The three main areas of focus for single family offices (SFOs) are wealth management, administration of the corporate structures and trusts and concierge services for members of the family. The growth of the Islamic family office, which is an SFO managed on Islamic principles, has grown more prevalent especially in recent years. STEPHEN F CUTTS posits that it is clear more will follow as many SFOs change from conventional to Islamic on the foundation of more Islamic solutions being available globally.
Islamic finance law promotes the use of capital in a way that benefits society in general while keeping in line with Shariah principles. However, Islamic SFOs are no less demanding of returns than conventional ones. As Islamic SFOs grow and become more international, they are colliding with the problem of a lack of Islamic solutions and products.
However, many Islamic SFOs investing internationally do not have Shariah options available to them. Financing interest may be a tax advisor’s choice to reduce taxable income but most countries still do not offer tax relief for the Shariah option. What is clear though is that many countries are now focusing on improving infrastructure and encouraging investment at home. Islamic family offices are better able to diversify abroad and support their domestic environment, especially as many own significant businesses in their home countries.
Malaysia, with its blend of common law and Shariah law, now leads the world in Islamic finance ideas and products. However, it continues to be hampered by the weak offerings of its offshore center of Labuan which could provide a stronger conduit for investment into Malaysia and Asia in general. However, currently Singapore and more lately the UAE (offerings from both the Dubai International Financial Center and Abu Dhabi Global Market) offer stronger solutions for Islamic family offices.
Review of 2016
2016 started on a negative note with growth slowing in China and falling commodity prices (especially oil) putting pressure on returns. The drive for economic diversification and jobs-for-nationals policies within many GCC countries created an uncertain and mixed environment for many SFO investments. Saudi Arabia is the latest in the line of Gulf countries to attempt to diversify its economy and modernize under the guise of a Vision Statement for the future.
One of the more momentous announcements of the year in the GCC was the declaration that value-added tax will be introduced from 2017. While having no direct impact in 2016 financially, SFOs managing businesses – which most are of course – will have to avail themselves of a whole new skill set.
The range of Islamic products and innovations continued to expand in 2016 although Sukuk market issuance fell to 43% in 2015. Indications are that the level is not yet back to the high levels of 2012 and 2013.
But one of the biggest international events affecting all SFOs, Islamic or otherwise, is the unexpected result of the US presidential elections. This is already having repercussions on how SFOs decide to invest in 2017 and beyond.
2017 will continue to see innovation and consolidation develop. AAOIFI will continue to have a growing role in standardizing Islamic finance structures. Although this is a painstaking progress, progress will continue to be made.
The continued growth of Islamic SFOs should continue as more families in Asia and the Gulf become wealthier. But increased internationalization of investments creates its own challenges in ensuring that the SFO retains its Islamic status.
Preview of 2017
Two of the greater challenges for Islamic family offices in 2016 with repercussions for 2017 were the US presidency and Brexit votes. Family office investment advisors suddenly find themselves investing for the short term not knowing what lies ahead, and it is likely this tendency will continue for a while.
The growth of Islamic banks in 2015 and 2016 converged with that of conventional banks. Islamic banks are generally more expensive solutions in a competitive environment, especially in the private banking sector. Many Islamic SFOs therefore spread their banking requirements between Islamic and conventional banks. 2017 must see Islamic banks become far more competitive or accept that their role will only be a niche one in the global banking market.
As the world moves toward more transparency and away from trusts as a tax-planning tool, Islamic trusts holding assets onshore will start to be used for purely succession purposes. This will require changes in legislation that probably will start to happen in 2017. Many Islamic SFOs currently use trusts to hold their non-domestic assets. These trusts will hold assets for beneficiaries in accordance with their rights under Islamic law, but will enable the assets to be held together for all heirs. Malaysia could take a lead in this area.
Areas of change
Islamic SFOs continue to find themselves hampered by a lack of quality Islamic product and services which, although improving in 2016, remains insufficient. This is partly due to a lack of suitable investment vehicles as shown by, for example, Abu Dhabi Islamic Bank not being able to move forward with its Islamic trust offering. In time the market will provide solutions.
Simple measures such as a national Shariah board like the one introduced by Malaysia would also hugely benefit other countries by paving the way for harmonization and the streamlining of Islamic offerings. There are currently too many Islamic boards each delivering their own interpretation of Shariah.
Other countries too can do much more to put Islamic finance on a level with conventional finance. The UK introduced legislation putting certain Islamic finance structures on the same tax basis as interest on loans. More countries could and will do more in this area.
Conclusion
In conclusion therefore, more Islamic families are converting their SFOs to Shariah compliant entities. However, much work still needs to be done to develop Islamic products for Islamic SFOs to invest in and work is needed to create new corporate and trust vehicles to hold Islamic assets and conduct business.
Countries too can do more to ensure that Islamic structures used by SFOs to invest are tax neutral when compared to conventional structures. Finally, the uncertainty created by unexpected political decisions will weigh on investment decisions in the short to medium term.
Stephen F Cutts is a family office advisor advising on the setup, management and administration of conventional and Islamic private family offices. He is a UK qualified accountant and tax consultant. He can be contacted at [email protected].