Falah Capital sparks US Islamic finance?

The most far reaching Islamic finance news in early April was the announcement by US-based Falah Capital to launch the “first in a series of Shariah-compliant index funds…structured as Islamic exchange-traded funds (ETFs) that will match the requirements of specific institutional and individual investors”.

Why is Falah Capital’s announcement important for both Islamic finance in the US and Islamic equity investing?

In Islamic finance, the backers of the project are often times more important than the project.

Why? Islamic finance places much emphasis on due diligence as there are “no guarantees” and “no risk shifting”. Hence, much focus is on credibility, trust and confidence on the backers, and then the undertaking.

In the case of Falah Capital, the chairman of the Advisory Board is Dr H Robert Heller, the former governor of the US Federal Reserve. To convince such a high-profile person to be a “stakeholder” in the project says much about the merits, confidence and credibility of the project.

Heller noted: “The timing is very attractive and the evolution of Islamic ETFs is starting to swing higher, which makes our proposition very exciting for investors in multiple jurisdictions.”

His comments implies (1) understanding of the investing landscape, where cost savings in passive investing becomes inevitable in a bias world of active managers, and (2) the cross border interest in index/ETF investing with underlying exposure to large capitalisation US market, especially when there is an attractive post purification dividend yield for entities like Malaysia’s Haj Fund, Tabung Haji.

The involvement of the world’s leading research- based Shariah screening provider, Ideal- Ratings, backer of the SAMI Halal Food Index, and high profile Russell Indexes, globally known for its Russell 2000, provides comfort of methodology transparency to investors in the US and beyond. The key lesson learned from my days at Dow Jones Indexes, credible Islamic indexes, is continued Shariah-compliance of companies, hence, quarterly review and monitoring for corporate actions. The “tag team” of Russell and IdealRatings is Triple A credibility!

Next, the Shariah-compliance will be undertaken by the well-known and respected organisation, Shariah Review Bureau. It is an independent Shariah advisor to institutions from UK, Canada, Switzerland, Hong Kong and Gulf Cooperation Council, and covers aspects of the global capital markets; equity, fixed income, multi-asset, and alternative investments. The key take-aways are independence, and exposure to geographies and capital market instruments, hence, an ideal Shariah entity to work with on research and product development.

Mohamed Donia, CEO of IdealRatings and Advisory Board member of Falah Capital, stated, “[H]iring a Shariah advisor like Shariah Review Bureau is very important to the nature of our work especially with their strong track record in Shariah-compliance management and an international footprint.”

Finally, the undertaking is majority backed by the Seattle, Washington-based Polson family, “one of Seattle’s oldest merchant groups; with historical links to agriculture, mining, timber, real estate, and financial services”.

Obviously, their backing speaks volumes about i) their approach to real economy sectors; ii) that have a community multiplier effect; and iii) it is an expansive approach to a financial sector that is inclusive in nature.

Falah Capital has done its homework and learned the three important lessons of market traction for an Islamic finance undertaking: 1) Right team mixture; 2) Right product, right price, and right time; and 3) Right market opportunity.

*This article was originally published on The Malaysian Reserve on 21 April 2014. Read the original article here.