And yet they have been conspicuous in their absence in investing in the Islamic finance market. However, in some countries such as Malaysia, Saudi Arabia, Indonesia, Bahrain and South Africa, pension funds have diversified their investment portfolios to include investments in Shariah-compliant products. Analysts stress that if pension and social security funds in the Muslim countries divert a mere 30 percent of their portfolios to the Islamic finance sector, the industry would receive a massive boost.
One of the leading pension funds that proactively invests in the global Islamic finance industry is the Employee Provident Fund (EPF) of Malaysia, which at the end of September 2009 had funds under investment totaling 370 billion Malaysian ringgits. In fact, the EPF fund size grew from 313.01 billion ringgits in 2007 to 342.01 billion ringgits - a year-on-year growth of just under 10 percent.
According to Wan Kamaruzaman Wan Ahmad, general manager of the Treasury Department at EPF, the fund is expecting an average annual growth rate of 10 percent over the next few years, and is committed under its mandate to invest some of its assets in Islamic financial instruments. "Since the start of Islamic finance industry in Malaysia in the early 1980s, EPF has always participated in its growth and development. In the last few years, this participation has been intensified. In the last two decades, Islamic finance has undergone a significant transformation and progress. Undoubtedly, Malaysia has been at the forefront of this progress," he explained.
To reflect the growing importance of Islamic finance in the EPF strategy, the management of the fund established a dedicated Islamic Investment Department in 2008. This department was upgraded to the Islamic Investment Development Department last year "to invest, manage and develop Islamic loans and corporate sukuk." This department is headed by former Bank Negara Malaysia, the central bank, official Jaafar Raihan, with the aim of expanding the investment allocation of EPF in Islamic finance in line with the industry's rapid growth.
In Saudi Arabia, the establishment of a new sovereign wealth fund (SWF), Hassana Investment Company, which will invest in real estate and commercial projects, and stock markets in the Middle East and overseas, may be a potentially significant development for the Islamic finance sector. Hassana's mandate is to be the fund manager of the assets of the General Organization for Social Insurance (GOSI), the social security and pension agency of the Kingdom. GOSI has assets worth over $400 billion held mostly in treasuries but also in Islamic banks such as a $2 billion stake (or 9.9 percent) in Al-Rajhi Bank, the largest Islamic bank in Saudi Arabia if not the world. GOSI also has strategic stakes in Alinma Bank, the latest Islamic bank in the Kingdom, and in Bank Al-Bilad, another dedicated Islamic bank in Saudi Arabia.
In Indonesia PT Principal manages pension fund investments in Shariah-compliant instruments; and in South Africa pensions funds including those run by Sanlam invest in the Shariah-compliant equity offerings of Oasis Asset Management including the Crescent Equity Fund, which invests in South African stocks, and the Crescent Global Equity Fund domiciled in Dublin and which invests in a global equity universe with a heavy weighting in selective US stocks.
However, Malaysia's EPF has set the benchmark and is probably one of the most important investors in sukuk. According to Kamaruzaman, the fund believes in sukuk as an investment product and likes the competitive pricing and price discovery transparency.
EPF is indeed one of the biggest investors in ringgit-denominated sukuk. At the end of 2005, EPF investment in sukuk was 29.75 billion ringgits. This figure increased by 81.9 percent by the end of 2008 to 54.14 billion ringgits. By the end of 2010, the EPF sukuk portfolio is projected to increase to a staggering 75 billion ringgits, this time not confined to ringgit issuances but also US dollar issuances.
These figures, emphasized Kamaruzaman, does not include sukuk holdings by asset management companies that manages EPF funds estimated at about 3.7 billion ringgits at the end of 2008.
The top five sectors of investment in corporate sukuk at the beginning of 2009 were in the power sector (10.31 billion ringgits); Islamic financial institutions (6.53 billion ringgits); telecommunications (5.93 billion ringgits); services (5.09 billion ringgits); and infrastructure (4.85 billion ringgits) respectively. Hence, according to Kamaruzaman, the growth of the EPF sukuk portfolio has far outstripped the growth of EPF fund size and this has made EPF the largest single local investor and one of the largest global investor in sukuk.
EPF's activities in the sukuk market is not confined to purchases in primary issuances. Secondary trading in the sukuk market, albeit largely ringgit trading, is very active and led by such entities as EPF especially in the current market as investment appetite is insufficient to purchase sukuk in the primary market alone and at times sales of sukuk are also made to rebalance portfolios and tenors. In 2008, EPF's secondary market purchases of sukuk totaled 3.02 billion ringgits.
Under the Malaysia International Islamic Finance Centre (MIFC) initiative, EPF is required to invest up to $1 billion in global sukuk via placements through Islamic asset management companies licensed by the Securities Commission of Malaysia, the securities regulator.
