The Asset Magazine

A green customer

The Asset May 2009 by Anuja Aggarwal


*Chan*: Growth and expansion on the cards

In mid-2008, a Swiss private bank decided to expand its customer base beyond the Europeans it serviced through its Singapore office. As a mountain of research pointed out, increasing wealth among Asians and Middle Easterners was worthy of its attention. But as it set about to hire the team, it was handed a blunt fact. “You have to offer shariah-compliant products,” asserted one private banker, “otherwise there is no point in me making a trip to Dubai.” The banker’s book included accounts that only made shariah-compliant investments, and as his persuasive pitches showed, there was an increasingly long list of banks that could meet this demand. “Deutsche, RBS, HSBC, Citibank – you name it, all top-tier players have Islamic products in their fold,” he says. Six months down the line, the bank joined this list and appointed Islamic Bank of Asia (IB Asia) as a custodian.

That, in a nutshell, is the evolving domino game of Islamic finance as it steadily notches up higher volumes and greater acceptability. What started with early movers such as Citibank (whose subsidiary Citi Islamic Investment Bank was headquartered in Bahrain as early as 1996) and HSBC’s Amanah (which has developed a global footprint since its creation in 1998) has grown into a situation where institutions across the spectrum are answering the opportunity: a variety of banks, unit trusts, wealth managers, investment banks, private equity funds, even governments are aiming to exploit the potential of Islamic finance. London, Paris, Kuala Lumpur, Dubai and Singapore all aspire to be centres of Islamic finance.

The ambition has spurred regulatory changes and issuance of Islamic paper. In Singapore, the government effort even included a series of high ministerial level meetings with the Gulf Cooperation Council, which eventually led DBS Bank to create subsidiary IB Asia, the first Islamic Bank of Singapore, in May 2007.

The burst of assets brings a new area of growth and expertise for the securities and fund services business. “We initiated (Islamic) custodian services in Indonesia in 2000, where we have experienced enormous growth in Islamic-compliant funds,” says Chan Boon-Hiong, head of fund services for Asia Pacific at Deutsche Bank. “Since then, we have expanded our custodian services pertaining to Islamic products across Asia and the Middle East, including Malaysia, the United Arab Emirates/Dubai, Saudi Arabia and, most recently, Brunei.”

Data on Islamic finance varies depending on who you ask as there is no central source of statistics for the field. But everyone concurs that Islamic assets have been rising swiftly, nudging the field from the niche end towards the mainstream. The growth rate is pegged at about 15% year-on-year. Eurekahedge estimates that Islamic assets worldwide now total US$800 billion, of which assets invested in Islamic funds are close to US$60 billion.

Translating at the micro-level, take the example of Prudential’s operations in Malaysia – Prudential Fund Management Berhad – whose Islamic funds under management doubled between 2003 and 2008. The real kicker came when, starting last year, it began managing private mandates, both onshore and offshore, in addition to eight Islamic funds. The initiative brought in 820 million ringgit (US$234 million), pushing its shariah funds under management beyond the 1 billion ringgit mark.

For the fund services industry, these developments open a new arena, one that is wide open to not only Islamic players but also conventional service providers.

At Public Mutual, the largest private unit trust company in Malaysia, none of the trustees or custodians of the 16 shariah-based funds is an Islamic entity. Likewise, at CIMB-Principal Islamic Asset Management, conventional players have found a footing. And this is not just an Asia experience (the region is perceived more liberal compared to the Middle East). Elsewhere, Amana Mutual Funds has appointed National City Bank Indiana as custodian. The list goes on.

“By and large, shariah boards do not require custodians to be Islamic,” says Richard Street, Middle East head of securities & fund services at Citibank. “It may change at some point in the future when shariah banks are able to offer the range of services we do. But that is not the case so far. Besides, I do not think shariah boards are there to try and roadblock the way. Our interactions with them have been a constructive consultative process, rather than a destructive policing activity.”

In fact, conventional players, with experience and arsenal over a wide range of services on their side, appear to have an advantage. Their Islamic counterparts, having focussed on traditional products in the past, are not up to speed with the rapidly developing demands of the Islamic funds industry.

As Chan points out, “Providing Islamic fund services doesn’t take away core requirements such as understanding multiple asset classes, international accounting principles such as AAOIFI, local GAAP and IFRS, various valuation methods, post-trade compliance and domiciliation regulatory requirements. For example, an Islamic fund might be domiciled in Luxembourg, the Cayman Islands or Jersey, and would still be subject to the same set of fund regulations as a conventional fund.”

Meanwhile, conventional players have been gearing up their knowledge about Islamic finance double time. “It takes time and training to keep staff up to speed with the latest developments in the Islamic finance arena and we invest in making sure that happens,” says Chan.

Making inroads

Of course, there are challenges in the business. The evolving nature of Islamic finance, and its consultative process where shariah boards are involved in various steps along the way, has ramifications. “Greater harmonization among the different Islamic finance interpretations in different regions would be beneficial,” admits Chan.

On the ground, this translates to a customized way of doing business. “We treat every client and every transaction case by case,” says Street. “The requirements are not standard and vary from client to client. Our focus is on configuring our service solutions to the individual needs of our Islamic clients.”

Mostly though, it is business as usual. The competitive landscape has several traditionally strong players vying for the pie and the traditional keys to success still work. Capabilities figure at the top end, as do relationships. Firms that have established ties with Islamic businesses have a clear advantage – it isn’t just about a foot in the door, it is also about speed, always a trump card in business.

“We were considering a couple of players, but IB Asia was the obvious pick”, explains the banker who set up the Islamic operations for the Swiss private bank mentioned earlier. “Their parent DBS already has our custody business; systems and procedures are already familiar; they are an approved counterparty – naturally they were able to offer us the shortest time to execution.”

The Asset Magazine

A green customer

The Asset May 2009 by Anuja Aggarwal

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