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East outperforming West in Islamic finance

English.news.cn   2013-01-27 23:05:40            

by Gerard Al-Fil

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.

Editor: Bi Mingxin
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