In Part 1, Rizwan Rahman explored the Mondragon Cooperation model and argued that its socialist principles could benefit capitalistic enterprise and community empowerment. In this concluding part, the principles and structure of the Mondragon model are used as a benchmark to create a blueprint for improving the value proposition of Islamic finance. In the process, one can see similarities between the philosophies of both concepts.

Islamic and finance as initially conceived was revolutionising global appeal and unique selling points in the industry is here to stay as it has global appeal and a unique selling point sharia compliance at  

nevertheless the same time is here to st, the industry is here to stay as it has global appeal and stay selling point sharia compliance. at the same time and for its survival the industry has to be mindful of the criticism especially the form versus substance argument.

Nevertheless, the industry is here to stay as it has global appeal and a unique selling point: Shari’a compliance. At the same time, and for its survival, the industry has to be mindful of the criticisms, especially the form versus substance argument that endlessly plagues the very foundations of the industry. It needs to realise that its fundamental and original goal is to meet the needs of the community, and not focus solely on profits. Learning from the model of the Mondragon Cooperation, synthesising profits and community alleviation is very possible, whilst still remaining decidedly and symbolically Islamic. We, therefore, explore the lessons that can be learned from Mondragon, its similarity to the teachings of the Prophet Muhammad and how these lessons can be applied in the modern world. In these next few pages, we offer a plan for improving Islamic finance but do not argue for a re-haul and removal of the current system. This would be counterproductive for the industry and will destroy the good work that has already taken place.

In summary of the process, a community needs to be educated in developing their spiritual composition and sharpening their technical skills through the creation of pedagogical institutions. This provides the backbone in galvanising members to work together by raising capital that can be donated into the pool which is used for investment. Investment is then put into the development of ideas for commercial organisations and their eventual creation. These commercial organisations along with other institutions such as banks and schools should be linked in a broad network where each party supports the other. We now proceed to expand the framework further.

Community

A community will be made up of individuals who create their own social organisations such as families, religious institutions and grassroots organisations including social services and sports centres. Father Arizmendi, founder of Mondragon Cooperation entered a community in which there was a church. This was the centre point. He then integrated himself with the people and the social organisations that were already present. He organised communal events bringing the community together. Having these foundations in place made it easier for him to teach the people. Similarly, the Prophet entered into a community that had institutions in place, such as the Ka’aba, as well as strong tribal and family ties. However, there were no mosques, though it can be argued that the mosque stems from the Ka’aba as it was a house of worship. From the religious institution and the cultural normative, the Prophet built his mission.

The church in Mondragon was the cornerstone from which these ideas and institutions were developed. Today, mosques are present in predominately

Muslim communities. At the very least, hundreds, and in central mosques, thousands attend Friday prayers. Imams have a responsibility to impart both the consciousness of Allah and act in accordance with the Shari’a to congregants. A dynamic imam can galvanise communities if he goes beyond preaching spiritual prerogatives. Islamic finance institutions need to have a greater relationship with mosques. Today, the relationship is tenuous (if it

exists at all) with mosque committees expressing suspicion of Islamic finance and its objectives. Improving relationships does not mean the mosques should have a say in the activity of Islamic financial institutions but mutual support would benefit both parties.

Education

Spiritual development

Any society is founded on cultural norms, customs and values that are rarely codified but understood. The legal and political framework of a society reflects certain values. Father Arizmendi was a Catholic priest, primarily in the community to assist spiritual growth. The Prophet’s fundamental objective was to grant his community the recognition of Allah. In doing so certain values were refracted from the notion of Tawheed (Figure 2). The Prophet became the exemplar of these values and from whom his community was to learn. Building role models is therefore important as well as aphoristic stories to convey the importance of values.

In the modern world, spiritual development is considered quirky and quixotic. Yet with the plethora of psychiatrists and self-help books, it still maintains its importance but in a different guise. The history of Islam testifies to the importance of a spiritual framework, starting with prayer and accommodating rituals and recitations. The science of tasawwuf focused on removing bad qualities of a person, and institutions such as guilds and sufi lodges were created to assist a person in purifying themselves. The industry would gainsay the notion that spiritual development is not within the sphere of concern but the institutions that prop up the industry (schools, universities) have a culture and do convey values. This culture and values are extenuated by the workplace. Corporate governance imparts values, and Islamic financial institutions have to be aware of the role they play in affecting a person’s comportment. Unfortunately, this is being forgotten. What has to be stressed is that spiritual development concerns the individual and not the community but by individual improvement, there will be community improvement.

Social Consciousness

A fundamental lesson that can be taken from Mondragon is community unity and the importance of imbuing this within members. Arizmendi emphasised the importance of helping each other, especially as the community at the time was in the grips of poverty. In Islam, the concept of the ‘umma’ is central to the religion’s strength. The oft-repeated hadith, “The similitude of believers in regard to mutual love, affection, fellow-feeling is that of one body; when any limb of it aches, the whole body aches,” highlights the importance of having social consciousness.

An important point is that Father Arizmendi tackled the challenges of a localised community; the Prophet Muhammad first built up his local community. In the modern world, the global village has broadened the definition of the community, and Muslims appear to take on the pains of other Muslims around the world. However, this is a weakness of the Muslim consciousness resulting in an arbitrary and nonplussed activity. The first point of change is the local community, then the surrounding communities and then those who are further away. It was a point that the Prophet understood as his mission grew from Medina. It is something Father Arizmendi understood with his parish, Mondragon. Islamic finance institutions have to consider the local community needs first, which will differ according to location and socio-economic status. There has to be greater inter-community linkages. Western institutions have understood the importance of social responsibility and Islamic institutions need to learn from this. In Figure 3, the governing principles of Arizmensndi’s cooperative are reproduced, this time showing how the Prophet had similar principles to encourage social consciousness.

Institutions

Schools and universities are the foundation of a person’s knowledge of the world, both in terms of technical knowledge and philosophy. It is within the school that citizens are influenced and, to some extent, moulded. Every educational institution indoctrinates, and the best ones align with the norms of society. Arizmendi’s first creation was a technical school that taught values and provided skill sets. As the Mondragon Cooperation grew, a university was developed. The Prophet taught his community values and law. It was up to his community to build from his teachings, and they certainly did creating educational systems that created philosophers, lawyers, scientists, etc. Technical skills on the other hand were a societal concern, and not a religious concern, though the Prophet encouraged people to work and not be aesthetical monks. It was part of their religious duties.

Madrasas represent the conduit through which the Prophet’s teachings are disseminated but many of them today suffer from a disconnection with greater society. More needs to be done to change the pedagogy of madrasas to account both for spiritual and technical education.

Financial intermediation

Pooling

Banks and governments are the best institutions to accumulate people’s money and distribute it to the private sector. Due to the fractional reserve system, banks have access to all the cash earned by individuals who choose to deposit. This is a significant pool of income they can use. As mentioned in Part 1, Arizmendi ascribed the failure of cooperatives to a lack of credit and/or lack of innovation. He, therefore, requested donations from the community, which created a pool of income to invest in commercial ventures. The Prophet used to rely on his community to donate for large-scale ventures such as poverty alleviation and military activity. Zakat was a religious duty, a form of compulsory tax, while sadaqah was voluntary. The more zakat given and sadaqah donated, the larger the pool. However, the quantum depends on the largesse of the community. A more selfish community, the less the donation. Cash can also be extracted from deposit accounts that are guaranteed by the banks.

Investment

Father Arizmendi created the credit union, Caja Laboral, which evolved into a large bank. From the bank, investment and credit were disbursed. In Islamic finance, the banks do the same but profit and loss mechanisms such as mudaraba and musharaka need to be supported more. The central problem for PLS schemes is a lack of information. Customers do not know where their money is being invested in. However, if banks have greater linkages with the community, information can be spread further. The internet and social media provide a tool to link people to the activities of the bank. If the remit of the bank is to invest in socially beneficial commercial projects and local businesses, fewer people will express discontent, and at the same time be aware of the flow of income. There will also be an inbuilt regulatory system of businesses in which banks invest. If businesses fail due to corruption or misapplication of funds, communities will be more aware and this would act as an incentive for businessmen not to transgress. Community censure can be a significant disincentive and has proven effective in smaller communities. Indeed communities have grown larger but with the improvement of communication technology, there is a way of managing numbers and distances as connectivity is instantaneous both audibly and visually. Debt finance instruments such as cards have more value for personal finance (buying houses, conducting renovations, etc).

Industry and innovation

Creativity

Education and investment were two of the core pillars of the Mondragon Cooperation. The final pillar was industry. As mentioned earlier, one of the reasons for the failure of cooperatives was the lack of innovation. Therefore, in Mondragon, there was an investment in research and development to build industry. While the historically Muslim world created impressive trade networks and established markets, it failed to embark on an industrial revolution. Today, the Muslim world has embarked on a course of industrialisation but more needs to be done in terms of investing in ideas for innovative products. In the so-called golden age of Islam (7th -12th century) one must wonder whether more investment in ideas that were being discussed at that time on aerodynamics, pneumatics, hydraulics, etc, would have led to an industrial revolution.

Network

The value and success of a cooperative depend on people working together for the benefit of their own society. It requires personal linkages as well as institutional linkages. The Mondragon Cooperation is made up of institutions that fall under four categories: Knowledge, Financial, Retail and Industrial. Within each institution, there are vertical linkages and financial disparity is reduced between higher management and labour. Between institutions, there are horizontal linkages with institutions assisting the other in terms of helping those companies that are doing poorly and also investing in research and development. There are also overlaps. For instance, schools will create labour who will work in retail and will pay their salaries which go into banks and then be used to invest in the industry. Overall, internal relationships and external relations have to be strong. (Figure 4) In pre-modern Islamic societies, artisan guilds ensured both vertical and horizontal relationships. The Ottoman Empire was renowned for the number of guilds in cities such as Istanbul. They created a cooperative environment and helped individuals develop skills and prosper. Merchant guilds were also formed and this helped with long-distance trade. Agentive relationships were strong, with agents responsible for their principal’s goods, travelling long distances and not reneging from their responsibilities.

Today, there needs to be greater linkages between institutions in Muslim communities. Islamic financial institutions have to be linked to mosques, grassroots organisations, schools, universities, companies and social services such as healthcare. Figure 5 shows the potential linkages between institutions that need to be created. Starting from the mosque and grassroots organisations that provide purpose to communities, the community needs to create schools and universities for spiritual and technical knowledge. From community funds, financial institutions are established to invest in industry and innovation. Profits from industry are then ploughed back into financial services and/or education and/or the community. There is interconnectivity and cooperation between all the institutions.

Conclusion

This blueprint taken from the experience starting of Mondragon is based on two assumptions: no government involvement the starting point is a blank canvas with no institutions present. With regard to the latter, institutions are already in place. Madrasas, universities, grassroots organisations, etc have been previously established. Islamic finance has done much in the last 40 years to create a worldwide industry but it needs to do more to connect and assist predominate Muslim communities build and improving the institutions that will benefit their locality. The weakest linkage is between Islamic finance institutions and mosques and madrasas. Once there is greater connectivity, there will be an improvement in the Islamic finance proposition that accounts for both the spiritual and practical development of the Muslim community. This does not require a revolution but an evolution in thinking and practice.

The inaugural Islamic Retail Banking Awards (IRBA) took place on November 17, 2015, at the prestigious Taj Hotel Dubai in the vibrant city of Dubai, United Arab Emirates. The awards ceremony was held in conjunction with the 7th World Islamic Retail Banking Conference, and was attended by more than 200 Islamic bankers and finance practitioners from around the world. The awards ceremony was organised and managed by Cambridge IF Analytica, which is a UK-based financial services intelligence house that specialises in developing and utilising powerful cutting-edge analytical tools to evaluate business data, assess macroeconomic indicators and understand market trends.
IRBA is the first-of-its-kind Islamic banking awards programme based on the most academically rigorous analysis of global Islamic banking efficiency performance. Winners are rigorously assessed by a panel of independent experts based on the new efficiency model developed by Cambridge IF Analytica. These prestigious awards honor individuals and institutions who have demonstrated great commitment and made significant contribution to the development, growth and success of Islamic retail banking.
IRBA celebrates excellence and best practices in Islamic retail banking in two categories:

• Strongest Islamic Retail Banks – award winners are selected based on a pathbreaking Islamic banking efficiency study conducted by Hamdan Bin Mohamed Smart University, which ranks over 132 Islamic retail banks.
• Critics’ Choice Awards – award winners are rigorously selected by the Critic’s Choice Committee, which comprises of leading Islamic banking experts from around the world.

Strongest Islamic retail banks should be considered the safest Islamic banks in terms of doing business with, both by customers on the liabilities side and those seeking financing from or doing business from these banks on the assets side. We believe that efficiency of operations and management should be the key factor in determining the safety level of a bank rather than its size. Unlike the Safest Bank Rankings by Global Finance Magazine, we employ a robust methodology to measure efficiency of Islamic retail banks. We expect that our ranking of Islamic retail banks will become a benchmark in assessing the performance of Islamic retail banks all over the world. Critics’ Choice Awards, on the other hand side, take into account wider factors in determining winners in a number of categories.

In the inaugural IRBA, a total of 25 awards were presented to Islamic banks and individuals, including a technology firm and an education of higher learning. A total of 10 individuals and institutions from the UAE were honoured with various categories of awards, representing 40% of the total number of award recipients. However, the coverage was global. Pakistan, Sudan, Malaysia, Oman and Saudi Arabia each took home 2 awards. Other countries represented in the awards ceremony included Kenya, South Africa, Bahrain, Kuwait and Jordan.

TOP AWARDS

Islamic Retail Banking Leadership Award 2015

Hussain Al Qemzi, Group CEO of Noor Investment Group and CEO of Noor Bank – UAE

The Islamic Retail Banking Leadership Award is the most prestigious award in IRBA, and is decided by the Critics’ Choice Committee. Hussain Al Qemzi was chosen to receive the inaugural award for leading Noor Investment Group since its inception to-date to uplift Noor Bank to become one of the most visible Islamic retail banking brands in the UAE.
The bank faced numerous challenges in its short history but Mr Al Qemzi saw it through troubled times, and rebranded it from Noor Islamic Bank to Noor Bank to increase its mainstream relevance. During his tenure as CEO, Noor Bank was rated A- by Fitch in 2014. The Critics’ Choice Committee considered the distinguished career of Mr Al Qemzi as CEO of Sharjah Islamic Bank, which under his leadership was recognised as a respectable Islamic bank after its full conversion from a conventional bank. This was indeed followed by his on-going role as CEO of Noor Bank.

IRBA CEO of the Year 2015
Mohammed Qasim Al Ali, CEO of National Bonds – UAE

National Bonds is a unique retail investment product that has received Best Islamic Saving Product Awards for the last three consecutive years. The man behind this success is none other than Mohmmed Qasim Al Ali, the founding CEO of National Bonds Corporation. The Critics’ Choice Committee decided to honour his contributions by unanimously voting Mohammed Qasim Al Ali as the IRBA CEO of the Year 2015.

Upcoming Personality in Islamic Retail Banking 2015
Asad Batla, Head of Consumer Banking at Bank Nizwa – Oman

Asad Batla, currently serving as Head of Consumer Banking at Bank Nizwa, has an illustrious career in Islamic retail banking. Prior to joining Bank Nizwa, he served the then newly established Noor Islamic Bank in the UAE. His instrumental role in developing the consumer banking franchise of Noor Islamic Bank was rated highly by his current employer who persuaded him to join the first full-fledged Islamic bank in Oman. Since joining Bank Nizwa, Mr Batla has developed an impressive consumer banking franchise of the bank, which is fast emerging as a premier bank in the country. The Critics’ Choice Committee opined that Asad Batla possesses both experience and expertise to assume a leadership role in an Islamic bank in the near future. This was the main reason behind choosing him as the winner for the Upcoming Personality in Islamic Retail Banking of the Year 2015.

Upcoming Shari’a Scholar in Islamic Retail Banking 2015
Mufti Aziz ur Rehman – UAE

In a very short span of time Mufti Aziz ur Rehman has established himself as an influential Shari’a scholar in Islamic retail banking and finance. As a hard-working Shari’a scholar, Mufti Aziz ur Rehman has acquired a number of formal qualifications, including from Accounting & Auditing Organisation for Islamic Financial Institutions (AAOIFI). He is at present pursuing a PhD at University of Management & Technology (UMT) Lahore, after which he is expected to rub shoulders with the Tier-1 Shari’a scholars in the Islamic financial services industry.

Islamic Banking R&D Award 2015
Dubai Centre for Islamic Banking & Finance, HBMSU – UAE

The Dubai Centre for Islamic Banking & Finance (DCIBF) at Hamdan Bin Mohamed Smart University (HBMSU) Dubai was chosen for this prestigious award for its pioneering research on Islamic banking efficiency, which was used as a basis for the selections of the Strongest Islamic Retail Banks. DCIBF is a joint initiative of HBMSU and Dubai the Capital of Islamic Economy. It supports the development of human capital in the areas of Islamic finance, and conducts both academic and applied research in this area. DCIBF has been publishing an Islamic Banking, Growth, Efficiency and Stability Report since 2014.

The 2015 edition of the report contained a detailed efficiency analysis that attempted to rank all retail banks of the world. This was acknowledged by the Islamic Banking R&D Award 2015 other similar research initiatives of DCIBF.

STRONGEST ISLAMIC RETAIL BANKS
Strongest Islamic Retail Bank in the GCC 2015
Dubai Islamic Bank – UAE

Dubai Islamic Bank (DIB) is the oldest Islamic retail bank in the world. In recent years, under the dynamic leadership of Dr Adnan Chilwan, DIB has further cemented its position as the premier Islamic bank in the world. Out of the 132 Islamic retail banks ranked in terms of efficiency, DIB was chosen as the Strongest Islamic Retail Bank in the GCC. The efficiency score attained by DIB in 2015 was 0.5930, which was the 5th largest score in the sample used in the efficiency study.
DIB is a public joint stock company, with its shares listed on the Dubai Financial Market. The bank enjoys a reputation as a leader and innovator in maintaining the quality, flexibility and accessibility of its products and services. It currently operates 90 branches in the UAE. DIB is also considered as a flag-bearer of Sheikh Mohamed Bin Rashid Al Maktoum’s vision of making Dubai a global hub for Islamic economy. What makes DIB the Strongest Islamic Retail Bank in the GCC is in fact the strong support received from the government of Dubai. “There is no doubt, however, that management of the bank has shown excellence in operating the bank on efficient basis,” said Professor Humayon Dar, Chairman of IRBA.

Strongest Islamic Retail Bank in the Asia Pacific 2015
Bank Kerjasama Rakyat – Malaysia

Bank Kerjasama Rakyat or Bank Rakyat for short was announced as the Strongest Islamic Retail Bank in the Asia Pacific region for its excellent performance. It stood ahead of many better-known Islamic banking brands in the region – attaining an efficiency score of 0.5280, and ranking 7th position worldwide. Bank Rakyat’s emphasis on quality and prudent asset management has contributed to operational efficiency and its overall success in Malaysia where it stands as the largest Islamic cooperative bank and the second largest Islamic bank.

For the last four consecutive years, Bank Rakyat exceeded the RM2 billion mark in profit before taxes and zakat, despite a
very challenging business and economic environment. Among the bank’s key initiatives has been a comprehensive and detailed three-phase transformation programme to ensure continued success and sustainability and to enhance its competitiveness.
“I feel extremely honoured, grateful and privileged to be recognised as the Strongest Islamic Retail Bank in Asia Pacific in Islamic Retail Banking Awards 2015,” said Datuk Mustafha Hj Abd Razak, Managing Director/President of Bank Rakyat. He attributed the success of the bank to his management team for their hard work and support in making Bank Rakyat a truly success story.

Strongest Islamic Retail Bank in Bahrain 2015
Bahrain Islamic Bank

Bahrain Islamic Bank is the oldest Islamic bank in the country. Although Islamic banking in Bahrain has become very competitive and overcrowded, Bahrain Islamic Bank has come a long way since its inception in 1979. The bank has been maintaining its leading position in the Islamic banking sector through adopting innovative Islamic investment and financing products, supported by superior retail and corporate banking services. It is listed on the Bahrain Stock Exchange. Its major shareholders are leading local and regional financial institutions.

