Saudi Arabia eyes global Islamic finance hub status through new index

Newly launched Tadawul Islamic index adds to growing index universe as kingdom eyes Islamic finance hub status.

London: Saudi Arabia is working to become a regional and global hub for Islamic finance. To achieve this, the kingdom is keen to develop the sector as well as attract investment from local and international Islamic investors and funds.

In response to growing demand for Sharia-compliant tools and investment services, Tadawul, the country’s stock exchange, launched its first ever Islamic index last month.

The TASI Islamic Index will track the performance of Sharia-compliant companies listed on the Saudi Exchange. The TASI Islamic Index is constructed from the Tadawul All Share Index “TASI” and will be screened for Sharia compliance, which are approved by the exchange’s Sharia Advisory Committee. The committee will be responsible for overseeing and approving the list of Sharia-compliant listed companies on a periodic basis.

The proliferation of Sharia indices makes sense, according to Redha Al Ansari, Head of Islamic Finance Research, Data & Analytics at the London Stock Exchange Group.

“In the past two or three years so many retail and institutional investors started to invest,” he said. “And with Saudi being one of the largest Islamic finance markets globally, you need to actually provide more investment opportunities for Islamic financial institutions beyond sukuk and real estate.”

Companies within the index are screened by an independent screening provider under the supervision of Tadawul’s recently formed Sharia Advisory Committee that include representatives from leading financial institutions.

Tadawul did not respond to a request by Salaam Gateway for further information about the methodology that will be adopted for the index.

The index will also act as a tool for investors and other stakeholders to guide and inform decisions when analysing investments. It will also help asset managers benchmark the performance of their Sharia-compliant portfolios.

One Riyadh-based portfolio manager said that the new Islamic index is a natural step given that a large proportion of companies on Tadawul are already inherently Sharia compliant.

“Most money managers were using the IdealRatings index for performance evaluation, now they can be measured vs a published index which most (retail) investors can track,” he said, requesting anonymity.

Monem Salam, executive vice president/portfolio manager at US-based Saturna Capital, said that any step that is taken towards Sharia compliance benefits the industry.

“It is still a bit unclear as to which methodology they will be using,” he said. “They mention a panel of scholars from various institutions. My experience from Saudi Arabia is that the institutions have varying guidelines, so it will be interesting to see what consensus they come up with. However, coming up with guidelines can be very beneficial for individual/retail investors and I applaud this move.”

But a Dubai-based multi-asset portfolio manager said that whilst the TASI Islamic index is positive it is not a game changer given the small number of global funds with a Sharia-only mandate as well as the small size of the Saudi stock exchange in comparison to other equity markets worldwide.

In addition to benchmarking, the new index can also serve as a base for financial instruments like derivatives and Exchange Traded Funds (ETFs).

Tariq Al Rifai, CEO of the Quorum Centre for Strategic Studies, a London-based think tank, said that the Saudis establishing their own benchmarks gives them a strategic advantage, since the country has the largest market cap in the Middle East and North Africa (MENA) region.

“This is because index providers may not know your objectives for a particular benchmark and more importantly, you own the data. That’s where the money is,” he said.

Adding to Islamic index universe

The TASI Islamic Index will join a growing number of Islamic indices that track regional and global equities as well as other asset classes. Providers like S&P, IdealRatings, MSCI and FTSE offer their own Sharia-compliant indices.

The most notable global Islamic indices include Dow Jones Islamic Market index and the MSCI World Islamic Index. In addition, providers also offer regional indices such as the Dow Jones Islamic Market GCC index. FTSE also offers Sharia indices in other jurisdictions like Malaysia and Taiwan.

“It is important to have Sharia-compliant indices as there is a big, growing market for Sharia-compliant investments and investors would need credible benchmarks to compare the returns,” explained Faisal Hasan, CIO and Head of Asset Management at Dubai-based Al Mal Capital.

“This is a positive move that help in measuring the performance for Sharia-compliant investments. I’m sure there will be more Sharia indices that will be coming in future as the market become more diverse and deeper,” he added.

Becoming an Islamic finance hub

The launch of the new TASI Islamic index is part of a wider drive by Riyadh to position the kingdom as the Islamic finance capital of the world by 2030.

Bashar Al Natoor, Global Head of Islamic finance at Fitch Ratings said that launch of the TASI Islamic index is not a surprise and was set out as one of the kingdom’s Financial Sector Development Programme (FSDP) initiatives relating to Islamic finance, part of its Vision 2030.

“This is part of the international positioning goals that aims to enhance Saudi Arabia’s international position as the leader in Islamic finance, along with other strategic goals and initiatives that aim to enhance and develop the Islamic finance industry’s governance, educational and research institutions to support growth of the sector,” he said.

The launch of the TASI index follows the formation of Tadawul’s Sharia Advisory Committee in April. The Committee consists of representatives from the country’s largest financial institutions to ensure independency and transparency.

Fitch’s Al Natoor reiterated that the progression and development of the kingdom’s Islamic finance industry is part of a wider objective of economic diversification.

“Beyond Islamic finance the FSDP aims to develop a diversified and effective financial sector to support the development of the national economy, diversify its sources of income, and stimulate savings, finances and investments,” he said.

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