Finance

The asset management industry in the United States developed properly in the 20th century although attempts to manage assets started as early as the 18th century when the US treasury department was established. Many asset management companies proliferated after the first and Second World War which was precipitated by significant fiscal changes especially the establishment of the fiscal operation bureaus in 1919 (US Treasury 1). The primary assets that were initially managed by these companies comprised of pension funds, mutual funds and assets from private banking.

Introduction
Asset management falls under the wide scope of investment management which involves the professional management of various assets such as real estate as well as the management of securities such as shares, hedge funds and bonds.  According to Jacobsen (2005 p. 2) an asset is something with certain value like cash, shares, piece of art or stocks.  The owners of the investments could be institutions such as pension funds, insurance companies, corporations or private investors. Narrowly, asset management is mainly used to refer to the management of collective investments. A collective investment is a way through which individuals invest their money in conjunction with others in a wide range of investments that are practically impossible for an individual investor. The aim of collective investment is primarily the sharing of costs and resultant benefits. Though the meaning of collective investments may vary in definition from region to region, it is normally used to refer to funds such as mutual funds, managed funds or investment funds. When collective investments are done, they normally are specific to regions such as collective investment in Eastern Europe or can be specified towards one line of business such as technology. This study will start by making a schematic presentation of the organization of the asset management industry upon which efforts will be made to make an in depth analysis of the different aspects of the historical and current trends in the asset management industry.

According to Walter (1998), the asset management industry is highly interlinked and can be depicted in an interrelationship as shown in the figure below there exist a significant overlap between mutual funds, private funds and pension funds in terms of contribution regulations and management.

Size of the Industry
The asset management industry has experienced tremendous growth during the last decades of the 20th century and has continued to proliferate in the 21st century. As of 1996, the total global assets under management was estimated at  30 trillion which comprised of  5.3 trillion in mutual funds assets,  8.2T in pension funds assets,  6.4T in fiduciary assets mainly controlled by insurance companies and an estimated  7.5 trillion estimated offshore private client assets. In the last fifteen years, the industry has experienced massive growth in comparison with other financial sectors and has expanded both in volume and also regionally. The conventional assets that are managed by the global fund management decreased from 19 to 61.6 trillion. 24.0 trillion of these were Pension assets while 18.9 and 418.7 trillion were asset investments in mutual funds and insurance funds respectively. Together with alternative funds such as hedge funds, sovereign wealth funds, exchange traded funds and private equity funds and in addition to funds of wealthy individuals, the total estimates of the global fund asset management industry totaled to 90 trillion by the end of financial year 2008, a fall of 17 from 2007. Before the decline experienced in 2008, there had been five years of continued growth in the assets industry which is estimated to have increased by more than double within that period. According to IFSL (2009) some of the factors that could have contributed to the decline in 2008 included decreased inflow of new funds, a fall in equity markets as well as a reduction of investors during the period. In regard to the recent economic meltdown experienced in major economic players especially the US and the UK, IFSL estimates that the effect on funds and assets management was less compared to the effect that the financial crisis produced on the banking sector. However, future predictions are that the economic crisis may produce long term effects on the industry. As of 2008, the US was the biggest source of international assets accounting for over 50 of managed assets in 2008 which was equivalent to over 30 trillion. The UK on the other hand was rated second accounting for approximately 9 of the total global managed assets. The figures below are tables and Ms excel constructs showing the size of the global asset management industry as indicated in the diagrams.

According to the figure above, the global managed assets rose from 41.4 to 76.4 in the period 1999-2007. A decline occurred in 2008 up to 61.6 trillion. The global fund management values shown in figure 1 consist of three main funds namely
Conventional funds-these comprises of pension funds, insurance companies funds and mutual funds which totaled 61.6 trillion by the end of 2008
Alternative funds- comprise of private equity funds, hedge funds and sovereign wealth funds which totaled 8 trillion by the end of 2008.

Private wealth funds-generated 32.8 trillion in 2008 and consists of private equity, private wealth and ETFs.
Asset management is now a global industry which has received a considerable share of interest among major financial strategic groups such as investment banks, commercial and universal banks, insurance companies, trust companies, independent and captive pension fund managers, mutual fund companies and other specialist firms (Walter 4). The entry of these high profile interested groups has been one of the reasons why the industry has grown substantially in the recent times.

Size of the Industry in individual countries
At the end of 2008, the managed assets were as shown in the table below for specific countries.
Table 3 Size of Asset Management industry per country

Main Reasons of Expansion

A number of factors have been identified as being the underlying drivers behind the growth of institutional asset management.

The increased trend towards professional management of assets in the form of unit trusts, mutual funds or other types of investment vehicles. Individuals can easily invest without the worry of losing their investments since the funds managers are committed in providing healthy research and expert advice on the most feasible and promising investment options (Eich 1).

A growing recognition that majority of the government sponsored schemes, most of which were created partially or wholly on a PAYG, pay-as-you-go basis are fast becoming fundamentally untenable and unreliable in the current demographic projections. As such, there has been a shift as individuals look for more tenable solutions that will address the rising numbers of retirees with high likelihood of living longer.

Provision for old age- according to Eich (2008) of Die bank, ongoing demographic changes has resulted to
an increase in interest for the provision of old age resources. Many people are expecting to live much longer due to improved life expectancy. In addition, there has been a decrease in birth rates which in the long run is expected to put a strain on traditional pension schemes offered by insurance companies. As a result, an increasing number of those in employment are being forced to plan for old age provision especially through funded schemes (Eich 1).

Internationalization- asset management is now a global business activity. The presence of professional funds manager who research and identify investment opportunities in different market segments have increased the confidence of private investors to invest in these types of assets. The internalization of asset management business has seen major players partnering with financial service providers such as banks to offer the best investment opportunities for their clients (Walter 4).