Strongest Islamic Retail Bank in Kenya 2015
Gulf African Bank

Set up in 2008, Gulf African Bank has gone from strength to strength, leveraging its position as Kenya’s largest Islamic bank.
Gulf African Bank follows the principles of universal banking and offers a wide range of Islamic financial products. The bank offers products and services that address needs of not just Muslims, but all economic players in the country including individuals, corporate companies, and other institutions. Consequently, the bank has rapidly grown a portfolio of valuable clients who have in turn helped the bank grow and prosper. This is evident by the bank’s strong results, which reflect growth in market share of deposits, financing and continued recognition of the bank as a market leader.
“This recognition of Gulf African Bank by Islamic Retail Banking Awards as the Strongest Islamic Retail Bank in Kenya is a clear indication of the bank’s strength and success in retail banking,” said Abdulla Abdulkhalik, Managing Director of Gulf African Bank.

Strongest Islamic Retail Bank in Malaysia 2015
Bank Islam Malaysia Berhad

Bank Islam Malaysia Berhad or commonly known as Bank Islam is the first full-fledged Islamic bank in Malaysia and indeed in the whole region of South East Asia. Through its pioneering role, Bank Islam has played a significant role in the development of Islamic banking and finance worldwide. It has provided technical assistance in the setting up of several Islamic financial institutions in the Asian region such as Indonesia, Thailand and Sri Lanka. Dato’ Sri Zukri Samat, Managing Director and CEO of the bank stated at the Awards Ceremony, “Bank Islam has chartered through unfamiliar territories and played a catalytic role in the rapid growth and acceptance of Islamic banking both in the country and the region, and this international recognition is a testament to the bank’s aptitude.”
With over 70 innovative and sophisticated Islamic banking products and services, Bank Islam offers a comprehensive range of services to its more than 5 million customers. Primarily a retail bank with consumer banking constituting more than 70% of total financing, The bank also offer a wide range of other products to cater for government-linked entities, corporates and not-for-profit organisations. Bank Islam’s efficiency score in the aforementioned study was 0.4570.

Strongest Islamic Retail Bank in Oman 2015
Bank Nizwa

Being the first full-fledged Islamic bank in Oman, Bank Nizwa has evolved itself into a leading provider of Islamic financial services in the country. This is a remarkable achievement for a new bank. Nizwa Bank has indeed put the Sultanate of Oman on the global map of Islamic banking and finance, as it is fast emerging as one of the most recognised brands in Islamic banking and finance.

Strongest Islamic Retail Bank in Pakistan 2015
Bank Alfalah Islamic

Bank Alfalah has been running a very strong Islamic banking business, competing with the full-fledged Islamic banks in the country. It is a premier Islamic banking franchise led by Rizwan Ata, Head of Islamic Banking. Given the excellent performance of this Islamic banking window in Pakistan, one should expect it to successfully spin off as a full-fledged Islamic bank in Pakistan.

Strongest Islamic Retail Bank in Saudi Arabia 2015
Bank Albilad

Unlike other Islamic banks in the Kingdom, Bank Albilad has fast emerged as a leader in the domestic Islamic retail bank, despite being a relatively new player. With a paid-up capital of SAR5 billion and top management positions manned by one of the best human resources available in the industry, Bank Al Bilad continues to increase its profitability since 2010. Its last annual profits announced stood at SAR850 million.

Strongest Islamic Retail Bank in South Africa 2015
FNB Islamic Banking

FNB Islamic Banking is another Islamic banking window, which has the distinction of receiving the Strongest Islamic Retail Bank award, the other being Bank Alfalah Islamic Banking from Pakistan. The phenomenal success of the bank can be attributed to the visionary leadership of its CEO Amman Mohammed who has helped the Group in extending its reach to across Africa.

Strongest Islamic Retail Bank in Sudan 2015
Al Salam Bank

Al Salam Bank Sudan draws its strength from its shareholders in the GCC. Since May 25, 2005, when the bank started its operations in Sudan, it has witnessed steady growth in its operations and profits. Al Salam Bank Sudan, which opened its first office in Khartoum, is part of the Al Salam group of banks, a financial institution that has its hub in Bahrain and also operates in Algeria.

CRITICS’ CHOICE AWARDS
Best Islamic Retail Banking Solution Provider 2015
International Turnkey Systems (ITS) – Kuwait

ITS is without an iota of doubt the best and most dedicated player in Islamic financial technology. With clients located all over the world, ITS offers its core Islamic banking system to Islamic banks and conventional banks in all markets where Islamic banking is being practised.

Best Islamic Retail Bank in Jordan 2015
Jordan Islamic Bank – Jordan

Jordan Islamic Bank (JIB) is the oldest Islamic bank in the country, and has received global recognition as a pioneering player in the global ITS is without an iota of doubt the best and most dedicated player in Islamic financial technology. With clients located all over the world, ITS offers its core Islamic banking system to Islamic banks and conventional banks in all markets where Islamic banking is being practised.

Best Islamic Retail Bank in Jordan 2015
Jordan Islamic Bank – Jordan

Jordan Islamic Bank (JIB) is the oldest Islamic bank in the country, and has received global recognition as a pioneering player in the global Islamic financial services industry. Set up in 1978, with its first branch opened in 1979, JIB finds itself in the cohort of first-generation of Islamic banks. Apart from excellence in management and prudence in operations, JIB also draws its strength from its major shareholder – Dalla Albaraka Group. The bank is led by Musa Shihadeh, CEO and General Manager, who attributed the bank’s success to its financial strength, safety and quality of its credit portfolio, and the management’s commitment to providing advanced products and services that meet needs of individual and institutional clients.
“On behalf of Jordan Islamic Bank, we are pleased to receive the Critics’ Choice Best Islamic Retail Bank in Jordan 2015,” said Musa Shihadeh after receiving the award.
“It is a timely recognition from Cambridge IF Analytica, and I am proud to confirm that JIB maintains a distinctive place among all the banks in Jordan. In accordance with our strategic plan we achieved growth in every field the bank focuses on.”

Best Islamic Retail Bank in Sudan 2015
Bank of Khartoum

Bank of Khartoum was chosen as the Best Islamic Retail Bank in Sudan due to several key factors. It is the largest Islamic retail bank in the country but the Critics’ Choice Committee choose the bank not only because of its stature in the country but also the potential role it can play in the global Islamic financial services industry. Bank of Khartoum draws its strength from its shareholders with more than 80% originated from the GCC and include the likes of Dubai Islamic Bank, Abu Dhabi Islamic Bank, Sharjah Islamic Bank, and Islamic Development Bank, among others.

Bank of Khartoum has the potential to become the leading Islamic bank in the African continent, which is home to the highest percentage of global Muslim population. Given this potential and the most innovative approach in product development and other services offered, Bank of Khartoum was rightly chosen as the Best Islamic Retail Bank in Sudan for the year 2015.
“All of us at Bank of Khartoum are delighted to be honoured by the Critics’ Choice Committee as the Best Islamic Retail Bank in Sudan,” said a buoyant Kashif Mohammed Naeem, EVP and Group Head of Retail and Microfinance. “Retail Banking remains the core focus of our bank and we will continue to expand our branch and ATM network. We are also committed to enhance our current e-banking offerings and to introduce more innovative products and services to offer even better solutions to our customers in 2016.”
Other important award winners in the Critics’ Choice category are listed in the table.
Next year’s IRBA Ceremony is expected to take place in Dubai. The nominations will start in August 2016 and will be announced through a global press release.

• As one of the four pillars of financial inclusion, takaful products can make a significant positive difference in the lives of vulnerable individuals by helping house-holds mitigate shocks and improve the management of expenses related to unforeseen events such as medical emergencies, a death in the family, theft or natural disasters.
• The promotion of an inclusive financial system has been an important national agenda of many countries. Many researches suggest that the access to takaful services is an important strategy for poverty reduction. However, the poor and low-income households are often ignored and inadequately serviced by the private insurance/takaful market and schemes because the premiums/contributions are unaffordable.
• To ensure that the public have access to financial security, the introduction of micro takaful products was outlined as a salient agenda under the BNM’s Financial Inclusion Framework 2011. In this regard, Skim Simpanan Pendidikan Nasional Plus (SSPN-i Plus) is a product that strategically promotes financial inclusion by providing a cost-effective and commercially sustainable micro takaful product, which enhances the social security net of the society.

Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance or takaful – delivered in a responsible and sustainable way. In the context of takaful, this is a critically important tool for not only reducing poverty, but also for helping those who have emerged from poverty to manage their risk and avoid falling back into poverty. As one of the four pillars of financial inclusion, takaful products can make a significant positive difference in the lives of vulnerable individuals by helping households mitigate shocks and improve the management of expenses related to unforeseen events such as medical emergencies, a death in the family, theft or natural disasters.
However, there is a persistent takaful gap, particularly in developing countries. With significant technological advancements over the past decade, the design, selling, and servicing of takaful products have improved significantly. These changes provide an opportunity to give poor people more access to takaful and to improve financial inclusion. This chapter highlights the features of SSPN-i Plus in Malaysia, examines the attractiveness of the product to the depositors and its role in advancing financial inclusion agenda specifically in ensuring savings and takaful products become more accessible to the underserved segment of the society.

A Case Study of Malaysia

The takaful industry in Malaysia is growing at an average rate of 12.4% annually for the past 5 years. Yet, further growth is crucial given that there is still a vast proportion of population uninsured, let alone the number of those that have protection but still underinsured (the combined life insurance and family takaful penetration rate in Malaysia is only 56%, of which 90% are under-insured). An insurance or takaful plan is important to provide financial cushion in case of emergencies or income loss, where many Malaysians are revealed to be ill-prepared to cope with unexpected expenses and loss of income according to the Survey on Financial Capability and Inclusion Demand Side conducted by Bank Negara Malaysia (BNM) in 2015. About 76% of the survey’s respondents are found to be facing difficulty in raising even RM1,000 during emergencies while only 6% of the respondents are confident to be able to meet six months of their financial obligations after an income loss.
To ensure that the public have access to financial security, the introduction of micro takaful products was outlined as a salient agenda under the BNM’s Financial Inclusion Framework 2011. In this regard, Skim Simpanan Pendidikan Nasional Plus (SSPN-i Plus) is a product that strategically promotes financial inclusion by providing a cost-effective and commercially sustainable micro takaful product, which enhances the social security net of the society. The product, which was jointly developed by Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN) and Hong Leong MSIG Takaful (HLMT), aims to cultivate the behaviour of saving and subscribing to takaful protection among the society since a young age. Any individual who opens SSPN-i Plus account stands to benefit from accumulation of savings and simultaneously receives a basic form of takaful protection which covers among others, Death and Total Permanent Disability benefit, Critical Illness benefit and Daily Hospital Allowance under attractive packages starting from as low as RM30 per month.

An Overview of SSPN-i Plus

SSPN-i Plus draws inspiration from the highly successful Skim Simpanan Pendidikan Nasional (SSPN-i) introduced 13 years ago. A new and improved SSPN-i Plus was introduced in June 2015 where the product offers a savings plan with a wide range of takaful protection under six different packages. The Shari’a-compliant scheme is offered based on the wakalah (agency) contract, where the customers (hereafter termed as “depositors”) appoint PTPTN as agent to manage their deposits for investment purposes while HLMT is appointed as an agent to manage the takaful fund. Any Malaysian below 65 years old is eligible to participate in and benefit from the SSPN-i Plus. Optimal benefits can be obtained for people with children or dependents since SSPN-i Plus offers immediate temporary relief in the event of financial difficulty against risk such as death or critical illness of the family breadwinner.
The SSPN-i Plus scheme is offered to depositors under six different options or packages, with the monthly deposits ranging from as low as RM30 per month to as high as RM500 per month. Each package has two components, namely savings and takaful contribution as shown in Table 1.

Why SSPN-i Plus?

The product has experienced exponential growth and take-ups due to the following features which provide value additions to the depositors:

Takaful Benefits

The main advantage of SSPN-i Plus as compared to the basic SSPN-i account is the takaful protection, which is offered according to the packages opted by the depositors.

For example, for those who chose to commit RM50 per month under the Ruby pack-age, RM40 of it will be deposited with SSPN-i, while RM10 will be accepted as a takaful contribution. The coverage enjoyed includes death and permanent disability, 36 critical illnesses, daily hospital allowances and funeral expenses which is also applicable to a spouse and up to three children. Most importantly, the availability of takaful benefits and the amount of participant’s contribution offered under this scheme is not determined depending on the participant’s age, gender and risk classification. As a consequence, this makes takaful to become much more accessible and affordable to all segment of the society regardless of age, gender, type of job, etc. Takaful benefits attached with different packages are compared in Table 2.

Income Tax Relief of Up to RM12,000

The depositors can enjoy an income tax relief on the contributions to SSPN-i Plus of up to RM12,000 annually, which is derived from up to RM6,000 relief from the amount of saving in SSPN-i account and up to RM6,000 relief from the takaful contribution. However, the income tax relief for the portion saved under SSPN-i account is only applicable to parents or legal guardians who open an account for their children/child as the beneficiary. Working parents with separate tax submissions and separate SSPN-i accounts dedicated to the same beneficiary (the same child) can also enjoy a tax relief separately up to the maximum of RM6,000 to each parent per year. Meanwhile, parents with a joint taxation but own a separate SSPN-i account each, are only eligible to obtain up to the maximum of RM6,000 of tax relief combined.

Savings Guaranteed by the Government and Takaful by PIDM

For the ultimate peace of mind, the savings portion under SSPN-i is fully guaranteed by the Malaysian government. This is provided for in Section 11 of Perbadanan Tabung Pendidikan Tinggi Nasional Act 2007. Similar to all other takaful certificates in Malaysia, the takaful benefits agreed with the SSPN-i Plus depositors are guaran-teed by Perbadanan Deposit Insuran Malaysia (PIDM) under the Takaful and Insurance Benefits Protection System in the event that the takaful operator failed.

Yearly Dividend

Another perk of SSPN-i Plus is its competitive yearly dividend rate or profit bench-marked against banking institutions’ fixed deposit rates. Furthermore, this dividend income is exempted from income tax (see Table 3).

Cabutan Wow

The depositors of SSPN-i Plus are also eligible to participate in Cabutan Wow! SSPN-i Plus Lucky Draw, and stand to win over 300 amazing prizes worth RM1.5 million. This initiative reflect the commitment to foster the culture of savings particularly among parents who are preparing their children’s higher education.

Condition on Application of PTPTN Financing

Beginning 1st January 2012, students who wish to apply for PTPTN education financing to fund their studies at Polytechnics, IPTA or IPTS are required to have an SSPN-i or SSPN-i Plus account with a minimum amount of outstanding deposit as determined by PTPTN.

Differences between SSPN-i by Plus and Other Popular Saving Instruments

Individuals’ savings, particularly by Muslims are usually channelled to several Shari’a-compliant saving instruments, namely Islamic fixed deposits accepted by Islamic banking institutions, Amanah Saham Bumiputera (ASB) managed by Per-modalan Nasional Berhad (PNB) and Wadi’ah Savings accepted by Lembaga Tabung Haji. Table 4 shows the differences between SSPN-i Plus and the other popular savings instruments in Malaysia.

To summarise, SSPN-i Plus is currently the most comprehensive savings plan which is not only guaranteed by the government but is also Shari’a-compliant, offers takaful benefits and is eligible for tax rebates of up to RM12,000 per year. Furthermore, depositors will be automatically eligible for the lucky draws with more than 300 prizes worth RM1.5 million a year.

Differences between SSPN-i Plus and Takaful Education Product

Table 5 shows key factors distinguishing SSPN-i Plus from a takaful education product in the market. Unlike many other takaful protection plan, the takaful benefits and amount of contribution of SSPN-i Plus are fixed under the six packages which ease the understanding and inclusion of the public. In addition, medical underwriting is not part of the requirement to subscribe to this plan.

SSPN-i Plus a Possible Avenue to Increasing Financial Inclusion

The promotion of an inclusive financial system has been an important national agenda of many countries, including Malaysia. Many researchers suggest that the access to takaful services is an important strategy for poverty reduction. However, the poor and low-income households are often ignored and inadequately serviced by the private insurance/ takaful market and schemes because the premiums/contributions are unaffordable. SSPN-i Plus addresses the issue in several ways. The first is by providing the means for saving and affordable protection particularly to the lower income group from as low as RM1 per day.
The takaful benefits under SSPN-i Plus are generally less expensive than an individual policy coverage offered by insurance companies or takaful operators since the contribution is not determined by the individual’s age, gender and risk classification. This in turn provides financial assistance against unexpected future financial loss, which ultimately avoids a person from falling into the poverty pit during adverse situations and encourages mutual cooperation via the spirit of tabarru’ (donation).

Additionally, the participants are also not subjected to a medical underwriting in order to obtain a coverage since the takaful operator providing the takaful benefits pools the risk of all depositors or participants to adequately price the risk. Furthermore, in ensuring sustainability and efficiency, SSPN-i Plus also uses a cost-efficient and innovative business model via affiliated distribution channels and technology-driven processes such as online submission and e-certificate. The cost savings from such measures are subsequently translated to a lower takaful contribution with higher protection value for the takaful participants.
Figure 1 reflects the number of SSPN-i Plus cases that are subscribed by depositors based on the six packages from the period of 1st January to 31st December 2016. The most popular package during that period was Intan package, followed by Ruby package.

Increasing Takaful Penetration and Financial Protection Gap

Malaysians should be aware that financial protection is also as important as accumulating savings. Currently, the combined insurance and takaful penetration of 56% is still relatively low compared to other developed countries according to a research study undertaken by Life Insurance Association Malaysia (LIAM) in 2013. Besides, up to 90% of the life-insured Malaysians are under-insured, which could result in inadequate protection to the family members. When something bad happens to them, the money that they can spend on their family probably will only last for a year or two. The amount was far below the takaful industry’s rule of thumb, in that, an individual especially the breadwinner is suggested to have takaful protection which equals 10 times his annual income. With higher sum assured protection, it could at least guarantee the family’s livelihood for the next 10 years.

SSPN-i Plus is the game changer the takaful industry needs to increase takaful market penetration rate and to closing the takaful protection gap among Malaysian due to its unique features and attractive advantages. SSPN-i Plus made its debut on June 2015 and has since captured more than 53,000 depositors for its capability of combining savings and takaful protection into one dynamic and comprehensive package at affordable prices with accumulated deposits of more than RM18 million.

Enhancing Reach via Digital Platform

In May 2016, PTPTN officially launched its Ejen Online (EO) programme where affiliated business partners or online marketing agents can assist those wishing to join the SSPN-i Plus scheme. The EO model by PTPTN was the first of its kind in Malaysia and worked through a network of agents without the need to set up physical branch infrastructure to strengthen its community outreach. This innovation benefitted PTPTN in terms of cost savings in expanding its network and has also changed the way people perceive SSPN-i Plus product. Instead of walking into a typical PTPTN’s branch to perform transactions, customers now have the option to open SSPN-i Plus account directly from PTPTN’s website or through any EO located all over Malaysia.
As a result, approximately 20% – 25% new account openings have been registered through EO since this programme was launched. Through this EO platform, PTPTN can promote other products to customers in the future. The EO will receive up to 25% commission and other incentives upon opening SSPN-i Plus account successfully. By meeting a targeted number of new accounts, EO will also be in the running for the “Best PTPTN Online Agent Award” and win travel package and cash prize. Through this model, the public will be able to start saving with ease through online transactions or via EO. PTPTN’s EO does not need to have capital or involve in cash transaction, and their working hours are flexible while training is provided. Furthermore, in ensuring sustainability and efficiency, SSPN-i Plus also uses cost-efficient and innovative business models via technology-driven processes like online submission and e-certificate. The arising cost savings from such innovations can subsequently be translated to lower takaful contributions, or higher protection value for the takaful participant.
Going forward, there are plans to allow existing customers of SSPN-i Plus to perform deposit transactions through the MEPS network and POS Malaysia. This is testament to the fact that PTPTN is taking innovative steps to encourage Malaysians to open SSPN-i Plus account by introducing models that work for low-income earners as well. Working towards a vision that encompasses financial inclusion for the poor, this sales strategy beyond PTPTN branches will not only ensure economic sustainability but also increase the overall stability of the financial system.

