Latest from GIFC

Friday, 22 August 2014

Islamic finance & management events in Kuala Lumpur Malaysia in 2014


Date: 24-25 September 2014
Event: KL Conference on Islamic Finance
Event site: www.islamic-finance-conference.net


To register or reserve a seat online, please go to:

Organizer: Alfalah Consulting
www.alfalahconsulting.com

Erdogan Retooling Turkish Banks To Boost Islamic Finance

Turkey’s biggest state-owned bank is branching out from being a traditional lender to farmers to providing the country’s largest corporate loan as the government pushes an expansion ahead of an initial public offering.


TC Ziraat Bankasi AS, the Ankara-based lender founded in 1863 during the Ottoman Empire, lent a record $1.6 billion to Cukurova Holding AS in July. The bank is also planning an Islamic finance unit, it said in a public filing today, while it ended talks about buying shariah-compliant lender Asya Katilim Bankasi AS (ASYAB) as it said a deal “is not in line with our bank’s priorities.” Bank Asya would have pursued talks if Ziraat had made an official bid, it said in a public filing today.
Deputy 

Prime
 Minister Ali Babacan, also in charge of banks, said earlier this month the government would welcome Ziraat’s purchase of Bank Asya.

“We will be in all areas that we think will support Turkey’s growth,” Ziraat Chief Executive Officer Huseyin Aydin said in an interview Aug. 19. He declined to discuss concrete targets.
Turkey’s government, which has said it plans to eventually sell shares in the bank, has encouraged Ziraat and two other state-owned lenders to broaden their offerings and include Islamic banking. The move may increase the state’s sway over financial institutions’ strategy, said Apostolos Bantis, a credit analyst at Commerzbank AG in Dubai.
“While Ziraat remains 100 percent controlled by the government, these transactions will increase concerns about the bank’s corporate governance policies and the government’s influence on the Ziraat’s business strategy,” he said.

PLANNED SALE

Aydin took over the top job at the bank in 2011 from another state lender, Turkiye Halk Bankasi AS. (HALKB) He’s charted new territory with the loan to Cukurova, the biggest yet by a Turkish bank to a domestic company.
Cukurova used the money to repay debt to Russia’s Alfa Group to recover a 13.8 percent stake atTurkcell Iletisim Hizmetleri AS (TCELL), Turkey’s biggest mobile operator.
“Ziraat is in a phase of growing its assets as a prerequisite for its planned IPO,” said Bulent Sengonul, an analyst at Istanbul-based Is Yatirim, in a telephone interview Aug. 18. “It will be positive for the bank to grow its capital through profits and its subsidiary base through participation banking.”
Bank Asya was established by followers of Fethullah Gulen, a U.S.-based imam, who is at the center of a power struggle with President-elect Recep Tayyip Erdogan’s Ak Party that has accused Gulen and his supporters of illegal wiretapping aimed at plotting a coup to topple the party.
Bank Asya said on Aug. 8 that talks about a deal with Qatar Islamic Bank SAQ had ended while Ziraat said in today’s public filing that the lender is in discussions with investors for a possible stake sale. Several government institutions canceled contracts earlier this month for the lender to act as cash collector for them. Turkey’s capital markets regulator also didn’t approve the bank’s application for a sukuk sale, citing uncertainty over its ownership structure.
“There is a risk that the Bank Asya transaction, which reportedly has links with the Gulen movement, might be interpreted as a tool to assert political pressure on the government’s opponents,” said Bantis of Commerzbank.
(Bloomberg / 21 August 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Nigeria: Zakat Can Eradicate Poverty - Sultan

Sokoto — The Sultan of Sokoto, Alhaji Sa'ad Abubakar, has said that the practice of Zakat is capable of eradicating poverty. The statement comes as the Sokoto State Zakat and Endowment Committee disclosed that it collected and distributed N105.3 million between January and now.


