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Recording of Islamic Wealth Management Fireside Chat with Jersey Finance 20 January 2022 with speakers:

Mr Faizal Bhana; Director Middle East, Africa & India, Jersey Finance

With

Ms Julia Charlton; Chairman, Commonwealth Chamber of Commerce, Hong Kong

 

This interesting fireside chat saw participants from around the world tuning in and interacting with Faizal and Julia on Jersey Finance’s latest report on global trends, insights and perspectives regarding Shari’ah wealth management.

Islamic wealth management continues to grow as part of the financial ecosystem with significant unrealised potential. Over the past two decades, international investment banks have streamlined and launched sophisticated Shari’ah compliant financial instruments for distribution by private and retail banks. Consequently, due to a stagnation of the innovation that was previously driving the market, whilst the demand for Islamic private wealth management services is undiminished, the Islamic finance market has been constrained by the limited available offerings of Islamic product and services.

Jersey Finance’s recently published ground-breaking research paper: Global Attitudes to Islamic Wealth Management was the main focus of this fireside chat. The report compiles attitudes to private wealth, fiduciary planning and succession by Muslim families, taking into account the views of over 2,000 respondents across the key markets of the UK (London), Asia (Kuala Lumpur), the GCC and Africa (South Africa).

You can find the published report here.

Podcast Recording

Julia Charlton: Well, hello and welcome everyone to the Commonwealth Chamber of Commerce and Jersey Finance’s live fireside chat on Jersey Finance’s fascinating new report on the Global Attitudes to Islamic Wealth Management. I’m Julia Charlton, chairman of the Commonwealth Chamber, and I’m very excited to be joined by Jersey Finance’s director for the Middle East, Africa and India and senior lead on Islamic finance, Faizal Bhana.

Julia Charlton: Jersey Finance is a not for profit organisation which is one of the world’s leading international financial centres. It has various offices around the world in financial hubs, including Hong Kong, where I am, New York,Dubai, and Shanghai and Jersey Finance also works closely with key global partners to offer legislative services to nurture an ethical, reputable and secure investment environment for clients.

Julia Charlton: So the topic of discussion for today is Jersey Finance’s recent report, The Global Attitudes to Islamic Wealth Management, which I find an enlightening and unprecedented piece of research which sheds light on the specifics of the Sharia legal framework for wealth management. And also includes a survey of the views and attitudes of Muslim high net worth, ultra high net worth, individuals and Family Offices towards key elements of wealth management, mainly succession planning, fiduciary planning, inheritance, Tax, current and future demands for investment products, ethical alignments and the distinctions between different Jurisdictions.

Julia Charlton: The survey also sheds light on the future of the Sharia finance market and what trends and strategies we can predict the Islamic Wealth managers and their clients will be working towards.

Julia Charlton: So as I mentioned here, to present these fascinating findings for us today is Faizal Bhana, who leads Jersey finance’s strategy, development and engagement across Africa, India and the Middle East with a special focus on key markets, liaising and working with key stakeholders, including public and private institutions, corporates and families, and building long term, mutually beneficial relationships. Faizal has an impressive academic background in law, and he’s been a valuable mentor for HRH Prince Charles’s charities and the Prince’s Trust and Mosaic, and he continues with his passion for mentoring young, dynamic and promising entrepreneurs globally. Faizal currently mentors MBA students from Oxford Business School, Said, where I was also briefly a student. So, I’m very pleased and honoured to have you here, Faizal. Thank you very much. I know you’ve just arrived in London and it’s great of you to get on this call, and I’m very excited for our audience to hear about the findings of the report. And I’m looking forward to after the discussion after that on the themes and trends. So just a word of housekeeping before we start.

Julia Charlton: The Fireside chat will be about an hour long. It will begin with the short presentation from Faizal and then we’ll have a Q&A session between me and Faizal, a discussion about the whole report. And there will also be a Q&A chat box, which will be open for participants at any time to ask questions which we hope that Faizal will be able to get to after the chat, which I have with him. So now then Faizal, over to you.

Faizal Bhana: Thank you very much and very good morning to everyone. Good afternoon, good evening wherever you joined us from. Thank you to the Commonwealth Chamber. Thank you, Julia, for that kind introduction and also providing Jersey Finance the opportunity to talk about, like you said, groundbreaking research. I’m just going to put my presentation on so that we can just quickly go through the last, you know, we thought it would be useful to, to provide some context. There will be a number of you on the call today wondering why Jersey is leading on this conversation with this particular specialist niche area and therefore be useful to provide some context and background of why we got involved in, as you mentioned, Julia. I’ll also go through some of the key findings of the report and then delighted to have a further conversation about some of those findings and exploring a bit more.

Faizal Bhana: You know, I should also mention that we will be sending out a link to the report that we’re discussing this morning to all that have registered. And also your, your team at the Commonwealth Chamber have written a fantastic summary I think of the report itself, which we can also share with all those that are registered, which would provide a bit more context around some of the questions and some of the findings also. So plenty to read after the presentation today. So just to go through very quickly, you gave a fantastic opening and summary of our jurisdiction. So thank you very much for that. We are a leading finance center globally independently recognized as such. But just to take a step back for those of you, of the listeners that don’t actually know where Jersey, you know, some basic information of Jersey. So I thought this would be useful to just sort of provide very high level stats about our jurisdiction. So we are an island, nestled between France and the UK within the Channel Islands, close to France and the UK. We’re a self-governing crown dependency of Great Britain. What that means is the Queen is the head of state for us, but we have an independent legislature and judiciary, and this becomes quite important in a moment when I try explaining Sharia compliance structure and expertise on island. We’re a very small population. You can see just under 110000 there. And again, from a substance perspective, it becomes important. I’ll touch on that in a moment.

