Benedicte Gravrand, Opalesque London, reports for Opalesque’s free daily Islamic Finance Briefing (subscribe here).

Quite a few firms are looking at creating Shariah-compliant products to attract the cash-rich Islamic investor’s community, as well as non-Islamic investors looking for less-risky alternatives. And despite the few challenges that it is facing, the Islamic finance industry is continuing on the road to self-development.

Islamic finance comprises any investment that is compliant with the Islamic Shariah law. According to ACCA’s Aziz Tayyebi, the current growth in Islamic finance is increasingly being seen outside the traditional markets of the Gulf Cooperation Council (GCC) countries and Malaysia which has meant that global market participants and policy makers are increasingly paying attention to its potential. The UK Government has also played a major role in trying to make the City of London the global centre of Islamic finance by extending support wherever possible, including the abolition of double stamp duty on Islamic mortgages, and the recently announced plans to test the feasibility of issuing Shari’ah-compliant sukuk bonds (aka Islamic bonds).

Among the most recent new ventures, Barclay Capital last month was in the process of launching a Shariah-compliant hedge fund platform along with Sharia Capital (Gulf-daily-news). HSBC Amanah opened three new Shariah branches in the cities of Bandung, Surabaya and Medan to coincide with its 10th year of operation in Indonesia (coverage). And the DFSA licensed Macquarie Capital Advisers (Dubai) Ltd as an authorised firm.

Singapore’s third-largest lender OCBC is one of the many institutions that have set up Islamic banking businesses to tap opportunities in the $1 trillion industry. OCBC told Reuters earlier this month that Islamic banking was gaining ground with non-Muslims worldwide, reflecting industry efforts to transcend religious beliefs to gain market share. Islamic finance has become popular in recent years among cash-rich Gulf Muslim investors, rising demand for ethical investing, and now for less risky alternatives.

Human resources
This rise in demand for Shariah-compliant investments has also given rise to a demand for Islamic finance experts, who are in short supply. That is why the Bangor Business School is one of the schools that have launched specialist courses on the subject.

Another problem in human resources comes from the lack of standardisation: there is no central authority for increasingly complex Shariah compliance demands, and Shariah experts in different jurisdictions do not always agree (CNBC video).

Challenges
Islamic finance does not allow debt with interests and does not invest in financials, so it has been generally sheltered from the general financial turmoil. However it does heavily invests in commodities and energy. And as those prices are tumbling down, one would expect such investments to suffer – and some have. However an analyst from SEI, a U.S. asset manager, is optimistic: “Should commodities, materials and energy pick up over the next quarter and beyond, we would expect to see sharia indexes recover from the Q3 slow down.” (coverage).

According to a recent Moody’s report, Islamic financial institutions, even if they displayed strong resilience in the financial turmoil, have been facing three series of cyclical challenges, which again reflect their current structural strengths and weaknesses:

- Managing short-term liquidity has been made more difficult;
- Investment portfolios, concentrated on illiquid and cyclical asset classes, have been impaired;
- Access to long-term funding has been postponed, forcing banks to reduce the maturity profile of their assets.

However, despite such constraints, which are expected to be temporary, Islamic banks have had the capacity to resist, thanks to a few buffers:

- Their credit portfolios have been essentially domestic, with limited pressure on asset quality so far;
- Their entrenchment in the retail banking arena, with high customer loyalty and deposit stability, limits the probability of massive bank runs;
- High capitalisation and ample core liquidity often provide a relatively higher amount of confidence to counterparts.

Not always a shelter from the crisis
However, the Middle-East is not altogether a shelter from the global financial crisis; oil prices are dropping and so oil-dependent economies are suffering and investing less; Dubai’s economy has suffered some setbacks in its real estate sector; and Kuwait lost heavily on some bank investments.

Dubai, whose economy is more reliant on real estate than on oil, has felt the effect of the falling oil prices as investors and lenders retracted from its real estate sector, forcing the country to put projects on hold, and its stock market to lose almost 70% of its value since the summer.

