Shebab Marzban, product development officer for Egypt-based Ideal Ratings, said that many western fund managers fail to carry out correct due diligence on Islamic finance products.
Speaking at the three-day World Islamic Banking Conference in Bahrain, he said that many holdings for Sharia funds do not adhere to strict rules of not investing in firms that make a profit from using interest or selling pork or alcohol-related products.
He said those that do generate profits from these industries can still be classed as Sharia-compliant, as long as the total wealth from the non-permissible products is less than 5 per cent. However, many Europe-based Islamic funds do not even meet that rule.
Mr Marzban said: “There is a lack of awareness on what is truly a Sharia-compliant product. Many funds have got a stamp on them that they comply with the principles from a Sharia body, but then they do not follow through with the correct screening.
“The problem is most fund managers outsource due diligence to index providers and they rely on that information to be correct and up to date. The problem comes when you look on a firm’s financial sheets and it may say they invest in food, but won’t necessary say pork.
“You also get some firms that just jump on the bandwagon and sell so-called Sharia products without doing the relevant checks.”
Mr Marzban said that the existence of diluted Islamic products in the western world is an inevitable part of the industry while it grows.
He added: “The Islamic finance industry is still young – only a few decades old. The industry is still developing and while it finds it feet this will unfortunately happen. But I do believe we will get there in the end.”
During the first day of debates, many experts voiced their opinions on the steps that the Islamic financial world needs to take to achieve a global appeal.
David McLean, managing director of Mega Brand, said: “Islamic finance continues to be one of the fastest-growing segments in the global financial markets and has become increasingly important in several countries. Although the Islamic banking and finance industry has achieved considerable success and growth over the past few years, a key challenge is to sustain this growth against the backdrop of this challenging global economic environment. This requires a thorough revision of key strategies and business models, taking into consideration the new realities in the global financial landscape.”