Islamic trade finance underpins FGB strategy

The Abu Dhabi-based lender FGB says its Islamic trade finance businessis booming as the government shrugs off the drop in oil price and continues spending on infrastructure.

That has kept imports for materials flowing into the country and created work for banks keen to get other sources of income apart from their traditional mainstay of vanilla-flavoured loans and deposits.

“Trade finance is very much a growing segment for banks in the UAE, whether conventional or Islamic, but Islamic trade finance is becomingmore and more popular with clients in the UAE,” said Shamzani Hussain, the global head of Islamic banking at FGB’s wholesale banking group.

“Most of these companies are companies that import materials from outside, companies that have clients outside the UAE.”

Mr Hussain declined to give specific figures for the size of FGB’s Islamic banking assets or the size of its business in trade finance but said that its Sharia-compliant assets had grown more than 80 per cent since 2013 as clients warmed to doing business the Islamic way.

Almost a quarter of all banking assets in the UAE do not bear interest, which is proscribed under Islam, but instead come with a pre-agreed profit rate, compared to about 11 per cent in 2006, he noted.

“There are clients that are interested in Islamic banking but do not have enough information,” he said. “They are not well educated as yet. This is an interesting group because what we are doing today is going out and educating our potential clients that would like to know more about Islamic banking.”

Like most banks in the UAE, FGB realises that it cannot survive on loans alone and has consequently beefed up its fee income business from underwriting bonds and securities, displacing HSBC to become the nation’s top arranger of syndicated loans. It has also expanded its footprint abroad in recent years, and since 2013 has grown its Islamic banking footprint. That helped make the bank the most profitable in the UAE last year.

“One of our key strategies apart from focusing on the UAE as our main market is to market our Islamic banking products across our seven international offices,” said Mr Hussain. “This is part of our strategy to diversify our revenue stream and be where are clients are.”

FGB has representative offices in London, Seoul and Hong Kong, and branches in Singapore and Qatar. Its representative office in India is being upgraded to a branch, and it is planning to operate a representative office in China by the end of the year.

(The National Business / 11 June 2015)

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

Western banks eye growth in Islamic trade finance

Bank of America Merrill Lynch (BAC.N) hopes to begin offering Islamic trade financing in the future, Chris Jameson, the bank's regional head of sales for global transaction services, said without giving a time frame.

"Our focus will be on Middle Eastern clients who are expanding their footprint internationally," Jameson said on the sidelines of a banking conference in Dubai.

"You can see that local banks are setting up Islamic units to cater for the needs of their clients. This is driving more and more international institutions to focus on the Islamic sector."

Islamic trade finance, which uses instruments that obey sharia principles such as Islam's ban on interest, has remained a backwater even as other areas of Islamic business, such as sukuk issuance, have boomed in the last few years.

This is partly because Islamic banks are relatively small and lack the expertise and large international networks of mainstream Western banks.

Foreign trade conducted by the 57 member states of the Organization of Islamic Cooperation totaled $3.9 trillion in 2011. But only a tiny fraction was financed in a sharia-compliant way; the Saudi Arabia-based International Islamic Trade Finance Corp, which promotes Islamic trade, approved transactions worth just $3 billion in 2011.

There are signs that this is changing, however, as trade flows between the Gulf and Asia - including predominantly Muslim countries in southeast Asia - become large enough to support specialist trade financing operations.

Trade between the six Gulf Cooperation Council countries and emerging Asia economies is growing at 30 percent annually, according to Kuwait-based Asiya Investments (KCIC.KW), which launched an Islamic trade finance fund with $20 million in seed capital last December.

Some Islamic banks in the Gulf are trying to expand in sharia-compliant trade finance through tie-ups with Western institutions; this week Dubai Islamic Bank (DISB.DU) said it would use Deutsche Bank's (DBKGn.DE) expertise to facilitate its letters of credit in Europe.

Dubai's oldest and largest Islamic bank hopes to serve local companies which are increasingly looking abroad for business, chief executive Adnan Chilwan said in a statement.

"In this regard, trade flows have become a critical component of this growth as has the provision of trade finance activities for businesses," he said.

Bank of America could opt for a strategic partner as well, Jameson said.

