Islamic trade finance may reach as much as $800bn a year should Sharia-compliant banks strengthen cooperation with financial institutions in other countries, according to a Bahrain-based regulator.
“At this point, Islamic trade financing is very simple, it’s not focused and it isn’t competitive,” said Mohamad Nedal Alchaar, secretary-general of the Accounting & Auditing Organization for Islamic Financial Institutions, whose standards have been adopted in countries including the UAE and Qatar. “We could tap 20 percent of the total trade financing, that’s very reasonable.”
Trade among the 57-member Organization of the Islamic Conference based in Jeddah is likely to reach $4 trillion in 2012, Alchaar said in an interview in Abu Dhabi on February 27. Islamic trade finance has been slow to develop because it remains fragmented, according to Yakub Bobat, Dubai-based Global Head of HSBC Amanah Commercial Banking.
Sharia-compliant letters of credit are based on the principle of wakalah, where a bank acts as an agent and is paid fees and commissions in place of interest. Non-Islamic trade financing, which typically involves loans and the payment of interest, is forbidden under Islamic law.
Demand for services and products that comply with Sharia law is increasing by about 15 percent a year and assets will rise to $1.6 trillion by 2012, according to the Kuala Lumpur-based Islamic Financial Services Board, a global standard- setting body.
Global sales of sukuk, which pay asset returns to comply with Islam’s ban on interest rates, are showing signs of a recovery this year after slumping in 2010. Issuance has reached $3.9bn from $676m in the same period last year, according to data compiled by Bloomberg. Offerings fell 15 percent to $17.1bn last year.
The yield on Dubai’s 6.396 percent sukuk maturing in November 2014 fell 7 basis points last week to 6.4 percent on March 4, according to Bloomberg data. The extra yield investors demand to hold Dubai’s government debt rather than Malaysia’s narrowed 2 basis points to 344, the data show.
“The main reason why the industry has not been able to take off is that trade finance needs parties to connect across borders,” Bobat said in a telephone interview March 3. “The industry today is still pretty local, fragmented, at best regionalized, and is in need of consolidation.” HSBC Amanah is the Islamic banking unit of HSBC Holdings in London.
The OIC plans to boost trade among member nations to 20 percent of total trading volume in 2015, according to the group’s 10-year plan posted on its website, from 14 percent in 2004. Trade among OIC members reached 17 percent in 2009, Jeddah-based Hameed Opeloyeru, assistant secretary-general of economic affairs at the OIC, said in an e-mail response to questions yesterday.
The OIC, which includes the UAE, Indonesia and Pakistan, is in talks to establish a free-trade area for its more than 1.4 billion people, according to its website.
“Islamic banks don’t have the reach yet to go into discussion with corporates that need trade financing,” said Geert Bossuyt, the Dubai-based managing director and chief executive officer of Dar Al Istithmar, an Islamic finance advisory company established in the UK in 2004.
Sharia-compliant banks will “become more active” over time, Bossuyt said in a telephone interview March 3. “It’s an evolutionary issue.”