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Tuesday, 26 November 2013

Dubai races to become global Islamic finance hub

Dubai: A decade ago, Kuala Lumpur had the distinction of being the undisputed leader among the global Islamic finance hubs. The launch of Dubai International Financial Centre (DIFC) in 2004 marked the birth of a new hub in the Middle East.
Dubai’s ambition got a new boost in January this year when the government declared its intention to make the city the global capital of Islamic economy. The Emirate’s new plan comes from Shaikh Mohammad Bin Rashid Al Maktoum, Vice President of the UAE and Ruler of Dubai, and has the involvement of government departments at the highest level.
Dubai’s initiative has triggered a flurry of activity across major global financial centres, all working towards a strategy of getting a share of the Islamic finance pie. From early March UK initiated a global push to boost the prospects of London. Not to be left out, Malaysia is in the process of finetuning its regulations to get more overseas participation in its Islamic financial markets.
London has been nurturing its ambition of becoming the western hub of Islamic finance for some time. At the first World Islamic Forum outside the Muslim world in London in October, British Prime Minister David Cameron could not keep London’s plans discreet.
“I don’t just want London to be a great capital of Islamic finance in the Western world, I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world,” Cameron told the gathering of more than 1,800 political and business leaders dubbed as the ‘Davos of the Muslim world’.
Obviously, there are others who too want a share of this fast-growing segment of financial services business. Two weeks ago, Hong Kong declared its intention to sell its debut sukuk to spur the city’s development as an Islamic finance hub. “The territory will offer the (Islamic) notes under the Government Bond Programme,” Au King-Chi, permanent secretary for Financial Services and the Treasury, said in a statement published on the government’s website.The UK government has thrown its full weight behind London as a contender for the Islamic finance hub by announcing its intention to issue its first sovereign sukuk (Islamic bond). Of course, the story doesn’t end there with just London entering the fray and gradually usurping the throne from the current two strong contenders.
Hong Kong is certainly eyeing the global potential of Islamic finance, but its immediate focus is on its captive market — China. Analysts say Hong Kong is in a hurry to define its niches before Shanghai, China’s new financial centre, becomes a threat to its dominance in the region.
“Hong Kong is a gateway to greater China, so this (sukuk) issuance would be very well-watched. A single issuance won’t give any country the title of Islamic finance hub, but we are seeing more non-Islamic jurisdictions stepping into the fray, which bodes well for the industry.” said Raj Mohammad, managing director at Five Pillars Pte, a consulting company in Singapore.
Singapore’s ambition
Singapore has been nurturing the ambition of becoming a new regional centre for Islamic finance — in direct competition with Malaysia and Indonesia for global capital flows. As an international financial centre, Singapore is keen to play a role in Islamic finance by leveraging its capabilities and credentials in wealth management, project financing and trade financing. The government has undertaken several initiatives in areas such as taxation, capital markets, REITs, Takaful insurance, and Islamic equity indexes, in order to improve Singapore’s attractiveness for Islamic finance. DBS Bank took the lead in 2007 and launched the Islamic Bank of Asia to focus on corporate capital markets and private banking services.
“Singapore’s strategy is based on the understanding that it cannot be a truly global financial centre if it does not offer Islamic financial services. Proximity to Indonesia, a major market for Islamic finance and relatively smaller size of Singapore’s domestic market seem to be pushing it to seek a share in the Islamic finance,” said Ketan Shah, an analyst at Orion Financial Consulting in Hong Kong.
Over the past few decades after the Asian financial crisis, Malaysia has emerged the Islamic finance centre for Asia with smart regulation and a growing ecosystem around Islamic finance. Approximately 70 per cent of Malaysia’s domestic debt issuance is in the form of sukuks, making it the world’s largest Islamic bond market with more than 60 per cent of global sukuk issuance originating from Malaysia.

