Malaysia highlights potential for Islamic wealth management

Malaysia’s recently announced target of becoming a global hub for Shariah-compliant investment and asset management has shed light on the huge potential of a still underdeveloped segment of Islamic finance: Sustainable and ethical wealth management.The Southeast Asian nation last week introduced a five-year Islamic Fund and Wealth Management Blueprint to further strengthen the country’s position as a global hub for Islamic funds and assets by 2021. The plan is the first of its kind globally and seeks to attract high-net worth individuals and asset managers to invest into Islamic wealth management services in a quest to tap an estimated $11.5tn-pool of wealth held by Muslim individuals, institutions and governments, of which over 80% are presently invested in non-Islamic jurisdictions.“The Islamic wealth management industry is still at a nascent stage of development as compared with other segments of the Islamic capital market,” Malaysia’s Second Finance Minister Datuk Johari Abdul Ghani gave the reason for launching the strategy. For Malaysia, which also operates an offshore investment centre for Islamic investments on the island of Labuan, the strategy could quickly pay off as Islamic wealth management options for high-net worth individuals and institutional investors such as pension funds, are, at least outside the Gulf Cooperation Council nations, indeed scarce. The Malaysian finance ministry is expecting that more international asset management firms will set up shop in Malaysia, following big names such as Franklin Templeton, Nomura Islamic Asset Management, Schroder Investment Management and wealth management units of banks such as HSBC Amanah, Standard Chartered and BNP Paribas that have already done so.Overall, Islamic funds had $71bn in assets under management globally last year, according to data from the Islamic Financial Services Board whose experts expect that asset growth will be spurred further by the growth of the global Muslim population and the fact that ever more people in the Muslim world are getting integrated into the financial system. Another boost would come from conventional investors seeking to diversify their portfolios, and another one from the increasing boom in individual retirement planning schemes through different Shariah-compliant investment portfolios.The rise of the Islamic wealth industry is also likely to lead to a redistribution of Islamic wealth, which is presently concentrated in non-Muslim jurisdictions. Estimates are that more than 80% of wealth owned by Muslim individuals, institutions and government, still remain outside the global Islamic financial services industry while around 70% of total Middle Eastern wealth is invested abroad and mainly in Western countries where conventional investment products are widely available, are comparatively more developed and have greater variety.In Islamic finance, investment products are still limited, but there is a trend of evolving and developing a broader product line at a wider investment scope with greater sophistication. At present, the most common forms of Shariah-compliant investment vehicles are equity funds, real estate funds, infrastructure funds, commodity funds, money market funds and some newly established hedge funds. In certain jurisdictions, alternative funds are also on offer. These investment vehicles employ Islamic contracts, namely Musharakah, Mudarabah, Ijarah and Murabaha, which ensure that the terms and rights of all parties are in conformity with Shariah principles. Newly developed products are multi-purpose investment vehicles designed for active investors such as specialized investment funds for which there are no investment restrictions outside their Shariah compliance except for the principle of asset diversification. These funds can be used to invest in anything from real estate to fine art and have become a popular choice for professional Islamic investors. Other tailor-made offerings comprise investments in risk capital through a specially set up company designed for private equity and venture capital, investment in microfinance funds or takaful contracts that serve as instruments for wealth and lifestyle protection. Since investment in gold has been declared halal just recently, this is another option to diversify an Islamic investment portfolio. And, last but not least, Islamic wealth management is also a prerequisite for proper wealth transfer in case of an inheritance since this needs estate planning – most commonly by establishing a trust – particularly in countries where there are no Islamic inheritance laws.