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Thursday, 3 October 2013

GCC Islamic banks growing fast

Islamic banks in the GCC are likely to grow faster than their conventional counterparts and increase their share of the region’s banking system assets for the foreseeable future, Standard & Poor’s (S&P) Ratings Services said on Tuesday.

However, with Islamic banks taking a more pronounced hit from lower interest rates and non-core banking revenues than their conventional peers because they traditionally operate with larger bases of non-interest bearing liabilities, profitability rates for the two banking models are converging, S&P analysts said on Tuesday in a report titled “Gulf Islamic banks continue to grow faster than their conventional peers, but profitability rates are converging.”

Stuart Anderson, managing director and regional head, Middle East at S&P, said Islamic banks outgrew their conventional peers between 2009 and 2012 in the GCC.

The asset bases of Gulf Islamic banks, roughly estimated at one-third of the assets of conventional peers, showed a compound average growth rate of 17.4 per cent compared with conventional banks’ 8.1 per cent, while their net lending and customer deposits grew by an average of 18.2 per cent and 19.9 per cent compared with conventional banks’ 8.1 per cent and 10 per cent,” he said. “We think Islamic banking will continue to increase its market share in the Gulf, and we expect the operating environment over the next two years to remain supportive for Islamic banks’ credit quality,” said S&P credit analyst Timucin Engin.

Low interest rates and lower capital market-related gains than 2008 pre-crisis levels are impairing revenue growth for most Islamic banks in the region, leading to profitability convergence with their conventional peers, said Engin.

Anderson said strong government support is the key to the rapid growth of Islamic banking in the region. “We expect Qatari Islamic banks to grow especially fast because of the country’s large infrastructure needs and investments, including the 2022 soccer World Cup.”

He said S&P expects Islamic banking to continue to increase its market share in the Gulf with the operating environment remaining supportive for Islamic banks’ credit quality over the next two years.

“That said, low interest rates and lower capital market-related gains than 2008 pre-crisis levels are impairing revenue growth for most Islamic banks in the region, leading to profitability convergence with their conventional peers.”

Engin said unless there is a cycle of higher interest rates that would help Islamic banks to expand their net interest margins, the convergence between conventional and Islamic banking returns in the GCC region would continue over the next few years. “Islamic banks used to be able to rely on strong returns from non-banking activities such as capital markets and real estate owing to the inflationary asset valuation cycle in the region. After their recent credit losses we now expect them to have similar provisioning levels to their conventional peers,” he said.

 “We believe the convergence of returns between the conventional and the Islamic banking models in the GCC region is here to stay,” said Engin.

(Khaleej Times / 03 Oct 2013)

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Islamic Finance: London Can Grab £1tn of Global Market Claims Ethical Asset Management's Saadat Khan

London could capture a trillion pounds' worth of the burgeoning global Islamic finance market, according to a Shariah-compliant asset management firm in the city.
Ethical Asset Management Chief Executive Saadat Khan said the UK could lure the lucrative Islamic investment by encouraging a market with truly Shariah-compliant financial products, because much of what is on offer at the moment does not suit Muslim investors' strict requirements.
Under Shariah finance rules, the charging of interest on lending is regarded as usury and forbidden. Investors must also avoid investments linked to certain things, such as pork and alcohol, which Muslims are barred by their faith from consuming.
"There are tens of billions of dollars looking for a suitable home that are doing nothing at present due to the structured nature of many Shariah-products currently available on the market," said Khan, whose firm was the UK's first Shariah-based asset manager when it was created in 2010.
"Several of these are described as Shariah-compliant or even Shariah-inspired. However, a significant number of investors are not interested in them because they are very similar to conventional products in all but name.
"Some of these are effectively conventional bonds, which are basically a promise to pay. An investment (loan) is made based on the strength of the balance sheet of borrowers who make huge profits and share a disproportionate amount of these profits with the investor.
"This model is against the true principles of Shariah Law, which encourages wealth distribution and that risk and reward is divided fairly."
London Deputy Mayor Sir Edward Lister has already been touting the city around the world as the western hub for Islamic finance.
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 in Kuala Lumpur, Malaysia.
"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.
Ethical AM's Khan, who has given evidence to the task force, argues that for a financial product to be Shariah-compliant there can be no guaranteed return on investment, such as coupon payments on bonds.
Instead, any investment should be based on risk-sharing through shared ownership of the asset, with profits or losses split between the parties.
"The purpose of the Shariah system is the same as all the Abrahamic faiths, which is not to benefit onesself only but to ensure the betterment of all," he said.
"We can make a huge positive contribution to society by operating in this manner and make a good return ethically on investments without any loss of profit. We must consider people before profit."

