Marc Norden, Director – Head of Investment Solutions, BLME speaks exclusively to Islamic Business & Finance from there on the babk’s renewed focus on HNWIS, the future of Islamic funds and the UK’s future
editor's pickWednesday 08, August 2018
What is your role within BLME?
I have worked at BLME for nine years and currently head up investment solutions. Prior to that I was head of asset management. The focus for investment solutions is supporting our wealth management business in finding investment opportunities for our GCC clients. We have found that this new strategy is what our clients are looking for rather than BLME developed incomes funds. In the past we offered a ‘Sukuk fund’ and an ‘Income fund’ which invested in Sukuk, Murabahah and Wakalah resulting in a lower risk and lower return than the pure Sukuk fund. We found that they performed well and did grow, but grew very slowly. So, rather than being a fund manufacturer, the Bank decided become more of a niche player focusing on the investment side where we could better support our clients.
Could you expound more upon BLME’s current focus?
Our focus is very much on the high net worth market in the GCC and broader MENA region, including the Levant. We aspire to be the leading provider of Shari’ah-compliant wealth management services out of the UK into the Middle East. This region has always invested in the UK. BLME has built some good relationships bridging the UK and the GCC and broader Middle Eastern countries. We want to be their first port of call for fully Shari’ah-compliant banking and investments out of the UK. How do we do that? First, we provide banking services and offer a full suite of real estate related services. Historically and continuing we see a lot of investment out of the Middle East into the UK real estate market. Our suite of services covers everything from beginning to end—if you’re looking for a property, whether residential or commercial, we are able to source real estate and real estate services working with partners or from our own team.
We help investors find a property either as a summer home or an investment property, can do the financing, and offer mortgages, commercial finance, or development. We’ve built up a strong reputation in real estate finance. Then once you’ve bought the property, we can help manage it for you, and we can organise concierge services. From an investment point of view, we are starting with real estate, but we are looking to broaden our investment services. It is my responsibility to look for other investment opportunities to help clients diversify away from a reliance on real estate. We are looking at other opportunities at the moment. Beyond Wealth Management and investment solutions, over the past eleven years we have developed a strong commercial finance division. We provide lease and asset finance alongside trade finance. BLME also provides market leading savings products in the UK.
Could you tell me more about those opportunities?
Our extensive experience in leasing and asset finance fits naturally into the Shari’ah world and provides potential opportunities from an investment perspective. BLME is looking at these opportunities, specifically considering assets in the transportation industry or equipment leasing. We hope to be able offer our clients some new compelling investment opportunities late 2018 and into 2019. Our aim is to help our clients maintain their wealth, consolidate and grow and support their investment strategies, particularly inter-generational wealth management.
Does Brexit factor into the decisions of your clients?
Brexit is a definite consideration at the moment for all investors and financial institutions. I think it would be wrong for us to stick our heads into the sand and say that it isn’t—it is. Some clients are holding back investment decisions until they see greater clarity. However other clients see the uncertainty as an opportunity and continue to consider investment into the UK. All the economic evidence shows that the UK is in a state of flux which creates uncertainty. Hopefully the government will be able to sort out or negotiate an agreement with the European Union sooner rather than later. Once the direction of travel is known and investors and companies alike can all prepare accordingly Brexit continues to be a consideration, and it is a concern.
However, despite the scaremongering that goes on both sides of the debate the country is not going to collapse overnight. From BLME’s perspective, we do not face into Europe as our focus is the Middle East. To that degree, the impact on BLME is minimal. Clearly there will be some impact on the city, but the infrastructure and financial services industry is very well embedded. You might see some movement to other parts of Europe, but the whole structure and brains of our financial services, the legal support environment— it is all embedded. While we are not clear on the direction of travel I do not think the UK financial services industry is going to change suddenly. I would like to think that pragmatism will rule in the end and we will have a reasonably smooth transition, whatever direction that happens to be.
How has the bank performed?
Last year we bought a retail warehouse which is leased to a well-known do-it-yourself company in Yorkshire. That investment is doing very well. Our clients who invested in that are getting about an eight per cent return. We are looking at another interesting opportunity at the moment. We do a lot of research and have a very strict due diligence process.
What are your thoughts on how London fit in to the future of Islamic finance?
London has done well at positioning itself as a global centre for Islamic finance. We’ve been very fortunate to have a lot of support from the Government, treasury, and various government departments. I think they realise how important Islamic finance is to the UK. Several years ago, the UK Government issued a Sukuk and they announced that they will roll it upon expiry. We would have liked to have seen a larger issuance. It was GBP 200 million, and I think demand would have filled five to ten times that. The UK Sukuk was also important as it was a catalyst for Sukuk issuance from the likes of Luxembourg and Hong Kong. There is an element of tokenism with some Sukuk issuance but it shows willing and governmental support for a growth industry. The Sukuk market would benefit from more issuance on the corporate side as well. When we look at Sukuk issuance, we see the same names and the same governments over and over again, and not a lot out of Southeast Asia and the Middle East. We have not seen a lot of large established global corporations come into the Islamic capital markets. Sukuk issuance taps into the strong financial and capital market infrastructure.
