Wealth can be simply defined as all things having an economic value, such as money, property, or goods – assets, capital, fortune, resource. Essentially, these are merely material possessions. In Islam wealth belongs to Allah and a person has no right to satisfy his fancies, as extravagance and wastage are scorned. Muslims are taught that money should be earned, invested and spent in approved (halal) avenues. Only then will he, his family and the society (ummah) obtain rewards for this life and also for thereafter.
Some verses from the Quran – “To Him belongs all that is in the heaven and on the heart: for verily God – He is free of all wants, worthy of all prices” (Quran: 22:64) and “Thy Lord is self sufficient, full of mercy” (Quran: 6:133,) – clearly illustrate that wealth consists of two elements – physical and spiritual. The first relates to the possession of materials, property or assets, the Arabic term being maal (plural: amwaal). The latter indicates the spiritual dimension of wealth, such as knowledge and virtue that resides in one’s soul.
Wealth can be obtained through effort or through inheritance. Islam recognizes maal only if it satisfies three requirements: when one possesses, secures and stores it. Money is not an end in itself, money is a means to higher values. Money should be earned, invested and spent in the right way for it to bring reward (or barakah), not only to the individual, but also to his family and the ummah as a whole.
Wealth management has a very comprehensive meaning. It is not just about investment management, it should also include liabilities management and risk management. Think about your mortgages, taxes, asset protection, cash, etc.
In managing wealth according to the principles of Shariah, the person’s intention (niah), how the wealth is earned, how it is grown (invested), how it is spent and the right of the poor and needy must all be determined.
Prospects for wealth management
As at the end of 2005 there were 8.7 million millionaires globally who had accumulated in excess of US$33.3 trillion in wealth. This showed a growth rate of 6.5% in high net worth individuals (HNWIs), whose combined assets increased by 8.5% over the previous year. This expansion in the number of HNWIs and the size of their wealth was helped by the robust world economy and buoyant stock markets. By 2010, HNWIs are projected to amass US$44.6 trillion in total wealth, growing at a compound rate of 6%.
The number of HNWIs in the Middle East alone stood at 300,000 with a wealth holding of US$1.4 trillion. Islamic banks around the world are said to have market capitalization of US$13 billion, assets worth US$265 billion, investments at around US$400 billion and deposits of US$202 billion. This, therefore, confirms the enormous potential for the growth of wealth management in the Islamic finance industry.
The escalating petroleum prices have underpinned the enormous growth of wealthy individuals, particularly in the Gulf region of the Middle East and Africa. As petroleum prices remain high, the Gulf Co-operation Council (GCC) is looking at a possible US$18 trillion or more abundance in additional revenue over the next five years. Of this additional income, 60% can be expected to be pumped into Shariah compliant banking and investment routes. The Middle East, which accounts for some 65% of the world’s oil reserves, will continue to drive the growth of HNWI financial wealth, which stood at 19.7% in 2005.
Given this highly lucrative market, banks and financial service providers are setting up specific onshore and offshore operations and acquiring new products and services, either through consolidation or mergers and acquisitions, particularly where Islamic wealth is concerned.
Financial institutions around the globe are becoming increasingly aware of the fact is that there are a growing number of affluent people out there. The launch of Faisal Private Bank in Switzerland last month was a landmark development “towards building the bridge between two distinct yet complementary traditions: Swiss private banking excellence and financial solutions based on ethics derived from the Shariah Faisal Private Bank,” according to its chairman, Khalid Abdulla Janahi. Faisal was the first Islamic private bank to be established in Switzerland.
Switzerland is a renowned international hub of private banking and Swiss private bankers have built up an enviable market position. This tradition will form the cornerstone of their appeal to investors looking for Shariah compliant products.
Citigroup is also taking bigger steps into Islamic finance. It was recently appointed lead manager and sole arranger for the US$1 billion Musharakah Islamic syndication of Emaar Properties, one of the largest property groups in the world (see News Briefs, Islamic Finance news, Vol. 3, issue 41, page 1). As the world’s largest financial institution, Citigroup is set to tap the growing market of Shariah based wealth management.
