Islamic wealth management comes of age

The Global Islamic Finance Report 2010 estimates that by the end of 2009, assets under the management of institutions offering Islamic financial services reached the $1.0 trillion benchmark. Islamic wealth management is a growing field within Islamic banking and finance. It refers to the phenomenon of managing wealth by adhering to Islamic principles of investment and preservation of wealth and transferring it to the next generation. The third of the five most widely known higher objectives of Shariah is protection and preservation of wealth as well as protection and preservation of faith, life, intellect and posterity.
More importantly, the Quran elaborates in great detail the rules of inheritance, something relevant to the transfer of wealth to the next generation. In fact, Islamic wealth management is very much rooted in core Islamic teachings and covers portfolio management, asset allocation and overall financial planning. More specifically, Islamic wealth management involves advising and supporting clients with regards to their family business, managing their bankable assets and planning their inheritance, charity and trusts, all in accordance with Shariah.
An estimated 60 percent of the global Islamic financial assets are held by institutions in the Middle East with the remainder off institutions in other parts of the world. Most of the countries in the Gulf region, especially the six countries (Saudi Arabia, Bahrain, Kuwait, the UAE, Oman and Qatar) which form the Gulf Cooperation Council (GCC) have a large concentration of wealth, enjoy high per capita income and related high standard of living.
Therefore, it is only natural for almost all the big Islamic banks in the Middle East to offer private banking, affluent banking or premier banking services targeting the mass affluent class of Shariah sensitive individuals and families. Examples of services related to Islamic wealth management include Al-Wajaha services by Dubai Islamic Bank and the Tharwa brand by Al Hilal Bank in the United Arab Emirates. Other banks like Abu Dhabi Islamic Bank and Al Rayan Bank also offer Islamic wealth management products and services. Faysal Private Bank in Switzerland is a fully fledged Islamic bank specialising in Islamic wealth management.
CIMB Islamic in Malaysia also recently launched its maiden Islamic wealth management program. According to Edbiz Consulting, out of the $39 trillion held by the High and Ultra High Net-worth Individuals and families (dubbed HNWI and UHNWI, respectively), about $4.0 trillion is held by Muslim HNWIs and UHNWIs. It is estimated that at least 25 percent of this wealth is Shariah sensitive, i.e. its holders would wish to manage their wealth in accordance with the Islamic guidelines for preserving, managing and transferring wealth to the next generation.
There is some anecdotal evidence that a growing proportion of Muslim youth is interested in Islamic financial services. In fact, almost all Muslims prefer a Shariah compliant financial service to a conventional equivalent if the costs associated with the two are otherwise exactly the same. Given that there are significant cost differentials between the two, this preference in practice is nonexistent. Demand for Islamic financial services is greater amongst the youth and those in the older age brackets. Those in the middle age brackets (40-55 years) are least interested in Islamic financial services.
It is expected that over the next few decades demand for Islamic financial services will be more uniformly distributed amongst all the age brackets. It is also expected that increase in the size of the mass affluent strata (middle classes) will induce more Shariah sensitivity in wealth management practices, as the newly rich tend to be more religiously motivated than many well established affluent families. Given the potential for a substantial increase in Islamic wealth, Islamic wealth management will assume an even greater importance in Islamic banking and finance.
While, it will be some time before a fully fledged model of Islamic private banking emerges, Islamic banks will continue to cater for the growing demand in premier and affluent banking through mainstream operations. There are a number of asset classes that can be deployed by Islamic wealth managers for portfolio construction and asset management in compliance with Shariah. Equities feature prominently in the realm of Islamic wealth management. Investments are usually made in relatively liquid equity of the public joint stock companies.
It is true that not all equities are fit for investment by Shariah-sensitive commercial entities, but the contemporary practice of Islamic finance has developed a universally acceptable screening methodology to create a Shariah network as a subset of globally available equity stocks. Real estate is the most popular asset class for investments by Shariah sensitive investors. There are a number of Islamic real estate funds set up in the Gulf region and elsewhere, which offers an opportunity for Islamic wealth managers to invest in this lucrative asset class. Sukuk (used as plural for Sakk) is supposed to be a Shariah compliant version of a fixed-income security.
Since the start of this century, Sukuk have proven to be a handy tool for Islamic investing, especially for those who look for less risky securities. Structured products can be used as an effective tool for wealth management in Islamic finance. Some of the Islamic structured products offered by Western investment banks allow Islamic investors to have exposure to conventional assets in a Shariah compliant way. This is not ideal from a viewpoint of Shariah authenticity but these structured products have proven to be a useful tool in the wake of a lack of credible Islamic assets available for Islamic investing.
Once Islamic assets increase in size and number, new and innovative products can be created. Some other asset classes like hedge funds have proven to be difficult to sell to Shariah sensitive investors. However, Shariah compliant hedge funds can be used as an effective tool for diversifying Islamic investment portfolios.
The writer is a renowned Shariah scholar, specialising in Islamic financial advisory and can be contacted at [email protected]