Conclusion

In a nutshell, SSPN-i Plus is an ideal financial product for the younger generation aspiring to excel at higher education levels with added peace of mind as their education costs are technically taken care of. It is a product that better reflects the realities of today and the future, taking into consideration of the ever-rising living costs. Through this scheme, it enables takaful to become more easily understood by the public and accessible to all segment of the society whilst maintaining the benefits.

• Although Islamic FinTech is still very new, it is a huge opportunity for Islamic finance to expand and engage more segments of society, and even be adopted by communities without access to traditional banking.
• In the context of financial inclusion, FinTech holds tremendous potential. These solutions are challenging old business models as they are provided with greater speed, accountability, and efficiency at a cheaper cost.
• As Islamic crowdfunding platforms grow, a wider range of Muslim-focused wealth management services may also be provided, guiding the community to invest in platforms for investment, as well as waqf and zakat.
• To support FinTech developments, the authorities have provided a regulatory regime that aids innovation while ensuring security as well as the infrastructure needed to drive the adoption of new technologies in the form of a regulatory sandbox.

The past couple of years have witnessed a rise of FinTech wealth management solutions. Banks and other institutions are giving their customers mobile and web apps with customised dashboards, allowing them to see fluctuations in their investments in real-time. Some platforms allow investors to track and mimic specific indices or other investors, to achieve the results of the best portfolios.
One way FinTech is disrupting wealth management is the rise of robo advisors that are algorithm-powered, virtual fund managers with potentially enhanced capabilities, at a fraction of price. It should be expected that since conventional fund management is being disrupted, then Islamic funds are next in line. Islamic wealth management has much to gain from the services available through digital platforms and FinTech. Crucially, a swift response is necessary to stay relevant in this digital age.
For the Islamic wealth management industry, Shari’a screening and compliance services are important value adding features. But much more must be done to create greater attraction, especially for Millennials. Although Islamic FinTech is still very new, it is a huge opportunity for Islamic finance to expand and engage more segments of society, and even be adopted by communities without access to traditional banking. Conversely, not moving into FinTech may very quickly cause the industry to lose ground and market share to conventional finance.

Unique Opportunities for Islamic Finance

There are numerous factors that point to a much greater opportunity for Islamic FinTech, compared to conventional finance. This is true at the most fundamental level. Here’s a quick overview of these factors:

Financial Inclusion and Increased Market Share

Islamic finance, while is growing strongly, is hardly inclusive, leaving out and bypassing large groups and communities of people. Statistically, 71% of Muslims are unbanked, compared to the world average of 62%, according to the Global Findex Database. Financial inclusion remains a major issue in many countries where Islamic finance has gained a footprint. Pakistan and Indonesia – two of the largest Muslim countries, are good examples of countries where Islamic finance has gained some significant market share but at the same time the number of unbanked Muslims is still relatively high. In the context of financial inclusion, FinTech holds tremendous potential. These solutions are challenging old business models as they are provided with greater speed, accountability, and efficiency at a cheaper cost. Embracing FinTech would undoubtedly help Islamic finance achieve the scale, access and outreach needed to serve this large segment of unbanked Muslims. Hence, adopting FinTech will potentially improve access to Islamic finance and help boost the industry’s market share.
Another area that FinTech companies are tackling is access to credit. In most developing countries where the vast majority of the population is unbanked, it can become a challenge for individuals and businesses to get a loan. In particular, credit history can be a huge road block for people that have never dealt with a financial institution before. FinTech companies (such as Lenddo) are providing an alternative way for banks and financial institutions to assess one’s creditworthiness. Instead of using traditional data to determine whether an individual is a good payer or not, they used social networks and other data such as Facebook, LinkedIn, Google, Yahoo and Twit-ter to prove one’s identity and creditworthiness.

Lack of Products

Islamic retail investment options are greatly lacking in many countries, both in Muslim and Muslim-minority countries. For example, EthisCrowd.com allows for ordinary Muslims to invest directly into social real estate development projects and earn a profit – first-time investors can start with only S$250. There is also a severe lack of financing options for SMEs and startups. P2P Platform KapitalBoost.com has successfully run pilot campaigns to finance 26 businesses from Singapore, Malaysia and Indonesia, with half already giving successful payouts, over its 1.5-year history.

Values-driven

The inclusion of social-impact and human stories are a key force of attraction, and creates virality for P2P crowdfunding campaigns. This is evidenced by the strong organic growth of the community-focused Islamic crowdfunding platform LaunchGood. com in the US.

FinTech Disruption?

In a Forbes article dated nearly a year ago titled, “FinTech Trends: Wealth Management and The Rise of Robo Advisors”, the author explains the rise of robo advisors in the wealth management industry. Robo advisors are computer programmes that help users to invest and manage their funds. Robo advisors create value by providing similar services as investment advisors or fund managers at lower costs and greater speed. Most importantly, a positive user experience makes investing ‘fun’ through interactive and user-friendly interfaces. Very quickly, such experiences will become the new norm.
Major institutions have taken serious heed of the current and potential future disruption of FinTech on the banking and wealth management industries. The response can no longer be one of wait-and-see. In the banking industry, one of the most proactive adaptors to the rise of FinTech is Citibank. A Fortune article explains the following, “The most wrenching period for the big banks is almost certainly yet to come. In March, Citigroup’s own research department put out one of the direst assessments yet. The 112-page report, titled “Digital Disruption,” was produced for the bank’s investment clients and reads like a Jerry Maguire manifesto.
The gist: radical change is coming. Citi says that FinTechs have nabbed US$9 billion in business so far, a small percentage of what banks bring in each year. But in just four years, the Citi analysts predict, FinTech revenues will leap more than 10 times, exceeding US$100 billion. By 2023, FinTech will account for 17% of consumer-banking services in North America, or US$203 billion.”
In August of 2015, wealth management giant BlackRock acquired FutureAdvisor, a robo-advisor platform with US$600 million under management in 2015. The move was intended to attract the mass affluent who want high-quality financial advice without the high prices that senior brokers charge. Another target segment is Millennials – a crowd that prefers digital mediums rather than dealing with brokers and advisors.
The acquisition should come as no surprise to those who have been following the news. Bloomberg published an article in May 2016 with the provocative title, “Robots Will Strike Asset Management Firms First”. It states, “According to a survey from the CFA Institute, Wall Street is getting a bit worried about FinTech replacing its jobs. The majority of respondents, which included more than 3,000 chartered financial analysts around the world, view asset management as the industry most at risk from disruption by financial technology. Fifty-four percent of respondents said the sector would feel the biggest changes, followed by banking, securities, and insurance.”
The writing on the wall seems to clearly indicate that wealth management is even more prone to disruption than banking. The same survey found that for banking only 16% is at risk of disruption.

1. What are the Drivers behind the Boom in Fintech?

Changing consumer behaviour and preferences Changing consumer behaviour and attitudes are playing a key role in the FinTech revolution as technology is facilitating the shift of control away from corporations to customers. Consumers are embracing new technology at a rapid rate, more engaged with the digital platforms, and they are increasingly less loyal to their financial institutions and demanding greater levels of personalisation, convenience and immediacy. The rising tide of Gen Y and Gen Z will drive future trends and developments. Their preference for digital experience has fuelled the demand for digital financial products and services.

2. Lack of Trust in Traditional Banking.

The global financial crisis of 2008 has motivated customers to shift to technology platforms. Since the banking crisis, the sturdiness of banks has been cast into doubt. The increasing frequency of scandals, combined with concerns about infrastructure and reliability, and the increase of automated processes have all served to erode trust and undermine the rep-utation of banks. According to a research conducted by Neopay, of the 2,000 ‘Millennials’ polled, one in three said they would trust a technology company, such as Google or Apple, with their e-money transactions whilst just 47% have had face-to-face contact with someone from their bank. This suggests younger consumers no longer consider traditional banks as the only option for managing their finances with more and more opting to handle money digitally through e-money channels. Furthermore, the prevalence of social media in Millennials’ everyday life, has given to the emergence of a ‘review community’, whereby customers are more inclined to place their trust in the opinion of a stranger. These review communities are shaping customers’ opinions of financial institutions more than the information provided by the institution’s own website.

The global financial industry has been undergoing transformational changes following the global financial crisis of 2008. FinTech companies have focused on innovative products for financial and insurance services such as digital currencies and blockchains and mobile payments.

3. Supporting policy and regulatory environment

Policymakers and regulators, increasingly aware of the potential of the FinTech sector in transforming financial services, are focusing on the need to provide a conducive regulatory environment and ecosystem to support new technologies. To support FinTech developments, the authorities have provided a regulatory regime that aids innovation while ensuring security as well as the infrastructure needed to drive the adoption of new technologies in the form of a regulatory sandbox. Such a regulatory sandbox has the potential to encourage and support the design and delivery of new financial products and services that benefit consumers and businesses. With a regulatory sandbox, FinTech innovators can overcome regulatory uncertainty, manage regulatory risks during the testing stage and reduce the cost and time to market.

4. Technology is accelerating the pace of change

Technology adoption is occurring much more quickly than before and is now in place to substantially transform financial services. Barriers to entry for digital disruption are also falling quickly because it is now cheaper or easier to commence a technology start-up, with the advent of open-source software and low-cost development tools.

5. Consumer adoption of mobile banking

Consumer adoption of mobile banking has surged as consumers shift away from the conventional ways of performing financial transactions to digital platforms and mobile devices. Factors contributing to the adoption of mobile banking are related to convenience, access to the service regardless of time and place, privacy and savings in time and effort. Financial technology companies have become acutely aware of this shift and as a result have been adapting to consumer demands for more mobile-friendly financial services. In recent years, more and more banks have released mobile apps to allow their customers to handle their finances without the need to walk into a brick-and-mortar store or even use their computers. Furthermore, developments such as the Internet of Things (IoT) and the maturing of artificial intelligence and robotics in the longer term will have a significant impact on delivery of banking and financial services products and services, and redefine the customer experience.

6. Adoption of various forms of payment modes

The widespread adoption of mobile devices such as smartphones and tablets has steadily fostered fin-tech resulting in a number of innovations within the mobile payment landscape. A number of innovations have emerged leveraging mobile devices and connectivity to make payments simpler and more valuable including peer-to-peer payments, digital-only banks, and mobile wallets such as Apple Pay and Android Pay.

Fintech Wealth Management Innovations

Large conventional banks have already aligned with current trends, by launching investment apps to help customers stay up to date on markets they have invested in, some even with insights from experts on macroeconomic and global developments. Such apps allow customers to view the status of their investments, receive alerts on markets changes, and info on how these may impact their investments.
In Islamic finance, such innovations have only just been introduced. One of the few available examples is Arabesque, which is the world’s first “ESG quant fund”. It was developed by professors, subject-matter experts and top professionals, working together to develop the next generation in asset management. The technology integrates environmental, social, and governance (ESG) data with quantitative investment strategies. The fund holds firm to Islamic finance ideals and refrains from any derivatives, securities lending, shorting, or leverage, while still outperforming 95% of its conventional peer group. According to recent update from Arabesque its minimum investment for the retail share class is now only US$100.
One of the signature features of robo-advisors is that they require minuscule fees and resources compared to traditional fund advisors, and can thus lower down minimum investments. Some, like online investment advisor Betterment, have no minimum balance requirement and tailor their services to beginner-level investors. Some platforms even lower their fees as client investments grow. Thus these FinTech platforms are able to achieve scale through making their apps free and having very low minimum investments. Once again the Islamic finance industry can learn from conventional FinTech.
In September 2016, Wahed Invest announced the launch of its robo-advisory investment services in the USA. Wahed offers a unique portfolio investment service that is fully automated. According to their press release, “The Wahed platform analyses thousands of securities worldwide to create portfolio allocations with the highest growth potential for its clients. The firm is registered with the Securities and Exchange Commission (in the USA), and is continually monitored by its Ethical Review Board.” This is a significant breakthrough for the Islamic finance industry. However accessibility to these services still remains an issue. Wahed has performed very well for its initial investors during the Beta period, and has made its service more accessible by, according to the founder, recently lowering the minimum investment to US$500.
To truly open up investment opportunities to the global masses, such business models and products with low minimum investment amounts are needed. With smaller investment denominations, a large pool of investors needs to be activated to raise significant volumes. Another emerging model for investment that can also facilitate small investors is crowdfunding.

Wealth Management’s Foray into P2P Crowdfunding

Lending or investment-based crowdfunding is commonly referred to as peer-to-peer financing or P2P. In mature P2P crowdfunding markets such as the US, wealth management and investment firms have been active in engaging in and investing with leading platforms. The two giants Black Rock and Vanguard have stakes in platforms Funding Circle and Lending Club, respectively. This attraction to crowdfunding is driven largely by the low-return environment for bonds and other ‘traditional’ investments. According to an index from investment bank Liberum, crowdfunding in the US offers a one-year return of 6.21%. There are now investment trusts that serve as a conduit for mainstream asset managers to invest in crowdfunding deals.
Meanwhile, the ‘opposite’ is happening in China, now the largest market for P2P globally, with 4,000 platforms providing funding of US$93.43 billion in 2015, according to Chinese regulators. In China, P2P platforms have aggressively expanded their variety and scope of investment offerings to transform into one-stop online wealth management platforms.
Two different significant trends are observed here as well as how P2P crowdfunding will increasingly become more important in the wealth management landscape. It is anticipated that both the trends identified in the US and China to also play out in the Muslim world, with finance and government institutions engaging and investing in as well as through P2P crowd-funding platforms. Malaysia’s regulators broke new ground when Securities Commission Malaysia issued 6 licenses for P2P financing in November 2016. This follows their issuance of 6 equity crowdfunding licenses a year earlier.
Experiences of crowdfunding platforms the likes of Ethis Ventures are solid evidence that crowdfunding is in itself a powerful wealth management tool, especially for millennials. Millennials are a different breed of new investors, with a strong distrust of mega-corporations and a natural attraction to digital marketplaces and platforms. The ‘uber-isation’ of retail services around the globe is powered by this sentiment – a growing preference for the decentralised provision of services. This resonates with funding marketplaces such as crowdfunding.

As Islamic crowdfunding platforms grow, a wider range of Muslim-focused wealth management services may also be provided, guiding the community to invest in platforms for investment, as well as waqf and zakat. A portfolio investment approach will also be in demand, to aggregate various campaigns with different risk-return profiles, duration, asset classes and geography. A whole new larger crowdfunding ecosystem may emerge, including mutual funds powered by crowdfunding and crowdfunding aggregators which will serve Muslims in a more comprehensive way.
There will be challenges and growing pains of course. Platforms are the gatekeepers of deals – deciding which campaigns get listed, and also curating the content of campaigns. Different platforms have differing standards of corporate governance and project screening and operate in different environments. The appeal of investing in real-world projects is also coupled with the inherent risks of investing in small businesses and projects. Proponents find value in this reality – this is truly the sharing of risk, as well as returns. Will we then reach a stage where there are robo-advisors for crowdfunding?

Human Touch Still Needed
All is not lost for fund managers. A report conducted by Salesforce suggested that the majority of millennials actually do prefer having an advisor. Results showed that 81% wanted their advisor to either manage their money completely independently, or collaboratively with them compared to 86% for Gen-X’ers and 89% for Baby Boomers.
It seems from some observations that even young first-time investors feel more comfortable consulting a real person for financial advice at certain stages. However, that does not mean that visits to brick-and-mortar branches is the way millennial investors wish to begin their foray into investments. Digital channels must be used to catch the interest of the digital generation. Through advertisement which is both graphical, educational and even entertaining, younger audiences can be attracted. Basic forms of engagement are through social media and inbuilt chat services within the company’s website.
Islamic wealth managers have the opportunity to ride the wave of these changes and go the route of industry leaders like Vanguard and Schwab who have made major adjustments in their strategies in response to the growth of robo advisors like Betterment and Wealthfront, to fit what younger investors are looking for. Vanguard and Schwab have recently launched robo advisor platforms of their own that include an option to interact with a human, if desired. They’ve slashed fees, and now offer a wider array of investment vehicles than the incumbent robo advisors.
Islamic investors have a unique worldview and investment values that cannot be inserted into algorithms. Islamic ethics of investment need to be understood from scholars and therefore their role remains critical. Technology can’t create an investing worldview from a person’s particular needs and goals, nor can it hold their hand and urge them to stay calm. These human qualities are still very valuable to investors young and old, therefore the optimal prospect for the future of Islamic wealth management seems to be the adoption of a good combination of the best of FinTech and human consulting.

Digital channels must be used to catch the interest of the digital generation. Through advertisement which is
both graphical, educational and even entertaining, younger audiences can be attracted. Basic forms of engagement are through social media and inbuilt chat services within the company’s website.

• Islamic REITs have tremendous potential to be developed as a thriving global wealth management product since it is structured on tangible real assets, which provide stability as the investments are channeled to the real economy.

• The success of Islamic REITs in Malaysia and Singapore gives weight to the assertion that Islamic REITs have strong prospects to be launched in global markets as a lucrative alternative real estate investment product.

• Islamic REITs are in early stages of development in most countries of GCC and hold significant potential for growth as interest in the region’s property soars with investors looking to diversify their geographical investment footprint. The potential is driven by strong real estate sector fundamentals such as demographic profile, expected implementation of mortgage law, and economic diversification.

• With declining oil revenues, financial managers in the GCC, in particular, are forced to look further afield for asset classes that meet their long-term business investment needs, and Islamic REITs offer the best fit to the issue.

Despite gaining momentum as a viable alternative channel for Shari’a-compliant investments, Islamic Real Estate Investment Trusts (REITs) remain a relatively underdeveloped asset class in the Shari’a-compliant universe. Globally, the market capitalization for REITs was around $570 billion at the end of 2009, a 2010 Ernst & Young (EY) study said. Islamic REITs play a small role, with Asia serving as the predominant hub for Shari’a-compliant trusts. Since the first Islamic REITs was launched in Malaysia back in 2006, this asset class has registered encouraging growth not only in Malaysia but has gained traction in other parts of the Muslim world, in particular the Gulf Cooperation Council (GCC) countries. The popularity of Islamic REITs demonstrates investors’ interest in diversifying their pool of assets and investments in an alternative real estate investment product. With declining oil revenues, financial managers in the GCC, in particular, are forced to look further afield for asset classes that meet their long-term business investment needs, and Islamic REITs offer the best fit to the issue.

What are REITs?

The Real Estate Investment Trust or REIT is a company that owns and in most cases manages income-producing real estate or related assets including office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. Unlike the typical real estate companies, a REIT does not develop real estate properties with a view to resell them later. Instead, a REIT buys and manages properties primarily to operate them as part of its own investment portfolio. In general, REITs make investments by buying, managing, selling, and leasing real estate; purchasing shares in publicly listed real property companies, by investing in debt securities in real estate property companies.
REITs have increasingly become a popular alternative investment option over the past several decades. Over time REITs have demonstrated a historical track record providing a high level of current income combined with long-term share price appreciation, inflation protection and prudent diversification. How does REIT works? Investors invest in a REIT by purchasing units of the trust, similar to shares of a common stock. In return of their investments in REITs, shareholders earn a share of the income produced through real estate investment, without actually having to buy or finance property. Hence, REITs provide opportunities to hold stakes in high-grade real estate which may otherwise have been difficult or impossible for a retail investor to hold.