Kuwait’s Gulf Bank had to be rescued by a government in the fallout from the global credit crisis, after suffering currency derivatives losses worth 375 million dinars, Reuters recently reported. And Kuwait’s Finance Minister Mustafa Al-Shamali was asked to confirm whether Kuwait’s sovereign wealth fund had lost 80% of its $5bln investments in Merrill Lynch and Citigroup ( Kuwaittimes.net).

After losing 22% in October, the broad MENA equity market index lost a further 14% in November taking the 2008 loss in MENA equity markets to close to 55% (coverage). The Dow Jones Islamic Market (DJIMSM) Index was up 5.3% on 5 December. And the Eurekahedge Islamic Fund Index was down 2% (est.) in November, -28.06% YTD.

Tomorrow: Experts give their views on the developments within the Islamic finance arena.

Recent exclusive articles about the Islamic Financial market on Opalesque’s Alternative Market Briefing:
- 300 institutions, $650bln assets at 15% yearly growth rate - Report says Islamic banking attractive as it is highly profitable: Source
- The 4th GCC Oil Boom (2002 - ????) Part 3: Understanding Islam: Source
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From Cpifinancial.net: The last few months have been good for those watching Islamic finance activities in India. It is a well-known fact that owing to its religious sensibilities India has been cautious in allowing Islamic financial activities.

Despite having one of the largest Muslim populations in the world and a strong demand for Shari’ah-compliant products from the community as well as the business sector, India has not yet permitted Islamic finance at official levels, though some kind of Islamic financial activities or Shari’ah-compliant products have been on offer for some time now….. Full Article: Source

From Gulfweeklyworldwide.com: The current crisis provides Islamic finance with a rare opportunity to reinvent itself and to appeal not just to the 1.5 billion Muslims in the world but the rest of humanity too, which is suffering as a whole from the collapse of free market capitalism and for whom the pain is likely to intensify next year, as the effects of the financial crisis are fully felt in the real economy in the form of higher costs and fewer jobs.

Islamic finance needs to focus less on complying with each rule and more on reflecting the principles which underlie those rules so that transactions are no longer Sharia-compliant but are Sharia-based….. Full Article: Source

From Theedgedaily.com: Maybank Islamic Bhd is targeting a 10% to 15% growth to its overall financial portfolio in its next financial year following the introduction of an Islamic term financing facility for corporate and business customers.

Maybank Islamic acting chief executive officer Ibrahim Hassain said the new facility, Musharakah Mutanaqisah Term Financing-i (MMTF-i), was a syariah-compliant financing facility for asset acquisitions and for refinancing landed properties, plant and machinery, vessels and commercial vehicles….. Full Article: Source

From Cpifinancial.net: Following a rebranding in 2006, Mashreq Group has introduced the second phase of its long-term strategy to become the most convenient bank in the UAE.

Osool, which operates in the self employed segment, will now become the specialised Factoring, Leasing and Commercial Auto Financing subsidiary of the Mashreq Group. …. Full Article: Source

Leading Islamic Solution to Drive Innovation in Banking Misys, the global application software and services company, announced today that Egyptian Saudi Finance Bank (ESFB) has chosen Misys Equation 3.9 for its 11 branches across Egypt. The solution is the latest version of the widely-used retail banking solution from Misys and will help ESFB to provide better and more innovative Islamic services to its customers.

ESFB is one of the leading banks in Egypt and has a long tradition of providing its customers with the best and most up-to-date products and services. Misys Equation 3.9 with advanced Islamic Banking capabilities was selected pre-integrated with the trade finance solution, Misys Trade Innovation. …. Full Press Release: Source

From Zawya.com: Banque Albaraka D’Algerie, a subsidiary banking unit of Albaraka Banking Group, announced that it had achieved a big increase in net profits in the first nine months of 2008 which rose by 80%. In the meantime, total assets increased by 39%, finance by 53%, deposits by 32% and shareholders equity by 68%.