Specialization- Over the years, there has been a marked diversification of opportunities for asset investments in different global markets. The combined effect of internalization and increased investment opportunities have led managers to keep on discovering new investment segments. Traditionally, most of these assets were in the form of regional funds, country funds or sector funds but as new segments have risen, new areas of investments such as fiber technology have emerged. To cater for the rise in new segments for investments, professionals specializing in particular types of assets have risen and these are able to maximally pursue profitable investments in their lines of investment. In addition to specialization by the professional asset managers, there has also been an increased trend among investors to be specific about the type of investment they wish to pursue. As such, fund managers are expected by their clients to have thorough knowledge of their areas of specialization to be able to authoritatively gauge yield and risks associated with investing in certain assets (Eich 1).

Displacement of private sector and public pension programs by assets contributed by working individuals and employers due to the pressure demands of evolving demographics and escalation of administrative costs.
An increased shift from the traditional portfolios that have for a long time over weighted domestic financial instrument (especially fixed income securities) for tax, regulatory or institutional reasons towards an increased investment in non-domestic assets classes and equities which have more likelihood of higher returns and also their association with lower inherent risks. The traditional portfolios have for a long term invested highly in diversified areas which has the advantage of diversifying the risks but also have the weakness of investing in financial environments some of which have very little correlations and therefore are unable to maximize profits for the investors.

Nature of the Business Status of the Asset Management Industry in US
In a report compiled in 2006 by Mckinsey and company, the asset management industry had then been rated as performing above average (Mckinsey 3). This was well before the financial crisis that hit major asset market segments in the UK and the US. The asset management industry in the US has the highest ratio of managed funds as a  of GDP when compared with other countries with large asset management industries. In 2008, managed funds in the US were 217 of the countrys GDP as compared by the UKs 204, Netherlands 147 and Switzerland 174 (IFSL 2). The total funds were derived from different sub sectors especially pension funds and funds from the insurance industry.  The total pension fund assets totaled 24.0 trillion. Out of these, more than 50 was derived from the US market, 11 from the UK while Netherlands contributed approximately 3.

Insurance funds by the end of 2008 totaled approximately 18.7 trillion out of which 80 was from long term insurance policies while the remainder was from general policies for instance property, casualty and health insurance.

Mutual funds by the end of 2008 amounted to 18.9 trillion. This represented a 28 decline from the previous year associated to investors switch to cash investments within the period which had been perceived as safer. Generally, the source of global mutual funds originated from the US, holding over half of the global total, followed by UK, France, Australia and Luxembourg. It is important to note that institutions are primarily the primary generator of these funds though there are slight variations depending on countries. For instance, institutions are the primary funds holders while retail investors accounts for more than 50 of the total in France.

In regard to alternative funds, their total by the end of 2008 was approximately 8 trillion. These consisted of private equity funds, hedge funds, sovereign wealth funds and ETFs (exchange Traded Funds).

These funds, as reported by IFS (2009 6) are primarily managed by US and UK owned firms. US firms managed approximately 46 of the funds while the UK managed 12 . Other countries such as Switzerland, Japan, Germany and France firms managed between 6-8 each. Funds managed by the developing countries approximated to around 4.  Of these managers, over 50 are independent managers while the remainders are mainly banks and insurance companies. Generally, the concentration in the asset management industry has grown and stabilized in the period towards and after 2000. For instance, the top twenty fund managers share of the top five hundred assets rose from 30 to 38 from 1997 to 2007.

Recent Developments in the Industry
One of the most significant developments observed in the asset management industry has been the trend towards mergers and acquisitions.  According to IFS (2009), there has been a significant rise in mergers and acquisitions in the asset management industry especially since the beginning of the credit crisis. For instance, the total managed assets that changed hands in 2008 amounted to approximately  1 trillion compared to  300 billion in 2007. This trend is expected to increase in the coming years and more traditional fund managers may be bought by alternative fund managers such as sovereign wealth funds and hedge funds managers. In one of the most significant mergers, Barclays Global Investors accepted a 13.5bn offer from Black Rock in June 2009. The merger represented the second largest deal in asset management and it essentially created the largest global fund manager. Other significant mergers in the industry has been the acquisition of Lehman Brother holdings investment division by MBO which cost 160m, the acquisition by Mitsubishi UFJ financial Group of Aberdeen Asset management which cost 226m and the acquisition by Nippon Life Insurance of Russell Investments which cost approximately 211m (IFSL 1).

Future Prospects of the Industry
According to the economist (February 28, 2008), the fund management industry has its own problems but it also has its own future prospects. The two prospects have been labeled appropriately as the elderly opportunities and the emerging opportunities. In this regard, a notable revolution that has hit the fund market has been the globalization of the fund market. The capital markets have today turned completely global. A characteristic boost to the global fund management has been the sale of BRIC countries funds to markets in developed countries especially Europe and US. It has been possible for fund managers in the US and UK to sell funds owned by BRIC companies to investors in Europe and US without the complication traditionally posed by time and geographical barriers. As such, globalization has positioned itself as one of the biggest prospects for the future performance of asset management. The globalization aspects that are going to positively transform the asset management industry are especially those concerning funds primarily in sovereign-wealth funds. Globalization will continue presenting enough opportunity for fund managers to diversify their investment portfolios. Apart from the sovereign funds, there is an increasing likelihood of individuals spread all over the world becoming wealthier and the subsequent need for them to build their own savings. As such, there will be an increase in the demand for fund-management groups to cater for the rise in wealthy individuals willing and able to invest their assets into appropriate funds. According to the Economist, a likely scenario as more individuals become wealthy will be a tendency to concentrate on more sophisticated products especially hedge funds. If market prediction by the economist are to be relied upon, some of the asset management hotspots in the future lies not only in the developed countries such as UK and US but are rising much more rapidly in emerging trade and technology giants especially China and Japan. In addition, there are likelihood of a booming asset management industry evolution in the Middle East buoyed by the ever increasing demand for global oil and the associated rise in oil prices (Economist 1).

