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Friday, 20 September 2013

Western banks eye growth in Islamic trade finance

Bank of America Merrill Lynch (BAC.N) hopes to begin offering Islamic trade financing in the future, Chris Jameson, the bank's regional head of sales for global transaction services, said without giving a time frame.
"Our focus will be on Middle Eastern clients who are expanding their footprint internationally," Jameson said on the sidelines of a banking conference in Dubai.
"You can see that local banks are setting up Islamic units to cater for the needs of their clients. This is driving more and more international institutions to focus on the Islamic sector."
Islamic trade finance, which uses instruments that obey sharia principles such as Islam's ban on interest, has remained a backwater even as other areas of Islamic business, such as sukuk issuance, have boomed in the last few years.
This is partly because Islamic banks are relatively small and lack the expertise and large international networks of mainstream Western banks.
Foreign trade conducted by the 57 member states of the Organization of Islamic Cooperation totaled $3.9 trillion in 2011. But only a tiny fraction was financed in a sharia-compliant way; the Saudi Arabia-based International Islamic Trade Finance Corp, which promotes Islamic trade, approved transactions worth just $3 billion in 2011.
There are signs that this is changing, however, as trade flows between the Gulf and Asia - including predominantly Muslim countries in southeast Asia - become large enough to support specialist trade financing operations.
Trade between the six Gulf Cooperation Council countries and emerging Asia economies is growing at 30 percent annually, according to Kuwait-based Asiya Investments (KCIC.KW), which launched an Islamic trade finance fund with $20 million in seed capital last December.
Some Islamic banks in the Gulf are trying to expand in sharia-compliant trade finance through tie-ups with Western institutions; this week Dubai Islamic Bank (DISB.DU) said it would use Deutsche Bank's (DBKGn.DE) expertise to facilitate its letters of credit in Europe.
Dubai's oldest and largest Islamic bank hopes to serve local companies which are increasingly looking abroad for business, chief executive Adnan Chilwan said in a statement.
"In this regard, trade flows have become a critical component of this growth as has the provision of trade finance activities for businesses," he said.
Bank of America could opt for a strategic partner as well, Jameson said.
"We would consider that - that's the model we have followed to date on cash management and trade. We can leverage the local expertise that they already have."
Haytham El Maayergi, head of transaction banking in the United Arab Emirates for Standard Chartered Bank (STAN.L), which provides Islamic services, said he was seeing demand for Islamic trade finance that was partly due to the convenience of its structures, not just its religious permissibility.
Islamic finance deals are backed by income from real assets, providing a layer of security which is attractive for many exporters of goods.
"A lot of Islamic structures are more appealing to clients not only because these clients are sharia-compliant, but also these structures are suitable for their business models. Clients want the ownership structure, less risky transactions and the ethical proposition that Islamic trade financing provides."

Maayergi added, "We see an increase in appetite from many of our MENA-based multinational clients."

(Reuters / 17 Sept 2013)

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Qatar Islamic banks set to outpace rivals

Growth of Shariah-compliant banks in Qatar is poised to outpace that of the UAE lenders as borrowing rises amid $200bn in government spending for the 2022 soccer World Cup.

Qatar’s four Islamic lenders will almost double their asset base to $100bn by 2017, Standard & Poor’s has said in a report. The assets of the largest Shariah-compliant bank in the country, Qatar Islamic Bank, last year grew five times faster than those of the biggest one in the UAE, Dubai Islamic Bank.

Spending for the world’s most-watched sporting event will spur lending for roads, stadiums and hotels. Bond sales by Qatari Islamic banks, only two of which have sold sukuk, also stand to benefit from the implementation of new global capital rules, S&P said.

“Qatari banks in general clearly have substantial scope to grow their asset base given the sheer magnitude of projects and infrastructure development going on in Doha at present,” said Chavan Bhogaita, head of markets strategy at the National Bank of Abu Dhabi.

The project pipeline in the UAE is also flowing, “albeit not at the same aggressive pace,” he added.
QIB’s Islamic bonds due in October 2017 yielded 2.74% by afternoon in Doha, according to data compiled by Bloomberg. DIB’s sukuk maturing in May the same year has a yield of 3.34%.

