Introduction to sharia-compliant investment

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Introduction to sharia-compliant investment

Assets in Islamic financial instruments have grown by an average of 15% per year over the past six years, and currently stands an estimated USD 950 billion. It is expected that the islamic finance will continue to grow at this rate for the next few years and that total assets in Islamic finance could reach USD 1.5 trillion by 2012.
Such a growth is supported not only by large muslim population in the world, but also non-islamic market who see the sharia-compliant products as alternative ethical products.
The demand for Islamic banking and Islamic products is increasing, especially in Turkey, and these products and services are being introduced by well known financial institution.  As Patrigest, we offer shariah comliant investment funds that invest in a wide range of asset classes such as equities, commodities and real estate.
Islamic Finance Concept
The Islamic financial system is founded on the absolute prohibition of the payment or receipt of any predetermined, guaranteed rate of return. This closes the door to the concept of interest and precludes the use of debt-based instruments. The system encourages risk-sharing, promotes entrepreneurship, discourages speculative behavior, and emphasizes the sanctity of contracts.
An Islamic financial system can be expected to be stable owing to the elimination of debt-financing and enhanced allocation efficiency. A “two-windows” model for Islamic financial intermediaries has been suggested in which demand deposits are backed 100 percent by reserves, and investment deposits are accepted purely on an equity-sharing basis. Analytical models demonstrate that such a system will be stable since the term and structure of the liabilities and the assets are symmetrically matched through profit-sharing arrangements, no fixed interest cost accrues, and refinancing through debt is not possible.
Allocation efficiency occurs because investment alternatives are strictly selected based on their productivity and the expected rate of return. Finally, entrepreneurship is encouraged as entrepreneurs compete to become the agents for the suppliers of financial capital who, in turn, will closely scrutinize projects and management teams (source:Institute of Islamic Banking and Insurance).
Patrigest’s Alternative Investment Products
The most common forms of Sharia-compliant Investment products that PATRIGEST offers are commodity and equity products. Please find below current investment products that Patrigest offers to its clients.
Product 1(Commodity). Islamic Certificate linked to RBS Crescent VC Commodity Navigator Index 
Brief Product Description:  A 18 months TL denominated Islamic Certificate seeking 100% capital protection through a Sharia-compliant mechanism and linked to the performance of the Crescent Commodity Twister Strategy. The proposed strategy linked to the growth prospect of metals, agriculture and energy sectors.
Product 2(Equity). Islamic Certificate linked to Participation Index (Katilim Endeksi)
Brief Product Description (indicative):  A 2 year TL denominated Islamic Certificate seeking 100% capital protection through a Sharia-compliant mechanism and linked to the performance of securities in the participation index.
Participation Index is a stock index formed of securities traded at Istanbul Stock Exchange National Market and conforming to Participation Banking principles. Securities are selected based on Index Rules set up according to Participation Banking principles. Accordingly, the index covers companies that are not active in the fields of interest-based financing, trade, services, intermediation (banking, insurance, financial leasing, factoring and other interest-based activities), alcoholic drinks, gambling, games of chance, pork and similar food, press, publication, advertisement, tourism, entertainment, tobacco products, weapons, futures gold, silver and currency trades.
Moreover, companies are required to achieve some financial rates in order to take part in the index. The rate of total interest loan rate of companies to market value shall not be lower than 30%; the rate of interest bearing cash and securities to market value shall not be lower than 30% and the rate of income from above mentioned fields to total income shall not be lower than 5%. Top 30 companies with the biggest public market value of such securities constitute the index companies. For more information on Katılım Endeksi you may look at website www.katilimendeksi.org.
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Emerging markets : the new hope ?

September 2010

Since 2008, investor’s view on emerging markets has rapidly changed. Today, the « bad students » have surpassed their « masters », which committed every possible mistakes. Let’s illustrate it with a simple example : when the IMF has to rescue Greece – a member of the EU, defined as a developped country – Turkey refused the extension of IMF’s funds. What a paradox ! The growth of emerging economies continue his way while european countries have to fix austerity plans. One thing is sure ; emerging countries saved the global economic growth of an almost total blackout.

 

Figure 1 : Emerging Markets Vs Developed Economies

The chart above shows the growth of both MSCI Emerging Markets (composition : Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela

, Bloomberg ticker : MXEF:IND, in green) and MSCI World Index, composed of the most developed economies (Composition : Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, United Kingdom, United States

, Bloomberg ticker : MXWO:IND, in orange). The comparison is quite easy ; emerging markets have passed the financial crisis with less damages. The MSCI world index increased by circa 50% between february 2009 and september 2010, while the MSCI EM index doubled during the same period. Another statistical comparison ? In the last ten years, the ROI of the MSCI Emrging Markets Index is about 8,8% (in USD) versus -2% for the MSCI World Index. What else ?

Statistics aside, emerging markets show three other relevant advantages, compared to developed economies : land, capital and population.

By Land, I mean the concentration of natural resources, their strategic location and the quantity of arable land. 80% of these resources are based in emerging countries.

By capital, I mean « cost of capital ». Firstly, today developed economies have to pay more for their sovereign debts than emerging markets. Secondly, sovereign debt of emerging markets represents only 6% of the global debt. Finally, capital is also measured by FDI, whose biggest recipients are emerging markets.

By population, I mean the young and growing population of emerging countries, which lead to an increase in incomes per capita, increasing by the way the consumption and, of course, the GDP. This is certainly the most important item.

In short, in the one hand. what we usually call developed countries will have to pay for their debts. In one way or in another, taxpayers will have to pay the bill (with more taxation or inflation). In the other hand, emerging countries present a growth of 5-7% a year, with a growing population, per capita income and GDP.

What do you wanna do now ?