Islamic Trade Finance Seen Lifting Growth of Sector

July 7, 2011 by · Leave a Comment 

By Shaheen Pasha

DUBAI, June 9 (Reuters) – Islamic trade finance has benefitted from shifting preferences towards Sharia-compliant banking and could serve as one of the key growth drivers to help the nearly $1 trillion Islamic finance industry double in size.

The global Islamic finance industry, which has been growing between 15 to 20 percent a year, is widely expected to reach $2 trillion in the next three to five years.

While Islamic banking and Islamic bonds, or sukuk, are expected to lead growth, bankers say Islamic trade finance could serve as the dark horse emerging to propel the industry further.

Trade finance, the lifeblood of global commerce, underpins 60-80 percent of the $12-13 trillion trade in global merchandise and practitioners say it is safer than other forms of lending.

Total trade finance among the 57 members of the Organization of the Islamic Conference, which includes Saudi Arabia, Malaysia and Turkey, is expected to reach $4 trillion by 2012, said Mohamad Nedal Alchaar, secretary-general of the Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI).

“(Islamic finance) could tap 20 percent of the total trading financing, that’s very reasonable,” Alchaar said, adding that while the current Islamic trade finance market remains fragmented and non-competitive, there has been a shift towards pushing trade finance among Islamic practitioners.

Part of the increased interest in Islamic trade finance is that the Islamic finance industry, which prohibits interest, has matured and can provide complicated instruments, such as Sharia-compliant hedging products to protect trade transactions, said Yakub Bobat, global head of HSBC Amanah commercial banking.

“If you don’t have access to Islamic hedging, there will be a currency conversion impact. In the absence of those solutions, people go for conventional,” Bobat said. “But the proposition is now complete and you can now use Islamic hedges for trade transactions.”

Bobat said such innovations in the industry will help persuade people inclined toward Sharia-compliant business to opt for Islamic trade finance over conventional forms.

In Islamic trade finance, a bank will provide a letter of credit, guaranteeing import payments using its own funds, for a client based on sharing the profit from the sale of the item.

But some banks are still wary of providing Islamic trade finance services, citing it as more costly and time consuming.

In addition, some see little difference between conventional and Islamic trade finance as both are fee-based products, resulting in lower demand for the Islamic product.

Changing that view will be key for the industry, said Shabir Randeree, chairman of the European Islamic Investment Bank.

East-East Trade Flows Grow

“There is a very compelling reason to promote this product given that the returns of trade financing can be very attractive, much more than real estate financing, for example,” he said. “Providers of this product have not been as aggressive in promoting it.”

But with increasing cross-border trade among Asian and Middle Eastern countries, demand for more Sharia-compliant financing from Muslims is still expected to increase.

Asia to Middle East trade flows more than doubled between 2005 and 2008, according to the World Trade Organization.

“If I compare three years back, volumes have gone up overall in the Islamic trade finance market,” said Ghazanfar Naqvi, managing director, Islamic origination and client coverage at Standard Chartered Saadiq.

“It’s a function of more awareness and more offerings. Today we are seeing customer preference changing and trade finance is a key component of growth in Islamic finance.”

Naqvi said it was difficult to pin down tangible global figures for Islamic trade finance as the majority of deals are not public transactions.

The International Islamic Trade Finance Corp. (ITFC), an independent entity within the Islamic Development Bank, said in its annual report that it approved $2.17 billion in Islamic trade finance transactions at the end of 2009.

That grew to around $2.55 billion in 2010, with a majority of transactions taking place in OIC member nations.

HSBC Amanah’s Bobat said Islamic trade finance will be a significant contributor to growth in Islamic finance but the industry will have to look beyond asset finance.

“The industry today is pretty much focused on asset finance and it needs to have the ability to capitalise on trade,” he said. “(Islamic trade finance) should be as much bread and butter business as it is for conventional trade flows.” (Reporting by Shaheen Pasha; Editing by Jon Hemming)

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$640b Halal Industry Needs to Align with $1tr Islamic Finance Sector

April 15, 2010 by · 1 Comment 

By Rushdi Siddiqui, Gulf News

I wanted to take a sukuk break, as the last few months seem to be only about sukuk default, restructuring, conferences/seminars, etc. Islamic finance is not sukuk, its much bigger than an instrument. I wanted to look at an area that Islamic finance (IF) has not been linked to: the $640 billion (Dh2.3 trillion) halal industry (HI). There is a link, but it’s associated with IF ignoring HI!

The halal industry believes that Islamic finance has long ignored its little ‘halal-half’ brother, because it either does not understand the business model or its financing needs.

