Global woes to turn spotlight on sharia funds

By Liau Y-Sing

KUALA LUMPUR (Reuters) - Rising risk aversion will force a flight to conservative Islamic investing, with Asia's $20 billion (13 billion pound) sharia fund market likely to be led by the Middle East, Brunei, Kazakhstan and Indonesia, a fund house said on Friday.

Once a niche market serving devout Muslims, Islamic finance has become popular with investors as the world financial crisis prompted some to rethink the merits of conventional banking.

Sharia bonds and stocks have met with approval as financial market participants trade high returns for greater security. But regulators and bankers warn that Islamic finance will take a hit as the global economy tips into a severe downturn.

"The whole sentiment towards risk has actually shifted," Deborah Ho, director of sharia fund house Asian Islamic Investment Management, said in an interview.

"The world environment has changed so much that it is back to simplicity, back to transparency and no bells and whistles. The natural effect of Islamic products is that you, by nature, cannot do anything too funky anyway."

Islamic investing has to conform with the sharia, which dictates that venture partners share profits and losses and investments should be ethical and avoid excessive risk.

Asian Islamic, with a 10 million ringgit capital base, is 51 percent-owned by Singapore's DBS Asset Management with the remainder owned by investment bank Hwang-DBS Malaysia Bhd. DBS Asset Management is a unit of DBS (DBSM.SI)

The Asian sharia fund management market, which has tripled since 2002, would keep rising due to demand from Muslims and the Middle Eastern petrodollars despite a recent sharp drop in energy prices, Asian Islamic chief executive Nor Azamin Salleh said.