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Tuesday, 30 June 2009

Opportunities for Islamic banking in Australia

Emirates Islamic Bank CEO Ebrahim Fayez Al Shamsi and Dubai Multi Commodities Centre (DMCC) CEO David Rutledge tell Business Spectator's Isabelle Oderberg:

* The bank is considering creating a presence in Australia through either acquisition or partnership
* The meltdown in traditional banking markets didn't affect the Islamic banking world, but the contraction in liquidity has
* The DMCC is examining whether the infrastructure it has developed could be deployed here
* Commodity traders in the Middle East are finding it difficult to secure financing

Isabelle Oderberg: I want to start by asking what sorts of opportunities you see in Australia for Islamic banking.

Ebrahim Fayez Al Shamsi: I think there is a huge opportunity for Islamic banking – and the demand for Islamic banking, globally, has been pleasing, especially after the recent international financial crisis. People believe that Islamic finance can provide a better solution for the financial environment.

IO: Are you targeting primarily the Muslim community or are you looking more broadly?

EA: The Islamic finance is not only for Muslims. Even in our own country, most of our customers have come to us not because of belief issues, but because of the variety of products and the service quality.

IO: Okay. Can you tell me a little bit about what sorts of opportunities have arisen in Islamic banking as a result of the financial crisis?

EA: The solutions and the products of Islamic by nature are based on trading – and assets trading always gives better solutions than trading in debts and using the currency as a commodity.

IO: I was wondering if you could tell me how you would operate in Australia. Would you be looking to take over an existing operation or would you need to start from scratch and set up something from the beginning?

EA: This is a fact finding mission and the options are open for us. We will try to use the easiest way, to start, if we decide to go ahead. It might be through acquisition. It might be through partnership with an existing partner. The options are open for us at this stage.

IO: You say that this is a fact finding mission – can you tell me about some of the conclusions that you’ve come to so far?

EA: We had an interesting meeting the last few days we’ve been here and we believe that the possibility for starting an Islamic banking corporation, even with limited capacity is a possibility.

IO: I understand there have been some government meetings. What has the attitude from Australian government been?

EA: I think the people have been very supportive, very cooperative – and they are willing, too. There is a need for introducing changes. They are willing to discuss that and to see how can we go about it.

IO: I did an interview recently with someone in Dohar about Islamic banking and it was explained to me that one of the key tenets is that there has to be a product behind transactions – some sort of commodity of some description. Does the fact that Australia has such an active commodities market give a good basis for Islamic products here?

EA: I think so, yes. Because the environment here is fit for that.

IO: Does it give more of an opportunity than a country that doesn’t have that kind of commodities market?

EA: Yes, of course. It’s got a diversified economy.

IO: One of the things that I understand has been quite difficult is standardising – what is and isn’t halal within Islamic banking. At the moment there are different religious bodies that give approval to certain products, but I understand there’s a move to do more standardisation. Can you tell me a little bit about that and how it’s progressing?

EA: I think in the beginning of Islamic banking that was the case. But now, actually, we are coming to standardised contracts and products. And we will see more of this in the future, too.

IO: Are there any challenges that face the expansion of Islamic banking in the world generally?

EA: Yes, I think there are challenges even in our own country. I mean, Islamic banking is a novelty sort of banking, so the challenges are always there. But I think we can accommodate ourselves in any environment.

IO: Globally, in finance, people have been pretty downbeat and traditional banking has taken a bit of a hit. What’s the feeling like in the Islamic banking world? Is it still pretty downbeat?

EA: I think Islamic banking is completely different and everybody believes today that the future is for Islamic banking. We very much believe in this and we have many products we can offer to different kinds of economic activities.

IO: Has it experienced the same kind of hit that traditional banking has experienced?

EA: No, not really because we are not involved in trading of loans. We are not at all in that, so we were not affected by the first hit. But of course the second hit, the liquidity issue, affected everybody.

IO: David, I was wondering if you could briefly introduce the Dubai Multi Commodities Centre for me and tell our readers exactly what it’s about.

David Rutledge: Sure. DMCC is a government of Dubai entity. It was established a little over seven years ago. It’s a free zone authority in Dubai, which means it has an area of land set aside which it has developed primarily for offices and residential space. That’s kind of the seed capital for DMCC that the government gave us. And that seed capital is being used firstly to promote a centre for companies that have an interest in trading commodities in one form or another, so we have about 1400 such companies that have now registered with DMCC as free zone companies.

In addition to that, we’ve developed a range of what we call market infrastructure for the commodity sector in Dubai – and to some extent in the region – so we’ve established some exchanges. We’ve established physical facilities for trading certain commodities – notably tea and cotton, which are important regional commodities – and we’ve established or created an electronic commodity warehouse receipt system to facilitate the financing of commodity trade, both in a conventional financing way and in the Sharia compliant way. So, we’re there substantially as a facilitator I guess, but also to establish businesses that have a commodities relevance and are consistent with building Dubai’s role as a significant trading centre for commodities.

IO: So, are you primarily set up to assist in the Islamic banking community or do you deal with other forms of financial operators? I mean, are you essentially a gateway between commodities and Islamic banking?

D: Well, no, I don’t think that’s our primary purpose, and I’d have to say that most of our relationships, historically, have been with conventional financial institutions. But as Mr Al Shamsi has mentioned – and you mentioned previously – the relationship between Islamic finance and the physical commodity sectors is a natural and very strong one. So I guess it’s kind of inevitable that over time we’ve built relationships with Islamic financiers and that many of the things that we do are of interest to Islamic financiers.

IO: What kinds of opportunities are you looking at in Australia?

D: Well, I’m here partly to see whether some of the infrastructure that we’ve developed could be deployed here. And I’m thinking about trade finance platforms that could be deployed here in Australia because of Australia’s very substantial commodities base. Also we have developed a range of investment products that are Sharia compliant and we’re interested in examining the possibility as to whether some of those products may be capable of being distributed here within the Australian market.

IO: And what are the opportunities looking like? What kind of reception have you had here?

D: Well, a positive reception. I mean, the delegation as a whole has been very well received. I think there’s a real burgeoning interest in Islamic finance here at the moment. But I think it’s too early to draw conclusions. We’ve still got one day of the delegation’s, or the mission’s, meetings to conclude – and then I’m sure once that’s done that the members of the mission will want to get together and compare notes and thoughts before reaching conclusions. But I think it’s been a very encouraging few days that we’ve had in Australia and I’m personally quite optimistic about various initiatives that may be able to be undertaken here.

IO: What’s the feeling like, generally, among the commodity trading market in the Middle East? Because in Australia it’s been pretty flat, with the demand tapering off quite sharply for a lot of our key trading partners.

D: Well, obviously the global slowdown has affected commodity markets and many commodity prices have fallen – and that inevitably is of concern to producers, which Australia primarily is. In the Middle East, I think it depends to some extent on what commodities you’re talking about. But I think for many commodities, particularly foodstuffs, it’s business as usual. I mean, the population consumes food basically no matter what stage of the economic cycle we’re at. And my understanding is that trading in many agricultural commodities is proceeding pretty much as before. I guess the one caveat I’d put on that is that, because of the banking crisis, it’s been harder for commodity traders to obtain finance – just because of the effect the liquidity in the banking markets and so on. But look, I think commodity markets are cyclical by their very nature and Australia knows that. I’m sure that the markets will move through the cycle, as they always have, and commodity producers in Australia will see better days again.

IO: I hope you have a successful trip and enjoy Australia.

EA: Thank you.

D: Thank you very much.

(Business Spectator)

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