Assets under management (AUM) in Islamic mutual funds have increased substantially, says Fitch Ratings in a new report. AUM peaked at end-2Q21 at around USD130 billion, before falling to around USD120 billion at end-2021. Fitch estimates that the growth rate of Islamic funds (84% nominal/13% annualised) has exceeded that of the broader global mutual fund industry (68% nominal/11% annualised), based on the latest comparable data for the five years to end-3Q21, which is based on Lipper and ICI Global data.
Saudi Arabia and Malaysia remain the pre-eminent Islamic fund domiciles worldwide, reflecting strongly established local markets. Offshore markets, such as Jersey and Luxembourg, also have nascent Islamic fund markets. Jersey is an Islamic exchange-traded fund (ETF) hub, where multiple commodity ETFs (notably gold ETFs) claim Sharia status, whilst Luxembourg has a broader Islamic mutual fund base.
Money market funds (MMFs) are the largest Islamic fund type. This is largely driven by the fact that Saudi Arabia is the largest Islamic fund domicile and MMFs are the dominant fund type there. By end-4Q21, 83% of Saudi Islamic fund AUM was invested in MMFs. Conversely, Malaysia fund assets are more spread out, with equity funds – the largest segment – representing 44% of total AUM.
Structural and legal characteristics of the assets held by Islamic funds can cause additional rating complexities, notably in the case of defaults in portfolio holdings. Furthermore, variations in regulatory practices in major Islamic fund domiciles can be meaningful to fund rating analysis, particularly when compared with standards and regulatory practices in major international markets.
