Global Islamic banking assets with commercial banks are on course to exceed $3.4 trillion (about Dh12.5 trillion) by 2018, fuelled by growing economic activity in core Islamic finance markets, according to the EY Global Islamic Banking Centre.
Several new players are rushing to cash in on this growing market. South Africa is the most recent entrant in the issuance of Islamic bonds or sukuk. American investment bank Goldman Sachs recently raised $500 million from its first Islamic bond sale. And the principality of Liechtenstein, banking on its well-established wealth management industry, is now looking at attracting Islamic financial business.
For now though, no single player has emerged as the default global Islamic finance hub. Malaysia and Dubai are already contenders, as are the UK and Hong Kong among non-Muslim countries.
“Existing [financial] hubs (London, Hong Kong and Singapore) are keen to leverage their critical mass of human capital, investors and financial services providers to maintain their leading positions,” says Khalid Howladar, Global Head — Islamic Finance GCC Financial Institutions at Moody’s Investors Service Middle East. “Malaysia, Dubai and Bahrain among others have much further to go in the international markets before they can become global hubs but they have strong domestic support for Islamic finance with vibrant Islamic banking sectors,”
It takes years of work, political will and a robust financial regulatory framework to create thriving centres for Islamic finance.
Countries have various strengths. Bahrain, for instance, is home to the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). The AAOIFI guidelines are followed by more than 200 institutional members from more than 45 countries.
Howladar says, “The Gulf countries vary in their approaches. Saudi Arabia is quiet but has the potential to completely dominate issuance volumes and build a very large sukuk market to rival Malaysia. Qatar supports the Islamic finance industry by forcing the segregation of Islamic finance institutions from conventional ones.”
GN Focus looks at the three main hubs for Islamic finance and explains how exactly they compare.
Nasdaq Dubai says the emirate has $21.08 billion as of May in sukuk on its exchanges. However, the UAE’s position as a centre for Islamic economy is consolidated by the fact that Goldman Sachs is issuing its sukuk here.
The UAE has seven fully fledged Islamic banks accounting for $95 billion of assets in 2013, compared to $83 billion in 2012, currently representing about 19 per cent of its total banking sector. According to the report, the compound annual growth rate for Islamic banking assets in the UAE is expected to be about 17 per cent from 2013-18.
However, Howladar says, “Currently Dubai is the one that has the potential to cover both segments. Dubai doesn’t yet seem to have a coherent Islamic finance strategy. Any yield curve is a good example of the government undertaking the research it needs to decide the next steps.”
A robust financial law environment has been conducive to the growth of Islamic finance in the UK, which takes its ambition to be the centre of this economy very seriously.
Neil D. Miller, Global Head of Islamic Finance of the UK-headquartered legal firm,
Linklaters, says, “The UK has been writing laws on Islamic finance for ten years now. It takes years and a lot of commitment on the part of the practitioners.”
Last year, London hosted the ninth World Islamic Economic Forum, with an opening address from Prime Minister David Cameron, who said, “London is already the biggest centre for Islamic finance outside the Islamic world. I want it to stand alongside Dubai and Kuala Lumpur as one of the greatest capitals of Islamic finance anywhere in the world.”
The UK has six Sharia-compliant financial institutions, with total assets of $19 billion. According to reports, $38 billion of outstanding sukuk was raised through 53 issues on the London Stock Exchange since 2009. It has also announced a new Islamic index on the London Stock Exchange and this year in June, it launched a £200 million (Dh1.7 billion) sukuk.
Malaysia has had a head start in the Islamic finance sector and is known for its role in creating benchmarks for the industry. Howladar says, “Malaysia is far ahead and has the deep base of human capital that is necessary to effect the regulatory changes necessary and to take Islamic finance forward in a prudent way.”
The country’s Islamic finance industry has existed for more than 30 years. It enacted the Islamic Banking Act in 1983, paving the way for the first Islamic bank.
It is ahead of the curve when it comes to regulating Islamic finance. Last year it passed an authoritative Islamic Financial Services Act to oversee operations within the country. It leads in terms of the complexity of products it offers and ease with which its political leadership addresses any issues.
Recently, Prime Minister Datuk Seri Najib Razak proposed the listing and trading of Malaysian government securities and government investment issues on the exchange-traded bond and sukuk platform in the 2015 budget. He said this would help boost the country’s equity and venture capital offerings, underlining the fact that Bursa Malaysia is already the largest Islamic stock exchange in the world with 80 per cent of its listings being Sharia-compliant.
The country commands more than 60 per cent of the global sukuk market amounting to $164 billion worth of outstanding sukuk in the first half of this year, according to Moody’s.
Malaysia has 16 fully fledged Islamic banks including five foreign ones. According to Moody’s, its Islamic bank assets total $135 billion, which accounts for 21 per cent of the country’s banking assets.
source: Gulf News