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Fri 2 Apr 2010 08:43 AM

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Islamic finance short on wealth management

Too many property-based products limit diversification - report.

Islamic banks are failing to cater for clients' wealth management and estate planning needs, pushing them to rely largely on traditional asset managers, said a report published by Bank Sarasin this week.

Until very recently there were no dedicated Islamic wealth management services, the report said, and the few that have emerged offer restricted services and products that fail to completely satisfy Islamic investors' needs.

"You have Islamic products that try to mimic the behaviour of conventional instruments, but there is a shortage of products that are Islamic in spirit," Sarasin head of Islamic finance Fares Mourad told Reuters in an interview.

The Islamic Wealth Management report said there was a shortage in Islamic private banking services. Islamic succession planning is in need of an overhaul, it said, currently lacking mechanisms to ensure wealth preservation over generations.

"In the Muslim world hardly any financial planners address this issue, yet successful estate planning would ensure the wealth people have built is consolidated, as well as encouraging family unity," Mourad said.

"We would like to see a genuine partnership between Islamic bankers and their clients that aims for wealth accumulation and preservation over generations."

He also said some products currently offered create a conflict of banker-client interests, with the banker's remuneration more dependent on transaction fees than on the long-term viability of the client's investments.

Examples include the asset management units at Bahrain-based Gulf Finance House and Arcapita, which amassed large transaction fees even though clients are now sitting on huge paper losses.

"We don't want relationships based on product pushing so the banker can collect fees, but rather the long term provision of services in the spirit of a partnership," said Mourad. "Ultimately the success of the client will determine the success of the banker."

Mourad said the preponderance of real estate-based financial products exposes clients excessively to the vagaries of property markets, limiting diversification.

Even so, he said, many opportunities to diversify exist, for example financing commodities trading, ship building or timber. This gives clients involvement in long-term economic activity, rather than speculation, which is against Islamic, law he said.

"Only when you have a long-term aim can you determine short-term steps to ensure you reach that aim," said Mourad.

"In Islamic Finance, the long-term perspective of investment is still missing." (Reuters)

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