On any one day, Sheikh Faizal Ahmed Manjoo may pore over tax law in, say, South Africa, while at the same time scouring ancient teachings of the Quran to shape a financial product that meets the moral and legal demands of both worlds.
The CEO of Minarah MultiConsulting, an Islamic finance consultancy firm, Manjoo is considered one of the leading experts in both Islamic and conventional commercial and pensions law. His expertise is in high demand as the financial industry, governments and universities scramble to join the fastgrowing Islamic finance sector.
This sector has gone from being regarded with suspicion after 9/11 to having the Vatican in March 2009 call on scandal-ridden Western banks to learn from Islamic finance, which runs on strict business ethics enshrined in Shariah, Islam’s religious law.
The Muslim world does not have a pensions culture or industry, let alone a discussion about longevity risk
Both Paris and London are competing to become the center of the sector, which is worth $1.6 trillion and showing an annual growth of 16%, according to the 2013
Global Islamic Finance Report. Sukuk, a form of bond, grew by as much as 77% in 2011, also breaking records in 2012.
Now Manjoo hopes to create a whole new branch – Islamic pensions – and in particular, products to underwrite longevity risk. “The Muslim world does not have a pensions culture or industry, let alone a discussion about longevity risk,” he says.
In fact, with the exception of some parts of South-East Asia, there is low insurance penetration, with life insurance non-existent in Dubai, Iran and Egypt. With Muslims making up 23% of the world’s population, this provides potential for the fledgling Islamic insurance (
takāful) and re-insurance ( retakāful) industries. “Not only are Muslim communities beginning to follow the same longevity risk pattern found in OECD countries, but the demographic change is happening faster than in the West, giving societies little time to adapt,” he says.
© Gallerystock AN ALARMING FORECAST
Traditionally, Muslims have many children, live in extended families, and are spiritually and morally obliged to look after old people. The safety net for the aged is built into the culture, making pensions unnecessary. Indeed, the concept of a legally fixed age for retirement has no precedent in Islam. However, this net is being eroded by the breakdown of the nuclear family, reduced mortality and reduced birth rates, which are leading to an aging population. The Pew report
The Future of the Global Muslim Population (2011) projects that between 1990 and 2030, the number of Muslims under 30 in Muslim-majority countries will have dropped from 68.4% in 1990 to 49.6% (see ‘ Breeding misconceptions’).
“The forecast is alarming. If Muslim countries don’t start planning to avoid the aging population problems that OECD countries now face, the effects could be disastrous,” warns Manjoo, who believes governments should capitalize on the current youth bulge.
A 1,500-YEAR-OLD BUSINESS CODE
Muslims cannot buy most conventional financial products because they break practically all financial laws enshrined in Shariah. These laws, in constant use for 1,500 years, prohibit charging interest (to prevent usury), excessive risk-taking, speculation and trading in unethical products.
Muslims cannot buy most conventional financial products because they break financial laws enshrined in Shariah
They also prohibit trading in products that do not exist or in money (a mechanism of payment and not a value in itself). These last two rule out trading in the futures market or in debt. But importantly, risk in business transactions must be shared and may not be transferred. This rules out the conventional pensions model, which has become a “game of passing the buck between the state, employers and individuals,” says Manjoo.
So how does his pension model differ? His model retains the classic three-pillar pensions model with the state, the private sector and individuals all contributing to pensions, but adds a fourth pillar: the Islamic philanthropic sector, known as
Infāq. As Islamic investments must be asset-based, this pillar would invest in long-term infrastructure projects to generate income.
In turn, this could stimulate the economy to create jobs,provide education and training. “The sooner they are put in place, the sooner they can help raise the income and hence contributions of the younger population,” says Manjoo. The state would play its role in covering longevity risk through sovereign longevity
sukuk, a form of government bond based not on interest, but on an asset.
So, for example, a government will issue sukuk to raise money to build a public utility, such as a toll road. The sukuk holder then owns equity in the project and can choose the maturity period. Occupational pensions and private-sector pension funds will be fed by contributions from employees and employers, income from zakah (charitable giving based on accumulated wealth) and waqf (the donating of property or assets for religious or charitable purposes), and investments. The conventional pensions model has become a game of passing the buck between the state, employers and individuals
Through the philanthropic
waqf system, donors can join an investment scheme meant for employees. The community makes donations on a purely philanthropic level, while the employees do so for their pensions. The donations are invested in long-term projects, which then in turn continue to provide income for more than one generation.
To comply with Shariah laws, financial engineers would need to develop other investments that are asset-based. They would also need to look into traditional investment instruments, such as longevity swaps and derivatives, as well as
sukuk and shares. Shariah scholars are still debating solutions for these. Tax issues would have to be ironed out. There is also great deal of actuarial work to be done to better forecast and match assets available against liabilities. “Developing Islamic products to meet longevity risk is not a simple matter,” says Manjoo.
He estimates that at least another 10 years are needed to create an implementable pension model. But where to from now? Manjoo is currently working with an actuarial consulting firm to sharpen up the model and get it out to the industry. In the meantime, he is enjoying being at the forefront of mixing old with new to create a new social model.