A decision by DBS Bank to wind down a joint venture with Gulf investors is more than a setback for Singapore's biggest lender - it's a sign that tougher times lie ahead for Islamic finance worldwide.
The industry grew at double-digit annual rates for much of the past decade, faster than conventional finance. Economic booms in its core markets, the Muslim-majority nations of the Gulf and southeast Asia, fueled the gains.
As Dubai aspires to become the global hub for Islamic economy, Islamic banking and Islamic capital markets are expected to grow simultaneously, said Adnan Chilwan, CEO of Dubai Islamic Bank. Clearly Islamic capital markets are relatively new phenomena. Earlier it was much simpler that if someone needed finance they would go to a bank and the bank would leverage its balance sheet and give a loan. Then it started becoming a little more sophisticated by many banks joining in together to do a syndicated deals. Then a stage came where banks started to participate in cross border deals.
Arab Spring and Milton Friedman: Is reducing MENA’s unemployment a social responsibility of Islamic Finance?
There is buzz about the prospects for Islamic finance in parts of the Middle East and North Africa region (MENA) impacted by the Arab Spring. News reports suggest that, as a consequence of change in public policy, the market share of Islamic banking in Egypt will grow to “35 per cent in five years from 5 per cent now.” Much attention in Islamic finance circles is also falling on the relatively smaller markets, including Oman and Morocco. Observers, including researchers from Credit Suisse, are also pointing to Islamic finance as a potential spur to economic growth in the Arab Spring countries.
As investors looked on in dismay at the 2009 default of Islamic bonds from Saudi Arabia to Kuwait, many critics forecast the demise of the Gulf’s sharia-compliant industry.
Islamic bond structures were seen as too complicated and too far removed from the real economy. While financial instruments appeared to be based on collateral, they turned out to be just like any other conventional product.
After a sluggish start to the year the Middle East’s Islamic bond, or sukuk, market appears to be recovering, with yields tightening markedly since late March and several large fresh sales coming to the market this month.
The yield of HSBC-Nasdaq Dubai’s Gulf sukuk index has tightened to 4.56 per cent – the lowest level in almost six years – from more than 6 per cent at the beginning of March. Conventional bonds in the Gulf have also rallied, but still yield 4.95 per cent.
Dubai’s government took control of troubled Islamic lender Dubai Bank on Monday to prevent a collapse undermining the Gulf Arab state’s banking sector.
Dubai, which is struggling to emerge from a debt crisis, said it will inject an unspecified amount of capital into the bank and its takeover would protect depositors’ interests.
The recent notification by Kuwait's International Investment Group (IIG) KSCC that it was not in a position to make the periodic payments due on July 12, 2010 on its $200 million exchangeable Sukuk Al-Mudaraba issued in 2007 and which matures in 2010, once again turns the spotlight on the governance process, relating to especially unrated sukuk in the GCC (Gulf Cooperation Council) countries.
New research from The British University in Dubai shows GCC-based Islamic banks performed better during the recent recession than conventional banks. Study suggest that in general Islamic banks are less cost-efficient than conventional banks, possibly due to a lack of economies of scale or because customers are predisposed to Islamic products regardless of the cost.
Islamic banking practice performed better and showed greater resilience during the recent economic crisis than conventional banking practice, according to new research by The British University in Dubai (BUiD), a research-based postgraduate university.
Islamic finance will likely outpace mainstream banks and top one trillion dollars in total assets this year as demand for ethical investments increase, officials said Monday.
But Islamic financial institutions must guard against straying from the basic tenets of Sharia law if they are to avoid the excesses that led to the global economic crisis, an industry conference was told.
When Kuwait Finance House Malaysia helped develop a $1.3 billion real estate project in the country in 2005 as a partner in the deal, Islamic equity property ventures were a rarity.