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BGI launches first Shari’ah-compliant ETFs on London Stock Exchange

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Barclays Global Investors has launched the first ever Shari’ah-compliant exchange-traded funds on the London Stock Exchange’s Main Market, enhancing the choice of Shari’ah-compliant produc

Barclays Global Investors has launched the first ever Shari’ah-compliant exchange-traded funds on the London Stock Exchange’s Main Market, enhancing the choice of Shari’ah-compliant products available in London and underlining the City’s emerging role as an important centre for Islamic finance as well as adding to the range of London-listed ETFs.

The three funds launched yesterday are the iShares MSCI World Islamic, the iShares MSCI USA Islamic and the iShares MSCI Emerging Markets Islamic, based on Shari’ah-compliant versions of three MSCI indices.

The Islamic indices screen out companies whose business activities involve earning or paying more than an incidental amount of interest, arms manufacturing or dealing, tobacco, alcohol, pork-related products, gambling and certain other forms of entertainment prohibited under Islamic law.

According to Rory Tobin, chief executive of iShares Europe, the effect of these restrictions is to increase the exposure of the index to sectors such as technology and raw materials, and diminish the weighting of financial services and certain types of media.

Over one, three and five, the performance of the Islamic indices is slightly superior to that of their non-Shari’ah counterparts, mostly because of the under-performance of financial stocks, according to Dimitris Melas, head of EMEA equity and applied analytics research at MSCI Barra.

The funds’ compliance with Shari’ah requirements will be reviewed annually by a newly-created Shari’ah Panel, consisting of distinguished Islamic scholars Dr Mohammed Elgari, Sheikh Nizam Yacuby and Dr Abu Ghuddah.

While the indices are reviewed by MSCI’s own Islamic advisers, the Barclays panel will supervise the operational infrastructure of the funds, including clearing and settlement. For example, BGI will seek to avoid interest-generating events such as overdrafts or the running of cash surpluses. Where this is unavoidable, BGI rather than the fund takes responsibility for the payment or receipt of interest.

The panel will also review products on behalf of Barclays Capital and Barclays Wealth as the group seeks to ‘become more efficient and proactive in the Islamic financial space’, according to Lindsay Tomlinson, vice-chairman of BGI Europe.

‘The creation of the panel will help shape a modern Islamic finance business,’ he says. ‘It will be possible to go ‘off-panel’ if a client wants to appoint its own Islamic scholars, but otherwise we expect to use the panel for the vast majority of Barclays Islamic products.’

Tobin says the launch of the iShares MSCI Emerging Markets Islamic in particular will create significant new opportunities for Islamic investors. ‘Historically it has been difficult for Shari’ah investors to achieve diversification in emerging market jurisdictions,’ he says.

‘To buy or sell emerging markets in a Shari’ah-compliant manner involves very significant decision overheads,’ with each investment having to be separately ratified as compliant. ‘Now investors can buy or sell emerging markets in a single transaction.’

One issue faced by BGI and the panel is how to deal with the proportion of dividends received by the funds that are considered impure because they are derived from interest-generating activities, but are not significant enough to disqualify the company in question from membership of the index.

Some funds in this position simply donate all the ‘impure’ dividends to charity, but Tobin says: ‘We calculate what proportion of the dividends is pure and impure, and leave it to the investor to decide what to do.’

David Shrimpton, head of product management and development at the London Stock Exchange, says: ‘It is great news that iShares has decided to list its first Shari’ah-compliant ETFs on the London Stock Exchange’s Main Market.

‘The launch marks another important step in London’s development as a global centre for Islamic finance. For the first time both British Muslims and the growing number of investors from the Middle East accessing our markets can benefit from the low-cost, instant diversification offered by a range of ETFs while investing in a way that is consistent with Shari’ah principles.

‘The range of Shari’ah-compliant products listed on the London Stock Exchange’s Main Market continues to grow. In the past year and a half we have admitted 14 Islamic finance instruments, or sukuk, to trading on our markets, which have raised in excess of GBP5bn.’

Shrimpton says the exchange is playing a key part in the drive by the UK government and the City to enhance London’s position as a global gateway for Islamic finance, It is part of the UK Treasury’s Islamic Finance Experts Group, which is currently examining the feasibility of the UK government becoming an issuer of wholesale sterling Islamic financial instruments.

He adds that the UK was the first European country to develop a tax system designed to remove obstacles to the development of Islamic finance and also the first to authorise wholesale and retail Islamic banks.

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