The financial results of the Bank for the first nine months of the year revealed that the Bank’s operating income amounted to US$59.38 million compared to US$39.78 million for the same period of last year. …. Full Article: Source

From Arabtimesonline.com: The global financial crisis will be at the top of the agenda at the next GCC summit meeting, to be held in Muscat in two weeks’time, said Deputy Prime Minister and Foreign Minister Sheikh Mohammad Al-Sabah on Tuesday.

GCC states are currently striving to create a unified stance vis-a-vis the global financial crisis, that would curb its impact on them and would be part of the groundwork to be discussed at the Arab Economic Summit, convening in Kuwait in January, he said in a speech he delivered at a Kuwait University conference on the changing face of the world economy….. Full Article: Source

From Business24-7.ae: Arab banks should take urgent measures to ensure stronger co-ordination so they can play an active role in the development of a new world economic order spawned by the current financial crisis, the top Arab banker has said.

Adnan Ahmed Yousuf, Chairman of the Union of the Arab Banks (UAB) said all countries are expected to contribute to the evolution of the new global system, adding the recent trips by British Prime Minister Gordon Brown and other officials to the Gulf illustrated the important part it can play in this field….. Full Article: Source

From Ameinfo.com: Daman Investments PSC, the leading Dubai-based investment management company, has announced the performance results of its highly subscribed funds, the Daman Speculator Fund, the Daman Second Emirates Fund, and the Daman Islamic Fund, for the month of November 2008.

The newest Daman offering, the Daman Speculator Fund launched in July 1, 2008, has presented a noteworthy performance in comparison with today’s volatile markets, posting a positive monthly gain….. Full Article: Source

From Dailystaregypt.com: In Egypt, where the colloquial term for any credit card is “visa,” it is easy to forget that a host of financial service companies are here, vying for a slice of the market presented by Egypt’s recent push toward banking.

MasterCard is one of these firms. From a regional office in Dubai, the financial company oversees 16 countries in the Middle East and Levant, in a swath sweeping from Pakistan to Egypt. …. Full Article: Source

Dow Jones Indexes, a leading global index provider, today announced the results of the regular quarterly review of the Dow Jones Islamic Market Indexes. All changes will be effective at the start of trading on Monday, December 22, 2008.

In the Dow Jones Islamic Market World Index, 481 components will be added while 226 components will be deleted. That brings the number of components in the index to 2,558. …. Full Article: Source

From Wired.com: Pakistan is about to become a failed state, and Iran and Turkey will be close behind. The West at present is unable to cope with a failed state like Somalia, with less than a tenth as many military age men as Pakistan, but which nonetheless constitutes a threat to world shipping and a likely source of funding for terrorism.

As state finances crumble, states will become less important, and freebooters will seize the stage. Think of the Mumbai terrorists as a political cognate of the Somali pirates, and the character of a Middle East made up of failed states comes into focus….. Full Article: Source

From Nasdaq.com: Malaysia’s national water assets management company Pungurusan Aset Air Berhad said Wednesday it may raise funds via Islamic bond issuance to partially finance its acquisition of the country’s water assets and to improve services.

“The bonds are likely to be Islamic,” PAAB Chief Executive Suhaimi Kamaralzaman told reporters at a news conference. He didn’t disclose details of the bonds or the timing of the issue….. Full Article: Source

From Creepingsharia: If “cash is king,” then Middle East coffers are irresistibly enticing. During a recent tour of Saudi Arabia and the Gulf states, Deputy Treasury Secretary Robert Kimmitt applauded the “growing role” of Arab banks in the U.S. economy.

Treasury is seeking buyers for its newly acquired bailout assets because more than $1 trillion in cash is urgently needed to rescue the largest U.S. banks….. Full Article: Source