Islamic Wealth Management is the fastest growing financial segment in the Middle East, with the industry already beginning to gain a foothold in various Islamic financial markets, due to the rising affluence of Muslim investors worldwide. In 2014 for instance, the number of Ultra High Net-Worth Individuals (defined as having a net worth of at least $30 million) residing in the United Arab Emirates (UAE) grew at a rate of 5 per cent, according to global property consultancy Knight Frank. Indeed, total UHNWI wealth in the Middle East is currently estimated at $0.7 trillion according to the same report, and is set to grow by 40 per cent over the next 10 years.
Naturally, the region’s significant wealth, coupled with its religious demographics, have created a demand for Islamic wealth management services. So even though Sharia-compliant investments currently only make up around 8-10 per cent of the Gulf Cooperation Council’s total, we are beginning to see increased demand for these investments on the part of global investors, and especially in the UAE, where Dubai is seeking to position itself as the capital of the Islamic Economy. Globally, a Reuters report estimated Islamic Finance assets at $1.66 trillion by the end of 2013, with Islamic funds and Sukuks leading year-on-year growth at 14 per cent and 11 per cent respectively. And in the core Muslim-majority markets, the share of Islamic assets is steadily rising: Saudi Arabia’s Islamic assets, for instance, have already reached 52 per cent, with various other markets expanding at double-digit growth rates.
The reasons for the popularity of these investments with wealthy individuals are numerous. Most obviously, given the region’s demographics, local investors are conscious of being religiously compliant with their banking activities. The new generation of family businesses- to use just one example- appears to be highly amenable to Islamic services and investments.
We also see the sector growing as investors seek to diversify their portfolios and reduce their risk. Sharia-compliant investments recorded a lower risk percentage than other investments and are less volatile and better-performing in the long run. For instance, the MSCI Islamic index rose 46 per cent between April 2007 and April 2015, whilst the regular MSCI Index only rose 34 per cent during the same period in $terms.
Investors very often point out that beyond religious motivations or risk aversion, investing through Islamic principles is a matter of respect to their tradition and to their ancestors who contributed to wealth creation. On this basis, a number of conventional banks have established wealth management arms in line with Sharia principles- investments that are free of interest and on a risk-shared basis. Multinational private banks have also begun to cater to this trend, by partnering with locally-based Islamic asset managers. This allows banks such as ours to share expertise, and increase the number of client offerings like Murabaha, Sukuks or Sharia compliant equity investment opportunities, through direct lines, diversified funds or discretionary mandates, and through a philosophy of responsible investment.
It may still be early days for Islamic private banking and wealth management, as it will be confronted with product development challenges in the initial stages. However, the sector appears to be on the right track, as evidenced by the growing number of asset and wealth management players. This indicates that the field is developing a strong footing, and, it would seem, is poised to enjoy a vibrant future. In this context, we wish to contribute to the development of bridges that embrace cultures, civilisations and industries, and generate enlightened and responsible wealth management solutions.
— The writer is Managing Director of Lombard Odier in Dubai.