Islamic finance continues to have expected ‘challenges’ with standardisation, and the halal industry, the issue of certification and certifying bodies appears to be even more nascent. In IF, we have generally accepted guidelines on accounting (AAOIFI and Malaysia), prudential regulations (IFSB), ratings (IIRA), hedging (IIFM), but what and where are the leading HI standard bodies; Malaysia (Jakim), Brunei (Brunei halal), but there are more ‘bodies’ in OECD than OIC countries. Query: is the certification process accepted outside the home country?

The GCC countries are major importers of billions of dollars in foods/products, projected to touch $53 billion in 2020. Now, what if large importers like Saudi Arabia or the UAE impose ‘their’ halal certification criteria for exports from these countries, including G20 countries like Australia (red meat) and Brazil (chickens)? Because of the GCC’s volume of imports, could there be a risk of back-door certification via the GCC? However, if GCC countries do not have certifications or it’s not yet harmonized, then halal exporters still have time to establish certification before externally imposed.

In Islamic (equity) investing, we have Sharia-compliant screening from the five index providers plus AAOIFI and Malaysia, however, what criteria, if any, for investing in listed halal companies. Meat or poultry [and food] companies should have their products according to Quranic guidelines, “O mankind! Eat of that which is on earth, lawful and good…” 2:168.

Global market

Although a Sharia-compliant food-only index may not yet exist, S&P has, as of March 30, 15 Sharia-compliant food companies in the GCC (15 Saudi and one in each Oman and the UAE) and 123 global Sharia-compliant food companies from China, Taiwan, Japan, Korea, Mexico, the US and others.

Is it correct to assume that GCC public listed food or meat or poultry companies’ offerings are halal, because large local populations and percentages of the expatriate communities are Muslims in these Islamic countries? Assuming correctly, then the Halal Index is possible with ensuing Halal Funds/ETFs off of such indexes.

Thus, two sets of indexes: Sharia-compliant and Halal index, but what about Sharia-compliant Halal Food Index? Would this be a ‘low-debt non-financial social-ethical counter-cyclical halal index? This could benefit ‘investors of conscience and appetite.’

The reality is the halal industry needs to establish an initial screening methodology for publicly listed companies in the halal industry globally, as the Sharia-compliant screens may not capture them. The present awkward situation is: one can consume the food or products of listed halal companies, yet cannot invest in them because they may fail the present Sharia screening!

Islamic banks (in the GCC) have traditionally financed the chain of ‘borrowers’ associated in real estate industry, commercial and residential, as they allegedly better understand the business model, risk, and recourse. The banks have stayed away from halal companies, possibly ex-Al Islami, hence, the latter has relied on the ‘friends and family finance’ (upstarts) and traditional interest based loans (established companies).

There are halal funds set up, but they are more for acquisition than financing. It would seem the fragmented global halal industry, in OIC and G20 countries, would be ripe for a consolidation strategy, hence, no different than the often heard quest for a big balance sheet Islamic mega bank created via consolidation.

Thus, financing of viable halal companies via roll-up acquisition strategy? Surely, more must be done, otherwise we may continue to consume halal products or meats financed with Riba-based finance companies!

The halal industry needs to get (1) its act together on process, auditing, and certification, and get into the face of Islamic banks and better explain the (2) inter-relatedness of the sectors, (3) better explain the business model, risk and its mitigation, (4) better explain that it establishes the foundation for diversified lending, and increased investor options for Islamic banks’ customers, and (5) allow Islamic finance to talk the talk of a $2-trillion ‘niche’ market in the making!

The writer is the Global Head of Islamic Finance, Thomson Reuters. Views expressed in this column are of the writer.

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Upgrade: Islamic Finance 2.0

April 1, 2010 by · Leave a Comment 

By Rushdi Siddiqui, Gulfnews.com

sharia_finance_dollar Future of Industry lies in move from sharia-compliant to sharia-based approach

Dubai : We are at an important crossroads in Islamic finance and banking, and I want to explore, in this column, the future of Islamic finance.

We hear about 1.5 billion Muslims, but has Islamic finance benefited the ‘man on the street?’ What is so ‘Islamic’ about Islamic finance?

Have we simply been putting an Islamic wrapper around conventional structures and products and placing a blessing them?

I’ve been in Islamic finance for more than a decade. This inaugural article will set the non-technical tone for the important areas I want to explore in the future, and I encourage the readers to comment as the Islamic finance community’s collective psyche, experience and insight will benefit the industry.

We in Islamic finance want to see a group blueprint of the industry going forward, including the building of two-way bridges — be it with South-east Asia or with Group of 20 (G20) countries.

Islamic finance is, at one level, for all those interested in “boring finance”, asset or project backed/based financing and non-turbo-charged investing (without derivatives and excessive leverage) in selected real economic sectors.