Speaking during flag off of an enlightenment campaign on the payment of Zakat, organised by the Muslim Ummah in Sokoto, the Sultan said: "Giving out Zakkat and endowment, according to the teachings of Islam will surely purify our wealth and also eradicate poverty in our society."
The Sultan, who was represented by the Galadiman Garin-Sokoto, urged Muslims and the leaders to be faithful and always fear Allah in the conduct of their activities.
In his remarks, Commissioner for Religious Affairs, Alhaji Tukur Alkali, said the affluent in the state need to ensure they play their roles as stated in the Quran.
The commissioner, who was represented by Sokoto State Director for Shari'a and Religious Affairs, Alhaji Aminu Aliyu, added that government needs to be supported in ensuring the welfare of the masses.
(All Africa / 21 August 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Wednesday, 20 August 2014

Azerbaijan’s IBA plans stand-alone Islamic banking unit

International Bank of Azerbaijan (IBA), the country’s largest lender, is preparing to launch a separate sharia-compliant banking unit as the former Soviet state prepares an Islamic banking law slated for next spring.

A stand-alone unit would allow IBA, 50.2 per cent owned by Azerbaijan’s Ministry of Finance, to more than quadruple its 
×
Islamic financing business in the country, said Behnam Gurbanzada, IBA’s director of Islamic banking.
“IBA is working on developing new products as well as establishing a platform for a separate, fully sharia-compliant unit,” Gurbanzada said.
IBA, which holds 40 per cent of banking assets in 
×
Azerbaijan, has thus far extended $180 million of 
××
Islamic financing in the country; after legislation is passed, this could increase to as much as $750 million within a year, he added.

The bank currently offers sharia-compliant products through an 
×
Islamic window, a practice which allows conventional lenders to provide 
××
Islamic financial services as long as client money is segregated from the rest of the bank.
A separate unit could help increase the appeal of ×Islamic banking among retail clients, in a country where an estimated 93 per cent of the population of 9 million are Muslim.
IBA also wants to create a strong domestic ×Islamic banking platform for use with its subsidiaries in Russia, Georgia and Qatar.
“Azerbaijan shows considerable promise to become a hub for ×Islamic banking in the region and has great potential to cooperate with ×Russia and all other CIS (Commonwealth of Independent States) countries which are interested in ×Islamic banking,” said Gurbanzada.
This month, the ×Association of Russian Banks asked ×Moscow to consider ways to promote ×Islamic finance in the country, including through an industry-specific law.
IBA has hired Bahrain-based consultancy ×Shariyah Review Bureau to help in the design of several projects including a real estate development in Azerbaijan’s capital ×Baku and a cash financing product, said Gurbanzada. The bank is also developing a sharia-compliant student financing product.
(Gulfnews.Com / 18 August 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Perpetuals in Vogue as Malaysia Airports Sells Sukuk: Islamic Finance

Malaysia Airports Holdings Bhd. (MAHB)’s plan to sell perpetual sukuk highlights rising interest in the debt from companies looking to shore up their balance sheets.


The manager of all of Malaysia’s 39 airports will hold an investor presentation for the offer on Aug. 25, two people with knowledge of the deal said last week. It will be the nation’s first sale of rated ringgit Islamic bonds with no set maturity following unrated issues by Malaysian Airline System Bhd. in 2012 and Boustead Holdings Bhd. in June. Boustead, a plantations company, sold the notes at 6.1 percent, 2.3 percentage points higher than its two-year non-Islamic debt at the time.
Perpetual bonds, which rating companies treat as equity, have been becoming more popular as they allow issuers to raise money without damaging their creditworthiness and offer higher yields to investors, Kevin Lim, RAM Ratings head of consumer and industrial ratings, said in an interview in Kuala Lumpur yesterday. Abu Dhabi’s Al Hilal Bank PJSC sold $500 million of perpetual sukuk in June, attracting around $5 billion of bids, the fifth such offer from the United Arab Emirates.
“The fact that Malaysia Airports is planning a rated perpetual sukuk suggests that investors are getting more sophisticated,” Mohd. Effendi Abdullah, head of Islamic markets at Kuala Lumpur-based AmInvestment Bank Bhd., the country’s third-biggest sukuk arranger, said in phone interview yesterday. “We are talking to a few companies that are keen to sell such debt.”