Besides the prospective new markets for this industry, there is the existing demographic dynamics in the developed countries which also present the industry with a sure performance prospects. It is predicted that the old-age dependency in European Union countries will rise from 21 currently to 50 in 2050. This implies that the number of people in retirement and above retirement age as compared to the working class population is likely to more than double during this period. The large percentage of this population are not well versed with the dynamics of investments they need to pursue to take care of their old age and as such, they are likely to pursue organized fund managers for their investments. In recognition that funding retirement income has been on a shift mode from the state and private corporations to individuals, these individuals will most likely be forced to seek funds management through formal funds managers. As such, the demand for asset and funds management is likely to register monumental rise in the period heading to 2050 (Economist Feb 28).

One of the best examples to the trend where individuals are likely to invest in funds has been the Swedish social security system. According to a paper presented at the University of Chicago in 2004, Swedes were in 2000 encouraged to invest in their own funds. Most participants invested their money into funds and in a five year period, one of the favorite funds had risen by 534. Despite the fund performing poorly in later years, very few people were willing to shift their investment from funds. Using this as an indicator, there is a likelihood that the demand for funds by individuals in the future is going to increase manifold (Economist Feb 28).

Another prospect that is almost imminent in the funds industry is the likelihood of emergence of funds and diverse products that are not currently in the market. Such products, generally defined as outcome oriented products are bound to increase if the trend observed in the mid 90s to the current period can be used as indicators. New products introduced into the asset management arena increased by 28 in the period 1994-2005 as compared to conventional mutual-fund industry which grew by only 13.  Analysts prediction has been that 25-30 earnings of the leading asset-management companies would be derived from new products by the end of 2010.  In the same breath, there is a possible increase of products that are going to overshadow the current products offered by asset management firms especially considering the rapid revolution in the technology industry.

One guaranteed aspect that analysts identify is that the next ten years will be marked by significant changes in the asset management industry that may either benefit the investors if smart options are adopted by fund managers or wreak them if the managers do not adapt strategic options of investment. For managers who are going to capitalize on the ageing demographics of the western population and the rising opportunities presented by the developing world, there is a possibility that investors will have significant reaps from their investments. Strategic decisions that may become necessary for managers will be the evaluation of building franchises in the complex world of foreign alternative assets. Fund managers that will fail to utilize some of these monumental changes may end up losing heavily due to uncertainties presented by turbulent markets. All in all, the future asset management industry is bound to increase buoyed by an ever rising population and the wealth of individuals generated in the developing countries (Economist Feb 28).

Challenges faced by companies in Asset management
A fundamental challenge that faces asset management is the loss of confidence by investors in the savings industry. This has been precipitated by a number of reported incidents of poor funds management that have in the past led to loss and a myriad of havoc for investors. As such, companies operating in this industry face the waning loss of investors due to bad publicity and past experiences. To restore confidence in the savings industry, fund management companies needs to develop and communicate strong ethics based on the necessary regulatory practices specified by respective governments. In addition, the companies face the challenge of maintaining confidence in fund governance among retail investors. As mentioned earlier in this study, there is a significant shift among investors as more private individual choose to invest long term funds instead of relying on their states and employers. According to Sants (FSAs Outlook), this confidence among retail investors is low in the US as compared to the UK. The decline in confidence has been precipitated by concerns on the quality and oversight range provided by trustees especially in pension funds. This challenge can be tackled by putting in place working groups that would examine issues surrounding fund governance. Another challenge that has traditionally been associated with companies in this field has been the problem of bundling. This is where fund management companies invest in too many products in diversified fields reducing their efficiency in carrying out healthy and feasible market research that would benefit the investors. In the UK, FSA has been pursuing a goal of unbundling or soft commissioning where companies are required to be transparent in all ventures that they invest the investors funds (Sants FSAs Outlook).

To add on this, the asset management industry is a rapidly growing industry and has been observed in the future prospects there is likelihood that the industry will continue flourishing in the future buoyed by the demographic trends and innovation of new products through new technology. Other fundamental challenges for companies operating in the industry include the emergence of giant conglomerates in the form of mergers and acquisitions. The large companies stifle competition since they raise the expected benchmark standards to levels that the average small and middle size companies are unable to afford. In addition, the company faces the volatility that characterizes the asset management industry. For instance, the current credit crisis that affected major world economies produced catastrophic consequences in the industry with some assets shrinking in value by as much as 30-40. Besides these challenges, there is the always change in trends buoyed by rapid technological changes that companies are unable to keep up in pace with. Clients today prefer more funds invested in technology than in other sectors which make the companies with traditional asset investments to stand at the risk of losing clients. In face of the above challenges, it remains the impetus of these companies to conduct proper market surveys that can always keep them in business and give them competitive advantage (Sants 1).

Customers in Asset Management
Customers who invest in funds are diverse and wide reaching. They include institutions such as public pension funds, insurance companies, corporations or private investors. One of the fundamental trends observed in the funds market in recent times has been a significant growth of investments drawn from private investors.

Competition in the Asset Management Industry
According to Trzcinka (1998) there is no standard yardstick or litmus test that can be used to quantify the level of competition in the funds management industry. There is however a definite intense competition among the industry players depending on the type of fund being managed. It is worthy to note here that unlike the competition in ordinary markets that produces a consequential lowering of prices for products, the competition in major funds industry has not resulted in a drop of investment costs.  There still remain significant hidden costs associated with different funds although different asset management companies have tried to create a competitive advantage over their competitors through downward adjustment of these hidden charges. Normally, the undisclosed fees associated with the transaction of funds are broken into three categories namely the expense ratio which is disclosed in the fund prospectus, the soft dollars which is equivalent to commission charged by brokers and the third covers expenses accrued during the transactions on the particular fund. For new companies gaining entry into the industry, the financial requirements are currently huge especially due to the current proliferation of large mergers that have raised the yardstick for investing in the industry.

Effects of Technology in the Industry
As in all other industries, the asset management industry has been revolutionized by the technology revolution that has changed the global business picture since the late 20th century. Invention of technology has made it easy for companies operating in the industry to maximize their operations by providing services for clients globally without the hindrance of geographical and time limitations. Technology has also enhanced efficient management and tracking of investments by investors through the application of customized softwares that are easy to use and manage. However, the cost of implementing technological changes have led companies to incur extra costs in terms of purchasing technological devices and acquiring skilled staff to handle the new technology. In addition, the ever changing face of technology implies that the companies have to repeatedly incur costs as new technologies emerge within the industry.

