Strengthening the Regional Asset Management Industry — Abdul Rahman Al Baker

Distinguished Guests, Ladies and Gentlemen –Good Morning.

It is a great pleasure to be here today to address the Annual Middle East Asset Management Forum. I would like to commend the organizers for  putting together a stimulating program, which will no doubt enrich the ongoing dialogue and debate on asset management industry in the Mena region. I hope that presentations and discussions during this forum would highlight and deliberate on important areas of assets management industry that would contribute towards further development and growth of the regional Asset Management services.  I would also like to extend a warm welcome to the participants and the distinguished speakers for taking the time to contribute to this event. 

The Assets Management industry has grown to become an increasingly substantial segment within the international financial markets and has gained significant interest as an efficient alternative model of financial intermediation. Generally, it is estimated that the assets management Industry globally reached around US$90 trillion as of the end of 2015.  This is large.  It is equal to around one year of global GDP or approximately three-quarters of the assets of the global banking industry.  It has also grown fairly rapidly, with Assets Under Management (AUM) roughly doubling over the past decade.  In the United States, for example, the Assets Under management have risen almost fivefold relative to GDP since 1946, from around 50% of GDP to almost 250% of the GDP.  In the United Kingdom this pattern has been replicated, but over a much shorter time period since around 1980.  Across most OECD countries, the patterns are similar.  All of this clearly indicates that global asset management industry is likely to continue its upwards trend, absolutely and relative to the economy, and it is expected to grow to top US$100 trillion by 2020.

In the GCC countries, it has been estimated that the Asset Management Industry reached around US$200 billion as of the end of 2015.  This total amounts exclude those assets that are managed by the public pension funds and sovereign funds.  As the industry grows, opportunities will expand for independent asset management firms which found it hard to take market share from large local banks that control the distribution channels to individual investors through their retail operations and corporate relationships.  However, bank dominance is likely to change over time as the market matures and more multichannel distribution emerges, such as digital brokerage platforms operated by independent asset managers.

Overall, the prospects for growth of assets management industry in the GCC are likely to be positive.  This positive trend can be attributed to the rapid expansion and increasing sophistication of the GCC financial markets, the enhancement to the existing regulations governing assets management and capital markets, the growth of wealth of High Net-worth Individuals as well as the steady economic growth in the region.

In Bahrain, the assets management sector has been continuing to show strong growth during the past five years.  Since the introduction of the Investment Business license by the CBB under Volume 4 Rulebook in 2006, the number of investment business licensees has risen to 54 as of the date.  This clearly indicates that the number of the investment business licenses grew from 22 firms in 2006 to 54 as of the end of April 2016.

The three categories of investment license permits firms to undertake any or full range of assets management activities depending on their category and line of business, such as investing as principal, asset management, operating a collective investment undertaking, acting as custodian of financial instruments, or offering brokerage and advisory services on financial instruments to clients.

As of the end of the first quarter of 2016, the total assets under management of Investment firms reached US$19.8 billion compared to US$17.5 billion on the same period last year, a remarkable increase of over 13%.  This growth in assets is due to the entrance of new investment firm licensees and the introduction of new innovative products and structures by existing firms.

The mutual funds sector is another fastest growing segments of assets management industry.  With approximately US$ 7 billion in assets under management, through more than 2,740 funds, the industry has been growing at a steady base in recent years.  Overall, there are 91 Islamic funds that are incorporated and registered in Bahrain with total assets amounting to US$1.3 billion as of March 2016.

The CBB, through its enabling legislation, promotes the development of new products for investors in both conventional and Islamic financial markets, while at the same time providing credible regulation in both areas.

