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Thursday, 6 August 2009

Crisis creates opportunity for Islamic wealth management

Beneficiaries from the financial crisis are few and far between but it could prove to be the making of Islamic wealth management. While sharia-compliant financial services have enjoyed strong growth among ordinary banking customers and institutions, the wealthy have been slower to embrace Islamic finance.

Humayon Dar chief executive of BMB Islamic, an alternative asset manager with a focus on Islamic finance, said: “Historically in the Middle East and North Africa region, the high net worth and ultra-high net worth families have not been interested in Islamic finance.”

Many wealthy individuals in the Gulf preferred to seek familiar western financial brands that could offer the latest hedge funds or structured products.

The regional head of a privately owned Swiss wealth manager, said: “Previously, the best shot at getting hold of the personal wealth of the local families was to offer commercial banking facilities. The big banks with good brands did well and pushed products as hard as they could. It was about packaging sexy products. But wealthy investors are realising that the big banner plus a familiar brand does not necessarily equal the safest place to put your money.”

The more constrained approach of Islamic institutions, which in theory do not engage in usury (charging interest on loans), short selling or leveraged investing, among other western practices, might look attractive by comparison. This, at least, is the bet being made by Bank of London and the Middle East, a UK-based institution that recently launched a sharia-compliant private bank.

Adrien Gayler, a former Merrill Lynch executive who is heading the private banking business, said: “It is a more conservative, simpler and safer approach with a range of products that is inevitably somewhat limited.

“It means clients probably will not benefit as much in a rapidly rising market, but in a downturn they will be protected.”

Ironically, the trend in Islamic finance in recent years has been towards trying to mimic complex and risky western financial products. By giving money to a counterparty which separately invests in underlying hedge funds or derivatives, an Islamic investor is able to receive a payout that tracks the performance of assets to which he would not otherwise be able to gain exposure.

Such structures need to be approved by a recognised sharia practitioner but many banks, particularly in the thriving Malaysian Islamic finance market, have succeeded in launching them.

Islamic investors who bought such products have seen hefty losses, prompting a backlash against financial institutions adopting more flexible interpretations of sharia law.

However, according to Dar, this reflects the general rise in risk aversion, rather than a decisive move by Islamic investors away from products replicating western practices.

He said: “Islamic investors like the risk-return profiles of traditional, western private banking products but with a sharia wrapper. Otherwise, they face the problem that the universe of sharia-compliant assets is quite small. Once normality returns to markets, the objections to these products will go away.”

Other wealth planning tools familiar in Europe are also being adapted for the Islamic market. FirstRand Trustees, a Guernsey-based arm of South Africa’s FirstRand bank, launched a sharia trust deed targeted at Muslim wealth owners with offshore or international assets this year.

(Wealth Bulletin)

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