Effect of Laws and regulation in Asset Management
Asset management is regulated by laws that govern the general securities industry in the US. The Securities and Exchange Commission is responsible for instituting and implementing necessary regulations and changes within the industry. Currently, laws governing securities are contained in the 1933 securities act the securities exchange act (1934), the trust Indenture Act of 1939 and the 1940 Investment Company Act. In addition, there is the Investment Advisers Act (1940). The most recent changes in the securities industry were contained In Sarbanes-Oxley (SOX) Act of 2002 that instituted stiff regulations pertaining the running of investment companies in the US.  Though the law has been credited for raising the transparency with which investment companies invest their investors funds, many in the asset management industry has blamed the Act for raising the companies operational financial requirements to levels that are unattainable by small and medium sized asset management firms. According to analysts, the cost of implementing SOX as mentioned above was exceptionally high and was relatively unaffordable to the small businesses. A survey conducted by a law firm, Foley and Lardner estimated that the Act increased the costs required for a company to trade publicly by 130. Another survey conducted by a consultancy firm, Korn  Ferry international estimated that the act cost Americas fortune 500 companies compliance expenses of approximately 5.1 million in 2004 (Park, 2009 p, 1). Many financial analysts have criticized the SOX act as being too costly especially in its implementation. A congressman Ron criticized the passing of SOX arguing that SOX was expensive and that the intrusion it created in the American asset market was a heavy burden to the small businesses which found themselves with too much expense to handle in an attempt to fulfill the acts requirements. According to the congressman, the Act has pushed many small businesses into conflict with the government and argued that a considerable number of firms were already conducting their IPOs outside the US and hence disadvantaging the US economy (Park, 2009 p, 1)..

Companies Leading in Asset management
There are many companies that have invested in the asset management industry. Based on size and the amount of asset under their management, some of the largest asset management firms in the US include Black Rock, Barclays Global Investors and Alliance Bernstein. Black rock is global asset management firms whose headquarters are in New York. By the end of financial year 2009, the asset under the companys management were valued at approximately US3.35 trillion which comprised of real estate, equity, cash management, fixed income, and advisory strategies. The company offers services such as risk management, enterprise investment systems and strategic advisory services through its subsidiary Black Rock solutions. The company is a listed publicly traded company and is the major shareholders include Merrill Lynch, Barclays PLC holding and PNC Financial Services which holds approximately 34.1, 19.9 and 24.6 respectively. In one of the biggest mergers in the asset management industry, the company acquired its competitor, Barclays Global Investors in June 2009. Much of the companys growth has been as a result of recent acquisitions with the first one occurring in January 2005 where it acquired State Street research Management.  The company serves retail and institutional clients in over 60 countries including pension funds, endowments, and high net worth individuals, insurance companies, official institutions and private banks. Some of their global products include cash management, alternative investments, marketing, real estate, capital markets, pensions, global consultant relations and wealth management. The company is strategically organized into specific strategic business units (SBUs) that cater for the specific products offered by the company (Black rock 1).

Alliance Bernstein LP on the other hand is a US based asset management firm which is primarily owned by Frances AXA. Its headquarters are in New York.  As of November 30, 2009, the company had assets under management of approximate value US496 billion.  The company offers diversified services globally which includes fixed income services, growth management services, equities valuation etc. The company also offers independent in-depth research in trading, portfolio strategy, and brokerage related services through its subsidiary, Sanford C (Pr News 1).

Effects of Large Firms in the Asset Industry
One of the fundamental effects that the large companies induce in the market includes the setting of standards. Clients the world over are interested in investing their assets with firms that have transparent and profitable asset investment strategies and as market leaders, these companies are looked upon as the benchmark for setting required standards. Due to their recent huge expansion, the large companies have the effect of stifling competition form relatively small companies attempting to enter in the market. Their expansion increases their capital base and profitability which they in turn invest in doing proper market research and therefore are able to offer their clients the best investment opportunities.

Credit Crisis Effect on the Asset Management Industry
In a report compiled by Price water house coopers (PWC 2009) in regard to the effect of the global credit crunch in the asset investment industry, the financial analysts were of the view that the industry performed better than the banking industry although the values of the assets did shrink. PWC estimates that in some worst scenarios, assets shrunk by as much as 30-40 which translated to huge losses for the asset management companies. One of the significant gaps observed among these companies was lack of clear management skills that could have responded more smartly to the credit crisis. PWC argues that the credit crisis ought to serve as a lesson for the asset managers to invest in better risk management efforts to avert more financial havoc in the future. In addition to the shrinking of asset values, some of the top performing companies lost ground due to losses from the crisis and are now poorly positioned to do business in the future (Saluzzi et al 2009). Hence, it can be inferred that the crisis overturned the pecking order of asset management companies and the volatility of asset markets could be a future deterrent for companies inspiring to invest in the industry.      

Predicting short term stock market performance is extremely hard and has been called a futile exercise by many in financial academia and professional circles (BPP, 2008). This is because, due to the inefficiency of stock markets with regard to information asymmetry,  many of the fundamental factors effecting stock market performance do not fully reflect themselves in stock prices in the extreme or near short term.

However, despite the above, a general guide (as opposed to quantified prediction) is provided below of the expected short term performance (covering the period from January 5th to April 05th 2010 ) of two major international stock markets the New York Stock Exchange (NYSE   with the Standard  Poor 500 (S  P 500) Index as our main subject of analysis) and the London Stock Exchange (LSE   with the FTSE 100 (Financial Times Stock Exchange 100) index as our main subject of analysis).

