New asset classes for Islamic investments

MENAFN.COM | 29/06/2009

(MENAFN - Arab News) The water industry and agriculture are emerging as major new asset classes for Islamic financial institutions, especially in the field of sustainable investments. This is despite the fact that the Islamic finance industry in general has hitherto not followed carbon neutral or carbon-friendly investment strategies.

In the aftermath of the global financial crisis and the increasing disconnect between finance and the real world, there has been a clamor for the banking sector to contribute more to the real economy instead of gambling in risky and complex derivatives. Islamic finance has been unscathed by the lack of any direct exposure to risky derivative investments, but it has been impacted by the knock-on effects on the economies of Muslim countries hampered by a credit crunch, high commodity prices, a collapse of the real estate market and burgeoning unemployment.

Islamic bankers like to stress that their activities are more connected to financing the real economy, although this is not necessarily the case. Otherwise the sector would be heavily involved in sectors such as oil, gas, energy, petrochemicals, technology, palm oil etc, which it currently is not. Whether this new-found trend in targeting the water and agriculture sectors is a departure remains a moot point.

Some banks such as Arcapita Bank, the Bahrain-based Islamic investment bank, have pioneered private equity investments in renewable energy companies such as Innogy UK, the British subsidiary of German wind-farm company. Arcapita at one stage also had equity interests in two UK-based water utilities. More recently, Gatehouse Bank PLC, the UK-based Islamic investment bank authorized by the Financial Services Authority (FSA), together with Sustainable Asset Management (SAM), launched the first Shariah-compliant water-focused investment strategy. The aim of the so-called "Islamic finance water strategy" is to offer investors with a long-term time horizon the opportunity to invest in a Shariah-compliant way in sustainability-oriented companies that offer technologies, products and services throughout the entire value chain of the water industry.

Gatehouse Bank will do the Shariah screening of the water industry companies, while SAM, which has more than 14 years of experience in the management of sustainability investments especially in the water-focused area, will attend to the asset management aspects of the strategy. According to David Testa, CEO of Gatehouse Bank, the worldwide market for water is characterized by its above-average growth potential. Global developments such as population growth, investments in the renewal of water-resource infrastructure, the strategic need for potable water, as well as efficient water management will represent significant growth drivers in the years ahead.

Water of course is a major challenge in the Muslim as in the rest of the world, where dire shortages are predicted over the next few decades. Jeddah Municipality for instance is building a huge $3.5 billion desalination plant in Shuaiba which will meet Greater Jeddah's water requirements for the next few decades. The Kingdom's commercial capital in fact will undergo a major SR30 billion facelift over the next five years.

Abdulgader Amir, vice mayor for Planning and Urban Development, Jeddah Municipality, has confirmed that the city "lacks fresh water and sewage facilities in large parts of the city. But work has started on a comprehensive sewage system for the whole city which will be completed in three to five years time. Similarly, a huge desalination plant is being built in Shuaiba which should be finished in the next three years."

But what is conspicuous is the absence of Islamic finance in financing this urban regeneration. "We would welcome the participation of Islamic banks. We would look at the various proposals made and based on value-for-money, cost effectiveness and efficacy. There is a considerable amount of liquidity in the market. We will definitely welcome any initiatives and suggestions from the Islamic finance sector. We are an open market and open to any viable financing options," explained the vice-mayor.

In the agricultural sector, it is Bahrain-based Gulf Finance House (GFH), together with its partners, Abu Dhabi Investment House and Ithmaar Bank, that are pioneering the Vision3 concept of long-term sustainable investments in the agricultural sector.

GFH has over the last three years pioneered a similar private equity concept in launching a series of "Energy City" hubs in Qatar, Kazakhstan, Mumbai and Libya. The agriculture sector investment strategy was first announced late last year when Vision3 signed a landmark deal with the Investment Support and Promotion Agency of Turkey (ISPAT) paving the way for nearly $9 billion investment in Turkey's agricultural sector, through a specialized investment entity called AgriCap, which will have a capital of $1 billion.

The investment is primarily focused on enhancing the massive agricultural projects like GAP, the South East Anatolia Project and the Konya Plains Project.

However, the GAP Project could prove problematic because Iraq and Syria have repeatedly in the past two decades objected to the building of the main Ataturk Dam which they stressed was affecting the flow the of the Tigris and Euphrates Rivers southward.

In late June 2009, GFH, ADIH and Ithmaar Bank signed a preliminary agreement with Morocco's largest bank, Attijariwafa, to establish a similar AgriCap Invest, a specialized food and agriculture focused investment institution, to investment in the agricultural and agri-business industry in Morocco and neighboring Maghreb countries.

Vision3 Chairman Esam Janahi stressed that "the current and future demands on the regional agriculture sector cannot be overstated. Growing populations, changing weather patterns and increasing demands on finite water resources mean that food and commodity prices are expected to increase over the coming years. Now more than ever, agricultural initiatives will need the support of specialist financial resources."

By Mushtak Parker
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