With nearly two billion Muslims worldwide, it should come as no surprise that the Islamic economy is a huge market that includes different types of sectors such as logistics, finance and food which the conventional market cannot afford to ignore. The family office’s objectives can be summarized as follows: as and when necessary, Shariah certifications for various capital and non-capital market investments and income production can be a requirement to make an investment and it is something that can be requested by some Muslims or Muslim investors.
Many subjects can be treated by a family office in a Shariah manner like succession, management of assets, value creation, buying and selling, investing in Shariah compliant bonds and such. Family offices have some services of a conventional family office with specificities to adapt depending on the needs of their clients. Family offices in the GCC under full self-direction are not common.
The management of wealth can be managed by a third party such as a bank or lawyer on behalf of the family. To manage this type of family office, the managing teams need to be specialized in Shariah law and work with Shariah scholars to offer the best quality of wealth products. The creation of structured Islamic estate instruments is specifically designed to meet family office needs, as well as reporting on global custody, specialized financial services, asset allocation, alternative investments and private equity in compliance with Shariah.
Review of 2022
The intricacies of family office operations continue to grow, and many organizations struggle with tools that are not built for them. According to a recent study by Family Wealth called ‘Report/WealthBriefing’, organizations that only serve one family typically have over 26 legal entities operating on their behalf. Family office professionals who took part in this year’s poll assessed that only a fifth of the working hours were spent on manual processes, compared with their belief that 42% of the 40-hour work week was spent on manual processes overall. Family offices are investing heavily in digital assets, private equity or hedge funds, and direct investments, representing an overall increase of 5% for the fiscal year. The contributors have indicated that the difficulties associated with recording and reporting on non-traditional assets using unsuitable software for the job will significantly increase. Investment preferences are continuing to shift toward alternatives as investors look for strategies to increase diversification and returns.
The success and operational excellence in the Islamic world essentially depend on Shariah governance, risk and compliance. To improve Shariah compliance standards and instill confidence in industry stakeholders, Shariah governance has been made a requirement for organizations providing Islamic financial services. Islamic service providers now face a market that is rapidly evolving as a result of regulatory changes, increasing fintech breakthroughs and the adoption of more sophisticated techniques by regulators and central banks. Family offices’ venture capital investments have decreased as a result of the deteriorating economic climate and market turbulence, but their interest in the asset class has not diminished.
According to a Preqin study, family offices in the Middle East are quite confident that China would be the emerging market with the most prospects over the next 12 months. China was regarded as the top market by 63% of the family offices questioned, compared with 30% of the region’s total investor base. Managers might believe that concentrating fundraising efforts in the Middle Eastern family office sector is too specialized. However, many family-owned businesses in the supply chains for oil extraction stand to benefit from the recent price increases.
The Global Family Business & Private Wealth Centre, the first of its kind in the world and in the region, was launched on the 1st September 2022 by the Dubai International Financial Centre with an estimated US$1 trillion in wealth expected to be passed down to the next generation in the Middle East over the next decade. Advancements in industry standardization and integration; the increased issuance of green Sukuk and socially focused Islamic financial instruments; and more digitization and fintech industry collaborations are three significant areas of continuous change and evolution.
Preview of 2023
Overall, wealth and investment outcomes are quite differently prioritized by younger and older investors in the Middle East. Compared to elder investors, younger investors place more emphasis on maintaining their wealth and improving their lifestyle. Compared to younger respondents, a larger proportion of senior respondents think it is crucial to leave their successors a profitable business.
The global economy’s impact on inflation and family office trends for 2023 will be significant, as it is in other regions. Strategic asset allocations would be a crucial area to reconsider. Holding cash and fixed income will not protect or produce the returns a family office anticipates in the inflationary climate. Due to their increased exposure to private debt, private equity and real estate, family offices have discovered that the private markets serve as an effective inflation hedge.
In comparison to elder investors, younger investors are also less likely to adopt their family’s investment strategy, have a long-term plan and adhere to it. The vast majority of younger investors continue to hold their assets in the region, despite generational differences. Similar numbers predict that over the next three to five years, this will largely remain unchanged.
Conclusion
In conclusion, the year saw consistent improvements in the sector. There are several approaches to establish standardization and integration, as shown in the growth of state and regional authorities, as well as the rising issuance of green Sukuk and socially conscious Islamic financial instruments when coupled with increased digitization and industrial collaboration. These improvements could be adopted on a wider scale to enhance industry adaptability as well as Shariah compliance standards and industry stakeholders’ confidence for offices. Third-party support will increase in demand as the industry develops and becomes more sophisticated, necessitating the onboarding of specialized skilled management.
Being discerning and proactive when making investment decisions in the upcoming year will guarantee quality assistance placement for optimal protection. Family offices have unquestionably benefited from the advancement of technology as this has allowed for more simplified and streamlined management strategies. As these technologies evolve, family offices must mirror technological shifts within the larger market. As younger investors seek to have more active and varied systems, family offices will begin to reflect the coming general changes.
Moria Crowley is a senior consultant at IsFin. She can be contacted at [email protected].