Islamic banking: Race is on to provide Shariah products
About 350m Muslims live in the rapidly-expanding economies of India, Indonesia and Malaysia, and there are many more in other countries such as Singapore, the Philippines and Thailand. Dealing with their financial needs in a way that complies with their religion is becoming a mainstream business.
The choice of investments is widening. Index compilers such as Dow Jones work with religious scholars to produce lists of companies that have been screened to make sure their activities comply with shariah (Islamic law). Businesses that make alcohol or pork-related products, are not suitable. Nor are companies that are highly leveraged, as shariah forbids the paying or receiving of interest. Traditionally non-Muslim countries are joining the race to attract Islamic capital. Britain has started consultations on issuing the first western government Islamic bond or sukuk. [A sukuk is a security giving regular income, and is structured to avoid the prohibition on interest.]
Japan also has ambitions to launch a government sukuk. Meanwhile, Donald Tsang, Hong Kong’s chief executive, said in October that the territory, one of Asia’s main locations for private banks, needed to offer more Islamic products to consolidate its position as a global financial centre.
Most of the focus on providing shariah-friendly services to high net worth individuals is further south. CIMB Private Bank in Malaysia is one of pioneers in this segment. In April, it unveiled plans for services for customers with M$1m ($300,000) or more of investable assets that would meet religious requirements.
Interest in Islamic financial products in general looks promising. Muslims will choose Islamic products if they are available. Surveys by McKinsey, the business consultants, suggest that, in Malaysia, Indonesia and the Gulf states, 25 per cent of investors are committed to seeking out and using financial services that compatible with shariah principles.
Another 50 per cent say they prefer to put their money into Islamic funds where possible, as long as they do not have poorer returns than conventional products. And that may be a problem. McKinsey concludes that Islamic banks in general rely too much on their religious credentials when attracting customers, and do not pay attention to providing a good service. That may mean that Islamic banks need to try harder if they want to start private banking arms. It is a competitive segment.
Already some traditional western wealth managers are preparing to enter the market, hoping to extend their reputation for good service. Furthermore, many rich investors in the west already shun investments in “sinful” industries such as brewing or gambling, so these banks may be able to extend that experience in tailoring services to fit ethical considerations – and make good returns – into the spiritual field too.
“The Islamic banking segment will be a growth area for our Middle East and Asian offices,” says Joachim Straehle, chief executive of Bank Sarasin, the Swiss-based institution owned by Rabobank of the Netherlands. “We quite like the investment principles prescribed by shariah. It forbids investment into asset classes that could be potentially harmful to human beings like tobacco, alcohol [and] gambling. By the very nature of these principles, these products carry a universal appeal.”
Sarasin has already launched shariah-compliant and capital-protected products based on agricultural commodities and baskets of metals. It is talking to Islamic scholars about extending the range.
Mr Straehle says new products will be launched within six months, although he declines to provide details. “We want to surprise the market,” he says. The potential in south and south-east Asia is more complicated than the simple population figures may suggest.
The number of rich people in India grew by 20.5 per cent from 2005 to 2006, according to the latest World Wealth Report by Capgemini and Merrill Lynch. But that rate of growth is an average for the population of the whole country and may not apply to the 150m-strong Muslim community.
In Indonesia, the report says, the number of high net worth individuals rose by 16 per cent over the same period. But much of the country’s wealth is concentrated in the Chinese minority who are not Muslims. Figures from the central bank estimate that, last year, shariah banks accounted for just 1.7 per cent of the country’s total of $153bn in banking assets.
Malaysia may look more promising. The government has ambitions to make the capital, Kuala Lumpur, one of the world’s biggest centres of Islamic finance and expertise. Sixty per cent of its population are Muslim but the government estimates just 15 per cent of assets are being managed Islamically. “We have been in Islamic finance for years,” says Nicolas Pictet, managing partner of the Swiss private bank Pictet. “To be blunt with you, the interest has been very mild.”
Other bankers say there is plenty of demand for private wealth management from Muslims in south and south-east Asia, but little interest in shariah principles.
“Many of our clients who are Muslim are – how shall I put it – not always that devout,” says one European banker. “They are more interested in returns than religion.”