Wednesday, June 16

It’s all about Syariah

0

“In uncertain times, investors are looking for safer products. If you buy sukuk, it has generally proven to be less volatile given its local buyer base, hence the reduced chances of a sell-off.”

So far, Islamic banking has moderately escaped the fallout from recent global financial cri­ses. However, experts believed that due to its heavy reliance on property investments and pri­vate equity, the booming global industry could be hit should the turmoil worsen and real assets start to crumble.

Jennifer Chang, a Kuala Lumpur-based partner at Price­Waterhouse Coopers noted that given the extent of the global crisis, Islamic banks might suf­fer damage despite their strong positions.

“Islamic banks, especially in the Middle East, got heavily into private equity and real estate investments, where a lot of loans may be backed by properties. Should the property market go down, there will be an impact,” she told AFP in an interview.

“If a borrower is not able to pay, then the bank will foreclose and the question is – can you sell the property in the market and at what value? These are issues which all banks can face.”

Abhishek Kumar, a senior research analyst at Financial Insights – a company under market research and analysis firm International Data Corp – was more optimistic, even as he believed that in the current financial storm, there would be no absolutely safe harbours.

“Recent events may even boost the sector, as more and more institutions will be interested in providing Islamic services to diversify their risk portfolio,” he said.

“We’re not really sure what the real extent of the impact is, and whether we’ve passed the worst of it or not – but the extent is not going to be as bad as in the mainstream sector.”

Kuwait Finance House, mean­while, wrote in a report, “In the current financial turmoil, it is interesting to note that Islamic financing may have prevented a majority of the mess created by the conventional banking and fi­nancial institutions. The outlook for Islamic financing is bright and will likely take the lead in terms of providing funding for major projects as the conventional banking system reevaluates its business model.”

In recent years, the sector had broken out of its niche and been embraced by mainstream banks. As well as basic bank deposits and investment accounts, it had expanded into areas including equity funds, bonds and Islamic hedge funds.

Most outstanding of all instru­ments would be the sukuk.

Global issuance of sukuk – which complies with an Islamic prohibition on riba (interest) by paying bondholders with cash­flow generated from assets – shot up by 71 per cent to US$16.8 billion year-to-date versus the year-earlier period, according to data compiled by Bloomberg. In the whole of last year, global sukuk sales was US$17.1 billion.

On this, Malaysia certainly has the financial ‘muscle’, accounting for about two-thirds of total Islam­ic bonds outstanding worldwide as of date. On the other hand, the nation’s Islamic finance industry is worth at an estimated RM350.8 billion in assets, ranging from stocks and insurance to home loans and pawn-broking.

Emerging players

Obviously with such prowess, Malaysia alongside the six-mem­ber Gulf Cooperation Council (GCC) that included the United Arab Emirates and Saudi Arabia, continue to drive the global sukuk market. Nevertheless, interest from other parts of the Muslim world was also increasing.

Standing tall among potential candidates was Indonesia, with about 88 per cent of its over 250-million population were Muslims.

In July, the central bank of Indonesia announced its ambi­tion to increase Islamic banking assets by 35 per cent this year from the 100.3-trillion rupiah (US$11.7 billion) achieved at the end of last year. According to central bank data, the syariah-compliant industry in Southeast Asia’s larg­est economy grew 50 per cent last year, compared with a 16 per cent rise in Malaysia.

In Thailand, there had been a new interest for the kingdom’s Islamic finance industry in tap­ping Middle Eastern oil money to help fund Thai infrastructure projects, which could help it to gain a foothold in a market with only a small Muslim population

In his opening remark at a recent industrial event in Bang­kok, president of the state-owned Islamic Bank of Thailand, Dheera­sak Suwannayos said the fledgling Islamic finance industry in the kingdom was propelled into the global spotlight in the aftermath of the financial crisis as it was seen as a more ethical, less leveraged way of banking.

CUSTOMER SERVICE: A woman teller assists a customer with a transaction at CIMB Niaga Syariah, CIMB’s Islamic banking operation in Indonesia. — Reuters photo

“A lot of money has been re­ceived by the rise in petrol and that needs to be reinvested. Not many sukuk have been recently is­sued so it’s an opportunity to grab that liquid market,” he said.

Suwannayos highlighted com­panies such as Thailand’s top energy firm PTT had been in­creasingly diversifying from their home market and needed to raise finance in dollar markets. To note, a PTT unit issued a local-cur­rency Islamic bond in Malaysia last year, seen as the first time a Thai company had tapped Islamic capital markets abroad.

“Thai Airways is also consider­ing offers from Middle Eastern providers of airplane lease financ­ing,” he added.

Perhaps the most current would be the Islamic banking scenario in Libya, which might benefit from the departure of Muammar Gadd­afi, according to the country’s former central bank chief.

Gadhafi, who ruled Libya for more than 40 years, rejected proposals to develop the banking industry.

“I allowed banks to open Islamic windows with separate balance sheets when I was governor,” said Farhat Bengdara, who was Lib­ya’s central bank governor until he fled the country in February, in an interview with Bloomberg last month.

“Everything we did, we did gradually because the political decision-makers were against this. Gaddafi said ‘If we call them Islamic banks, so what about the banks we have? Are they infidel banks?

“The way I see it, there is a huge opportunity for Islamic banking,” Bengdara said. “The Libyans are conservative and many of them don’t like dealing with interests. So having full-fledged Islamic banks will be very attractive to them.”

With a global worth of more than US$1 trillion and an aver­age annual growth of 15 per cent, surely the Islamic financial ‘pie’ is large enough to be shared by all.

 

1 2