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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Urban Art Flourishes in Dubai’s Dusty Industrial Zone

May 19, 2011 by · Leave a Comment 

By Martina Fuchs and Shaheen Pasha

DUBAI, May 5 (Reuters) – A dusty industrial zone in flashy Dubai has become an unlikely home for a flourishing underground art scene that has grown even as the emirate’s fortunes declined, curbing appetites for extravagant pieces.

Al Quoz, home to stark warehouses and a huge cement factory in the shadow of the world’s tallest building, the Burj Khalifa, is a far cry from the glitz and glamour that has come to be associated with Dubai.

“It’s raw. It’s a clean plate that we can work on. This is a growing cultural hub, a warehouse district where the ceilings are high and rents are low,” said Rami Farook, founder of the Traffic gallery, where Emirati, Iranian and Saudi artists show works ranging from graffiti art to blaring video installations.

That’s a far cry from the art scene just a couple of years ago, when upscale galleries hosted champagne-fuelled purchases that reflected big money and status, like the Maseratis and Bentleys cruising along the emirate’s palm-lined streets.

Now, affordability and artistic message seem to carry more weight, and the seemingly underground vibe is drawing in a different crowd.

At Etemad Gallery, a former furniture warehouse in Al Quoz, a beige wax sculpture of a human torso riddled with bullets and shells stands in the shadows. Nearby is a series comparing the iris of the human eye to constellations of dying stars.

“There is a growing confidence in local contemporary artists and also an increase in interest in women artists from the region,” said Rory Miller, director of Middle East and Mediterranean Studies at Kings College in London.

“Following the economic downturn which hit Dubai hard, there is a move, especially among the younger age group, to look to art that is grittier, more relevant and reflective of their own lives and recent experiences.”

Art houses have taken note of shifting local tastes, even as the higher end of the art market sees signs of a rebound on the back of Dubai’s economic recovery.

“We included a lot more younger artists who are more affordable because we want to increase the depth of participation,” said Michael Jeha, managing director of auction house Christie’s Middle East, which recently held a sale focusing on contemporary artists from Saudi Arabia and Iran.

A number of the pieces sold for less than $10,000, Jeha said, with others available for between $2,000 and $3,000.

All of the works in the Traffic gallery priced between $1,000 and $3,000 sold out. “This made me realize that people in Dubai had this passion for the alternative,” said Traffic’s Farook. “This is the niche I am trying to tap into.”

Raj Sehgal, managing director at Credit Suisse Private Banking in the Middle East and Indian Subcontinent, said some of his clients were looking for investments that could deliver future returns.

“A trend that is quite evident among many of our clients in Dubai is that they have started buying street art due to its appreciation value over time,” Sehgal said.

The political and social upheaval sweeping across the Arab role also appears to be playing a role in the renewed interest in more affordable and urban art.

At Art Dubai, the emirate’s annual contemporary art fair, a number of politically-themed pieces were on display, including one painting that portrayed ousted Egyptian president Hosni Mubarak’s using icons from Facebook, the social networking site that played a role in uniting street protesters against him.

“Possessing a piece of art because of a certain name or status is holding little relevance,” said Omer Alvie, creative director at Villa No. 6, which showcases emerging artists from Pakistan and arranges exhibitions of alternative art in Dubai.

“Now collectors are interested in the theme of the piece and what the artist is saying. It’s a record of history.”

(Editing by Mark Heinrich)

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Gulf Islamic Banks Eye Conversion of Conventional Peers

May 3, 2010 by · Leave a Comment 

By Frederik Richter and Shaheen Pasha

MANAMA/DUBAI (Reuters) – More banks in the Gulf Arab region may convert to Islamic finance in a bid to tap rising demand for sharia-compliant products and to avoid the heavy investment required to launch new banks.

A source told Reuters this month that Qatari investors are planning to buy a 25 percent stake in Ahli United Bank <AUBB.BH> <AUBK.KW> from Kuwaiti investors and have plans to convert Bahrain’s largest retail bank, which itself plans to take its Kuwaiti unit Islamic.

“Converting to Islamic is compelling in the region. In Kuwait Islamic banks have rapidly won market share from conventional ones,” said Sayd Farook, senior consultant at Dar Al Istithmar.

Converting conventional banks would help the industry expand its retail footprint — for instance in countries where no new licenses are given out but conversions are allowed –, which experts say the industry needs to develop a more sustainable business model.

The Islamic banking industry in the Gulf Arab region has mostly relied on channeling the region’s oil wealth into real estate and private equity, and was badly hit by a regional property correction late in 2008.

“I would say between 70 to 80 pct of the Muslim market (in the region) would bank with an Islamic bank….if you are an Islamic bank you get to capture that market,” said Sameer Abdi, head of Islamic finance at Ernst & Young.

Scholars have said they do not oppose converting conventional banks as long as their investments and debt levels are brought in line with sharia, which bans investments in certain sectors such as alcohol, over a grace period.

“There is usually a two-year conversion gap from the moment you convert….during which you need to give away to charity any income from conventional instruments,” said Farook.

Experts say that converting a bank comes cheaper than launching a green-field retail bank, but costs associated with revamping the bank’s work-flow, accounting and core banking IT systems are still high.

“Depending on the scale of the bank and the market in which it operates, it could take two or three years before the investment pays off,” said Hatim El Tahir, a Bahrain-based director at Deloitte & Touche.

