Private Banking | Europe draws Islamic funds
 
Barbara Wall IHT
Wednesday, May 21, 2003
Western banks have been key players in the development of a· robust Islamic finance sector, but can they hold on to their Muslim clients? According to some industry watchers, political considerations are exerting a growing influence on the investment predilections of investors from the Gulf states.
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Michael McMillen, a partner in the New York-based law firm King and Spalding, who advises on Sharia-compliant investment products, said that although some Middle Eastern investors have expressed concern about U.S. policy on Israeli and Palestinian matters, this is unlikely to affect the amount of business coming his way. On the contrary, there is more demand than supply for his work right now, he said.
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"A small proportion of Islamic investors have redirected money out of the United States into Europe and Southeast Asia for political reasons, though most of the capital flows have been driven by economic reasons," McMillen said.
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"What we are seeing is a reorganization of priorities," he added. "A weak economy has been a major disincentive to invest in the United States, and Europe is currently seen as a more attractive investment bet. Islamic investors will not abandon the U.S. completely. Deals are still being done, but the people involved are more reluctant to publicize them."
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Tariq Raifa, spokesman for Failaka International, an online Islamic financial services company, said that other forces may be at play. "Economic reasons have shifted the focus away from the United States toward Europe, but the introduction of new regulations post-Sept. 11 has led many Islamic investors to fear that their accounts will face an unnecessary amount of scrutiny by the U.S. authorities."
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According to Raifa, Islamic investors feel less threatened in Europe, though Britain has also been criticized for the way it has handled investigations into the accounts of Islamic charities and high-net-worth Muslim investors.
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A spokesman for the Islamic Banking and Insurance Institute in London said that Britain's Financial Services Authority and anti-terrorism unit have investigated in an unfair and often heavy-handed manner many Islamic account holders and found no suspicious transactions. "It is our understanding that a public statement to this effect will be made in due course which should go some way to alleviating any concerns that investors may have," he said.
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Islamic capital flows may also have been driven by liquidity concerns.
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"During the Iraqi conflict, investors from the Gulf states put a premium on liquidity and moved funds into short-term investment instruments," said a spokesman for a London Islamic bank. "With the war now over, we may see a greater commitment to longer term investments."
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Fears that anti-U.S. sentiment and liquidity issues will stymie the growth of the Islamic finance sector are thought to be unfounded. "We are on the brink of something special," McMillen said. "Up until a year or two ago, there were few Islamic products to speak of. Now we are seeing the development of a serious Islamic real estate sector, credit market and proposals for the first Islamic hedge fund."
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King and Spalding have acted as advisers to Meyer Capital International, the company behind the development of a Sharia-compliant fund of hedge funds. Eric Meyer and his associates have spent the last two years developing the fund. And last week they received the authorization needed to launch the fund.
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Initially the Islamic fund will have long/short managers and will focus on the technology and health care sectors. "Most health care and technology stocks pass the Sharia screening process - by focusing on these sectors our fund managers will have more investment choice," Meyer said.
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Raifa said the introduction of an Islamic hedge fund may not be as revolutionary as some commentators have suggested. "The average hedge fund has around 20 different investment tools at their disposal. Islamic investors may be disappointed with a fund that is restricted to long/short managers," he said.
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According to Meyer, "Long/short managers typically either trade only equities with possibly some options. More technical managers might get into futures and debt instruments, but I think we would be hard-pressed to find a manager that utilizes 20 different risk management tools in his hedge fund and still can figure out a return at the end of the day. Long/short funds represent 33 percent of the hedge fund universe currently. These are some of the more successful and well risk-managed styles of funds and we have not received any disappointed commentary from potential investors in the fund."
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Meyer Capital International plans to introduce, possibly in September, a classic hedge fund that "will compete and beat the performance of traditional hedge funds," said Dauvin Peterson of Meyer Capital. "When we are ready to roll out other products, including a Sharia-compliant venture capital fund, they will be on exactly the same playing field as their mainstream counterparts. Only the terms will have to be structured differently in order for the funds to be Sharia-compliant.
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"There is no longer a need to have a so-called cost of being Muslim. Transactions in real estate and leasing have become highly competitive on a cost and return basis with traditional Western vehicles. Some have probably outperformed Western-style transactions."
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Real estate funds are the flavor of the moment. Recently, the Bahrain-based Gulf Finance House raised £50 million ($80 million) from Gulf investors for its Gulf Atlantic Real Estate Co., which invests primarily in British real estate. Returns on British real estate funds were around 9 percent in 2002 and are forecast to breach 10 percent in 2003. First Islamic Bank and Kuwait Finance House have also been involved in large real estate deals in Europe.
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Duncan Smith, a spokesman for the London-based Islamic Asset Management, said Islamic real estate funds would continue to focus on Britain and, to a greater extent, on Continental Europe in 2003. He expects interest in the U.S. market to pick up by the end of the year.
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Barbara Wall is a free-lance journalist based in Britain.

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