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Wealth check.

Ever since the Dubai debt debacle, HNWIs have been starting to demand more diversification as the Islamic finance industry's reliance on real estate products and Islamic financing structures have been called into question. However, so far Islamic wealth managers have failed to hear their clients' emerging calls for better wealth management.

John Sandwick, an independent Islamic wealth management and asset management consultant, said that at present virtually no banks offer much beyond real estate products. He said, "A broader product range is desirable. Real estate investments are a cornerstone of the industry, but it needs to diversify from this in the interests of its clients."

According to Fares Mourad, Head of Islamic finance at Bank Sarasin, the preponderance of real estate-based financial products exposes clients excessively to the vagaries of property markets, limiting diversification. However, Mourad believes that Dubai's debt debacle may well prove to be a catalyst for better Islamic wealth management, having highlighted the need for better diversification. He said, "Dubai was a shock but I believe it does the industry good because it forces it to look into other investment possibilities beyond real estate, like alternatives such as natural resources, water, alternative energy."

He said that many opportunities to diversify exist, for example financing commodities trading, ship building or timber. He said that this gives clients involvement in long-term economic activity, rather than speculation. He said, "Only when you have a long-term aim can you determine short-term steps to ensure you reach that aim. In Islamic finance, the long-term perspective of investment is still missing."

Sandwick cited Sukuk as an under-tapped asset class, as Sukuk funds only make up $120 million of what he estimated to be a $75 billion market. He said that despite the uncertainty after the debt stand-still requested by Dubai World on $26 billion of debt, some of which is Shari'ah-compliant, demand for Sukuk will recover and thrive if the industry can provide structures that do not exclusively use real estate as their underlying tangible assets.

Alex Theocharides of Watamar & Partners said, "Nobody has yet managed to construct an acceptable, sufficiently liquid Sukuk fund, there is not enough Sukuk on the market. Another welcome development would be the growth of Shari'ah-compliant mutual funds, an industry which could hit hundreds of billions of dollars from the current $10 billion. It's a huge opportunity for the industry."

According to Toby Birch, Founder of Guernsey-based Birch Assets, a lack of common standards is also thwarting the development of Islamic wealth management products. He said, "The average fund is small and committee driven, and products are usually designed by big banks -- the only ones who can afford top scholars. This ampens innovation."

However, Birch is optimistic that this will change, as clients become increasingly demanding, pushing product development. "I don't think there ever will be across the board standardisation because the key schools are pretty different, but you will get a regional bias, people will use the best-known scholars for Asian and Middle East markets," said Birch.

Harris Irfan, Head of Islamic products for Barclays Capital, believes that having demanded more choice, HNWIs will sit on their cash and wait to see what comes next. He said, "The time is right for providers to give them that choice," he said.

Furthermore, the Dubai World debacle has also called into question Islamic financing structures. Sandwick believes that when they get their new products, investors will also scrutinise their fee structure and will demand changes from the current structure. Currently transactions featuring real estate as the compulsory tangible asset involve upfront fees for the managers even before the client has made a return.

According to Mourad, some of the products currently offered create a conflict of banker-client interests, with the banker's remuneration more dependent on transaction fees than on the long-term viability of the client's investments. He cited the asset management units at Bahrain-based Gulf Finance House and Arcapita as examples, which amassed large transaction fees even though clients are now sitting on huge paper losses.

Mourad said, "We don't want relationships based on product pushing so the banker can collect fees, but rather the long term provision of services in the spirit of a partnership. Ultimately the success of the client will determine the success of the banker."

However, Sandwick is optimistic that the Dubai World debacle could give the industry the shakeup it needs to push for a more equal sharing of risks between manager and investor, as Islamic finance principles demand. He said, "The future may be brighter for a more rational allocation of capital in the Islamic banking industry, with a greater emphasis on developing business models that rely on recurring income, not high-stakes gambles with other peoples' money."

According to a recent report from Bank Sarasin, Islamic banks' failure to cater for clients' wealth management and estate planning needs has forced them to rely largely on traditional asset managers. The report explained that, until very recently, there were no dedicated Islamic wealth management services, and the few that have emerged offer restricted services and products that fail to completely satisfy clients' needs.

Mourad said, "You have Islamic products that try to mimic the behaviour of conventional instruments, but there is a shortage of products that are Islamic in spirit."

In order to foster the growth of wider Islamic wealth management services, Malaysian financial institutions have been urged to seek international cooperation. Malaysia's Second Finance Minister, Ahmad Husni Hanadzlah, said that local institutions should consider forging partnerships and joint ventures with world-class asset management companies to explore the potential in this segment.

He said that the Islamic wealth management could be regarded as one of the strongest emerging capabilities in the country's Islamic financial industry as asset management has become one of the fastest growing businesses in the financial services sector, and that teaming up with globally-famous asset management firms could help local institutions to improve their branding on the global stage.

According to the report from Bank Sarasin, as well as a shortage in Islamic private banking services, Islamic succession planning is also in need of an overhaul. According to the report, Islamic succession planning currently lacks the mechanisms to ensure wealth preservation over generations.

"In the Muslim world hardly any financial planners address this issue, yet successful estate planning would ensure the wealth people have built is consolidated, as well as encouraging family unity," Mourad said. "We would like to see a genuine partnership between Islamic bankers and their clients that aims for wealth accumulation and preservation over generations."

According to Hanadzlah, the combined wealth of the Asia Pacific and the HNWIs in the Middle East is expected to keep an annual increase of 8.8 per cent and 15.6 per cent respectively until 2018, indicating great potential in the asset management sector and an opportunity the Islamic finance industry cannot afford to ignore. If the Dubai World debacle gives the industry the push it needs to fill the current gaps in the market, it may well have done Islamic finance a favour.

2009 CPI Financial. All rights reserved.

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Publication:Islamic Business & Finance
Date:Sep 5, 2010
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