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Thursday, 12 December 2013

Islamic finance to sustain growth in MENA

DOHA – Rapidly-growing Islamic-based finance will drive the next phase of economic growth across the Middle East and North Africa (MENA), financial leaders have said at the Euromoney Qatar Conference Wednesday.

With bankers in attendance from around the world, the event has provided critical insight into the state of the global economy, and the MENA region’s growing role as a source and key market for Islamic-based finance.

Globally sharia-compliant assets are estimated to be worth $1.4 trillion, and slated to post double-digit growth in the next two-to-three years, according to a recent report from Standard & Poor’s. The GCC and Asia are set to be Islamic finance leaders, followed by newcomers such as Turkey and Nigeria.

As well as funding planned government infrastructure investment, Shariah-compliant finance is increasing its importance in the corporate space. 

International communications company Ooredoo recently launched a $1.25 billion 5-year sukuk as part of a growing trend. The rise of the Islamic financing sector will provide important stimulus at a critical period for the MENA region, where there is increasing pressure to boost employment opportunities and enhance support for the private sector. The MENA region needs to create 75 million jobs to keep pace with population growth, requiring greater investment by small- and medium-sized enterprises which represent 80 percent of the region’s businesses, according to figures presented at the conference.

Khaled Al-Aboodi, Chief Executive Officer, Islamic Corporation for the Development of the Private Sector (ICD), said: “The private sector is the main engine of growth for jobs, better income, and increased standard of living. Achieving this developmental goal will require public-private partnerships, supported with Islamic finance.Qatar is assuming an increasingly prominent place on the world stage, while playing an important role in socio-economic development in Africa, Central Asia, and Southeast Asia.”

Qatar has taken a leading role in Islamic finance, in line with its goals of becoming a global financial hub and diversifying its economy. Speakers from around the world at the conference concurred that Qatar was entering a new phase of unprecedented opportunity.

Rene Karsenti, President, International Capital Market Association Group, said: “As a financial sector, Qatar benefits from solid attributes such as an English common law environment, and a world-class regulatory regime. The Islamic finance sector represents also an opportunity - the sector has enjoyed increased activity and is expected to continue to grow as more sophisticated financial instruments spark the interest of investors.”

Robert Stheeman, Chief Executive, United Kingdom Debt Management Office, said: “Qatar will need to further diversify its economy and encourage the private sector and entrepreneurship, and continue its focus on research and development, education, and health. Successfully delivering on this will help Qatar achieve its National Vision 2030, and place Qatar as a leading economic centre in the region and global economy.”

Beyond the GCC, Turkey is becoming more active in the Islamic finance market in order to enhance economic growth, as the country recently issued two sovereign sukuk: $1.5 billion 5.5-year in September 2012, and $1.25 billion 5-year in October 2013.

For delegates from the international finance sector, as well as for local decision-makers in Qatar, this year’s Euromoney Qatar Conference has provided an important opportunity to share ideas and better understand the changing dynamics of the global economy.

(Saudi Gazette / 11 Dec 2013)
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The continued rise of Islamic finance in the UK

Despite the clear political will for the UK to become an Islamic finance hub, there are steep political challenges ahead.
At the ninth annual World Islamic Economic Forum in London on 29 October, David Cameron announced that he wants to see London standing shoulder-to-shoulder with Dubai and Kuala Lumpur as one of the great global centres of Islamic finance. In saying this, he declared that he intends Britain to become the first non-Muslim state to issue sukuk – Islamic bonds that are structured in such a way as they do not infringe upon Sharia law.
While the issue size is expected to be relatively modest – approximately £200m in the first instance – the announcement should rightfully be seen as a symbol of the square mile’s desire to capture a large share of the growing Islamic finance market. Few would dispute the wisdom of this move, for the growth of Islamic finance since the first sukuk was issued in Malaysia in 2000 has been very impressive.
The global Islamic economy, which includes the Islamic finance industry, is estimated to have a total value of $8 trillion. Sukuk have been used since their inception as a means for corporates and states to raise alternative financing. In light of the global crisis and liquidity squeeze, Islamic finance has grown exponentially. On this basis, it would be strange in a sense for London and other global financial centres not to try to gain some market share and we should expect announcements similar to that of Cameron’s from spokespeople in New York, Frankfurt, Paris, Hong Kong and Singapore.
The growth of Islamic finance is attributable to many different factors, but that growth would not have been possible without the development of the contemporary financing techniques or structures that underpin the industry. For this, sukuks today can be seen as a union between religious principles and modern financing techniques. One can understand the appeal of sukuk, particularly in light of the banking crisis that has gripped the Western world and beyond since 2008, for in some senses it can be seen as a more tangible investment than a conventional bond, because the sukuk owner has a stake in the underlying asset rather than a share of debt. So while a conventional bond holder essentially receives interest on a loan, the sukuk holder receives a share of profit derived from the commercial ventures of the business, rather than on interest (interest is strictly forbidden under Sharia law).
However, despite the clear political will for the UK to become an Islamic finance hub, there are undoubtedly challenges lying ahead. An obvious area of weakness is a lack of indigenous expertise in terms of awareness of the range of financial products on offer and the various structures that can be implemented to make finance initiatives Sharia-compliant. Although there are Islamic finance practices operating out of London, there is still a dearth of expertise. Furthermore, regulation standardising practices and giving confidence to borrowers will be required to grow the industry. However, these are not immutable, nor insurmountable, obstacles.
As uncertainty persists in certain parts of the global economy, it has created an opportunity for Islamic finance to continue to flourish and expand into new economies. The UK has put down a marker in aiming to be the first western nation to issue sukuk and such a move is to be welcomed by the markets and legal and financial services. If some of the challenges are removed then watch this space, for it would be a brave individual who discounts the possibility of further growth in this intriguing market. There are currently 50 sukuk listings on the London Stock Exchange – expect many more to come.

(News Statesman / 11 Dec 2013)
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