The great advantage that the UK has, is that there are a number of law firms and professional services that have not just experience in the particular asset type that we are looking at, but also from the Shari’ah angle as well, which is hugely beneficial. In order to continue to grow and mature it is imperative to the Islamic finance industry to come up with good quality products that compete with conventional alternatives. Several years ago, a number of players came into the market seeing an opportunity not because they had particularly strong convictions to be Shari’ah compliant but because they saw an opportunity from a commercial perspective. These organisations have fallen away because they were not able to grow assets. For those who provide Islamic finance because we believe in what we are doing and we believe that there is not just a client base but a right way to do things, the future will be good.
Lombard Odier just launched their Islamic fund. As BLME has operated Sukuk and fixed income funds in the past, do you think you would ever launch a fund-based on the Index?
Strategically, it doesn’t fit with what we do and for the time being our focus is on other opportunities. Personally, as someone who has worked for many years in the industry and has previously managed index funds I am a strong proponent of Index funds if they are used properly as a part of an asset allocation strategy. I think the challenge for the industry is getting traction on Islamic funds. There are a lot of Islamic funds, equity funds in particular, but with very few exceptions, there is no scale in it. I do not know why that is but suspect that it is down to a lack of education and profile.
Theoretically I have a slew of products that would be very good for the Islamic market, but from a commercial perspective they would not work without a prohibitive amount of investment. You would expect, if the Muslim community were better aware and the funds offered returns equal to those of a conventional fund that the Muslim community would be supportive of the industry. Anyone who has a pension scheme has the opportunity to select how their pension is invested. I know there are people out there who have set up Islamic investment schemes for pension funds in the UK for example, but have struggled to get any momentum or traction behind it. There is a potential market but there is a lot more the industry can do to educate and raise the profile of Islamic funds.
Is that do-able? Does the Lombard Odier Islamic fund launch help signal that it is possible for others to follow suit?
They are focused on the Middle Eastern market, and creating product for their high net worth clients. It is the sort of product that most investors would expect to have available. Lombard Odier will have developed this fund with their clients and target market in mind. If we are talking about Middle Eastern investors, without wanting to be too generalist about this, they know what they want from their investments and what asset classes they are comfortable with. For example, Middle Eastern investors generally like real estate, they like the tangibility of it. They like to be able to point to a building and say, that’s mine.
Why are Middle Eastern investors wary of funds?
Prior to the credit crisis in 2008 you started to see more Middle Eastern investments into equities and financial institutions. Then, of course, everything blew up, and they retrenched after that. It has taken time for confidence in investing in markets to return, specifically those markets that they are less familiar with. Investors also exited asset classes and instruments they are not familiar with and as part of this you can see that there was in general wariness towards funds. This came about prior to the credit crunches, where a number of financial institutions in the Middle East packaged up balance sheet assets into investment products, which subsequently crashed. The same situation occurred in many regions and ended with investors not really knowing what was in those products. They knew they were buying a “fund” but they didn’t know what was in it. The assets in there blew up, and they lost x percentage of their capital. In reality the issue was not with the fund but with the underlying asset.
However, confidence in funds is returning although not yet to pre-2008 levels, I think that will continue to improve over time. In each generation, people come from the Middle East to the UK and America to study, and become more familiar with the type of investment techniques available here. Outside of the Middle East, funds and Shari’ahcompliant investment vehicles in Southeast Asia have traction and are growing very quickly. In Malaysia and Indonesia, investment products are doing quite well, especially if you are a local manager. People tend to invest in local assets where they understand the market meaning the next step there is to try to internationalise and diversify those portfolios and we are starting to see signs of that. It will take time. The Middle East has always historically relied on the government to look after the population, but that is starting to change. In the coming years, we will see the public having to become more self-reliant and that will increase the need for savings products, and then the potential for the Islamic fund market will rise.
How can the industry find that growth?
One of the things that the whole industry needs to do is focus on technological and digital solutions and products. Islamic finance needs to keep pace or ideally outstrip the technological advances of the conventional finance market. If this can be achieved clients will probably not be able to tell, from a service and functionality perspective if they have a conventional or Islamic financial service or product. Whether that is the right thing is another part of the debate, as one of the challenges for the industry is whether it wants to be a clone of the conventional industry or to be totally different. The answer is probably somewhere betwixt and between as we should strive to maintain and develop an awareness of the ethical and moral distinctness of Islamic finance. For most of us our foremost thought is our security. Our security comes in two ways—our personal support network of friends and family, and our wealth. When it comes to securing our wealth, you do not want it to be jeopardised.
Therefore, there is comfort in the devil you know. Islamic finance is still a reasonably new industry—it is only been going for 40 to 50 years but it has only taken off in the last 10 to 15 years. We need to build a lot of trust and we need to get people to break away from the comfort of conventional finance, which has obviously been established for hundreds of years. If we can build that trust and we do not have any blow ups the opportunity is there, but it is about getting people comfortable with it. As the assets start to increase and the industry starts to grow there will be more comfort, but it is a slow burn, and a lot slower than many people expected. Takaful, for example, doesn’t seem to be going anywhere. People want insurance but they are not sure about the mechanism and mutuality of it. It works in theory, but does it work in practise? Consumers ask themselves, am I going to risk it? You have to build a lot of trust.