Global Islamic finance industry needs to build economies of scale

MUSCAT -- Financial institutions and regulators around the world need to work together to address challenges that are limiting the geographic growth of Islamic finance, according to a key expert. David McLean, Chief Executive of the World Islamic Banking Conference: Asia Summit, which opens in Singapore next week, said that although Islamic finance has come a long way, achieving significant growth over the last decade, the overall size of Islamic assets is still less than 1 per cent of the global financial system and the industry has still to build significant economies of scale.

"Being comparatively young, Islamic finance currently offers fewer product choices for consumers, while isolated pools of Islamic liquidity in each market restrict opportunities for more efficient allocation of capital across international jurisdictions," McLean ahead of the June 3 opening of the 4th Annual World Islamic Banking Conference: Asia Summit.

"As Islamic finance embarks on its next phase of growth, the industry must overcome these challenges and build scale, reach critical mass and expand its geographic footprint -- and this will require financial institutions, regulators, and international standard setting agencies to work more closely together," McLean stated.

More than 480 key Islamic finance leaders and senior decision-makers representing the major regional and international institutions, regulatory bodies and government agencies, are attending WIBC Asia 2013. The high-profile gathering will create an ideal platform to facilitate discussions on achieving further growth and international connectivity in the Islamic banking and finance industry in Asia.

According to Abdul Hamidy bin Abdul Hafiz, CEO of Kuwait Finance House (Malaysia), "The Islamic finance industry has shown tremendous growth in terms of business volumes, product innovation and geographical spread -- as well as achieving significant improvements in its legal and regulatory frameworks. The industry is now entertaining customers across wider segments and economic sectors and is moving well beyond its early niche status.

However, the Islamic financial system is still very small compared to the existing conventional economic system. With the lessons learnt from the recent global financial crisis, we are now well aware of the inherent dangers in unproductive capital. What is needed is a more efficient and effective mobilisation of investible surplus that promotes economic prosperity by financing real economic activities. This perfectly fits with the objectives of Islamic finance and by promoting and strengthening the cross-border connectivity in Islamic finance, it would allow capital allocation to the most efficient investment portfolios."

He went on to say that, "The role that the annual World Islamic Banking Conference: Asia Summit plays in bringing together industry leaders from key Islamic financial centres for dialogues on improving the global connectivity of Islamic finance is commendable and we are delighted to be once again supporting this key industry gathering." According to Sulaiman Alireza, Executive Director, Head of Direct Investments, Asiya Investments Hong Kong Limited, "There has been a significant expansion of both intra-Asia as well as cross-border trade flows between Asia and the Middle East.

Annual intra-Asia trade is expected to quadruple from current levels of almost $5 trillion to $20 trillion by 2020. Similarly, trade between the GCC and emerging Asia is growing at a rate of 25 per cent per year." He said the emerging Asian economies, excluding Japan, account for approximately 20 per cent of the world GDP. "Middle East investors are on the lookout for greater diversification, both in terms of geographical allocation and asset classes, beyond the traditional investments in the US and Europe.

(Zawya / 01 June 2013)

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The appeal of Islamic banking

SINGAPORE: Islamic banking has been gaining worldwide popularity in recent years.

Assets in the sector have grown to US$1.5 trillion and are expected to reach US$2 trillion by 2015.

However, this is still less than one per cent of global banking assets and although its growth story continues to be a positive one, Islamic banking still faces considerable challenges in raising profitability.

With an annual growth rate of about 20 per cent in the past four years, the appeal of Islamic banking has not been lost on global commercial banks like Standard Chartered.

Standard Chartered's Saadiq Islamic Banking chairman Shayne Nelson, said: "For example, in the consumer bank, we have been growing at a CAGR (compound annual growth rate) of 47 per cent over the last five years when it comes to revenue. In that period, our client base has also doubled so it is a very big business for us when it comes to growth. It is still globally a small part of Standard Chartered Bank, but growingly a more important part of our operation."

