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Thursday, 29 January 2015

The Globalization of Islamic Finance

Islamic finance remains one of the bright spots in the global financial industry post the 2008 financial crisis. Despite two decades of strong growth, the industry is now finally poised to break into conventional financial markets in the West.
Islamic finance is comprised of instruments, infrastructure, institutions, and markets that apply Sharia rules and principles. You might be wondering how Islamic finance impacts you, if you’re based in a non-Muslim country. Increasingly it’s being viewed as an avenue of growth for global banks, as the industry caters to the world’s 1.6 billion Muslims.
The advent of Islamic finance allowed devout Muslims the ability to access financial products and services without compromising on their beliefs. As a result, total global Islamic banking assets are projected to surpass US$2 trillion in 2014.
The Islamic finance sector is primarily comprised of Islamic Banking, Sukuk (Islamic Bonds), Takaful (Islamic Insurance), and Islamic Mutual Funds. The geographic centers of Islamic finance are primarily in Asia (Malaysia and Indonesia) and the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates).
At its core, Islamic finance is governed by fundamental principles outlined in Sharia law. The main distinction between conventional finance and Islamic finance is that the latter prohibits riba (usury/interest). Thus, virtually all Islamic finance products are based on the principle of risk sharing as opposed to risk transfer.
For example, an Islamic mortgage transaction would entail the bank purchasing a property and then reselling it to the homebuyer at a fixed profit. The buyer would then have the option to make the payments in installments. However, due to the concept of risk sharing, the bank could not charge additional penalties for late payments but would retain ownership until the loan was paid off.

Global Investors and Islamic Finance

For global investors, the sukuk (Islamic bond) market is probably the area of greatest interest within Islamic finance. The sukuk is an asset-backed security, which represents ownership in a tangible asset. With a sukuk the initial face value of the bond isn’t guaranteed. Unlike a conventional bondholder, a sukuk investor shares the risk from the underlying asset.
In practice, some sukuks are issued with repurchase guarantees, which would result in the investor receiving face value at maturity, much like a conventional bondholder. However, not all Sharia scholars agree this structure isSharia compliant.
Traditionally, governments and government-related entities in Asia and the Gulf Cooperation Council (GCC) issuedsukuks denominated in the local currency to domestic investors. However, increased demand from global investors has led to increased cross-border issuance from non-traditional sources.
Last September, rating agency Moody’s observed,
The year 2014 has become a landmark year for sovereign sukuk, with the UK issuing its inaugural sukuk, and with Hong Kong and South Africa expecting to conclude sales in September 2014. All three are major non-Islamic countries, and the transactions indicate a significant change in the potential size, depth, and liquidity of this market.
This move into sukuk finance by countries with populations that are not predominately Muslim marks a shift in the long-held perception that Islamic finance is the domain of Muslim countries.
In an effort to assist countries that seek to issue sukuk, Islamic institutions like the Islamic Corporation for the Development of the Private Sector offer help with the structure of sovereign sukuk finance.
(Casey Research / 28 January 2015)
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Islamic banks eye market share in strife-torn Iraq

Baghdad: For all the sectarian violence gripping Iraq, Sharia-compliant banks operating in the nation see opportunities for growth.

Elaf Islamic Bank, the 14-year-old Baghdad-based lender, is targeting a 28 per cent increase in profit this year, even as rival Cihan Bank said its income dropped last year as rebels seized parts of the country. 

Iraq's cabinet approved a draft law on Tuesday regulating the Sharia-compliant banking industry, which will now move to the country's parliament for passage.

Airlines cancelled flights to Baghdad on Tuesday after a United Arab Emirates passenger jet was shot at, highlighting the growing security threat in a country where IS group has declared a caliphate. Amid the strife, at least eight Sharia-compliant lenders are operating, including Abu Dhabi Islamic Bank, seeking to tap a population of 36 million that has one of the lowest penetrations of formal banking in the Middle East.

"It's a high-risk market, but at the same time there's strong potential," Montasser Khelifi, a Dubai-based senior manager at Quantum Investment Bank, said by phone. "There is a huge population, it's a big country with important oil resources. But the banking market is still not developed."

Huge opportunities
About 11 per cent of Iraqis aged 15 years and older have accounts at formal banking institutions, according to World Bank data, compared to about 60 per cent in the UAE.

Elaf expects to increase income to about $15 million this year from $11.7 million in 2014, according to Manjula Mathew, the bank's executive director of research, investments and asset management. Kurdish International Bank's profit increased 5 per cent to $36.7 million in 2014, according to chief executive officer Bustam Al Janabi. Cihan's earnings fell 37 per cent to $22.6 million, said deputy chief executive officer Naz Bajger.

Iraq's Islamic banks are still in their early phase and "the challenges are acute, but the opportunities are enormous," Mohieddine Kronfol, the Dubai-based chief investment officer for global sukuk and Mena fixed-income at Franklin Templeton Investments, said by phone. "We find that Islamic banks, wherever they operate, they tend to grow faster than conventional in acquiring market share."

Security concerns
Iraq's lenders have been constrained by the dearth of legislation governing Islamic banks and advances by IS, which threaten to drag the country into the worst sectarian conflict since 2007. The central bank said it will spend $4.2 billion to support economic activity and create jobs as the nation also grapples with oil prices close to the lowest in six years.

The yield on Iraq's 2028 dollar bond rose 37 basis points this year to 8.3 per cent. That compares to a 28 basis-point decline through January 27 to 4.1 per cent in the average yield of Middle East bonds, according to JPMorgan Chase indices.

Iraqi Prime Minister Haidar Al Abadi said this month that the country's economic recovery isn't complete and the fight against IS is far from over, more than a decade after the fall of Saddam Hussein.

"The challenges are huge," he told Bloomberg TV's Charlie Rose on January 23. "Our economy cannot sustain two major spendings. One is to sustain our society and two is to sustain this awful war. We need help on this."
Abu Dhabi Islamic Bank, the second-biggest Sharia-compliant lender in the UAE, has been operating in Iraq since 2012 and is taking a long-term view of the country where it sees "great potential," Nuhad Saliba, head of ADIB International Banking Group, said. Cihan Bank said its outlook improved toward the end of last year as the United States began airstrikes on IS.

"The last quarter of the year was better," Bajger said by phone from Erbil. "The first half of the year will be tough, but I can say that it would not be hard as the third quarter of 2014.

(Times Of Oman / 28 January 2015)
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