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Thursday, 2 January 2014

Malaysia: Islamic wealth management next phase of growth for Islamic finance

KUALA LUMPUR: Some two years ago, Malaysia’s former Prime Minister Tun Dr Mahathir Mohamad delivered a thought-provoking talk themed “Islamic Finance as the means for Revival of Islamic Renaissance.” He spoke at length on how managing wealth efficiently can contribute to a country’s growth.

What Dr Mahathir was trying to say was by leveraging on expertise and skills, especially in wealth management, a country can benefit not only from the spinoffs of the products but also the potential of the industry moving forward.
Managing wealth, according to him, is not just commercial sense, but it is also a duty and responsibility for Islamic bankers and financial experts to take on so that wealth can be better managed which can further lead to the awakening of Islamic renaissance.

“The wealth of the Muslims and their banking system should enable Islamic countries to grow and become fully developed.

“If they have not been able to develop their countries, it is due to their failure to acquire or innovate ways of using their resources and wealth in a productive way,” he said.

Dr Mahathir said wealth is not just for acquiring and enjoying the good things of life.

From wealth itself, it can create more wealth through management skills, through investments, through application of the resources acquired to produce goods and services and to trade.

Wealth does not only contribute to the development of good administration, but also the building of infrastructures, while at the same time eradicate poverty.

More importantly, wealth can contribute to the acquisition of knowledge, which is really necessary for a country to become a developed nation.

Why is this niche industry was given emphasis for the past few years? For some time now, the focus has been on the conventional wealth management but industry players and the investing public are gradually realising that the potential also lies through Islamic instruments.

Rising of high-net worth individuals despite crisis

One of the factors that prompt this changes is the rapid growth in the number of high-net worth individuals (HNIs) on the back of the global landscape uncertainties.

Who are these HNIs? HNI refers to individuals who have more than US$1 million liquid assets that are investable.
In Malaysia alone, it is estimated that the number of HNIs will double from its current 32,000 to 68,000 people in 2015; with their net worth increasing in tandem to US$330 billion from US$140 billion.

That is certainly a huge number which presents an enormous opportunities for Islamic bankers and financial players if they played their cards right.

But it does not stop only at the domestic shores, there are another big “slice of cake” across the Asian region to be tapped especially with most Asian countries are the ones that really create growth.
A report from Julius Baer, Asia will add 1.66 millionaires, 2.82 millionaires by 2015 as China and India, the world’s fastest-growing major economies, continue to mint millionaires.

It forecasted that the wealth of HNIs, those with US$1 million or more in investable assets, would nearly triple to US$15.8 trillion in the next five years to 2015.

The Swiss wealth manager has forecasted that China alone would register half of the millionaires in Asia, with combined wealth of US$8.8 trillion from the current 502,000 million HNIs, with investable assets totaling US$2.6 trillion.
It said India would more than double the number of HNIs to 403,000 by 2015, while Indonesia would see the highest growth rate in the number of wealthy people, up by a quarter to 99,000, Julius Baer said in 2011.

Meanwhile, on economic growth, the Asian Development Outlook (ADO) for 2013 has estimated that regional economic growth in the Asia-Pacific region would pick up to 6.6 per cent this year and reach 6.7 per cent in 2014.

Malaysia as Islamic wealth management hub in the region
Recognising this potential, there has been calls to make Malaysia an Islamic wealth management hub in the region.
This is to capitalise the current expertise and capacity and further cemented its position as one of the renowned Islamic financial centre in the world.
Among the calls were from the Securities Commission (SC), which said that many measures have been undertaken to encourage this industry to flourish and to allow Islamic fund management companies enjoy tax incentives.
According to the SC, there were 19 licensed Islamic fund management companies in the country as of July 2013.
So what is it that the industry players are lacking of? The regulator said the answer lies in innovation.

Industry players should look into innovative solutions that could be offered to their clients.

By the year 2020, Malaysia’s assets under management of Islamic funds are expected to hit RM322 billion from RM80 billion last year.

This RM80 billion represent about 16 per cent of the total industry assets, representing quite a significant market for the local Islamic funds.

Malaysia still retained its position as the world’s largest sukuk (Islamic bond) market, accounting for almost 70 per cent of global sukuk outstanding, as well as home to the world’s largest unit trust industry with 169 shariah-compliant funds.
With all these data, industry players have quite a big market and segments to choose from and by continuing to innovate and expand, this potential does not only lies in Malaysia but across the region.

There are currently 27 commercial banks (with local and foreign ownership), 16 Islamic banks, five international Islamic banks and 15 investment banks in Malaysia, according to Bank Negara Malaysia’s website.

Labuan IBFC as one of the channels to manage funds

Another institution that is seriously looking at tapping the potential of Islamic wealth management is the Labuan International Business and Financial Centre (Labuan IBFC).

In line with its goal to enhance its presence in the region, it sees Islamic wealth management as one of its growth drivers.

Labuan Financial Services Authority (LFSA) Director-General Ahmad Hizzad Baharuddin said in 2012, as personal wealth in the Asia Pacific continues to grow in line with robust economic development, the Labuan IBFC would benefit from the correspondingly stronger demand for Islamic wealth management products.

“Islamic wealth management products demand not only the availability of an enabling legislative and regulatory framework that caters to the market structure’s needs, but also an environment that ensures prudential safeguards, particularly Shariah governance. The Labuan IBFC has all these requirements in place,” he said at the Global Islamic Finance Forum 2012.

