The spread of Shariah-compliant finance is good and bad

The spread of Shariah-compliant finance in the Middle East, India and Africa is both a good thing and a bad thing. Everything depends on the perspective of the observer.

That it is spreading is beyond any doubt, according to the Jeddah, Saudi Arabia-based SEDCO Capital asset management house. It says it has seen a sharp rise in the number of investors seeking out its PEI investment products.

Investors can choose from over 14 SEDCO Sharia-compliant strategies in Luxembourg with total assets of $1.8bn. Shariah-compliant asset managers are now recognised globally as providing exceptionally strong platforms.

The good

For Hasan al Jabri, chief executive officer of SEDCO Capital, it is very much a good thing. He has been developing the prudent ethical investing concept with Shariah-compliant investment at its core since 2013.

He recently oversaw the publication of what is described as a seminal SEDCO Capital white paper, entitled How can Responsible Investors Benefit from Islamic Criteria? This paper compared portfolios across the US, Europe and Asian equity markets.

The research showed that Shariah-compliant portfolios have outperformed unconstrained and responsible investment strategies over the last decade on an absolute return and risk-adjusted basis across all analysed markets.

The author speaks

Christian Gueckel, chief risk officer at SEDCO Capital and author of the paper, said: “Our analysis has shown that sector exclusions and balance sheet constraints cause a distinct return profile for Islamic portfolios.

The lower financial leverage and better cash conversion result in a bias to quality and growth which adds prudence to Islamic portfolios, he says. The results show that responsible unrestricted investors would have performed better using Islamic criteria, he adds.

The global financial crisis that began in 2007 highlighted the downside of excessive leverage and the robustness of the Shariah investment universe, which proved sturdier and less volatile to market conditions and shocks.

Islamic portfolio outperforms

SEDCO Capital’s paper found that over the period from 2006 to 2016, the global Islamic portfolio outperformed the global conventional portfolio by an annualised three percentage points with a much lower Sharpe ratio.

From an opposing perspective the issue is different. Understanding Shariah law is integral to understanding the dangers of Shariah-compliant finance, states Shariah Finance Watch (SFW), a project of the USA's Center for Security Policy.

Shariah law is Islamic law dating back to the 7th century and is today the law of the land in Saudi Arabia, Iran, Sudan and the law under which the Taliban operates, notes the SFW in one of its quieter moments.

Shariah authorities paid handsomely by western creations

Shariah law authorities, some of whom are now being paid handsomely by major banks and other western creations have the power to dictate Shariah compliance as deemed by “scholarly consensus” on many matters including finance.

SWF blogger Christopher W Holton argues that Shariah-compliant finance continues to be an instrument of Islamic imperialism. Nowhere is this more true than in Africa.

In Kenya, with a very small Muslim population, Shariah-compliant financial institutions are descending upon the marketplace, he contends. Blind exuberance is driving financial institutions to adopt SCF.

SFW cites examples of authoritarian Shariah law including

• Requirement of women to obtain permission from husbands for daily freedoms
• Beating of disobedient woman and girls
• The execution of homosexuals

Next sub-prime crisis?

This wilful blindness, and lack of both transparency and due diligence may cause SCF to be the next sub-prime crisis, but this time with deadly consequences, the SFW warns.

It is against this backdrop that SEDCO Capital has launched a new investment strategy. This combines traditional Shariah finance principles with ethical investment. PEI stresses the importance of due diligence and transparency.

It also integrates analysis of environmental, social and governance criteria. Hasan al Jabri said: “We have pioneered a prudent ethical investment approach that ensures we invest in companies that have strong governance, clear structures and a prudent level of leverage.

SEDCO targets

• Strong returns and performance
• Ensuring investments benefit society
• Compliance with Shariah and ESG investment principles
• Avoiding excessive leverage and non-transparent investment structures

Distinct return profile

Christian Gueckel, chief risk officer at SEDCO Capital and author of the paper, said: “Our analysis has shown that sector exclusions and balance sheet constraints cause a distinct return profile for Islamic portfolios.

The lower financial leverage and better cash conversion result in a bias to quality and growth which adds a prudence element to Islamic portfolios, he says. Results show that responsible and unrestricted investors would have performed better using Islamic criteria.

The global financial crisis in 2007 highlighted the downside of excessive leverage and the robustness of the Shariah investment universe, which proved sturdier and less volatile to market conditions and shocks.

In conclusion

Islamic stocks feature many aspects that are commonly referred to as indicators of quality such as low accruals, low leverage, high share of cash-backed profits and distribution of cash, notes Christian Gueckel.