Islamic wealth management is the fastest-growing financial segment in the Middle East, with the industry already beginning to gain a foothold in various Islamic financial markets, due to the rising affluence of like-minded investors worldwide. AKASH ANAND dissects the Islamic wealth management industry.
In 2014 for instance, the number of ultra high-net-worth individuals (UHNWI) (defined as having a net worth of at least US$30 million) residing in the UAE grew at a rate of 5%, according to global property consultancy Knight Frank. Indeed, total UHNWI wealth in the Middle East is currently estimated at US$700 billion according to the same report, and is set to grow by 40% over the next 10 years.
Naturally, these types of investors are spreading over the world with significant wealth, and coupled with the ‘ethical aspect of investment and banking’, have created a demand for Islamic wealth management services. In the core Muslim-majority markets, the share of Islamic assets is steadily rising: Saudi Arabia’s Islamic assets, for instance, have already reached 52%, with various other markets expanding at double-digit growth rates.
Furthermore, a number of conventional banks have established Islamic wealth management windows in line with Shariah principles – investments that are free of interest and on a risk-shared basis. Multinational private banks have also begun to cater to this trend, by partnering with locally-based Islamic asset managers. This allows banks to share expertise and increase the number of client offerings like Murabahah, Sukuk or Shariah compliant equity investment opportunities, through direct lines, diversified funds or discretionary mandates, and through a philosophy of responsible investment.
The private banking and wealth management sector appears to be on the right track, as evidenced by the growing number of asset and wealth management players. This indicates that the ﬁeld is developing a strong footing, and, it would seem, is poised to enjoy a vibrant future.
Despite the global financial crisis, the majority of investors and asset managers still believe that performance and efficiency during the past five years remained the same or surpassed expectations. Building on this momentum, most asset managers are willing to increase their Islamic investment holdings in the next 12 months.
While the GCC has emerged as the most preferred investment destination for investors and asset managers, Sukuk and equities are equally popular asset types for 2015 and 2016. Most asset managers also highlighted a preference for a more supportive Shariah framework within their markets.
The key areas of opportunity available to the Islamic asset management industry include Islamic wealth management, private equity, crowdfunding, sustainable investing, and socially responsible investments.
Almost 70% of Middle Eastern wealth is transferred overseas. To attract this wealth, Islamic asset managers need to compete with institutions overseas by providing both attractive yields and a superior level of service quality and product customization.
Contribution of technology
As it becomes apparent that the demand for Shariah compliant wealth management business is growing significantly, it is therefore important to understand the role and importance of world-class solutions that can address the complex requirements of this business. Wealth management is introducing new players, new business models and giving the power to the customer. For instance, wealth managers and customers nowadays require use and information while on the go, ie mobility. The products offered by Islamic business follow certain accounting standards adhering to AAOIFI: asset classes to have different treatment, portfolio composition needs extra filters, calculations, etc. Therefore it is very important for this business to invest in robust solutions that can address these requirements seamlessly. The interpretation of Shariah may differ from one country to another and from one region to another. Unfortunately, in Islamic finance there is no set of financial standards until today that forces all banks across the world to adhere to as is the case in conventional finance.
For example in Malaysia, there is a Shariah board at the country level, and in coordination with the central bank of Malaysia, Bank Negara Malaysia, they regulate this industry. In other countries, central banks set burdensome laws and regulations, and each bank has its own Shariah board to interpret the Shariah and create financial products that fit the board’s interpretation. The only way to adhere to these multiple sets of heavy rules and regulations is to have flexible technologies, all-embracing regulatory reporting tools pre-built in the system, to anticipate and address pending regulatory changes while maintaining compliance in the most cost-effective and efficient manner. This means that the system has to be completely parametric, flexible and customizable to allow these differences in implementation.
Elements that contribute to the competitiveness of the Islamic finance institutions include the following:
- Digital services and advice available to clients
- Strengthen an outcome-oriented portfolio construction
- Better collaboration of wealth and asset managers to deliver stronger investment propositions
- Transparency is key across all models (discretionary, advisory, execution-only) so that automation and efficiency are achieved
- Enhance the frontline productivity
- Comprehensive regulatory reporting coverage with a flexible and robust rules engine
- Customized product definition and accounting coverage, and
- Multicurrency, multilingual, multi-asset class, omni/multi-channel coverage.
In terms of technology, mobile and cloud technologies have been utilized to offer more capabilities to the industry ranging from providing a personalized client service with a unique experience in the design to cost efficiencies since in some cases there is the freedom of no internal IT infrastructure but with the option of a private or public cloud with utmost security by the provider, which always needs to be verified. Such tools enable Islamic finance institutions to enhance their services and to stand out from the crowd.