DUBAI, Jan. 27 (Xinhua) -- While
lenders in the United States and Europe have downsized their exposure in
banking in compliance with Islamic law, Islamic financial institutions in
Southeast Asia and the Middle East and Africa (MEA) region are taking over the
initiative.
According to global consultancy Ernst
and Young, worldwide investments done in line with Islamic law, known as
Shari'ah, will reach 1.8 trillion U.S. dollars globally in 2013.
There was a time when major Western
banks like Citigroup, HSBC, UBS and Deutsche Bank set the pace for the
developments in Islamic finance, while their much smaller counterparts in the
Muslim world just followed. In recent years, this order has been almost
completely shifted in favor of the East.
The shift occurred partly because the
financial crisis forced U. S. and European lenders to get back to their roots
by reducing their exposure in exotic fields like Islamic finance and by
downsizing their investments in emerging markets. It is also because economies
in Southeast Asia and the MEA region have outperformed the global economic
growth since the start of the new millennium and upgraded their regulatory
system to spur Islamic banking.
According to John Sandwick, founder
and CEO of Islamic wealth manager Safa Investment in Riyadh and Geneva,
"many banks in the West got it wrong when they thought they can reach
Muslim investors halfheartedly, by launching a Shari'ah-compliant fund or two,
but Islamic finance requires a complete investment and advisory service."
The industry, mostly designed to
serve the financial needs of the 1.5 billion Muslims globally, is growing by 15
percent per year and will double every five years. Under Shari'ah, interest-
based and speculative investment like short-selling or trading derivatives are
banned, as well as stocks from firms which produce alcohol, weapons,
entertainment or pork meat.
In 1996, Citibank as the first
Western bank opened a branch in Manama, Bahrain. That was at that time the Arab
world's major hub for global banking, fund managers and insurance. When British
bank HSBC opened an "Islamic window" in 1998, it paved the way for
London to become a beachhead of Islamic finance in Europe, a position it has
maintained until today. As of today, there are five stand-alone Islamic banks
in Britain, whilst 19 billion U.S. dollars in reported assets are managed in
line with Shari'ah in London.
But HSBC suffered a blow in Qatar
last year when the central bank in Doha banned conventional banks from running
Islamic windows. Consequently, HSBC shut down Amanah services in Qatar, a blow
to the British lender since Qatari economy got a boost after it won the right
to host the 2022 World Cup games.
As an example of how powerful Islamic
banks have become, Qatar' s biggest Islamic bank Masraf Al-Rayan launched a
takeover bid for London's ailing Islamic Bank of Britain, known as IBB. Since
its inception in 2004, IBB desperately tried to generate profits through
Shari'ah-compliant retail banking. The deadline for the takeover was set at
first for the end of 2012, but was eventually extended to Feb. 4, 2013.
Swiss private bank Sarasin, which
operates in the Gulf Arab region in a joint venture with Alpen Capital, said it
was not affected by the Qatari central bank's ban as it offers "advisory
services" to ultra-rich individuals and financial institutions. " We
neither develop standard Islamic financial products nor do we offer third-party
products with a Shari'ah label," said Rohit Walia, executive vice chairman
and CEO of Bank Sarasin-Alpen.
Nevertheless, Switzerland's star over
Islamic banking has been on the decline since the country's biggest lender UBS
shut down its Islamic subsidiary Noriba. In 2007, UBS integrated Noriba under
its one-bank strategy into the group.
Switzerland's only stand-alone
Islamic bank Faisal Private Bank in Geneva suffered heavy losses with real
estate investments worth 1.8 billion dollars during the global financial crisis
in 2008 and 2009. After Faisal's biggest shareholder Ithmaar Bank in Bahrain
failed to sell the entire bank, it was consequently transformed into a family
office on Nov. 1, 2012. With this move Switzerland's sole Islamic bank ceased
to exist.
Other setbacks happened in Germany,
whose biggest lender Deutsche Bank closed down half a dozen of its Islamic
funds it launched under its subsidiary DWS due to a lack of capital inflows.
Meanwhile, global issuances for
Islamic bonds, or sukuk, hit 121 billion dollars in 2012, registering a
43.36-percent increase over 2011. Malaysia accounted for over 60 percent of
these issuances, while the Middle East and North Africa region accounted for 32
percent. The only noteworthy activity in the West was seen in Germany:
Munich-based insurance firm FWU launched Islamic insurance, also called
Takaful, in the early 2000s. On Dec. 12, FWU launched the first ever Islamic
issuance from a German corporate firm. With a par value of 55 million dollars,
it was also the largest European corporate sukuk ever issued.
Unlike conventional bonds, sukuk do
not pay interest based on a coupon, but share profits of a specific, tangible
asset (like a real estate or a commodity) with the investors. "Sukuk
continues to be in the spotlight, especially after the global economic
meltdown, where we learnt that carrying excessively risky debt on the books can
lead to financial collapse during black swan events, " said Ashar Nazim,
MENA Islamic Finance Services Leader at Ernst and Young in Dubai.
While Switzerland, which has no sukuk
listed at the Swiss Exchange in Zurich, seems to be out of the race, London and
Luxemburg are desperately struggling to keep their markets attractive for
Islamic bond listings. The London Stock Exchange has 37 sukuk listings valued
at a total of 20 billion dollars. At the Luxembourg Stock Exchange, 16 sukuk
have been listed so far, totaling 7.3 billion dollars.
However, the government of Luxembourg
put plans to launch a sovereign sukuk in 2011 on hold. And the aforementioned
figures appear tiny compared to Islamic assets in Saudi Arabia (151 billion
dollars), Malaysia (133 billion dollars) and the United Arab Emirates (94
billion dollars).
Meanwhile, the wheel for Islamic
finance keeps spinning in the East. Post-turmoil Arab states like Egypt and
Tunisia have started to implement law to spur Islamic finance. These moves show
that Islamic finance will go it way mostly in the Middle East and Far East.
The first sovereign sukuk in 2013 was
issued on Jan. 23 by the Dubai government, as part of a 1.25-billion-dollar
dual-tranche sovereign bond. The issue was split into an Islamic bond (sukuk)
with a par value of 750 million dollars and at a profit rate of 3. 875 percent,
and a 30-year, 500-million-dollar conventional bond whose coupon was priced at
5.25 percent.
The issue attracted a whopping
interest of 380 investors who placed orders of over 15 billion dollars. Half of
the sukuk investors are based in the Middle East, while European and U.S.
investors accounted for 38 percent of the conventional tranche.
Georges Elhedery, head of global
market at bank HSBC, one of the joint lead runners of the sukuk, said in an
e-mailed statement that the numbers were speaking for themselves. "The
tight pricing, tenor and speed of execution demonstrate international
investors' confidence in Dubai's credit."
On Jan. 9, ruler of Dubai Sheikh
Mohammed Bin Rashid Al-Maktoum launched an initiative to promote Dubai as the
center of global Islamic economy.
(Shanghai Daily.Com / 27 Jan 2013)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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