Faizal Bhana: We’re not part of the United Kingdom or the European Union so that our jurisdiction, our IFC, provides a a globally recognised and award winning platform for investors that are looking to do international investments across the globe, but particularly within these two key markets. As I mentioned, we’re responsible for our own laws and taxes, and this is quite a significant point from a Sharia compliant structuring perspective. You can see this a lot on this slide, I don’t intend to go through all of that, but just I’m going to pick up a couple of points from that slide, if I can. The expertise of our jurisdiction. So, we celebrated 60 years as an IFC last year; and we have about that much decade’s long experience and expertise of advising on Sharia compliant structures, products and services from across the globe. We have stakeholders, including from the Far East, Middle East, Africa that have been using our Jurisdiction not only for theironventional products and structures and international investments, but also Sharia compliance.

Faizal Bhana: In Terms of substance. I’ll touch on this again. You know, we’re an island of one hundred and seven to ten thousand roughly depending on what time of the year it is. But, we have around fourteen thousand people that work in the financial services sector, so almost 15 percent of our population is engaged in the sector. So that provides, you know, substance on the ground, expertise on the ground with decades of the required experience and required expertise for areas such as Sharia compliant financing. And this has certainly helped from a private wealth perspective. Investors may come in for use our jurisdiction for one particular reason, but then once they interact with the industry, as you know Julia, from jurisdictions such as Hong Kong and other financial centers globally. Once you know stakeholders start using the Jurisdictions, then you know that relationship grows and the confidence grows. So that was the other one and then reputation, I think, in this age of transparency, reputation is a huge, huge factor for users of finance centers. You know, we know Moneyval and the FATF assessments that are done globally have an impact on, you know, on the jurisdictions that are reviewed and every jurisdiction on the planet is now being assessed in some way or the other to ensure that they meet global standards, whether it’s in relation to money laundering, whether it’s in relation to confidentiality, etc. And Jersey has always topped these tables and we’ve been a forward thinking early adopter of these global standards. We’re very proud of this. And again, this becomes relevant from a Sharia compliant perspective because some of the structures, as you know, especially financial products, are quite complicated.

Faizal Bhana: So working through a jurisdiction not only that has the expertise and experience, but has a global reputation, helps steer some of these and provide confidence to international investors that are coming in and and supporting and investing in these products. Very quickly through this, these are the foundations of our industry. The four key pillars there; funds, private wealth, banking and capital markets. But all underpinned by, you know, by the regulation, the rule of law, political independence, economic stability and tax neutrality. I’ll just just briefly go through the rule of law and the regulation point. I think this is an important point to consider, and it’s an important consideration for users of our jurisdiction when it comes to niche areas such as Sharia compliant financing or even sustainable finance. Our ability to devise and produce our legal system- robust legal system- provides that additional comfort and expertise that stakeholders look for. So our trust law is developed over decades and has been administered, used, and protected over decades. The regulatory framework around that also is something that is an attraction for users of our jurisdiction. We have, as you know, junior firewall legislation. So from a private wealth perspective, this firewall legislation gives comfort the users of our jurisdiction. In the event that there’s any challenge, this challenge has to be through the legal system and the courts within Jersey, which is an important point for founders and family businesses who use our Jurisdiction to have that comfort that in the event, for example, of the death of the founder of a trust, for example, then at least their wishes will be protected within the confines of our own judiciary and legal system. So in addition to the four pillars that we have for our industry, we also have specialists supporting sectors I’ve highlighted some there, and Islamic finance is one of those. As I said, we celebrated 60 years last year and we’ve been doing Sharia compliant financing structuring for as long as that, from across the globe.

Faizal Bhana: So this is one area that we’re proud of. Now, from a Sharia compliant perspective, these are some of the key highlights and key characteristics that stakeholders have said to us  that Sort of gives them comfort of using our jurisdiction. So familiarity. As I mentioned, we’ve been dealing with stakeholders from across the globe on their Sharia wealth, Sharia corporate needs, expertise, experience So and then obviously Jersey Trusts and Foundations. We’re going to go into that in a moment when we start talking about the report. But that’s another quite an important consideration for stakeholders, Muslim clients and users of the jurisdiction who have this particular requirement to adhere to the Islamic faith. They find these tools and these solutions and structures that are available in Jersey an important factor when they’re choosing their own estates. Regulations, we talked about this, this true parity under the Jersey law. So, whether it’s a Sharia compliant product or a conventional product, the treatment under the law is equal. And this is important factor that stakeholders of our jurisdiction find or use as a consideration. A stable, reputable jurisdiction with a strong legal framework. This is a summary that has been repeated to us by different users of the industry, and I think it nicely summarizes our unique offering. Now, just in terms of some of the trends that we’re seeing in the market, particularly in the private wealth sector, before we get into the research, and some of these will resonate with listeners on the call today. You know, the pandemic has accelerated some of the discussions around succession, whether it’s being built as a result of death in the family of the patriarch or the matriarch or of that generation, or whether it’s about integration of the next generation. It’s quite it’s quite telling because we were all grounded because due to the travel restrictions, a lot of the next generation who would ordinarily been jet setting across the globe were forced to be in one place, and they had to focus their mind and thoughts on the family business with the family. And this resulted in a lot of these discussions around succession, governance,etc.

