India and China has the Huge Market Size of Islamic Finance Products

In its 2012 Islamic Wealth Management Report, “The path to corporate transformation — converting a company to Islam”, Bank Sarasin reviews the complexities of converting a business to Islam, a topic which is rarely discussed or written about. Conversion is complicated by the need to address every aspect of a business, the lack of broadly accepted standards and regulations, and differences in the Muslim world itself. The report, released yesterday, is the bank’s third on Islamic Wealth Management.

Converting a business to Islam can increase the value of a company by 18-25 per cent due to the scarcity of genuine Islamic investments. But the conversion process is arduous, extending from the design to distribution and beyond, to how the company spends its profits.

As Sarasin notes, the market potential is massive, with the global Muslim population expected to increase by 26 per cent to 2030, to 2.2 billion, rivalling China and India in terms of market size. The Muslim market segments in India and China alone are larger than some countries’ populations, estimated at 140 million and 40 million respectively. Demographics are also compelling, with 43 per cent of Muslims under the age of 25.

Fares Mourad, Head of Islamic Finance, Bank Sarasin & Co Ltd, commented: "Questions from an Omani businessman sparked this report. We found there was almost no information on this topic, so, with the benefit of our practical expertise given our unique Islamic Wealth Management services, we wrote this Report. We’re providing our clients and other investors with much needed information and advice.

As Muslims become an increasingly important segment of the global economy, the conversion of a company to Islam will become a greater issue — for entrepreneurs, executives and investors." Conversion also involves social, political, and financial risks. Extra costs may be associated with Sharia compliance, since a religious audit is required. Marketing is also complex, given the differences in interpretation of Islamic law and observance by Muslims globally. Beyond market factors, governance, legal and financial implications must be considered.

The Report also calls for the GCC (Gulf Cooperation Council) to take a leadership role by establishing standards for the registration of Islamic investment products with one regulator. This would allow asset managers to market products to clients across the Gulf without the lengthy and costly registration process now required since products must now comply with different regulations in Bahrain, Kuwait, Saudi Arabia, Qatar and the UAE. The Report notes the leadership demonstrated by Malaysia, not only in terms of Islamic finance, but with regard to halal production.

The report also reviews:
Developments in Islamic Finance in 2011: Progress was made, driven by vigorous underlying trends. Volume, geographic reach and quality all increased in 2011.

What asset classes should be held by families: Family wealth needs to be reviewed from the perspective of non-bankable and bankable assets to ensure a secure and productive mix of assets. The word “productive” may not refer to returns, but to the purpose served by bankable assets.

The resurgence of the Sukuk market in 2011 and opportunities in 2012: The Muslim investor gained halal alternatives to conventional bonds as yields surged. Market size increased almost 45 per cent to $180 billion. Volumes are expected to increase, with new issuers and those who delayed in 2011 coming to the market in 2012.
The lack of alternative investments for Muslim investors: Options are limited by Sharia considerations, with futures not allowed and Muslim investors continuing to disdain hedge funds despite approval by many scholars.
Islamic equities’ performance in 2011: While most Islamic indexes fell in 2011 many outperformed conventional indexes because Islamic criteria screens out most financial stocks. As an example, the Dow Jones Islamic Market Pakistan Index, while down 1.06 per cent, beat the conventional Dow Jones Pakistan Index by more than 16 per cent. Muslim investment criteria may lower risk.
The legal complexities of converting a business to Islam, contributed by law firm Al Tamimi and Company: The structure of business arrangements, investments and debts, and licensing must all be reviewed, with a Sharia board or consultant overseeing compliance.
Bank Sarasin is one of the only Swiss private banks to offer a full-spectrum of Sharia-compliant wealth management products and services. Launched in 2009, Sarasin’s Islamic Wealth Management combines services such as estate and succession planning, financing and asset management with such money market and structured products as Wakala, Murabaha and Maraya.