The Middle East may be the heart of Islam and its investors may have plenty of liquidity, but the region’s Islamic banking sector remains relatively immature and undeveloped compared to markets in Muslim south Asia.
But although the recent turmoil in the Middle East has certainly done the local Islamic finance industry no favours, new financial products and regulations are appearing across the region, helping the sector mature both in core Gulf countries and those such as Jordan and Oman that have so far had have limited sharia-compliant options.
Most recently, the Sultanate of Oman on Tuesday issued a royal decree allowing the establishment of the first Islamic banks in the country.
The timing of the decree was a bit of a surprise, said Gigi Varghese, a research analyst with Vision Securities in Oman, but the idea of opening an Islamic bank had been batted around for a while.
Because the country has no formal Islamic banks, many local depositors keep their money in non-interest bearing demand deposit accounts.
Potentially, wealthier individuals now using Islamic banks outside the country could bring their money home. But most of the country’s deposit base is not that sophisticated and the new regulations will mostly draw those demand deposits away from local conventional banks, said Murad Ansari, banking analyst with EFG-Hermes.
Elsewhere, Jordan recently saw its first domestic issuance of an Islamic bond, or sukuk, issued by a local cement firm owned by Saudi investors who wanted to use sharia-compliant funding.
Because Jordan lacks tax and other regulations to accommodate the sukuk structure, the bankers involved had to ask the government for waivers specifically for the deal. And, because the local Islamic banks were too small to handle the $120m issuance, conventional banks joined the financing team, said Nasri Al-Ashkar, a banker with Capital Bank, which arranged the deal.
“Basically the Jordanian government extended exemptions particularly for this issuance making it a feasible structure,” Al-Ashkar said. “We’re probabaly the first that went to the government with this request.”
The industry dislikes describing anything as “innovative” – according to Islamic law, certain types of innovation are forbidden – but new innovations in the field have happened even in the United Arab Emirates and Qatar, which have long-established Islamic financial sectors.
Even in the Gulf, analysts say, Islamic investors have lots of liquidity, but the sharia-compliant offerings that exist are insufficient and not diverse enough to meet their demand for products in which to invest.
Last November, the UAE launched its inaugural action of sharia-compliant certificates of deposits, which the central bank described as the state’s “first Islamic liquidity management tools”.
And in Qatar, a decision in February to prevent conventional banks from offering sharia-compliant products is expected to give a boost to the country’s Islamic banking sector, which will no longer have to compete with larger conventional banks for the business of more observant Muslim customers.
“What we see in the GCC is what we have seen in Malaysia maybe , five, six, seven or eight years ago, ie, really the building up a framework of … not only a sukuk market, but other instruments,” said Paul-Henri Pruvost, a credit analyst with Standard & Poor’s.
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