Islamic Finance: where next for the industry

While the comeback of stock market rallies investment banking, the Shari'ah-compliant industry faces its toughest test since it entered its boom phase a decade ago.



I got puzzled when I received a tweet from @Worldmuslimnews on May 11 saying "Islamic finance is out". Are issuances of Islamic bonds (sukuk) not going through the roof as we can read day by day? Could first quarter results published by Islamic financial institutions (IFIs) be better? Inspecting the tweet I realized with relief that @Worldmuslimews simply announced the latest edition of an electronic newspaper on Shari'ah banking.




At a first glance, the IF-world looks prosperous as ever. Double-digit profit increases like the 10.7% year-on-year surge Bahrain's Al Baraka Banking Group reported Sunday have become a familiar occurrence. According to Kuwait Finance House, global Sukuk outstanding reached $235.4bn in Q1, a 16.7% increase year on year. Egypt's president Mohammed Morsi signed the Sukuk bill into law, opening doors for the issuances of Islamic bonds in the biggest Arabic country by population. New markets combining the Koran with capital are emerging in Tunisia, Oman, Uganda, China and Tatarstan, to mention a few. 




However, a closer look reveals some fractures in the shining façade. Islamic financial institutions are in danger of becoming a victim of their own successes. Because "Wall Street is back", as The Economist says on the title of its latest issue, the non-interest, non-conventional, ethical style of Islamic investment industry faces a talent crunch.




"In times of bullish stock markets, rising investment banking profits and a new appetite for derivatives jobs at Islamic banks and insurance firms lose attraction," said Marcel Omar Papp, the head of Swiss Re's Islamic re-insurance division Retakaful in Kuala Lumpur. Selling insurances, Shari'ah-compliant or not, is like watching an oil painting drying, he added. 




In addition, the IF-sector witnessed two prominent exits in New York and in Zurich. Rushdi Siddiqui left Thomson Reuters where he worked for four years as global head of Islamic Finance with a remit to push the firm's Islamic information tools and market data. According to insiders, Siddiqui never received the recognition at Thomson Reuters which he had at Dow Jones Indexes where in 1998 he invented and launched the first ever Shari'ah-compliant equity market measures, the Dow Jones Islamic Markets index series. Last month, Siddiqui, an American Muslim with Indian roots, co-founded Islamic private equity firm Azka Capital.




Meanwhile Standard and Poor's indices joined forces with Dow Jones Indexes and from the former 150 Dow Jones Indexes employees only 20 "survived" the merger.




Another prominent resignation happened at Switzerland's Bank Sarasin which is now Bank J. Safra Sarasin & Cie AG. Fares Mourad, the head of Islamic finance with Sarasin resigned in February this year after successfully lifting the Basle-based lender to being the only Swiss bank capable of providing the full range of Islamic wealth management tools, from trusts to treasury solutions.




In the Gulf region, Sarasin operates in a joint venture with Alpen Capital, led by founder Rohit Walia. Alpen Capital told AMEinfo.com on request that there were no plans to halt the joint venture and both sides would continue to develop and promote Islamic wealth management in tandem. However, it remains questionable how stable this partnership is after Sarasin merged with Brazil-based Banque Jacob Safra.




More worrying is that many Shar'iah-scholars (they may forgive me for my assessment) are approaching the age of retirement. Newcomers are rare. As Bahrain's respected (and still relatively young) Sheikh Nizam Yaqubi from Bahrain once said "we cannot produce Shari'ah scholars like mushrooms, their education takes up to 20 years."




The question must be asked of how the industry will cope with all these new banks in so many new IF-markets. While Sukuk and new market participants mushroom, Islamic finance standards - with the exception of accounting standards set by AAOIFI, remain opaque, a jigsaw of national Shar'iah-banking rules treating the label "halal" differently depending on their viewpoint. 





(Ameinfo.Com / 21 May 2013)




---

Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com