February 23, 2017 3:00 pm JST

Massive gold-backed ETF certified as sharia compliant

Financial industry eager to attract new investors in Islamic world

TOKYO -- U.S. asset management company State Street Global Advisors has announced that a huge exchange-traded fund for investment in gold has been certified as being compliant with Islamic financial law.

The question of whether ETFs themselves comply with Islamic law has not been addressed. However, the certification by Amanie Advisors of Malaysia, a leading sharia advisory company specializing in Islamic financial institutions, is expected to stimulate investment in the gold ETF within the Muslim world. 

The fund, called SPDR Gold Shares, is one of the world's largest ETFs backed by gold bullion, having a net asset balance of more than $30 billion. Managed and marketed by State Street Global, it is listed on the New York Stock Exchange.

The ETF, which listed on the Tokyo Stock Exchange in 2008, is a popular financial instrument among investors in Japan as well.

Islamic law prohibits the acceptance of interest or fees for loans of money. As it is unclear whether ETFs comply with the law, there have been reported cases in which Muslim investors shunned them.

The World Gold Council, a market development organization for the industry, paved the way for certification by asking the Accounting and Auditing Organization for Islamic Financial Institutions, a Bahrain-based nonprofit organization tasked with maintaining and promoting sharia standards for Islamic financial institutions, to determine criteria for gold trading. The AAOIFI announced standards for gold trading in December 2016, which led to Amanie's authorization.

There has been cash trading in gold throughout history in the Islamic world. In traditional Arabian open-air markets, known as souks, shops selling gold bullion, coins and jewelry stand side by side. 

Joseph Cavatoni, who is in charge of ETFs at the World Gold Council, said the certification is an important step toward meeting demand for gold in the Islamic financial market, which is valued at $2 trillion, as it gives Muslims access to gold-backed ETFs.

The authorization enables observant Muslims to include gold ETFs in their asset portfolios. The industry is eager to tap new investors as the number of Muslims is increasing sharply in Asia. 

Global demand for gold rose 2% in 2016 from the previous year to some 4,300 tons, according to the World Gold Council. Demand related to ETFs for investment in gold totaled around 531 tons, the largest since 2009.

Increased demand for gold reflects heightened geopolitical concerns, such as Britain's decision to withdraw from the European Union and the election of Donald Trump as U.S. president.

While demand for gold grew worldwide, the Middle East witnessed a 16% decline. In particular, demand in the United Arab Emirates fell to a 19-year low, reflecting lower crude oil prices and a decrease in the number of tourists visiting the country.

But as oil prices have rebounded on output cutbacks by oil-producing nations, the latest certification is expected to stimulate investment in gold in Middle Eastern and other Islamic countries.

(Nikkei)

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