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Monday, 6 August 2012

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.


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."


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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Why is Islamic finance important for MBAs?

There are a number of business schools now introducing Islamic Finance in their curriculums. For some, the reasoning is to open MBA students up to different cultural realities, but for many schools, it just makes business sense.

We can identify three main reasons why it is important to include Islamic Finance in the curricula of an MBA student.

Islamic finance has a niche hold on the market, and it is growing at a tremendous rate

Islamic finance has developed into a solid industry that complements conventional banking, only a fraction of the available liquidity is actually invested in the sector, (2 per cent of global banking assets) though it does offer great potential and further growth prospects (is growing more than 20 per cent annually.) Some of the most active countries in Islamic finance (Saudi Arabia and the UAE for example) represent the highest level of liquidity in today’s global market, a market hungry for liquidity.

On the other hand, out of the 1.6 billion Muslims in the world, only 14 per cent use traditional banks, compared to 92 per cent of US households and 95 per cent UK, and a large number might find Islamic finance as an attractive option for their savings and/or financial needs.

The Islamic market demands a specific expertise that combines solid financial knowledge with that of Islamic finance market. MBAs can fill that role

The origins of the Islamic modern banking movement first developed in the 1950s and 60s, but its full development occurred in mid 70s after the oil crises of 1973, coinciding with the emergence of Islamic movements.

During the 90s, Islamic financial institutions became increasingly innovative and developed more complex instruments and structures to meet the demands of modern day business. Today they cover a wide product range, from corporate finance to asset management; and future development is likely to be in the area of derivatives liquidity management.

In recent years, driven by the oil financial liquidity and an increase demand, the industry witnessed a large expansion, both in terms of its side, as well as in the financial innovation of the new developed products. Today, most conventional players are active, like Deutsche Bank, HSBC, BNP, Citi, UBS, or Barclays in the offer side but also companies like general electric in the demand side. Therefore, it is becoming a global industry that needs global expertise.

Because the industry is so new, there is still much room for people willing and capable of providing the needed innovations to move the industry further. Thus, MBAs not only need to learn about the Islamic finance world because it can shed light on other finance markets, but because it invites innovation and offers job growth.

MBA students have a solid training in finance and finance innovation, that can be easily transfer to the Islamic finance sector, provided that they understand enough the Islamic finance market. Therefore, for MBA students looking into new career possibilities, Islamic Finance Industry can definitely be something for them to explore.

A deeper understanding of Islamic finance will help MBAs shape the debate on the new financial order

There is a popular saying: There is nothing like a good crisis to reassess your options and look for new alternatives.

Islamic finance can offer some food for thought in the financial crisis. For example, the industry was less effected by the crisis because its intrinsic features help the stabilization of credit growth, promote an asset-based investment, foster economic productive transactions and thus a reduction of systemic risk, and for the most part help to have a balanced leverage.

In general, the principles of avoiding speculation and fostering instead the real economy provide interesting insight on how to avoid some of the causes of financial crisis.

In short, the market for Islamic finance has developed itself as a serious alternative for conventional banking and covers a wide product range, experiencing state of the art education- and research regarding the Islamic Finance Industry is interesting for international students.

A deeper knowledge of Islamic finance can improve the competitiveness of MBA students on the international financial market stage – for their personal career possibilities and also in shaping a new financial order that is in the coming.

Celia de Anca is the professor of Islamic Finance and director of Scief at IE Business School.

(The Independent / 06 August 2012)

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All eyes on Oman's Islamic finance

Oman investors could not get enough of Bank Nizwa when the country's first Islamic lender listed its shares in June.

