Having emerged shell shocked from the economic turmoil of the past two years, many investors within the high net worth community are searching for alternative means to achieve the optimum balance between yield and liquidity within a relatively risk free environment.
For those willing to look beyond familiar territory, Islamic finance has become an increasingly attractive option.
Until relatively recently there has been a common misconception that Islamic finance is more complicated than conventional finance or that it is only available to Muslims. In fact Islamic finance is straightforward, transparent and accessible to any client who is looking for a more ethical approach to finance, where risk and reward are shared.
Put simply, Islamic finance is a method of financing and banking operations that abides by Islamic (Shariah) Law. The main principles of Islamic finance are the avoidance of all haram (harmful) activities such as charging interest instead investors receive a profit share. In addition to the prohibition on charging or receiving interest Islamic financial institutions must ensure that ambiguity (gharar) or gambling/speculation (maysair) is minimised in transactions and contracts. Complying with Shariah also means that Islamic Financial Institutions are not permitted to invest in alcohol, pork, pornography or gambling.
As a result of these inherent principles, individuals who invest in Islamic products are less exposed to market risks or pressures. Indeed, many of the instruments or investment methods which contributed to the financial crisis are not permitted by Islamic finance. Fundamentally, it is an asset-backed, risk adverse and transparent financial system of the type being promoted by governments and regulators. Within the context of the economic crisis and its aftermath, this ‘back to basics’ approach has made Islamic finance increasingly attractive to a wide spectrum of investors.
Given these principles, it is perhaps surprising that opting for an Islamic product is not detrimental to choice. Most products available to high net worth individuals through conventional banks are available through Islamic banks. For those wanting to diversify their investments that were previously solely held by UK high street banks, a Shariah compliant Premium Deposit Account offers investors competitive returns.
Alternatively, professional investors can invest in Shariah compliant instruments such as Sukuk (an Islamic ‘bond’) and Ijara (the leasing of assets), through Islamic money market type, equity and fixed income funds. These products can provide investors with a consistent income stream, while maintaining a strong focus on liquidity, capital preservation and robust risk management.
While Shariah compliant investment products haven’t always been easily accessible, the market in Europe has advanced since 2004, when the first UK Islamic bank was authorised by the Financial Services Authority. Indeed, a recent estimate puts the Islamic finance industry at $1 trillion worth of assets and predicts that it will grow at between 10-15 per cent per annum.
There are now four banks in the UK which are dedicated to the provision of Shariah compliant investment services and the industry is focused on developing new products which respond to the divergent needs of its customers. Conventional banks have also identified the potential of Islamic banking and many have opened Islamic ‘windows’ over the last 10 years. There are over 500 financial institutions offering Islamic finance in over 80 different countries, ranging from retail banks to investment banks and asset managers.
Crucially, all institutions offering Islamic banking services must have solid risk management and self-regulation to ensure that each transaction is transparent and that the appropriate due diligence and standards of disclosure required are observed. To ensure compliance with these requirements, each product and master agreement is reviewed and approved by a Shariah Supervisory Board. This Shariah specific regulation and governance is in addition to the conventional regulation that applies to all UK based financial institutions.
With the hiatus of the economic downturn still fresh in our minds, investor sentiment is cautiously moving from wealth preservation to wealth creation. Given its robust approach to risk management, accessibility and transparency, Islamic finance may just be the way forward for those seeking an alternative solution.