Last year, a record US$144 billion worth of new Sukuk, or Islamic bonds, were issued worldwide and experts believe 2013 is likely to be another record year of issuances.

Besides wholesale banking, Standard Chartered said there are opportunities in Islamic wealth management, especially in centres like Singapore.

"We are seeing more and more of our Middle East private banking clients wanting to book into Singapore, rather than Switzerland which they would have gone to traditionally. So there's a big opportunity to grow the wealth management area of Islamic banking in Singapore," explained Mr Nelson.

Still, Singapore, which is hosting a World Islamic Banking Conference next week, represents a relatively small market.

According to Ernst & Young, the largest markets for Islamic banking in asset terms are Saudi Arabia, Malaysia, United Arab Emirates, Kuwait and Qatar.

Some experts said it is the Islamic banking centres in Southeast Asia that have been most successful in attracting non-Muslim clients.

Sani Hamid, director of economy and market strategy at Financial Alliance, said: "In Malaysia, the majority of the take up rate for the Islamic mortgages are non-Muslims. In Singapore, a lot of money from the Islamic term deposits actually comes from non-Muslims."

However, most Islamic banks have not been as profitable as their conventional banking counterparts.

In 2011, Islamic banks averaged a return of equity of 12 per cent compared to 15 per cent for global conventional banks, according to the World Islamic Banking Competitiveness Report by Ernst & Young.

Experts said this could be because of a weak risk culture, lack of scalability and poorer asset quality.

(Channel News Asia / 31 May 2013)

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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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Shariah Banking to Reach 5% of Market Share in Q2: Bank Indonesia

Bali. Bank Indonesia, the country’s central bank, expects the market share of Shariah banking to reach 5 percent in the second quarter of this year, its chief said on Thursday.

“Five percent of market share is expected to be reached in this quarter,” Bank Indonesia Governor Agus Martowardojo said during the opening of the 3rd Bank Indonesia International Seminar on Islamic Finance in Nusa Dua, Bali, on Thursday.

Based on the central bank’s record, the assets of Shariah banks had grown 35 percent from 2011 to 2012 to total Rp 214 trillion ($21.8 billion).

Agus said Bank Indonesia believed that progressive Shariah banking and financial development needed to be managed strategically. With the development of a blueprint, the growth of Shariah banking would be more significant, he said.

Agus said several strategies in the blueprint started with arranging proper incentive regulations and infrastructures developments. Moreover, he said, there must be infrastructure to distribute the information to the market, education and protection for consumers, and also product development to facilitate many types of transactions.

“To increase the financing contribution of Shariah banking toward the economy, it is important to develop a strong and comprehensive Shariah financial system. That includes Shariah banking, non-Shariah banking and a Shariah stock market,” Agus said.

The former finance minister added that there is a strong tie between Shariah banking, the takaful industry, or Islamic insurers, and Shariah stock markets.

Bank Indonesia Deputy Governor Halim Alamsyah previously said the financing of Shariah banking is 70 percent to 80 percent dominated by lending to micro, small and medium enterprises. He added that the financing activity of Shariah banks is relatively active with funding and saving ratios above 90 percent.

Islamic lenders comply with the Shariah law that prohibits the receipt of interest payments, by instead receiving a pre-arranged percentage of revenue to repay a loan.

Bank Indonesia is targeting an increase of as much as 58 percent this year in banking assets that comply with Islam’s ban on interest. Currently, 4.6 percent of holdings in the country are Shariah-compliant, compared with around 20 percent in Malaysia, central bank data show. An expanding Islamic banking industry supports the issuance of sukuk as it creates more demand for the debt.

(Jakarta Globe / 30 May 2013)

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Islamic Finance: BLME Targets 15% Asset Growth in 2013

Britain's Bank of London and the Middle East (BLME) is aiming to grow its assets by 15% this year following the significant rise in Islamic finance activity in the Gulf region.