What makes them particularly attractive for investors is that REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay income taxes on those dividends. Hence, REITs are to real estate what mutual funds are to equities and bonds. REITs also provide the benefit of easy liquidity, which means that investors can buy and sell their units (if publicly traded), which is not possible with physical real estate. Even in the case of non-listed REITs, the units can be exchanged over-the-counter (OTC) market.
REITs provide efficient and convenient way to invest into real estate market, even in small lots for small investors, while providing diversification benefits with low liquidity risk and typically offer investors high yields as well as a highly liquid method of investing in real estate. Furthermore, investments in real estate through REITs have lower risks involved compared with a direct investment with a developer.
Another advantage of REIT is that it is a combination of two different types of returns – regular income and capital appreciation. The income is generated mainly through a periodic cash flow– for instance, rental income from a house/commercial property; while the capital appreciation comes by way of increase in value, as in the case of price appreciation of a stock or in the value of a real estate property owned by REIT. Listed REITs are publicly traded like common stocks on various exchanges. To make it competitive for investible funds in the capital markets/stock exchanges, a listed REIT, would also have the features of efficient entry/exit for the investors, while providing long-term funds to the real estate entities.

CONVENIENT ENTRY AND EXIT

Since REITs are listed on an exchange, investors can make short-term bets on commercial property markets and, to an extent, transform investments in commercial properties as liquid.

LOWER TICKET SIZE OF INVESTMENT

REITs allow even small investors to purchase commercial assets; this is particularly beneficial for individual investors who prefer to have exposure to the real estate sector in their investment portfolios.

TRANSPARENCY

Many countries have a regulating body which has strict framework and guidelines for REITs under which they operate, and is also being adopted by more and more countries, with evident interest in REITs.

REGULAR INCOME AND CAPITAL GAINS

A REIT is required to distribute a significant portion of its net income to avoid taxes. In addition to regular income, REIT investors also benefit from appreciation in the value of the underlying property.

REITs emergence on global scene

REITs have their origin in the US in 1960 and since then have assumed a very significant role for funding real assets in the US and Europe. Later became an important part of Far-East-ern financial markets the likes of Hong Kong, Korea, Singapore, Australia and Malaysia. As reported in REIT.com, the REIT industry in the US has flourished extensively in the past few years, rising from ALL REITs market capitalisation of US$1.5 billion in 1971, to US$138.7 billion in year 2000, dropping to US$191.6 billion in a post-subprime crisis of 2008. The market capitalisation of ALL REITs as of August 31, 2016 crossed US$1 trillion.
The super growth shows that investors are looking for the promising aspects in REIT, especially in terms of hedging against inflation while generating regular income stream. US REITs collectively own nearly US$3 trillion of real estate assets. Over two decades, US-listed REITs have delivered their shareholders a compound annual return of 10.4%, higher than S&P 500’s at 8.2% p.a. There has been a voluminous increase in average daily dollar trading volume to US$6.6 billion in August 2016, from US$2.2 billion in August 2006.
As of July 31, 2016, the FTSE EPRA/NAREIT Global Real Estate Index included 482 stock exchange-listed real estate companies in 38 countries around the globe. Of the US$1.6 trillion in equity market capitalisation represented in the Developed Markets index, 76% originated from REITs. The Index included 149 publicly traded Equity REITs and listed property companies from 15 emerging markets across the Americas, Europe, the Middle East, Africa and Asia. While the US remains the largest listed real estate market, the listed real estate market is increasingly becoming global. The growth is being driven, importantly, by the appeal of REITs.

Emergence of Islamic REITs

Islamic REITs are specialised asset classes, augmenting Islamic wealth management practices globally. This collective investment scheme has underlying exposures in the real estate sector, which fits well with Shari’a principles that emphasise on real-sector and asset-based investments. The key feature of Islamic REIT is that the incomes and fund management of the Islamic REIT must observe the principles of Shari’a. Hence, Islamic REITs engage in acquisition and leasing of real estate (including tenancies and sub-tenancies), where the activities and operations are Shari’a-compliant.
What sets apart Islamic REIT from a conventional REIT is that the latter can only invest in properties whereby tenants operate in businesses that comply with Shari’a principles, including the guidelines on Shari’a-compliant permissible assets for Islamic REIT. Hence, the Islamic REIT fund must be structured and run in a manner that is consistent with Shari’a as well.

Non-permissible activities or businesses for REITs are:

• financial services based on interest;
• manufacture or sale of non-halal products or related products;
• serving, distribution and manufacture of alcohol products;
• weapons or defense;
• hotels and resorts;
• entertainment activities that are non-permissible according to Shari’a;
• manufacture, sale or distribution of tobacco-based products or related products; and stockbroking or share trading in non-Shari’a-compliant securities.

However, an Islamic REIT is permitted to own (purchase) real estate in which its tenant(s) operates mixed activities that are Shari’a permissible and non-permissible on the condition that the fund manager performs some additional compliance assessments before acquiring real estate with mixed activities.
Malaysia became the pioneer in the development of the Islamic REITs, with the introduction of the world’s first guideline for Islamic REITs in November 2005 by the Securities Commission Malaysia and the launch of the first Islamic REITs in July 2006, namely Al-Aqar KPJ REIT. Since then 3 other Islamic REITs have been listed on the stock exchange. Following the success in Malaysia, Sabana Shari’a-compliant Industrial REIT was listed on the Singapore stock exchange in 2010. It was 2.5 times oversubscribed and saw heavy investor interest from the Gulf Cooperation Council (GCC). Since then, its portfolio has grown to include 21 quality industrial properties in the country and is now the world’s largest listed Islamic REIT by total assets. It also became the world’s first Islamic REIT that has been well accepted by investors in the GCC countries2.
The first country in the GCC to launch an Islamic REIT was Kuwait back in 2007, followed by Bahrain and UAE. The growing awareness of Shari’a-compliant products provides significant opportunities, and is expected to drive the demand for Islamic REITs. Another milestone in Islamic REITs was achieved with the launched of the Al Salam Asia REIT Fund, by Bahrain’s Al Salam Bank, in 2014. Dubbed as the world’s first Asian REIT fund, the REIT will invest in a portfolio of Asian properties.

Malaysia: Pioneer of Islamic REITs

Currently, there are sixteen Malaysian REITs listed on Bursa Malaysia, of which, four are Shari’a-compliant, namely Axis REIT, Al Aqar REIT, KLCC REIT and Al-Salam REIT. As depicted in Table 1, as of June 2016, the share of Islamic REITs to total industry was 41.7% with market capitalisation of RM17.12 billion3. Malaysia was the first country to promote Islamic investment instruments focused on property, with the Malaysian Securities Commission issuing the world’s first guidelines for Islamic REIT in 2005. The guidelines among others included the utilisation of real estate assets and the financial facet of operations.

Box 5.1 Malaysia’s Guidelines on Islamic REIT

Guidelines for Islamic Real Estate Investment Trusts were issued on 21 November 2005. These guidelines as outlined by the Syariah Advisory Council (SAC) of the Securities Commission were to facilitate the establishment of an Islamic REIT). These guidelines must be read together with the Guidelines on Real Estate Investment Trusts (revised on 28 December 2012).

• Non-permissible rental activities must not exceed the 20% benchmark based on the total turnover or area occupied.
• Not permitted to own real estate in which all the tenants operate non-permissible even if the percentage based on turnover/floor area is less than the 20% benchmark.
• All forms of investments, deposits and financing must comply with the Shari’a principles;
• Must use the takaful schemes to insure its real estate.
• The Manager must engage a Shari’a advisory panel of 3 scholars or company approved by the Securities Commission.

Al-Aqar Healthcare REIT, formerly Al-Aqar KPJ REIT, was launched in 2006 with investments in hospitals and other buildings related to the health tourism industry. Its portfolio comprises a number of hospitals tenanted by one of Malaysia’s largest healthcare providers, KPJ Group, which runs specialist hospitals conducting permissible activities according to Shari’a. The Al-Aqar REIT sets many milestones including the world’s first listed Islamic REIT, Asia’s first healthcare REIT and a benchmark for the development of Islamic REITs in Malaysia, as well as the region. The second Islamic REIT, Al-Hadaharah Boustead REIT, was listed on the main board of Bursa Malaysia in February 2007 but was delisted in 2014. It owned and invested in plantation assets comprising plantation estates and palm oil mills.
In December 2008, AXIS REIT – the world’s first Islamic industrial/office REIT was introduced. AXIS REIT was originally established as a conventional REIT in 2005 but was restructured in 2008 as a Shari’a-compliant REIT in accordance to the Islamic REIT guidelines. With the introduction of the KLCC REIT in 2013, this became the world’s first Shari’a-compliant stapled REIT. Sta-pled REITs are investment vehicles which include two or more separate entities ‘stapled together’ to trade using a single new financial instrument. In the case of KLCC REIT, the REIT is stapled to shares of KLCC Property Holdings Bhd (KLCCP) who owns Kuala Lumpur City Centre’s three prime assets: Petronas Twin Towers, Menara 3 Petronas and Menara ExxonMobil. The fourth REIT is the Al Salam REIT, which was listed in 2015. The REIT has a diversified portfolio ranging from office buildings, shopping malls, college buildings, warehouses and food and beverages retail outlets.

Growth and Prospects of Islamic REITs in the GCC and Middle East

Islamic REIT is in early stages of development in most countries of GCC and holds significant potential for growth as interest in the region’s property soar with investors looking to diversify their geographical investment footprint. The potential is driven by strong real estate sector fundamentals such as demographic profile, expected implementation of mortgage law, and economic diversification. Above all, in view of the declining oil revenues leading to declining state funding, the growing demand for residential real estate is expected to promote market-based financing instruments like REITs.

REITs have demonstrated a historical track record providing a high level of current income combined with long-term share price appreciation, inflation protection and prudent diversification.

Islamic REITs hold significant potential for growth in the GCC as interest in the region’s property soar with investors looking to diversify their geographical investment footprint.

At present, the REIT’s market in the GCC is still in a nascent stage. There are only 5 Islamic REITs in the whole of GCC (Table 2) and only Emirates REIT and Eskan Bank REIT are listed in the GCC. It took some time for the Middle East to jump on the bandwagon after numerous attempts to introduce REITs were met with muted response. The earliest REIT to be launched in the GCC was the Arabian Real Estate Investment Trust (AREIT), launched by HSBC and Daman in 2006. It invests in prime commercial properties throughout GCC region. It is a private placement and is not listed on any stock exchange. However, a Kuwait-based REIT, Al Mahrab Tower REIT was the first Islamic REIT launched in the GCC, which has funded several real estate projects including the Al Safwa Towers in Makkah.
In the following year, Qatar established Regency REIT, which became the first REIT established in the state of Qatar and the first cross-bor-der Shari’a-complaint REIT to be listed on the Singapore Stock Exchange. The REIT’s property portfolio includes residential, hotels and office properties located in Qatar. Although the Qatar Stock Exchange suggested that more could be on the way, Islamic REITs is still struggling to attract interest in the country. Bahrain saw the launch of the Invest REIT in the following year. This Shari’a-compliant REIT has an estimated market capitalisation of US$80 million.

Regulations have permitted REITs in DIFC since 2009, but the onset of the financial crisis, and the subsequent property crisis, delayed any substantial progress in this area. Therefore, it was only in 2010 that the first REIT in the UAE was set up. The Emirates REIT, founded by Dubai Islamic Bank and Eiffel Management at the end of 2010, now has a portfolio value of US$742 million as of September 2016 with a market capitalisation of US$333 million. Listed on Nasdaq Dubai, Emirates REIT is claimed to be the world’s largest publicly listed Shari’a-com-pliant REIT both by total assets and by market capitalisation. It generated property income in the first nine months of 2016 of US$36.3 million, an increase of 22% from US$29.8 million in the same period in 2015. The Emirates REIT owns nine properties in Dubai, whereby 61% of its income is generated from commercial assets, 21% from education assets and 11% from retail assets. In January 2017, Eskan Bank REIT was the first REIT to be listed on the Bahrain Bourse. This Shari’a-compliant REIT had a US$52.2 million offering, which represented 72.9% of the trust’s total size.

The steadily improving real estate sector together with improvement in investor sentiment, growing awareness for the REIT investment structure, and increasing significant appetite among institutional and retail investors for exposure to income-producing real estate in the Middle East, is likely to spur demand for REITs in the region. However, most GCC countries do not have any clear regulations in place for both conventional and Islamic REITs and their listing. Lack of proper regulatory framework for listing and operation of REITs is still a major hindrance for the development of REITs in the region. Only Emirates REIT and Eskan Bank REIT are in the listed space across the region.
At present, only Bahrain, Dubai, Kuwait and Saudi Arabia have regulations governing REITs in some form or another. REITs in Bahrain are governed by the Bahrain Financial Trusts Law 2006. However, following the issue of REIT listing regulations by the Bahrain Bourse in May 2015, Eskan Bank Realty Income Trust became Bahrain’s first listed REIT.

The Eskan REIT, which was listed in January 2017 consist of two income-generating and unleveraged properties owned by Bahrain Property Musharaka Trust. In Dubai, the DFSA (Dubai Financial Services Authority) issued the regulatory framework for fund management which includes the framework used for REITs registered and listed in Dubai. In this framework, REITs are required to be “closed-ended” as well as being publicly traded. The regulation of the REIT is required to distribute 80% of audited net income to unit holders whilst the REIT’s leverage is restricted at 70% of total assets value. Another parameter is that REITs are not allowed to invest more than 30% of total assets in ‘property under development’.

Box 5.2 Key Regulations of REITs in Bahrain

• REITs in Bahrain are governed by the Financial Trusts Law No. 23 of the year 2006, Volume 7 of the CBB Rulebook and the REIT Listing Rules issued by Bahrain Bourse.
• All REITs must be authorised or registered with the Central Bank of Bahrain.
• The REIT should hold a minimum of two real estate properties comprising at least 80%of the net asset value (NAV).
• Up to 20% of the REIT’s NAV can be invested in the development of existing properties. This implies that properties under development cannot exceed 20% of the fund’s value.
• REITs are not allowed to invest in undeveloped land or mortgages
• Minimum value of the REIT must be US$20 million.
• The REIT can leverage to a maximum of 60% of its NAV.
• The REIT must distribute a minimum of 90% of its audited net realised income.

Box 5.3 Key Regulations of REITs in Dubai

• REITs in Dubai are governed under the DIFC Investment Trust Law in 2006.
• REITs can only invest up to 40% of their total assets in assets other than real property.
• REITs with 100% foreign share ownership are restricted to certain designated areas in Dubai.
• REITs must derive income from at least two types of tenants; whereby each type of tenant or lessee must produce 25% of the total income.
• The REIT must distribute a minimum of 80% of its annual net income.
• The REIT can leverage to a maximum of 70% of its NAV.

Islamic REITs have tremendous potential to be developed as a thriving global wealth management product since it is structured on tangible real assets, which provide stability as the investments are channeled to the real economy.

Although Saudi Arabia has recently issued regulations for the listing of REITs in January 2016, but it has yet to be formally launched. Qatar and Kuwait’s capital market authorities are also said to be working on issuing regulations for the development and listing of REITs. However, in Kuwait, the Capital Market (CMA) Law No.7 of 2010 allows for only equity REITs. One of the key characteristics of the Equity REIT under the CMA Law is that non-Kuwaiti citizens are allowed to indirectly invest in the real estate sector in Kuwait, which is generally not possible. In particular, the CMA Law, its directives and Decree No.8 of 2012 do not impose any restrictions hindering non-Kuwaiti citizens from investing in REITs.
The Capital Market Authority (CMA) of Oman is also finalizing a new draft on Real Estate Investment Trust (REIT) Fund Regulation including the listing of REITs. Although no specific REIT Regulation in Oman is in place, the existing Investment Funds regulatory framework allows for the setting up of any collective investment scheme, including the establishment of a conventional or Islamic real estate fund with some minimum requirements. This is evident by the launch of the Izdihar Real Estate Fund by Bank Muscat, which was listed on the Third Market of the Muscat Securities Market. Nonetheless, a specific REIT Regulation would not only provide further clarity to the market, it has the potential to act as a catalyst for more REIT issuances in the market.
A major advantage of investing in REITs is that tax benefits are not taxed. However, this advantage does not add much value to investors in the tax-free environment of the GCC. Although special tax treatment is not an incentive for Gulf investors to invest into a REIT, they can still benefit from the high dividends, especially with the expected recovery of the real estate sector in the UAE where rents are expected to record significant rise. Finally, there are limits or total restrictions in place for foreign ownership of real assets in GCC countries. Even in those GCC countries which have regulations for REITs, there are restrictions on foreign ownership of property. On top of this, restrictions on foreign investments in capital markets also pose challenges to the development of REITs in the region. Dubai market has 49% restriction on the ownership for REITs while in many advanced countries 100% foreign ownership is allowed.

Conclusion

Islamic REITs have tremendous potential to be developed as a thriving global wealth management product since it is structured on tangible real assets, which provide stability as the investments are channeled to the real economy. Real asset and tangible assets investments are also the preferred asset class among Muslim investors and institutions given its natural fit with the Islamic finance principles, which advocate link between the real economy and the financial sector. The success of Islamic REITs in Malaysia and Singapore gives weight to the assertion that Islamic REITs have strong prospects to be launched in global markets as a lucrative alternative real estate investment product.
The concept of REITs is not new in the GCC, but it is indeed very fresh in terms of its implementation and adaptability. In the past, REITs in the GCC have not fulfill their potential for several reasons. One such reason was the global subprime financial crisis of 2008. The financial crisis had a dramatic shift in investment perception and expectations of the investors around the globe, more so in the GCC. The crisis led to the need of diversified investment basket, rather than putting all the eggs in the same basket and investments in real estate is no exception. Investors realised the need of quick entry and exit, which was available in listed property instruments like listed REITs. From 2006, most of the GCC members were trying their best to formulate a regulatory framework, but when the crisis struck, it took with it any realistic chance of progression.

Hence, Islamic REITs are one type of investment that capital market authorities in GCC can focus to develop regulations and popularise it with clues and studies from countries such as Malaysia and Singapore. With huge appetite for Islamic investment products within the GCC region; High Net Worth Individuals (HNWIs) investors, as well as Government, owned entities such as pension funds, investment funds and sovereign wealth funds might invest in REITs to diversify their portfolio. Once Islamic REITs are popularised and listed in GCC exchanges, institutional investors such as takaful companies might also invest in Islamic REITs.

Islamic estate planning, which makes up a part of Islamic financial planning, is not well-developed and needs further enhancement and improvement for it to flourish so that every Muslim can benefit from it.
For Muslims, beyond the provision of advice on Islamic law of inheritance and bequest, Islamic estate planning calls for proper planning on the disposition of personal property and assets. Several factors have been identified to contributing to the current scenario, ranging from awareness, knowledge and cost implications.
It is a common misperception amongst Muslims that the rules of inheritance are the sole and inevitable mode of wealth distribution. Other key instruments of Islamic estate planning are takaful, wasiyya (will-writing), hiba, waqf and trust, which can be used to accommodate the laws of inheritance.
A major impediment to the development of waqf is the lack of financial resources to revive the regeneration of productivity of the waqf assets. Waqf funds itself are not sufficient to manage the waqf assets since the assets are not fully utilised to generate income.

Islamic estate planning is an important aspect of wealth management and financial planning. Currently, Islamic estate planning, which makes up a part of Islamic financial planning, is not well-developed and needs further enhancement and improvement for it to flourish so that every Muslim can benefit from it. The important components of Islamic estate planning include hiba, wasiyya, waqf, takaful and fara’id (Islamic law of inheritance), among others. This chapter discusses some of the major issues pertaining to these components and offers recommendations to resolve them.

An Overview of Islamic Estate Planning

Islamic estate planning refers to the allocation of wealth carried out by a person during his lifetime and its distribution upon his death in accordance with the principles of Islamic law. As such, estate planning aims to distribute wealth in a way that offers financial sustainability and satisfaction to entitled beneficiaries. The estate becomes more relevant when family members of the person are in financial need or suffering from disability.

To this end, estate planning also has the following objectives:

• To protect the rights of the family members of the person
• To prevent any disputes among the legal heirs, beneficiaries and creditors
• To save time and costs in applying for the distribution of estate
• To put the assets under waqf that is properly managed for the benefit of the Muslim community
• To prevent any possible claims which could arise after the death of the property owner
• To ensure the rights of the spouse or children from an unregistered marriage to the deceased’s estate.