INCOME DROPPING

Malaysia Airports will offer as much as 1 billion ringgit ($317 million) of perpetual sukuk, the two people who asked not to be named because the information isn’t public yet said in interviews on Aug. 15. It’s part of a previously-announced 2.5 billion ringgit Islamic bond program.Chief Financial Officer Faizal Mansor declined to comment on the latest offer when contacted by telephone yesterday.
The company, which has a market capitalization of 10.6 billion ringgit, had total debt of 4.2 billion ringgit at the end of June. The airport manager will report net income of 234.7 million ringgit this year, according to the average estimate of 19 analysts in Bloomberg survey, compared with 388.9 million ringgit in 2013. The company’s shares have fallen 14 percent this year, worse than the 0.3 percent decline in the benchmark stock index.
Malaysia Airports last sold Shariah-compliant securities in September 2013. The 4.15 percent notes due 2018 and the 3.85 percent debt due 2016 last yielded 4.17 percent and 3.87 percent, respectively, data compiled by Bursa Malaysia show.

PRICE DISCOVERY

Borrowing costs on AAA-rated corporate non-Islamic bonds due 2024 climbed 40 basis points, or 0.4 percentage point, to 4.86 percent this year, according to a central bank index. That’s the highest level since September 2011.
“Rated perpetual issuance is rare in Malaysia and therefore I expect some price discovery to take place,” Norlia Mat Yusof, chief investment officer at Kuala Lumpur-based Etiqa Insurance & Takaful, said in an e-mail interview yesterday. “The yield must be reasonably above AAA issuance to account for the liquidity premium and the rather cautious investor sentiment due to rising interest rates.”
Worldwide issuance of bonds that comply with Islam’s ban on interest has climbed 27 percent this year to $26.9 billion, according to data compiled by Bloomberg. Malaysian sales have increased 78 percent to 39.3 billion ringgit, although the amount of offers has slowed from 18.7 billion ringgit in the first quarter.

CORPORATE PIPELINE

The country’s beleaguered national carrier, which has lost two planes this year, sold 1 billion ringgit of perpetual Shariah-compliant notes in June 2012 to yield 6.9 percent. Khazanah Nasional Bhd., Malaysia’s sovereign wealth fund, has offered to take the airline private and announce details of a plan to revive it at the end of this month.
SP Setia, a property developer, issued 609 million ringgit of the debt at 5.95 percent last December and Boustead sold 201 million ringgit in June. All of the securities are unrated and can’t be traded under Malaysia’s Securities Commission rules.
“Perpetuals are attractive to investors because they offer higher yields,” Elsie Tham, a senior fund manager at Kuala Lumpur-based Manulife Asset Management Sdn., who oversees more than $1 billion, said in an Aug. 15 phone interview. “The offering should attract interest because the pipeline of corporate bonds in Malaysia is a bit dry at the moment.”

NEW BENCHMARK

Aeon Credit Service (M) Bhd., the Malaysian unit of Japan’s second-biggest consumer-finance company, still hasn’t offered perpetual sukuk since Managing Director Yasuhiro Kasai said it would do so in a Dec. 10 interview.
It’s more cost efficient to issue perpetual bonds than traditional equity because the transaction is tax deductible, said RAM Rating’s Lim. Corporates can improve their capital structure by replacing debt with notes that don’t mature because they are treated as shares by rating companies, he said.
“Malaysia Airports’ perpetual sukuk, once sold, will provide a benchmark to potential issuers,” Lim said. “Investors looking for higher yields will also have more investment choices.”
(Bloomberg / 19 August 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Monday, 18 August 2014

Post crisis Islamic banks must revise business model

A growing global sentiment around ethical and socially conscious businesses is emerging. Large segments of the world’s consumers are showing a preference to work with businesses that are socially conscious. Six years after the economic crisis there is still much cynicism and anger directed at the conventional banks. People across the globe have a hunger for a more ethical, transparent and robust financial system. This has opened a window of opportunity for Islamic banks to emerge as a values-driven alternative to conventional banks, for those who seek a wholesome banking experience.

