Once again, a few days ago, there was a call from Islamic wealth managers, this time from Malaysia, for the Organisation of Islamic Cooperation (OIC) countries to actively participate in the development of an Islamic Capital Market (ICM), especially wealth management, by placing investments and giving fund management the authority to manage such assets.
At the same time in Istanbul on Thursday, the Turkish Undersecretary of Treasury Osman Celik made a similar call for greater participation by both governments and the financial sector, especially the Islamic finance industry, to facilitate access to finance for entrepreneurs in helping to build an “Innovation Economy and Investment Ecosystem”.
Both he and his deputy prime minister, Mehmet Simsek, were addressing actual and would-be entrepreneurs at the International Business Form (IBF) 2016, which was convened last week during the 16th Musiad (Independent Businessmen’s Association of Turkey) Expo, stressing the importance of access to finance whether through the burgeoning use of financial technology or through investment funds.
The public policy initiatives, incentives and financing options, which Ankara is encouraging, including a new venture capital platform, was second only to Malaysia in the OIC, who last year became the first country in the region to introduce a legal framework to facilitate Equity Crowdfunding.
Prime Minister Datuk Seri Najib Razak is keen on greater product innovation, especially in the syariah-compliant green investment space, including developing new financial assets such as carbon credit-based solutions. Kuala Lumpur has been encouraging the development of an ecosystem that facilitates the financing of socially-beneficial and sustainable ventures, such as the Sustainable & Responsible Investment Sukuk framework introduced by the Securities Commission, and the Environmental, Social and Governance Index launched by Bursa Malaysia. Work by the Securities Commission on the introduction of a Peer-to-Peer (P2P) Lending Framework is well on its way and would improve access to capital for small and medium enterprises.
In Istanbul, where I participated on two panels including the one with Celik, the mood was both encouraging and frustrating. Celik is a top former Islamic banker with Turkiye Finans, which is majority owned by Saudi Arabia’s National Commercial Bank and one of the seven participation (Islamic) banks authorised in Turkey. Another panellist, Datuk Dzulkifli Mahmud, chief executive officer of Malaysia External Trade Development Corporation, passionately exhorted OIC governments and institutions to facilitate greater access to entrepreneurs in Muslim countries, which he maintained would increase trade and business cooperation between them and benefit the ummah in general.
The reality is that in both Islamic wealth management and access to entrepreneurial finance, the situation is a work in progress, but at the bottom of the learning and facilitation curve. With the global Muslim population set to increase to over 1.5 billion and the savings and investment culture in the OIC countries in general very low, save in Malaysia, and wealth and estate planning a crucial rubric of Islam — especially in terms of pension provision and inheritance — it does not take a genius to work the numbers of the huge untapped potential in Islamic wealth management.
True, in Malaysia the government and its agencies, including Bank Negara Malaysia, Khazanah, the Employees Provident Fund or Retirement Fund Incorporated (KWAP) — the two pension funds — play an important hand-holding role through the awarding of investment mandates in equity, Sukuk and infrastructure funds. Even Lembaga Tabung Haji, the much-revered Malaysian pilgrims management fund, is in on the act outsourcing the management of a large chunk of its assets to selected fund managers.
But, while governments and their agencies can and do play a crucial role especially through their asset allocation investment strategies, they can never be the sole gatekeepers of Islamic wealth management. Muslim personal wealth globally runs into an estimated US$2 trillion (RM8.7 trillion), which include those of high-net- worth individuals, family offices, and the professional and middle classes. Then, there is the wealth of the Muslim diaspora, ranging from South Africa, to Europe, North America and Africa.
The challenge is both cultural and market based. There is an adage which says: “Arabs love bricks and mortar”, meaning that they literally like to feel their investments. This is why we have seen over-exposure of Islamic investments especially in the Gulf Cooperation Council states in real estate, sometimes to the vagaries of market bubbles which caused real hardship to ordinary investors let alone the rich and powerful. Hence, the under-investment in the two other investment portfolio asset classes – gilts (equivalent of sukuk) and equities.
True, pension funds and insurance funds drive the conventional equities market, which runs into a few trillion dollars in assets under management (AUM). But, the ultimate investors are individuals through their pension and insurance contributions. In this respect the role of EPF and KWAP is so important that both the OIC and the Islamic Development Bank should cooperate with them to export their models to other countries.
The EPF is launching its dedicated Simpanan Shariah on Jan 1, and KWAP is converting into a fully syariah-compliant fund. The two Islamic equity markets are indeed Saudi Arabia — the largest in terms of assets under management (AUM) of an estimated US$40 billion and Malaysia, which is the largest in terms of number of unit trusts and wholesale funds. The challenge is that the global Islamic equity market is a mere estimated US$70 billion, which is miniscule compared with the conventional equity market.
To think that it was an American, Freddie Crawford, at Wellington Management who structured the first Islamic equity fund for the National Commercial Bank under its Al Ahli brand in the 1980s. Al Ahli remains the single largest family of Islamic equity funds and its global trading equity fund in its heyday was the only US$1 billion-plus Islamic fund, but which today is struggling to muster even US$300 million. The reality is that a mere 5 per cent allocation of assets from the 22 Muslim sovereign wealth funds would see a massive incremental rise in AUM in the very Islamic investment universe wealth managers in Kuala Lumpur are alluding to.
Mushtak Parker is an independent London-based economist and writer