Islamic finance sector seen to reach $2 trillion by 2015

DUBAI — The $1 trillion global Islamic finance industry is set to double in size between 2011 and 2015, recording an annual 20 per cent growth driven by increasing demand for this “credible alternative” to conventional banking in the GCC and Asia.

“The global crisis faced by conventional finance has led to Islamic finance increasingly being viewed as a credible alternative. Issuers and investors have realised that the risk-reward balance in both conventional and Islamic finance are not fundamentally different,” said Stuart Anderson, managing director and regional head for the Middle East at Standard & Poor’s, or S&P.

S&P expects the $1 trillion global Islamic finance industry to grow 20 per cent over 2011-15 doubling in size over the period.

However, there are some more upbeat forecasts by pundits for the Islamic finance industry. Noor Islamic Bank chief executive Hussain Al Qemzi, speaking at the 2^nd Annual Middle East Islamic Finance and Investment Conference, said the global Islamic finance industry could grow from its present $1 trillion to around $4 trillion within five years as untapped markets such as China open up and new products drive demand.

Standard Chartered said in its Islamic finance industry outlook in June that banking assets of the Shariah-complaint segment, currently growing twice as fast as conventional banking assets, would reach $1.1 trillion globally in 2012, up 33 per cent from 2010.

With the gap between Islamic and conventional banking solutions narrowing substantially, and due to the fast development of the Islamic banking industry, Muslim high net worth individuals are increasingly expecting Shariah compliance in managing their wealth, making Islamic wealth management solutions a key market need, Standard Chartered Private Bank has observed. In the UAE, Islamic banking assets would grow to 20 per cent of the total banking sector in 2012 from an estimated 18 per cent in 2011, the bank has said.

The global prospects for the Islamic Finance industry will be the subject of a conference to be hosted by S&P in Dubai on September 25.

Entitled, “The Globalisation of Islamic Finance: Connecting the GCC with Asia and Beyond”, S&P’s Islamic finance conference will explore how enhanced links between GCC and Asia can drive greater convergence and globalisation in the industry.

Other key subjects that will be discussed at the event include the prospects for Islamic banks in the GCC when compared to their Asian counterparts; the varying applications of Takaful in Asia and GCC; and how greater use of sukuk can boost GCC and Asian economies.

Islamic finance growth is currently led by countries in the GCC and Asia, which represent half of the global industry. “Young, fast-growing Muslim populations; robust macroeconomic environments; and large infrastructure projects that require financing are the main drivers of this increasing growth. Malaysia leads the global industry while Saudi Arabia leads in the GCC,” S&P said.

“We have also seen stronger and more active support from domestic authorities, particularly through the creation of regulatory and tax frameworks, ensuring a level playing field between conventional and Islamic instruments,” said Anderson.

A key development expected to drive globalisation and expansion of Islamic banking outside Asia and the GCC is the increasing attractiveness of sukuk among global investors. At a time when conventional banks’ appetite for term loans is declining, S&P believes that sukuk could become a key funding source.

Sukuk issuance looks set to cross the $100 billion threshold in September 2012, and is projected by S&P to grow 25 per cent over 2012-15 to reach about $200 billion a year in 2015. Malaysia, Indonesia and the GCC are expected to account for a combined 85 per cent to 90 per cent of issuance mainly to finance infrastructure-related projects.

This year, new GCC issuances — as of September 17 — has totalled $19.9 billion across all asset classes compared with $19.4 billion of new issuances in all of 2011. Asia, meanwhile, has seen sukuk issuances worth $57.9 billion year-to-date, compared with $64.9 billion in 2011. In terms of number of issuances this year, the GCC has accounted for about 50 and Asia for 430 issuances — also as of September 17 — compared with 44 and 437, respectively, for 2011, S&P said.

(Khaleej Times / 22 Sep 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
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Corporate sukuk outperforming sovereign bonds

KUALA LUMPUR: Malaysia’s corporate Islamic bonds are returning twice as much as government sukuk this quarter as economic stimulus spending boosts investors’ risk appetite.

The Bloomberg-AIBIM Bursa Malaysia Corporate Index, a benchmark started this week that tracks 57 local-currency issues, gained 1.6% since June 30 to 101.062, while a similar gauge for sovereign notes rose 0.7% to 109.165. Global dollar-denominated syariah-compliant debt advanced 2.3%.

Sukuk issuance by Malaysian companies increased 59% in 2012 to RM50.8bil, spurred by corporations taking part in the Government’s US$444bil development programme. Inflows to emerging-market bond funds have surpassed last year’s total, as central banks in Japan, the United States and Europe pumped cash into their financial systems.

“Global stimulus has helped strengthen sukuk appetite in Malaysia,”Zakariya Othman, head of Islamic ratings at RAM Ratings Services Bhd, said in an interview in Kuala Lumpur on Wednesday. “Foreign investors are keen on Malaysian bonds and sukuk because they give decent returns and offer investors an opportunity to diversify their debt portfolio.”

Bond funds in developing economies have attracted more than US$36bil this year, compared with US$17bil for the whole of 2011, according to US-based research firm EPFR Global. The Bank of Japan unexpectedly expanded an asset-purchase plan on Wedneday, days after the Federal Reserve announced a third round of so-called quantitative easing.