Faizal Bhana: In fact, we now see from research conducted by the Big Four on their annual surveys that they do family businesses and family offices, that next generation are now very much involved in the business. Some surveys and found 60 percent plus of next generation being involved in that. So these kind of accelerated discussions around succession and around family governance also brought in considerations about Sharia. Because, you know, some of the Muslim families, high net worth Muslim families in particular, started looking at this question around, particularly when you’re looking at Shari’a succession, they started looking at how do you build the requirements of the faith into succession, you know, from a family perspective. So this is one trend. The other quite important trend thate see in in global markets is the alignment or the perceived alignment between some of the principles of Sharia compliant finance and ESG Minded investment decision making. There’s a number of areas within that, that sort of qork with investors on both sides. So whether it’s ethical investing, whether it’s socially responsible investing. And again, next generation play a key part here. The next generation are very mindful of their impact. How is my wealth impacting not only my community immediately around me, but the globe? And these conversations we see it across the globe, you know, people have become celebrities at the back of these conversations and this alignment with Sharia compliant financing, certainly around provisions of governance and supervision and particular investment strategies, this has worked and resonated with the younger generation, the next generation. It’s brought this conversation into the mainstream. It’s a Sharia Compliant financing was about, you know, in the 70s and 80s when it initially came about, it was always about banking and trying to bring the unbanked Muslim population or faith based believers into the financial system. However, with the with this perceived alignment between ESG and ethical financing, it takes that entire conversation into the Mainstream.

Faizal Bhana: So you now have decisions, investment decisions, being made into Sharia compliant products, not because of faith driven reasons, but because of its alignment with some of these principles. The other interesting factor is the demand for international finance centers, which offer this experience and expertise in both these structures. So certain concentration, certainly from the Middle East, Africa and also jurisdictions like Malaysia and Indonesia, Brunei, you see that there is even the sovereign wealth funds in those areas are now looking at having a sustainable framework, but they have these requirements and asset allocations for Sharia compliant products. So this conversation is very much bringing this niche area into the mainstream, and there’s a number of drivers for that. Now let’s get into the research itself and quickly go through that.We’re still OK on timing there, but I’ll very quickly just go through some of the some of the key. So what’s the landscape? What’s the context of this research specifically within the private wealth sector? So,ne thing that We have seen or we continue to see is the sophisticated Sharia compliant financial instrument. So, you know, the likes of Sukuk, everybody hopefully would have come across the sukuk, which is the equivalent of the Sharia compliant bond. You know, products like this, financial instruments have taken over the limelight of the Sharia sector. And the private wealth sector has taken a sort of a backseat and as has suffered as a result, even though this was the area that was initially, where the demand for the services were, you know, private individuals, consumers that wanted to use their money and investments in a Shari’a compliant way have been overtaken by the larger, more complex, complex product. As a result, there’s been an innovation slowdown, particularly in the consumer space, because people are focused on the more larger, especially institutional investors have overtaken that discussion. There’s a high demand, but restricted products and services as a result. And this is good for the private wealth industry because it shows that there is potential in that industry.

Faizal Bhana: And, you know, we’ve seen somewhat of a resurgence on the supply side. So you know, you have, because of increased use of technology, because of new fintech businesses coming online, because of these discussions and the trends that I talked about earlier, for example, around succession. There has been this resurgence on the supply side. We’re now using different technology. The industry is trying to widen that scope of products and services that are available for this particular niche. We’ve already talked about the ESG and the next generation, their reliance on technology, this is quite an important point. As the next generation gets involved in decision making from a private wealth perspective, their reliance on their habits, particularly around technology, play an important part in the development of these services and products that are going to be available in this industry. And we see that in some of the findings from our own research that will get into soon. Against this Backdrop, Jersey Finance commissioned Gateway Global to undertake primary research with the aim of producing a report. A blueprint, if you like, that could delve deeper into the trends shaping Sharia compliant wealth management. Through our research report, Global Attitudes to Islamic Wealth Management, we wanted to get a better understanding of attitudes from the perspective of Sharia minded family offices, high net worth, ultra-high net worth individuals and private banks towards Sharia compliant and ethical wealth management services. And we wanted to get into the detail of this so that there was there, there was figures that people could rely on. So we asked some fundamental questions what values are held by Sharia compliant private wealth market? What are their attitudes to succession, to risk, to industry sectors, to ethical investment, to philanthropy? And you know what, where should product providers and international finance centres focus their attention? So in compiling the report, Gateway interviewed a cross-section Of some 2000 High net worth individuals, family offices, institutions who manage well for high net worth Muslims and customers across a number of key markets, including London, Kuala Lumpur, the GCC and Africa.

