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Monday, 31 December 2012

Islamic finance industry enters 2013 with new strength

DUBAI, Dec. 29 (Xinhua) -- The year 2012 marked a turning point for banking on Islamic principles as new markets and new regulations in the Mideast helped the sector to flourish.

According to Ernst and Young, globally assets managed in line with Shari'ah will reach in 2013 an all-time high, amounting to 1. 8 trillion U.S. dollars, up from 1.2 trillion U.S. dollars in 2012.

Neither the ongoing turmoil in the Middle East nor the Euro zone debt crisis could prevent Islamic banks in the Middle East from reaching out to new markets and more business. While issuances of Islamic bonds, known as sukuk, flourished and new markets like Egypt and Oman embraced the banking in line with Shari'ah by setting up new laws and regulations to remove legal hurdles for Islamic banks.

Run on Islamic bonds

News issuances of Islamic bonds reached 40 billion U.S. dollars globally in 2012, up from 36 billion dollars last year, according to Malaysian Bank CIMB. In July, the Gulf state of Qatar launched one of the largest sukuk with a volume of four billion dollars. The issuance attracted bids worth a whopping 25 billion dollars. The proceeds will be used to revamp the country's infrastructure in order to be ready to host the FIFA 2022 football world cup.

But the sector suffered a setback when Dana Gas from the Gulf sheikhdom of Sharjah failed to settle a one billion dollar sukuk which was due on Oct. 31 since payment delays from clients in Egypt and in Kurdistan. However, Dana agreed with creditors to restructure the sukuk on Dec. 1.

Crossover markets

Meanwhile, the Egyptian cabinet approved on Dec. 23 draft law on the issuances of sukuk. Under the draft law, new sectors such as individual and investment funds, will now be able to finance government projects through Islamic bonds. The draft law was referred to parliament for debate to be passed and enacted.

The Sultanate of Oman is the latest country which legalized Islamic finance in May 2011. Meanwhile, Oman has amended its national law in order to regulate Islamic banking transactions in order to abide to the royal decree number 69/2012.

As the first Islamic bank in Oman, Bank Nizwa said it would launch operations at the start of 2013. Listed on the Muscat Securities Market on July 5, Bank Nizwa shares have been traded sideways since then.

In addition, "Iraq is contemplating Islamic banking legislation while Libya prepares to implement its Islamic banking framework," said Ashar Nazim, partner for global Islamic banking at Ernst and Young.

Gulf region leads

Although Islamic finance, which forbids interest and trading in shares of "un-ethical" businesses (like producers of weapons of alcohol), is a global phenomenon, the Middle East remains the industry's nucleus. Saudi Arabia is the biggest market for Islamic banking followed by Malaysia and UAE, Nazim said.

According to the report, the Islamic banking industry in Saudi Arabia, with an estimated 207 billion dollars of Shari'ah- compliant assets, was ranked first in 2011. Malaysia ranked second with total assets of 106 billion dollars and the third was United Arab Emirates (UAE) with 75 billion dollars.

Due to the industry's bullish outlook, investors also sent shares of Islamic financial institutions higher. UAE-based Ajman Bank whose shares were listed on the Dubai Financial Market DFM gained 68 percent in value in 2012, outperforming the DFM general index which climbed 17 percent higher.

Al Salam Bank Bahrain shares which were traded in Manama and Dubai rose by 39 percent since Jan. 1. In the third quarter of 2012, the bank's net profit rose five-fold year on year to hit of 6.8 million Bahraini dinars (18.04 million dollars).

Looking abroad

Other Islamic banks prepare to expand abroad. Masraf Al-Rayan from Doha, Qatar, expressed interest in buying troubled Islamic Bank of Britain, known as IBB, but the deadline looms as IBB's largest shareholder Qatar International Islamic Bank wat to have clearity over a possible deal until January, according to sources. "That the Qatar Central Bank separated Islamic banking from conventional banking in 2012 by law helped the Shari'ah-finance industry a lot," said Syed Hasan, general manager wholesale banking at Masraf Al-Rayan.

Frascesco Pavoni, head of financial services at German consultancy Roland Berger, said that all Gulf states shall follow Qatar's example. By separating Islamic finance from conventional banking, Islamic banks, often younger and smaller in size that their conventional counterparts, gain a higher radius to expand and reach out to potential clients, said Pavoni.

Islamic finance is not only about the prohibition of interest. Because risky asset management strategies like short-selling, trading naked options or futures are banned under Shari'ah, banks and investors increasingly choose for Islamic financing strategies. "God has permitted trade, but forbidden interest," says the Holy Koran in sura 2, verse 275.

(Shanghai Daily.Com / 29 Dec 2012)

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