The initial public offering was oversubscribed 11 times as the novelty of a new listing appealed to investors on the smallest of Arabian Gulf exchanges. The share sale also sparked hopes of a rebound in sentiment on the Muscat Securities Market.
Now the fledgling bank is being watched closely by investors as the country reverses its policy on Islamic finance and starts to court new Sharia-compliant equity and debt issues for the first time. It also wants to encourage conventional debt listings.
"If the price does not hold up that will obviously put a dampener on other issues," said George Sandars, a partner at SNR Denton in Muscat. "But if it turns out to be reasonably successful it will help to improve sentiment."
But the 24-year-old exchangefaces a stiff task in stimulating subdued interest in Gulf equity markets hobbled by dwindling trading volumes and the closure of brokerages starved of the commissions needed to survive.
It's a familiar story for financial professionals in the Gulf.
The Muscat Securities Market has failed to break out of a narrow trading range of between 5,000 and 7,000 points for the past three years after peaking at more than 12,000 in June 2008.
"The market in Oman is not liquid by any means. Prior to 2008 there were lots of IPOs and private placements and although the economy as a whole stood up to the financial crisis fairly successfully, it had a very negative effect on equity markets," added Mr Sandars.
Oman's stock exchange is the smallest by market capitalisation in the Gulf. The Muscat Securities Market Index has fallen by about 4.5 per cent since the start of the year. Its main measure lists companies the collectively traded shares of which are worth less than US$2.2 billion (Dh8.08bn). By comparison, the market capitalisation of Saudi Arabia's Tadawul index is worth more than $570bn.
Muscat has an even lower profile for debt listings. Apart from government-issued paper, there are just nine bonds listed on the Muscat Securities Market, mainly from local banks. The government wants to change that and a recent study by the Oman Central Bank concluded there was a need to develop both a government security and corporate debt market in Oman. Ratings agencies such as Moody's and Standard & Poor's rate government debt and political risk.
Muscat recommended the enactment of an insolvency law to help speed the process.
While the crisis in Europe may have dented demand for Gulf stocks among institutional investors there, it could also represent an opportunity. Gulf company Islamic bond yields hit a record lowlast month as the worsening debt crisis in Europe encouraged investors to seek alternative homes for their money.
Average sukuk yields fell to as low as 3.66 per cent on July 17, according to Bloomberg data. Islamic bond sales have hit a record $17.46bn this year, which has not gone unnoticed by regional bourses - including Muscat - keen to capture a slice of this fast-expanding sector.
The latest listing of Oman's first Islamic bank on the exchange could encourage further listings and help to create a local market for sukuk, said Suleiman bin Mohammed Al Rashidi, the deputy director general of operations and market surveillance at Muscat Securities Market.
Oman had for some time been unique among Gulf states in not encouraging the development of Islamic finance in the country.
It reversed the policy last year partly to halt the outflow of Islamic funds at a time of internal political upheaval. Investors hungry for more fresh listings in Oman may not have to wait too long, with other IPOs in the pipeline.
A second Islamic lender, Oman Arab Bank, a unit of Ominvest, is expected to follow Bank Nizwa with a partial share listing this year subject to market conditions. Renaissance Services, a conglomerate based in Muscat, is also believed to be considering IPOs of parts of its operations.
(The National / 06 August 2012)

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Nigeria: Islamic Banking Encourages Fairness

Kaduna — The Director, International Institute for Islamic Banking and Finance (IIIBF), Professor Shehu Usman Rano, at the weekend said the Islamic banking system is meant to ensure fairness through just and equitable distribution of resources.
Professor Rano said this while presenting a paper titled; "The Role of Islamic Finance in Economic Development" at the second annual national conference of the Islamic Economic Thought Association (IETA), a students' group in the Ahmadu Bello University (ABU), Zaria.
Professor Rano said; "While conventional economy deals with papers and gains accruing for worldly benefit, Islamic economy deals with reality and benefits accruing here and hereafter. Wealth is distributed fairly through Zakat and other lawful means. Asset of Islamic economy is expected to grow by 20 to 30 percent globally."
The Vice Chancellor of the ABU, Professor Abdullahi Mustapha, represented by the Head of the Department of Economics at the institution, Dr Suleiman Karwai, described the conference as an avenue of enlightenment. He urged IETA to sustain the tempo.
In his remarks, a professor of Economics in ABU, Professor Mike Kwanashe, said Islamic banking should not be viewed as a faith-based system.
The president of IETA in ABU, Rabi'u Magaji, on his part, said Islamic economy has the ability to proffer solution to the economic crisis facing the world.
(Allafrica / 06 August 2012)

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Malaysia: Record ringgit sukuk sales forecast

