During a recent dinner in Dubai, a longstanding colleague of mine from the private banking business asked, “What do you think of Islamic wealth management as an enterprise model?”

I was stumped. Not because I haven’t thought about it, but because it had been so long since I’d heard the question. These discussions were more common in the pre-credit crisis era, when the liquidity cycle was peaking. They have all but evaporated in the current environment.

Held Back by Space and Time

By any reasonable measure, Islamic wealth management—comprehensive advisory relationships with well-to-do investors—has not shared the growth trajectory of Islamic banking and finance. I conclude there are two reasons:

• Space. This enterprise model lies somewhere in the middle of the spectrum of retail and wholesale banking functions. Ultra high net worth families demand a unique mix of corporate banking products, cash equivalents, and personal investment services. In universal banks, such a function can get lost on the organizational roadmap. Too small to matter, too big to ignore.
• Time. Islamic wealth management is quite unlike the retail business, where there is a clear reward for attracting large volumes of individual assets. Nor is it like the wholesale business, where transactions can quickly generate high profits. Islamic wealth management takes time to develop into an effective, efficient commercial model. It is a deep-mining proposition that provides long-term rewards, but it may lack a certain bling.

I should not be entirely pessimistic. There have been important strides taken by financial leaders in some corners of the Islamic world. Realistically, however, it is hard to identify a cadre of firms that are either first-movers or fast-followers.

Prospects for Future Development

Still, the credit crisis could be the best thing that has ever happened to the Islamic wealth management business. I see two macro trends potentially leading to a higher profile for this industry segment:

• Diversification Requirements. Islamic investors seem prepared to move beyond local investments, many of which have disappointed. A shuttered real estate project in Bahrain is perhaps unlikely to offer more attractive returns than a China-related investment idea over the near-term. Certainly neither the Gulf nor Southeast Asia lacks meaningful investments for the Islamic investor, but these may not be readily at hand in a slow-growth global environment in which liquidity is constrained. By way of example, I just finished a preliminary roadshow across the Gulf for a Shariah-compliant Australian equity fund that my firm is helping launch for qualified institutional investors. Two or three years ago, I would have expected objections about (1) better returns locally and (2) Australia being too far afield. I heard very little, if any, of these once-routine pronouncements.
• Compressed Investment Returns. It is hard to take a disciplined approach to investment portfolio construction, legacy planning, and cash flow management, when a venture down the street is aspiring to offer annual returns above 40%. Ideas about economic cycles and investment waves tend to be ignored during asset bubbles. But outsized returns are likely to be a distant memory in the post-crisis era. Some Islamic investors have dealt with this new reality by ceasing to make new investments altogether. While I appreciate the human nature behind such behavior, it seems to be an artless tactic, given that there are always portfolio opportunities somewhere in the world. Coming back to personal example, the 25% average annual total return generated over the past decade by our client’s Shariah-compliant Australian equity strategy commanded some attention. It may be consistent with selected global opportunities in offering an antidote for fear-induced paralysis.

In Search of an Irrational Mind

If the Islamic wealth management business cannot attract the involvement of major firms, even when macro themes support its viability, there may be a strategic opportunity an “irrational mind” to back such an enterprise model. I use the term irrational because the investment proposition may be such: “Invest a lot of money up front and wait a long time before you see sizeable returns.”

Because I once led a firm backed by venture capital, I am all-too-familiar with the expectation for high returns in a short period of time. This legacy dates to the heyday of the technology cycle. It no longer fits with reality.

Irrationality may be at home in the Islamic banking business. Five years ago, when I transitioned my company into Islamic asset management, I was told by a Wall Street pundit that I was marginalizing myself. Today, such efforts are commonplace.
Fifteen years ago, when I asked the CEO of a US-based financial monolith about prospects for the firm entering the Islamic finance business, he said, “Never.” Today, the successor firm aspires to be a player.

Thirty years ago, Islamic banking and finance was merely a concept promoted by a few visionaries across the developing world. Today, its advance is likely to be one of the most important industry themes this century.

Call to Action

I wrote a chapter for a book on Islamic wealth management two years ago, but in hindsight, its direction was likely misplaced. That chapter ended with a call to action intended for firms with nascent Shariah-compliant private banking businesses. I should actually have addressed that call to venture-capitalists and entrepreneurs, who have the appetite for the stable returns of the Islamic wealth management business, not to mention the stamina to wait for them.
I reiterate that call to action. In general, we need more strategic and less emotional approaches to building the enterprise model. I see three areas for prompt consideration:

• Assemble a broad and innovative product array to support advisory work.
• Fund research budgets to provide grounding for advisory work and convey a proprietary “voice” in company communications.
• In building organizational structures, focus on substance instead of veneer.

Each of these points interacts with the others; none has to be controversial. Proper implementation should help the Islamic wealth management business take a truly competitive stance, as the industry re-thinks its development in the post-crisis era.
All the better with the unequivocal support of an “irrational mind,” whether individual or corporate.

Notice to Readers

This article was originally published in So Far: The Journal of Strategic Thinking in Islamic Finance, Volume I Issue 2, follow this link to visit the publisher’s website.

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