But can Islamic banks truly offer the world a better way of banking?
Global Islamic banking assets are put at $1.8 to $2 trillion. But, the truth is no one knows the exact size of the market, since there is no industry institution that keeps track of the data. However, we can be certain on a global scale Islamic banking is a niche product, accounting for little over one per cent of the world’s financial market.
So, even though Islamic finance boasts impressive annual growth rates of 15% to 20%, there is no real tangible evidence that Islamic finance is a global force, or about to become one. Islamic Bank deposits are minuscule compared to those held by conventional banks. In addition 80% of Islamic banks have a market capitalisation of less than US $25 million. And, if we consider the situation in this region, despite the financial strength of the GCC countries, conventional financing still represents the greater part of the debt market.
So why, 40 years after the emergence of Islamic finance, has Islamic finance failed to displace conventional finance in almost all Muslim dominated countries, and is marginalised in the rest of the world?
Few can dispute that the lack of standardisation has held back Islamic finance. There is increasing recognition among Islamic banks that there is a need for balanced regulation that does not impede growth, or allow for abuse. But disagreement and different interpretations over what is Shari’a compliant, and what is not, make it difficult to develop globally accepted products. Even at a national level there are inconsistencies. At Noor Bank we have found ourselves in situations where we have entered a syndicated corporate loan with four other UAE Islamic banks, to find we can only get approval from three of the four banks’ Shari’s boards. If Islamic banks want to offer a better way of banking, these inconsistencies must be eliminated.
But there is a far more fundamental issue that today’s Islamic banks need to address.

Catching up with new trends
Islamic banks are conservative and traditional by nature. They rarely change their ways, unless it is to catch up with new trends that are profitable. But, as an industry, we can no longer ignore the changes that are taking place in society. If Islamic banks are to offer a better way of banking for the world, we must first recognise that the world has changed.
To date Islamic banks have largely imitated conventional financial products. As a result, new asset classes have become accessible to Islamic investors, enabling them to access risk and return profiles in previously untapped areas. But, copying and adapting conventional banks’ products and services, adds little or nothing to the value proposition. Why should a customer choose an Islamic bank over a conventional bank, if there is, in reality, little or no difference between the two, especially if the Islamic alternative costs more?
If Islamic banks truly want displace their conventional counterparts, it is time to rethink their purpose and business model. Of course, Islamic banks should offer customers products that meet their needs, while at the same time improving the customer experience and reducing costs. But in line with our Islamic values, we should also mobilise wealth for the good of society and bring the financially disenfranchised into the real economy. Providing for the common good is a powerful message that Islamic banks should claim for themselves.
Confidence in conventional finance is at an all-time low. This has created an increased appetite for ethical finance. The absence of riba, or interest, in Islamic finance, should make it appealing to those who feel conventional banks have abused their trust. The opportunity is there to be grasped. But unless Islamic banks clearly define their differences from conventional banks, in moral and value terms that appeal to, and are easily understood by Muslims and non-Muslims, the promise that Islamic banking can offer the world a better way of banking will have no more substance than a mirage in the desert.
(Gulfnews.Com / 17 August 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

U.A.E. Margin Trade Crackdown Fans Shariah Push: Islamic Finance

Brokerages in the United Arab Emirates, where the market regulator last month vowed it may create new rules to control so-called margin trading, are increasingly offering Shariah-compliant versions of the service.