Abdi said he estimated that up to 15 percent of existing customers could leave a converted bank, not necessarily because they disapprove of the switch to sharia, but because the bank might struggle to maintain its service level during a difficult transition period.

Bahrain’s Al Salam Bank <SALAM.BH> is converting Bahraini Saudi Bank <BSBB.BH>, which it bought last year, as is Egypt’s National Bank for Development <DEVE.CA> after Abu Dhabi Islamic Bank <ADIB.AD> partially bought the lender in 2007.

But the Gulf Arab region is rarely seeing mergers and acquisitions due to cultural sensitivities and opaque ownership structures, which could be the biggest obstacle to the conversion of conventional assets.

Bahrain’s Ithmaar Bank <ITHMR.BH> this month concluded the transformation from an investment house to an Islamic retail bank to improve its funding base, but could do so because it fully owned Islamic retail bank Shamil.

But Kuwaiti banks and merchant families have been badly hit by the financial crisis and are trying to sell down their international assets, which could be a way in.

Their ownership in many banks in the off-shore banking center Bahrain, both Islamic and conventional, could migrate to Qatari investors and banks that are awash with cash, bankers and analysts say.

“Qatar is a small economy…the bigger banks are looking at other markets,” said Janany Vamadeva, banking analyst at HC Brokerage, adding that Qatari companies would also be best positioned to raise money in current capital markets.

(Reporting by Frederik Richter and Shaheen Pasha; Editing by Dinesh Nair and Louise Heavens)

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Sukuk Market Starved of Benchmark Sovereign

March 25, 2010 by · Leave a Comment 

By Carolyn Cohn and Shaheen Pasha

LONDON/DUBAI, March 23 (Reuters) – Sovereign borrowing still eludes the Islamic bond, or sukuk, market, leaving investors hungry for a benchmark issue to reinvigorate trading after the credit crunch and the Dubai World crisis.

Where issuance from euro zone and emerging market borrowers in 2010 has been fast and furious, with emerging market borrowers alone issuing over $50 billion, there have been no sovereign sukuk issues at all.

Only one international sukuk has been issued so far this year, a $450 million Islamic bond for Saudi property developer Dar al-Arkan.

A resolution of debt woes at state-owned Dubai World, the mounting of domestic regulatory hurdles for issuers and improved liquidity could bring sovereigns to the sukuk market from around the third quarter.

But for now borrowers have been deterred by thin trading, the extra premium which borrowers have to pay to attract investors into this relatively small and specialist market, question marks over sovereign guarantees and regulatory conundrums.

“There is genuine need for issuance,” said Muneer Khan, partner and head of Islamic finance at law firm Simmons & Simmons in Dubai.

“Government-related issuances and good credit corporate issuances can often open the gates for further corporates.”

A sukuk is similar to a bond but complies with Islamic law, which prohibits the charging or payment of interest.

The typical path for any debt market is that the initial borrowers are sovereigns, seen as relatively risk-free, followed by state-owned entities, and then by corporate borrowers who will offer a higher yield.

“If sovereigns get deals away at a certain level, corporates should trade 30-40-50 basis points above,” said a London-based Islamic finance specialist.

But without sovereign deals, it is hard for corporates to follow.

The Philippines last week shelved plans for a debut sukuk issue, citing legal hurdles.

Indonesia, which has previously issued in the sukuk market, has no plans to issue again before September.

Gulf borrowers such as Bahrain and Dubai have also previously issued sukuk. But trading is weak after the shock payment standstill on Dubai World debt, which includes Islamic debt, and other defaults in a market once boasting a zero default rate.

In addition, the lack of a government guarantee for some state-owned Dubai World debt came as a shock to many investors.

Sukuk prices are generally trading below par and the market is highly illiquid, market participants say, even as benchmark emerging sovereign debt spreads are trading at their tightest over U.S. Treasuries in nearly two years.

Global sukuk issuance is likely to range between $15-17 billion in 2010, down from $19 billion last year, a recent Reuters poll shows. Currently even those forecasts look ambitious — in 2009, nearly all sukuk issues were made by states and quasi-sovereign entities.

“The sukuk market has been doubly affected by the downturn and the situation in the Middle East, so people are not pushing ahead — it’s not an easy market for a first-time borrower,” said Farmida Bi, partner at law firm Norton Rose in London.

European sovereigns have failed to issue any sukuk at all.

The UK was at the forefront of plans for sukuk issuance, and has the legal framework in place. But its original plans coincided with the outbreak of the global financial crisis, and the country has since saddled itself with huge amounts of debt.

“The reality is that the UK government has to fund a 178 billion pound ($266 billion) deficit,” said the Islamic finance specialist.

“To come to the market with a $500 million to $1.0 billion sukuk is not the highest on their priority list.”

France was also hoping to issue a sukuk but has become bogged down in legal changes, and market participants say sukuk issuance in countries such as Turkey remains some way off.

However, there are a few signs of light.

Investors are awaiting a restructuring any day of $26 billion in Dubai World debt, which will draw a line under the four-month old problem.

“The more positive news that comes for resolutions, the better,” said Khan. “It can’t hinder further issuances, but it could help.”

Sovereigns such as Jordan and Kazakhstan have said they want to issue sukuk for the first time, although there is no set timing.

And as markets around the world recover, led by emerging debt which is seeing strong demand, sukuk could yet attract investors.

According to a Gulf regional banker at a major investment bank: “The sukuk market is a natural follower of the debt capital markets and we’re starting to see more activity there. There is liquidity in the bond market.”

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