In Malaysia, for example, there are currently more than one million cases of estate dis-putes amounting to RM38 billion, where distribution was not properly managed by legal heirs and are waiting to be heard in courts. This shows that planning for estate distribution is very significant, failing which could result in huge losses.

Issues in Islamic Estate Planning

Estate planning amongst Muslims is not widely practiced and in some countries it is almost totally neglected by Muslims. While many are of the view that estate planning only applies to wealthy individuals with millions in assets, in reality this couldn’t be further from the truth.

For Muslims, beyond the provision of advice on Islamic law of inheritance and bequest, Islamic estate planning calls for proper planning on the disposition of personal property and assets. Several factors have been identified to contributing to the current scenario, ranging from awareness, knowledge and cost implications.

Ignorance

The low level of awareness of Islamic estate planning has prevented its widespread application in the society. Many individuals are not aware of the availability of Islamic estate planning to facilitate their wealth management needs. To this end, the amount of unclaimed assets amongst Muslims exemplifies the lack of awareness of the importance of estate planning as well as apathy or ignorance in following or carrying out the procedures of asset distribution.

Lack of commitment

Some parts of the society may be aware of Islamic estate planning but are not committed towards applying it for their wealth management needs. Perhaps this is because they do not have full understanding of the importance of estate planning in a person’s lifetime.

Cost implications

Other parts of the society may be aware of Islamic estate planning but have concerns in seeking estate planning advice due to its cost implications. Therefore, they tend to avoid it altogether to save costs, thus missing out on the opportunity to manage their property.

Misperception of estate planning

Some individuals in society have a wrong perception of estate planning, whereby they do not regard it as a part of the teachings of Shari’a. They place little importance on it, as the concept of tawwakul (trust in God) is largely misunderstood by the people. While the majority of Muslims viewed that estate planning is not necessary as the Islamic Law of inheritence already ensures the redistribution of wealth and that share for heirs is already provided for within the law.

Estate Planning Instruments and Related Issues

It is a common misperception amongst Muslims that the rules of inheritance are the sole and inevitable mode of wealth distribution. Other key instruments of Islamic estate planning are takaful, wasiyya, hiba, waqf and trust, which can be used to accommodate the laws of inheritance. Each of the instruments are briefly explained in the following section. Using these instruments, estate planning can be prepared for two elements of time, covering planning during the lifetime and planning upon death.

The Islamic Law of Inheritance

The Islamic law of inheritance governs Muslims on the division of estate after death. It is a complete and comprehensive system for the legal heirs that outline the portions of each rightful beneficiary and the non-rightful beneficiaries.2 The Islamic law of inheritance is derived from three sources of Islamic law – Quran, hadith, ijma, and ijtihad of companions. There are about 36 verses in the Quran related to the Islamic law of inheritance, thus showing the importance it carries in our life. Two of these verses from the Holy Quran are produced on page 74-75.

“From what is left by parents and those nearest related. There is a share for men and women, whether the property be small or large, a determined share”
(Sura Al Nisa 4:7)

“God (thus) directs you as regards your children’s (inheritance): to the male, a portion equal to that of two females: if only daughters, two or more, their share is two-thirds of the inheritance; if only one, her share is a half. For parents, a sixth share of the inheritance to each, if the deceased left children; if no children and the parents are the (only) heirs, the mother has a third; if the deceased left brothers (or sisters), the mother has a sixth. (The distribution in all cases is) after the payment of legacies and debts. Ye know not whether your parents or children are nearest to you in benefit. Those are settled portions ordained by God; and God is all-knowing, all-wise”. (Sura Al Nisa 4:11)

Meanwhile, verses 11, 12 and 176 of Sura Al Nisa give specific details of the rights of inheritors, which are applied by Muslim jurists. These are shown in Table 1.

The objective and spirit of fara’id can also be best understood through a hadith narrated by Sa’ad bin Abi Waqqas. The Prophet s.a.w. said: “It is better to leave your heirs wealthy than to make them beg from people with their hands. Whatever you spend on maintenance (nafqah) is sadaqa, even the morsel you put in your wife’s mouth.” [Hadith narrated by Imam Bukhari and Muslim].
This is one of the objectives of the law of inheritance as a form of wealth planning to ensure justice, and that the family members left behind can continue to live their lives as per normal; as well as to protect them from oppression after the death of their loved one. While the Quran and hadith are primary sources of Islamic law, ijma’ and ijtihad are considered as the secondary sources. Ijma’ is consensus of Muslim scholars on Islamic law whilst ijtihad refers to the use of legal reasoning to make juridical decisions, which is the main instrument of interpreting the Divine message and relating it to the necessities of the Muslim community in its aspirations to attain justice, salvation and truth.
There are some responsibilities that must be fulfilled in terms of claims and obligations before distribution of the estate upon death of the estate owner. If distribution is done before the fulfilment of these responsibilities, the right and claims of the other parties may be denied, leading to dispute. These responsibilities are as follows:

• Settlement of burial expenses
• Payment of debts including income tax
• Payment of zakat, unfulfilled hajj, and other obligations (like religious donations)
• Claims against the estate including vows, hiba and trust
• Wasiyya (legacy bequest)
• Fara’id Distribution

Wasiyya

Wasiyya literally means to direct, to order or to instruct someone to do something either in the lifetime of the maker of the wasiyya (testator) or after his demise. However, it is commonly used to refer to what is to be done after death, i.e. an act of giving away property during the lifetime of the testator but becomes effective on his/her demise. Within this context, wasiyya can be translated as a will or bequest. In the event of the testator’s death, the execution of wasiyya is only permissible after payment of funeral expenses and upon the settlement of the deceased debts.
There are Shari’a rules that must be observed with regards to wasiyya or will writing in order to ensure its compliancy with Shari’a. Two principal restrictions are placed by Shari’a on wasiyya. First of all, the bequest is not allowed to be made in favour of legal heirs, so that those who are not eligible under the fara’id laws could also receive the property. For example, if a testator wishes to give his property to non-heirs such as foster children, he may choose to create a will. This rule is derived from the hadith which Abu Imama reported: “I heard the Prophet say: Allah has already given to each entitled relative his proper entitlement. Therefore, no bequest in favour of a legal heir”.
Secondly, the quantum of the bequest must not exceed the one-third limit of Islamic law of inheritance. This is meant to protect the interests of the legal heirs. This limitation on wasiyya is based on Saad bin Abi Waqas’s narration that the Prophet (pbuh)“…came to visit me in the year of the farewell pilgrimage when I was afflicted with a severe illness. I said to him: ‘O Prophet, you see how ill I am. I have property and no heir except my daughter. Shall I then give away two-thirds of my property as alms?’ He replied, ‘No.’ I said, ‘A half then?’ He still said, ‘No.’ I then asked, ‘A third?’ He replied, ‘A third.’ And a third is much. It is better that you leave your heirs rich than you should leave them destitute, begging from their neighbours.” However, if the testator wants to give more than one-third of the property after his demise, consent of the lawful heirs is required.
There are several concerns related to the implementation of the wasiyya including testacy and intestacy, which may have implications and bring legal challenges and difficulties to the property owner. Testacy refers to the condition of leaving a valid will. In this case, the property which was left by the deceased is provided for in a will and an executor6 was appointed by the deceased before his death to distribute the property according to his wishes. The chosen beneficiaries may or may not be his family members, which in the English Law are also called heirs. All properties movable and immovable must be stated in the will; otherwise, they will become intestate estates or properties.
When a person dies without leaving a will, then his estate would be distributed according to the laws of intestate. Civil laws of intestacy, a common feature in western countries, would decide who inherits the estate, which may be very different from the Islamic law of intestate succession. For Muslims, Shari’a law provides rules on how the intestate’s estate shall be divided among the deceased’s beneficiaries, which is referred to as fara’id.

Hiba

Hiba or gift, according to Islamic law, is an act of granting ownership of a property to someone else during his lifetime without any reprisal or consideration. Since hiba is made during the lifetime of the donor, when the donor dies the property does not constitute as part of his estate. This is contrary to the division by means of inheritance whereby distribution or transfer of ownership only takes place after the death of the property owner.7 As hiba is considered as a gift, anyone can be a recipient of hiba. But unlike wasiyya, hiba is not limited to one-third of the inheritance intended for the non-beneficiaries. Hiba should, however, be settled on the heirs or non-heirs during the lifetime of the donor so that the property is not subjected to fara’id.
It should be noted that the exchange of gifts is encouraged under Shari’a principles. The Prophet (pbuh) said, “Exchange gifts among you and thus strengthen mutual love with each other.” He had also said, “Give presents to one another, because a present removes grudges.” He also said: “If anyone seeks to take back a gift he is like a dog who returns to its vomit. An evil example does not apply to us.”

Although hiba is not compulsory, it is deemed as a good instrument to be used to satisfy financial goals. In the context of wealth management, hiba is regarded as a tool to facilitate the movement and transfer of wealth from one party to another. Hiba, as the third dimension in estate planning structure, complements fara’id and wasiyya. For a hiba to be valid, certain requirements under Islamic law must be met.

Although hiba is not compulsory, it is deemed as a good instrument to be used to satisfy financial goals. In the context of wealth management, hiba is regarded as a tool to facilitate movement and transfer of wealth from one party to another. Hiba, as the third dimension in estate planning structure; complements fara’id and wasiyya. For a hiba to be valid, certain requirements under Islamic law must be met. For example, the donor must be the sole and genuine owner of the property intended for hiba, while the donee can be anyone (either Muslim or non-Muslim) so long as the donee is capable and has the authority to own property, either accountable (mukallaf) or non-accountable. In the case where the donee is not an accountable person such as a minor or disabled, then the hiba is to be given to a guardian (wali) or a trustee on behalf of the donee.
Shari’a law also prescribes conditions for the property or item to be given away as hiba, such as it must be lawful, it must have value according to Islamic law, its ownership is transferable, it exists during the time of hiba and it is not connected to the donor’s property that cannot be separated such as a crop or building on a land.

Takaful
Takaful is an Islamic concept that grasps on protection and distribution of property. Takaful gives benefits to consumers in the form of wealth protection and also has a key element in risk management and can be understood as a discipline that enables an individual or organisation to deal with any uncertainty to protect assets or resources. Originated from the Arabic word kafala to mean joint guarantee, takaful is based on mutual cooperation, responsibility, assurance, protection and assistance between groups of participants. Hence, the cornerstone of takaful is to protect the interest of contributors or participants during their life and their inheritance upon their death.
However, different opinions and views have been put forth by scholars in deciding the benefit of takaful to the nominee named in the beneficiary form. The concept of hiba is applied in various family takaful products, such as takaful education plans. In this plan, for instance, a takaful participant will make hiba of the takaful benefits to his child to finance the cost of his education in the future. Upon death of the takaful participant, all takaful benefits will become the rights of his nominated child and will not be distributed amongst other legal heirs of the deceased according to fara’id. Nevertheless, if the takaful partici-pant is still alive when the takaful certificate matures, the benefit will be surrendered to him.
The question that arises is whether the takaful benefits can be given solely to the child as a nominee, or should be distributed based on the fara’id rules to other beneficiaries from the legal heirs upon the death of the takaful participant? The issue has arisen due to two different views regarding nomination. Some opined that takaful benefits are the wealth of the deceased takaful participant; thus becoming a part of his estate that must be distributed to the legal beneficiaries based on the fara’id. Accordingly, only legal heirs can become nominees. Others viewed that the takaful participant can give takaful benefits to the nominee as hiba. Therefore, he needs not to be a legal heir.
However, scholars have diverse opinions on whether takaful benefits qualify to be a subject matter of hiba or they are only available upon the death of the takaful participants. Accordingly, some argued that the takaful benefits are considered as bequest (wasiyya), which should not exceed one-third of the deceased estate minus the expenses and debts.

BOX 4.1
Application of Hiba in Takaful: Malaysian Case Study

The Shariah Advisory Council (SAC) of Bank Negara Malaysia has issued two resolutions on the application of hiba in the context of takaful. The SAC, in its 34th meeting dated 21 April 2003, resolved that:

• The takaful benefit may be made as hiba because the objective of takaful is to provide coverage for takaful participants. Since the takaful benefit is the right of takaful participant, the participant is at liberty to exercise his right in accordance with Shari’a;
• Since the hiba by the participant is a conditional hiba, the status of the hiba will not be transformed into a bequest;
• Normally, takaful benefit is attached to the death of participant and maturity of takaful certificate. If the participant is still alive when the takaful certificate matures, the participant will receive the takaful benefit. However, if the participant passed away before the maturity date, the hiba will be effective;
• Participant is entitled to revoke his hiba which was made before the maturity of takaful certificate, because a conditional hiba will only be completed after delivery (qabd);
• Participant is entitled to revoke his hiba which was made to certain individual and deliver the benefit to another person, or terminate his participation in takaful if the nominated recipient passed away before the maturity date; and
• Takaful nomination form shall clearly mention that the status of nominee is as beneficiary, if it is intended by the participant as hiba.

The SAC, in its 52nd meeting dated 2 August 2005, resolved that the concept of statutory protection as practised by conventional insurance may be applied in takaful industry in the following manners:

• Payment of takaful benefit will neither become part of the estate of the deceased (takaful participant) nor subject to the deceased’s debt;
• The takaful participant may appoint a responsible trustee for the takaful benefit.

However, the government-owned trustee will be the trustee for such takaful benefit in the following situations:

• There is no appointed trustee;
• Nominee is incompetent to enter into a contract; and
• The parents had predeceased the nominee in the event the nominee is incompetent to enter into a contract.

Once the trustee received the takaful benefit, the takaful company is deemed to be released from all liabilities relating to such takaful benefit (BNM, 2010, p. 88).

The basis of this ruling, as clearly mentioned in the Shariah Resolutions, is as follows:
The aim of takaful benefit is to provide coverage for participant or nominee (hiba recipient). Since the status of takaful benefit, which is treated as gift (hiba) will neither be a bequest, be a part of the deceased’s estate nor others, the takaful benefit is identical to the statutory protection as practised by conventional insurance. Therefore, any takaful benefit nominated to husband/wife, child or parents (if husband/wife or child had predeceased the policyholder at nomination time) shall not be annulled, changed, surrendered and charged without the consent of the nominee. In addition, since statutory protection protects the interest of the nominee and does not contradict the concept of hiba ruqba (a gift which puts death of either the hiba provider or recipient as the condition of hiba), this concept may be applied in takaful industry (BNM, 2010, p. 88).

Waqf

Throughout the Islamic history, waqf as an instrument has played a great role in wealth management and in contributing to social welfare. In Shari’a law, waqf or endowment, means a permanent dedication or giving away of property for any purpose recognised by Shari’a, whether purely religious or charitable. There are indirect provisions that indicate the use of waqf, such as:

“O you who believe! Spend of the good things which you have (legally) earned, and of that which We have produced from the earth for you.”Al-Baqarah, 2:267.

“By no means shall you attain al-birr (piety, righteousness – here it means, Allah swt’s reward, i.e., paradise), unless you spend (in Allah’s cause) of that which you love; and whatever of good you spend, Allah knows it well.” in Ale Imran, 3:92.

The Prophet (pbuh) always endorsed waqf and encouraged its practice as part of wealth management and planning for the hereafter. According to the Prophet (pbuh), “When the sons of Adam die, their deeds come to an end, except charity with enduring benefits, their knowledge which benefits others and their virtuous sons, they pray for them (bless them).”
Generally, waqf is divided into two types from the perspective of its purpose – specific waqf and general waqf. A specific waqf is normally created for the purpose of security in the interest and welfare of family members and close relatives. Upon the creation of this type of waqf, the beneficiaries along with their generations will be entitled to the benefits of the waqf property. However, upon the death of everyone, the waqf property becomes general waqf for the benefit of the poor and needy in the society.
A general waqf, on the other hand, is created for the purpose of the public and is meant for the interest of the society such as the poor, orphans and others. This type of waqf is initially targeted at the general interest of the community. It can be created in the form of mosques, schools, hospitals and other utilities that benefit society and bring prosperity and welfare to the public.

Issues and Challenges in Waqf Practices and Development

Historically, waqf funds have been used to finance various developments in many Muslim countries. It was in fact the main provider for the development of these countries’ education and healthcare systems. However, the function of waqf as an effective tool for socio-economic development has declined in modern times. Colonialism and government interventions in effected Islamic countries are among key reasons behind its decline. Others have criticised the rigid legal (fiqh) doctrines for stagnancy of waqf including supremacy given to the deed, i.e., mutawalli can only act according to the stipulations incorporated in the waqf deed and the irrevocability of the waqf. They expounded that the contemporary inflexibility of waqf doctrine as a more likely reason for the waqf’s decline.
Most waqf properties are not being used productively or are lost, hence remaining largely untapped. Despite the huge potential and significant role of waqf in social and economic development, waqf faces various obstacles and challenges that hinder its development.

Waqf is also faced with the issue of negative perception by today’s modern society who perceived it to be very narrow, unmodern, non-economic, anti-social, and revolving only in religious matters.

Considered as a modern way of financing waqf assets, cash waqf has become increasingly popular, particularly because of its flexibility which allows distribution of the potential benefits of waqf to those in need.

Financial constraints

A major impediment to the development of waqf is the lack of financial resources to revive the regeneration of productivity of the waqf assets. Waqf funds itself are not sufficient to manage the waqf assets since the assets are not fully utilised to generate income. The collection of waqf revenue is another challenge faced by waqf institutions. In most cases waqf revenues are insufficient to bear the operational costs due to the waqf institution having no self-generating income and the unproductive delay in the earning of waqf properties.

Legal constraints

In addition to the rigid fiqh doctrines of waqf, a country’s law may add another layer of legal complications. For example, local law may constitute a constraint against the establishment of waqf by its citizen or the law of a non-Muslim country may also constitute a constraint against receipt of waqf by the targeted beneficiaries. In Malaysia, for example, matters relating to the administrative affairs of Islam or Islamic law are placed under the jurisdiction of the State Government. This implies that the administration of Islamic affairs, including waqf, is governed through various state laws or enactments. Thus resulting in differences in interpretations, procedurals of promulgating fatwa or legal rulings in relation to waqf practices.

Shortage of expertise and management skills in waqf

The shortage of technical expertise and professionals in developing waqf continues to hamper the development of the waqf sector. Waqf should be managed with qualified, knowledgeable and professional managers who are well acquainted with Islamic as well as country laws. In some cases mutawalli or waqf managers are found to be unqualified or unaware of the ways in which they can utilise the scheme to generate revenues to be distributed to beneficiaries. Similarly, the wealth of methods to raise funds have not been fully utilised by waqf institutions. Studies on waqf management in Malaysia observed that most of the waqf officers do not have training or competency in investment analysis, project management, property valuation or any experiences that related to the development and management of waqf assets.

Undeveloped and unproductive waqf land

Waqf properties mostly include mosques, religious places, Islamic schools and cemeteries. Thus, very few waqf lands generate income. Underlying reasons for the state of idle or undeveloped waqf lands include ambiguity in the status of waqf land development, inefficient management, types and location of the waqf land, lack of financing of the waqf itself and lack of an effective business model for waqf land development. However, there are circumstances where waqf assets located in commercial and strategic areas could not be developed due to specific conditions imposed on the waqf assets, namely specific waqf. Such cases render waqf assets to be unproductive in generating returns from economic activities.

Unregistered waqf estates

Another constraints faced by the development of waqf is unregistered waqf lands or properties. Without the land title or legal ownership, development to waqf assets cannot be done accordingly by the waqf administrator. In some cases, waqf administrators fail to maintain a comprehensive and reliable data on waqf lands, subsequently causing most waqf lands to be unidentified and not developed effectively.