Mena Corp. Financial Services LLC, an Abu Dhabi-based investment firm, signed a 50 million-dirham ($13.6 million) accord last week with Dubai-based Aafaq-Islamic Finance Company to offer Shariah-compliant margin trading, where banks and brokers lend money to investors to trade. Al Safwa Islamic Financial Services was one of five firms accredited to provide margin trading this month, the Dubai Financial Market announced Aug. 5.
“You have more and more firms acquiring licenses,” Abu Dhabi-based Fathi Ben Grira, chief executive officer of Mena Corp., said by phone yesterday. “We’re pretty convinced there will be a strong appetite.” The deal with Aafaq may grow to as much as 350 million dirhams by year-end, he said.
The practice contributed to stock market volatility in the country this year that sent Dubai’s benchmark index from a bull market into a bear and back again in less than a month. The U.A.E. said it may amend the rules governing lending against shares after reviewing the price swings. Increased monitoring by the central bank and Securities & Commodities Authority is creating more clarity for investors and is fueling client demand, Grira said.

LIMITED SUPPLY

Shares of Shariah-compliant companies globally advanced 5.2 percent this year through yesterday, according to the Dow Jones Islamic Market World Index. Dubai’s gauge jumped 42 percent in the period and is the best-performing index in dollar terms among more than 90 tracked by Bloomberg. Abu Dhabi’s measure added 17 percent.
Islamic margin trading allows investors, predominantly high-net-worth individuals, to borrow cash according to terms that adhere to the religion’s ban on interest to trade shares, Grira said.
“We’re giving interest-free loans, others offer Murabaha,” Sherif Zohdy, head of brokerage at Al Safwa said by phone from Sharjah yesterday. In a Murabaha contract, goods are bought and then resold with a pre-agreed mark-up to allow lenders to cater for customers who want to lock in payments in the future.
“I have lots of clients who need margin trading, but I cannot offer it,” Zohdy said. “Our capital is 130 million dirhams. Only banks can deal with margin trading on a big scale.”
Total margin accounts at Dubai Islamic Bank PJSC (DIB) rose almost 30 percent to 291.5 million dirhams in the second quarter from the end of last year, according to its latest financial statement.

NEW RULES

The benchmark DFM General Index soared into a bull market July 15, about three weeks after entering a bear rout fueled by speculation over the ownership structure at Arabtec Holding Co. (ARTC), the U.A.E.’s largest publicly traded construction company. Banks and brokerages exacerbated the selloff as they offloaded stocks to pay back some of the money that was borrowed to buy them.
Representatives of the SCA, the central bank and the country’s two main stock exchanges met to consider the volatility, and said they will make changes to lending regulations if necessary, the SCA said July 7.
Further regulation will help boost the total volume of Islamic margin trading, according to Mena Corp.’s Grira. “We’re for regulation,” he said. “The market has been hurt in the past.”
(Bloomberg / 18 August 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Sunday, 17 August 2014

New opportunities open for Islamic banking in Bahrain

With a strong and well established financial services sector, Bahrain’s role in expanding the global reach of sharia-compliant financing looks set to broaden further through three developments firmed up in July. Two new partnerships were announced last month that will expand the number of Islamic Financial Services (IFS) institutions in the kingdom, while an agency already active in the sector is furthering its work to globalise the industry.

On July 9 a joint venture was formed between the kingdom’s Economic Development Board (EDB) and the Islamic Corporation for the Development of the Private Sector (ICD), an arm of the Islamic Development Bank (IDB), to promote the sector by offering training, software and sharia-compliant financing.
A week later, a second partnership offering training programmes and research was announced between the UK-based consultancy Islamic Finance Advisory and Assurance Services (IFAAS) and the Bahrain Institute of Banking and Finance (BIBF), a business education provider.
Finally, the International Islamic Financial Market (IIFM), a non-profit based in Manama, is working on a contract template for sukuk (Islamic bonds), due in early 2015, which it hopes will standardise the product into a form that will be more accessible to Islamic businesses around the globe.
Such efforts aim to bolster the rising popularity of IFS in the financial world. In the past five years, global Islamic financial assets grew by a compound annual growth rate of 22.8% a year, reaching $1.8trn at the end of 2013, according to a June report by Kuwait Finance House (KFH). Of this, $75.1bn is being actively managed by Islamic funds – after a 4.9% rise in the first half of 2014 – while the number of such funds has grown from some 800 in 2008 to 1069 as of mid-June.  

