Egypt’s nod to Islamic finance to attract investments: stock exchange chief

DUBAI, May 1 — The passing of a new law that would legalize Islamic bonds by Egypt’s upper house a day ago could trigger an investment windfall for the highly indebted country, the chairman of Egypt’s stock exchange said here on Wednesday.

Mohammed Omran, at the ongoing two-day Africa Global Business Forum, said the underdeveloped bond market at the Nile would get a boost by the new law which increases certainty for foreign investors.

“The share of financing based on capital markets increased to 25 percent last year from 10 percent in 2005, but 75 percent of financing is still provided from loans granted by banks,” said Omran.

Islamic bonds, or sukuk, do not pay interest but distribute profits based on tangible assets like properties, land or commodities.

In 2012, the global sales volume of issued sukuk reached an annual record of 46 billion U.S. dollars.

Omran said foreign Arab investors and retail bank clients in Egypt are likewise keen to invest in line with Islamic law, or Sharia.

Hitesh Asarpota, director of structural finance at bank Emirates NBD in Dubai, agreed with Omran, and cited Turkey as an example where a convention state bond that was launched in January 2012 attracted 3 percent of Arab investors, but an Islamic sovereign bond five months later attracted more than 50 percent.

Egypt is seeking desperately foreign investments, as its financial stand worsened in the wake of the 2011 upheaval.

Egypt’s sovereign debt to gross domestic debt ratio swelled to 80 percent in 2012 from 76 percent in the previous year, according to figures compiled by Lebanese lender Bank Audi.

Talks between the Egyptian government and the International Monetary Fund on a 4.8-billion-dollar emergency loan have been held for the last two years without solid results.

While the Islamic finance industry became mainstream banking in the Gulf Arab region, Malaysia and Indonesia, banking in line with Sharia is still insignificant in Egypt as ex-President Hosni Mubarak kept Islamic finance as he saw it as fertile ground for the once oppositional Muslim Brotherhood, which today heads the government.

(NZ Week, 1 April 2013)

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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

Main principles of Islamic finance

Islamic finance has become a force in its own right, especially in the emerging markets of Asia and the Middle East. However, this has not been without its fair share of ups and downs. The industry suffered the after-effects of the global financial crisis and has been criticised for products that look too much like their conventional cousins. 

It has, however, grown to become significant parts of the banking systems in countries such as Saudi Arabia, Malaysia and the UAE and even countries with Muslim minorities are considering measures to spur its growth in their markets. 

To move forward, the industry would do well go back to its roots. The main principles of Islamic finance are that of risk-sharing: taking on risks for possible rewards or losses and a requirement for financial transactions to be backed by assets such as properties or land. 

Going back to these principles, especially the latter, will pave the way for what we believe, are the strongest opportunities for Islamic finance: Sukuk (Islamic bonds) project finance and Islamic real estate investment trusts (Reits). Although nascent, there is so much opportunity for more of these deals because project finance bonds and Reits are a natural fit with Islamic finance, which is about building a stable future by investing in the real economy and putting one's capital to productive use for societies' benefit. 

As the global population is forecasted to reach 9.2 billion by 2050 from 7 billion currently, project finance Sukuk can help to raise more capital to build infrastructures such as roads, water supply installations, houses and schools, especially in the developing countries. Islamic Reit, which by definition, is asset-backed by a portfolio of properties, is a new asset class that fund managers and private investors can consider, post the financial crisis, when money has flown out of traditional equities. 

LIQUIDITY POOL 

The population boom means more infrastructure investment will be needed in Africa, Asia and the Gulf Co-operation Council (GCC) countries. Globally, KPMG estimates $40 trillion is needed in the coming decades to provide basic levels of infrastructure. 

In the GCC, infrastructure spending is estimated to reach $120 billion over the next 10 years while Southeast Asia's infrastructure expenditure is forecasted to exceed $150 billion over the next five years. 

To fund these projects, governments and private sector developers can use bank financing but the liquidity pool is becoming limited as banks become concerned about liquidity risk and regulations that require more capital to be set aside for long-run project finance facilities. 

Long-term financing is essential as infrastructure assets can be productive for at least 10 years. A viable alternative is to tap into the funds of longer-term investors such as pension and sovereign wealth funds, via project finance Sukuk. Given that most of the needs are in the GCC and Southeast Asia, two regions with significant Islamic funds, project finance Sukuk is an avenue that issuers can consider. 

In 2010, a significant Sukuk project finance, which was a first in many ways, is Trans Thai-Malaysia (Thailand)'s MYR 600 million Sukuk. The issuer, TTM (Thailand), is equally owned by Thailand and Malaysia's national oil companies, PTT Public Co Ltd and Petronas respectively. 

The second opportunity in Islamic finance is Reits. For fund managers and private investors, this asset class is a good alternative to bonds because investors get exposure to real estate while enjoying the benefits of investing in bonds and equities. 

With Reits, investors get a steady stream of income, which together with potential increase in the share price, may lead to attractive total returns. Share prices tend to be stable. Buyers are available if investors want to sell because listed Reits are liquid. 

Tax treatment is also favourable because dividends are tax-exempt in some countries like Singapore. The properties and shares are managed by professionals. And investors need far less capital to invest in Reits compared to properties directly. Most of the listed Reits are currently in the US. Asia, which forms about 12 per cent of the global Reit market, presents an incredible opportunity, especially since Reits have proven to perform better than equity and bond indices in the US and Singapore. The five currently listed are mostly in Asia, three in Malaysia and one in Singapore. 

(The writer is Global CEO of HSBC Amanah and CEO of HSBC Bank Malaysia Berhad.)

[Business Recorder, 23 April 2011]

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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

Malaysia aims to collaborate with Oman to develop Islamic finance

KUALA LUMPUR: Malaysia is looking forward to collaborating with Oman to address challenges in developing the Islamic finance industry, says the Regent of Perak Raja Nazrin Shah.

He said a potential area of collaboration and an issue faced by the industry today was human capital development, and Malaysia had established several institutions to provide training for Islamic finance professionals.

“These institutions include the International Centre for Education in Islamic Finance, the Islamic Banking and Finance Institute of Malaysia and the Securities Industry Development Corp.

“Leveraging on these institutions, Oman and Malaysia can embark on joint initiatives to develop a pool of professionals to drive innovation and growth of the Islamic finance industry,” he said when addressing theOman Islamic Economic Forum 2013 in Muscat yesterday.

Raja Nazrin said Malaysia’s Islamic banking assets reached US$164.9bil (RM501.71bil) as at end-December last year, with an average growth rate of between 18% and 20% annually, while total assets of its Takaful industry amounted to US$6.4bil, with a market penetration rate of 13%.

“The Islamic capital market reached a size of US$460bil, as at end-2012, after registering an average growth of about 14% per annum over the past decade,” he said.

On the global front, Raja Nazrin said the industry posted an annualised growth rate of almost 15% over the past 10 to 15 years to reach a size of about US$1.3 trillion.

He said that while this growth was achieved primarily in Muslim-majority countries, an increasing number of non-Muslim-majority jurisdictions have also been developing their Islamic finance industry, including the UK, Luxembourg and Hong Kong.

“The size of Islamic financial assets is forecast to reach US$1.8 trillion by 2016, while cross-border financing and investment activities are expected to accelerate, especially in the Islamic capital market, as emerging economies embark on infrastructure spending,” he added.

Raja Nazrin, who is also the financial ambassador of the Malaysia International Islamic Financial Centre, said that bilateral trade between Oman and Malaysia rose significantly to US$740mil in 2011 from US$265mil in 2010. – (Bernama, 2 May 2013)

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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