MANAMA: The Kingdom of Bahrain’s mutual funds industry is one of the fastest growing segments of the overall financial sector. With more than $7 billion in assets under management, through more than 2,800 funds, the industry has been growing at steady base in recent years, according to CBB official.
“Overall, there are 92 Islamic funds that are incorporated and registered in Bahrain with total assets amounting to US$1.5 billion as of March 2014,” Abdul Rahman Al Baker, Executive Director of Financial Institutions Supervision told the Islamic Funds Conference opens on Monday in Manama.
The CBB, he added, through its enabling legislation, promotes the development of new products for investors in both Islamic and traditional finance, while at the same time providing credible regulation in both areas.
“The existing regulatory framework for Collective Investment Undertakings (CIUs) has provided for a full range of investment funds catering to various types of investors, from retail to high net worth individuals and institutional investors. In order to further enhance the existing CIUs framework, the CBB has issued Volume 7 Rulebook which provides a comprehensive rules and regulations pertaining to the authorization and supervision of CIUs domiciled or offered for sales in Bahrain. The regulation has recognized the importance of expanding key areas such as the corporate governance, as well as the role and responsibilities of each relevant party of a scheme. It also expands the variety of funds that can be established in Bahrain, by introducing rules governing Real Estate Investment Trusts (REITs) and Private Investment Undertakings (PIUs). Private Investment Undertakings are new breed of invsetment funds with a high degree of flexibility in structuring, aimed basically to facilitate private investments, the like of a family held investment, single investor or a single investment type. Due to the investment risk characteristics it may exhibit, such type of scheme can only be initiated to High Net-Worth Individuals and Institutional investors.
“In keeping with Bahrain’s leadership in Islamic finance, the CIU rules also provide a solid foundation for the establishment and management of mutual funds that comply with Sharia principles,” he added.
Furthermore, he said, the CBB has recently issued the Module on Issuing and Offering of Securities and Sharia-compliant Sukuk (OFS Module) offered through public or private placements in or from Bahrain, as a part of Volume 6 Capital Market Rulebook. The OFS Module contains detailed rules and regulation that covers the issuing, offering, floating and subscribing to different types and classes of securities, including Sharia compliant securities. The Module also provides the procedures and documentation that need to be submitted by the issuer as a part of their application to obtain the CBB approval in this regard.
He said the CBB was in the process of finalizing the regulation governing the authorization and supervision of Sharia Advisory Services companies, as a part of Ancillary Service Providers Module under Volume 5 Rulebook, that will help those small Islamic Investment institutions and collective investment schemes to outsource their Sharia review to these entities in order to enhance their operation and reduce the costs of such services. The services of those companies include the evaluation of financial institutions level of compliance to the Sharia principles as well as the issuance of Sharia pronouncements on any aspect of the Islamic financial institutions activities and operations.
The CBB, he stressed, having pioneered the development of sukuk, remains active in the sovereign sukuk market through the issuance of medium to long term sukuk, complemented by a regular program of short term issuance.
It is the CBB’s hope that such initiatives will go a long way in harmonizing market practices and further enhancing the Islamic capital market.
Generally, he said, the potential size of Islamic finance market is vast, and the accelerated establishment of Islamic finance hinges on attracting the flow of these potential funds into Islamic investment. “However, it is important to ensure that Islamic funds and investment industry have solid and strong foundations for future development and growth.”
“In order to further enhance the growth and expand the Islamic Investment industry, there are several factors that need to be taken into consideration. First, there is a need to build a financial system that would be able to facilitate efficient capital and trading flows. This requires further development of an Islamic financial system which has the entire required infrastructure that includes: (i) Islamic financial Institutions ranging from banking, takaful, capital market, fund and wealth management entities, (ii) creating a conducive legal and Sharia framework, and (iii) a financial system that has a comprehensive range of Islamic products and services.
“Having an active Islamic financial market is one of the contributing factors that will further enhance the growth of Islamic investment industry. Basically, a vibrant Islamic financial market will facilitate fund raising and investment activities and will enhance the creation of primary and secondary markets for Islamic financial instruments. In this regard, some progress has been achieved.
“Second, it is critical for Islamic financial institutions to better understand the clients and their needs for financial products and services, as such understanding will help to further expand the horizons of Islamic market. For example, the investment of Islamic financial institutions should shift focus from key-holdings constituting long term assets with large amounts of real estate, toward new asset classes and markets.
“Third, it is important to adopt proper corporate governance in the Islamic investment industry in order to enhance the confidence of the investors and to ensure that markets are fair, efficient and transparent. This includes having proper disclosures requirements of all terms and conditions of the Islamic products, as well as transparency in disclosing financial information and indicators.
“Creating adequate regulatory framework for Islamic investment products is another factor to further strengthen the Islamic Investment Markets. Such regulation should create the necessary framework for investment products targeting small, medium size, as well as accredited investors, who wish to invest their funds in accordance with Sharia principles. This regulatory framework should also cater for wide range of Sharia compliant investment products that include equity, sukuk, and various types of Islamic funds.
“Fourth, it is important to have sufficient number of professionals that are well versed in both the capital market and Sharia knowledge to further develop the Islamic investment industry. This, in turn, will further enhance the products development and improve the services to investors in the Islamic capital market.
“Another critical issue that needs to be addressed is related to the development of robust national and international liquidity infrastructure, which is currently still underdeveloped in most of the jurisdictions in which Islamic financial services are offered. The development of such framework is necessary not only to reduce the cost of intermediation, but also will enhance the availability of liquid Sharia-based Islamic financial market instruments in the financial system and achieve efficient money market operations for Islamic financial players.
“It is important to further encourage more spending on research and developments, in order to further enhance the contribution of the Islamic financial industry in the global market.”