KFH-Research report about Islamic wealth management industry

18 February 2012

Fortunes of the rich will reach USD 162 trillion in 2015



Astonishing growth in Islamic fortunes expected in light of increasing number of rich Muslims



USD 1.3 billion volume of Islamic assets by end of 2011

KFH-Research prepared a report about Islamic wealth management industry around the world. It stated that this industry has great growth potentials during the coming years, in light of the growing number of rich Muslims, constant growth of Islamic assets, and the increasing demand for Shariah compliant services and products in Islamic and non-Islamic countries. It revealed that the volume of Islamic assets reached USD 1.3 billion by the end of last year.

In addition, the report mentioned that the global wealth management sector is expected to grow with an annual average up to 6% from 2012-2015 to reach USD 162 trillion, despite expected slowdown in global economy.

The following is the report:

Islamic Wealth Management IndustryIslamic assets have grown at an average rate of 15%-20% per annum over the past decade to reach approximately USD1.3tln in 2011. The main driver behind the development and growth of the Islamic finance industry is the growing demand and preference for Shariah-compliant financial products, backed by rising wealth and excess liquidity arising from the high oil prices over the years. Since the 1970s, when GCC oil companies were nationalised and oil prices surged, the region's GDP as well as individual fortunes have grown significantly. Indeed, the Islamic wealth management industry remains one of the fastest growing sectors in the Middle East and sparked high interest outside the region.

In recent years, a genuine interest in Shariah-compliant products and services among the country's Muslim and non-Muslim communities alike has caused market forces to take over and steer the growth. We see tremendous growth potential in the Islamic wealth management industry, driven mainly by the increasing population of high Islamic high net worth individuals (HNWIs) as well as improvement in investors' confidence on the back of commendable economic growth in emerging countries.

According to market estimates, global wealth increased by 8% y-o-y to USD121.8tln in 2010, underpinned mainly by strong growth rates in emerging economies, high commodity prices, recovery in the real estate markets, and high oil prices. Although the growth pace in wealth has slowed post global financial crisis, compared to the average growth pace of 11% achieved between 2002 and 2007, the outlook continues to remain positive, with strong wealth growth drivers in the emerging markets of Asia, the Middle East and Latin America.

Global wealth is projected to grow by approximately 6% annually between 2011 and 2015 to reach USD161.9tln, characterised by the following factors:

• Positive performance of capital markets, strong GDP growth especially in emerging markets and increased savings worldwide post crisis.

• North America is expected to remain the largest wealth market, with total wealth growing at an average rate of 6.9% annually to reach USD48.8tln in 2015, representing 30.1% of global wealth.

• Europe is expected to be the second largest wealth market, with total wealth growing at an average rate of 5.7% annually to reach USD45.6tln in 2015, accounting for 28.2% of global wealth.

• Asia's total wealth (excluding Japan) is projected to grow at the fastest pace, averaging at 18% per annum to reach USD37.3tln in 2015. As such, Asia's total wealth will account for approximately 23% of global wealth in 2015 (2010: 17.8%).

• Total wealth of emerging markets of Asia (excluding Japan), MENA and Latin America combined is projected to reach USD49.4tln in 2015, representing an average growth rate of 16.6% per annum. Total wealth from these regions will account for approximately 30.5% of global wealth in 2015 (2010: 24.4%), outstripping North America's 30.1% and Europe's 28.2%.

Islamic assetsIslamic banks, takaful companies, Islamic investment banks as well as Islamic private equity companies act as an intermediary to channel surplus money into the financial market system. The Banker Top 500 Islamic Institutions reported that the GCC's full-fledged Islamic banks contributed 42.1% of total global Islamic banking assets in 2011, followed by Iran (35.7%), and Malaysia (12.3%). The Islamic banking industry is not only confined to Muslim-majority countries such as the GCC and Malaysia, but also into new territories such as the Far East and Europe, many of which are currently in the midst of implementing appropriate regulatory and legal reforms that would facilitate the provision of Islamic financial products. Customer base comprises both Muslims and non-Muslims while players include domestic as well as international conventional banks.

Over the years, the Islamic financial institutions have started to tap new growth opportunities in other regions and form cross-border linkages. The range of Shariah-compliant products and services has also grown, underpinned by an increased knowledge and awareness of Islamic finance principles. The depth and breadth of Islamic finance products have increased from basic savings account to more sophisticated instruments on the capital market such as sukuk or Islamic bonds and Islamic real estate investment trusts.