New York Stock Exchange  S  P 500 Index
Following the sub prime mortgage crisis, the ensuing credit crunch and the resultant global economic meltdown which plunged the world into a global recession, the US administration responded with fiscal stimulus measures (including a 787 Billion fiscal stimulus plan and the cash for clunkers scheme), near zero interest rates, a plan to buy troubled assets (the 700 Billion TARP), funding of commercial and investment banks to help them shore up their balance sheets and extended government support to save jobs through nationalization and restructuring of car manufacturers Chrysler and General Motors (Financial Flicker, 2009).

All of the above have now started showing results with many banking companies (once battered down by the financial onslaught) returning to profitability along with many SP 500 companies returning to profitability as consumer spending increases and job concerns are alleviated.

It is expected that this momentum in financial markets will continue going forward. However, concerns over the strength of the recovery will remain prevalent with US economic date, most particularly on unemployment and consumer spending, to look out for as the same can dent investor expectations. Apart from this, by and large, the stock market will continue its upward march.

London Stock Exchange  FTSE 100 Index
The effect of the sub prime mortgage crisis hit the British economy hard with Londons place as the center of international finance severely dented as a result of the credit crunch and the global economic slowdown. The nationalization of mortgage specialist Northern Rock and the too big to fail types of RBS and HBOS prompted the rise of Singapore, Hong Kong and Shanghai as new centers of financial services. Insurance and shipping also suffered declines as a result of a drop in world trade. All of this has had adverse effects on the services driven British economy (Financial Flicker, 2009).

The government has responded with measures aimed at restoring trust in financial markets coupled with monetary policy easing the way for consumer spending to pick up. However, these measures are in effect long term solutions aimed at bringing London back in the international lime light with little attention being paid to short term fiscal stimulus.

Hence, going forward, the FTSE is expected to remain range bound with market performance as a whole largely depressed (Schweser, 2008). Overseas income by British multi nationals will drive positivity, especially for those companies whose operations are located in the rebounding Asian market.

The bank is now on the verge of an exciting and promising opportunity in the Asian region. The only problem concerning investing in their stock is that it is overvalued. The price-to-earnings ratio of around 307 would mean very little returns to the unfortunate investor. There are actually strong fundamentals for this business, but it is nevertheless disadvantageous, if the returns you get are several times lower than the average desirable investment.

The stock price of the bank seems likely to continue rising as it is strategically located in Asia. The bank has an edge over the American and European counterparts, since its history is closely tied with the Asian territory of Hong Kong. Dividend advantage aside, the company has chosen a timely and strategic move to focus its business on the fast rising Asian markets. The American and European markets are not set to recover anytime soon from their financial problems. The American economy has just experienced the real estate bubble which caused the worldwide recession we are facing at the moment (Landon 2009). The European market is also besotted with liquidity problems of its own, particularly, Greece.

HSBC has almost half of its revenue coming from the Asian region which enabled it to survive the losses from the sub prime bubble from the American operations. They were the first ones to have suffered tremendous losses from the sub prime mess. They only have the advantage of having diverse operations that is why they are able to sustain the massive loss from the real estate crisis.

The continued growth in the Asian region coupled with the fact that the American and the European economy is not going to recover anytime soon, pushed them to move the center of their operations to the Asian region. This has been symbolically indicated by the change of residence by its Chief Executive Officer to Hong Kong. They were previously based in London, Werdigier (2009). The change of focus in terms of the target market, however, is on a long term basis as it is already a trend that will last for a considerable time span.

The lack of established banking and financial products in China and other Asian nations makes this region a very attractive target for HSBC and other firms in the financial industry. This means a considerable growth potential for HSBC for a long time to come. It would mean a sustained growth in its earnings potential that will also entail a continued positive evaluation of its stock price. The top of the share price is not yet going to be seen. The PE multiple has already reached a very high level, since it is now highly unprofitable to buy HSBC shares. The major reason for this has been their loss of earnings in the American business segment. There are still numerous investors that are buying the companies shares despite the extremely high price of their stock.

The recent trend of HSBC also points out the start of a reversal in their bad debt experience (Reuters 2010). They have been saddled with unpaid loans for several years already, but the situation has finally started to improve. The banks policy of stopping the sub-prime losses has finally paid off. This is another reason for the banks performance to improvement. Automatically, it would also trigger higher stock prices as investors see it as a sign of strong fundamentals for the bank.

There will be plenty of opportunities for HSBC in the Asian region to sustain its stock price growth for a long time in future. China alone has already started to buy large amounts of raw materials and commodities to ensure its continued industrial expansion. Metals as well as commodities are consumed by bulk by Chinese firms and its government. They are strategically posing themselves to have access to a variety of raw materials in the event that the supply would be compromised. This is especially true with rare metals and energy supply.

They need copper and iron to provide the electrical distribution system required to fully sustain the industrialization (Burgos 2010). They cannot afford to have interruptions in the oil supply for their electrical needs. They are already gearing toward alternative energy sources just like the rest of the world.

All of these factors mean more business opportunities for HSBC. The bank is poised to be able to take advantage of the capital inflows from the American and European economies to China. HSBC is already deriving almost half of its revenue from Hong Kong alone. They have the resources as well as the aptitude to expand their scope in the Asian region exclusively. They may not be the only foreign bank targeting the emerging economies of Asia but there is plenty of space to provide a healthy profit for everybody. The financial services industry of China as well as other Asian countries is also underdeveloped or non-existent at all. All of these constitute impressive opportunities for a multinational entity like HSBC to win a considerable market share while the opportunity is still there.

There is also another additional source for HSBC. The constant exchange of goods from the Asian and the European countries means a healthier economy for the Asian countries. The middle class is increasing as well as people with high net income (Wan 2010). All of these are ripe ingredients for staging a profitable business environment for the bank and its services. The healthy interaction of Asian nations with the rest of the world means impressive opportunities for the bank to cater to their financial transaction needs. Related fields like asset investment as well as capital management services will also add to revenue sources of the bank.

