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Tuesday, 28 October 2014

Islamic banking and capital markets to develop hand in hand

Dubai: As Dubai aspires to become the global hub for Islamic economy, Islamic banking and Islamic capital markets are expected to grow simultaneously, said Adnan Chilwan, CEO of Dubai Islamic Bank.
Clearly Islamic capital markets are relatively new phenomena. Earlier it was much simpler that if someone needed finance they would go to a bank and the bank would leverage its balance sheet and give a loan. Then it started becoming a little more sophisticated by many banks joining in together to do a syndicated deals. Then a stage came where banks started to participate in cross border deals.
Conventional debt markets are relatively old compared to Islamic bond markets. Over the last decade a number of corporates and sovereigns have started raising funds in the bond markets.
“Corporates around the world have realised that bank funding is available, while the availability of funding from capital markets is function of a number of factors such as global macro economic policies, geopolitical situations and such other events and that market may not be available infinitely. So purely from an opportunistic point of view, issuers are using both these markets depending on the prevailing market conditions,”
Over the last few years a number of sovereigns and corporates have started to lean towards Islamic capital markets. This is happening not because it is cheaper or because it is more secure but for the simple reason that it is a larger investor base. When a company decides to tap convectional capital market it automatically excludes a huge group of investors, but on the contrary if they go for a sukuk issue it is bringing into the fold both conventional and Islamic investors — naturally expanding the investor base.
There is a large pool of Islamic liquidity available. A larger liquidity pool generates larger demand which means the potential to drive price increases. The global financial crisis taught everyone a lot of things. People have now started looking at this industry as more resilient because there are clearly defined underling assets. They are carved out to support the bonds and it gives natural stability to this asset class and there is a secondary market which is performing well. With all these factors put together now people are keen to tap the Islamic capital markets.
Supply shortage
The industry is relatively nascent and also Islamic capital markets is now gaining popularity it is also a function of how liquid the secondary markets are performing. For an issuer to issue an Islamic paper also depend on demand. Of course, on the supply side, the major concern for corporates is the availability of Sharia compliant assets that can be ring-fenced. Islamic finance is asset backed and asset based.
“Supply is also a function of demand in the market. Nobody wants their issue to be under performing. When the issue is trading at a premium it simply means that there is demand for that paper in the secondary market,” said Chilwan. Additionally, he believes that as the market matures issuers should strive for better corporate governance and better disclosure standards.
The MSCI upgrade of UAE and Qatar markets to emerging markets this year is expected to increase asset allocation foreign institutional investors in these markets. “When a country is in the MSCI basket, the issues from that countries are also looked at very positively. So it is not just the equity markets, but the bond markets also benefit from this positive market vibes. Of course, ratings that comes along with issuances are also helping international investors to gain confidence in companies and markets,” said Chilwan.
(Gulf News.Com / 27 October 2014)
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Sultan Nazrin: Strive to make Islamic finance dynamic

DUBAI: Muslim countries must strive to make Islamic finance and the ecosystem in which it operates as dynamic and information-rich as possible, said Sultan of Perak, Sultan Nazrin Shah.
He said that in order to do so, there must be considerable investment in human capital particularly research, education and training.
These, he said, include financial institutions, the investment community and importantly, those responsible for Islamic jurisprudence and policy makers.
Sultan Nazrin noted that Islamic finance is fast becoming mainstream global finance, citing that the United Kingdom became the first sovereign issuer of sukuk outside the Islamic world followed by Hong Kong and South Africa.
“These sovereign issues mark a milestone and a coming of age of sorts for Islamic finance and asset management,” he said.
The Sultan of Perak, who is the Royal patron for Malaysia’s Islamic Finance Initiative was speaking at the Islamic Forum Dubai 2014 The Franklin Templeton Investments.
Sultan Nazrin made a special mention on Dubai and Malaysia, which he described as being major players in the Islamic finance sector.
He said efforts must continue to ensure the soundness and integrity of Islamic assets, where they have to be true not just to good investment principles but also the ethical values enshrined in the teachings of Islam.
“The ultimate objective of Islamic investment is to achieve al falah or success, happiness and well-being in this world and the hereafter through efficiency and effectiveness but also with fair dealing and economic justice,” he added.
Sultan Nazrin said a large proportion of Islamic investment today takes place on a cross-border basis where in terms of forging inter-connectivity, the effects of Islamic finance are global and should be recognised as such.
Training the much-needed capital, industry talent, regulatory bodies and business networks would draw people of all races and creeds closer together and not just Muslims, he added.
“With earlier provisos that Islamic financing and asset management need to be managed progressively and sustainably, this increasing closeness cannot but have positive effects in promoting greater mutual understanding and acceptance of Islamic finance by all,” said Sultan Nazrin.
He said Asia, particularly East and South-East Asia were the regions likely to take Islamic finance and investing to the next level as economic growth and wealth creation in this part of the world is expected to continue, albeit at possibly more suitable rates.
(The Star Online . 28 October 2014)
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