"We would consider that - that's the model we have followed to date on cash management and trade. We can leverage the local expertise that they already have."

Haytham El Maayergi, head of transaction banking in the United Arab Emirates for Standard Chartered Bank (STAN.L), which provides Islamic services, said he was seeing demand for Islamic trade finance that was partly due to the convenience of its structures, not just its religious permissibility.

Islamic finance deals are backed by income from real assets, providing a layer of security which is attractive for many exporters of goods.

"A lot of Islamic structures are more appealing to clients not only because these clients are sharia-compliant, but also these structures are suitable for their business models. Clients want the ownership structure, less risky transactions and the ethical proposition that Islamic trade financing provides."

Maayergi added, "We see an increase in appetite from many of our MENA-based multinational clients."

(Reuters / 17 Sept 2013)

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

Islamic trade finance set to make strong inroads into Qatar

Islamic trade finance could “provide new opportunities and become the preferred choice” for emerging rapid growth markets (RGMs) such as Qatar, Turkey, Indonesia, Malaysia, Saudi Arabia and the UAE, it said.  

RGMs are emerging as “hot spots” for global business and they promise to permanently alter the global trade scene over the next 10 years.

Many of these markets already have strong trade links with other “core” Islamic finance markets, which offer new opportunities for growth for Islamic trade finance.

According to Ashar Nazim, partner, Global Islamic Banking Center of Excellence at Ernst & Young, the increase of trade flows to the East and within emerging economies combined with growing interest in Islamic finance, meant that Islamic trade finance was now a serious alternative.

“A constant challenge for business leaders is to anticipate and interpret how global trade is changing, while understanding the opportunities and risks it creates.

“Boards and management of Islamic banks must take note. Trade, technology, culture, labour and capital will integrate at different rates across these markets and need to be anticipated when transforming the financial institution’s trade finance operations.”

RGMs are now an increasingly significant part of the global economy. They will become an even more dominant force in global trade and as a result, businesses are going to have to adjust their strategies to reflect the increasingly regional pattern of world trade and in this context should now start to consider Islamic trade finance.

Ernst & Young’s Mena Financial Services Industry leader Gordon Bennie said: “Trade will grow between these markets, creating a wide range of new opportunities for them and advanced economies will also benefit, as exports to emerging markets become a rising source of growth.

“Middle Eastern countries are trading increasingly with other RGMs, reflecting the faster growth in demand from these countries.

“Banking, insurance and other financial services sectors in these countries will grow as the economies mature and the middle classes expand, offering new opportunities for trade. Demand for more sophisticated financial services is already growing rapidly as wealth levels rise.”

The degree of change in both the scale and direction of trade will have a profound impact on the competitive environment for all companies wherever they are located around the world. Trade will also be increasingly focused around Asia, the Middle East and Africa, suggesting that the key geographical location for companies will change.

To compete in the market effectively, Islamic institutions will need to align their trade finance operations with global common practices, the report said.

There has to be a clear understanding of how Islamic financial institutions can add value to businesses in their trade functions.

Despite the high percentage of Muslim populations in emerging markets, E&Y said conversion to Islamic trade finance will not be successful without a clear framework that gives businesses a good reason to switch.

Islamic institutions also need to maintain the talent pool that serves these emerging markets and ensure that talent management is an integral part of their business strategy. There is currently a shortage of staff with extensive experience in Islamic markets so this issue needs to be addressed with the industry’s rapid growth.

Islamic banks need to build international connectivity and scalable trade finance platforms that can connect with businesses and financial institutions beyond borders.

This could be challenging given the small size and localised nature of most Islamic banks.

(Gulf Times / 02 June 2013)

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

Islamic trade finance: shift in global trade patterns provide opportunity

* Trade finance neglected by Islamic finance industry

* Direct lending preferred over trade business

* But shift in global trade patterns provide opportunity

* Some Western banks forced to cede market share

By Bernardo Vizcaino

DUBAI, Aug 5 (Reuters) - Omar Ibn al-Khattab, ruler of a nascent Islamic empire in the seventh century, once convened a meeting in Medina to admonish his subjects "for avoiding trading and leaving the markets in the hands of the foreign traders".

