Malaysia leads global Islamic Funds recovery with $140bn AUM forecast

By Puja Sharma

In Malaysia, which has one of the most advanced Islamic finance ecosystems, the Islamic repo market is far less developed than the conventional repo market with only around 1% of the total Islamic money market volume.

Global public Islamic funds’ AUM likely to bounce back; Malaysia in the lead.

The assets under management (AUM) of public Islamic funds globally are expected to bounce back to the 2021 peak of about $140 billion in the next two-three years, with Malaysia having the highest concentration of funds, Fitch Ratings says in a new report.

As per a report Islamic banks’ usage of Islamic repos and its harmonisation is generally low due to lack of standardisation and differences of opinions in terms of sharia-compliance. In Malaysia, which has one of the most advanced Islamic finance ecosystems, the Islamic repo market is far less developed than the conventional repo market with only around 1% of the total Islamic money market volume.

A lower interest rates is forcasted (US policy rate 2024F: 4.75%; 2025F: 3.5%), which will likely increase appetite for investments in emerging markets, including Islamic funds. However, macroeconomic fluctuations and geopolitics could bring volatilities.

“The fund management industry is still in the relatively early stages of development in the Gulf Cooperation Council (GCC) and underdeveloped in most OIC countries except for Malaysia. Islamic funds are even at an earlier stage of development due to limited products, lack of economies of scale, differences in sharia interpretation and shortage of human capital,” said Bashar Al-Natoor, Global Head of Islamic Finance. “Private Islamic funds are expected to be much larger than public funds, with real estate being one of the key asset types. However, there are less disclosures and transparency that would allow us to measure the industry size.”

Public Islamic funds globally held over $111 billion in AUM at end-2023, up 3% yoy. These are concentrated in Malaysia (28.3%), Ireland (18.1%) and Saudi Arabia (17.2%). However, Islamic funds, by count, are more granular, with Malaysia’s share at 36.8%, followed by Indonesia (16.9%), Pakistan (15.3%) and Saudi Arabia (12.8%). This classification is based on the funds’ domiciled country and Lipper data, which may not capture all private funds.

In the GCC countries, Islamic funds were close to 80% of total public funds at end-2023, supported by demand from sharia-sensitive investors, with balance by conventional funds. Islamic funds’ share reached 49% in Pakistan, 33% in Malaysia and 8% in Indonesia. The largest public Islamic funds by AUM were equity funds (36.3%), money market funds (20.9%) and sukuk funds (10%). A number of funds and indices exclude sukuk if they do not comply with AAOIFI sharia standards.