Tag Archives: Finance

Islamic Finance From Faith To A Global Industry

Islamic Finance From Faith To A Global Industry

Six years ago, Malaysia launched a US$600 million bond and sold it to the world.

It was more than two times oversubscribed, and attention would have passed if not for a difference — it was the world’s first sovereign sukuk or bond issued according to the tenets of Islam.

Bank Negara Malaysia’s governor Tan Sri Dr Zeti Akhtar Aziz remembers the overwhelming response at the first roadshow in Hong Kong and ultimately, a third of the investors came from this region.

“Six years on, the Islamic financial landscape has been dramatically transformed into a vibrant, dynamic and competitive global intermediation mechanism that is supported by more than 300 Islamic financial institutions in more than 75 countries,” she said at an Islamic finance seminar in Hong Kong this week.

These days, “tremendous” is the word to describe the demand for sukuk, evidenced by oversubscriptions of between two and 13 times by both Islamic and conventional investors.

Islamic finance has become the fastest growing sector in the financial services industry. It has been dubbed the new “Silk Road”, the new link between Asia and the rest of the world.

It is not difficult to fathom why. Take a look at the numbers and see why international financial centres like Hong Kong, Singapore and London are getting into the queue.

The global Islamic financial empire is estimated at US$700 billion and expected to double in the next two years to US$1.4 trillion by 2010.

Total value of Islamic assets has surpassed US$250 billion, more than 40 times over since 1982 and growing at 15 percent a year. Islamic equity funds have expanded by than 25 percent over the past seven years.

“Obviously, Islamic finance has become part of the global financial system and it offers huge potential for development and growth,” said Hong Kong Financial Secretary John Tsang.

The rapid growth of Syariah-compliant products and services is speeded by the huge pool of petrodollars in the Middle East of about US$1 trillion in annual revenue.

And Asia has overtaken Europe as the second most popular region for investment from the GCC after the United States.

GCC is the acronym for Gulf Cooperation Council comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Salman Younis, managing director of Kuwait Finance House (Malaysia), said about US$1.5 trillion of GCC funds are held in assets worldwide vested in treasuries, corporate bonds, equities and funds.

“Recent trends in investment activities have been equally significant, investment projects amounting to more than US$160 billion to be financed by GCC countries in Asia have been announced since 2005,” Younis said.

Islamic finance is managed according to the tenets of Islam which forbid interest or investments such as in gambling or alcohol counters.

Inevitably, the new “Silk Road” leads to Malaysia which ventured into the relatively unchartered territory of Islamic banking way back in 1983 and now distinguishes with an Islamic financial system in parallel with convention banking.

Malaysia boasts of having the most comprehensive range of Islamic products and services from everyday banking and family needs such as deposits, credit cards, pawnbroking and insurance to sukuk and other wholesale capital.

Malaysia is also the global top sukuk issuer with over US$52 billion or 62 percent of world’s total, boosting its position by opening its bond market to allow outsiders to raise ringgit or foreign denominated funds.

Increasingly sophisticated Islamic financial products are coming into the market with the development of comprehensive regulatory and supervisory regime under the Malaysia-based Islamic Financial Services Board (IFSB) that was established in 2002.

Islamic hedge funds and Islamic benchmark indices have made their debut.

“There has also been increased listing of Islamic financial instrument in international exchanges. This has enhanced the depth of the Islamic financial markets and increased its attractiveness of an asset class for investments,” Zeti said.

By 2020, the global Muslim population is estimated to grow to 2.5 billion from the current 1.5 billion, to underline the huge potential ahead of the industry, and not forgetting the growing number of non-Muslims, for instance in Malaysia, who are turning to Islamic finance.

Having only a tiny Muslim population is no obstacle for Hong Kong which is keen on developing a wholesale Islamic finance market, said Tsang.

The island city recently launched its first Islamic retail fund for sale and retail investors. Hong Kong has also decided to upgrade its observer status to become an IFSB associate member.

London bid to be key centre for Islamic finance

London bid to be key centre for Islamic finance

As the global market for Islamic financial services has grown three-fold over the past decade, so London is setting out its stall to be the key, according to a new report Monday.

The study by the International Financial Services London (IFSL) on Islamic finance, co-sponsored by the UK Trade and Investment Department, said the expertise in London is represented by 23 banks, nine fund managers and a number of international law firms offering Islamic service, while there is a secondary market in Sukuk valued at two billion dollars a month and a growing market for retail mortgage business.

IFSL’s report also found that daily trading in commodity-based agreements through the London Metal Exchange is a key mechanism for the management of assets and liabilities by Islamic financial institutions and the 23 UK banks outnumber more than four times those of any other country in Western Europe.

Britain is also ahead of the rest of Western Europe in establishing fully Sharia compliant banks, with three of the 23 UK banks having set up there since 2004.

These are The Islamic Bank of Britain, The European Islamic Investment Bank and The Bank of London and The Middle East.
Britains Minister for Trade and Investment Lord Digby Jones welcomed the report and congratulated IFSL for producing an in depth and informative report.

He said in a statement “London’s position as the premier Western centre and partner of choice for Islamic finance is a huge step in the right direction”.

“The results of this report will help shape UK Trade and Investment strategies to position the UK as a world leader and investment destination of choice”, he added.

The global market for Islamic financial services, as measured by Sharia compliant assets, is estimated to have reached 531billion dollars at end-2006, having grown by over 10 percent a year from about 150 billion dollars in the mid-1990s.

Islamic commercial banks accounted for 75 percent of the assets 397 billion dollars, and investment banks 13 percent, 66 billion dollars.
The British Government takes a view that developing Islamic financial services helps to combat social exclusion while also giving additional weight to London’s status as a global financial centre.