The London-based Shariah compliant bank is targeting more business from the Middle East, in its capital markets and wealth management divisions, with the opening of a Dubai office later in 2013.

Its new office will be housed in the Dubai International Financial Centre. 

The total assets of BLME that was set up six years ago and owned primarily by Kuwaiti shareholders, increased to more than £1bn ($1.52bn, €1.18bn) at the end of 2012.

The UK's largest standalone Islamic bank plans to attract more business from neighbouring countries such as Qatar and Saudi Arabia with its presence in the United Arab Emirates, BLME's CEO Humphrey Percy told Reuters in an interview.

(International Business Times / 17 may 2013)

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Turkey builds up new Islamic finance tools

As Turkey seeks to boost political and commercial ties with the Gulf and diversify its borrowing, one of the Muslim world’s most dynamic economies is developing an Islamic finance industry which could rival current volumes in Malaysia - the world’s top sukuk issuer - within a decade. 

The new rules, which were sent to Turkish Prime Minister Recep Tayyip Erdoğan’s office for approval this week, will allow Turkish corporates and banks, as well as the Treasury, to issue the world’s most widely used types of sukuk, giving them access to a wider pool of investors via a global market estimated at more than $100 billion.

“Islamic finance is just like halal food, there may be two reasons to choose it,” said Mustafa Cetin, head of financial institutions at the Turkish arm of Bahrain-based Islamic lender Al Baraka.

“Either you prefer interest-free products or you find the cost of borrowing, the taste, attractive.”

Turkey’s islamic banks are known locally as ‘participation banks’ in part reflecting public sensitivities. But nervousness about Islamic finance has eased in recent years, helped by growth of the sector in Western economies. Just over a year after its debut dollar-denominated sukuk issue, Turkey’s Capital Markets Authority (SPK) is finalising regulations on five new types of Islamic bond as the country aims to become a major issuer of Islamic debt.

Turkey aims to turn its economic and cultural capital Istanbul into a major financial centre. It foresees $350 billion of infrastructure spending on the project, with Islamic finance expected to be one of the major sources.

Turkey has begun to open the doors to giving new banking licenses after the 2001 banking crisis, with no exception for interest-free Islamic banks, called participation banks.

As of now four banks have operated in the participation banking industry: Bank Asya, Türkiye Finans, Albaraka Türk and Kuveyt Türk. They constitute 5.3 percent of the Turkish banking industry. The state-run banks, Ziraat Bank and Halkbank, will also establish new participation banks.

(Daily News / 31 May 2013)

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Turkey: Istanbul bourse targets being Islamic finance center

Borsa Istanbul (BIST) aims to become one of the most prominent centers that work in accordance with the principles of participation banking in the Middle East, Europe and Africa, BIST head İbrahim Turan said on May 31.

Turan stated that they had introduced their studies with the Islamic Cooperation Organization during the meeting of the Islamic Financial Services Board (IFSB) held in Malaysia, noting that Malaysia was the most important center in East Asia in the non-interest financing field.

“We want to make Istanbul the most important center [in the non-interest financing field] of Wester and Eastern Europe, the Middle East and North Africa. We had talks about this issue in the framework of cooperation,” he said. Turan reminded that Capital Markets Board (SPK) had prepared a regulation on non-interest financing tools. SPK is finalizing regulations on five new types of Islamic bond, as the country aims to become a major issuer of Islamic debt. The new rules, which were sent to Prime Minister’s office for approval this week, will allow Turkish corporate and banks, as well as the Treasury, to issue the world’s most widely used types of sukuk, giving them access to a wider pool of investors via a global market estimated at more than $100 billion.

Turan said they had started an initiative to allow companies from 60 countries, chosen according to BIST’s vision of “Istanbul International Finance Center,” to sell their capital market tools in Istanbul and also to buy and sale of tools which are already sold.

Turan also said they had held talks to develop cooperation with Singapore Bourse, which is one of Asia’s most important centers in capital markets, during his visit to the country.

(Daily News / 31 May 2013)

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