Alternatives to conventional financing
According to global rating agency Standard & Poor’s, issuers are likely to seek alternatives to conventional financing, given the uncertain outlook for global credit markets. Islamic finance is one such alternative. “Infrastructure projects are a logical fit for Islamic finance for two reasons — the Islamic finance market is growing and deepening; and Sharia (Islamic law) governs Islamic finance and is based on the concepts of asset-backing and shared business risk,” S&P said in a recent note.
“Malaysia’s role in creating a well-regulated market with significantly high number of issuance is well recognised in the industry. In that respect, all new centres will have a lot of catch up to do,” said Khalid Howladar, senior credit officer at Moody’s Investors Service.
Malaysia pioneered the use of Sharia-compliant sukuk bonds to fund infrastructure projects and is the leader in Islamic financing. The key issue for this market, in our view, is that a lack of standardisation constrains sukuk issuance. It also deprives the market of an organised structure to facilitate secondary trading and liquidity.
Malaysia has challenges, too. Corporate governance standards are moderate and the enforcement of governance practices could improve. Shareholder activism is limited and corporate scandals far too frequent. While the law provides for creditor protection, the process for enforcing legal claims can be protracted. These issues should be easy to fix, provided they are approached with vigour and zeal.
London is leveraging on its preeminent position a global financial centre for conventional finance. It believes that its global banking linkages and close association with traditional markets for Islamic financial services could be translated into emerging as a new global Islamic financial services hub. London has led in attracting issues by big international companies because of the massive size of its conventional financial markets and its globally respected legal system.
Strategically located in the oil-rich Gulf region, Dubai sees opportunities in becoming a global hub for Islamic finance starting with being a financial centre for Middle East, North Africa and sub-Saharan Africa. Dubai has already started its efforts in earnest to convince the regional issuers list their sukuk here. Analysts say Dubai won a victory this month when the Jeddah-based Islamic Development Bank, which has long operated sukuk issuance programmes in London and Kuala Lumpur, said it would set up a $10 billion programme on the Nasdaq Dubai exchange.
Besides Dubai, in the GCC there are at least three other cities such as Bahrain, Qatar and Riyadh that are angling for a share of Islamic financial services business but with limited success.
(Gulfnews.com / 24 Nov 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

Turkey has ‘long way’ to go for Islamic finance system


Turkey has made good progress in the Islamic finance system in the participation banking field, but there is a long way to go for Islamic insurance system (takaful) and Islamic capital markets, says Ashar Nazım, partner at Global Islamic Banking at Ernst&Young. 

There is a financial cycle to be completed in Islamic finance: a banking system (participation banks), which was already founded and growing in Turkey, Islamic insurance system (which they hoped would soon come to Turkey) and capital markets, Nazım said in an interview with the Hürriyet Daily News. 

“The participation banks’ volume was under $40 billion in 2012 but the Turkish government is aspiring to a 15 percent market share by 2023. [That means] an increase of five times in terms of participation bank assets, to more than $200 billion by 2023. It is an ambitious target that is achievable as well if certain steps are put in place,” Nazım said.

Three key priorities

“The challenge and opportunity for Turkey is to understand and define ‘How Turkey can be the intellectual capital of the Islamic Finance World.’ Because, the next phase of development will be about innovation,” he said, noting that there were three key priorities that should be completed in Turkey to develop the Islamic finance system. 

The first priority is regulation, said Nazım. “Regulatory clarity is extremely important. Because the investors like a predictable, well-articulated and distinct framework.”

There isn’t currently a special regulation for participation banks in Turkey, they are in compliance with the current banking regulations, which are obstacle against the sector’s growth, he said, adding that there were some countries that had exclusive regulations for participation banks. 

Because of a gap in regulations, there aren’t currently any takaful companies in Turkey, he said. Also, Turkey has sukuk as a capital market instrument but the capital markets have a broader meaning with a number of different instruments that don’t take place in the country, he noted.

The second priority is the supply side, he continued. “Establishing of institutions and making enough private and public sector financing of it and capital available for it: To achieve 2023 targets, between seven and 10 participation banks are needed. Also they should be created in 18-24 months. Any delay would mean slowdown in industry,” he said. Turkey needed to increase capitalization of participation banks 10-fold over 10 years, he added.

Moreover, creating new institutions on the banking side, Islamic insurance side and capital markets was necessary, and new companies in the sub-financial sectors insurance, like asset management, leasing, should be founded, he said. 

The final priority is creating talent, Nazım said. Human resources should be developed to enhance this sector, he said, adding that Islamic finance could be a great opportunity to create new employment. 

Turkey a prominent Islamic finance market

Nazım said there were six key markets for Islamic finance in the world: Qatar, Indonesia, Saudi Arabia, United Arab Emirates, Malaysia and Turkey. However, Nazım urged that the next 12-24 months would be critical for Turkey. 