Kuala Lumpur: Malaysia’s top sukuk arrangers are predicting domestic sales in 2012 will surpass last year’s all-time high as record-low borrowing costs and the government’s $444 billion (Dh1.63 trillion) spending programme drive issuance.
Offerings of ringgit notes reached 30.8 billion ringgit ($36.03 billion) this year, compared with 75.6 billion ringgit ($88.43 billion) in 2011. CIMB Islamic Bank Bhd., the second-biggest debt manager in the past seven months, has 15 billion ringgit ($17.55 billion) of deals in the pipeline, according to Chief Executive Officer Badlisyah Abdul Ghani. His counterpart at Maybank Investment Bank Bhd., the top arranger, says Prime Minister Najib Razak’s development plan is boosting sales from companies building roads and railways.
Yields on Malaysia’s top-rated Shariah-compliant securities due in 2022 have dropped 29 basis points since December to 4.37 per cent, below the 2011 average of 4.89 per cent and a high of 5.6 per cent in August 2006, according to a central bank index. Standard & Poor’s and Moody’s Investors Service affirmed their investment-grade credit ratings for the nation, the world’s biggest sukuk market, in the past week.
“The pipeline in Malaysia is very, very healthy,” Kuala Lumpur-based Badlisyah, whose CIMB Islamic Bank is a unit of CIMB Group Holdings Bhd., said in an interview yesterday. “Issuers are taking advantage of low borrowing costs to sell sukuk to refinance loans and for capital expansion.
Billion ringgit pipeline
Indonesia, which opened its first Islamic bank in 1992, nine years after Malaysia, is also seeing a revival in corporate sukuk sales. Issuance climbed more than fivefold in 2012 to 1.35 trillion rupiah ($142 million) as of June, compared with 200 billion rupiah for the whole of 2011, according to data from the Capital Market and Financial Institution Supervisory Agency. Offerings reached 2.3 trillion rupiah in 2008, an all-time high.
Malaysia is already having a record year for sales, with potentially about 20 billion ringgit of Shariah-compliant debt in the pipeline, according to data compiled by Bloomberg. The notes pay returns on assets to comply with Islam’s ban on interest.
Tanjung Bin Power Sdn., which owns a coal-fired plant in the southern state of Johor, is planning to sell 4.5 billion ringgit of sukuk to refinance debt, according to a July 24 e-mailed statement from RAM Rating Services Bhd. Syarikat Prasarana Negara Bhd., which operates an overhead rail network in the capital Kuala Lumpur, is looking to sell 4 billion ringgit to finance a line extension.
Shift to stocks
Some investors may start to switch out of bonds, including sukuk, and into stocks as yields are so low, according to Pankaj Kumar, chief investment officer at Kurnia Insurans (Malaysia) Bhd. based in Petaling Jaya near Kuala Lumpur.
The FTSE Bursa Malaysia KLCI Index posted its best month in July since February, rising 2 per cent. The gauge has gained almost 7 per cent this year, compared with 0.8 per cent for the whole of 2011, and reached a record high on July 19.
“There’s a shift coming from the fixed-income side, where returns are no longer justifiable and that’s why some funds are moving toward dividend-yielding stocks,” Pankaj said in an interview yesterday.
Global Islamic bonds have also rallied this year, driving yields to unprecedented levels. Average yields dropped 12 basis points, or 0.12 percentage point, this week to a record 3.16 per cent on August 2, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.
Dollar Sukuk rally
The securities returned 6.4 per cent in 2012, according to HSBC, while debt in developing markets climbed 12.2 per cent, JPMorgan Chase & Co.’s EMBI Global Composite Index shows.
Malaysia’s dollar-denominated sovereign Islamic bonds rose for a fifth day, with the yield on the 3.928 per cent notes dropping 10 basis points this week to 1.69 per cent, according to data compiled by Bloomberg. That’s the lowest since the debt was sold in May 2010.
The difference in yields between the Dubai government’s 6.396 per cent securities due in November 2014 and Malaysia’s debt was little changed at 148 basis points today and widened four basis points from a week ago.
Growth in Malaysia’s Islamic finance industry is also providing lenders with excess cash to invest in debt, supporting demand for new issuance, according to Kuala Lumpur-based AmInvestment Bank Bhd., the third-largest sukuk arranger.
‘Hungry for sukuk’
Shariah-compliant banking assets grew 24 per cent to $137 billion last year, or 22.4 per cent of the total, the central bank said in its annual report providing the latest figures.
Malaysia’s SME Bank, a state-owned financial institution, sold 500 million ringgit of Islamic bonds on August 2 that attracted 2.5 billion ringgit in orders, Managing Director Mohd Radzif Mohd Yunus, said in an interview in Kuala Lumpur.
“The strong demand shows that investors are still hungry for sukuk,” Mohd Radzif said yesterday.
Fitch Ratings reaffirmed the Southeast Asian nation’s rating at A-, the fourth-lowest investment grade and the same level as S&P, on Aug. 1 citing the country’s “track record of macroeconomic stability.”
Bank Negara Malaysia projects economic growth of 4 percent to 5 per cent this year, its annual report shows. Gross domestic product increased an average 5 percent in the four quarters ended March, data compiled by Bloomberg show. The ringgit is the fourth-best performing currency against the dollar this year among Asia’s 11 most active, strengthening 1 per cent.
“Sukuk sales can break the 2011 record if all the planned offerings in the pipeline come to market,” Mohd Effendi Abdullah, head of Islamic markets at AmInvestment Bank, said in an interview yesterday. “Corporates are likely to continue to tap the Malaysian market because borrowing costs are low and there’s still a lot of liquidity in the market.
(Gulfnews.Com / 06 August 2012)

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