Lack of awareness on waqf

Lack of awareness and knowledge of waqf have hindered the development of the waqf sector. For instance, most are unaware that the establishment of waqf is not limited to real estate only. Cash waqf, for instance, can be used to develop productive economy, a potential tool for society empowerment. Considered as a modern way of financing waqf assets, cash waqf has become increasingly popular, particularly because of its flexibility which allows distribution of the potential benefits of waqf to those in need. For example, in Bangladesh, the Social Investment Bank Limited (SIBL) issues cash-waqf certificates to collect funds from the rich and distributes the gains of the managed funds among the poor.

BOX 4.2 Legal Issues in Waqf: A Case Study of Malaysia

The jurisdiction of hearing cases related to waqf: In Malaysia, waqf is categorised as a trust and subjected to the Trustee Act 1949, which only allows the High Court to hear any cases related to trusts. This means all cases related to waqf fall within the High Court’s jurisdiction. However, it is known that the High Court has unlimited civil jurisdiction in all matters other than matters involving Shari’a law. Therefore, waqf has to be regulated according to Shari’a rulings, which by this virtue is not recognised by the High Court.
The jurisdiction of Shari’a courts on waqf: In Malaysia, the jurisdiction of Shari’a courts falls within the power of the individual states, and can be found in the Islamic affairs enactment laws legislated by each state. This contradicts the objective of Islam, which provides that all laws, including waqf, should be enacted in accordance to the Quran and Sunnah, and can only be determined by the Islamic affairs enactment laws although they may be against what was stated in the Quran and Sunnah and other sources of Shari’a.

Trust

Trust is another vehicle in Islamic estate planning. Through the setting up of a trust, individuals can ensure the total protection of their asset(s) is preserved for their beneficiaries while in the safe hands of the trustee, who is a fiduciary who manages property and assets placed in a trust. A trustee may be an individual, a company or a public body and there may be a single trustee or multiple co-trustees. Once created, a trust separates the property’s legal ownership and control from its equitable ownership and benefits. Hence, and the trustee becomes the legal owners of the trust assets once the assets are transferred to them while the beneficiaries become the beneficial owners of the trust assets. A trust is usually governed by the terms of a deed of trust, which outline how the trust assets will be managed for and in the interest of the beneficiaries. To the effect, trust is made up of four parties:

• The Settlor: This is the person that sets up the trust fund
• The Trustee: This is the person that acts on the fund. This trustee is to look after the assets given to them by the settlor but they cannot benefit from it
• Beneficiaries: These are the people that the fund is set for
• Protector: These are those that are appointed to supervise the trustees and to protect the beneficiaries’ interests

For a Trust to be valid, some rules must be fulfilled. First is the rules against perpetuities, which prescribed a maximum period in which the interest of a beneficiary is required to vest, i.e. (a) the period of the lifetime of one or more of specified persons living when the settlement is created, and 21 years; or (b) A fixed period of up to 80 years. Secondly, the rules against inalienability refer to a principle that property must not be made non-transferable. The third rules are rules against public policy and defrauding creditors.

Shari’a law contains no prohibition on lifetime giving except on the deathbed or during a terminal illness. This clearly indicates that a person can willingly dispose one-third of his assets into a trust to a non-heirs. Shari’a scholars recognised that assets carved out of a pool of assets and vested in a trust and trustee can be considered as assets gifted inter vivos (i.e. during life), and would not form part of the estate assets upon the death of the owner of the assets or settlor. Under living trust, once ownership of assets is transferred to the trustee, those assets no longer belong to the settlor and hence, the Islamic inheritance rules do not apply to them, which simply means that other legal heirs cannot claim to be entitled to these assets. In this case, it is irrevocable unless the power of revocation is reserved when constituting the trust. The trust property will, however, revert to the settlor if the beneficiary pre-deceases the settlor.
But the concept of a living trust can be found to be inconsistent with the Shari’a concept of hiba in view of the settlor’s retention of control and enjoyment over the trust property during his lifetime. Transferability through hiba requires the rigid conditions regarding the ownership status of the hiba property, i.e. the need for actual transfer of property (qabd) as a requirement to ratify the transfer. Often in the case of self-declaration by a settlor as trustee, there is no immediate transfer of the possession of the property to the beneficiary especially if the beneficiary is a minor.

Conclusion

The components discussed earlier are very important aspects in Islamic estate planning as they facilitate a person’s wealth management and planning needs. These aspects should first be understood by financial planners to enable them to provide proper advice to their clients. However, some of the issues highlighted should be addressed and resolved to ensure proper implementation of Islamic estate planning. Awareness and education on wealth planning should be made a part of the education system in order to spread the knowledge of Islamic estate planning among the society. The findings can be briefly summarised as follows:

• The major instruments used in estate planning are hiba, wasiyya, waqf and fara’id.
• Estate planning is a very important aspect in wealth management and financial planning.
• These instruments have issues and challenges such as ignorance, lack of commitment by the public, cost implication and wrong conception of the estate planning.
• There are some specific issues related to these specific instruments such as the issues of Testate and Intestate are very much related to the wasiyya. As for the instrument of hiba, its issues are related to some aspect of takaful such as the MRTT and the Nomination which is also based on hiba under Takaful Scheme.
• As for the waqf, despite its importance and potential it still has some issues and challenges such as: lack of financial resources, legal constraint, shortage of expertise and management skills of waqf, undeveloped and unproductive waqf land, unregistered land and lack of awareness on waqf.

Awareness and education on wealth planning should be made a part of the education system in order to spread the knowledge of Islamic estate planning among the society.

• Findings support the phenomenon known as the “retirement savings crisis”. Many researches have shown that people are at risk of entering retirement without the resources necessary to maintain their standard of living and provide the financial security they need for their retirement years.

• Survey findings highlight serious concerns about the ability of financial advisors to provide unbiased, professional advice as only 37% of respondents agreed that financial advisors are in general reliable.

• When it comes to mode of communication with their financial advisors, majority of respondents are conservative with 66% prefer face-to-face interactions.

• Survey results also indicate that investors are not interested in a “digital-only” relationship. Undoubtedly, technology is the way forward for wealth managers in a competitive financial landscape. But communication should not be limited to virtual channels, and digitisation should not be seen as a replacement for the bonds of trust formed by human relationships.

Cambridge IF Analytica conducted a study titled “Demystifying Islamic Wealth Management: Consumer’s Knowledge and Preferences”. This study aimed to assess consumers’ knowledge levels on Islamic wealth management products and identify factors that affect their choice of Islamic wealth management products and services.

We surveyed 806 individuals in 26 countries spanning across 5 continents to help wealth management firms understand consumers’ knowledge, attitudes and behaviours. Respondents were consumers of Islamic banking, takaful and Islamic wealth management services. Our survey respondents were predominantly in their mid-30s to early 40s, well-educated and have investable assets ranging from US$151,000 to US$500,000.

Financial Priorities & Knowledge

In these uncertain economic times, having a financial cushion is a priority for many. When asked to rank the importance of various financial priorities, reducing or eliminating debt was the overwhelming first choice (73%) as shown in Figure 1. This is followed by investmment efficiency (65%), preserving wealth and assets (56%), spending on personal goals and needs (52%) and to save more (51%). However, overall tax efficiency is the lowest priority with only 4% of surveyed respondents cited this as their financial priority. This offers some interesting insights into where consumers stand with their finances. Clearly, respondents prioritised debt reduction and investments over savings. It should be noted here that financial priorities will depend on what stage of life a person is at. For example, a young professional will focus more on building up a deposit to buy a house. Whilst an older person will be planning for retirement.

The study shows that the younger generations have different priorities than their older cohorts. One crucial area where this is evident is wealth preservation. Six in ten Boomers in this survey (60%) have preserving wealth and assets as their number one financial priority, and nearly half (49%) of Gen X or Millenials are focused on investing their money efficiently. It is perhaps not surprising that 88% of Millennials cited saving more as their top financial priority.

87% of surveyed respondents believed that only rich people need financial advisors. Part of this misconception may be rooted in the fact that people often lump financial advisers in the same category as other financial service providers such as lawyers who often charge expensive retainers. In many cases, price is one of the biggest factors discouraging people from seeking help from financial professionals or experts.

Another interesting finding is that about 83% of the respondents viewed estate planning as only meant for the rich or old people. While this view is common amongst the majority of respondents surveyed, it couldn’t be further from the truth. In fact, proper estate planning can help people across the wealth spectrum to achieve numerous goals. However, about 82% agreed that managing wealth is important in achieving their financial goals. Meanwhile seven in ten respondents are of the view that wealth management services serve to help them grow and diversify their financial portfolio.

Keeping a Finger on the Pulse of Islamic Wealth Management

Respondents were asked if they had subscribed to any Islamic wealth management products or services. As shown in Figure 3, 68% said they do. Of these 20% subscribed to both conventional and Islamic wealth management products and services.

But 32% do not own any Islamic wealth management products. The reason? 87% of them cited not having enough assets as the primary reason (Figure 4). Nearly two-thirds of respondents expressed lack of understanding of Islamic wealth management, suggesting that lack of knowledge is a barrier to the growth of the industry. Another 45% said they are not able to subscribe to Islamic wealth management products and services because these are not available in their country of residence, implying a huge untapped opportunity for the Islamic wealth management industry.

When it comes to Islamic wealth management goals, majority (77%) surveyed cited retirement income and planning as their primary goal (Figure 5). This is followed by investments and wealth accumulation (59%) and wealth and lifestyle protection (58%). This reflects the growing awareness about long-term financial planning, including for retirement. For most people, planning a comfortable retirement can’t be done in a matter of a couple years — it takes decades of diligent planning and savings to reach retirement goals. Gen Xers and Boomers, who see retirement on the horizon, are by far the most focused with this goal in mind, where 80% of them cited retirement to be a financial priority. This is a stark contrast to only 20% of Millennials.

Our findings also support the phenomenon known as the “retirement savings crisis” and consistent with the earlier findings on financial priorities of respondents. Many researches have shown that people are at risk of entering retirement without the resources necessary to maintain their standard of living and provide the financial security they need for their retirement years. Factors such as sustained rises in health care costs, increased life expectancy and the possibility of future reductions in government-provided retirement benefits have contributed to the “retirement savings crisis”. All of these contribute to a greater need for financial advising that goes well beyond investment advice.

These Islamic wealth management goals far outranked wealth transfer where less than half of respondents (41%) stated wealth transfer as a goal. Clearly, consumers placed greater priority on income production than to preserve and plan for transference of wealth to progeny in a Shari’a-com-pliant manner, which is an important goal of Islamic wealth management. Although wealth distribution among heirs is determined by Islamic inheritance law, the need for estate planning is vital as it offers financial sustainability and great satisfaction to its entitled beneficiaries. This is particularly true in countries where Islamic inheritance law doesn’t have a role in the judicial system. Factors such as low level of awareness of Islamic estate planning and the misconception that estate planning only applies to wealthy individuals with millions in assets explain why estate planning amongst Muslims is not widely practiced. Chapter 4 offers a comprehensive discussion on Islamic estate planning.

Despite retirement income and planning was the primary Islamic wealth management goal of more than 70% of respondents, only 36% had sought any advice on retirement plan from a professional financial advisor or wealth manager (Figure 6). Majority sought advice on takaful products (59%) and savings and investments products (48%). An alarming finding is that only 39% of surveyed respondents said they had consulted a professional advisor on financial planning. But to have a better understanding of barriers to financial advice, one must examine seeking of advice by consumers and delivery of advice by professional financial advisors.

The study also pinpointed profound gender differences in financial planning attitudes and practices. While 90% of women who took part in this survey sought and used financial advisors, only 67% of men did so. Hence, the study supports evidence that women are more likely to seek and actually use financial advisors, while men are more likely to get information on their own. Various studies have shown that men are less likely to pursue financial advice because of their overconfidence in their own abilities and preference for self-directed learning. While each person is shaped by his or her own individual experiences, there is some compelling research on gender and finance that raises potential barriers to advices seeking by both men and women.
When asked to rank the benefits of having professional advice, nearly two-thirds of respondents revealed that ‘having greater peace of mind’, ‘motivations and discipline to financially prepare for retirement’ and ‘help find ways to reduce risk and better understanding long term goals’ were their top four benefits (Figure 7). 47% of respondents think that engaging professional advice would help them learn strategies to make money quickly. The results show quite clearly that it is not just about getting a decent return on money, but it’s having a plan in place to deal with economic uncertainties and help keep you on track to achieving your goals.

However, only 10% of respondents thought that a major benefit of a financial advisor or planner would be that they would spend less time and effort on financial planning. The results have serious implications for the Islamic wealth management industry in general, and Islamic financial planning in particular. Although they perceive many benefits from receiving profes-sional financial advice, consumers are sceptical of the financial advice received and are less likely to view financial advisors as trusted sources.

Appetite for Expertise

In describing their experience with financial advisors, majority of those who used a financial planner or wealth manager said that their financial advisors understood their personal goals and financial objectives (55%) and have the relevant skills and expertise (53%), whilst 52% said that the advice suited their financial needs (Figure 8). Less than half of the respondents were satisfied with the services provided (44%) and trusted their financial advisors (43%).

Only 42% thought that their financial advisors had communicated effectively on how their finances are managed. The findings highlight serious concerns about the ability of financial advisors to provide unbiased, professional advice as only 37% of respondents agreed that financial advisors are in general reliable.

The level of distrust is alarming for financial institutions and agencies/associations and is consistent with the populous view of the industry post the financial crisis, which had led to a distrust of financial advisors. This raises the issue of whether financial advisors show a satisfactory level of professionalism and ethics towards their clients. It is therefore vital for financial institutions to use effective communication and marketing strategies such as using social media and blogs to mitigate this lack of trust.
By far the most important reason for choosing Islamic wealth managers or financial advisors cited by the surveyed respondents is access to investment expertise (58%) (Figure 9). The second reason is their years of practical experience (48%), followed by their expertise in general financial planning (45%). These factors far outweigh firm’s reputation (36%) and competitive rates (37%). Hence, implying that respondents are willing to pay for the services provided because they are looking for an advisor with the expertise to help them navigate the complexities of the financial markets.

Personal Interactions are Preferred with Digital Channels Playing Complementary Role

When it comes to mode of communication with their financial advisors, majority of respondents are conservative with 66% preferred face-to-face interactions at the office or branch (Figure 10). Another 63% of respondents cited email as their preferred channel of communication. Investors’ perceived importance of these interactions reveal strong preferences for personal interaction, as well as other traditional channels. Survey results also indicate that investors are not interested in a “digital-only” relationship. Undoubtedly, technology is the way forward for wealth managers in a competitive financial landscape. But communication should not be limited to virtual channels, and digitisation should not be seen as a replacement for the bonds of trust formed by human relationships.

What is interesting here is that only 37% would like to communicate via social media applications, implying that traditional channels continue to be the primary medium for interaction with an advisor, including discussing finances or obtaining information. Although digital channels play a complementary role, more than 43% of surveyed respondents preferred mobile apps as opposed to social media (37%). This relatively low appetite for using social media to communicate on financial matters is a reflection of consumers’ preference to keep their financial activities separate from their social networks.

Trust is a Barrier to Financial Advice
24% of respondents said they have never sought any advice from any financial advisors or wealth managers. Of these 88% were male, 71% had a postgraduate degree and 38% were between 18 and 30 years old. ‘Prefer to do it on my own’, ‘rely on family, friends and co-workers for financial advice’ and ‘do not trust professional advisors’ were the top 3 reasons for not using the professional financial advisory services (Figure 11). The results point to the fact that these people are sceptical about the value of financial advice, because they feel they have the ability to find financial information themselves.

Twenty-six percent of respondents who haven’t worked with a professional financial advisor say they have not done so because they prefer to seek advice from family, friends and co-workers. Although it is encouraging that financial matters are being discussed with family and friends, it is however prudent to handle some situations with the help of a competent professional advisor. Since professional financial advisors have broad experience working with many different clients and situations, they can quickly assess client’s need and offer sound advice that is tailored to their circumstances.
Trust is also a barrier to financial advice. The recent turmoil in the financial markets has significantly lowered consumers‘ confidence and trust in the financial services profession. Lack of trust is holding most consumers back from working with a financial professional, with 20% saying they did not trust professional advisors and planners. Hence, they are more likely to turn to family and friends for advice on financial planning matters or rely on websites and other sources for financial information. While informal advice may be customized to an individual household’s financial details, friends and family may be uninformed and therefore may provide inappropriate advice. However, given the current economic climate, it makes it even more important that people have access to affordable financial planning advice. The industry also needs to work together to change the idea that planning is only for the wealthy.

Digital is Key to Financial Management
The study also analysed the activities conducted through digital channels, the digital interactions investors want, and their propensity to adopt digital offerings and use robo-advisors. Digital technology is already employed across a wide array of their financial and wealth management needs. As can be seen in Figure 12, majority of the transactions conducted through digital channels are basic banking transactions – view account or statement (82%) and conduct online transactions such as online purchase and money transfer (75%). Only a third were using online services for portfolio management.
About 47% of those surveyed used digital channels to access research and seek out advice on financial matters, thus seeking to become more educated about investing. The finding reveals an opportunity for wealth managers and financial advisors to provide relevant resources for investment education that can potentially help build trust. This could be the key to greater investor engagement.

Nearly half (48%) of the surveyed respondents said they were familiar with the concept of robo advice (Figure 13). It should come as no surprise that familiarity and comfort levels with robo-advisors decrease with increasing age. Only 12% of Boomers were familiar with robo-advisors. The numbers change to 33% and 57% with Gen X and Millenials, respectively, which implies that there is a large market for automated financial advice.
Robo advisor or also known as automated investing or online advisors, use computer algorithms and advanced softwares to build and manage a client’s investment portfolios, offering such features as automatic rebalancing and tax optimisation. Most robos have little or no investment minimums, so one does not have to be mega-rich to benefit from their advice. In addition, robo-advisors offer convenience and expertise for a fraction of the cost of a financial advisor.

In the earlier sections, we reported that personal interaction was cited as the most preferred channel of communication with advisors. Hence, human touch is still required. But investors are increasingly aware of how automated technology can help them in making better and informed investment decisions. Of those who said they have heard of robo-advisors, over a quarter are actually using it whilst 56% said they haven’t explored robo-advisor services but could imagine using it in the future (Figure 14).
Our findings suggest that the future of investment advice lies at the intersection of technology and humanity.

Of those respondents who are not using robo advisors, five in ten said they are likely to use these services for wealth management whilst 36% said they don’t think they will (Figure 15). With majority of the respondents positive to the adoption of an automated solution in Islamic wealth management, the future of financial advice will be digital.

• While today total assets in the Islamic finance system worldwide are measured as high as US$2.293 trillion, and expected to grow to US$4.3 trillion by 2020, the assets in Shari’a-compliant mutual funds barely reach US$53 billion, or just under 3% of assets in Islamic finance today.
• There is evidently a predominance of Islamic equity mutual funds, with 54% of the 744 funds dedicated to this asset category, and 38% of AUM.
• Islamic money market funds (aka, murabaha or commodity finance funds) comprise 12% of all Shari’a-com-pliant mutual funds, yet a whopping 33% of Islamic fund AUM.
• Among the 744 mutual funds in the universe of Islamic mutual funds, 63% had a track record of 5 years or more, and comprise 76% of all Islamic mutual fund assets under management. This gives evidence that the preponderant weight of Islamic mutual funds is in those with established histories, a key ingredient to professional and regulatory acceptance.

Many individuals and institutions save money for future spending. That is true regardless of spiritual identity. People of all faiths habitually save for their futures. In all developed and many developing economies the savings of individuals and institutions are largely channelled through one or another type of asset management entity. An individual can walk into a local bank or go online and purchase mutual funds. A university endowment or family foundation will have a Board of Trustees establishing an investment plan, and hires professional asset managers to implement that plan. Pension funds and insurance companies employ investment professionals internally or on an outsourced basis to manage their assets. Almost all have investment goals that must be achieved through security selection and asset allocation, the core functions of asset management.
Asset management in more developed areas of the world, and many developing, is a well-established business with hundreds of thousands, and perhaps millions, of employees and tens of trillions of US dollars equivalent in assets under management. It is by and large a secular business. While socially responsible and ethical investing have become new important trends in the last decade, they are generally not by themselves spiritual.
Asset managers deal with decision constraints on a regular basis. A client can be an individual or institution and give instructions to invest in assets of type “A” but not in assets of type “B.” Some investors—such as the Methodist Church, the California State Employee Retirement System, the Norwegian Sovereign Wealth Fund, or the Bill & Melinda Gates Foundation—provide specific constraints on their asset managers, usually involving the avoidance of investments involved in controversial businesses such as weapons, petroleum, gambling, or others considered anti-social, non-humanitarian, or somehow defined as unethical or not socially responsible. So, adding constraints to security selection is not new; rather it’s been around for decades.

