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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Islamic Trusts Could Revive Gulf Property Market

June 9, 2011 by · Leave a Comment 

By Shaheen Pasha

2011-05-28T211614Z_2103306788_GM1E75T0ESH01_RTRMADP_3_EMIRATES

A dhow sails during the Al-Gaffal 60ft traditional dhow sailing race between the island of Sir Bu Nair near the Iranian coast, and Dubai May 28, 2011.

REUTERS/Stringer

DUBAI, June 2 (Reuters) – Jordanian Ashraf Hamdan began investing in Dubai’s real estate market in 2006, with a few modest rental investment forays before turning his sights on flashier projects as a wave of luxury developments hit the market.

The real estate bust in 2008 left investors like Hamdan with half-finished projects sitting in the desert sun and losses that were unlikely to be recouped.

“It was a costly learning experience for a real estate investor,” said the 53-year-old businessman. “But real estate is in our blood here in the Arab world. It’s a tangible investment, and from an Islamic perspective, that appeals to me.

“I’m just going to be looking for smarter, alternative ways to get into the market in the future.”

The emergence of Islamic real estate investment trusts (REIT) in the Middle East, which offer the chance to own shares in a portfolio of real estate assets with a steady paid dividend from the income earned on those assets, may lure investors like Hamdan back to the sector again.

Islamic REITS differ from their conventional counterparts by banning investment in any assets that pay interest or conduct business in any forbidden industry, like gambling, alcohol or adult entertainment.

Aside from providing an alternative investment in the Gulf Islamic finance industry it could also inject more transparency and regulation in a property sector plagued by unrealistic expectations of returns and occasionally murky dealings.

“Over the last two or three years, people have been in freeze mode where the focus was cash and other liquid things,” said Daniel Diembers, principal at Booz & Company in Dubai.

“The Dubai bubble really helped the (property) market to mature. Now is the moment where it is all shifting. There is a lot of wealth up for grabs.”

Globally, the market capitalisation for REITs was around $570 billion at the end of 2009, a 2010 Ernst & Young study said. Islamic REITs play a small role, with Asia serving as the predominant hub for sharia-compliant trusts.

Renewed Confidence

Malaysia’s Axis Global Industrial real estate investment trust (REIT) is planning an initial public offering with an asset size of $1.05 billion, making it the world’s largest Islamic REIT.

Islamic REITs launched in Bahrain and Kuwait have been relatively small in size – Bahrain’s Inovest REIT and Kuwait’s Al Mahrab Tower REIT launched with less than $95 million in capital each – and neither has been publicly listed.

But an anticipated infrastructure boom in hot markets such as Saudi Arabia and Qatar and the launch of the UAE’s first Islamic REIT may buoy faith in real estate investments, creating a wider niche for the Sharia-compliant trusts to thrive.

Emirates REIT, which launched with seed capital from Islamic lender Dubai Islamic Bank last November, is aimed at medium-income investors and offers returns of 6 to 8 percent annually, said Mark Inch, director of Eiffel Holding and founding shareholder of Emirates REIT.

“There is a discipline and transparency that comes with a regulated REIT,” he said. “Buildings will not only be properly managed but financial management will also be completely transparent. It’s a prerequisite of bringing back confidence.”

Emirates REIT has 40 deals under review ranging between 40 million dirhams to 500 million dirhams and will be fully operational by the summer, Inch said. An initial public offering is planned within 18 months to two years once it secures assets of 1.5 billion dirhams.

The interest is growing. National Bank of Abu Dhabi is considering creating an Islamic REIT while the FTSE Group may develop an Islamic REIT index as the industry grows globally, officials at both said.
The Gulf region has dabbled in the REIT market over the years with little success.

A 2008 Islamic REIT launched by Saudi Arabia’s Sumou Holding and Geneva-based Encore Management fizzled in the kingdom as the financial crisis sapped enthusiasm. Other attempts to launch a REIT in the region, including a conventional one by troubled property developer Nakheel, were quickly squashed.

Asia, by comparison, has seen a boom in sharia-compliant REITS. Malaysia, considered to be at the forefront of Islamic finance, launched its first Islamic REIT in 2006. Singapore’s Sabana REIT, launched in 2010, was 2.5 times oversubscribed and saw heavy investor interest from the Gulf.

The Gulf has been held back by the slow pace of innovation in the real estate sector, as well as the Islamic finance industry in general, experts said.

In contrast to Malaysia, where the government is active in creating a strong regulatory environment, there is no regulatory standardisation in the Middle East. And investors are understandably wary of investing in a new real estate venture given the spectacular property collapse in the region.

Oz Ahmed, associate director of wholesale banking at HSBC Amanah in Malaysia, said Mideast investors seem ready for homegrown REITS given the high participation in Asian ones.

“There’s definite potential for issuers within the GCC to identify assets but people have to become comfortable with them,” he said.

“We’ve gotten to the point where we’re working well in the banking paradigm. Now practitioners are looking to develop products that come closer to Islamic finance principles.” (Editing by Amran Abocar and 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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