Ninety percent of Shariah compliant indices will be customized in the next five years (By IFN)

Ninety percent of Shariah compliant indices will be customized in the next five years

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GLOBAL: Shariah compliant indices are fast gaining ground in the investment universe as investors seek more transparency. Fund managers are also looking at ways to broaden their investment universe, with customized indices expected to take the reins moving forward. Mohamed Donia, CEO of Ideal Ratings, a global provider of Shariah screening and fund management services believes that the current disparity between investment guidelines and indices will be a major roadblock in the industry if it is not quickly addressed on a global scale. “Index requirements for a Shariah compliant fund are rather tricky, because the index is based on a specific set of rules or investment guidelines, or Shariah rulebook based on a specific Shariah board. This is not just a problem in the Middle East, but a problem everywhere, and it is a very difficult problem to solve,” he said. Different institutions at present have different views in terms of what elements should be present in terms of screening, creating different sets of guidelines, which will be benchmarked against a certain index. The fund manager in turn will screen the companies against the investment guideline, and invest in it, and then benchmark it against the index which already has a different set of pre-existing rules for screening. “Therefore, the benchmark is not truly a benchmark, and the difference between the rules within the investment guidelines and what is in the index will create a variation. And due to the different views in the industry, there needs to be an index with the same exact rules as the mandate to be able to truly benchmark against the fund manager. This has created the need for customized indices. Customized indices are essentially based on the same exact rules as the investment guidelines and are on the same level, which will enable fund managers to make a true comparison of performance,” he added. Mohamed Donia also believes that customized indices will constitute over 90% of the Shariah compliant index universe, moving forward as there has not been any momentum for a single view on a rulebook within the industry. He said: “There are about 50 to 60 rulebooks worldwide, and this is absolutely fine, because there are different opinions and schools of thought, however this has created the need for customized indices, no doubt.”