Could Dubai debacle boost Islamic wealth management?

GENEVA (Reuters) -Islamic wealth managers must cater for their clients' emerging calls for a more diversified portfolios to win a larger slice of an industry valued at up to $4 trillion, experts told Reuters.

High net worth clients are beginning to demand more diversification in the aftermath of the Dubai World debt stand-still, which has called into question the industry's reliance on real estate products and Islamic financing structures, experts told the Reuters Islamic Finance Summit this week.

"Dubai was a shock but I believe it does the industry good because it forces it to look into other investment possibilities beyond real estate, like alternatives such as natural resources, water, alternative energy," said Fares Mourad, head of Islamic Finance at Swiss private bank Sarasin (BSAN.S).

"A broader product range is desirable. Real estate investments are a cornerstone of the industry, but it needs to diversify from this in the interests of its clients," he said.

Independent Islamic wealth and asset management consultant John Sandwick said at present virtually no banks offer much beyond real-estate products.

Sandwick cited as examples sukuk or Islamic bonds as an under-tapped asset class, as sukuk funds only make up $120 million of what he estimated to be a $75 billion market.

He said that despite the uncertainty after the debt stand-still requested by Dubai World on $26 billion of debt, some of which Islamic compliant, demand for sukuk will recover and thrive if the industry can provide structures that do not exclusively use real estate as their underlying tangible assets.

"Nobody has yet managed to construct an acceptable, sufficiently liquid sukuk fund, there is not enough sukuk on the market," says Alex Theocharides of independent wealth manager Watamar & Partners.

Another welcome development would be the growth of sharia-compliant mutual funds, an industry which could hit hundreds of billions of dollars from the current $10 billion.

"It's a huge opportunity for the industry," he said.

ROAD BLOCKS

Toby Birch, founder of Guernsey-based Birch Assets, which invests client money according to sharia principles, said a lack of common standards was also a threat to the development of Islamic finance.

Islamic-compliant products must be sanctioned by scholars, but the difference in interpretations of the sacred texts has led to a fragmented industry where a product could be acceptable in one market and forbidden in another.

There has been little convergence between the two main schools of thought on sharia-compliance, the Bahraini and the Malaysian, and this has hampered liquidity in the past, said Theocharides.

"The average fund is small and committee driven, and products are usually designed by big banks -- the only ones who can afford top scholars. This dampens innovation," said Birch.

Birch and other industry participants say this could change, driven by increasingly demanding clients pushing product development.

"I don't think there ever will be across the board standardization because the key schools are pretty different, but you will get a regional bias, people will use the best-known scholars for Asian and Middle East markets," said Birch.

MORE SCRUTINY

Having demanded more choice, high net-worth individuals will sit on their cash and wait to see what comes next, said Harris Irfan, head of Islamic Products, Barclays Capital.

"The time is right for providers to give them that choice," he said.

When they get their new products, investors will also scrutinize their fee structure more and will demand changes from the current structure, Sandwick said.

Currently transactions featuring real estate as the compulsory tangible asset involve upfront fees for the managers even before the client has made a return.

There will also be a push for a more equal sharing of risks between manager and investor, as Islamic Finance principles demand, but the Dubai World debacle could give the industry the shake up it needs, Sandwick said.

"The future may be brighter for a more rational allocation of capital in the Islamic banking industry, with a greater emphasis on developing business models that rely on recurring income, not high-stakes gambles with other peoples' money,"

(Additional reporting by Rachna Uppal, Editing Cecilia Valente and Rupert Winchester)