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Being realistic is key to developing capital markets

05/01/2011 06:30:00 AM GMT   Comments ()     Add a comment   Print     E-mail to friend

Dubai : The forward-looking economic realities of Islamic finance is about new markets and product strategies, however, it is based on a number of assumptions. The assumptions, usually optimistic in Islamic finance, need to be realistic and defensible as the industry marches towards Islamic finance 2.0 or $2 trillion (Dh7.34 trillion).


There are a number of assumptions, including:

 Oil price, a major contributor to diffusion to Islamic finance, will be above $70 a barrel (Dh257) for the next 5-7 years. Defensible, as growth stories of rapidly developing economies (RDEs), China, India, etc.

 Government, including non-Muslim, supports a (level playing field) and sponsorship (sovereign Sukuk) of Islamic finance will continue, but the "baton" is slowly being passed onto the private sector. Defensible, as petro-liquidity surpluses need to be invested for (home country) infrastructure and future generations.

 Standardisation of structures, products, etc., will continue, resulting in efficiencies, innovation, and reach. Defensible, as there are an estimated 6,000 Fatawas and agreement on 90 per cent, hence, slowly bridging the differences of the "last mile".

Scholars and qualified personnel should increase, as the seeds will be harvested in future, hence, addressing a major bottleneck in the industry. Defensible, as it's a universally acknowledged issue and expenditures and efforts have already commenced.

Liquidity and risk management, from Malaysia's Suq Al Sila to UAE's central bank's Islamic CDs to Malaysian housed International Islamic Management corporation (IILM), to address short term liquidity mismatches and reduce "leakage". Defensible, as a coordinated approach at the highest level via public-private partnerships.

The assumptions lead to new realities in Islamic finance and forward-looking comments, seen as "sign posts on the road to Islamic finance 2.0, include:

The OIC (Organisation of Islamic Conference countries (57)) become a more powerful and recognised economic/trading bloc, may be not BRIC but possibly Asean, as increased intra-OIC trade and investment to 25 per cent by 2015. Thus, greater penetration of Islamic finance, including Takaful, to the non-bankable and SMEs, and inclusion and inter-play with the $640 billion Halal industry.

Islamic mega bank, via consolidation, either market forces or central bank raises paid up capital requirements, or new license is a "need of the hour." The present size of Islamic banks, seen as rounding errors or small size of a transaction in western markets, is not conducive to financing (local) infrastructure projects, participating in syndicates internationally, expanding regionally/international, etc. Is there a need for universal Islamic bank?

Screen-based trading platform for Sharia compliant/based equities and instruments will be the predecessor for possible Islamic stock exchange. Today, Islamic finance is fragmented, 500 institutions in more than 75 countries and close to 10,000 Sharia compliant public companies on 40 stock exchanges, but using examples of the harmonised Eurozone pass-portability, will not work for, say, investing in OIC listed companies.

Nearly 85 per cent of market capitalisation of a global Islamic index is in G20 countries, and Muslim countries have a bias towards [non-permissible] conventional financial sector, with many remaining companies having small free float or illiquid. Screen based, or virtual, will not allow provide connectivity (to communicate), but also populate the platform with variety of compliant products, hence, multiple price discovery and liquidity for trade execution of asset classes.

Cross sell of Islamic finance to non-Islamic institutions, as the latter (read G20) is looking for new opportunities, new asset classes, new modes of financing and new geographies. The uptake of hard currency Sukuk by western fund managers, large (GE) and small (IIT) western companies raising money via Sukuk, non-Islamic investors in Islamic mutual funds (Amana funds in US), and so on, shows Islamic finance is on their radar screens.

New markets

Today, Islamic finance is present in 14 of the G20 countries, from the established United Kingdom to recently interested Australia, and it will continue to be led by asset management capabilities, raising capital, etc. Islamic finance, in one form or another, is in 28 of 57 OIC countries, and countries like Malaysia, Bahrain and the UAE will reach out to brethren countries, from retail to financing infrastructure projects.

New products

Today, Islamic finance is accused of pushing Islamically wrapped conventional products, and with low scores on customer service and support. The enlightened Islamic banks are taking a professional hence holistic approach with robust customer service.

The bandwidth range of Sharia-compliant products will increase, and focus is now towards Sharia-based, as part of authenticity. Finally, an increasing amount of funds, and just fund returns, will stay in OIC countries for economic development.

The new reality of Islamic finance will be about reach, transactions, cross-selling, etc., all contributing to the development of an Islamic capital market.

-- The writer is Global Head of Islamic Finance at Thomson Reuters. The views expressed are personal and do not reflect that of his organisation or Gulf News.

Source: Gulf News

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