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Monday, 28 July 2008

West eyes Islamic finance market share

Source: Emirates Business
by Shuchita Kapur
An increasing number of Western financial institutions and non-Muslim countries are aiming to become thriving entities or markets for Islamic finance.

The numbers are supporting the trend. According to Kuwait Finance House, Islamic finance industry is expected to hit $1 trillion by 2010 because of an increased global demand for Shariah-compliant financial products and services. Islamic banking assets are currently estimated at $750bn in value.

Industry experts from the region are also voicing their support towards Islamic financing that is gaining grounds all over the world, including the European continent. "Different people have different figures but Islamic banking is expected to grow to take 30-40 per cent of the total banking market in this part of the world [the Gulf region]. We've seen a huge increase in the number of pure Islamic banks and it will be interesting to see how it compares with banks that combine conventional and Islamic models," David Proctor, CEO of Al Khaliji Bank, told this paper. Given such huge stakes, western financial institutions are in the fray to get a slice of this capital and are foraying into Islamic banking and finance.

"Islamic finance has made rapid strides and there are several factors for this. Firstly, it is no longer a mystery and is allowing Western institutions to achieve the same objectives as a conventional bank would do, which is raising capital. Western institutions want to broaden their base capital and they are using an instrument to broaden their target market. This attraction is compounded by large pools of capital," Imran Ahmed, Managing Director, Asset Management at Mashreq, explained to Emirates Business.

International banks are setting up Shariah-compliant products and are promoting them in the European market also. HSBC has an Islamic Financial Solutions wing, HSBC Amanah, that has been very well received in Islamic nations. Barclays Capital, on the other hand, has partnered with Dubai Islamic Bank for the world's largest sukuk issuances. Not to be outdone, Standard Chartered is trying to get it share through its network in the Gulf, Pakistan and Malaysia. Moreover, Deutsche Bank is pioneering capital protected funds in the Gulf while UBS is developing Shariah-complaint wealth management services. These are just some of the many examples that illustrate the growing interest of western institutions in Islamic finance.

"Many people are investing in Islamic products but for them, it's just a product, with similar economics but differently formulated. In the current [high] oil price environment and due to the large asset transfer to the Gulf, it is hard to imagine any Gulf country going bankrupt," Laurent Dambly, Managing Director and Head of Capital Markets at Arqaam Capital, said while talking of the increasing acceptability of Islamic finance products by big international conventional banks. Rodney Wilson in his research paper Islamic finance in Europe for European University Institute said: "Islamic finance is thriving in Europe, and many major banks perceive it as a profitable opportunity to generate new business rather than a threat to existing business."

As Muslims are no different from non-Muslims in their needs and demands for financial services, Islamic banks and conventional banks offer Shariah-compliant retail products that mirror those provided to ordinary clients, argues Wilson.

Hani Kablawi, Managing Director, Head of Middle East & Africa at The Bank of New York Mellon, is amazed at the pace at which Islamic finance has grown internationally.

"That is certainly a testament to the size and pace of demand for Shariah-compliant products. Islamic finance is likely to grow even faster if standardisation is achieved. Western countries and their FIs invest in Islamic products merely for economic reasons, and the fineprint to them, is tangential. The more pertinent question is, why have western financial institutions taken the lead in developing Islamic banking products and when will the banks of the region catch up as innovators in the field?" he asks.
Fiscal interest by banks and other financial institutes in Shariah-compliant products and services was recently highlighted in a report titled "Islamic Finance In France: Paris Tries To Reduce The Gap With London."
In Europe, the UK is the leading centre for Islamic banking, which was integrated into the country's legislation. But now France may give it tough competition as recently the French government signalled a change in attitude. It is set to adjust its fiscal and legal framework to render it friendlier to the development of Islamic finance, according to Standard & Poor. However, till date, Britain sees itself as the European leader in providing Shariah-compliant financial services, aiming to serve both domestic Muslim markets as well as tapping into the vast wealth of Gulf investors.

Recently, the City of London hosted the first Annual World Islamic Banking Conference, where the British government repeated its intention to issue its own Sukuk, or Islamic sovereign debt, in future.
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
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