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.

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.