Growing demand across a number of sectors, rational pricing and innovative products are trends that are shaping the future of Islamic banking and the finance industry.
Despite continuing tensions across the Middle East and North Africa, key regions for this niche industry, Islamic finance continues to make headlines.
A well-publicised shortage of liquidity in the United States and European markets has resulted in organisations looking more towards funding from sources in the Middle East and South East Asia. There is a move towards more deals being funded from Islamic investors through the debt capital markets.
This uplift is also being driven by a better understanding of the products, their risks and their returns.
Education surrounding Islamic products has gained strong momentum following the spotlight turning on the "engineering" of financial products following the 2008 financial crisis.
This has resulted in accounting and financial bodies playing more of a role in the development, understanding and governance around the delivery of a wide range of Islamic products across the wholesale and retail sectors.
Globally, Islamic banking assets are said to be growing twice as fast as conventional banking assets and are expected to reach US$1.1 trillion (Dh4.04tn) this year, up 33 per cent from 2010.
The additional source of liquidity offered by Islamic finance has attracted the interest of non-Islamic market participants, especially where the pricing and commercial terms are identical to those used under conventional loan financing techniques.
As a result, it is no surprise that that a number of non-Islamic institutions have shown a desire to tap into the Islamic markets and diversify their sources of funding - with GE Capital, Nomura and Goldman Sachs notable examples.
As the popularity of Islamic finance continues to grow, so does its jurisdictional coverage and this has led to governments and central banks to promote the growth of Islamic finance.
Against this backdrop, western governments have taken steps to adjust their legal regulatory framework to accommodate Islamic finance products and, in the GCC, a new regulatory framework for Islamic finance is being pushed forward in Oman.
Broadly speaking, the approach taken by each of these governments has been to encourage growth through levelling the playing field - to ensure equal legal and regulatory treatment between Islamic and conventional forms of finance.
The strategic importance of becoming an Islamic finance hub should not be overlooked. Not only does Islamic finance provide an important source of liquidity, but it also is likely to play a significant role in the reshaping of global financial centres in the post-financial crisis, alongside more banking regulation.
The phasing in of Basel III standards around the world over the next few years is yet another factor that may ultimately favour Islamic banking.
These standards could potentially make trade finance activity more expensive by requiring banks to increase capital reserves.
However, Islamic banks have tended to adhere to stricter capital requirements, and are therefore less likely to have additional costs that affect their ability to compete in the lucrative trade finance space.
There will always be a demand for "real-economy" trade finance products, but the approach to Islamic trade financing activity has been quite patchy to-date.
However, over time, we should see Islamic trade finance establish itself as a strong cornerstone of the Islamic finance industry. Some would argue that the Islamic finance industry should already be doing a lot more to encourage this kind of trade activity.
Where the project finance market is concerned, there have been strong levels of project activity over the past few years in the Middle East as regional economies emerge from the shadows of the global credit crunch.
Saudi Arabia continues to dominate, but significant rebuilding and new infrastructure demands across the North African countries as they emerge from the Arab Spring will undoubtedly attract the further deployment of Islamic funds.
Although the demand for Islamic project financing continues to grow, concerns remain over whether Islamic banks have the necessary capital bases to fund the requirements of the larger projects on their own - without being integrated within a much wider "multi-sourced" financing arrangement.
Despite this concern, it is expected that the proportion of project financings that include an Islamic tranche will continue to grow and, furthermore, that the number of project financings that have multiple Islamic tranches to them - including of particular note, project sukuk - will also increase.
What is certain is that future prospects for the continued growth of Islamic banking look optimistic.
With the backdrop of the euro-zone crisis, as well as demand for rebuilding regional economies in the post-Arab Spring, Islamic finance looks set to grow in its wider appeal for a long time to come.
What is certain is the rise in popularity will continue; what is less clear is which countries will emerge as Islamic financing hubs and whether they will be compelling enough to attract some of the Islamic capital and investment away from the Arabian Gulf.
Debbie Barbour is a partner, and Paul McViety the legal director for finance and projects, at DLA Piper Middle East
Company profile
Name: Oulo.com
Founder: Kamal Nazha
Based: Dubai
Founded: 2020
Number of employees: 5
Sector: Technology
Funding: $450,000
A State of Passion
Directors: Carol Mansour and Muna Khalidi
Stars: Dr Ghassan Abu-Sittah
Rating: 4/5
Europe’s rearming plan
- Suspend strict budget rules to allow member countries to step up defence spending
- Create new "instrument" providing €150 billion of loans to member countries for defence investment
- Use the existing EU budget to direct more funds towards defence-related investment
- Engage the bloc's European Investment Bank to drop limits on lending to defence firms
- Create a savings and investments union to help companies access capital
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Analysis
Members of Syria's Alawite minority community face threat in their heartland after one of the deadliest days in country’s recent history. Read more
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Profile Box
Company/date started: 2015
Founder/CEO: Mohammed Toraif
Based: Manama, Bahrain
Sector: Sales, Technology, Conservation
Size: (employees/revenue) 4/ 5,000 downloads
Stage: 1 ($100,000)
Investors: Two first-round investors including, 500 Startups, Fawaz Al Gosaibi Holding (Saudi Arabia)
Key features of new policy
Pupils to learn coding and other vocational skills from Grade 6
Exams to test critical thinking and application of knowledge
A new National Assessment Centre, PARAKH (Performance, Assessment, Review and Analysis for Holistic Development) will form the standard for schools
Schools to implement online system to encouraging transparency and accountability
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Document everything immediately; including dates, times, locations and witnesses
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LIVING IN...
This article is part of a guide on where to live in the UAE. Our reporters will profile some of the country’s most desirable districts, provide an estimate of rental prices and introduce you to some of the residents who call each area home.
Dubai Bling season three
Cast: Loujain Adada, Zeina Khoury, Farhana Bodi, Ebraheem Al Samadi, Mona Kattan, and couples Safa & Fahad Siddiqui and DJ Bliss & Danya Mohammed
Rating: 1/5
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