December 8, 2022

Understanding Shariah Compliant Indexing

Islamic finance represents around 1% of the conventional financial system with around $4trn in assets and is set to grow at double-digit rates over the coming years. According to Refinitiv, global Islamic finance assets are forecast to increase to nearly $6trn by 2026, from $3.374trn in 2020.

This fast rate of expansion reflects growing demand from the rising investment culture amongst savings-rich Islamic countries and the increasing sophistication of Islamic financial and investment products.

In our paper, we review this increasingly important part of the world’s financial markets and set out why the established principles of Islamic finance can align with modern financial approaches such as indexing.

Specifically, we:

  • Introduce the central ideas of Islamic finance, before looking at recent market trends and noting the role of the UK and London Stock Exchange Group.
  • Explore the ways Islamic equity and bond indices are constructed, highlighting benchmarks from FTSE Russell.
  • Offer insights into what the markets could hold for Islamic finance over the short /medium term and whether the prevailing environment is one of growth or contraction.

We also provide insights on key trends from a recent report by Refinitiv, including

  • The funds sector: forecasted to continue its recent above-average growth, where it gained assets at a faster rate than any other Islamic finance category during 2019 and 2022.
  • Islamic sustainable finance: more Islamic funds with sustainability or ESG mandates are expected to be launched in the coming years. Greater awareness on ESG issues is also attracting retail investors to funds, along with many corporates who are seeking clear sustainable development paths – and inclusion in the relevant ESG indices.
  • Islamic fintech: where Shariah compliance is allied with digitally delivered financial solutions, which makes it easier for Muslims to access financial tools that are in line with the principles of their faith such as savings accounts, loans and mortgages.