Faizal Bhana: The responses were hugely insightful. And just to give you a flavor of some of the key findings on the investment side, real estate and infrastructure remains a dominant asset class and this will drive, you know, it’s driven primarily by some of the historical decision making people like to own assets and property fits very well into that. And respondents were rating it most important for their portfolios both today and in 18 months’ time. So again, this continues to be a good area. 62% of the respondents said they would always choose a Sharia compliant investment, even if the performance was inferior to an equivalent commercial product. So that’s quite an important finding again. 96% of the respondents stated they were either actively taking steps towards succession planning or plan to prepare for it soon, which represents a huge opportunity for advisors,  jurisdictions to tap into this wealth transfer process. 76% explored trust as an important structure in succession planning, while 30% explored foundations. Again, these are figures that would resonate with professional services, fiduciary services, financial centers because these are opportunities to highlight expertise and experience. And the last point they tend to, you know, 10 to 50 percent of their total net worth being allocated to philanthropic activities. So obviously, from a Muslim faith perspective, you have this religious requirement of the Zakat, which is 2.5%. But this goes beyond that. We’re now talking about 10 to 50 percent. Again, this fits in quite nicely with the impact conversation that impact driven investment decision making, particularly of the next generation that we discussed earlier. So some final thoughts from me. And you know, the report itself has got many, many findings. We will send you a link to the report. Please do read that and also a summary of that report that the Chamber h has drafted, which again, is an excellent one. But just some final thoughts from me. You know, in terms of orderly succession, robust governance and in the integration of next generation, these are the key areas that are driving this demand surge that we’re seeing, and it’s going to continue for the next 18 months, particularly for the high net worth ultra-high net worth bracket. The next generation are tech-savvy, impact conscious and with a global outlook. This is an important point and will drive some of the supply side product development that’s going to come through in this area. The investment decisions are in the backdrop of ESG and impact. This is a live point and this takes Sharia compliance, structuring, and products and services into the mainstream and and being utilized both by investors, the Muslim faith, but also of non-Muslims. And as a result, demand for IFC is in all their industry stakeholders, who have the expertise and experience, significantly benefiting from this surge in this space. So thank you very much. I will stop sharing and stop speaking and pass it back to you, Julia. Sorry, I’m taking a bit of time to go through that, but I hope that was useful.

Julia Charlton: Absolutely perfect, thank you very much, Faizal. So you’ve really given us a great overview, but I just wonder, can you put a number or a U.S. dollar figure on this global size of the Islamic finance market? Roughly.

Faizal Bhana: Yes, I mean,so there’s a number of a number of figures that are thrown around.

Faizal Bhana: Firstly, in terms of growth, actually, when you look at growth,the compound annual growth of the industry is around 10% since 2006, and the growth in 21′ to 22′ is projected to be 10 to 12%. And in terms of numbers, you know, its current assets are 2.2 trillion dollars globally, and they’re projected to get to 3.7 trillion by 2024. Again, these will vary depending on-.

Julia Charlton:  How you classify this, I guess, there’s an enormous difference.

Faizal Bhana: And also, you know, banking is the significant part and sukuk would be the significant partn terms of these assets. On the private wealth side, you know, this is an area that needs to be developed. So there’ll be quite a bit of work that will need to be done from that sector. But you know, it’s a growing industry. When you compare it to the conventional industry, obviously, it’s a smaller part of it. But it’s a significant part. And as it goes into the mainstream through through decisions being made on the ESG side, you’ll see the number growing even more significantly.

Julia Charlton: Mm-hmm. Do you see in the future ESG products or ESG investment and Sharia actually converging to some extent and some ESG actually being structured to almost always be Islamic compliant?

Faizal Bhana: Julia, that’s a that’s a very good question, I think it’s important. I have labored on this and I have mentioned that, you know, this perceived alliance or this perceived alignment, sorry between the two, but you know, we should clarify that it is very different.

Julia Charlton: Right?

It is, obviously the considerations when investors are making the investment whereas Shari’a Compliance is a complete form of financing. So even though the numbers I talked about in terms of projections for the Sharia compliant finance industry being 3.7 trillion, it is a fraction of the conventional global financial outputs. There’s still a long way to go in terms of catching up on numbers. So whether the decision, you know, certainly on the Shari’a compliance side, it could be that we’re heading towards a decision where we’re seeing that all Shari’a compliant financing should meet ESG standards at a minimum level. And obviously, that’s another discussion. What is the minimum requirements, different jurisdiction by jurisdiction? But the other way around, I think it’s, you know, it would be it’ll be interesting to see how that develops because obviously certain, you know, sort of conventional banks, for example, will have their own ESG strategy. You know, interest based products, which are prohibited from a Shari’a compliant perspective; a very much, you know, part of the global finance market. It is the global finance market. So they will have their own ESG. But the convergence is an important area. And and this is where Shari’a compliant financing comes into the mainstream.

Julia Charlton: Yeah, thank you, that’s interesting. One thing I would find particularly fascinating in the report, because I love history, is the explanation, which I didn’t know, that the concept of trusts actually comes from Islamic finance legal concepts. And I found that amazing. Do you just want to share that with everybody listening briefly who might also have an interest in history like I have?

