Private banks must expand their services if they want to serve clients in accordance with Islam. This may require training staff in Islamic financial planning.Orlando Crowcroft reports.
The high-net-worth individuals of the Gulf have long been targets for international banks, not least in the wake of the financial crisis, which has pushed down revenues from banks’ core businesses in Europe and the US.
Yet just last year, one of the world’s leading Islamic banks, Bank Sarasin, claimed that although Islamic retail banking was on the rise, the growth of Islamic private banking for high-net-worths – classified as those with more than $1 million in investable assets – was marginal.
Sharia-compliant financial planning services are needed for the management of property assets, wills and overseas investments, says the bank, as well as for philanthropic giving – a requirement for all Muslims according to the Koran – which it claims accounts for more than $50 billion a year in the Gulf Cooperation Council (GCC).
“Islamic financial planning is largely neglected by the Islamic banking industry,” says Fares Mourad, head of Islamic finance, at Bank Sarasin. “It requires a detailed process, as well as structures and products to ensure Muslim investors are fully compliant with sharia law.”
To serve Muslim clients well, says Mourad, a banking system is needed that manages the entire Islamic wealth cycle, from acquisition to preservation and distribution, rather than a system that simply deals in sharia-compliant products through a conventional private banking set up.
MORE PRODUCTS NEEDED
Broadly, sharia-compliant finance is any banking activity that is consistent with the principles of sharia law, which prohibits the fixed or floating payment or acceptance of specific interest or fees – known as riba or usury – for loans of money.
The best-known products in the market are takaful, sukuk and mutual funds, which are available to retail customers and high-net-worths, and which have been the primary sharia-compliant focus of international banks over the past decade.
But while these conventional products offer a way into Islamic finance for international banks, more services are needed. The wealth management market in the Gulf is dominated by local banks – particularly in the United Arab Emirates, Saudi Arabia and Malaysia. Though these firms have expanded their private banking arms thanks to increased demand, the market is relatively young.
“It is still in its early stages of development when one compares it with the more holistic conventional private banking market. There is not enough to meet growing demand, albeit slow growing,” says Noor Quek, managing director at NQ International, a Singapore firm that provides advice to wealthy family businesses in Asia and the Middle East.
Quek sees opportunities in providing potentially lucrative services such as succession planning, trust services, discretionary and non-discretionary portfolio management, equities and structured investment products. But, echoing Mourad, she stresses that international banks should not seek to sell individual products but a whole package.
This is because successful wealth management means winning a long-term commitment from clients – banks in Europe and the US may represent a family for generations – and one-off sharia-compliant investment products are not enough to establish such relationships.
But there have been moves in the past decade in some banks in Switzerland, long the home of family wealth management, to enter this market. Switzerland’s Faisal Islamic Bank was one of the first, opening its doors in 2006 in a bid to persuade wealthy Muslims to place their money in Geneva.
More recently, international banks have targeted the Islamic market, looking to wealthy Middle East and Gulf investors to replace business they may have lost in the West. The World Wealth Report 2013, released by Capgemini and RBC Wealth Management, says there are now 490,000 people in the Middle East with investable assets of $1 million or more.
Although the amount of assets under management in Islamic private banking is difficult to determine, Islamic banking assets are growing twice as fast as conventional banking assets, says Standard Chartered, and are expected to reach $2 trillion by 2015.
The bank launched its own sharia-compliant wealth management proposition in 2012, on offer to clients in London, Geneva, Dubai and Jersey, with plans to extend the network to Singapore and Hong Kong.
Demand will grow fast, claims the bank, and not just in the conventional markets of the Gulf. Malaysia is a big market for Islamic banking, and interest is growing in parts of Africa as well as in Turkey.
“Demand for sharia-compliant private banking in the GCC and around the world continues to grow as the gap between conventional and Islamic banking solutions narrows,” says Stephen Richards Evans, head of private banking, Europe, Middle East, Africa and South Asia, at Standard Chartered.
“It is critical for major private banking hubs like Geneva, London, Singapore and Jersey to create the necessary Islamic capabilities to support this demand.”
But operating as a credible Islamic finance provider entails a serious commitment in terms of governance infrastructure. A bank requires a sharia board, typically composed of three or more Islamic scholars, who must certify that the bank acts in line with sharia principles. The views of individual scholars may sometimes differ from others, creating potential confusion and complexity.
Regulations and expectations of clients may also vary depending on where they are from. Clients in Saudi Arabia, for example, may have different priorities to those in Indonesia or Malaysia. As a result, coming up with a set of products that can transcend all these differences can be a challenge.
“The compliance and due diligence process is onerous as each stage of product development has to be carefully assessed for its compliance with sharia laws and often there could be differing views between the religious scholars,” says Quek.
“Balancing profitability with risk and compliance and ensuring it meets with sharia regulations is a challenge. Costs tend to be higher and margins slightly thinner,” she adds.
People skillsHuman resources are important, too. Banks need to find and train the people who will manage and sell the products. Muslim clients in the GCC and Middle East are used to using their own banks to manage their assets and it is a challenge to persuade them to change this habit.
It is a point that Eric Meyer, executive chairman at Dubai Shariah Asset Management, raised in an interview with Funds Global Mena last year. Meyer’s DSAM Kauthar Gold Fund seeks to target investors looking for a sharia-compliant investment platform, but he says he has found it difficult to find people who can sell the platform to new clients.
“There needs to be an educated sales force. I am so frustrated that we’ve built state of the art Islamic products, but I can’t teach a sales force what is special about them or how to position them,” he said.
When it comes to longer term wealth management – with its more complex structures – the need for good relationship managers is even more profound, especially given the long-term commitment a bank makes to its client.
“Human resources both at the customer and processing levels, with sufficient technical understanding of Islamic banking, are essential,” says Richards Evans.
Quek says the banking world has a great deal further to go.
“More banker and client education on the rationale of sharia is critical. The market will be there once the products are there. But it won’t happen tomorrow,” she says.
©2013 funds global mena