As the banking sector continues to mature in the Asia Pacific (APAC) and MENA regions, and the Islamic finance sector continues to grow both in terms of total assets and number of customers, there is an opportunity for Islamic banks and wealth management providers to review their product development and distribution strategies, particularly focused on the affluent and mass affluent segments.

Review of 2021
2021 has been a year of change for banks globally, but particularly for those based in the GCC rentier states with budgets that rely on stable oil prices.

The year saw heightened merger and acquisition activity across banks in the GCC, with several transactions receiving regulatory approval across Saudi Arabia, the UAE and Qatar, in part expedited by the global COVID-19 pandemic and volatile energy prices.

Alongside this consolidation, the Islamic finance market has also witnessed new market entrants, particularly in the fintech space — the 2021 Global Islamic Fintech Report notes that there are now 241 Islamic fintechs operating worldwide, of which 32 are focused on wealth management.

However, while the APAC and MENA regions account for the majority of the world’s Muslim population (60% in APAC and 20% in MENA), only 16% and 22% respectively of Islamic wealth management fintech providers are based in these regions.

Preview of 2022
In 2022, there is an opportunity for wealth management firms to take advantage of growth accelerators: namely, advances in financial literacy and increasing numbers of women entering the workforce who possess more responsibility for family wealth.

In addition, much-needed clarity on government policy across APAC and MENA regarding the post-pandemic return of expatriates to these growth regions could provide a valuable boost to local financial services firms.

According to figures from the IMF World Economic Outlook, emerging and developing Asian economies are expected to grow by 6.3% in 2022. In contrast, economies of the Middle East are forecast to grow by 4.1% in the same year.

Projected to be the fastest-growing region in the world next year, banks and other financial services providers in APAC have the opportunity to harness this growth, particularly Shariah compliant firms that are in a position to attract Muslim customers with focused product offerings.

There is an opportunity for Islamic institutions to tap into the recent trend of developing wealth management propositions for affluent and mass affluent clients. Long overlooked in favor of wealthier clients, wealth management’s middle segment represents a key potential revenue driver for Islamic banks, particularly if the client experience is tailored and differentiated.

The aforementioned M&A activity across the MENA region, particularly in the GCC, creates opportunities as well as challenges for the acquiring banks. It can sometimes be difficult for those customers who have been absorbed into the new entity to align with their new provider’s digital capabilities, particularly if those capabilities are deemed lacking.

This damages the customer experience and often leads to a reduced ‘share of wallet’ and account closures if the acquiring bank cannot meet expectations. Mass affluent and affluent wealth management product propositions are heavily reliant on digitization, particularly in developing markets where digital penetration is growing exponentially.

Accordingly, providers need to ensure that they have a thorough digital strategy to protect and grow their businesses.

Conclusion
Moving into 2022, Islamic banks and wealth managers face a split path: either digitize and develop more sophisticated product offerings for an increasingly savvy customer base, or face loss of market share. A digital roadmap should be a key part of an Islamic financial institution’s strategy, as not only does it focus the organization’s proposition on customer requirements, it will also place a greater emphasis on streamlining their operating model while reducing cost.

Thomas Woods is a senior consultant focused on wealth and asset management consulting at Capco UK. He can be contacted at [email protected]