Converting a conventional business into a Shariah-principled entity can enhance the value of the company by 18%-25%, according to the Islamic Wealth Management (IWM) Report 2012. Moreover, the non-bankable assets of family-run companies needed further diversification, the report said.
“Converting a business to Islamic finance can increase the value of a company by 18%-25% due to the scarcity of genuine Islamic investments,” it said.
The conversion becomes a pertinent issue with global Muslim population expected to grow by 26% by 2030 and with Muslims becoming an increasingly important segment of the international economy.
However, it said, the conversion process was arduous, extending from the design to distribution and beyond, to how the company utilised its profits.
Although there are clear requirements regarding the conversion of a financial institution and the handling of financial transactions to ensure compliance with Shariah law, largely documented in the standards of the Accounting and Auditing Organisation for Islamic Financial Institutions, the question has become much more complex when commercial enterprises are concerned, it said.
“In reality, transforming a company in to an Islamic finance entity would demand examining every aspect of the business. The degree of transformation would depend on many issues and aspects related to the type of business the company undertakes, how it conducts its business and finances and where it is located,” the report said.
Highlighting that conversion also involved social, political and financial risks, the report said extra costs may be associated with Shariah compliance since a religious audit is required.
Marketing is also complex, given the differences in interpretation of Islamic law and observance by Muslims globally, according to the report.
Bank Sarasin said the market potential is “massive” as the global Muslim population is expected to increase by 26% to 2.2bn by 2030, rivaling China and India in terms of market size.
“The Muslim market segments in India and China alone are larger than some countries’ populations, estimated at 140mn and 40mn respectively,” the report said, adding demographics were also compelling with 43% of Muslims under the age of 25.
“As Muslims become an increasingly important segment of the global economy, the conversion of a company to Islamic finance will become a greater issue for entrepreneurs, executives and investors,” Bank Sarasin managing director and head of Islamic finance, Fares Mourad said.
Regarding the family wealth, the report said bankable assets accounted for 30%-40% of the total family wealth and provided liquidity to balance the illiquid nature of the majority of the wealth (non-bankable assets).
Finding that in the Middle East, real estate has a 30% share of non-bankable assets, it said realty provided limited liquidity and its degree of security was challenged due to the high exposure of investors and banks to the sector, increasing the downside risk.
Other items, including collectibles, jewllery, cars and animals such as race horses, accounted for about 30% of non-bankable assets, according to the report.
source: Gulf Times