Sukuk forms a significant component of the Islamic capital markets, second only to equity. Over the past decade, the sukuk market has grown to reach USD178.2bln outstanding to contribute 14.3% of the total global Islamic finance assets at the end-2011. 2011 witnessed primary market issuances grow by 88.4% y-o-y to USD85.1bln. During the period, the South-East Asia region dominated issuances, accounting for 76.9% while issuances in the GCC region accounted for 22.1% and other jurisdictions the remaining 1%. Prospects for the sukuk industry remain bright, underpinned mainly by sovereign issuers and their support for the market, which issued USD58.9bln or 69.3% of all sukuk during 2011, strong economic growth and development in the emerging markets, the continued spending on infrastructure and the project-based financing requirements in Asia and the Middle East.

The Islamic funds industry has grown sharply over the past decade thanks to the growing number of institutions structuring products as Shariah-compliant alternative investments. The industry took off in 2007 along with many other areas of the asset management world. Unfortunately, it followed suite when asset prices retreated after the global financial crisis and global markets faced a sharp correction. Nevertheless, total Islamic funds' assets grew to USD40.9bln in 2011, achieving a 7.4% growth during the period. Similarly, the number of funds grew to 715 at the end of 2011, up 3.9% from the 688 funds in 2010.

2012 looks set to be a difficult year for Islamic funds given the continued struggles in the Eurozone, as well as in other developed nations which are facing the prospects of another recession. Shariah-compliant equity, which made up 56.3% of Islamic funds' asset allocation in 2011, will be crucial to fund performance and will be looking to rebound after ending 2011 negatively.

Outlook There is likely to be a bigger migration to Islamic financial services in certain markets due to the loss of faith in the conventional system arising from the global economic and financial crisis. As market conditions continued to improve, expect investors to increasingly look for Shariah-compliant investment opportunities which are more transparent and ethically structured.

Attention has been increasingly drawn to the Islamic microfinance segment as a means to eradicate poverty in countries with large Muslim populations. In this regard, Islamic microfinance could serve as a possible investment to investors who are looking for an asset class that offers both positive social implication as well as reasonable returns to the investors. Islamic microfinance is indeed unique, as it is a mixture of economic, social and religious principles:

• Economic. The elimination of interest rate or riba and other unlawful transactions help to avert harmful consequences to the society and economy.

• Social. The profit and loss sharing contract promotes participation, equality, trust and brotherhood.

• Religious. The practice of benevolent finance is an implementation of worship and moral responsibility of human beings.

Moving forward, we see tremendous growth potential in the Islamic wealth management industry, driven mainly by the increasing population HNWI as well as improvement in investors' confidence on the back of commendable economic growth in emerging countries. The International Monetary Fund (IMF) expects global growth to expand by 3.3% in 2012. Although advanced economies are expected to struggle to grow, growth in emerging and developing Asia is expected to expand albeit at a slower pace, with China's GDP to grow by 8.2% in 2012 (2011E: 9.2%) and India's growth is forecast to slow to 7% from 7.4% in 2011.

Meanwhile, the economic outlook remains robust for the GCC supported by high revenue from the hydro-carbon sector and higher public spending. Crude oil is expected to average at USD100 per barrel in 2012 vs. USD98.8 per barrel in 2011. Non-oil GDP growth in the GCC is also expected to remain healthy following additional fiscal spending and implementation of measures to promote economic diversification. Nevertheless, real GDP growth for the GCC is projected to ease from 6% expected in 2011 to 5% in 2012, taking into consideration the downside risks from the likelihood of volatility in oil prices, high inflation induced by massive government spending and slowdown in the global economic activities.

Other factors that will support growth of the Islamic wealth management industry include the following:

• Strong demand for Shariah-compliant products and investments.

• Proactive measures taken by governments and jurisdictions worldwide to promote the development of Islamic finance in their respective countries.

• Government-linked/ top tier companies in the Middle East and emerging Asia (financial, real estate, oil & gas and transport sectors) are looking for funds on the back of massive infrastructure and construction projects in the regions.

• Encouraging demographics. By 2020, the total Muslim population would have increased to an estimated 2.5 billion from 1.5 billion currently. Currently, Asia Pacific region has the highest Muslim population totalling 1 billion or 62.1% of total Muslim population.

In terms of investment preference, in the next few years, HNWIs are expected to increase allocations to riskier assets such as equities and real estate, in line with improved investment sentiments and especially if the global economy shows clear signs of a sustained recovery.

Key risks to the outlook include a slowdown in the world economy and contagion effects arising from the European sovereign debt problems.

About KFH Research Limited
KFH Research Limited is an award winning, independent Islamic research entity and is owned by Kuwait Finance House. Its research advisory includes economics, financial and feasibility analysis on new markets and potential investment ventures in various sectors worldwide. Please visit www.kfhresearch.com for more information.

© Press Release 2012 from Kuwait Finance House

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