This chapter further explains some of the points discussed by Dr. Muhammad Qaseem in the previous chapter. While the previous chapter was primarily on Shari’a guidelines around wealth and its management, this chapter brings in an economic dimension to the discussion. Focusing on the acquisition, preservation and the use of wealth for purchasing goods and services and other amenities and luxuries of life, the authors argue that the observed small fraction of Islamic wealth in a global context is consistent with the Islamic emphasis on acquisition and spending of wealth. Islamic wealth management in this framework is inherently ethical in nature and scope. This chapter is contributed by World Bank’s Global Islamic Finance Centre, with three main authors, namely Mustafa Tasdemir, M. Murat Cobanoglu and Dr Zamir Iqbal.
Introduction
Growth prospects of Islamic wealth management industry are driven by a number of factors such as organic liquidity driven by stable oil prices, younger and more affluent population, and the increasing number of interest-sensitive investors who until recently lacked proper Shari’a-compliant opportunities to manage their wealth (Jaffer, 2013). There was also a significant surge in the personal wealth in the Middle East region that still constitutes the largest market for Shari’a-compliant finance. As per the estimates of this report, the global wealth stands at US$107.3 trillion, with Islamic wealth in the MENA region reaching
US$3.8 trillion (see Chapter 1).
Islam encourages its adherents to preserve and grow wealth. Islam has prioritized preserving and conserving wealth as one of the five main necessities in the schema of broader objectives of Islam. These include the preservation of religion/faith, soul, mind and intellect, progeny and wealth/property. It is important to understand that classical Islamic texts use the word ‘maal” to refer to wealth, which means all things which are capable of being owned, and is divided into corporeal and usufruct. If possession is not possible for something, it cannot linguistically be regarded as maal. For example, alcoholic beverages and interest-based financial products cannot be deemed as Shari’a-recognized wealth. Hence, even a Muslim actually owns such Shari’a repugnant assets, they will not be counted towards Islamic wealth.
Islam puts utmost importance to wealth management on a micro and macro level. On an individual level, the wealthy are required to to prepare guidelines on how they want to distribute their assets before and after the death (e.g., will-writing and establishment of trusts or awqaf). On a macro level, there are fiscal tools that allow the state to ensure efficient utilization and distribution of wealth and other available resources. Thus, managing and planning Islamic wealth is deemed important in ensuring social welfare and public interest.
Wealth management includes financial services incorporating financial planning as well as portfolio management as part of comprehensive advisory and management of a client’s wealth. Islamic wealth management has emerged as part of Islamic finance and broadly shares the features and advantages of conventional wealth management. However, Islamic wealth management differs from conventional counterpart because it has to adhere to certain prohibitions such as interest, gambling, excessive risk and uncertainty.
Islamic approach to wealth takes into account social justice. Social justice requires sharing rewards as well as losses in an equitable fashion among borrowers and lenders and that the process of wealth accumulation and distribution in the economy be fair and representative of true productivity. The Islamic economy is an ideal system in which individuals benefit from a broad array of economic freedoms, including the right to private ownership and the liberty to trade at freely negotiated terms.
There is an emphasis on the importance of circulation of wealth in any community in order to ensure social justice. For this purpose, society should take relevant measures guaranteed that wealth does not circulate among a privileged few and restrict the overall benefit of prosperity to a small, privileged group of rich people, continuing to make the concentration of wealth worse and more skewed. In this respect, Islamic law of inheritance is important, which ensures that the wealth is distributed amongst the heirs in an equitable way. However, if a wealthy individual does not want their wealth to be distributed in accordance with the proposed inheritance schema, individual right of ownership is recognized in Islam. In such a case, there is a need to actively manage wealth throughout the lifecycle of an individual.
