TheCityUK report on Islamic finance

TheCityUK, the trade group for London's financial services industry released its annual report on the Islamic finance industry, showing the growth of the industry to $1,130 billion in assets at the end of 2010 with an estimated growth in 2011 to $1,289 billion. This report is useful because at this point there are several years of report to look for trends, in part to identify areas where the data are more or less likely to reflect reality.  The Islamic finance industry is notoriously opaque, so hard data, even data on the aggregate size of the industry, are unreliable. 

For example, on of the areas that I am skeptical of the data is the inclusion of the Iranian financial institutions.  The reason why I am skeptical of the Iranian data is that, despite accounting for 36% of total assets and facing tight international sanctions, there has been no spillover to the rest of the Islamic finance industry in terms of growth.  Viewed a different way, as of the end of 2006, Iranian Islamic financial institutions had $154.9 billion in total assets as of the 2008 version of this same report.  By 2010, this had increased to $388.0 billion, an annualized growth rate of 26%.  The Iranian economy was growing during this period (pdf, page 5), but with international sanctions tightening, and limited financial market development and integration with other markets for Islamic finance, it is unlikely, in my opinion, that the Iranian Islamic finance industry grew at a more rapid pace than the Islamic finance industry in the rest of the world.  Another factor that casts doubt on the rapid growth is that the banks that would represent much of this growth are specifically targeted by sanctions, and are also large banks (it is much harder for a big bank to achieve and sustain such a high growth rate). 

However, the rest of the report is worth reading because there are few other sources of data on the industry as a whole.  For example, a new table this year (I think) shows a data series of the average management fee of Islamic funds.  The interesting thing in the table is that the average management fee has been declining from 2006 to 2011Q1, from over 1.5% to just above 1.0%.  This is a positive development for Islamic investors, but may hamper the entry of new fund managers.  However, one area where growth is due is in fixed income funds, which only make up 6.8% of total assets under management in Islamic funds.  The demand for Islamic fixed income funds is likely to be strong, since there are few offerings and it is difficult for all but the largest investors to invest directly in a portfolio of sukuk.  The upside from the fee perspective is that most conventional fixed income funds charge lower management fees than equity funds, so prospective entrants will be less concerned with the dropping average management fee in the Islamic fund space.