Global Islamic finance torn between competition and consolidation

Motivations of centres and participants may need alignment to deliver critical mass.

Global Islamic finance torn between competition and consolidation

Global Islamic finance torn between competition and consolidation

A ‘compare and contrast’ exercise was possible last week for those who had attended Dubai’s Global Islamic Economy Summit and previously London’s counterpart event a few weeks ago.

An even greater number of delegates was apparently present, over three thousand, in the rather more salubrious setting of Madinat Jumeirah, which, it’s probably fair to say, beats a reclaimed industrial dockland anytime, but especially in late autumn.

Dubai was seeking to lend weight to its claim as the putative centre of the Islamic economy, extending its reach beyond the familiar field of Sharia-compliant finance, although this correspondent’s focus remained on this key element, which attracts such attention, given the business potential still to be had.

One statistic delivered in a side session illustrated that point even more starkly than before. It’s often noted that Islamic financial assets make up only 1 per cent of the global total, just to keep a degree of perspective amid the hype.

In respect of assets under management, though, that ratio, so we were told, is $60 billion versus some $60 trillion overall, making it a miniscule percentage and a sitting target for rapid evolution if this segment of activity can be cultivated.

There were so many so-called takeaways from the event — informational sustenance rather than alimentary — that it would not do the subject justice to sweep through them. It’s a topic to be tracked with due discretion and consideration, and to be filtered through the prism of time.

That said, as an exception, the publication of the Thomson Reuters Islamic Financial Development report was of special note in analytical terms, as is the rubric of this space. It carries a multi-category analysis showing Malaysia leading the pack in the rounded advancement of the industry, followed interestingly by Bahrain, then UAE, but not featuring Saudi Arabia in the top ten, despite its size.

That prompted thoughts here on the global process of the sector’s development, and whether that predominantly will feature on the one hand competition between the various locations that want to secure market share, or collaboration on the other hand, by the various centres and regimes to get the job done. A harmonization of standards, documentation and regulation is believed by so many involved in the industry to be necessary.

While we hear a lot about the Gulf and Malaysia in their dominance of Islamic finance, their motivating forces and realization seem distinct, and internationally the sector appears fragmented.

Even basic research yields that, whereas Malaysia has embraced the sector in a focused way, as part of developing financial services within a national economic strategy, the Gulf’s approach till now, for all its longevity and natural affiliation, has been sporadic.

Malaysia has stolen a march, with a concerted agglomeration of support from the government, central bank, securities regulator and participating institutions. That well-coordinated process continues today. With a new financial district in view, Malaysia wants to compete with Singapore and Hong Kong, in keeping with its programmed vision to 2020.

Most especially, as an underlying philosophy, Malaysia seems devoted to meeting the requirements of the market, rather than imposing a specifically ethical or religious predestination.

In spite of its obvious alignment with Islamic finance historically, in the GCC the sector’s growth has been organic rather than systematised, to date. Of course, the region has had enviable energy resources to rely on, often argued to have curtailed other avenues to growth.

In a globally competitive sense Malaysia is ahead in the game, practically speaking, particularly in trained staff. Meanwhile, a unified, consolidated outlook is actually not on the agenda in the Gulf, although, clearly and by definition, not every centre in the region can be a hub.
Indeed, the recent signing of a Memorandum of Understanding between the central banks of Malaysia and the UAE, aiming to foster closer economic ties, indicates that co-operating externally could actually be easier than bonding internally.

In some sense, it is not surprising that the GCC states, as sovereign nations, should have ploughed their own furrows. The absence so far of Gulf monetary union is evidence of this disjuncture. Europe’s dysfunctional condition as a template can only have warded off collectivist sentiments.

At the same time, the Gulf’s deeper association with Sharia-compliance is a profundity that even its rival Malaysia is known to respect.

The different schools of thought might prove an enduring schism. That’s not fatal for the industry, but might remain a disadvantage for those who want an Islamic market, but need it to be streamlined.

Perhaps Dubai has a chance to find a way between the two pillars: of cultural authenticity alongside the pragmatism necessary for significant success in the real, competitive world.

As far as comparing and contrasting is concerned, while the UK may have a ‘can-do’ attitude, it’s as if Dubai goes the critical step further, with a ‘will-do’ resolution.