“If Turkey establishes enough institutions which are handsomely capitalized in terms of financial capital and human capital, we’re going to see a very strong growth trajectory which can make Turkey one of the leading global centers for Islamic finance, particularly in capital markets, wealth management and trade finance. That’s why we said Turkey is in an ideal position between Europe, Central Asia and Middle East and very well connected,” he said.

According to Nazım, there are two main reasons differences to choose Islamic finance system: Islamic finance offers a more balanced distribution of risks and rewards. The second is that Islamic financial activities are much more closely linked to the real economic activities.

Meanwhile, the term “socially responsible finance” has been replacing Islamic finance because it is a broader definition as this sector doesn’t target only Islamic countries or Muslims. 

The World Islamic Banking Conference (WIBC) in Bahrain will be held between Dec. 3 and 5. As Ernst&Young is one of the major sponsors of this event, they will release their World Islamic Banking Competitiveness Report in December.



(Daily News / 25 Nov 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

Dubai to benefit from global Islamic finance surge

Dubai: The big surge happening in the global Islamic finance sector is expected to benefit Dubai as it pitches to become a global Islamic financial hub, analysts said.
“Global Islamic Finance is expected to maintain its rapid pace of growth, strengthening itself as a real alternative to conventional finance,” said Stuart Anderson, Managing Director & Regional Head, Middle East at Standard & Poor’s.
"With strong growth in Islamic finance in the region in the form of rising sukuk issuance, creation of innovative Islamic financing structures and increasing number of corporates and government related entities raising long-term funding through Islamic financing, Dubai can play a key role in building Islamic capital market infrastructure
Despite registering healthy volumes in 2013, the sector is seemingly struggling to match last year’s exceptional growth due to tougher market conditions. Worldwide year-to-date issuance dipped 25 per cent from last year to $77.4 billion, as of September 22, 2013. S&P believes 2013 sukuk issuance is on course to cross the $100 billion mark.
In the third quarter, the Gulf region witnessed a slowdown in issuance largely because of rising yields driven by the expectation that the US Fed would cut the bond buying programme. With the Fed deciding to postpone the tapering, the yields have flattened. “We expect more issuers from the region to tap the market as the yields are down while the supportive environment is boosting the prospects of sovereigns, government related entities, financial institutions and banks raising long term funding through sukuk,” said Karim Nassif, Associate Director, Infrastructure of S&P.
S&P analysts expect Africa with significant Muslim population will be the next frontier of sukuk expansion. “With most Sub-Saharan African countries running large fiscal and current account deficits, are currently financed conventional bonds. There is clearly an opportunity for Sukuk issuance,” said Nassif.
As global awareness of Islamic finance is gaining momentum, the Islamic financial market would benefit from a greater volume of sukuk to satisfy the needs of global investors, said Khalid Howladar, Senior Credit Officer, Islamic finance at Moody’s Investors Service. “If we take the total assets of Islamic banks globally, it is expected to be around $1.5 trillion, which is still under 1 per cent of total global financial assets,” said Howladar.
Global awareness
Although countries that are most likely to use this type of financing are from the Middle East and Asia, there is growing global awareness about Islamic instruments as an asset class and as financing tools.
Structural complexity and extensive legal documentation are the hurdles which face Islamic finance investors and inhibit the growth of this market segment. Despite such challenges, there is growing interest in Islamic financial instruments because they provide access to a new and growing liquidity pool for borrowers. As Islamic banks and institutions tend to be extremely liquid and supply of sukuk still remains limited, recent sukuk issuances have all been oversubscribed several fold.
There is significant demand from international investors for exposure to Gulf and Asian debt instruments. Whereas, Islamic principles encourage that investment should be restricted to asset backed financial instruments. The fusion of these two distinct markets renders Islamic instruments extremely complex.
Some of the recent innovations in the sector look promising — for instance the shortage of instruments to boost capital base or allocate excess liquidity into Sharia-compliant investment options. Such recent innovations include the use of hybrid sukuk by GCC banks to strengthen capital and the ‘International Islamic Liquidity Management (IILM) 2 SA’ vehicle set up by Malaysia-headquartered IILM Corporation to better manage short-term allocation of excess liquidity.
(Gulf.News.Con / 25 Nov 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

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