Private banking is an umbrella term for the financial services afforded to high and ultra net worth individuals (UHNW) and family offices as well as large institutional investors with sizeable assets.
According to a report by Boston Consulting Group (BCG) last year, Saudi Arabia had the highest concentration of UHNW households, measured per 100,000 households (at 18) followed by Switzerland (10), Hong Kong (9), Kuwait (8), and Austria (8).
Although millionaires globally form a fragment of all households at a mere 0.9%, they own approximately 39% of global wealth. The number of millionaire households increased by 12.2% in 2010 to about 12.5 million.
As Islamic finance gains prominence globally, increasing numbers of financial institutions are establishing Islamic windows to cater to the Muslim clientele. In spite of this, Islamic assets are relatively small in the context of the global private banking market. UBS AG, currently ranked the world’s third largest private bank in the world with assets under management of about US$1.56 trillion, launched its standalone Islamic private bank in 2004 to cater to its wealthiest Middle Eastern clients.
Another fully-fledged Islamic private bank is Bahrain-owned Ithmaar Bank’s Faisal Private Bank. Touted as the first Swiss Islamic bank, Faisal Finance was established in 1982. It became a bank after obtaining a full banking license 24 years later. This begs the question: is Islamic private banking true to the form and substance of its conventional counterparts such as Coutts, Julius Baer and Pictet & Cie?
Fares Mourad, the managing director and head of Islamic Finance at Bank Sarasin, argues that it is not only equal but much more as it also offers the ability to help Muslim clients fulfill their needs and obligations in this world for a better afterlife — something not offered in the conventional space.
“Aside from the wide range of investment products as well as incentives also specially catered to the conventional investor, Islamic private banks provide an avenue for the Muslim investor to invest according to Shariah principles, which is part of his duty as Muslim to do,” he elaborates.
Fares describes Islamic private banking as having evolved from an investment banking style with a focus on deals and products into a more asset management style of business which generates a steady (albeit slower) stream of income. However, he contends that the term ‘private banking’ is being misused by inexperienced private bankers, who are conjugating asset management, wealth management and private banking into a single stream, something with which he totally disagrees.
“Wealth management concerns the life cycle of the investor and how he manages it. You cannot solely address it from an asset management or Islamic banking perspective. In general, there is a shortcoming when it comes to using the term private banking,” he explains. He feels that this strategy is used to attract heedless affluent clientele seeking to obtain desired returns.
Fares is of the view that affluent investors should be rightly advised by their private banker as to the best methods of managing their wealth, as many tend to associate their investment and business decisions with their private wealth. These investors expect their private wealth to obtain similar returns to their businesses.
“In reality, their private wealth comprising private properties, real estate and bankable assets should be deemed as their reserves of last resort. So that if and when their businesses do suffer a setback, their private wealth will be able to assist them during that period,” he stresses.
With global wealth reaching US$121.8 trillion according to BCG’s 2010 figures, the potential for Islamic private banking is tremendous: particularly in Asia and the Middle East where the growth of household millionaires was recorded at 17.1% and 8.6% respectively. Islamic private bankers should be focusing on providing holistic investment solutions guided by Shariah principles to assist the Islamic investor in fulfilling his duties and obligations for the life beyond. — RW