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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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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