Both banks are rated A by Fitch Ratings, the sixth-highest investment grade. That compares with a yield of 3.32% for the HSBC/Nasdaq Dubai GCC Financial Services US Dollar Sukuk Index.

Qatar now has one of the fastest-growing Islamic banking industries in the world because of the surge in demand for local credit, S&P said.

“Unlike the UAE, conventional banks in Qatar aren’t allowed to offer Islamic products, which allows the Shariah-compliant banks to completely capture the Islamic banking market,” said Chiradeep Ghosh, a Bahrain-based analyst at Securities and Investment Co.

“We expect to see stronger borrowing appetite from corporations in Qatar compared to the UAE, supported by the roll-out of Qatari government projects.”

Qatar’s economy will grow 5.2% next year, the fastest in the GCC, according to the median of 17 estimates compiled by Bloomberg. Economic growth will reach 3.4% in the UAE and 4.2% in Saudi Arabia.
Still, total loans at QIB fell 14% to $11.5bn in the first six months of the year. Loans at DIB declined 3.3% to $16.2bn in the same period, while UAE loans grew 4.4%.

“We have seen an up-tick in lending in the UAE,” Jaap Meijer, the Dubai-based director of equity research at Arqaam Capital, said. “There are a lot of opportunities for UAE banks in the retail and corporates sectors” that will help drive their expansion, he added.

The UAE central bank expects to release revised limits for bank exposures to government-related entities in the next two months, the chairman of the Banks Federation said.

The central bank said in April 2012 that banks must not lend more than 100% of their capital to local governments and the same amount to government-related entities to help reduce risk.

“The forthcoming GRE lending restrictions from the UAE central bank will certainly be a key factor for the future growth trajectory of certain UAE banks,” Bhogaita said. “While they will still have ample scope to expand their balance sheet, they may need to work harder for such growth.”

Lending growth in Qatar will re-accelerate in 2014 after a visible slowdown during the first half of the year due to “administrative delays with certain projects,” S&P said. Islamic banks may grow an average of 15% over the next five years, it added.

“If the banks grow, they need to find the matching funding,” Timucin Engin, S&P credit analyst, said in an interview. “We might see some of the banks more active on debt issuances.”

QIB has total assets of $20.32bn compared with $30.26bn for DIB, according Bloomberg data. Total loans at QIB grew 62% in 2012 to $13.4bn compared to a 5.9% increase to $16.8bn at DIB.
“On our numbers, it could take until about 2022 for QIB to overtake DIB,” Meijer said.

(Gulf Times / 19 Sept 2013)

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Islamic Finance: London Eyes Becoming Western Capital of Sharia-Compliant Banking

London is vying to be the capital of Islamic finance outside of the Muslim world, says the city's Deputy Mayor Sir Edward Lister.
A task force on building the UK's Islamic finance industry has been at work since early 2013 and London will host the World Islamic Economic Forum in October.
"The task force has just started and its aim is to make it easier for banks in London to have Islamic products, which is still quite a new concept to any of them," Lister told a press conference, reported Reuters.
"Only now people are beginning to understand what the products actually mean and how they comply ... What you will see is a lot of companies introducing those products."
Globally, the Islamic finance industry is forecast to be worth $2.6tn (€1.9bn, £1.6bn) by 2017. It has grown by around 30% each year since the millennium and consultancy firm Oliver Wyman predicts that there will need to be at least 150 Islamic finance institutions by 2020 to meet the ever-growing demand.
There are more than 20 UK banks offering Sharia-compliant products, such as HSBC and RBS. There are also three Sharia-only institutions, including the Islamic Bank of Britain (IBB).
By increasing the number of Sharia-compliant financial services in London it will be easier to facilitate investment in the UK from Islamic investors.
What is Islamic banking?
According to IBB's website: "Islamic banking operates without interest which is not permitted in Islam, as money in itself is not considered to have intrinsic value.
"As interest is income generated from money, it is seen as effortless return. Instead money must be used in a productive way and wealth can only be generated through legitimate trade and investment, which involves an element of risk.
"Islamic banking therefore uses various principles recognised as Sharia compliant such as Ijara (leasing), Musharaka (partnership) and Wakala (agency agreement). Islamic banks use these principles to develop Sharia compliant financial products, such as savings accounts and home finance, which allow Muslims to conduct their finances in an Islamic way."

(International Business Times / 19 Sept 2013)

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