Purification fee 'cleanses' Islamic KiwiSaver fund
A fee which hasn't been seen before in the New Zealand investment industry has emerged with the issue of the prospectus of the country's first Islam-friendly KiwiSaver.
The prospectus outlines a "purification payment" which is calculated when a person takes their money out of the newly-created Amanah KiwiSaver scheme. The fee is designed to "cleanse any investment income that may have been generated by a corporation for non-permissible activities".
The size of the fee is not disclosed in the scheme's prospectus, though it seems to be needed because by its very nature KiwiSaver is not strictly compliant with Shari'ah law.
The IRD collects payments from employers and employees and passes them on to KiwiSaver managers, holding the money for a short time, and this may result in interest being earned on contributions.
The scheme will invest in a sub-fund which will, in turn, invest in US stock exchange-listed companies which may have activities all around the world. This will also mean that some non-Shari'ah activity will happen. Purification fees, which are an attempt to calculate and remove from an investor's returns the proportion of money made as a result of non-Shari'ah activities, are directed to a registered charity of the saver's choosing.
"The Amanah systems are very good on the selection of investments and the avoidance of purification costs," Amanah managing director Brian Henry said. ‘They are not, to date, material to the fund's performance."
While purifying income may be a new concept in KiwiSaver, it is not new in global Islam-friendly investing. A 2009 report into Shari'ah investing by PwC said a quarter of the world's population were Muslim, but less than 1 per cent of the world's financial assets were "Shari'ah-compliant".
By contrast, New Zealand's Muslim population is a tiny proportion of the wider populace, with the 2013 Census suggesting it is just over 1 per cent or just shy of 46,200 people giving their religion as one of several forms of Islam. The report said the issues facing fund managers in offering Shari'ah investments included the need for an Islamic Advisory Board and a system to purify income.
It noted that the need for advisory boards resulted in higher fees for savers. Amanah's advisory board includes Dr Faruk Balli, a senior lecturer at Massey University School of Economics and Finance. It is the board's job to ensure that Shari'ah investment practices are followed. Shari'ah requires a prohibition on making money from certain activities, and that precludes investing in companies which do. This could range from companies that have anything to do with pork products and non-halal meat to alcohol, and tobacco. Profiting from gambling is also "haram", or forbidden, as is making money from weapons, pornography, nightclubs, or stem-cell treatments. And because there is a prohibition on receiving interest, investing in conventional banks and insurance companies is prohibited.
Derivatives like currency-hedging are also not permitted, which means investors must put up with volatility caused by the movements in the cross-rate between the US and New Zealand dollars.
The Islamic funds industry appears to have grown rapidly, due in part to a loss of trust in Western fund managers following the global financial crisis. Malaysia International Islamic Financial Centre estimates the global Islamic funds industry has grown from US$29.2billion under management in 2004 to almost US$74b.
HAVING FAITH IN A FUND
Some people's religious and ethnic affiliates have a bearing on the investment choices they make, including in KiwiSaver. But the assets invested in, the skill of the fund manager, and the fees schemes charge are the major determinants of the returns investors can expect.
The religious and ethnic schemes available include: Koinonia KiwiSaver Scheme: An ethically invested KiwiSaver scheme for the Christian community designed to be invested in ways that reflect Christian values.
BCF Kiwisaver Scheme: Only for members of the Brethren Christian Fellowship. Leave the fellowship, and you have to leave the scheme, as the Brethren choose not to "break bread" with unbelievers.
IwiInvestor KiwiSaver Scheme: Run by a Maori funds manager and aims to build a Maori investor base. While there is no Maori-specific way of investing money, the scheme offers financial literacy workshops for members. There are also a number of KiwiSaver schemes set up for specific employers, or sectors.
- Sunday Star Times