The volatility of the stock price, on the other hand, has been extremely skewed by the recent worldwide recession. The HSBC has been enjoying a steady increase in their share prices from 2003 to 2007. The peak of the increase was noted in 2008 and then the prices dropped sharply at the beginning of the 2009 when the global crisis reached its climax. The volatility of the stock price should be carefully measured in terms of the time period (Alibaba 2005). If we are to measure the beta coefficient or the volatility of the stock price excluding the worldwide crisis, the stock price would naturally exhibit higher volatility. It would change dramatically, however, if we are to analyze the stock volatility without the recent crisis effects.

The calculations would show that the beta coefficient would be better than the 1.24 ratio it is showing right now as of 2010. It is better to apply a long term approach when trying to analyze the volatility of a blue chip stock like that of HSBC. It is important to note that the bank has seen steadily increasing returns on its capital investments. Their share prices have risen significantly from the pre-2003 period to the highest level it reached at around 2007. It is only the worldwide credit crisis that has sent its share prices plummeting downwards. Nevertheless, the bank continues to be a thriving and healthy financial institution simply because of its capacity and scope of operations.

In simple words, the bank continues gaining steady market share prices in the Asian region due to their roots and familiarity with the business climate there. They might be hurt by their position in the American sub prime mess but it is only a matter of time before they recover. The kind of recovery they will have will take some time since the losses were massive. Their sound decision to stop focusing on the American and European side of the business segment however would create bigger returns for them without the same risk presented by sub prime like before. They have not conquered the whole Asian market yet, since it is a relatively untapped market.

It is not only China that will trigger the kind of growth that HSBC will experience from entering the Chinese financial industry (Lo 2007). Most Asian countries are fast growing economies simply because they have not fully matured to become first world countries like America.

Another thing that can influence the share prices of the HSBC stock is the mounting pressure on the Chinese Renminbi to appreciate in value. The Chinese government has always pegged their local currency to the dollar to ensure they will always be lower than they really should be. It gives them unfair advantage in terms of trading with the United States.

HSBC on the other hand will stand to benefit from the situation since they are heavily dealing with Chinese currency. It does not matter what will happen to the US dollar since they are in the position to take advantage of the potential events. As the Chinese economy continues to grow, Renminbi will continue to appreciate as it should be in the first place. The increase in value of Renminbi will also increase the value of the HSBC holdings. HSBC has already started to pay more attention to the Asian region and their exposure to the local currencies such as Renminbi will undoubtedly go higher in value. This factor might take some time to bring the intended effect, but it will undoubtedly increase the stock price of HSBC when it does come to fruition.

On the other hand, the American economy is in danger of inflation due to the massive stimulus programmes their government has implemented (Radcliffe 2006). It is advantageous that HSBC has started to lie low on their American and European operations. This has the opposite effect on HSBCs share price though. If the American side of the business of HSBC goes down, it will reflect negatively on the companys performance. Naturally, the side effect of low earnings will also mean lower share prices for HSBC. The contrasting effect of Chinas increase in value as a source of revenue and as a currency for HSBC will balance the negative effect of the American economy. The extent of which side will have a bigger effect on HSBCs earnings, however, is anybodys guess.

The situation is very complicated and very sensitive to any slight reversal that it is impossible to predict what the final result will be on HSBCs profitability. What is beyond any doubts is that the American economy will recover, but it will never be the same, as the majority of their manufacturing and other white collar jobs have been outsourced already. The kind of recovery that will happen would be a jobless one.

There are many predictions in fact that the American economy would return to its pre-recession level in at least seven years. This may or may not be true but the fact remains that the American economy will never be the same again. The constant factor, however, is the kind of flexibility that HSBC has created for itself (Jim Collins 2003). They are capable of operating in both the American and the Asian region. No matter what kind of economic situation, HSBC stands poised to take advantage of the economic activities these thriving economies will require of them.

The exposure to other currencies will also mean better hedging for HSBC in terms of risk. If one currency falls in value, there is another one that will cushion the impact. For sure, the activities of HSBC in a broad spectrum will allow them to weather any temporary adverse situation experienced by one of their sources of revenue. There is a risk however for HSBC, if they are to hold all of their position in American dollars.

Since the threat of inflation is always present as a result of the governments massive stimulus programme, they might decrease the value of their holdings as well. It is already well and good that HSBC has started to focus more on other foreign currencies like the Chinese Renminbi. In case HSBC has not hedged itself against a possible fall of the dollar, their share prices will undoubtedly suffer as well. This is the same situation with the Euro currency they are exposed to as well. It is already well known that Greece is one of those that have a very bad credit reputation (Jim Collins 1994). It is likely that these countries will contribute a lot to decreasing the earnings of the company.

The only redeeming factor for HSBC in this situation is the move to shift their focus away from the American and European economies. These are already mature markets and suffering from the lack of exciting growth prospects. HSBC would be exposing itself too thinly if they are to place all of their assets in these markets. The strategic move to Asia would not only increase their chances of capturing the exciting growth prospects there, but also shield them from unwanted inflation any single nation might experience. It is a sound decision for them to have shifted their focus of attention.

All in all, the diversity of its holdings will enable HSBC to maintain if not increase their earnings on a steady basis. The only question that remains is how fast they are in adapting to changing consumer demands and economic markets. They either benefit from the situation or get damaged from reacting slowly to the changing circumstances. All of these would reflect in the share price of HSBC. From the looks of what they are implementing, they are doing the right thing in focusing on the Asian markets. Their share price is indeed poised to continue going up.

Another factor that should be considered is the globalization (Graham 2004). The outsourcing business is here to stay and that means more growth for previously weak and small economies in Asia. As these economies grow, their potential for the revenue growth also means much for HSBC. Jobs in sales, web design, admin assistance and accounting are all outsourced now to these cheap labor markets. It would mean a higher number of the middle class and more potential clients for HSBC.

The wire transfer needs for capital and salary crossing the globe literally would be a  considerable source of revenue for HSBC also. Small and medium business that will spring from these bigger drivers of the economy will also need international money transfer services and payment options. All of these are rich grounds for HSBC to start tapping into. The increase of individuals with high net income would also mean more clients for investment products. Insurance as well as pre-need plans are going to have more room for growth.