Comparative measures:

In terms of the Islamic finance industry’s international profile and cross-border flows, Malaysia and the GCC are most prominent, accounting for roughly 12 per cent and 40 per cent of business booked respectively, with Saudi Arabia representing the largest of the Gulf states in this respect with around 14 per cent of the overall sum. Malaysia, though, is the leader (with a 60 per cent share) in global sukuk issuance, perceptibly the cutting edge of the sector, with its tailored welcome to emerging-market and Sharia-compliant investors. Just over a fifth of the country’s banking system by assets is Islamic; the average for Muslim countries is more like 12 per cent.

Islamic finance, the Gulf and London’s future as a global hub

David Cameron’s highly symbolic speech at last week’s 9th World Islamic Economic Forum confirmed the government’s commitment to develop London as an important hub for Islamic finance. London Mayor Boris Johnson was also keen to encourage investment, pledging £100m to attract tech start-ups from the Muslim world.

Islamic finance, the Gulf and London’s future as a global hub

Islamic finance, the Gulf and London’s future as a global hub

It is not surprising to see both national and local government seek this investment, as London is in many ways ideally placed to benefit from a growth in this special form of finance. In the race to attract the sector, London enjoys various historic and cultural advantages over many of its rival financial centres.

Sharia-compliant banking has been handled in the UK since the early 1980s and London has long been at the centre of business and investment in the Muslim world. In the 90s, London began to provide more sophisticated and structured Islamic services, as local financial services and legal firms acquired enhanced knowledge and experience of the market.

Over the years, London has managed to maintain the industry. Last year it had about US$18.5 billion in sharia-compliant assets, the 9th most of any city in the world.

This experience in Islamic banking gives the city a degree of social capital in the field, unmatched by rival financial centres in the West.

The UK government now recognises Islamic finance as a valuable proposition, one which can bring innovation and diversity in the well-established UK market. Ultimately, it can support London as an international financial centre.

Why Islamic finance?

Current economic reality, both in the UK and globally, provides an important rationale for the government’s desire to attract capital from the Gulf.

With most Gulf investors aiming for sharia compliant investment or Islamic financing, moves by UK governments over the years to facilitate them are simply responses to economic conditions. After all, given Islamic finance has already been behind developments like the Shard or the Olympic Village, local and national governments would be foolish to ignore its potential. In addition, financial inclusion in terms of providing financial access to Muslim community according to their religious tenets has played a role as well.

The recent commitment by the UK government again aims to attract further capital to London, accompanied by the political will to provide a more welcoming environment by extending the Islamic finance sphere through sukuk, or Islamic bonds, for example.

There are four ways in which Islamic finance could be developed in the UK:

Engagement: The relevant authorities must engage with businesses, retail groups, Sharia scholars, regulators and the financial product providers themselves to ensure the right environment for Islamic finance to flourish in London. Coordinating all these various groups will be tough, and that is why the formation of an “Islamic finance task force” is essential, as announced earlier this year.

Investment: Existing UK-based Islamic banks and financial institutions should invest in product design, launch and distribution to be able to maintain a competitive edge.

Competitiveness: The legal, regulatory and financial environment should work in coordination to ensure London’s competitiveness in terms of providing the right environment for future Islamic finance activity in the capital.

Demonstration: This will require providing all the necessary conditions for the existence and growth of the market. The Prime Minister’s indication of a sovereign sukuk sends a symbolic signal to other competing markets indicating that London is taking this seriously.

This would all be part of a process of increasing the provision of financial services at all levels in society, something development economists call “financial deepening”, an important boost to economic growth.

Global rivals

While London has for some time aimed at becoming an Islamic finance centre, other financial centres including Tokyo, Hong Kong and New York, could perhaps be considered as potential competitors.

However, none of these rivals appear to have London’s political backing. This not only enables appropriate laws to be passed, but it also provides Islamic capital with confidence that it will be well received in the country.

Tokyo remains hesitant, while New York still strategically keeps away from Islamic finance. Hong Kong represent important competition, being open and welcoming to Islamic finance but London still has the competitive edge.

Istanbul promises to become a serious competitor in future, with a growing Islamic finance sector based in the Muslim world’s second largest economy benefiting from close ties to both East and West.

Entirely new rivals may emerge, but Islamic finance’s risk averse attitude generally motivates it to remain in known traditional markets rather than new shores which may have higher returns, but also higher risks.

Recent commitments to develop Islamic finance in the UK represent a positive move. The UK economy will derive further benefits from attracting Islamic capital, and London’s position as a global financial centre will be strengthened.

For further reading on the subject, see our Explainer: how does Islamic finance work?