Shariah sensitive investable assets in 2008 in the Gulf Co-operation Council states and Asia almost tripled to $736 billion compared with $267 billion in 2007 according to figures released by Ernst & Young Islamic Funds & Investments Report (IFIR 2009.

In computing the total asset size, the report included Awqaf and endowments, Takaful operators in Malaysia, sovereign wealth funds in the Middle East-North Africa (MENA) region and Asia as well as Pakistan and South East Asia markets. Not all of these were included in the 2007 figures.

This encompasses a potential annual revenue pool of $3.86 billion for the Islamic asset management industry.

Fund sizes remain small with over 50% having assets under management (AUM) of $20 million or less.

In 2008 and the first quarter of 2009, 25 Islamic funds were liquidated I compared with 18 in all of 2006 and 2007 combined.

The number of new funds launched has fallen from 271 in the 2006-07 to 89 in 2008 and first quarter of 2009. This drop in new launches compares with the severe market correction shown by a 50% decline in the MSCI Index November 2007 to March 2009 contrasting with a 40% return in the period May 2005 to November 2007.

The largest concentration of Islamic funds remains in the Middle East. Equity funds lead for choice of asset type. Just under a fifth (19%) Islamic funds are domiciled in Saudi Arabia with close to a quarter (23%) domiciled in Malaysia.

Saudi Arabia holds $19.28 billion in total AUM for Islamic funds with Malaysia at $4.579 billion in AUM.

The untapped markets in Asia and MENA are a source of growth for the Islamic funds industry because of their large Muslim populations. These markets where Islamic finance is still in its infancy include Indonesia (207 million), Pakistan (161 million), India (150 million), Bangladesh (132 million), Turkey (71 million) and Iran and Nigeria (both at 64 million).

While the Islamic indices have performed poorly worldwide, the average return from Islamic equity funds fell 39% in 2008 compared with a positive 23% return in 2007. In the first quarter of 2009, the average return was down 3.7%. Average Islamic fixed income fund returns dropped from 3% in 2007 to 1% in 2008 and the first quarter 2009.

Commodity prices declined in the second half of 2008 although there are signs of recovery in this asset class. In the first quarter 2009, the average return of commodity funds was at 10%, a substantial increase from the 20.01% drop in 2008.

Islamic cash funds remained constant, providing an average return of 3.9% in 2008 as compared to 3.4% in 2007. In the first quarter 2009, average returns were at 0.7%.

Average returns from real estate funds fell from 8% in 2007 to a negative 11% in 2008 and are down 5% in the first quarter of 2009.

Sukuk issuance has slowed as spreads widen. Sukuks worth $15.5 billion were issued in 2008 compared with $47.1 billion in 2007. Ernst & Young's IFIR 2009 report estimates sukuks with a total value of $27.5 billion will be issued in 2009.

"Two-thirds of all players manage less than $100 million each in Islamic assets. The global competitive landscape is fragmented and a shakeout appears likely," commented Omar Bitar, managing partner, Middle East advisory services at Ernst & Young Middle East.

"Firms will need to select a product and distribution platform that is aligned with its strategy and position themselves as alpha-seekers or asset gatherers to set their fee structure. Pressure on fund managers to consider a lean and efficient corporate structure through the outsourcing of non-core business activities is now more than ever," he said.

According to Sameer Abdi, head of Ernst & Young's Islamic finance services group, the Islamic asset management industry landscape has changed significantly. "With almost $50 billion in fund assets under management and a large, expanding and untapped Muslim population, there are likely to be considerable opportunities in the future," he noted.

Commenting on the key risks facing the Islamic funds industry, Sameer said the business risks landscape for Islamic asset management has changed substantially since 2008. "Revisions of expected returns have caused some investors to withdraw capital and previously robust business models have struggled to cope with extreme market events. The economic downturn, a reduction in investor risk appetite and unclear valuations will be the most pressing business risks in 2009," he noted.

The 2009 edition reflects on measures leading industry players are taking to strengthen their market positions and renew growth strategies in the backdrop of the global economic downturn. The report concluded opportunities continue to exist for Islamic investments and the Shariah-compliant funds industry can catalyse the next phase of growth.

Ernst & Young's Islamic finance services group (IFSG) is a specialist group catering to the specific needs of Islamic and conventional financial institutions requiring Islamic financial advisory services

The Middle East practice of Ernst & Young has been operating in the region since 1923.