Faizal Bhana: Yeah. So the concept of Waqf, you know, is quite an important concept that goes and is utilized to this day across the globe by Muslim families and Muslim individuals. This is an endowment that is made for the benefit of the larger community. So this was encouraged during the Prophet’s time. He encouraged people to use, you know, this structure so that their cealth benefited individuals beyond just themselves and bring that community spirit in. And this concept obviously grew during the times of the Crusades, whenindividuals joined that effort, they left their families behind and they left their families’  money to try and maintain those families. And this is how the English jurisprudence on the trust developed. But it was all hand in hand. There is quite a wider explanation. I don’t want to take up the time from our conversation, but there is an explanation in the report, on the historical context. But yes, I mean, it’s interesting how that convergence now happens even within the ESG sphere. So you start off with the trust concept and there is definitely some of the  jurisprudence has, you know, you can trace it back to Islamic Waqf endowments. And in the same way in the modern era, you know, we have alignment in the principles of ESG and some of the Shari’a compliant financing, certainly around ethical, you know, the ethical element of finance.

Julia Charlton: Yeah, I really find that fascinating. So with your- with Muslim clients, do you in wealth management, do they have any preference between trusts and foundations? Do you notice any preference?

Faizal Bhana: Again, a very good question. I think personally, I don’t think there’s a preference, but you know, there’s this control element. So in the trust, the family or the patriarch or matriarch would need to give up the legal ownership of the assets within the trust structure to the trustees who will become the legal owners of the trust. And having created the wealth, it is always a complicated conversation about trying to explain to someone why he should give up the legal right to that, to trustees. But jurisdictions like Jersey and other IFCs globally, with their regulatory framework and their robust regulator- so, we have the Jersey Financial Services Commission that not only regulates the individual trustees, but the entities that they work for provides comfort. But again, the other factor when high net worth families are considering structures would be the assets they hold and where they are. So if they’re in a jurisdiction that would recognize common law concepts like trusts, it makes it easier to have that conversation. And some jurisdictions, even Muslim majority jurisdictions, don’t have concepts like the trust. So you’d have to use a corporate vehicle or a corporate structure to support some of their structuring. As you know, Julia, there is a wide combination. But what our research found from a global perspective is that obviously there’s a 70% tilt towards trusts a and foundations are relatively new. As a jurisdiction, Jersey, you know, we started our foundation regime just a few years ago. We’ve just actually this week hit our 500 mark on foundations.

Julia Charlton: So interesting.

Very, very new. Very, very New. Even in the Middle East, you know, I’m based in Dubai, as you know, and in the UAE, they’ve been driving this and they’ve also, you know, hit significant milestones. They have a foundation regime in the ADGM and the DIFC. These are two finance centers here, and people tend to like the foundations because of its corporate resemblance. So basically, you know, these control questions come back in and the family is able to sit on the Council of a Foundation and be involved. It’s a bit like a board of directors of a corporate, as you know. So, it’s a bit easier, but it’s still a very new concept when you Compare it to a trust.

Faizal Bhana: You know, trust side, this is something that has been there for decades, generations like you, you mentioned, you know, in the 1300s, 1200s, it’s been developing since then. So every eventuality- and this is what families like the certainty of it. So every single eventuality that the patriarch, matriarch, wealth generator can think of has been addressed by a court case, whether in Jersey, whether in the U.K. under English law, that can answer that question for them. Whereas a foundation is a relatively new concept in some jurisdictions, it hasn’t even been challenged in the courts. So that sort of, you know, that sort of drives the demand side.

Julia Charlton: Yeah, it’s particularly fascinating for me to see the synergy between common law and Islamic finance. That’s certainly something I learnt from that report. And you talked about the role of the next generation in this Islamic finance and wealth management. I mean, how and what changes do you think they’re going to want and what direction are they going to take things in?

Faizal Bhana: The two key areas where I think the next generation are going to, well, three, let’s say three. Three key areas that I would say that they’re going to sort of cement within this sector is going to be governance and transparency. You know, the next generation are highly educated. They’ve been educated with Western education system. They’ve seen transparency and governance at work. They’ve seen that fairness element. They want to be able to pinpoint decision making at every stage so that they can challenge it, they can improve it, and they can make sure it works for all the stakeholders. So you’ll see that more and more in the system. Whereas the patriarch and matriarch generation, you know, decision making was concentrated, within, a very small circle. I think as the next generation get involved, you will seehat circle being increased, there will be an increased reliance on professional management. We see this in family offices, family businesses. They want to hire the best minds to help them make the most money in the most responsible way. So that brings me to my second point for the next generation. They’re very conscious investors. They’re very aligned to impact. You know, again, it’s been driven for different reasons. We’ve found that the next generation are a lot more conscious of the impact of what they do today on future generations, for their children, for their grandchildren. And they want this ethos being built into their way of doing things. And then obviously the third point that next generation will form and will sort of drive would be the technology, the use of technology. You know, we see traditional wealth creators did business in a very traditional way. A lot of them were traders. A lot of them, you know, sat down and sold goods for a profit from physical locations. You now have the next generation disrupting that and saying- No, we want to do it differently. We want to use technology. I want an instant answer. I want to be able to sit in my chair in in Hong Kong and be able to invest in, you know, bricks and mortar in the U.S., in the U.K. and I want to know on a second by second how I’m doing. So this increased use of technology is also going to be driven by the next generation. They are very tech savvy and they’re global citizens.

Julia Charlton: Yes, I mean, I did notice that there’s still a preponderance, though, in real estate and infrastructure preference. And presumably that means physical infrastructure. Whereas fintech, for example, and some of the tech investment doesn’t seem as popular at the moment, would you see that shifting?

