382 AN INTRODUCTION TO ISLAMIC FINANCE
The nature of fi nancial intermediation and the style of fi nancial prod-
ucts and services offered make Islamic banks a hybrid between commer-
cial and investment banking, similar to a universal bank. A universal bank
benefi ts from economies of scope because of its close relationship with an
established client base and the access this provides to private information.
Combining different product lines (such as banking and insurance products)
or commercial and investment banking lines may increase the relationship
value of banking at a much lower average cost of marketing.
For example, by expanding the scope of their services, Islamic banks
could spread the fi xed costs (both physical and human capital) of managing
a client relationship over a wider set of products, leading to a more effi cient
use of resources. They could use their branch networks and other chan-
nels to distribute additional products at low marginal costs. As universal
banks, they would be able to capitalize on their good reputation established
in one product or service area to market other products and services with
relatively little effort. This would also benefi t consumers by enabling them
to purchase a bundle of fi nancial services from a single provider, rather than
having to expend time and money acquiring them from different providers.
WEALTH MANAGEMENT
Wealth management entails offering fi nancial planning and management
to high - net - worth individuals and private and public institutions, with the
goal of sustaining long - term wealth. With the current wave of petro - dollars
being earned by GCC countries, the demand for such services from public -
sector institutions is bound to increase. Although several GCC countries
are currently using conventional investment vehicles, the increasing demand
for Shari’ah - compatible products is likely to mean that some portions of
this wealth may be available for Islamic fi nancial markets. Similarly, there
are increasing numbers of institutional investors who will be interested in
Shari’ah - compatible wealth management. These include central banks with
excess foreign - exchange reserves, state pension funds, future funds (such as
the oil funds established by some countries), and sovereign wealth managers.
Several prominent economists have argued that the foreign - exchange
reserves held by the central banks, and some sovereign wealth funds should
consider investing a portion of these reserves in riskier assets such as the
equity markets. This should be encouraging for Islamic fi nance, which
is based on the principle of risk sharing and is friendly to equity sharing
investments.
However, offering robust wealth management in Islamic fi nance
presents serious challenges. Any wealth management process begins with
defi ning investment objectives and goals. This is followed by a rigorous
strategic asset - allocation (SAA) process which determines the optimal mix
of asset classes to achieve the desired goals and objectives. In conventional
fi nance, the SAA process has become a science, with the aid of sophisticated