GLOBAL ISLAMIC FINANCE FORUM Wealth Management The Takaful - - PowerPoint PPT Presentation

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GLOBAL ISLAMIC FINANCE FORUM Wealth Management

The Takaful Rendezvous

20th September 2012

By: Saiful Yazan Ahmad

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Wealth Management from Islamic Perspective…

Basic Principles of Islam on wealth differs from Western concept:  All wealth belongs to Allah and human is only a caretaker or wakeel. Hence, accountability grows with the level of wealth. Wealth is endowed by Allah to people in the form of Sustenance/Rizq.  No matter how hard a man works to gain wealth, he must not lose sight that Allah is the One who created wealth and sent His help to him. “Every bounty that you enjoy is from Allah and whenever any misfortune strikes you, it is Him to that you cry for the removal for your distress” (16:53) “To Him belongs all that is in the heavens and all that is in the earth, and all that is in between and all that is beneath the soil” (20:6)

5 Core Values in Islam Protection of Dignity

Protection of Wealth

Protection of Deen (way of life) Protection of Intellectual (‘aql) Protection of Lives

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ISLAMIC WAY OF LIFE

Mu’amalat

Economy Country Civilization Culture

 Gaining wealth is a legitimate quest in Islam so that they can become economically strong; have a better life; give back to society (thru zakat, donations, waqaf, etc. ) and leave inheritance for family members.  The more we are given wealth, the more we should give away.

WEALTH MANAGEMENT – Islamic Perspectives

“ O you who believe! Spend out of what We have provided you …” (2: 254) Some part of wealth must be given back in the cause of Allah. As Allah never mention ‘Your wealth’ in the Quran but instead mentions; “ …and give them out of the wealth that Allah has given you..” (24:33)  The concept that wealth belongs to Allah has the following effects: a) Muslims will accept ownership of wealth as a trust from Allah, hence utilize wealth only to seek for prosperity in this world and hereafter; b) Muslims will ensure that wealth is managed within Islamic environment i.e. enforcement of zakat, tax or state duty for the prosperity of the ummah.

Note: Mu’amalat refers to interaction among human beings

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WEALTH MANAGEMENT IN ISLAM

• Wealth should be accumulated and distributed to the next generations/offspring for long term

survivorship and prosperity of future family members as well as the society.

• Therefore, a man must manage and control his wealth, and not to let the wealth controls him.
• Islam dictates correct way of spending money. Some prohibitions like spending to show off wealth,

causing wastage, spending on illegal products and practicing exuberance/lavish spending.

• Not to forget that there is a share of your wealth for the poor and needy too.
• Another concept to understand is wealth is not the end in life, but it is meant to attain higher value in

life.

• Wealth management in Islam include:
• Zakat management;
• Inheritance,
• Wills and testaments
• Estate management
• Managing cash and saving
• Managing of tax and state duty; and
• Different business transactions.

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WEALTH MANAGEMENT LANDSCAPE IN MALAYSIA

Mainstream Mass Affluent Lower High Net Worth Upper High Net Worth Ultra High Net Worth Family Offices Hedge Funds Private Equity Multi-Family Offices Wealth Advisory Firms Trust Companies Wealth Mgmt Firm Private Banking Arms Full Service Brokerage Financial Planners Financial Advisors Retail banking Insurance Stockbroking Companies Unit Trust Companies Source: BNM Financial Sector Blueprint 2011-2020

Size of investible assets

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 Asset/wealth management is very important in the world of finance.  Generally, it involves professional management from an institutional investors (i.e.: insurance/takaful companies, pension funds, unit trust companies, etc.) and high net worth individuals (HNWIs).  As for Muslim investors, formerly they often turned to conventional financial institutions to have their assets managed conventionally.  However, due to the emerging field of Islamic finance and the availability of various kinds of products and services which are Shariah-compliant nowadays, the Muslim investors now can easily choose different Islamic financial institutions to manage their assets/wealth to meet the desired expectation.

DEVELOPMENT ON WEALTH MANAGEMENT INDUSTRY

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MALAYSIA: DEMOGRAPHIC CHANGES

Source: Dept. of Statistics, Msia & Pew Research 27.5 27.9 28.3 29.4 70 2008 2009 2010 2012 2030f Total Population 71.6 72 71.9 76.4 76.8 77 2008 2009 2010 Male Female

Diagram 1: Total Population (2008-2010,2012 & 2030) Diagram 2: Life Expectancy by Gender (2008-2010) 48% 52% Male Female  Total population is increasing in a lower average annual

growth population rate (2%: 2000-2010) compared to 2.6% for the period 1991 – 2000. (see Diagram 1)  It is attributable to the lower birth rate from late marriages and also from considerations of higher cost of living.  Due to improved quality of living and advance in medical care, the average life expectancy of Malaysia is improving as reflected in Diagram 2.  Apart from it, Muslim population is largest in Malaysia with the proportion of 61.3% and expected to become larger in 2030 (64.5%) – Huge potential for Islamic financial products  The ratio of male & female is almost balanced. (see Diagram 3)

