Oil dive drags sharia-compliant funds down

The fall in the oil price has claimed another victim. Sharia-compliant funds have suffered their worst sales in four years as the price of oil plummets and tensions in the Middle East spook investors.

Sales of the products, which avoid companies that make money from the sale of alcohol, pork and pornography, as well as meeting other principles of Islamic finance, fell more than 75 per cent last year compared with 2014, The Financial Times reported on Sunday.

The slowdown is a big setback for the fledgling $60bn Islamic fund industry, which only began finding its feet in recent years, and raises questions about the products’ prospects.

“The money is not flowing into Islamic fund managers,” says Mustafa Adil, head of Islamic finance at Thomson Reuters, the data provider. “People are not as bullish as they were in previous years. And that will have an impact on growth.”

As recently as 2013, the Islamic fund industry was growing at a rate of 10 per cent a year.

However, because a large number of investors in Islamic funds are based in countries dependent on oil or commodities for their wealth, the fall in the price of oil has had a large impact on sales, says Tariq Al Rifai, executive director of Failaka Advisors, a consultancy that specialises in Islamic finance.

The price of oil has more than halved since the middle of 2014, dropping to under $30 a barrel last week.

“This has caused investor confidence to go down and resulted in them pulling their money out of Islamic funds,” says Al Rifai.

Just $584m was invested in sharia-compliant funds globally last year, compared with almost $2.4bn in 2014, according to Morningstar, the data provider.

Adil says the challenging political situation in the Middle East and north Africa, where the regions are grappling with the rise of Daesh, the terrorist group, and tensions between Saudi Arabia and Iran, has dented sales of sharia-compliant funds further.