Faizal Bhana: So again, the trends that we see is, you know, a lot of the fintech and technology businesses are in the early stage cycle of their existence.

Julia Charlton: Absolutely.

Faizal Bhana: We’ve seen some huge successes with the unicorns of the world. Everybody knows, know there have been huge successes that have come out of that. But essentially a large part of that industry is still in its very early stage.

Julia Charlton: Yeah.

Faizal Bhana: Now the investment rounds that they go through it’s quite interesting. You know research that, I think KPMG or PwC, I can’t remember- one of the big four- that have conducted also found that family money was 60% likely to be invested in these startups, which is quite an important point. So even though, you know, even though the point you make around investment decisions largely being driven, and we see real estate being the predominant asset class that the investments are going into, the fintech is a growing one. We see it as a growing one. But I think you don’t see the volumes of it because it’s at the early stages of its cycle. But, you know, we expect this to grow even within the real estate sector itself. Technology will play a huge part.

Julia Charlton: Absolutely, you know, green buildings and all of that, I guess.

Faizal Bhana: So I think that the next generation will drive that.

Julia Charlton: Yes. Yeah. So how do you think places like Malaysia and Dubai compare with Jersey? I mean, they must have their own strong points.

Faizal Bhana: Yeah. I mean, soMalaysia is regarded as one of the preeminent centers for Islamic finance, almost 40% of its banking assets now are Sharia compliant. It’s a huge- it’s got global standard setting bodies that are headquartered there that are that drive the conversation for the industry. It is the central bank, Bank Negara, is instrumental in the development of Sharia compliant financing, not not only within Malaysia and Southeast Asia, but globally. They drive that conversation when we talk, you know, we’ve talked a lot about ESG and sustainability. Malaysia itself is becoming a leading player from a Sharia compliant, financing wise, you know, in terms of driving that conversation at the global level. So they are an important part. They will always remain an important part of the industry. But you know, the private wealth niche area is an interesting one. And some of these jurisdictions I already mentioned that some of these jurisdictions, including in Southeast Asia, majority Muslim, all have very large Muslim populations, but they don’t have these private wealth concepts within the Legal framework and regulatory frameworks. So trusts, foundations,

Faizal Bhana: you know, how do you deal with private wealth? You know, they have robust and good corporate structures. Their banking sectors are very good. You know, they’re aligned with the global banking sector, but they don’t have a, you know, they don’t really have this niche space and it’s developing. So you know for example, conversations like ours today help develop that market and help develop that sector also. Dubai, again, you know, is a huge player in that industry And they also are trying to drive that- this niche on the private wealth side. So, for example, in Dubai, they introduced a federal trust law just last year, which is an interesting development for that sector.

Faizal Bhana: Bahrain has probably the best trust law in the region. Again, you know, it’s only been passed into law and it’s only been developed in the last decade or just  over the last decade. So, you know, they’re relatively new when you compare it to IFCs like Jersey and, you know, centres like London where you knowthese structures have been available for decades and centuries for private wealth. So in summary, you know, Malaysia, Dubai and other Jurisdictions play a key part in the development of Shari’a compliant financing across the globe. But when you look at specialist areas like private wealth, because of the expertise like we have in Jersey, for example, you know, we’re able to sort of- and the legal parity that I talked about in our law that allows us to deal with Shari’a compliant products and services and structures in the same way as we would any other. You know, it allows us to the flexibility that we need to be able to provide these services for that space.

Julia Charlton: Interesting, and just from my personal point of view, Hong Kong comes within your breakout category in the report, what does that mean and how well or- or not is Hong Kong doing in relation to Islamic finance?

Faizal Bhana:  Hong Kong, as you know, in 2007, took great strides. You know, they introduced legislation to allow sukuk.

Julia Charlton: Yes.

Faizal Bhana: And subsequently, in 2014, ’15 and ’17, they issued sukuk in a total value of $3 billion. So, you know, these are important steps that demonstrated the legal, regulatory and tracks framework able to support that industry. So it’s taken these strides. And since then, you know, the global sukuk have been listed on the Hong Kong Stock Exchange. You’ve had Islamic funds being developed, Islamic banking windows being operated from there. So I think it’s all, you know, Hong Kong is a sophisticated financial center, it’s always going to be demand driven. And as the sovereign steps in and you know, there’s an enabling environment that they’ve created from 2007. And as the demand grows, you know, it just makes commercial sense. The more demand there is, the more structured products and services will be available, you know, from that perspective.

Julia Charlton: But presumably that’s Asian demand rather than Hong Kong domestic demand.

Faizal Bhana: You’re the expert on on the Hong Kong market. I’d have to, you know, I’d have to rely on what you see on the on the local market, but certainly, you know, Hong Kong is a global player, right? So like any  international finance center, when there is a large corporate or large family business that is looking to issue or list the sukuk, they will look at all the key markets. You know, in my legal days when we were advising corporates sovereign, quasi-sovereigns or even families, private families who are looking to set up or issue a sukuk. You know, they would look at all of the markets and Hong Kong would be right up there from a listing perspective. Of course, the industry is bigger and larger, and the demand is larger from outside of Hong Kong than it is from within Hong Kong. Yeah, but you know, it’s always about economics. You know, what is there? What can we provide from the supply side that will be taken up on the demand side?

Julia Charlton: So you also talked a bit about the sort of potential of sukuk and Islamic finance in the corporate and sovereign space as an alternative forms of financing. Could you share some more thoughts on that?