If we are to consider HSBC as a company however, they also present strong leadership skills as well as business savvy. Although they have been blessed with tremendous growth over the last few decades, it has unfortunately led them in buying a company engaged with sub prime shares. Now that the rest of the world knows this brings losses, they have started shifting their attention back to their Asian roots. The business organization is enjoying a relatively efficient decentralized command. They are fast and nimble in adapting to their respective territories. Their business strategies are also well attuned to the modern tendencies.

All of these factors are what makes it a strong business (Graham 2006). They have great fundamental business advantages that allow them to weather whatever adverse economic conditions there is. Their management is well experienced and they also have adept staff in all local branches. Their size alone makes them capable of committing big capital investments with other business entities. Their asset management business is also competitive. Their credit card is also one of the biggest in the world. The transaction fees from this alone is already generating them a healthy return on investment.

All in all, HSBC has the flexibility and the range to take advantage of the economic terrain. They might have encountered some failures in the form of the sub prime business, but they are quick to react and prevent further losses. The management team is also experienced and seasoned veterans. The general economic climate is also something that will ensure prolonged the growth well into the future. All of these factors point to steady increase in earnings for HSBC and ultimately to an increase in their share price as well.

The market may react to Wall Street reports, but the steady rise in earnings for HSBC will only mean that the market will adjust itself and regain the steady momentum for share price increase. Its the current PE ratio is already undesirable for any value investor. It still provides some sort of inflation protection for an investor with a massive capital. If you want a better return, you should wait for it to drop in share price lower but the current situation does not give any indication that it will return to its recession level prices anytime soon. Any investor wanting to hold a long term stock should buy the HSBC stock now before it reaches higher levels that would make it unprofitable.

Britains refusal to adopt the Euro as its currency is not entirely unfounded. It is true that the pound is on the brink of sinking below with the euro. However, this is temporary. It is estimated that the pound will recover in five months. This increase is estimated to be significant, as the British economy is set to improve in a years time. The predicted recovery is both long-term and stable.

The common problems with the proposed adoption are as follows 1) disparity of foreign equity, 2) differential interest rates among member-countries, and 3) differences in GDP growth among member-countries. Disparity in foreign equity is a forestalling issue. By adopting the euro as its main currency, Britains foreign debt will continue to increase. Increasing the quantity of euro circulating in the British economy will result to an increase in pound-denominated assets. As such, payment of foreign debt becomes more tenuous. Britain has to pay more with little effect on GDP growth.

Interest rates differ across member countries. This is rational because GDP growth differs across countries. Countries with high economic growth have high interest rates. Britain at present sets interest rates below the prescribed rate. This is done to encourage individuals to invest more in the market. If Britain adopts the euro, it is required to set interest rates at the prescribed value. Thus, although the adoption would increase the pounds parity, it will decrease GDP growth.

The nature of foreign and domestic assets can potentially increase or decrease the pounds parity with the euro. An increase in domestic assets can increase the pounds position against the euro (or a reduction of foreign assets). This will also lead to a minimization of foreign debt accumulation. If Britain wants to improve its position in Europe in terms of currency parity, it must either increase its domestic assets or lower prevailing interest rates. This is, of course, at the cost of potential government revenue.

In banking industry, the key to attract people to put their money in savings is the attractive products, the establishment of branches in an area, joint marketing with other industries and many others. One strategy that retail bank carry out is to establish the shariah unit to target not only Moslem people worldwide but also others.

Concerning the banking industry, this paper will discuss about the main concepts of Islamic finance laws (Shariah) and its comparison to the conventional banking practice. In addition, the focus is on the Islamic financial sector in the Middle East, particularly in the largest 3 active markets of United Arab Emirates, Saudi and Kuwait.

Introduction
Over the century, the conventional banking has been evolving in number of banks and assets as they reach remote areas to target large number of customers. However, the steady development of conventional banking has been tested during the incident of credit crunch period since 2007 that causes some banks to collapse.

At this time of crisis, most economists would believe that the collapse of some of worlds greatest banks is attributable to the global financial crisis. Some observers however, believed that a systemic error that exist within the banks, was partially contributing to the downtrend of these banks growth rates. It is suspected that a failure to perform proper risk management and financial control was also a main cause of these banks decreasing performance quality.

Despite the development of conventional banking practices, within the past two decades, the Islamic banking appears to fulfill the demands of Moslem customers that want to be free of Riba (usury or interest) that conventional banking practices. Concerning these underlying reasons, therefore, the research question for this paper is

As Islamic banks have different characteristics and rule as depicted in Shariah law, how is the level of debt impairment of Islamic Banks during the credit crunch (compared to conventional)

I choose this research statement or question since it may be different from others who only focus on discussing the benefits of Islamic banking without explaining the debt impairment of Islamic Banks during the credit crunch. Therefore, instead of discussing the partial discussion on Islamic banking development, I decide to put emphasis on highlighting the benefits of Islamic banking and its development.

Relation to Previous Research

Shariah law
In the Islamic law concerning the life, in addition to the ban of interests, there are also other laws that Moslem cannot infringe such as drinking alcoholic liquor, gambling, eating pork, pornography and anything else in which in Islamic law (Shariah) this actions considered as Haram (unlawful). Moreover, in Islamic financial banking practice, there are some orders characterizing the development. Some of the features as following
Islam permits individuals to gather their economic well-being. However, Islam makes a strict guidance between what is Halal (lawful) and what is Haram (forbidden).

Islam justifies the ownership of wealth for individuals but Islam obligates their believers to spend a portion of their wealth for the Needy and prohibit them to squander and waste it.

Surplus that Moslems got from any business activity is justified and they can retain it but Islam rule to reduce the margin of the surplus for the benefits of the community as a whole. This kind of social participation is called Zakat.