As adequately explained by Muhammad Qaseem in this report, accumulating wealth is a legitimate activity in Islam. If accumulated wealth is managed in accordance with the Islamic principles, it is expected to bring positive externalities in the form of additional blessings for the society. Islam prohibits waste, overspending, and ostentatious and opulent spending in the utilization of one’s wealth, and encourages gifts, donations, philanthropy and zakat. These injunctions ensure that the benefits of one’s wealth are not limited to an individual or a family but the whole society benefits from it.
Wealth management is also crucial on a macro level, as without having access to adequate resources on a long-term and sustainable basis, a state may find itself in difficult fiscal positions to undertake projects of social significance. In the context of many contemporary Muslim-majority countries whose major source of income and wealth is natural resources (especially oil and other fossils), it is absolutely imperative to manage sovereign wealth in such ways that the adverse movements in prices of natural resources do not grossly disturb government budgets and consequently general business environments in these countries – something that is relevant to the current situation in the GCC countries, which are currently facing historically low oil prices. Ibn Khaldun – one of the most celebrated social scientists of all times –refers to the role of wealth in a macroeconomic context as follows:
Success in wealth accumulation is very much dependent on asset allocation strategies to minimize risk and maximize returns on accumulated wealth by diversifying the portfolio.
Wealth provides the resources that are needed for ensuring justice and development, the effective performance of its role by the government, and the well-being of all people. Wealth does not depend on the stars, or the existence of gold and silver mines. It depends rather on economic activity, the size and division of labour, the largeness of the market, incentives and facilities provided by the state, and tools, which in turn depend on saving or the surplus left after satisfying the needs of the people.
Although the macroeconomic aspect of wealth management is not a focus of this report, the above reference is certainly relevant to sovereign wealth management, which is also an important consideration in conventional wealth management.
Factors Affecting Wealth Management
Acquisition of Wealth
Wealth accumulation is probably the most important aspect of wealth management, as without having wealth its management becomes redundant. Acquisition of wealth involves both amassing new wealth and growing an existing stock of wealth. In practice, there is no distinction between the two, as they are intertwined. The baseline objective of wealth accumulation is to preserve accumulated wealth under all circumstances.
Factors affecting wealth accumulation fall under four categories: externalities, legitimate commercial activities, dealings in prohibited goods and services, and ethical factors. A windfall in the form of a gift or share in inheritance requires no effort. However, it is absolutely important to manage orphans’ estates in the most efficient and ethical way – something that has been heavily emphasized in the Holy Quran. Other external factors that have contributed significantly to the growth of HNWI population in a number of countries, including many in the OIC block, include exponential increase in prices of some of the assets (e.g., the real estate). Increase in wealth in such a manner does not require significant management. However, there are many families and institutions that made the best out of the price hike in the real estate through a number of strategies.
Wealth management is absolutely important in the wake of decrease in prices of some fo the assets (e.g., the current downturn in the oil prices). Such external factors must be taken into account while acquiring new assets as part of wealth portfolios.
Success in wealth accumulation is very much dependent on asset allocation strategies to minimize risk and maximize returns on accumulated wealth by diversifying the portfolio. Shari’a-compliant asset management has emerged as an important segment of the wider asset management industry. Compared to previous decades, there has been significant progress in Islamic asset management in the last 15 years. It is expected that increase in the supply of Islamic financial management products and services will help in Islamic wealth accumulation on an individual as well as national level. This will certainly add to the global size of Islamic wealth and the Islamic wealth management industry. Now that a number of Islamic indexes have been developed and are reported frequently by the service providers, and a huge Shari’a universe of stocks exists, one should expect further inflow of HNW wealth into Islamic finance. Furthermore, other asset classes like sukuk and takaful are also becoming increasingly more accessible.
It is expected that increase in the supply of Islamic financial management products and services will help in Islamic wealth accumulation on an individual as well as national level. This will certainly add to the global
size of Islamic wealth and the Islamic wealth management industry.
Preservation of Wealth
Islam views wealth or property as a precious gift that Allah has given to human beings to enhance the quality of their life. The issue regarding the wealth in Islam is not only about its ownership and distribution where some people own abundantly (the have) and the others only pose a few (the have not), but also about the management and attitude towards it.
