This article exploring views about Islamic private banking introduces a new member of the editorial team for WealthBriefingAsia: Titien Ahmad. For more details about this highly experienced writer and observer of the industry, scroll down to the bottom of the article.
Professor Shamsher
Although there has been increased interest in Islamic wealth management lately, an authority on this segment of the financial world says there has been excessive focus on wealth accumulation at the expense of more important issues.
“There are still a lot of opportunities yet to be tapped in Islamic finance with better infrastructure,” Professor Shamsher Mohamad Ramadlilli Mohd, told this publication recently in an interview.
“The focus of Islamic wealth management has been around the wealth accumulation and generation aspects given the development of the bond and equity markets and the ready client demand. However, there are other opportunities in Islamic wealth management such as wealth distribution, protection, purification that are not explored sufficiently by practitioners,” he said.
“Practitioners in markets where Islamic wealth management has taken shape such as Malaysia, Bahrain and Saudi tend to focus on wealth generation as they have tapped on the growth of the banking and capital market sector in that market. For example, tapping on the demand for bonds through ‘sukuk’ issuance,” he said.
The developing Islamic capital markets has generated a myriad of savings and investment products that adhere to the Shariah investment principles forbidding interest, uncertainty and investment in companies dealing with areas that are prohibited in Islam such as gambling, alcohol, tobacco, arms and pornography.
Previously, Shariah-compliant products tend to be introduced by boutique investment companies focusing on this market but recently non-Shariah specialists are also starting to tap on the growing demand. Franklin Templeton launched three Shariah-compliant, Luxembourg-domiciled investment products earlier this year.
Still retail wealth management
Other than the Shariah-compliant capital market or sukuk for companies looking to tap Islamic funds for capital, demand for Islamic wealth management has been largely concentrated in the retail segment with limited demand among institutional investors.
Wealth managers also tend to see clients allocate a portion of their assets in Shariah-compliant vehicles while the larger percentage remains in conventional instruments. The main driver lies in the more attractive yield offered by conventional wealth managers. Given the broader range of investment instruments available and the existing economies of scale, conventional investments will undeniably generate a higher yield.
Prof Shamsher prefers to be realistic and believes that yield inevitably drives the flow of investments. “Institutional investments are not faith-based but are rather profit oriented. How many big investors do we know are investing money based on faith?” he said.
Islamic wealth management mere window-dressing?
Thus, he sees the opportunity for Islamic private bankers to look at other aspects of wealth management. In reality, there are existing instruments for wealth distribution such as endowment through waqf, wealth purification through zakat and wealth protection through takaful but little attention has been paid on the product development front.
“(One) aspect of wealth distribution is waqf. There is so much wealth in the market but do we have a suitable mechanism to utilize this wealth to benefit the society at large? How do we develop small- and medium-sized businesses that are predominantly deprived of conventional financing opportunities?” said Prof Shamsher.
One of the reasons for the uneven development of Islamic wealth management is its relatively nascent stage. Even though the religious tenets supporting Islamic finance dates back to the seventh century, the industry really started taking shape in the 1970s.
Prof Shamsher underlined Islamic finance’s short history: “The difference between Islamic and conventional wealth management is that Islamic finance has been around for 50 years while conventional banking has been around for many generations.”
As reported recently, there continue to be concerns that growth of the $1.5 trillion Shariah financial services sector is hampered by a lack of global standards. (To view that story, click here.)
Restricted talent pool
There is thus, Prof Shamsher said, a limited pool of bankers who understand Shariah compliance against conventional banking and an even smaller pool of policy-makers who do so. The staff shortage is especially crippling in a market where Islamic banking tends to develop in parallel with conventional banking and there is a need for Islamic compliance and risk management to also mirror that of the conventional banking regulatory framework.
“The main challenge lies in the interpretation as there are different schools of thought that could lead to different solutions to the same problems that might hinder the healthy development of the industry,” Prof Shamsher said.
The common criticism is thus that Islamic wealth management tends to be a mere reflection of conventional wealth management and are just conventional investment instruments dressed up with Shariah-compliant principles.
For example, risk mitigation is often cited as an area that needs improvement in Islamic finance when it needs to comply with conventional risk management policies. According to Prof Shamsher, “Islamic wealth management operates on a risk-sharing basis. However, the current practice might not be in full compliance with these risk-sharing principles due to practical reasons. As a result, the Islamic banking institutions currently mitigate risks by using derivative contracts to manage the risk in a conventional manner or go for low-risks investments.”
Understanding both sides
At the recent World Islamic Banking Conference held in Singapore, there was a general consensus among the speakers that Islamic finance practitioners need to first of all understand conventional banking practices so as effectively balance demands from both worlds.
“We need the human resources in the Islamic finance Industry who understand both conventional practice and Shariah principles. We have a quite a number of people who are trained in Shariah but are not conversant in conventional practices and vice-versa,” Prof Shamsher said.
INCEIF was set up by Malaysia’s central bank, Bank Negara in 2005 as part of its bid to be an international Islamic finance hub. The institute has reached to students from over 70 countries with its Chartered Islamic Finance Professional in addition to masters and doctorate programmes in Islamic finance and is wholly dedicated to postgraduate study to ensure that its graduates have an understanding in both conventional and Islamic banking practices.
As with major developments that can potentially affect the market’s development, government support is critical.
“Islamic countries, especially the oil-based economies, should coordinate joint ventures in developing global Islamic wealth management industry as they have the wealth,” said Prof Shamsher.
“In Malaysia, we are fortunate to have the full support of the government as the central bank and agencies like INCEIF are put in place to support the industry’s growth.
“Political will is important for the success of the Islamic wealth management industry,” he concluded.
About the author:
Titien Ahmad is a seasoned observer of the financial services industry having covered bank strategies and trends in Asia Pacific for more than a decade. She has delivered numerous executive briefings for research clients and industry conferences and is regularly quoted by both regional and local print, radio and television news services on developments in the region’s financial services industry. With the limited industry intelligence publicly available in Asia, Titien has been instrumental in developing and launching a number of information products and services that now provide critical input into strategic decision-making for those operating in the region’s financial services industry.
We are delighted to welcome Titien to the editorial team as part of our growing and deepening coverage of the market.