Borrowing costs for top-rated companies in Malaysia dropped 30 basis points, or 0.30 percentage point, to 4.33% this year, the lowest level since 2003, according to a central bank index. Sales of sukuk, which pay returns on assets to comply with Islam’s ban on interest, are set for the best quarter of 2012. Issuance in the world’s biggest market for the debt reached an all-time high of RM75.6bil in 2011.

Overseas investors increased ownership of government and corporate debt in 2012 to record levels. Foreign holdings totalled RM198bil in July, 6.3% more than the same month in 2011 and exceeding the previous all-time high of RM191bil reached in March, Bank Negara figures show.

“This is going to be another great year for sukuk,” Mohamad Safri Shahul Hamid, deputy chief executive officer at CIMB Islamic Bank Bhd, a unit of CIMB Group Holdings Bhd, said in an interview in Kuala Lumpur. “Low borrowing costs and strong demand are supportive factors.”

Rafe Haneef, CEO of HSBC Amanah Malaysia Bhd, said the increasing supply could eventually put a strain on the market, particularly with bigger issues related to the Government’s spending plans to build roads, railways and power plants over the next decade.

“It will reach a point soon where the liquidity will be a constraint,” Kuala Lumpur-based Rafe said in an interview. “We’re seeing a lot of bumper issues coming up, with more construction-related and project finance sukuk, which will have longer tenors and bigger sizes,” he said, declining to give details.

Yields on syariah-compliant bonds declined 43 basis points in the international market this quarter to 3.01% and reached a record low of 2.97% on Sept 14, as the Fed announced its bond-purchase plan, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The difference between the average and the London interbank offered rate, or Libor, narrowed 42 basis points to 198 basis points.

Returns on Islamic debt have lagged behind non-syariah-compliant securities in the developing market, where bonds gained 6.4% this quarter, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

Malaysia’s borrowing costs in the dollar sukuk market also reached an all-time low. The yield on the 3.928% notes maturing in 2015 has fallen 39 basis points to 1.48% since June 30, according to data compiled byBloomberg. The difference between that bond and Dubai’s 6.396% debt due November 2014 shrank 46 basis points to 116 basis points.

(The Star Online / 21 Sep 2012)

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

Philippines to Draw Up Shariah-Compliant Stocks List

The Philippine Stock Exchange (PSE) is drawing up a list of Shariah-compliant equities to attract the nation’s Muslim investors and $1.2 trillion of investible funds in the Middle East.

The exchange is holding consultations and workshops with the Al-Amanah Islamic Investment Bank of the Philippines, government agencies and the Asian Development Bank on standards for Shariah-compliant stocks, Leo Quinitio, head of the bourse’s capital-markets development division, said in an interview.

“There’s a large pool of investible funds in the Middle East that invest only in Shariah-compliant stocks or companies that meet Muslim doctrines,” Quinitio said in Manila yesterday. “We are working on this and hopefully by the first half we will have a list.”

The Philippine Stock Exchange has sought to introduce new products, including real estate investment trusts and exchange traded funds, to boost trading in Asia’s 12th-largest stock market. The nation’s equities have a market value of $209 billion, or about equal to Nestle SA (NESN)’s capitalization, according to data compiled by Bloomberg,

Trading on the Philippine stock exchange has averaged 5.86 billion pesos ($141 million) a day this year, 22 percent more than 2011’s average, the data show. The Dow Jones Islamic Market World Index (DJIM) of companies that meet Islamic guidelines has surged 13 percent this year, outpacing an 8.3 percent gain by the MSCI Asia Pacific Index.

No Alcohol

Quinitio said Muslims are restricted from investing in companies that violate Shariah doctrines, which forbid the engagement in activities deemed unethical such as gambling, production of alcohol and armaments. There are also restrictions on interest-related income, he said.

Apple Inc., Exxon Mobil Corp. and PetroChina Co. are the three biggest Shariah-compliant companies by market value that Muslims can invest in, according to data compiled by Bloomberg.

Drawing up a list of Shariah-compliant stocks can be “very difficult,” according to Abdul Jalil Abdul Rasheed, chief executive at Kuala Lumpur-based Aberdeen Islamic Asset Management.

“One of the challenges is how detailed do they want the standards to be and this can make the work intensive,” Rasheed said. “Do you want it to be 100 percent compliant or have a tolerance level of say 5 percent of earnings come from non-halal business? The other challenge is do you want the financing of the business to be shariah-compliant as well?”

Overseas Buying

The Philippine exchange is working with the National Commission for Muslim Filipinos to form a Shariah advisory council, Quinitio said.

“There are no signs so far that investors’ interest in the Philippines has waned,” he said. “The market is enjoying a good momentum.”

Overseas investors bought a net $2.19 billion of Philippine equities this year to Sept. 20, compared with $1.33 billion of purchases for all of 2011. The benchmark Philippine Stock Exchange Index (PCOMP) has rallied 21 percent this year and closed at a record on July 5 amid optimism about the nation’s economic growth prospects.

The $1.3 trillion Shariah-compliant finance industry is expanding globally at an average annual rate of 15 percent, according to a June report from Malaysia’s Securities Commission. The Islamic Financial Services Board in Kuala Lumpur predicts the market will reach $2.8 trillion by 2015.

Islamic assets account for about 1 percent of global financial market, according to a March 2012 publication of the UK Islamic Finance Secretariat. The largest centers remain concentrated in Malaysia and the Middle East, including Iran, Saudi Arabia, United Arab Emirates, Kuwait, Bahrain and Qatar, according to the report.

(Bloomberg / 21 Sep 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com