Preservation of wealth is important for wealth continuity and its accumulation. The preservation of wealth can be divided into two parts. The first part affirms its elements and establishes its foundation while the second part keeps away actual or probable disharmony. The first part includes: (1) work to cover one’s own and family needs; and (2) prohibition against fatalism, indolence, and laziness. The second part involves prohibition of extravagance, theft, robbery and other crimes, indulgence in riba/interest, and confiscating others’ wealth unlawfully. Preservation of wealth, therefore is inherently ethical.
Islamic tax regime aims to maximize revenue collection by implementing tax system that has lowest cost and improving tax compliance among taxpayers. Taxation has, therefore, legal and economic incentives and implications, as compared to moral and spiritual incentives in the case of zakat. Modern taxation merely looks at the compliance of a citizen to his or her country’s laws and regulations. Despite the fact that taxation is a social obligation without having special sense of gratitude to Allah or to obtain nearness to Allah, it has to be borne in mind that as a citizen in a particular country, Muslims are also obliged to pay relevant religious taxes.
Consumption of Wealth
Consumption may be the most critical stage in wealth management. Islam sets three main principles for consumption. These are: (i) consumption of lawful things, (ii) consumption of pure and clean things, and (iii) exercise of moderation in consumption. First principle dictates that a believer can only spend for things which are halal – lawful and permitted. Given that an Islamic consumption basket is truncated, excluding alcohol, narcotics, gambling, and luxuries, etc., it ensures preservation and accumulation of wealth. Second principle leads to consumption of goods and services that are environment-friendly and are not against social policy of Islam. The last principle of consumption requires moderation in expenditure which means that one should avoid excessive spending beyond the needs.
The concept of needs has utmost importance for Islamic approach to consumption of wealth. As a safeguard towards a just distribution of wealth and combating hardship and poverty, Islam dictates mutual social responsibility among Muslims. Needs are classified into three categories in Islam. The first category is of necessities of life like food, clothing, shelter, education, healthcare and so on. What would improve the quality of the necessities are categories under complements. Third category covers the good and services that accord the consumer social status or recognition.
For Islamic wealth management, the most relevant category is the third one. Given the detailed guidelines on conspicuous consumption, Islam ensures that high-end goods and services are used in moderation.
Hoarding and circulation of wealth is another important issue in Islamic wealth management and consumption of wealth. In order to consume without borrowing one needs to accumulate wealth. On the other hand, Islam does not allow its adherents to hoard the wealth but instead recommends that wealth must not circulate among the wealthy only, which requires that human beings must devise and uphold systems that achieve fair distribution of wealth and avoid unjust concentration.
Zakat is one of the most important institutions that facilitate the circulation of wealth and avoid its concentration. The goal of zakat is to redistribute wealth from the well-off to the most underprivileged. Wealth can also be redistributed through charity, voluntary contributions and interest-free loans. Another institution directly relevant to wealth management in Islamic finance is waqf.
Conclusion
In academic writings, there is huge emphasis on morality of wealth and its management for the benefit of a wider spectrum of stakeholders in a society rather than just the immediate owners of wealth. While this may have relevance to political debate, wealth managers and private bankers have a distaste for such arguments. As practitioners and technical experts in the field of Islamic wealth management, Islamic financial institutions are involved in offering Shari’a-compliant solutions to HNWIs, UHNWIs and sovereigns.
This inaugural Islamic Wealth Management Report covers a spectrum of issues in Islamic wealth management. This chapter focused on some methodological issues in acquisition, preservation and utilization of wealth in an Islamic context.
The countries that have experienced significant development and accumulation of wealth have also done so parallel to the broader population rising above poverty and enjoying higher standard of living. In the process not only the middle class has expanded as the largest class, but also the asset/capital ownership has spread widely. Islamic perspective on wealth cannot focus on merely wealth accumulation and management without finding ways to spread asset/capital ownership.