(International Business Times / 01 Oct 2013)

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Some unlikely players are getting into Islamic finance

Global markets are vying to get a piece of the action in Islamic finance. With an emphasis on ethical investing and prohibitions against interest and excess risk, the relatively nascent industry has struck a chord with investors burned by conventional finance in recent years. According to Ernst & Young’s World Islamic Banking Competitiveness Report 2013, Islamic banking assets held by commercial banks globally are expected to exceed $1.8 trillion this year, a 38% increase since 2011. The vast oil wealth present in the Middle East and an aggressive push by Malaysia to serve as an Islamic finance hub in Asia have helped drive the growth. But the industry is also getting a boost from markets outside the Muslim world. Here are four markets to watch: 
With 2.7 million Muslims, the UK is ramping up ambitions to be the Western capital of Islamic finance. The country launched an Islamic finance task force in March, aimed at bolstering business compliant with sharia, or Islamic law.  London is hosting the World Islamic Economic Forum this month, a conference of Islamic financiers that attracted more than $8.6 billion in financial deals last year. London’s involvement marks the first time the event has been held outside of a Muslim country. Currently, 22 British financial institutions offer Islamic products and there are three standalone Islamic banks, including the Bank of London and the Middle East, which plans to list its shares on Nasdaq Dubai this month in a clear bid to participate in the growing Islamic economy in the Gulf.  The country revised its tax legislation to accommodate Islamic bond, or sukuk, issuance but plans to offer its first sovereign sukuk were abandoned in 2009 as the global economic crisis sapped enthusiasm. Even so, London remains a major player in the sukuk market with the London Stock Exchange reporting that over £22.3 billion has been raised through 49 issues of sukuk on the LSE.


By all measures, India should be a natural player within the Islamic finance industry. The world’s largest democracy boasts one of the largest populations of Muslims in the world at 177 million; only Indonesia has more. But a long history of religious strife and political power struggles between the dominant Hindu population and Muslims has made India reluctant to embrace Islamic finance. Under the country’s current laws, the financial sector requires banking to be pegged on the concept of interest, forbidden in Islam. But a recent decision by the country’s central bank, the Reserve Bank of India (RBI), to allow a firm in the Kerala to operate as a non-banking financial company that follows Islamic principles is raising hopes that India will soon allow sharia-compliant business to develop further.

It is an uphill battle, to be sure, based on precedent. Last year, the RBI pulled Kerala-based financial firm Alternative Investments and Credits Ltd.’s (AICL) license after 10 years, saying it violated India’s laws on charging interest, through its Islamic model. But experts say there is a change in the air, with India seeing Islamic finance as one method of helping to attract more investment from cash-rich Gulf states to help finance proposed infrastructure projects. If the political and economic will is present, there may be enough momentum to overcome pressure from right-wing critics, such as the Bharatiya Janata Party (BJP).


This tiny country is playing a big role in the development of Islamic finance. It has grown into the leading non-Muslim domicile for sharia-compliant investment. Luxembourg already is a hub for internationally distributed investment funds but its emphasis on developing Islamic finance helped it attract Middle Eastern capital. It became the first country in Europe to host an Islamic finance institution in 1978, and with its reputation as one of the best tax regimes in Europe, Luxembourg has been a magnet for Islamic finance deals. As of 2012, the country has 41 sharia-compliant funds with €4 billion in assets under management. It is the main destination for listing sukuk in Europe, according to a report by Ernst & Young.