A Slow Evolution

Modern Islamic finance can be said to have begun in 1975 with the foundation of Dubai Islamic Bank, and continued in 1977 with Kuwait Finance House. Both institutions, and since then dozens more, are primarily retail banks. Retail banking in the Islamic sense means the same as with conventional banks: deposit-taking institutions that serve individual customer needs such as payment systems (debit cards or checking accounts), short-term credits, credit cards, auto loans, and the like.

After a period of maturity nearly all the retail Islamic banks established parallel corporate banking services to serve business and government customers. For these customers they established Islamic payment systems, inventory finance, equipment finance, letters of credit and guarantee for exporters and importers, and the usual list of services provided to companies and agencies. Corporate banking turned out to be identical in Islamic finance to conventional corporate banking in terms of service, reliability and cost.
In 1998-99 the world’s first Islamic investment banking institutions appeared, with Arcapita and Gulf Finance House in Bahrain raising an estimated US$30 billion from investors through 2007, and issuing close to US$3 billion in sukuk for their own balance sheets. The world’s first global sukuk (Islamic bond) was issued in early 2001 by the Malaysian government, and was soon followed by more from the Dubai, Bahrain, Saudi and Indonesian governments. Sophisticated legal counsels created Shari’a-compliant share purchase agreements, mortgage loan agreements and long-term asset financing contracts that became widely accepted by Shari’a scholars. By 2014 even the UK, Hong Kong, South Africa and Luxembourg governments had issued sukuk, indicating a highly legitimized form of Islamic investment banking was achieved.
Shari’a-compliant trading and brokerage banking was established in the Islamic finance space with the likes of Mubasher, a highly popular independent Saudi brokerage and clearing house for regional and some international shares, while throughout the 2000s banks in the Saudi and Gulf region set up numerous Shari’a-compliant brokerage units, often in separately capitalized investment divisions, all with the same level of service and cost as their conventional counterparts.

Narrow Base

In short, these four pillars of Islamic banking—retail, corporate, investment and brokerage & trading—all rapidly advanced over the last 40 years to become legitimate financial service providers for their respective clientele, equal in nearly all senses to conventional financial service providers. Absent, however, is the fifth pillar of banking, Islamic asset management. Compared to the other four areas of banking, Islamic asset management has barely moved. While today total assets in the Islamic finance system worldwide are measured as high as US$2.293 trillion, and expected to grow to US$4 trillion by 2020, the assets in Shari’a-compli-ant mutual funds barely reached US$53 billion, or just under 3% of assets in Islamic finance today. Compare that to the approximately equal amounts in US mutual funds and assets in US commercial banks (about US$15 trillion each, meaning mutual fund assets are approximately equal to 100% of banking assets) and the disparity of Islamic assets under management to Islamic finance assets becomes more acute.
There may be multiple causes for the retarded development of Islamic asset management. Certainly the advances in the other four categories of Islamic banking were swift and widespread. From near zero levels in 2000, sukuk outstanding worldwide now surpass US$300 billion, Islamic mortgages in the United States are said to exceed US$3 billion, while Shari’a-compliant assets in the Malaysian banking system are quickly approaching 30% of all assets.
We consider here Islamic asset management as a unique and separate function of Islamic finance. Perhaps the retarded development of Islamic asset management is due to the lack of adoption of conventional asset management methodologies. Perhaps too there are cultural or social issues involved.

Size & Nature of Global Assets under Management

The asset management industry comprises around US$78.7 trillion in professionally managed assets worldwide (Figure 1 & Table 1). According to PwC, the global investable assets for the asset management industry will increase to more than US$100 trillion by 2020, with a compound annual growth rate of nearly 6%. We know intuitively that much of this managed wealth is owned by individuals and institutions (institutions often acting on behalf of individuals, such as pension funds) in developed economies. Before the publication of Islamic Wealth Management Report 2016 (IWMR), the industry analysts found it difficult to put an exact number on the global size of assets held by Muslim HNWIs, institutions and governments. The estimate for 2017 is US$ 11.9 trillion, as mentioned in Chapter 1.

Pension funds and insurance companies play an equally powerful role as intermediaries in the real economy by investing in tens of trillions of dollars and their equivalents in other currencies in stocks, bonds, other credit vehicles, hedge funds and private equity. They also universally have the same general objective of mutual fund investors, maximizing return while minimizing risk through the application of Modern Portfolio Theory (MPT). But, pension funds and insurance companies have special asset-liability management issues. They are constrained in their portfolio allocations by regulators insisting on extremely prudent investments to insure future liabilities (pension and insurance claims) are paid. And, they are captive in the sense that no single individual can enter into and benefit from the investment strategy of a pension fund or insurance company. They represent specific investor groups and only those groups.

Even with the most transparent investment policies, the large size and specific nature of these institutional investors make their asset management profiles less appealing for what we are trying to achieve here in discussion of Islamic asset management (although, of course, Shari’a-compliant pensions and insurers, or takaful, may substantially benefit from applying Islamic asset management to their investment strategies and processes). To gain a more specific identity of Islamic asset management we examine mutual funds to achieve our understanding of what is possible. At the same time, mutual funds are the “common man” investment, meaning the outcome of this research may have greater utility for more persons, in particular Muslims.

Mutual funds, by nature, are the most democratic vehicle for individuals and many institutions to place their savings. They offer advantages to investing that few individual investors could hope to achieve on their own without mutual funds.

The Role of Mutual Funds

Mutual funds play several roles in asset management. First, they are the investment vehicle of choice for many individual investors, and not only in developed economies. Most individuals cannot hope to gain the benefits of investment diversification by themselves due to the complexity and barriers for individual access to global capital markets. Mutual funds offer a portal into sophisticated, professional asset management with low entry amounts. As stated by the International Monetary Fund, “Financial intermediation through asset management firms1 has many benefits. It helps investors diversify their assets more easily and can provide financing to the real economy as a ‘spare tire’ even when banks are distressed. The industry also has various advantages over banks from a financial stability point of view.”
Few investors choose a single-asset-class portfolio. Professional investors diversify investments across multiple asset categories: Cash, Fixed Income,3 Equity and Alternative Investments. Most professional asset managers achieve diversified portfolios through MPT, optimizing risk and return to achieve investment objectives. By analysing, filtering and selecting mutual funds an individual investor can hope to achieve an optimized portfolio.
Mutual funds—numbering over 79,000 worldwide and managing more than US$33 trillion in assets—play an important role in achieving diversification and portfolio optimization for many individual and a good number of institutional investors6. Mutual funds, by nature, are the most democratic vehicle for individuals and many institutions to place their savings. They offer advantages to investing that few individual investors could hope to achieve on their own without mutual funds. Further, absorption of mutual funds into an economy is considered an indication of that economy’s strength and sophistication. Developed economies have much higher ratios of mutual fund AUM to GPD than less developed economies. Mutual funds do play a significant role in the markets in which they invest, whether money markets, fixed income, equities, or alternative investments. Mutual funds are invested across all asset categories, and given the current US$33 trillion value of AUM in mutual funds worldwide, one may conclude their role in capital markets is not insubstantial.
Notes on the Historic Development of the Islamic Mutual Funds Industry Ernst & Young annual reports on the Shari’a-compliant mutual funds universe estimated 150 such funds in 2000 and 400 in 2006. Today our count of this universe results in 744 funds, indicating a growth of almost 400% in the previous 15 years. Islamic mutual fund assets under management were estimated by E&Y at US$39.5 billion at the end of 2006, while our measurements today indicate almost US$58.8 billion, for a total 9-year growth of 49%. For comparison, assets under management of US mutual funds from 2006 through 2014 grew 52%7, a nearly identical rate of growth, meaningful until one considers the former is part of a spectacularly fast-growing sector—Islamic finance—while the latter is from a highly mature market. What is interesting is that Islamic mutual funds industry was born sometime in the mid-1990s and today many of the funds founded in the industry’s infancy are still around. What is not so clear is the historic evolution of these funds and their assets under management.

Asset Allocation for the “Typical” Muslim Investor

We look now at the distribution of Islamic mutual funds within classic asset categories in an effort to see if there is skewness in the types of funds that have been produced to date by Islamic fund providers, where here we’ll define skewness in comparison to the US mutual funds market. While not a good measure, since other mutual fund markets can be quite different, we can at least have one comparison among developed mutual fund markets. There is evidently a predominance of Islamic equity mutual funds, with 54% of the 744 funds dedicated to this asset category, and 38% of AUM. Is this “normal”? In terms of AUM, the U.S. mutual fund market has 56% dedicated to domestic and international equities8, so while the ratio of funds is similar, the variance of AUM ratio is significant.
More variance is visible when comparing other asset categories. There are 118 Islamic mutual funds in the Fixed Income category (where “Trade Finance” is sometimes added in this text due to the occasional appearance of funds that invest in sukuk as well as trade finance, rare in conventional bond mutual funds), comprising 16% of all funds and nearly 9% of AUM. In the US market AUM in bond funds comprise 22% of all mutual fund AUM, a variance of about 250% more than we see in the Islamic mutual funds market. Even more graphically, Islamic money market funds (aka, murabaha or commodity finance funds) comprise 12% of all Shari’a-compliant mutual funds, yet a whopping 33% of Islamic fund AUM. In comparison, U.S. money market funds account for only 15% of American mutual fund assets. Equally striking, the loose category Alternative Investment funds accounts for 2% of all Islamic funds and 14% of AUM, yet in the U.S. market this category has an 8% share of assets. As we’ll show below, however, this can be highly misleading. Alternative funds in developed markets are highly heterogeneous, while the Alternative Investment category in Islamic mutual funds is quite concentrated (see Figure 2 and Table 2 below).

The category Mixed Allocation is more difficult to define, as this is sort of a “grab bag” of mutual fund investments and investment styles. Drilling down into the fact sheets of many of these funds is illustrative. One might invest in up to 99% Shari’a-compliant equities when the manager sees an opportunity, or up to 99% cash and fixed-income instruments if the manager feels valuations are under threat. Many such funds exist with various limits on fixed income (murabaha, sukuk and deposit assets) and equities. Some of them have announced disciplined to make best efforts to keep within certain bands, for example not to invest more than 40% or 80% in equities, with the balance in fixed-income securities. These mirror the portfolio strategy funds common among major asset managers.

Track Record

An important distinction for asset managers is a mutual fund’s history, or track record. A fund with a longer track record will provide more data that will display the consistency, or lack thereof, of the fund manager’s skills in managing assets through measurements of price and price volatility, plus assets under management. A bit surprisingly, it was discovered that among the 744 mutual funds in the universe of Islamic mutual funds, 63% had a track record of 5 years or more, and comprise 76% of all Islamic mutual fund assets under management. This gives evidence that the preponderant weight of Islamic mutual funds is in those with established histories, a key ingredient to professional and regulatory acceptance (see Figure 3).

It was discovered, too, that while only 11% of all Islamic mutual funds had been around for 15 years or longer, they comprised 35% of all Islamic mutual fund assets under management. These 81 veterans of the industry enjoyed average assets under management of US$254 million, a figure which combined with track record indicates a relatively large pool of large, historic funds. This dispersion of track record and AUM can be more clearly envisioned in Figure 4 and 5.

Among the top five countries for Islamic mutual funds (Malaysia, Saudi Arabia, Indonesia and Pakistan), there is evidence of the historic evolution for the creation of these securities over time. In terms of number of funds, both Malaysia and Saudi Arabia display maturing mutual fund industries, while relative newcomers Indonesia and Pakistan are filling the gap with substantially more fund production in the “less than 10 years” category than their more mature rivals. In fact, the evidence indicates the greying, or aging, of the Islamic mutual funds industries in both Malaysia and Saudi Arabia, perhaps because most available product gaps were first filled ten years or more ago.

The evidence also points to the maturing of Saudi mutual fund assets under management, and to a lesser extent also in Malaysia, and the younger nature of assets in the Indonesian and Pakistani markets. And, measuring top-five by AUM adds Luxembourg to the list, where more than 70% of Islamic funds have five or less years of track record, a relative newcomer compared to the other four.

Conclusion

There is an understudied yet large and historic global market for Islamic mutual funds. Little has been written about this market and there is paltry academic research. Yet the potential utility to Muslims (and non-Muslims who wish to achieve the same goals) of Islamic mutual fund investing into globally allocated, optimized portfolios is presumably very large.
There is still much to learn about each of the asset categories in Islamic mutual funds requires, in particular determining if there are geographic biases among issuers of Islamic mutual funds. Do Saudis create and manage more equity funds, while Malaysians more fixed-income funds? Are mutual fund families in the UAE more likely to outsource non-local fund management than those in Saudi Arabia? Why are the large majority of existing Islamic mutual funds issued in just two reference currencies, the US dollar (and the dollar-linked currencies of the GCC region) and the Malaysian ringgit? Is there space for distributing these funds in other currencies via additional share classes, or would home-grown mutual funds better meet domestic savings needs?
Certainly the above revelations are barely scratching the surface of the Islamic mutual funds market and the subsequent construction of sharia-compliant, optimized portfolios in the Income, Balanced and Growth strategies typical in the asset management industry. Comparing the academic research in this sector to that done on conventional asset management is like comparing a mouse to an elephant. The mass is thousands of times greater in the latter. But, with each small step a better platform is constructed for the next level of research.

• World’s Muslim population, estimated to be 2 billion currently is expected to increase to 2.8 billion in 2050. A by-product of this demographic dynamic will be the rapid creation of wealth across the Islamic world, which will underpin the continued expansion of the broad market for Islamic finance.
• The global Islamic wealth pool is estimated to be worth about US$11.9 trillion. Of this total, however, as much as US$9.65 trillion of wealth owned by Muslim individuals, institutions and governments is estimated to be held outside the global Islamic financial services industry.
• Many high-net-worth individuals (HNWIs) throughout the Islamic world are comfortable with wealth management offerings from providers of conventional financial services, which is in part a reflection of the availability of a wider range of products in conventional asset management than in its Shari’a-compliant equivalent.
• Increased depth and diversification in the sukuk market has significant implications for the Islamic wealth management industry, because there are clear signals that investors in the Muslim world are developing an appetite for the longer-term stability of fixed-income markets in preference to equities.

Recent trends in the evolution of the global wealth management market have been mixed. In 2015, the global asset management industry recorded its worst performance since the 2008 financial crisis1. The market picked up in 2016 marginally.

Worldwide, assets under management (AUM) rose by just 1% in 2015 to US$71.5 trillion from US$70.5 trillion, which was a disappointing showing compared to the average annualised growth rate of 5% between 2008 and 2014. BCG attributed 2015’s muted growth in AUM to tepid net inflows twinned with the generally negative and turbulent performance of global financial markets. The end of the 2016 figures were even gloomier, as the global AUM stood at US$69.1 trillion.
Other recent analyses, meanwhile, reported that AUM in the asset management industry have even been declining. According to research published in October 2016 by Pensions & Investments (PI) and Willis Towers Watson, assets managed by the world’s largest 500 managers fell in 2015 for the first time since 2011. This analysis reported that total AUM were down 1.7% to US$76.7 trillion at the end of 2015, compared to US$78.1 trillion the year before.2 In a nutshell, everything is not honky dory in the global asset management industry.
By contrast, the narrower wealth management industry has continued to expand and prosper. In a White Paper on the Global Wealth Market published in May 2015, Datamonitor fore-casted that by the end of 2018, the assets of high net worth individuals (HNWIs) will surpass US$40 trillion, an increase of over US$18.5 trillion since the end of 2014. “During the same period,” the report added, “the assets of the affluent population as a whole will increase to almost US$99 trillion. The forecast rate of 23.7% growth for 2014-2018 is slightly lower than the 26.5% recorded in 2010-2014.”
It is not just this growth outlook which suggests that the current environment may represent an unparalleled opportunity for wealth managers at a number of levels. A recent survey of more than 2,000 individual clients and 60 wealth management senior executives3 revealed that the global wealth management industry is undergoing an “unprecedented level of change”. There are several drivers behind this transformation, ranging from shifting demographics and investor preferences to competitive threats from the FinTech world described as “digital disruption”.

5 KEY WEALTH MANAGEMENT TRENDS FOR 2017 AND BEYOND

With opportunities to generate alpha increasingly elusive, and with margins under pressure and uncertainty still prevailing about the regulatory outlook, it is small wonder that asset managers and their clients across the world are re-evaluating their strategies. As a consequence, it is estimated that four out of 10 clients are currently open to switching wealth managers under the right circumstances. This represents a US$175 billion to US$200 billion global revenue opportunity for those firms willing to make strategic investments to deliver a superior client experience, while others may find themselves at risk of losing a substantial portion of their business.

Potential for Islamic Wealth Management

While there is abundant room for further growth in the global wealth management industry, there are several reasons why the Islamic niche of the industry is expected to outgrow conventional wealth management over the coming decade. One of the most fundamental of these is the demographic profile of the global Muslim population. According to the Pew Research Centre, while the world’s population is projected to grow 35% in the coming decades, the number of Muslims is expected to increase by 73%, rising from 1.6 billion in 2010 to 2.8 billion in 2050. In 2010, Muslims made up 23.2% of the global population. Four decades later, according to the Pew forecasts, they are expected to account for about three in ten of the world’s people (29.7%)4. Much of this projected growth is attributable to the fact that Muslims have the youngest median age (23 in 2010) of all major religious groups, seven years younger than the median age of non-Muslims (30).

One by-product of this demographic dynamic will be the rapid creation of wealth across the Islamic world, which will underpin the continued expansion of the broad market for Islamic finance. Projections on the growth of Shari’a-compliant finance vary, but according to Global Islamic Finance Report 2017, it is expected to grow to US$3 to US$4.3 trillion by 2020. More specifically, the Datamonitor analysis forecasted that demographics and economic growth will be especially supportive of the growth of the wealth management industry in countries with majority or fast-expanding minority Muslim populations. Over the next few years, one of the world’s fastest-growing wealth management markets, according to the Datamonitor projections, will be Pakistan, which will expand at a 10.27% compound annual growth rate (CAGR) between 2015 and 2018. This will be eclipsed by the projected CAGR of 10.62% over the same period in Nigeria, where Pew forecasted that 58.5% of the population will be Muslim by 2050, up from around 50% today.

Why is Islamic Wealth Management Underdeveloped?

It is not just the demographics of the global Muslim population that will drive continued growth of the market for Islamic finance in general and Shari’a-compliant wealth management in particular. Both markets are widely regarded as underdeveloped relative to their potential. Based on an estimated size of US$2.293 trillion in 2016, for example, the Islamic finance assets still represented just about 2% of the total global financial market worth US$127 trillion5. The global Islamic wealth pool, estimated by Islamic Wealth Management Report to be worth about US$11.9 trillion. Of this total, however, as much as US$9.65 trillion of wealth owned by Muslim individuals, institutions and governments is estimated to be held outside the global Islamic financial services industry.
The reasons for relative underdevelopment of Islamic wealth management industry are well understood and have been widely documented. One of these is that it cannot be assumed that there is a direct link between the size of the global Muslim population and demand for Shari’a-com-pliant financial services. This is because many high net-worth individuals (HNWIs) throughout the Islamic world are comfortable with wealth management offerings from providers of conventional financial services, which is in part a reflection of the availability of a wider range of products in conventional asset management than in its Shari’a-compliant equivalent. Historically, the lack of diversification available for Islamic investors in local as well as international markets was regarded as a function of the restrictions on permissible investment instruments under Shari’a law. As well as ruling out exposure to any companies involved in proscribed areas such as arms production, alcohol sales or gaming, the prohibition on the charging or receipt of interest payments (known under Islamic law as ‘riba’) effectively put the entire conventional financial services industry off limits to most Shari’a-compliant funds. This in turn dramatically reduced the universe of listed equities and equity-based investment funds open to Muslim investors.

