|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.
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).
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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