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