Diagram 3: Percentage on Population by Gender 2010

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Diagram 4: Malaysia Population by Age Band & Gender (2000 & 2010)

 Malaysia’s population is aging partly due to:

• Delaying marriage to pursue higher education which impacts birth rates
• Improved healthcare and quality of life which led to higher life expectancy

 Increase of working population (15-64 years old) from 62.8% to 67.3%  Proportion of those above 65 years old has increased from 3.9% to 5.1%  Impact to Takaful market :

• Longer life expectancy gives opportunity for Takaful operators to design extensive coverage specific

to these aging group thru tailored products (e.g: medical coverage, investment/savings /retirement)

MALAYSIA DEMOGRAPHIC PROFILE (cont’d)

Source: Dept. of Statistics, Msia

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Diagram 5: Urban & Rural Population (2010)  In tandem with Malaysia's rapid development, the proportion of urban population increased to 63.0 per cent in 2010 compared with 62.0 per cent in 2000. Urbanity means information can be disseminated faster and this helps in effectiveness of marketing communication and increasing awareness on financial products including Takaful. Urban population tends to be exposed to higher cost of living which will create the need for wealth creation, management and protection products.

63% 37%

Urban Rural

MALAYSIA DEMOGRAPHIC PROFILE (cont’d)

Source: Dept. of Statistics, Msia

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MALAYSIA DEMOGRAPHIC PROFILE (cont’d)

 The largest fraction among the class of income data is the RM5,000 (USD1,600) and above group which takes up 24%  Another interesting observation is 26% of the households earn between RM1,000 (USD322) to RM2,000 (USD645).  This creates an opportunity for basic protection products that will meet the needs of the lower income group. (e.g: micro takaful) while the higher income group will augur well for the development of the takaful industry due to increased affordability.

1% 6% 14% 12% 11% 9% 7% 6% 10% 24% 499 below 500 - 999 1,000 - 1,499 1,500 - 1,999 2,000 - 2,499 2,500 - 2,999 3, 000 - 3,499 3,500 - 3,999 4,000 - 4,999 5,000 above

Diagram 6: Household Income Distribution for 2009

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KEY FOCUS AREAS

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 Growing population size

• Huge opportunity in creating product suites that cater to the needs of each life cycle.

 Higher Life Expectancy for Women

• Opportunity for products targeted at women (critical illness, savings or retirement plan, etc)
• Opportunity to competitively price (relative to male target market) protection-based products due to

higher life expectancy.  Aging Population: Retirement Planning Needs

• In Malaysia, the retirement age has been increased to 60 years old from 55 years previously
• Opportunity for Retirement Plan:
• For the young adults – a plan that can generate their wealth until they reach retirement age (long-

term)

• For the older adults – potential short term plan which can allow them early retirement.
• Cheaper retirement based products for male (relative to female) due to wider difference in life

expectancy between male and female

• Opportunity for better medical and health products due to increasing cost of treatment.

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KEY FOCUS AREAS

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 Competent & Dynamic Talent

• It is estimated that an additional workforce of 56,000 is required by 2020 in Malaysia to fulfill the talent

demands in critical areas including wealth management (2010: 144,000).  Expanded Dimension of Islamic Financial Institutions

• Expand the dimension of Islamic financial activity with greater emphasis on the

management of Islamic funds in Malaysia through the advent of Islamic investment banks, fund managers and wealth advisory service providers with global reach and stature.  Effective Mobilization of Larger Funds

• Financial institutions need to improve the mobilization of broad range of funds (from households in the

form of traditional retail deposits and insurance premiums) to more sophisticated sources such as pension funds and institutional investors funds within Malaysia and also the region. .

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DEVELOPMENT & SUPPORT

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Well-Developed Shariah Governance Framework  Bank Negara Malaysia has established a centralized Shariah Advisory Council (SAC) to advise on issues related to Shariah compliance matters pertaining to the Islamic banking and Takaful industry. The approach was taken, by recognizing the importance of Shariah compliance in the Islamic financial system which possesses unique characteristics when compared to the conventional system.  The SAC is responsible for analyzing issues on Islamic banking and Takaful matter, to ensure the aspects

• f the operations of Islamic financial institutions are in accordance with Shariah principles.

Well-Developed Market  Malaysia has placed an equal emphasis on the four core sectors in Islamic finance – Islamic banking, Takaful, Islamic capital market as well as Islamic money market. Malaysia is one of the leading Takaful market and has been experiencing rapid growth.  The rapid liberalization of Malaysia's Islamic finance industry has encouraged foreign institutions' participation in Malaysia, thus creating a diverse and growing community of domestic and international Takaful operators that have acknowledged experience in the Takaful industry  Currently, there are 12 Takaful operators in Malaysia, capable of providing unique Takaful solutions to tap the market.

