Despite increasing demand, Islamic wealth management is trailing behind the strong growth rates experienced by the rest of the industry. KHADRA ABDULLAHI assesses the current state of the market and looks at what needs to be done to promote the sector further.
The Islamic finance industry has evolved considerably over the last three decades. Islamic banks are now operating in more than 50 countries,with most leading conventional banks having set up ad hoc Islamic finance windows. To date, approximately 60% of Islamic financial institutions are located in the GCC region, with 20% in South Asia and another 20% throughout the rest of the world.
Globally, the industry has been growing at an average of 15-20% per year for the past couple of years. The Islamic banking industry, in particular, continues to experience robust growth with reports indicating a growth rate that is 50% faster than that of the overall banking sector. According to Ernst & Young’s World Islamic Banking Competitiveness Report 2013, the industry’s assets under management are forecast to pass the US$1.8 trillion mark in 2013, up from US$1.3 trillion in 2011. Overall, Islamic assets have grown an average of 19% per year over the past four years.
How did Islamic private banking and wealth management fare over this period? Despite the growth of Shariah compliant products over the past decades, Islamic private banking and wealth management remain the only sectors lagging behind.
As a matter of fact, up until recently, wealthy and ultra-wealthy Muslim investors maintained relationships with conventional private banks with the predominant purpose being the preservation of their existing wealth, while additional growth was less of a priority.
Investors were satisfied as long as fees, taxes and Zakat could be paid without affecting the principal amount. During that time, the range of Islamic products offered by retail banks such as checking accounts, mortgages, car financing, etc., has more than doubled; whereas the offering of Islamic private banking products has only increased by 10-20%.
According to the World Wealth Report 2012, released by Capgemini and RBC Wealth Management, the Middle East was the only region in the world that witnessed an increase in wealth among individuals in the high net worth individuals category.
The number of millionaires in the region rose by 2.7% to 450,000 in 2011. Furthermore, the number of high net worth individuals in the Asia Pacific region reached 3.4 million in 2011, topping the number in North America. The increase in wealth for the Middle East and the Asia Pacific regions is mainly due to increasing commodity prices, especially for oil and gas and manufacturing-based growth, respectively.
The IMF estimates that economies in developing Asian countries expanded by 7.3% in 2012 and will expand by a further 7.9% in 2013. That compares with 2.1% and 2.4% in the US, respectively. The MENA region’s economies are forecast to grow by 4.2% and 3.7% in 2013.
Besides increasing in numbers, Muslim high net worth individuals have gained financial sophistication (with regards to risk management, diversification and yield enhancement) over the years and are increasingly expecting their wealth to be managed in a Shariah compliant manner. Yet, in many cases, their existing private banks can only offer limited products or structures that comply.
There is increasing demand for tailor-made Shariah compliant products such as succession planning, financing, discretionary and non-discretionary portfolio management, equities and structured products. For instance, demand for Shariah compliant structured products has increased tremendously in recent years due to falling yields on Islamic bonds. Shariah compliant structured products are perceived as more attractive to high net worth investors even though such investments are classified as higher-risk, often involving hedging; and are typically tied to movements of underlying assets, including equities.
Furthermore, even when Shariah compliant products are available, the quantity offered is limited as investors tend to hold positions until maturity, thereby making it difficult for new investors to find them on the market.
Islamic wealth management, or the process of wealth acquisition, preservation and distribution, has a long way to go as private banks have been focused on product offering rather than taking a holistic view of the needs of their clients. In addition, Shariah compliant private banking lacks track records showcasing the industry’s overall performance and needs more time to establish records of historical performance and a wider range of products in order to grow and increase its appeal to both Muslim and non-Muslims high net worth investors. Islamic private banks’ performances will also need to emphasize higher and more sustainable returns over time in comparison with their conventional counterparts.
Islamic private banking needs to do more to cater to the needs of affluent Muslims. Given the current market conditions and the increasing demand for Islamic wealth management globally as well as in the traditional markets of the Middle East and Southeast Asia, it is time for the industry to further leverage its inherent strengths of being linked to real economic activities and play a key role in putting in place a holistic Islamic economic system.
Khadra Abdullahi is an associate in investment banking at Faisal Private Bank. She can be contacted at
[email protected]
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