An Islamic perspective on financial planning and wealth management
Two of the five pillars of Islam are related to money. The third pillar states that it is mandatory for every Muslim to pay Zakat. The fourth pillar relates the performance of the Hajj or pilgrimage for Muslims with financial ability. This demonstrates that managing wealth is of prime importance in order to uphold the pillars of Islam.
Wealth belongs to Allah and is only held in trust by human beings. Many Muslims perform their obligations towards Allah (such as prayers (solat) and fasting) with ease, but fail in the area of wealth management. Wealth management according to the Shariah serves many purposes. Not only does it motivate a person to work hard and earn his wealth, but it gives hope to the poor and needy. Managing wealth disciplines a person to save in order to help himself, his family and his society financially. By saving even a small part of his income or profits earned, instead of wasteful spending on impulse, a Muslim can fight consumerism, thus keep inflation down.
Wealth accumulation through Shariah compliant investments
Conventional wealth management solutions are very broad. They include investment management, estate planning (wills), trusts (wealth management for survivors), insurance, banking and asset management.
It is well documented that two parameters governing any Shariah compliant investment solution are the ban on interest (riba/gharar) and the ban on non-halal avenues. An important factor that should not be overlooked in Islamic wealth management solutions is the risk profile of the client. Even the most Shariah compliant portfolio does not always address effectively a client’s concerns. Risk is directly related to returns; the logic is to diversify the investments into various asset classes. Assets with low returns (under 10%) are generally not likely to make losses, while assets with high returns (above 100%) are likely to fall by a similar quantum, or even bigger.
Challenges that undoubtedly will arise for Shariah compliant wealth managers relate to regulatory, legal and judicial frameworks. To meet the worldwide demand for advanced and sophisticated Islamic products, the industry and its advisors, together with many different regulators, will continue to create legal structures within which to operate in a secure and Shariah compliant manner.
Wealth purification and distribution
Cleanliness in Islam covers both physical and spiritual cleanliness. The former is elementary. The latter involves purification from evil doings that might harm or even ruin a person’s relationship with others and with Allah. This involves cleanliness of the mind from bad intentions, or committing unlawful acts; cleanliness of the heart from jealousy, hypocrisy and evil desires. A person must also indicate hope, truthfulness, forgiveness, compassion and other such qualities.
Islam instituted the Zakat tax system as a way to wealth purification. It is mandatory for every Muslim whose wealth has reached more than a certain amount to pay Zakat at a fixed rate, equivalent to 2.5% of his holdings of money or tradeable goods. Zakat is also a means of narrowing the gap between the rich and the poor, and to make sure that everyone’s needs are met in society.
Islamic wealth distribution is a means of establishing a natural and practical economic system. There exists neither compulsion nor force, thus allowing each individual to function according to his ability, aptitude and choice. Because of the obligation of Zakat, the distribution of a small part of a person’s wealth to the needy, the destitute and the paupers is ensured. Another aspect of Zakat is that it eradicates wealth concentration in the hands of a few.
Another form of wealth distribution takes the form of Faraid, a law that stipulates estate distribution of a deceased Muslim after his death to his heirs (minus burial costs, debts, rights of the spouse to mutually acquired properties, incomplete lifetime gifts (hibah) and after-death legacies limited to one-third and non-heirs (wasiyat or will).
The growth of HNWIs, particularly Muslims, has captured the interest of conventional banks and big investment houses and is a force to be reckoned with. It is therefore not surprising that conferences focusing on the Islamic finance industry are becoming major events in western countries like Switzerland, Germany and the UK, as well as in non-Muslim countries in Asia. Wealth managers have a potentially sizeable market around the world to take into consideration and the attainment of new knowledge in Islamic wealth or fund management to cater to the religious needs of these HNW Muslim individuals should not be overlooked.