The idea of a supra-sovereign wealth fund was suggested by
Malaysian Finance Minister, Ahmad Husni Hanadzlah, at the 35th Annual Board of
Governors Meeting of the IDB which was held a few weeks ago in Baku,
Azerbaijan. The fact that neither the IDB governors nor its board took the
suggestion forward is reflected in the official communiqués in which the notion
of a supra-SWF is completely ignored. Even in his closing speech, IDB President
Ahmad Muhammed Ali did mention it at all.
“The recent economic crisis,” stressed Minister Hanadzlah,
“has brought forth fundamental changes in the global economy. The realignment
in the global economic balance is shifting investment fund flows from the West
to the East. The developing nations will be the world’s future source of wealth
and centers of prosperity. The combined Muslim economies of Asia, Middle East,
Central Asia and Africa (MAMICA) are contributing significantly to global
growth.”
Malaysia’s suggestion is for the IDB to position itself as
an intermediary and conduit of capital, technical resources and advice —
forging investment partnerships, particularly encouraging Shariah-compliant
investments between the MAMICA economies and the wealthier member countries of
the Muslim world’s multilateral development bank. “Let us consider the
establishment of the world’s first supra-sovereign wealth fund. On behalf of
the high-income economies, the Fund is to invest in MAMICA manufacturing
services, natural resources and portfolio investment sectors, providing returns
that are compatible to the global SWF industry,” explained Minister Hanadzlah.
Malaysia maintains that this initiative would also reinforce
the IDB’s role as a catalyst of change in its member countries. The IDB has one
of the most diverse memberships of all multilateral organizations. It has some
of the world’s richest countries per capita per income, and some of the poorest
nations on earth amongst its ranks. In fact over 21 member countries of the IDB
are classified as LDCs (Least Developed Countries) according to UN poverty
criteria.
The profits from the Supra-SWF in excess of a
mutually-agreed threshold, according to the Minister, can be channeled into a
low-yield fund to finance capacity-building programs in the less-privileged
Muslim countries. “Collectively, we have the capability to empower our less
fortunate brothers, to provide them the resources to build a common future of
shared prosperity. I am convinced the IDB’s position can be further strengthened
as an important champion of economic empowerment for the Muslim World,” added
Hanadzlah.
But his assertion that “the diversity of the IDB membership
is the source of our strength as well as our challenge” has already got the
cynics dismissing the idea. According to some Islamic bankers the idea of the
supra-SWF will not fly because of lack of unity, poor and non-transparent
political and economic governance and the past experience of such intra-Arab
organizations such as the Arab Monetary Fund (AMF) and BADEA (Arab Fund for
Economic Development), albeit they were not classical SWFs. These institutions
were badly managed, inefficient and prone to all sorts of petty nationalisms
and shenanigans.
Others stress that the IDB member countries are too risky
and do not have quality deal pipelines and assets to invest in which could
absorb the huge investment liquidity involved. This is particularly so if the
portfolios are restricted to Shariah-compliant investments. They also point to
a serious shortage of qualified project and investment appraisal expertise in
the IDB member countries. This means that if such as supra-SWF were to be
established, it would in general have to rely on personnel from the
conventional sector and from developed countries.
The above assertions smack more of an inverse economic
colonialism and entrapment.
The SWFs lost billions of dollars as a result of their
investments in the likes of Citigroup, Barclays etc. Some of these have been
recovered as the global economy emerges from recession, albeit painstakingly
slow.
The main problem with the Muslim SWFs is that of moral
ambivalence. On the one hand they want to be Muslim, but when it comes to
money, investments and returns, then their Islam flies out of the window. They
become as aggressive as their conventional counterparts in pursuing mammon and
the single-minded pursuit of profit and return maximization. This is the same
logic of the pious Muslim who prays five times a day; performs Haj, gives
Zakat, but when it comes to money he worships riba (interest).
Many Muslim SWFs frown upon Islamic finance as unworkable or
to be tolerated for political or socio-religious reasons. The challenge for the
likes of Malaysia’s SWF, Khazanah Nasional Berhad, is to prove to their
counterparts in the OIC countries that investing in Shariah-compliant assets
are as competitive and profitable, if not more, as in any other assets. This is
why Khazanah has now embarked on a strategy that sees its investment in
Shariah-compliant assets as its mainstream activity and investments in
conventional assets as the alternative strategy. This is an important
investment mindset change that needs to be nurtured amongst all the Muslim
SWFs, especially if the concept of a supra-SWF is going to take root.
Of course, the IDB itself can be construed as a form of
supra-SWF involved in promoting the economic development of its member
countries and boosting intra-Islamic trade. There is no reason why a Fund of
Funds subscribed to by SWFs could not make modest contributions to selected activities
and sectors in IDB member countries based on market risk-reward return
criteria. The caveats
According to the latest rankings of the Sovereign Wealth
Institute (SWI) published in August 2010, there are currently 24 listed Muslim
sovereign wealth funds (SWFs). They have estimated total assets in excess of
$1.6372 trillion.
By far the largest Muslim SWF is the Abu Dhabi Investment
Authority, the world’s single largest SWF in terms of assets estimated at $627
billion. The Foreign Holdings of SAMA (Saudi Arabian Monetary Agency) amounts
to $415 billion, followed by the Kuwait Investment Authority’s $202.8 billion,
and the Libyan Investment Authority’s $70 billion.
Malaysia’s Khazanah which has estimated assets in excess of
USD25 billion is a more marginal player compared to the above four. This means
that it is less influential unless of course the concept of the supra-SWF is
taken up at a government-to-government level. In that case the participation of
Abu Dhabi, Saudi Arabia and Kuwait is essential.
Khazanah Nasional is the investment arm of the Malaysian
Ministry of Finance and is the most proactive SWF investor in the Islamic
finance space. Earlier in August 2010, Khazanah forayed into neighboring
Singapore’s Islamic capital market with a landmark SGD1.5 billion sukuk.
Khazanah’s sukuk portfolio, prior to the SGD issuance, totaled an impressive
RM30bn and in 2009 it took a strategic 25 percent investment stake totaling
$150 million in Fajr Capital, a Dubai-based Islamic investment firm, and completed
the acquisition of a $76 million acquisition of a 10 percent stake in Jadwa
Investment, a leading Shariah-compliant investment company in Saudi Arabia.
According to Mohammed Tariq, Senior Adviser to the IDB
President, the multilateral bank is in negotiations with the Arab and Muslim
SWFs to play a greater investment role in the Islamic finance sector.
The Middle East in fact accounts for 44 percent of SWF
assets under management, compared with 35 percent for Asia, 17 percent for
Europe, 2 percent for the Americas and 2 percent others. On a weighted average,
Saudi Arabia’s SWF assets are projected to increase to $1.27 trillion by 2013,
and the global SWF potential to hit between $4 and $5 trillion.
A Sovereign Wealth Fund (SWF) is a special purpose investment
fund or vehicle with large pools of capital generally owned and controlled by
the Government and composed of financial assets such as stocks, bonds, real
estate, or other financial instruments funded by foreign exchange assets. These
assets can include balance of payments surpluses, official foreign currency
operations, the proceeds of privatizations, fiscal surpluses, and/or receipts
resulting from commodity exports such as oil, gas and palm oil. They typically
invest in overseas assets by can also invest in state-owned enterprises and
more recently in selected domestic companies usually on a long-term basis. SWFs
should not be confused with official foreign exchange reserves and other such
reserves, state-owned enterprises (SOEs) and government pension funds.