Islam also prevents the collection of wealth in few people by ruling its laws of inheritance.
In general, the economic system that Islam practices is back to the social justice principle by preventing any attempts that would cause any injurious impact and individually self-destructive
(Islamic Banking, 2008 HSBC, 2009b)

Principle of Islamic Bank
The basic principle of Islamic bank practice is the prohibition of Riba (Usury or interest). In this manner, it means that Islamic banking outlaws not only riba, a term that describes the concept of usury but also the concept of interest. The underlying reasons behind the prohibition of Riba are based on Islamic moral guidance and common sense, which becomes the foundation of many religions in the world, including Islam (Islamic Banking, 2008).

Instead of giving interest to their customers, Islamic banking practice adopts the concept participation in the enterprise where customers will put the funds at risk on a profit-and- loss-sharing basis. However, unlike the investment in conventional stock market, this kind of Islamic banking practice does not exhibit speculative scheme since this risks can be alleviated by conducting diversification of risks, careful investment policy, and proper management by Islamic banking or financial institutions (Islamic Banking, 2008).

Based on this laws, in Shariah concept, profit and loss sharing basis become one key financial transaction. This fair treatment will then distinguishes good performance from the bad and the mediocre. By adopting this financial practice, Islamic banking is encouraged to have better resource management since Islamic banks are built to have a clear differentiation between shareholders capital and clients deposits in order to have fair and correct profit sharing based in Islamic Law (Shariah) (Islamic Banking, 2008).

Research Method
To be precise, this paper employs qualitative approaches to a research. Furthermore, there are two approaches in qualitative research, interviews and observations, but this paper carries out the observations methods, especially we employ non-participant observation method especially by analyzing qualitative information from journals, books, magazines and many more.

The reason we choose observation method is due to the fact observation is an important research tool in which it allows us to observe other people in a natural setting or in a more artificial experimental situation. Moreover, by using observation method we can collect and gather data in natural settings concerning what is really going on in a real-life situation.

The most important of conducting observation is it provides researchers with an understanding about the perceptions about things or people we observe. However, since observation deals with someones perception, we plan to avoid preconceptions since it would provide this research with some bias.

The method does not involve direct interviews, which will slightly reduce objectivity and the accuracy of information. We are retrieving data from experts analysis, journals and various publications from available media. Using the data resources above, we are hoping to present an independent and objective analysis toward the matter of Islamic banking practice.

Reflection
The Islamic banking industry shows tremendous development within the past two decades. However, some of the basic principle that Islamic banking practices have been adopted by conventional financial institutions over the centuries ago. This is obvious as depicted in Islamic Finance a Euromoney Publication (1997) that reveals although the western media sees the Islamic banking just evolve at presents but in fact the practice has been evolved since seventh centuries.

In addition to the prohibition of interests, Islamic banking institutions also carefully collect funds from customers or investors in which they only allow source of funds from lawful business practices. Figure 1 shows the comparison between Islamic and conventional banking practices

Due to the benefits of practicing the Islamic banking, many retail banking start offering the Shariah unit of their banking practice. HSBC, for example, have presented a Shariah unit of their bank. According to Iqbal Khan, formerly the founding CEO of HSBC Amanah and now become Chief Executive of Fajr Capital, reveals that Islamic finance becomes a fastest financial service that continues exhibiting the positive growth within the past two decades (Zawya, 2009). The reason is clear since Moslem population holds the second largest population in the world (Figure 2).

HSBC Amanah ( HYPERLINK httpwww.hsbcamanah.com www.hsbcamanah.com), for example, also has appetite to expand into foreign markets that have majority of Moslem population. HSBC Amanah, says that the presence of HSBC Amanah currently exist in Qatar, UAE, Indonesia, Brunei, Bangladesh, Saudi Arabia, Malaysia, UK, US and Turkey and other countries will follow (HSBC, 2009a).

The attractive market of Islamic financing in Moslem countries, HSBC immediately expand into offices Dubai in which at first the development of Islamic Bank was only existed in several Arab countries. But as the benefits and offering of Islamic Banks are attractive, the phenomenon of Islamic Banking shows tremendous growth not only in Moslem countries but also in other part of the world.
 
For Islamic banks, innovation also becomes significant factors in the development of the banks. This is because in developing products and services for Islamic banks, they should carefully plan the products and discuss it with the government and Council of Ulamas. Ulamas are considered as collective name that become top class of religious officials in Islam that composes of scholars and other Moslem who understand the Islamic law.

Among the services that are common in Islamic Bank is for personal and business. For personal services, the offering usually covers personal loans, home and vehicle financing, and also investments. Meanwhile, for corporate accounts, the services include investments, trade services etc. Figure 4 shows many kinds of personal and business services that HSBC Amanah offers to customers.

The Fall of Lehman Brothers
The global crisis that hit the financial industry has brought down the Lehman Brothers to file for bankruptcy. This becomes the largest victim of the global credit crisis and forces the institutions to sell its investment management business and put the company to be the biggest investment bank to collapse since 1990 (the case of Drexel Burnham Lambert). The case of Lehman Brothers represents the bankruptcy worth 639 billion at the end of May far surpassing the WorldCom bankruptcy that accounts for 107 billion when the telecommunication company file for bankruptcy protection in 2002 (Paulson, 2008).

Since the fall of conventional banking sector due to the exposure to risks, Islamic banks avoid to the complex debt-based structures and rely heavily on the retail deposits and financed real estate, private equity, and equities. In other words, Islamic banks have never been exposed to the risks that have affected their conventional counterparts (Syed Imad-ud-Din Asad, 2009).

This case of inability to pay debt also occurs in the case of Al-Gosaibi where the company has defaulted debt more than 15 billion. This situation asks Saudi Arabias central bank to buy up the debt but the governor asserts that they would not buy up debts.

Conclusion
Islamic banking is viewed as way out in managing the crisis as the nature of the Islamic banking practice. Concerning the issue, this paper has elaborated about the main concepts of Islamic finance laws (Shariah) and its comparison to the conventional banking practice. In addition, the focus is on the Islamic financial sector in the Middle East, particularly in the largest 3 active markets of United Arab Emirates, Saudi and Kuwait. The success practice is performed by HSBC that open their Sharia unit called HSBC Amanah.