with food producers in Oman, Sudan, Australia and Turkey, among others. More examples for SWF investments in the GCC in halal food operations are Emirates Rawabi (Investment Corp of Dubai), the Kuwait China Investment Corp of the Kuwait Investment Authority, an entity focusing on poultry operations in Asia, a special halal food investment fund set up by Bahrain’s Future Generations’ Reserve Fund, and the Gulf Japan Food Fund launched by the Gulf Investment Corp, the joint sovereign
wealth fund of the six GCC countries.
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