The existing regulatory framework for Collective Investment Undertakings (CIUs) has provided for a full range of investment funds catering to various types of investors, from retail to high net worth individuals and institutional investors.  In order to further enhance the existing CIUs framework, the CBB has issued Volume 7 Rulebook which provides comprehensive rules and regulations pertaining to the authorization and supervision of CIUs domiciled or offered for sales in Bahrain.  The regulation has recognized the importance of expanding key areas such as the corporate governance, as well as the role and responsibilities of each relevant party of a scheme.  It also expands the variety of funds that can be established in Bahrain, by introducing rules governing Real Estate Investment Trusts (REITs) and Private Investment Undertakings (PIUs).  Private Investment Undertakings are the new breed of investment funds with a high degree of flexibility in structuring, aimed basically to facilitate private investments, the like of a family held investment, single investor or a single investment type.  Due to the investment risk characteristics, it may exhibit, such type of scheme can only be initiated to High Net-Worth Individuals and Institutional investors.    

In keeping with Bahrain’s leadership in Islamic finance, the CIU rules also provide a solid foundation for the establishment and management of mutual funds that comply with Sharia principles.

Furthermore, the Offering of Securities (OFS) Module under Volume 6 Rulebook contains detailed rules and regulation that covers the issuing, offering, floating and subscribing to different types and classes of securities, including Sharia-compliant securities like Sukuk offered to the public or through a private placement in or from Bahrain.  The Module also provides the procedures and documentation that need to be submitted by the issuer for various types of securities that will be offered publicly or privately, as a part of their application to obtain the CBB approval in this regard.

Generally, the potential size of asset management sector is vast, and the accelerated establishment of the sector hinges on attracting the flow of potential funds into asset management industry.  However, it is important to ensure that asset management industry has solid and strong foundations for future development and growth. 

In order to further strengthen and enhance the growth of asset management industry, there are several factors that need to be taken into consideration. First, it is critical for asset management institutions to better understand the clients and their needs for financial products and services, as such understanding will help to further expand the horizons of asset management industry.  In other words, asset managers should properly address customer expectation, as those failing to adjust will face severe challenges to continued profitability and growth.  Furthermore, distribution channels should be more aggressively leveraged to specifically target a whole new class of tech-savvy investors, many of whom command unlimited access to more financial information and advice from their mobile devices than they could obtain from most financial advisors.

Second, it is important to adopt proper corporate governance in order to enhance the confidence of the investors and to ensure that markets are fair, efficient and transparent.  This includes having clear and proper disclosures of all terms and conditions of the investment products, as well as transparency in disclosing financial information and indicators.

As investors have become extremely price sensitive and far more sophisticated about costs, benchmarking, alpha versus beta and risk management, asset management firms will realize they can no longer successfully compete by charging excessive fees for their investment products.  Therefore, firms should invest in innovation, deal effectively with a flat to rising interest rate environment, tactically re-evaluate investment in their distribution channels, create differentiation and build brand awareness in order to compete successfully and contribute to further strengthen the industry.

Fourth, compliance is core, as the new era of compliance will force firms to focus on an enterprise-wide integration of business strategy and not simply short-term tactical solutions.  For asset management firms that effectively meet the challenge of the changing regulatory environment, investment in infrastructure and implementation of an enhanced operating model will provide opportunities to enhance profitability and ensure growth.

Creating an adequate regulatory framework for investment products is another factor to further strengthen the asset management industry.  Such regulation should create the necessary framework for investment products targeting small, medium size, as well as accredited investors. This regulatory framework should also cater for wide range investment products that include equity, mutual funds, retirement products and various types of investments.

 Last but not least, it is important to have a sufficient number of professionals that are well versed in capital market and asset management services to further develop the industry.  This, in turn, will further enhance the products development and improve the services to investors in the market.

Ladies and Gentlemen, the CBB intends to remain at the forefront of the asset management industry and we look forward to working closely with market players to further develop this key industry.

Thank you for your kind attention.

Statement by Abdul Rahman Al Baker, Executive Director of Financial Institutions Supervision, Central Bank of Bahrain at the Middle East Assets Management Forum -Bahrain, 30 & 31st May 2016.