Faizal Bhana: Yeah let’s go back to 2019 because I think from 2020, 2021, the numbers are a bit skewed. So 2019, the global Sukuk market was worth $146 billion, a significant number. It’s a fraction fraction of the total bond market. So for your listeners, obviously, sukuk is the Shari’a compliant equivalent bond. So, so there’s a long way to go in terms of making up ground and becoming competitive enough and in an alternative class in itself for institutional investors. However, the number in 2019, and this is why I went back to that number, was an increase of almost 19% from the year before and a 499% increase, you know, from just a decade ago. So,ou know, when you look at that trajectory, the demand globally is- was significant Until the crisis hit. Now, in 2020, the industry numbers, you know, we have some industry numbers for 2020 and that there was a drop from 146 billion in 2019 to to one 140 billion. And so, you know, that shows you that the demand came down but the forecast for 2021 was again a 10% increase. So the sukuk market is, you know, is a huge market. It’s going to be as more and more sovereigns come on board,

Faizal Bhana: you know, the UK issued its second sovereign sukuk last year. It’s a G7 economy doing that, so that adds credibility to that form of alternative finance. You’ve got all these sovereigns across the world that have, you know,that are now in huge budget deficits as a result of the support that they’ve had to provide through the crisis. And they will look to other ways of raising this debt or raising this finance, and sukuk provides a useful alternative and we’re seeing African governments, we’re seeing Asian governments doing just that, you know, looking at exploring and opening up their legal framework. The issue is going to be the legal framework of these jurisdictions allowing this flexibility, like what Hong Kong did in 2007. Because of the way some of the Shari’a compliant structures work, there needs to be an enabling environment provided by the regulators and the laws of that jurisdiction so that it makes the the issuance of, and the structuring, of these products viable in these markets. And this is quite a big step that needs to be taken with it. And then that would encourage corporates and families to also issue sukuk because a lot of these, in markets where these enabling framework has been provided, you’ve had corporates and family businesses taking that step and issuing sukuk, and this is important for developing that market.

Julia Charlton: Absolutely. So do you think some of that enabling legislation and perhaps the lack of it is why some jurisdictions, for example, which have quite large Muslim populations like the Indian subcontinent  and parts of the non-GCC Middle East countries, they don’t seem to be significant in terms of Islamic finance.

Faizal Bhana: Yes.The short answer would be would be that because I think you will find that even within these jurisdictions, there are pockets of products and services and mutual kind of organizations that are set up, clubbed groups of people that come together and particularly tax, Julia. I think if you look at some of these jurisdictions, the issue is taxation.

Julia Charlton: Absolutely.

I’ll give you, I’ll give you and your views. I know we’re running out of time, but just a minute, if I can just explain one structure and bring this to life. You know, you have a lot of the Shari’a compliant structures are driven by the sale of a product or underlying economic activity. Now, in the conventional sense, obviously, you borrow money and you charge an interest and governments and regulations and laws acknowledge this premium that is Mmde on the on money that is lent out. But that is not recognized when it comes to the sale of a product or of an asset which forms the basis of the Shari’a compliant Structure. So when you know when a profit is made in a Shari’a compliant structure, it’s treated like normal profit. So the taxation for that makes the service and the product a bit more challenging in these jurisdictions.

Julia Charlton: Yeah, I know all bond financing of any description is very tax sensitive, isn’t it?

Faizal Bhana:

Julia Charlton: Yeah. So well, that’s incredibly interesting. And I think we have a few minutes left and actually quite a few questions from people who are listening. So let me just jump through some of them.

Julia Charlton: Here’s one. Is there really a difference between Shari’a finance and normal finance? Isn’t sukuk just the Arabic for bonds, for example? In particular, how to Jersey’s products fulfill the PLS concept, which is core to Islamic finance?

Speaker3:  So I think, a very good point, this is ane week seminar kind of a question, but let me-

Julia Charlton: This is another webinar, is it?

Faizal Bhana: Let me try- Let me try and summarize the seminar. I’ve already touched on this economic activity point, so I think to better understand Shari’a compliant financing, it’s useful to look at some of the restrictions. I mentioned restrictions in interest. So this is a complete no-no from a Shari’a compliant financing. So what happens in Shari’a compliant financing is you must have an underlying activity a So whether that’s a lease, whether that’s a sale of a product, whether that’s a partnership, you know, these are the three main areas where you have Shari’a financing come through. Now, in order to have that, you need to have an asset at the back of it. So without confusing people, you know you as a consumer, you would walk into a conventional bank to get a mortgage and you would walk into a Sharia compliant bank to get a mortgage and you will walk out of those banks with the mortgage. But the difference is, how is it done? And in the Shari’a compliant bank, you would go in there, the bank may actually buy the property jointly with you. It may buy the property and lease it back to you with a plan for you to buy it over the duration of the period. Or alternatively, it may buy it and resell it to you at a higher price, and you can pay that deferred payment over several years. Whereas if you walk into a conventional bank, you go in there and they will borrow you the money to buy the property and you will pay them an interest on top of the money that you’ve borrowed, which is a difference. But I hope I’ve sort of summarized that-

Julia Charlton: No no, that’s really clear to me. I mean, it’s simply putting everything into the principal aspect of it rather than the interest part of it and the actual cost of the asset, isn’t it?

