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Wednesday, 27 February 2008

Islamic banking enters new phase of innovation

'Islamic banking has entered a new phase of innovation', said Mr Ahmed El Shall, CFO of Dubai Bank, speaking at the Annual General meeting of the UAE Financial Markets Association (UAEFMA).

The AGM was held on 15 February 2008 at Le Meridian Mina Seyahi, and was attended by treasury market professionals from UAE banks. Mr El Shall, who is also the Chairman of the Islamic Bank's Liquidity Management Task Force set up by the Central Bank of the UAE, said that product development in Islamic Banking is now extending to the relatively nascent Islamic money markets and derivatives segments. Mr El Shall traced the growth of Islamic finance from its humble origins more than three decades back to the vibrant and thriving industry that it is today, where everyone wants a piece of the action.
Most of the growth in recent times has taken place in Sukuk, the Shari'a-compliant equivalent of bonds. Outstanding Sukuk issued is estimated to be in excess of $90bn. While the recent turmoil in the credit markets has affected the Islamic bond markets, with issuers having to call off their borrowing programmes, according to Mr El Shall it is only a matter of time before new issues start hitting the market. He also stated that various governments are already lined up to issue Sukuk, including those of the UK, China and Japan.
'Another important development,' Mr El Shall pointed out, 'is the interest that has been generated in the concept of Wakala, which is emerging as an accepted form of deposit placement both in the retail and wholesale segments. Wakala refers to an agency agreement in which the deposit-taker manages funds for the depositor for an expected rate of return.' 'In the wholesale segment in particular, a popular alternative to Wakala is Murabaha, which involves the buying and selling of permitted commodities, with the return to the depositor taking the form of profit on such trades. However, this method is generally cumbersome due to the tedious documentation involved,' he added.
Mr El Shall also noted, 'Recent developments in the Islamic derivative market have been more in the form of embedded optionality in deposit and financing products. Currency-linked deposits and Reduced Rate Currency-Linked Financing are just two of the recent products that have enriched the Islamic product repertoire, while innovative products with pay-offs similar to exotic options such as single-touch and no-touch options are also in the product pipeline.' He concluded by emphasising, 'Structuring Shari'a-compliant products is a major challenge and can be a painfully slow process.
New entrants to the Islamic banking sector have been striving to be more innovative and come up with Shari'a-compliant solutions that can match those offered by conventional banks.' The UAE Financial Markets Association is the standard-bearer for financial markets professionals in the UAE, and is affiliated to ACI - The Financial Markets Association, which is the global umbrella body of national associations. Among other things, the UAEFMA provides a forum for discussion on issues affecting the markets and gives feedback to official authorities and industry on ways to foster the growth of the UAE market. --(AMEInfo)

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