The story underscores the importance given by Islam to real economic activity, said Muhammad Qaseem, head of the sharia department at Dubai Islamic Bank-Pakistan. "One of the main sources of earning pure wealth is true sharia-compliant trade."

Centuries later, however, the Islamic finance industry - which is growing rapidly in some areas, such as debt issuance - is neglecting merchandise trade, leaving trade finance for conventional banks to dominate.

When the Paris-based International Chamber of Commerce held its regional meeting in Qatar in March, for example, a five-day agenda devoted just 30 minutes to Islamic finance.

The event brought together trade experts from around the globe, but Islamic banks were not prominent. In contrast, Commercial Bank of Qatar and Qatar National Bank , both conventional lenders, were major backers of and participants in the event.

Both the Morocco-based Islamic Centre for Development of Trade (ICDT) and the International Islamic Trade Finance Corp (ITFC) have called for "capacity building" activities such as seminars and workshops to spur trade among Muslim countries, but such efforts remain largely unmatched by Islamic banks.

"I have not seen a dedicated forum for Islamic trade finance. There are some attempts...but they are not focused," Nazeem Noordali, general manager of corporate and structured finance at the ITFC. "I don't know how ready they are."

Educational efforts by Islamic finance bodies are "not doing well", said Arif Khalifa, head of global trade finance at Kuwait Finance House. "They are only focusing on introduction and definitions...Conventional banks are more developed."

The Saudi-based ITFC, a non-government entity promoting Islamic trade, approved transactions worth $3 billion in 2011, 29 percent of which came from the Middle East and North Africa.

YOUTH

One problem lies in the relative youth of Islamic banks, many of which have only had major international operations for a decade or so and which do not have large numbers of experienced staff with technical expertise in trade.

Some Islamic banks feel trade finance is operationally too intensive for them, said Safdar Alam, chief executive of London-based Siyam Capital. "Lading, transport, documentation - Islamic banks are not geared up to do that".

Conventional banks, on the other hand, use trade finance to win more business from clients across the whole supply chain, said Alam, a former head of Islamic structuring at JP Morgan.

"If Islamic banks want to take it seriously, they need to go through that intellectual hurdle."

At present, Islamic banks' preference is for straightforward lending products, Alam said. "Islamic banks want financing to be as simple as possible; all they know is debt financing - who and how much. It all ties up into their cost-benefit analysis."

Islamic banks could address their limited size through outsourcing, he added. "They can ask conventional banks for help in execution, operation...The big trade finance banks will educate you."

TRENDS

In fact, global trends promise to increase the scope for Islamic banks to expand in trade finance.

The Gulf region is outpacing global trade growth, noted Vincent O'Brien, chair of the International Chamber of Commerce's (ICC) Banking Commission Market Intelligence Group.

Trade between the Organisation of Islamic Cooperation (OIC), which has 57 member countries, and the rest of the world reached $1.59 trillion in 2010, representing 10.5 percent of the world's total, according to the ICDT. Countries with the highest increase in trade volumes last year included Bangladesh, Nigeria and Indonesia, it said.

"There is an opportunity for Islamic banks to be more involved in trade flows between Africa and the rest of the world," said Noordali.

Meanwhile, the euro zone debt crisis is forcing European banks, leaders in trade finance, to retrench. This is leaving an opening for others, John Ahearn, managing director and global head of trade for Citibank, said in an ICC report.

But that window of opportunity may close as non-European conventional banks strengthen client relationships and realign strategies. Conventional banks in the Gulf such as National Bank of Fujairah aim to expand in the field; "business is picking up, other banks are eyeing the sector," said R S Rangan, head of trade services at NBF.

Another factor which may ultimately aid Islamic banks is the phasing in of Basel III banking standards around the world over the next several years.

This could make trade finance more expensive by requiring banks to increase capital reserves. But because Islamic banks in general already adhere to stricter capital requirements, they will face less of an increase in costs, said David Vicary, chief executive of the Malaysia-based International Centre for Education in Islamic Finance.

Islamic transactions tend to be on-balance sheet, so banks must hold more capital reserves; conventional banks have been keeping more transactions off-balance sheet but won't be able to do this as much under Basel III.

"Stronger and better Islamic banks will take Basel III as an opportunity to strengthen their competitive positions," Vicary said.

(Reuters / 05 August 2012)

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