Faizal Bhana: Yes. And and it’s at this point, I should also bring in another factor. So one of the other prohibitions that we have in Shari’a compliant financing is certain sectors that are prohibited from investment. So, for example, gambling, you know, Shari’a compliant investors would not invest in gambling companies or products and services. And this takes me back to the the ethical investment point I made earlier for next generation. The next generation, they also look at some of these investment criteria and say, actually that fits in with what we are looking to do in terms of making a positive impact on the community. So you know this alignment takes this decision making out from a niche area like Shari’a into the wider, you know, mainstream.

Julia Charlton: I have another question here from Andrew Wells. Do you use normal interbank interest rates to determine rates of return?

Faizal Bhana: So there is a, you know, I’m not a banker, but there is a reference rate used within- you know, the Shari’a industry operates within the global finance industry and there are certain norms and reference points and measurement. Even the measuring of success, it has to be by means of reference to global standards. And some of these global rates are used within Shari’a compliant products and services. So the reference points are there. They have to be there. There is a fluctuation. But in order to make it Shari’a compliant, there is a complex mechanism doing that. But to answer the question, in short, yes, there is a-there will always be a reference point to the rates of return that are earned on the global market, you know, because Sharia industry operates within that global market.

Julia Charlton: Right. Yes, and someone else has asked, what exactly do you mean by ESG focused investments? Can you give a few examples? Well, I suppose that’s a sort of general question outside of Sharia finance, isn’t it? Suppose, wind farms? I don’t know.

Faizal Bhana: Yes. I mean, you know, ESG is a value based decision making process that, increasingly, investors are demanding and product suppliers are providing. So it’s environmental and societal and governance related decision making. So essentially, you’re saying, how is my product service structure impacting the environment around me? I mean, what good is it doing to, not only from a green perspective, but community wide? What’s- how is it impacting stakeholders beyond just the shareholders of the business? You know how, is my investment impacting that, you know, from a, you know, from a societal perspective For example, some of the products you know, you’re looking at sustainability how can how can we benefit? You know, how can the wider group of stakeholders benefit from financing and make this offering sustainable? And then obviously the governance aspect is supervision and how it is monitored. So how do you make sure that the products and services are what they say on the tin? Quite complex. Another webinar for that. But you know, it is this value based decision making.

Julia Charlton: Yeah, and it’ll be very interesting to see how that perhaps develops in an Islamic finance context. You know, whether there will be layers of Islamic finance governance onto some ESG investments. I mean, I think that would be an interesting thing to watch.

Faizal Bhana: And just, yeah, just on that point. I know we run out of time but one of the key requirements, and this is another characteristic of Shari’a compliant financing, is that there has to be an independent confirmation of the Shari’a compliance element. And again, next generation like that, and that’s the governance part that they align with the ESG -more widely used ESG principles. So this additional layer and the point that you make where the sustainability and the wider ESG Framework comes into, that would be the next stage of the development of these standards. I think probably.

Julia Charlton: Yeah, I think that would be terribly interesting. Can I just ask, is Jersey Finance planning to do sort of repeats of this exercise or is it a one off?

Faizal Bhana: Well, no. I mean, the idea would be to update this research. Now it’s been very well received globally. You know, we’ve had thousands of downloads. We’ve had the opportunity to launch it in several markets including, obviously today, in the Far East and the Commonwealth itself. And yeah, we would look to update. We would look to update this research and try and look at changing attitudes and see whether some of those investment decisions have played through. You know, a lot of the research, you would have seen Julia, is questions around investment decision making in 18 Months time. So hopefully we ought to be there in 18 months time and say, OK, where are we now?

Julia Charlton: That would be fabulous. That would be great. Right? Well, there’s a few more questions actually in the chat, but perhaps I can pass them on and you can manage to answer one or two of them by email, perhaps. And so, just a final question from me. What do you see is the likely developments over the next couple of years? What would you see as the single most likely thing to be happening? Most important?

Faizal Bhana: I think we’re going to see- when you say development, I’m going to focus on the Shari’a compliant wealth.

Julia Charlton: Absolutely. Yeah, yeah, yeah.

Faizal Bhana: Okay.

Faizal Bhana: Yeah. So I mean in that sector I think the nextgen, because the next generation are going to play an increasing part in that conversation, we’re going to see products, services and structures being developed much more quickly and increasingly using technology. And access and the market share of this will grow exponentially as a result because it will be available for all and not necessarily just for those that are within a particular demographic. So I think it’s exciting. And IFCs and stakeholders within international finance centers like professional services, firms like yours, and other trust, fiduciary services see that potential and they develop products all the time and we see that coming through.

Julia Charlton: Brilliant. Thank you very much. I’m going to really look forward to the next report when it comes out, and perhaps you could ask more questions about demand for technology and what people would like in that area. I think that would be pretty interesting. And it may well have moved on a lot by the time you do the next report anyway. Well, thank you so much, Faizal. That brings us to the conclusion of this online event today. Thank you, everybody so much for being with us. And thanks to our wonderful speaker, Faizal Bhana, for taking time out from his hectic schedule when he’s just arrived in the UK and deep diving into the realm of Islamic finance with us today. We very much look forward to seeing you again soon.

Faizal Bhana: Thank you for joining us; bye, everybody.

 

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