PROGRESS THROUGH PARTNERSHIP

Under the first of the two partnerships, the ICD will establish a new enterprise, called Ijara Company after a type of Islamic leasing agreement, through which it plans to lend assistance to small and medium-sized enterprises (SMEs) in Bahrain. The agreement includes setting up both a training centre and a centre for developing software on Islamic financial products, with the intention of exporting any tools it creates to foreign markets. “The new Ijara Company will add to the wide range of sharia-compliant products and services on offer, particularly for SMEs,” said Kamal bin Ahmed, the EDB’s acting chief executive. To supplement this, the two agencies will also discuss the possibility of setting up a special fund to invest in SMEs based in Bahrain.
The second agreement, signed July 16, focuses on education and research. The BIBF, which already provides instruction in both conventional and Islamic finance, will use the partnership with IFAAS to launch new training programmes and conduct research, drawing from the latter’s experience in the IFS industry since 2007. From offices in Paris, Manama and Birmingham, UK, consultants at IFAAS conduct audits, develop products, carry out feasibility studies and assist with regulatory compliance. The first new course being offered by the partnership, “Fundamentals of Finance and Banking Operations”, is scheduled to be held in September in English; others to follow will be taught in French and Arabic.
Training centres are key to sustaining the rapid growth of IFS. According to Barry Cosgrave of finance group Shearman & Sterling, the industry has long been viewed with caution by conventional investors due to the general mystique surrounding such concepts as sukuk, takaful (Islamic insurance) and musharakah (joint ventures). “Much of this was down to a simple lack of understanding of what were perceived to be mysterious structures with complicated names,” he wrote last month in Acquisition International, a finance journal. “However, as an increasing number of sukuk have run through the maturity cycle, it has provided an illustration of how Islamic instruments bear many of the characteristics of conventional finance products.”  

SETTING STANDARDS FOR SUKUK

As awareness grows, standardising IFS instruments is seen as a way to help facilitate their wider acceptance. The new contract template being developed by IIFM should boost the importance of sukuk – which already accounts for 15% of total sector assets, the second-largest category after Islamic banking (80%), and well above the portion from real estate investments, according to the KFH. The main business of the IIFM, an industry non-profit, is to harmonise practices in the sector by creating specifications and templates for finance contracts.
With a working group composed of representatives from the IMF, the IDB and a range of other banking institutions, the agency will look at several different structures, including mudaraba (profit-sharing agreement), wakala (management fees) and sukuk that can be converted or exchanged.
Lack of accepted standards has been one factor holding back new issuances, as IFS clients are reluctant to invest where the details of sharia-compliance are hazy or the authority on which they are based questionable.
Even with such hindrances, sukuk has seen rapid growth. Global Islamic bonds reached $117bn in 2013, spread over 811 issuances, according to Zawya, a MENA news outfit run by Reuters. The IDB issued $1bn in five-year sukuks in July, following a $1.5bn sale in February and a $100m round in April, with plans for another issue of about $500m in May 2015.
(Oxford Business Group / 15 August 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

The SME Gap In Islamic Financing

For most parts, the boom in Islamic finance within the GCC and indeed in North Africa and South Asia has been about the retail consumer – the individual who prefers to bank in accordance with his Islamic ideals – and previously, the large corporate sector.


In that rush though, the historically underfunded small and medium enterprise (SME) sector has been overlooked by financial institutions across the region.

A new study by International Finance Corporation (IFC) showed that around 35 per cent of SMEs in the Middle East and North Africa (MENA) are excluded from the formal banking sector because they seek Sharia-compliant products that are not readily available in the market.

The study, which was carried out across nine countries, found a potential market gap of up to $13.2 billion for SME Islamic financing in the region with a corresponding depository potential of $9.71 billion to $15.05 billion across these countries.

“To tap the underlying potential,Islamic banks need to build capacity and develop Sharia-compliant products to cater to this emerging sector,” the report said.

Despite the rising demand for Islamic financing among SMEs, the study reported that of the 36 per cent of banks in the MENA region that offer SME products, only 17 per cent offer Islamic options.