Islamic Finance: Strategic tie-ups will boost industry globally

Islamic Finance: Strategic tie-ups will boost industry globally

Malaysia’s top banker said on Tuesday strategic alliances among Islamic finance players will help realise the global potential of the industry in the wake of increasing interest by several financial centres including Hong Kong in Islamic finance.

Addressing a two-day Islamic finance seminar here, Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz said the tie-ups will lead to a more integrated international Islamic financial system and enable players to tap the immense markets of both Muslim and non-Muslim communities.

She said conventional financial institutions can also work together with Islamic financial institutions to raise sukuk or Islamic bonds, or structure other Islamic products which are syariah-compliant.

“The wide-ranging availability of such assets and the massive financing needs of the new growth areas in the region such as in China, Indonesia and Vietnam will be attracting funds from surplus economies such as from the Gulf economies,” she said in a keynote address on “Towards Gaining Global Growth Potential of Islamic Finance”.

Noting that the setting up of an Asian Sukuk Fund could be explored as an extension of the Asian Bond Fund, Zeti said: “Potential issuers may leverage on Malaysia’s sukuk platform and its strength as the world’s largest sukuk issuance centre with over US$56 billion (RM184 billion) or 62 per cent of the world’s sukuk issues.”

The sukuk market is the fastest emerging form of Islamic finance, increasing at an annual average rate of 40 per cent spurred by high levels of surplus savings and reserves in Asia and the Middle East.

In Malaysia, sukuk bonds had surpassed conventional bonds for three years running with an annual turnover of RM135 billion.

Zeti said Malaysia, with three decades of Islamic finance experience, is entering a new phase in developing the country as an international Islamic financial centre and becoming more integrated with the international financial system.

“This aims at strengthening our economic and financial linkages and thus promoting greater trade and investment across borders,” she added.

Zeti was optimistic that Islamic finance this year and beyond will remain positive despite the challenging global environment as it has the ability to meet changing economic demands, apart from being cost-competitive and having well-supported legal and regulatory frameworks.

“Islamic finance as a new industry requires more initiatives to expand the horizon of business parameters and innovative product offerings. There is a need to conduct further in-depth research on syariah issues relating to risk mitigation, liquidity management and hedging,” she said.

Sukuk to lead bond mart

Sukuk to lead bond mart

Sukuk or Islamic bonds will remain the debt security of choice this year among companies involved in infrastructure and property projects, amid robust demand for the instrument.

Companies prefer sukuk as it could attract both conventional and Islamic investors, said a fund manager. He sees fewer corporate bond issuances going forward.

Rating Agency Malaysia (RAM) chief economist Dr Yeah Kim Leng said he expects a higher take-up of sukuk issues, particularly among Islamic investors from the Middle East.

Local companies would therefore be encouraged to raise funds via Islamic-based debt instruments as opposed to conventional bonds, to attract these investors, he said.

The prevaling trend was to go for asset-based Islamic instruments, he added.

Last year RM54 billion worth of corporate bonds were issued, in what was deemed a record year by local ratings agencies. Some 70% of these issuances were structured based on Islamic principles, and the trend is expected to continue this year, according to Malaysian Rating Corporation Bhd (MARC).

Malaysia is the world’s largest sukuk issuer, with over US$56 billion (RM184.8 billion) or 62% of the global sukuk base, according to the central bank.

Yeah also said the market would see a more diversified base of debt instruments this year, with private debt securities (PDS) issuances shifting towards convertibles.

“We’re likely to see a broadening of the instrument types involved. We’re also seeing more convertible loan stocks and asset-backed securities,” Yeah said.

Last week IOI Resources (L) Bhd’s US$600 million exchangeable bonds were snapped up in 90 minutes.

The bonds, convertible into IOI shares, were launched at an initial size of US$500 million and exercised in full for US$600 million on Jan 10.

UAE the world’s biggest Islamic bond issuer

UAE the world’s biggest Islamic bond issuer

The United Arab Emirates was the world’s top issuer of Islamic bonds during the last seven years, contributing 36.2 percent of global sale value, Kuwait’s Global Investment House (GLOB.KW: Quote, Profile, Research) said in a report on Thursday.

Malaysia, which along with the Gulf is one of the world’s Islamic banking hubs, came second, contributing 32.1 percent of Islamic bonds by value, though Malaysia issued far more individual bonds, Global said.

The world’s largest Islamic bond or sukuk, worth $3.52 billion, was sold in 2006 by Dubai property developer Nakheel.

The Islamic banking industry has boomed as more of the world’s 1.3 billion Muslims seek financial services that comply with their beliefs, especially since Sept. 11 2001, Global said.

“As a result of the U.S. policy towards certain financial organisations and charitable foundations, the Muslim world has reacted by expanding the demand for more Islamic banking,” the investment house said in its report.

Gulf investors are also attracted by higher returns from Islamic over conventional banking, while Western investors are drawn to Islamic investment products as a way to diversify their portfolios, Global said.

There are now at least 300 Islamic financial institutions spread among 75 countries compared with almost none 30 years ago, Global said.

Management consultants McKinsey & Co in December predicted the assets held by Islamic banks would hit $1 trillion by 2010.

The main obstacles to the growth of the industry are a lack of awareness among Muslims of the products and services on offer, and a lack of standardisation of the laws governing Islamic banks, Global said.
“Unless there is a general consensus among the major players of Islamic banking on creating a universally accepted set of regulations that are clear to the masses … the popularity of this concept will become a lingering challenge.”

Islamic law bans interest and instead pays a return derived from underlying physical assets.