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Saturday, 5 May 2012

UK: The rise of Islamic finance

There has been much debate about the Arab Spring in the past 12 months, with the world’s eyes watching what this will mean for the rest of the globe.
At its very heart lies individual and societal freedoms, but what is particularly interesting is that it is likely to result in more democratically-elected Islamic governments with the promise of moral leadership and shares values. This in turn will result in much greater demand for Islamic finance and wealth management solutions.
The global Islamic finance industry is currently purported to be worth more than $1 trillion (£619bn). It is expected to continue to grow in line with the development and expansion of the financial markets generally with a growing number of new shariah-compliant stocks and sukuk – a financial certificate similar to a bond – and a general desire to assert a specific Islamic identity to social activities.
But while the term Islamic financial planning might conjure up images of the Gulf or north African regions, we believe the UK is, and will continue to play, a pivotal role in advancing the growth.
The UK is home to more than 2m Muslims and an leading financial centre. It offers great potential and currently boasts Islamic assets worth more than $19bn (£12bn).
The UK has 22 banks that offer Islamic finance products, far exceeding that of any other Western country. Many mainstream financial groups recognise the need to service Muslims’ financial requirements, as well as those of many non-Muslims whose investment principles are aligned with the ethics promoted by Islamic law.
I believe that as Islamic finance expands and the range of products continues to broaden, there will be a growing demand for education and skills, where once again the UK institutions are leading the way.
Already the UK’s banks, sukuk issuance and exchange-traded products are supported by a sturdy infrastructure. This includes more than 25 major law firms and the largest four professional services’ firms in the country, while up to 10 universities and business schools offer qualifications in Islamic finance education.
Furthermore the UK’s Islamic finance sector recently received a major structural boost following the integration of the UK Islamic Finance Secretariat into TheCityUK, an independent body that promotes UK-wide financial and related professional services. UKIFS is the leading cross-sector body that assists with the promotion and development of Islamic finance.
The events of 2008, the financial crisis and the ensuing panic ‘destroyed’ trillions of dollars of wealth. Among the worst hit were retail investors and so-called tried and trusted investment wisdom failed to counter the crisis.
Against this background, and faced with the challenges ahead, many have concluded that a rethink is necessary to the way we invest and, in particular, how we assess risk.
One can argue that if conventional institutions had followed the basic principles of Islamic finance that provides an additional risk screen, exposure to toxic sub-prime debt, sparing some investors from the worst excesses of the crisis could have been avoided. It is also interesting to note the Middle East by and large escaped the brunt of the crisis.
As I explored and looked in more detail at Islamic financial planning I became acutely aware that sharia law dictates a specific approach to investing – it provides specific requirements for wealth preservation and transfer. Regardless of the impact on their net wealth, Islamic investors are faced with the issue of family and generational wealth management. The complexity of Islamic requirements is so great that wealthy investors may need to establish professional family offices to assist with asset management, business management and legal issues
Naturally the dramatic rise in Islamic finance has prompted many to ask what it entails. Broadly speaking, shariah-compliant investing can be categorised by three overriding principles: procedural, substantive and charitable.
The first prohibits the use of interest payments – riba – based on the principle that it is unacceptable to benefit from lending money. It also forbids the use of gambling – maysir – and uncertainty – gharar – resulting in financial products that are structured in such a way that risk and profit are shared between the investor and the organisation arranging the investment.
The second stipulates that investment should only support practices that are in line with shariah law and investment in companies involved with alcohol, gambling, pork, pornography and tobacco are prohibited.
Last, charitable principles call for the setting aside of a certain amount for the purpose of charity, as a means of purifying one’s wealth and to help others.
But far from deter investment, there has been a boom is Islamic financial investments. To date the London Stock Exchange has seen more than $19.5bn (£12bn) raised through 31 issues of sukuk, with 10 new sukuk listings in 2011 and two in early 2012.
Globally sukuk issuance is expected to rise a further 50 per cent this year, with companies increasingly turning to capital markets as a result of banks reaching their lending limits.
However while there are significant opportunities to invest in high-quality global companies with strong balance sheets and sustainable income streams, we believe that this is a rather conventional way of looking at things and could be the wrong starting point when considering financial planning.
Many people are familiar with Islamic finance products and terms such as riba, sukuk and takaful – Islamic-compliant insurance – but there is less known about the merits of financial planning.
At its essence financial planning is more than just the use of shariah-compliant products. Clearly while any investment product, irrespective of industry or sector, has to be shariah-compliant, it is more important for the entire client or customer experience to be in accord with the principles of Islamic investment.
Institutions often believe that by merely using shariah-compliant products they have offered the client an experience in a manner consistent with Islamic law, but financial planning promotes the idea of helping individuals identify and achieve their long-term financial and life goals.
In my experience product solutions are irrelevant if one does not understand an individual’s lifestyle objectives and has a clear picture of their goals, dreams, hopes and fears. An investment, be it Islamic or not, is meaningless unless set against these objectives and revisited on a regular basis through a trusted relationship. After all what is right for one person is not necessarily right for another.
Although the main principles of shariah-compliant investing are enshrined in Islamic law, they still have to be applied.
Therefore I see their net result as adopting and following highly-ethical business standards and practices that result in socially responsible investing applied against a moral value-based framework. The lifestyle approach that I follow is, in my view, entirely consistent with the principles of shariah law. Lifestyle financial planning is relevant and appropriate to both Muslims and non-Muslims. For Muslims in particular it provides a complete solution rather than a solution based simply on the use of sharia-compliant products.
Only through this method do I believe that clients can truly enjoy a shariah-compliant investing experience.
Niraj Vyas is financial planning director for Guardian Wealth Management

(F.D Adviser / 03 May 2012)

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