This is not all their doing though. The study pointed out that apart from a high level of risk aversion that banks in the region have, poor regulatory environments, differing perceptions of Islamic finance, and a lack of relevant products were hindering the growth of Islamic SME banking.

“The Islamic banking industry is not adopting measures that would grow the market. They don’t have a strategic outlook and there is a lack of product innovation,” said Attiq ur Rehman, partner, Israa Capital, a bespoke consultancy firm in the Islamic finance industry.

NEW-TO-BANK’ OPPORTUNITY


The IFC study also noted a significant variation across countries; demand for Islamic banking is as high as 90 per cent in Saudi Arabia while falling as low as four per cent in Lebanon. The study was carried out in Iraq, Pakistan, Yemen, Saudi Arabia, Egypt, Lebanon, Morocco, Tunisia and Jordan, and according to the IFC, the key findings from the study apply these the GCC region.

“What we see in Saudi will be applicable to the rest of the GCC region as these markets are very similar,” said Mouayed Makhlouf, regional director for IFC, MENA.
“But more importantly, the study reveals a significant, untapped ‘new- to-bank’ funding opportunity, as banks and other financial institutions lack adequate strategic focus on this segment to offer Sharia-compliant products. It also highlights the measures they need to take to overcome this.”

Tariq Muhammad, partner and head of Islamic Finance at auditing and consulting firm KPMG Lower Gulf, agreed and added that Islamic finance products tailored to the needs of the SME sector and delivered in a cost-effective manner represent a huge opportunity.
“Traditionally, Islamic banks have focused on large corporates looking for product structuring and legal documentation, while issues around enforceability made the SME proposition slightly unattractive,” said Muhammad.

“However, over time, tailored products have emerged that suit the SME sector complexities and ticket size. Most banks in the UAE have already spotted this opportunity and are aggressively working towards bridging this gap.”

Several conventional banks in the UAE have launched Islamic windows that offer various financing options for SMEs. Picking up the trend, some financial institutions in the GCC have also been mulling Sharia-compliant products for SMEs.

Oman Development Bank (ODB) announced last year that it is considering launching an Islamic window which would also provide Sharia-compliant funds for SMEs. Meanwhile, Standard Chartered Saadiq recently launched its first Islamic banking centre in the UAE with an aim to step up its product offerings in the space.

RIDING THE BOOM


According to the IFC report, the Middle East’s manufacturing sector was the most attractive sector for Islamic funding due to its capital intensity, export potential and the ability to value- add to the economy.

The report also noted that there is a huge potential for the conversion of an existing SME portfolio that avails of finance from the formal conventional banking channels to Islamic finance. This is an opportunity worth an estimated $4.1 billion and constitutes eight per cent of the existing SME lending portfolio, the study said.

Despite such potential, Islamic financing for SMEs faces a number of challenges that could obstruct it from going mainstream.

“There is a lack of awareness of how Islamic finance products are structured and operate among SME players. This would require significant effort from the banking sector to educate the participants,” said KPMG’s Muhammad.

“Excessive documentation required under Sharia-compliant financing is also a barrier and would require simplification and adaptation of documentation to suit SME needs.”

“The nature of financial information, collaterals, ownership structures and customer relations of SMEs require in-depth knowledge of each sub sector within SMEs. This would require the banks to create an SME research center before accepting this risk,” he added.

However, there is hope that as the Islamic banking industry develops significantly over the next few years, SMEs will find apt partners to fund their growth in the region. “Islamic banking has a compound annual growth rate of 15 per cent whereas conventional banking in these countries is not more than seven per cent,” said Israa’s Rehman.

Fuelled by economic growth in core Islamic financial markets, global Islamic banking assets are set to exceed $3.4 trillion by 2018, according to a report released earlier this year by auditing and consulting firm, whose Global Islamic Banking Centre also reported that the combined profits of Islamic banks broke the $10 billion mark for the first time at the end of 2013.

(Gulf Business / 16 August 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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