The rise of Islamic financial planning

The world’s eyes have been watching with interest events unfold in the Middle East over the past 12 months, wondering what the next chapter holds.

At the very heart of the Arab Spring lies individual and societal freedoms, but what strikes me as particularly interesting is that this widespread uprising is likely to result in more democratically-elected Islamic governments. This, in turn, will prompt a rise in demand for Islamic finance and wealth management solutions.

The Islamic finance industry is estimated to be worth over $1 trillion (£646 billion) globally – a figure only expected to grow as the financial markets develop and expand and a rising number of stocks become Shariah-compliant.

Broadly speaking, Shariah-compliant investing can be categorised by three over-riding principles – procedural, substantive and charitable principles.

The first forbids the use of interest payments based on the belief that one should not benefit from lending money. It also forbids the use of gambling and uncertainty, meaning that financial products are structured in such a way that risk and profit are shared between the investor and the organisation arranging the investment.

The second calls for investments to work in sync with Shariah law and thus prohibits the inclusion of alcohol, gambling, pork, pornography and tobacco investments.

And finally, the third stipulates that investors set aside a certain amount for the purpose of charitable giving, in order to purify one’s wealth as well as help others.

While the Middle East is undoubtedly the home of Islamic financial planning, the UK has become the indisputable jewel in the Western crown and we believe it will play a pivotal role in advancing growth going forward.

The UK is already home to over two million Muslims and currently boasts Islamic assets worth in excess of $19 billion (£12 billion).

Its 22 banks offering Islamic finance products far exceeds that of any other Western country and what might once have been a niche area is now becoming much more mainstream, as flocks of financial groups recognise the need to service Muslims’ financial requirements, as well as those of many non-Muslims whose investment principles are aligned with the ethics promoted by Islamic law.

This growing desire to assert a specific Islamic identity to crucial social activities has caused a boom in Islamic financial investments. To date, the London Stock Exchange has seen over $19.5 billion (£12.6 billion) raised through 31 issues of sukuk alternative financial investment bonds, with 10 new sukuk listings in 2011 and two in early 2012.

Globally, sukuk issuance is expected to climb a further 50 per cent this year, with companies increasingly turning to capital markets amid a constraint in the banks’ lending ability.

However, while there are significant opportunities within the UK to invest in high quality global companies with strong balance sheets, we believe this could be the wrong way to tackle financial planning.

Many seeking Islamic finance are already familiar with the products and different terms, but the merits of financial planning are an altogether lesser known world. At its heart, financial planning is more than just the use of Shariah-compliant products. Clearly, while any investment product must adhere to the Shariah rule, it is important for the entire client experience to be in accord with the principles of Islamic investment.

With this in mind, Islamic financial planning promotes the idea of aiding individuals in identifying and achieving their short and long-term life goals.

In my opinion, the whole art of product solutions is somewhat redundant if one doesn’t fully understand an individual’s lifestyle and has a clear picture of their goals, hopes and dreams. After all, what is right for one person is unlikely to be right for the next person. Only through this, do we believe that clients can truly enjoy a Shariah-compliant investing experience.

(Money Observer / 14 June 2012)

---
Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com