Over the next few years, one of the world’s fastest-growing wealth management markets will be Pakistan, which will expand at a 10.27% compound annual growth rate (CAGR) between 2015 and 2018.

A number of other restrictions imposed by Islamic law also narrowed the range of opportunities accessible to investors committed to observing Shari’a-compliant financial rules. The prohibition on interest payments meant that opportunities to diversify into conventional fixed-income instruments were limited. The Quranic ban on ‘gharar’ (defined as speculation) and on trading in products that an investor does not physically own, meanwhile, has traditionally been a stumbling block to the development of derivatives, structured products and Islamic hedge funds. This in turn has sharply reduced opportunities available to investors to protect themselves from falling prices and volatility in a way that is compatible with Shari’a guidelines.

The global Islamic wealth pool is estimated to be worth about US$11.9 trillion. Of this total, however, as much as US$9.65 trillion of wealth owned by Muslim individuals, institutions and governments is estimated to be held outside the global Islamic financial services industry.

As a result of these multiple restrictions, asset and wealth management in the Islamic finance universe has been overwhelmingly long-only equities-based. A by-product of this has been that the market for Islamic investment funds has been vulnerable to macroeconomic uncertainty. This has been evident over the last 12 months. According to data published by the MIFC6, even though the market for Islamic funds is expected to grow by more than 5% per annum to reach US$77 billion by 2019, challenging macroeconomic conditions and volatile market conditions drove a notable recent decline in the number of Islamic funds in 2015. Beyond restrictions on the range of products available to Muslim investors – which have inevitably had an impact on the performance and liquidity of Shari’a-compliant investments – there have been a number of structural shortcomings that have slowed down the growth of Islamic wealth management, especially in the Middle East. For example, the fragmentation of markets in the resource-rich GCC has hampered distribution of financial products. This is one reason why the mutual fund market in the Middle East remains very underdeveloped compared to the US and Europe.
Another reason that has been advanced in explaining the relative underdevelopment of the Islamic wealth management sector is a so-called trust deficit, (see chapter 3 for further details)7. Almost half (48%) of respondents to this survey on the Knowledge, Attitude and Practices (KAP) of the industry indicated that they had never used any Islamic wealth management products and services. The reasons they gave included lack of understanding, shortage of trust and preference for managing their own financial affairs. The survey also found that 18% of industry practitioners and experts believed convincing Muslim HNWIs to invest in accordance with Shari’a-compliant rules was “very difficult”.

An Underdeveloped Takaful Sector

In the GCC, in particular, this deficit also appears to extend to another underdeveloped area for the more efficient long-term management of Muslim wealth, which is the life takaful (Shari’a-compliant insurance) market. Although there is a relatively sophisticated family (life) takaful sector in Malaysia; inefficiencies in distribution, lack of differentiation between Islamic and conventional insurance, and a shortage of long-term investment opportunities have combined to impede its growth in the GCC. Data published by A.M. Best indicated that while life assurance accounts for 64% of total gross written contributions (GWC) in Malaysia, the share of family takaful in the Middle East is just 12%8.

Closing the Gap?

There are, however, a number of indications that recent developments in the Islamic financial services are more supportive of growth in the Shari’a-compliant wealth management industry than it has ever been. This may explain why the private banking and asset management industry in the GCC is attracting a rising flow of investment from global investment managers, many of which have been establishing joint ventures with regional banks. In terms of product availability, Islamic wealth management is closing the gap on the conventional industry in a number of ways. In the equity market, for example, the increased diversity of products available to investors is being driven by liberalisation, most notably in Saudi Arabia. A more active IPO market is increasing supply and diversity in the Saudi equity space, while the rising participation of overseas investors is injecting more liquidity.
Saudi Arabia is also a conspicuous example of a Middle Eastern market that has seen a dramatic increase in supply in its fixed-income market over the last 12 months. This mirrors a key trend in the evolution of the global Islamic capital market during the last 10 years, which has been characterised by growing maturity, depth and diversification of the market for sukuk, Shari’a-compliant financial certificates that are similar to conventional bonds. Although issuance in the global sukuk market declined in the first half of 2016, commentators are enthusiastic about the longer-term potential for the market. The good news is that there have been serious efforts from all stakeholders, including the Islamic Development Bank (IDB), the Islamic Financial Services Board (IFSB), and the Account and Auditing Organisation for the Islamic Financial Institutions (AAOIFI) to enhance the ingredients of standardisation in an attempt to develop a vibrant and sound Islamic finance sector. Collectively, these will contribute to the popularity and acceptance of sukuk issuance.
Another promising development for this market is the decision by JP Morgan to include a number of sukuk in its flagship Emerging Markets Bond Global Diversified Index, which is widely expected to bolster demand from conventional investors and support liquidity in the market. Perhaps more important, index inclusion is also expected to be an impetus for structural improvements in the sukuk space, with index providers likely to demand increasingly high governance standards as a precondition for inclusion. While cross-border institutional flows from conventional and Islamic investors alike will be one growing source of demand for sukuk, another will be retail investors. Indonesia, for example, has been prioritising the sale of sukuk targeted at domestic retail investors, which will help support the government’s aim of increasing the share of sukuk issuance from about 13% of total government issuance in 2015 to at least 50% over the next 10 years.

Another reason for the positive longer-term outlook for sukuk issuance is the high funding requirements that are likely to be created in areas such as the GCC as a result of depressed oil prices. Standard & Poors (S&P), for example, has estimated that weak energy prices will mean that the GCC will have some US$560 billion of funding needs between 2015 and 201910. If only a modest share of this total is raised in the sukuk market, it will have a significant impact on issuance volumes and liquidity. Increased depth and diversification in the sukuk market has significant implications for the Islamic wealth management indus-try, because there are clear signals that investors in the Muslim world are developing an appetite for the longer-term stability of fixed-income markets in preference to equities. Higher issuance volumes twinned with more diversity in the sukuk market also has important implications for the global takaful sector, which has a pivotal role to play in underpinning continued expansion in the broader Islamic wealth management industry. This is because a deeper sukuk market will provide enhanced opportunities for institutions to manage their longer-dated assets and liabilities more efficiently.

SRI – A Driver for Islamic Wealth Management?

Another potential driver of growth in the sukuk market is the growing conviction that there is a clear overlap between Islamic financial tenets and socially responsible investment (SRI), which is becoming increasingly appealing to HNWIs across the global investment community, irrespective of their religious beliefs (see Figure 1). This overlap is not just a reflection of the Quranic prohibition of investment in a number of industries that are increasingly regarded as socially taboo in non-Muslim as well as Muslim-majority countries. It is also a function of the structure of Shari’a-compliant investment instruments, many of which are based on real asset ownership.
Speaking at the World Energy Summit in Abu Dhabi in January 2015, Sean Kidney, CEO of the Climate Bonds Initiative, commented that “the asset-focused nature of all sukuk makes it a good fit with the green bonds concept, which is also asset-focused”.11 This mirrors a broader belief that growth in demand for asset-based investments is likely to continue against the back-drop of fiscal uncertainty, supporting further increase in the popularity of Shari’a-compliant instruments among Muslim and non-Muslim investors alike. Given the strong underpinning of Islamic finance upon SRI, green financing is likely to make headway within the Islamic finance industry in the coming years.
As both the sukuk and the green bond segments develop, it is just a matter of time before sukuk market investors and conventional SRI investors are drawn to investing in green sukuk. With the dire need to finance enormous infrastructure and renewable energy projects amidst falling oil prices, green sukuk provides a very plausible investment solution.

This is especially true for the GCC and Middle East region where there is increasing demand for energy supply and subsequently, energy financing. Green sukuk has the potential to facilitate and increase broader participation in the sukuk market by conventional investors who are looking for ethical and socially responsible investment. The growing trend toward green sukuk or SRI sukuk are mainly due to the growing awareness of investors toward ethically and socially responsible investment and the stricter capital requirements for banks to finance infrastructural projects. Figure 2 shows the potential growth of green sukuk.

More Products Needed

Nevertheless, while the growth in the sukuk market is encouraging, if Islamic wealth management is to flourish, it is essential that practitioners and their advisors explore a broader repertoire of products such as Shari’a-compliant exchange-traded funds (ETFs), real estate investment trusts (REITs), private equity funds and liquid alternatives. This is because in an environment of subdued growth, low inflation and depressed commodity prices, investors will no longer be able to rely on long-only exposure to traditional asset classes as a means of generating returns. More specifically, as Datamonitor noted in its 2015 White Paper on the Global Wealth Market, alternative asset classes are a crucial source of diversification for HNWIs. According to Datamonitor, “traditional asset classes such as bonds, deposits, equities and mutual funds account for only around two-thirds of the average HNW portfolio. This means alternative investments are important, including non-liquid investments like property.”

Harnessing Growth Opportunities in Islamic Wealth Management

The clear potential for growth in the Shari’a-compliant wealth management industry is attracting the attention of policymakers in a number of Islamic finance hubs as well as regional and international private banks and asset management groups. Malaysia has made no secret of its ambitions to strengthen its position as Southeast Asia’s dominant centre for Islamic finance in general and Shari’a-compliant wealth management in particular. In a keynote address at the 12th World Islamic Economic Forum (WIEF) in August 2016, Malaysian Prime Minister Datuk Seri Najib Razak said that the country had identified Islamic wealth management as a “new growth area”. In the same address, Prime Minister Razak noted that Malaysia’s Islamic capital market had more than tripled in size over the last 10 years, to RM1.7 trillion. Malaysia continues to be the global leader in the sukuk market, commanding 52.6% of the global sukuk outstanding at the end of 2016, while total assets under management of Islamic fund management industry therein remain the world’s second-largest.

Given the strong underpinning of Islamic finance upon SRI, green financing is likely to make headway within the Islamic finance industry in the coming years.

Malaysia continues to be the global leader in the sukuk market, commanding 52.6% of the global sukuk outstanding at the end of 2016, while total assets under management of Islamic fund management industry therein remain the world’s second-largest.

The Malaysian financial services sector has responded constructively to the government’s push to promote Islamic wealth management. In September 2016, for example, the Kuala Lumpur Stock Exchange opened the world’s first end-to-end Islamic exchange platform, named Bursa Malaysia-i. At the launch of this initiative, Bursa Malaysia’s CEO Tajuddin Atan explained that the introduction of the new service was designed to provide “a conducive marketplace for Shari’a-compliant investing and to help further strengthen the products and services offered by the Islamic capital market.”
Leading asset managers are also supportive of Malaysia’s ambitions in the wealth management arena. When it launched its new Shari’a-compliant ASEAN Megatrend Fund in April 2016, for example, RHB International Asset Management announced that this was aimed at complementing the government’s efforts in “developing and growing the Islamic finance marketplace with the aspiration to position Malaysia as a key player.” Significantly, RHB is reported to be planning to follow the launch of the Megatrend Fund with a range of Shari’a-compliant products offering investors exposure to private equity, real estate and sukuk, as well as equities. The roll-out of these new funds, which may also be made available to investors in Brunei, Indonesia, Singapore and the Middle East, is part of RHB Group Asset Management’s long-term agenda of increasing the share of Shari’a-compliant assets from 8% of the total today to 25% by 2020.
There is still plenty of scope for innovation if Malaysia is to deliver on its potential as an Islamic wealth management hub by offering a broader product range. Although there are a number of Islamic ETFs and REITs listed in Kuala Lumpur, for example, the volume remains modest. As a paper published by Perintis E-journal in 2015 noted, even though I-REITs have been established for almost 10 years, only three I-REITs were listed in Bursa Malaysia as at 31 December 2014.
There has been great interest to develop Islamic REITs in Malaysia’s neighbouring country, Indonesia. In May 2017, the Financial Services Authority (OJK) of Indonesia announced that it is considering providing a legal basis for Islamic REITs in the third quarter of 2016, aiming at attracting more property investors, especially those from the Middle East.17 The Indonesian government has plans to provide an incentive for the Islamic REITs, equal to that of the conventional REITs as outlined in the ninth economic policy package launched in March 2015.

Progress in Dubai

In the Middle East, Dubai is committed to expanding its financial centre, with Islamic private banking, asset and wealth management all expected to play a pivotal role in supporting this growth by exploring a range of new Shari’a-compliant versions of conventional instruments. For example, the Fatwa and Shari’a Supervisory Board of the Dubai Financial Market (DFM) has recently published a draft paper on Hedging against Investment and Finance Risks.18 This outlines the DFM’s standard on hedging which forms a “point of reference for Islamic banks and financial institutions to safeguard their funds without violating the rules of Shari’a”.

As well as being committed to providing a growing repertoire of Shari’a-compliant investment funds for local investors, Dubai’s leading asset managers are also offering HNWI investors an increasingly international suite of products, often in joint ventures with overseas managers. A striking example came in October 2016, when Emirates NBD International and UTI International announced the launch of the Emirates India Equity Fund, offering investors exposure to Shari’a-compliant Indian equities. This initiative builds on Emirates NBD’s strategy of developing a portfolio of global funds in cooperation with partners such as Jupiter Asset Management.
Another growth area for wealth managers focusing on opportunities in the Middle East is the private equity market. According to the most recent annual report published by the MENA Private Equity Association, 2015 was a year of continued investment in the MENA region, with private equity and venture capital approaching levels of investment activity higher than in the days prior to the global financial crisis.
Increased investment in the private equity sphere is being driven by innovative players such as the Dubai-based principal investments firm, Fajr Capital, which is focusing on investment opportunities in the high-growth markets in the Organisation of Islamic Cooperation (OIC). As Fajr noted, “key Muslim majority nations are emerging as one of the main growth engines for the global economy. Our target OIC markets represent a distinctive investment opportunity: common values and cross-border regional trade flows, coupled with strong growth and high liquidity”.
Turkey is also attracting the attention of international and MENA-based private equity funds. Although some investors have been unnerved by political uncertainty in Turkey, the country’s compelling growth and demographic profile continues to attract private equity investors. In July, for example, the Dubai-based private equity firm, Abraaj Group, launched its first Turkey-oriented fund. This US$526 million fund is targeting medium-sized businesses, with a focus on consumer goods and services, health care, financial services, retail and logistics.

Conclusion: Holistic Wealth Planning and Management Offerings

While offering Islamic investment funds across a range of asset classes is a key pillar of the wealth management service offered by leading asset managers and private banks, the winners in this fast-expanding market will be those that are able to offer a more holistic Shari’a-com-pliant wealth planning and management package to Muslim clients. As the Labuan International Business and Financial Centre explained23, “The process involves the creation of wealth through (inter alia) a business, profession or trade and/or savings with financial institutions, the investment of the wealth created to generate returns, the protection of wealth through risk management, takaful and trusts, and the distribution of wealth through gifts (hiba), wills and trusts. The range of activities comprises financial analysis, Shari’a-compliant asset and securities selection, investment planning and ongoing monitoring of investments, as well as estate planning, tax planning and retirement planning.”

Private banking in the Middle East-Asia has developed into a mature market with well-established private banking hubs and high growth potentials. This is particularly true in the Arab Gulf region. Since the 1960s, Lebanon developed a well-advanced private banking services sector and was referred to as Switzerland of the Middle East. In the 1980s, Bahrain emerged as an offshore banking center, and more recently Dubai is contemplated as an Islamic investment and wholesale banking hub. In the Far East, Labuan has emerged as an international financial centre, challenging its more developed neighbor Singapore, and has started attracting significant volume of business falling in the realm of Islamic wealth management. A number of institutions from the Middle East have also started showing interest in establishing business in Malaysia in general and in Labuan in particular.
In this context, the Islamic wealth landscape continues to change at a rapid pace. Organizations that grew out of the family business are evolving into sophisticated wealth and investment managers. Family offices
in the Gulf region and elsewhere in the Middle East are now adopting more formal governance structures, realigning their organizational structures, implementing risk management strategies, embedding more rigorous internal controls, and introducing up-to-date technology solutions.

In the Far East, Labuan has emerged as an international financial centre, challenging its more developed neighbor Singapore, and has started attracting significant volume of business falling in the realm of Islamic wealth management.

The HNWIs and UHNWIs in the gulf region are set to grow in number and wealth holdings in the coming years and remain the most attractive segments in the long run. Globally, the number of millionaire households, i.e., HNWI population in the Middle East grew by 16% between 2012-20131.
However, in order to rapidly gain market shares and capture additional margins, Islamic wealth managers in the region can also consider targeting the mass affluent client segment by proposing a diversified

Sharia’-compliant service offering.
Nevertheless, Saudi Arabia, United Arab Emirates, Kuwait and Bahrain, are well-established centres for fund distribution and wealth management. Bahrain has a thriving funds’ industry established since the 1980s, with the first Bahraini-domiciled fund being launched in the Kingdom in 1984. Bahrain is, in fact, home to the region’s largest range of funds – 2,827 registered funds at April 2014. Of these, 92 are Bahraini-domiciled schemes and 41 are Islamic funds2.

Unlike other oil-rich neighbours, Bahrain’s limited natural resources have encouraged policy-makers to look elsewhere for growth, especially in the financial sector. The financial sector is the largest single employer in Bahrain, with Bahrainis representing over 66% of the workforce. Overall, the sector contributes 17% of Bahrain’s gross domestic product (GDP), making it one of the key drivers of growth in the country.
Favourable Regulatory Environment
Historically, the Central Bank of Bahrain had constantly strategized the country’s position as a regional Islamic financial centre. Its Collective Investment Undertakings (CIUs) rulebook is one of the best in the region
and matches with international best practices. The financial regulator adopted good governance and code of ethics standards. Other regulatory environment also features:

• Low and competitive tax regime (both on personal and corporate level);
• Absence of exchange controls or restrictions on capital flows;
• Friendly business and developed financial environment; and
• Proximity to various Gulf private banking markets,
• e. g., the largest economy of Saudi Arabia.

Bahrain as a Competitive Marketplace
Bahrain is a Gulf cross-border hub for Islamic wealth management. The status of Bahrain as a Middle East cross-border hub is one of its major advantages and a key location factor in the global Islamic wealth management landscape. Bahrain continues to position itself as a global specialist in the Islamic financial industry and the Central Bank of Bahrain continued to enhance regulatory and business environments in the country.

• Long-term presence: the major international private banks have for years been active in the Gulf.
• The Arab Gulf is relatively less affected by the global financial crisis, hence the on-going creation of wealth, despite the recent oil price drop and geopolitical risks.

More generally, and in order to rapidly grow this niche market in the region, Islamic wealth managers can also consider targeting the mass affluent client segment by proposing diversified Sharia-complaint service offerings. This strategic choice can help grow the Islamic assets under management (AUM). On the other hand, focusing on the UHNW and HNW segments represents a long-term choice for private banking players who will need to adapt their services to satisfy their clients.

In many ways, traditional players have been established for years now in key markets. New market players are joining and are set to introduce innovative Sharia-compliant wealth management solutions.
In this context, global tier-one private banks, Swiss Boutique and other European private banking institutions are setting foot-print and expanding their service offering to cater for Islamic wealth management.
A number of factors will strengthen the shaping of this niche industry in the region:

• Addressing regulatory compliance requirements in an efficient manner
• Improving financial infrastructure and operating models
• Product development and marketing strategies to attract migration of assets invested in Europe and the USA
• Growth strategies to operational efficiencies
• Defining a target-appropriate geographical footprint (geographical footprint optimization)
• Defining proper product and service range and coverage
• Defining appropriate and best communication channels
• Defining new pricing models
• Upgrading staff skills sets

Conclusion

Bahrain in the GCC and Labuan in the Far East are two important centres of Islamic wealth management, and there is a definite need to create institutional links between the two to offer a geographically diversified choice to the Islamic HNWIs and UHNWIs for high-quality Islamic wealth management solutions.