KUALA LUMPUR, March 6 Malaysia's $160 billion state pension fund has hired consultants to study the possibility of establishing one of the world's first state-backed pension funds focusing entirely on sharia-compliant investments, sources familiar with the matter said.
If it goes ahead, the plan could pour billions of dollars into sharia-compliant assets in Malaysia, stimulate its Islamic finance sector, and provide a model for other predominantly Muslim countries such as those in the Gulf.
The Employees Provident Fund (EPF), the world's sixth-largest pension pool, is looking at the viability of such a fund from accounting, legal and sharia-compliance standpoints, the sources said, declining to be named because the matter is not yet public.
Global advisory firm Ernst & Young, Kuala Lumpur-based law firm ZICOlaw and ZICO's sharia advisory team were hired in late 2013 and are to present a final study to the EPF this year, the sources said.
"Depositors are asking for the option to put their savings into sharia investments alone, so the EPF is looking to set up the end-to-end infrastructure, from collecting contributions to returning dividends," said one of the sources.
The EPF did not respond to a request for comment from Reuters.
Malaysia has one of the world's largest Islamic finance sectors and authorities are keen to develop it; they envision the industry holding 40 percent of the country's total banking assets by 2020 against around 23 percent today.
The EPF already invests about a third of its portfolio in stocks and bonds that comply with sharia principles, which ban interest payments and pure monetary speculation.
But having a standalone, state-backed Islamic pension fund would put Malaysia ahead of most countries in developing its pension industry. The fund might be the world's first such institution outside Iran, where the entire financial system is designated as Islamic.
The EPF has set up an internal committee to steer the project, which it hopes to implement within two or three years. But the timeline will depend on the final study from the consultants, one of the sources said.
"They want to make sure that a separate fund will be an attractive proposition, by matching the returns people are used to seeing from the EPF."
The EPF has consistently outperformed its guaranteed minimum dividend of 2.5 percent annually. It declared a rate of 6.35 percent for 2013, the highest in over a decade. It had accumulated 360 billion ringgit ($110 billion) in savings from 6.4 million members as of 2012, based on its last annual report.
Malaysia launched a private pension scheme last year, following countries such as Pakistan and Turkey. The Private Retirement Scheme (PRS) has 17 Islamic funds out of 44, and is driven by asset managers such as CIMB-Principal Asset Management, Public Mutual Bhd and AmInvestment Management.
The EPF has been more adventurous in recent years, investing more actively in real estate abroad. Reuters reported last July that the EPF was spending about $660 million on properties in Germany and France, to maintain dividends in the face of limited opportunities domestically.
($1 = 3.2710 Malaysian ringgit) (Additional reporting by Bernardo Vizcaino in Sydney; Editing by Andrew Torchia and Stuart Grudgings)