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Top 12: HNWIs Population by Country (2011)

Highlights: World’s Population of HNWIs is increasing by 0.8% in 2011 however, the total of HNWIs wealth declined by 1.7% in 2011 as compared to 2010. The bulk of the world’s high net worth individual population remains concentrated in the United States, Japan and Germany which accounted for 53.3% of the world’s high net worth individuals in 2011, up slightly from 53.1% in 2010 #1 leading country in HNWIs is USA. However, the growth rate has declined by 1.2% from 2010 to 2011. As compared to Euro countries such as Germany, France and Switzerland, though they are facing debt crisis, still their number of HNWIs is

• growing. This is one of the reason why the growing HNWIs in Middle East have yet to lose their desire for Swiss private bankers.

Source: Annual World Wealth Report 2012 | eFC June 2012

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FUTURE OUTLOOK & POTENTIAL

Wealthy and Super Affluent Market Segment

68 78 61 82 36 44 42 50 20 24 19 24 15 18 14 18

10 20 30 40 50 60 70 80 90 2006 2007 2008 2009 Singapore Thailand Indonesia Malaysia*

Diagram 7: Major SEA HNWI Population 2006 - 2009 ('000) Diagram 8: Percentage of Wealth Distribution in SEA

49% 34% 12% 6% Singapore Thailand Indonesia Malaysia*

2009 Percentage Singapore 340 49% Thailand 232 34% Indonesia 80 12% Malaysia* 40 6% Total 692

Diagram 9: SEA HNWI Wealth Distribution (USD billion)

Source: Watson Wyatt

• In SEA, Singapore recorded the highest number of HNWIs

followed with Thailand, Indonesia and Malaysia. Similarly, the wealth distribution follows the same order.

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MALAYSIA’s HNWIs FORECASTED POPULATION & WEALTH (2011 & 2015)

4 key Factors Drive the rise in Malaysia’s HNWIs

Strong & stable long-term GDP growth (trade & agriculture Development in Islamic finance & banking sector Asia strong currencies which can promote the inflow of FDIs. Asset price appreciation from real estate and equities. Region/Co untry 2011 2015 HNWI Wealth Stock HNWI Wealth Stock Asia 1.16 million people US$5.06 trillion 2.82 million people US$15.81 trillion Malaysia 32,000 people US$140 billion (RM433 billion) 68,000 people US$330 billion (RM1,020 billion)

Source: Annual World Wealth Report 2012 | The Edge June 2012

Highlights: About 3% of the Asia’s HNWIs is in Malaysia in 2011. Significant growth in Malaysia’s HNWIs population is expected to be more than double in 2015. This is due to 4 key factors that have driven the rise in Malaysia’s HNWIs population.

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FUTURE OUTLOOK & POTENTIAL

Wealthy and Super Affluent Market Segment

The Opportunity for the Segment  Provide Takaful products to the wealthy and super affluent segment as part of financial planning tools for estate management – estate liquidity; estate distribution and philanthropy.  The key target segments are the affluent Muslims and growing non-Muslim population attracted to the simplicity and equitable financial concept of Takaful products  Current Takaful offerings are not designed for this segment and their needs.  Need independent financial advisors who can cater for varying needs of the affluent (investment services, mutual funds, takaful, travel advisory, advice on islamic law of inheritance, estate planning, will writing and trust set up ) – one stop centre for all wealth management needs.  Some of the affluent are more international and frequently traveling overseas, hence product offerings must pass international standards eg funds must be international and well diversified  Tax incentive also need to be looked at – this group falls under maximum tax bracket.

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“High net-worth individuals (HNWIs) are incredibly talented when it comes in making money and collecting assets, however about 99% of them are struggling to manage their wealth.”

WHITMAN, 2012

People are ignorant about wealth management. What do they need?

“A professional guidance and support from financial advisors/planners, takaful agents, brokers and bancatakaful staff , etc.”

Some Thoughts from one of the Wealth Management Institutions …

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HOW TAKAFUL CAN COMPLIMENT IN WEALTH MANAGEMENT?

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General Takaful Family Takaful Motor Miscellaneous Marine/ Cargo Fire Engineering Fidelity Guarantee & Bond Personal Accident Liability Theft Aviation Business Ind Family Group Family Riders

Savings Annuity Investment Linked Education MRTT GTT GHS GCTT/Cashline GID CI FIB Waiver of Contribution AD&D Payor Savings Retirement/Pension

SNAPSHOT OF TAKAFUL PRODUCTS

Takaful products can cater for various wealth creation as well as wealth protection needs of investors.

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CHALLENGES

Key Challenges on wealth management: 1. Debt crisis and uncertainty in the global market especially in Euro zone and US will definitely affect wealth management. 2. Uncertainty in the value of major currencies will affect overall global economies. 3. Overall Islamic finance industry scarce of talents in both industry’s practice areas as well as Shariah aspects. 4. There are limited Islamic financial products or instruments to cater for HNWIs with global standards and acceptance.

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Thank You

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SaifulYazan.Ahmad@takaful-ehsan.com.my CEO, ING PUBLIC Takaful Ehsan Berhad