While Islamic finance is certainty gaining in popularity, the industry has struggled to expand due to a shortage of highly liquid, investment-grade financial instruments that Islamic institutions can trade to manage their short-term funding needs. To help with that, Luxembourg’s central bank co-founded the International Islamic Liquidity Management Corp (IILM) in 2010 with other central banks from Asia, the Middle East and Africa. The IILM issued its first dollar-denominated $490 million Islamic bond August, a move that is being seen as a first step toward create a cross-border market for Islamic financial instruments.


At first glance, Turkey seems to be a no-brainer when it comes to embracing Islamic finance. As the eighth most populous Muslim country in the world and Europe’s only Muslim country, there’s a natural market for sharia-compliant business. But Turkey long prided itself on a secular stance toward finance and politics, even referring to its four Islamic banks as so-called participation banks to imply the profit-and-loss-sharing model of Islamic finance. As the global financial crisis weakened Western markets, however, Turkey made the strategic decision to put aside its reluctance and strengthen ties with its oil-rich Middle Eastern brethren.

That decision is expected to make Turkey a major player in Islamic finance going forward. Ernst & Young estimates that the Islamic banking sector will triple in 10 years reaching $100 billion by 2023. Sukuk will play a major part in this growth. Turkey revamped its tax laws to allow for the issuance of one type of sukuk without double taxation and the country’s Capital Markets Board said in April that it is looking to expand its offerings to encompass other forms of Islamic bonds. Turkey issued its first sovereign sukuk in 2012 and said it will issue lira-denominated sukuk twice a year. Given Turkey’s secular legal environment, the success of its offerings has been hailed as a benchmark for Western markets seeking to enter the Islamic finance market.

(Quartz / 03 Oct 2013)

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Singapore and Malaysia urged to collaborate on Islamic financing

SINGAPORE: Singapore and Malaysia should look for more cross-border opportunities to collaborate on Islamic financing.
This is according to speakers at the inaugural Islamic Finance Services Conference on Tuesday.
Experts said Singapore should also widen its breadth of Islamic finance products to cover the areas of retail, real estate and equities, in order to spur growth in this area.
Malaysia is the world leader in terms of Islamic financing, making up about 30 per cent of the more than US$1 trillion worth of global assets in Islamic finance.
As for Singapore, the growth momentum in Islamic financing continued unabated even when certain tax incentives expired earlier this year.
In Budget 2013, the Singapore Government said it will tax Islamic finance business at the standard 12 per cent rate instead of 5 per cent, the current rate, when the incentive expires on March 31.
Nazmi Camalxaman, associate director of Group Islamic Banking at CIMB, said: "I think Singapore has a lot of potential, especially in terms of Islamic asset management. It is untapped in Singapore. So I think if Singapore plays its cards right and chooses the products and services wisely, it will become a strong player in terms of asset management."
CIMB Singapore has secured about S$400 million worth of Islamic commercial and corporate banking deals this year.
This is almost three times the amount of Shariah-compliant deals the bank transacted last year.
Experts said Singapore must continue to play to its strengths.
Zainul Abidin Rasheed, advisor of the Middle East Business Group at the Singapore Business Federation, said: "Singapore does not have to emulate the kind of moves that Malaysia has because Singapore by itself is a very strong financial sector and we have our own strengths, but there is still room for us to see how we can best tap the growing market in terms of finance, whether from Southeast Asia or the Middle East."
Other ASEAN players are also keen to tap into that growth.
Ariff Sultan, regional director (Asia) at Ideal ratings, said: "Governments and the exchanges have worked together in trying to find a more sustainable growth of Islamic finance in ASEAN.
"There is a common working platform that ASEAN exchanges are coming together to be able to inter-trade within ASEAN and in that space, both also looking at creating Shariah-compliant equities."
Other analysts are anticipating the likes of Singapore, Thailand and Indonesia pushing out such Islamic equities through the ASEAN exchanges platform in the near future. 
(Channel News Asia / 01 Oct 2013)

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