There seems to be no letting up of the massive growth of the global Islamic banking and finance sector in the coming New Year. Never mind the estimated year-on-year growth of between 15 percent to 20 percent of the global Islamic finance sector, which are usually being bandied around.
In reality, on the ground, the balance sheets, the deposits, the number of branches, the assets under management in selective individual Islamic financial institutions (IFIs) are growing by between 25 percent to 40 percent.
With oil prices and liquidity projected to be sustained at roughly the same levels during 2007, the budget surpluses of Gulf Cooperation Council countries will continue to be high. The Saudi budget for 2007 is projected at a staggering SR160 billion. This is important for the Islamic finance sector given that it will further drive both the public and private sector involvement in the sector.
In some respects, 2006 was a watershed year for the increasing involvement of GCC utilities and corporates in Islamic finance especially in Sukuk issuance and in syndicated Murabaha facilities, raised for general corporate purposes or for expansion activities. This trend will be reinforced during 2007 and beyond, with majors such as Saudi Aramco, SABIC, Emirates, Qatar Gas 7 Petroleum Company, Alba, Dubal among others setting the pace. While the GCC and Malaysia are no doubt the mainstay of the Islamic finance pool of funds and product innovation, there are signs that new markets will emerge during 2007.
These include Indonesia, the most populous Muslim nation with over 210 million people. Indonesia is in the process of launching its debut sovereign Sukuk in the first quarter of 2007. Other countries include Singapore, which has aspirations of being the International Islamic Capital Markets center. The Singapore Stock Exchange (SGX) together with Barclays Capital and others are working toward issuing the first exchange traded fund off the SGX/FTSE Asia 100 Shariah Index.
Turkey is another market, which is ripe for Sukuk and other more complex Islamic finance structures. Following the first Sukuk issued out of the US by gas company, East Cameron Partners in Houston in 2006, Western corporates in the US, UK, the EU and Central Europe are also showing much interest in utilizing the structure to raise funds to refinance existing corporate debt or to finance working capital and expansion activities, including acquisitions.
Other markets on the margin include South Africa, Russia and China. South Africa already has a history of Islamic finance spearheaded by Bahrain-based Albaraka Banking Group. But more recently the local banks such as ABSA, First National, Nedbank and Standard Bank have entered the market in a much more committed drive especially in retail banking and asset management. The Oasis Group, with its Crescent family of Islamic equity, balanced and property funds, have a lead start in Islamic asset management. With its tie-up with Malaysian, Saudi and Dubai partners, its overall aim is to provide seamless Shariah-compliant brand products, which transcend borders and can equally be sold to customers in Riyadh, Kuala Lumpur, Cape Town, Dubai, Istanbul, London etc.
This will also be an increasing trend in 2007 as Islamic finance becomes increasingly globalized. Here the banking majors such as Citigroup, HSBC, UBS, Standard Chartered, BNP Paribas, Societe Generale, Credit Suisse and Deutsche Bank should have a natural advantage because of their global reach and marketing expertise.
Similarly, the next phase of industrialization, even in the GCC, cannot be financed solely out of equity or the government budgets. There will increasingly be a reliance on the debt markets for Sukuk and other capital markets instruments and financial markets for syndications. Islamic finance is set to leverage its position because of its competitive pricing and now increasingly acceptable structures.
The extra tier of Shariah compliance is no barrier to entry for Islamic finance, as witnessed by the subscription of an increasing number of conventional banks in Europe, the US, Asia and South Africa to Islamic instruments such as Sukuk and Murabaha syndications. These banks are now increasingly comfortable with the risks associated with these instruments.
The three main market growth trends for Islamic banking in 2007 will be expansion in retail banking; the continuing march of the Sukuk but with more emphasis on hybrid complex issues and the beginning of a secondary market in the GCC subject to one of the Western banking majors being prepared to take on this role; wealth management such trusts and private equity.
In the UAE, for instance, Dubai Holdings has already announced that it is in the process of setting up the AED3.6 billion Al-Noor Islamic Bank. At the same time Dubai Bank is also set to complete its conversion into a fully-fledged Islamic bank in 2007.
In the two major markets in the GCC and Malaysia growth will be different yet complementary. In Malaysia, growth will be vertical as opposed to lateral in the GCC markets. Malaysia’s establishment of the Malaysia International Islamic Financial Centre (MIFC) in September 2006 heralds a new concerted effort by the Badawi government to consolidate the existing 12 Islamic banks in the country (both local and foreign) and to pave their globalization by encouraging them to venture into new markets and to attract investors into Malaysia by passing enabling legislation which transcends current foreign exchange and capital control regulations. CIMB Islamic Bank, for instance, has acquired a license to set up an Islamic finance company in Manama in Bahrain in a joint venture with a local partner.
The Malaysian emphasis now is on capacity buildings; on investment in human capital development (partly through the nascent INCEIF (the International Center for Education in Islamic Finance); enhancing the financial soundness and compliance of IFIs; enhancing Shariah compliance and governance; and the internationalization of the sector beyond the Muslim countries.
In contrast, the GCC states will see more lateral expansion of the market through new banks and companies and more products. This is partly because of the huge liquidity in the market which impacts more directly on demand dynamics for financial products. It is also because the GCC and other regions are playing “catch-up” with Malaysia in terms of Islamic financial architecture; regulations and legislation.
In some areas, such as Takaful (insurance), market penetration, however, will be frustratingly slow, simply because the starting base is much lower, and there still remain huge barriers to entry — low capitalization of Takaful companies; poor marketing; lack of reinsurance (Retakaful); ambivalent Shariah views on insurance; and poor market education.