This is strongly proven as Labuan IBFC repositioned itself as midshore centre from an offshore centre, where entry into Labuan was lower, but once the companies get in, they need to adhere to a robust regulatory framework as well as international best practices and standards which also include anti-money laundering and anti-terrorism.
Back in February, the Labuan IBFC launched its 2013 Wealth Management Year, which reflected its seriousness towards growing that part of businesses.

In an interview with Bernama, Labuan IBFC Chief Executive Officer Saiful Bahari Baharom said since then, the acceptance toward their road shows as well as Wealth Management Masterclass, a session where industry players and investing public can learn more from the experts, has been very well accepted and encouraging.

So far, it has been one of their successful events with more than 65 to 70 percent of participants expressing their interest to participate again in order to know more about wealth management, he said in an interview with Bernama.
During one of the events, which was the mid-year wealth management forum in late June, about 350 people attended, reflecting a huge interest among investing public on how they can tap on different products in wealth management services.

Saiful said Labuan IBFC offers quite a wide range of wealth management tools for HNIs, family offices and other wealth managers that need a range of structures offering efficient wealth transfer, dynastic planning and inheritance management as well as through Islamic instruments.

As of last year, Labuan foundations increased by 62.5 per cent to 65 foundations from 40 in 2011.

During the year, registration of companies there also recorded a growth of 8.9 per cent or 779 companies, bringing the total number of companies to 9,487 as at December 2012.

As at May 31, 2013, there are 9,811 Labuan-based companies, 60 banks, 206 insurance firms, 38 trust companies, 280 leasing companies, 81 foundations and 15 Labuan International Trading Companies.

Islamic banks set up unit to cater Islamic wealth management

Apart from offshore and midshore centre, banks are also preparing to face this new wave of changes in the Islamic finance.

While conventional banks are already present in the wealth management market, Islamic banks are gradually looking at this segment as another source of growth.

Bank Islam Malaysia Bhd, which is Malaysia’s first Shariah-based institution, was established in 1983, at times where Islamic banks and finance were still at its infant stage.

Started its operations with traditional financing like savings and investment types of products for individuals, it has expanded into offering products suitable with the fast pace changing financial needs of customers across the board.
This include products and services related to capital market, treasury, structured products, micro financing as well as wealth management.

So far, Bank Islam has offered quite a comprehensive list of more than 70 sophisticated and innovative banking products and services with competitive advantages similar as those offered by its conventional counterparts, through a wide network of 131 branches and more than 1,000 self-service terminals around Malaysia.

Since its inception, it has grown a diverse clients base and has been ranked the fourth strongest bank in Malaysia, 53rd position among Asia Pacific strongest banks, 24th among Largest Islamic Financial Institutions and 34th among Global Islamic according to ranking list by the Islamic Banker in 2011.

The second Islamic bank in Malaysia, Bank Muamalat Malaysia Bhd, also have a wealth management business of its own, wanting not to be left out from the race in getting a slice of the business, although initially the returns are still negligible.

These are only some of the examples of local Islamic banks trying to do in order to enter this market.
For other Islamic banks, there are certainly different strategies and mechanisms up their sleeves to tap into this lucrative market.

Although the contribution from this segment is still small in numbers, it can be a strong contributor moving forward if these players enable to increase interest these potential customers through innovative products.

Lack of awareness on Islamic wealth management

While some industry players are ready to take on this new phase of development, there are still challenges in making the industry as successful as other Islamic products and services previously.

One of it is the lack of awareness among the public about Islamic wealth management.

Among those, there is one group that took the initiative towards increasing the awareness among investing public, is BNP Paribas-INCEIF Centre for Islamic Wealth Management (CIWM).

The centre is a joint collaboration between BNP Paribas Malaysia Bhd and The Global University for Islamic Finance (INCEIF) which is dedicated to support the growth of the Islamic wealth management industry, asset management and capital markets.

Among their key objectives are furthering education and research, industry innovation as well as policy development.
This centre not only dedicated to research and development in the area of Islamic wealth management, but it also focuses on asset management and capital markets.

The setting up of this centre is aligned to support the growth of the Islamic wealth management industry that can offer innovative financial solutions to meet the more sophisticated investment demands of the increasingly affluent population particularly in Asia and the Middle East.

Apart from applied research, the centre also conducts policy related research for relevant regulatory agencies, apart from creating commercial and innovative Islamic wealth management related products as demanded by investing public.

The centre, which was launched by Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz in 2012, reflected a strong bond between industry and Islamic finance education system in creating significance contribution towards the industry.

This certainly augurs well for Malaysia as the country prepares to become an internationally recognised hub for Islamic wealth management.

With INCEIF as the partner, this centre also presents vast opportunities for the present industry players to upgrade their capabilities through either long- term courses as well as professional certificates provided by the university.

According to The Banker’s 2012 annual survey, there are now more than 600 Islamic financial institutions operating in over 75 countries worldwide.

These provides an indication that acceptance towards Islamic finance industry has generally set a positive momentum in the future.

Islamic wealth management is just one part of many segments in Islamic finance that are waiting to be tapped.
There are many more in years to come.

Innovation, coupled with a right direction and guided by comprehensive regulations, can set a stronger tone for the industry players to follow.

With all these, what Malaysian players need to understand is that they need to buck up and remained at the edge where they can compete fairly and justly, not only in the domestic market but also beyond the shores, regionally and globally.

Only then Malaysia can stand tall and be proud to say they are indeed unbeatable global player and become a role model for the rest of the world.

(Borneo Post Online / 02 Jan 2014)
Alfalah Consulting - Kuala Lumpur:
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