Islam does not necessarily have a monopoly on ethics because these are common shared values with other religions and philosophies. However, the former has ‘codified,’ via scholars, screens and structures into financial contracts having links to permissible real economic activities.

Sharia compliance

Among the 57 Organisation of Islamic Conference (OIC) countries, not one Muslim country in the last 40 years has ‘Islamised’ its economy for general acceptance; not Sudan, Pakistan or Iran.

The $1 trillion (Dh3.67 trillion) industry operates in a world economy of inter-connected interest rates, debt and other similar factors, hence Sharia scholars have allowed a permissible amount of impurity as long as the industry moves towards removing such impermissibilities.

Put differently, scholars, as Sharia gatekeepers, are seeking progress and prosperity, which is different from modernisation. Thus the reference rates in Islamic mortgages, syndicated loans, sukuks and other financing are the efficient cost of capital credit of the London interbank offered rate (Libor) and/or the Treasury.
However, where is the industry with a methodology for an Islamic interbank offer rate (Ibor)?

There are over 555 Islamic funds with $35 billion (Dh129 billion) of assets under management, and, if we focus on Islamic equity funds, the question that comes to mind is this: ‘What is the link between a Sharia-screened company from any of the five index providers to Islamic finance or a Muslim country?’

The screening results in a universe that can be deemed as a style of investing — ‘non-financial, low debt social-ethical investing.’

Thus, some of the Sharia-compliant companies include Microsoft, BP Amoco, Pfizer (with a bias towards energy, health care, and technology), yet what is their link or connection to Islamic finance?

Could such companies and, in the aggregate, present day Sharia-compliant Islamic indices, be deemed an economic indicator of Islamic finance in a Muslim country? We now need to look at Sharia-based Islamic indices.

IFIs and sukuks

We hear and read about 300 Islamic financial institutions (IFIs) in 75 countries, and the need for larger balance sheets to compete against the ‘big boys’ on the project finance deal table for instance, hence, a call for the consolidation or the creation of established Islamic mega-banks.

A concern with such an Islamic mega-bank revolves round whether it poses a systemic and confidence risk in the home country as concentrated exposure without many compliant-hedging mechanisms?

Is there a need to think about safety nets and stress tests before central banks allows for an Islamic mega-bank?

The sukuk market, roughly equated to Islamic bonds, is now worth over $107 billion, having been the locomotive of Islamic finance during the petro-liquidity spike.

However, recent bankruptcies, defaults, and restructuring exercises, have been portrayed by western media as the beginning of the end of Islamic finance.

In an embryonic industry, like the 40-year-old Islamic finance, these growing pains are welcomed and will actually strengthen the industry, as precedents become known and down-side risk is better understood.

Sukuk growth and development appear to be following the ‘path’ of the Eurobond market, and the International Finance Corporation (IFC) and General Electric (GE) sukuk issuances in late 2009 underline the merits of such financing in turbulence.

Contribution factor

We have a number of Islamic finance conferences, and a number of Islamic finance awards.

It is often strange to see or read when different conference organisers or magazines have, for instance, a ‘best Islamic bank’ award, and each names a different bank.

It has been said in certain quarters that some of these awards are driven by sponsorships rather than actual votes or, ideally speaking, real contribution to the industry.

At this stage in Islamic finance, awards should emphasise ‘contribution’ and not ‘best,’ as that latter implies mature and connected Islamic financial institutions globally.

The foremost contribution to Islamic finance has been made by His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and Governor Zeti Akhthar Aziz, and, obviously, the real Sharia scholars, regulators like the United Kingdom’s FSA, central banks like the Central bank of Bahrain, and conventional banks with windows and subsidiaries.

Shaikh Mohammad, a standalone stakeholder, raised the profile of Islamic finance globally via the Dubai brand before oil reached $140 a barrel, and Zeti, as a globe-trotting ambassador, made her a separate asset class in Islamic finance.

They have established the awareness and macro framework, and now the industry has to move towards Islamic finance 2.0.

Pulse of Islamic finance

One of the serious issues the markets are tackling is to how to find an effective, overall pulse of Islamic finance. In most instances, numbers such as $1 trillion and the like are used to demonstrate the awesome potential of this industry.

However, how can we really gauge what’s happening to the industry on a daily basis?

The path to Sharia-based Islamic finance is expected to have speed-bumps, pot-holes, diversion road signs, construction vehicles with signs such as ‘do not follow’, but lets raise the issues from Sharia-compliance to get to the destination of Sharia-based.

The writer is the global head of Islamic Finance & OIC Countries for Thomson Reuters. The views expressed in this column are his own and should not be attributed to his organisation.

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