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.

Investments in Gulf SMEs estimated at $14 billion by GOIC

Kuwait News Agency (KUNA) reports the Gulf Organization for Industrial Consulting (GOIC) as saying the total volume of investments in small and medium enterprises (SMEs) in the Gulf region amounted to $14 billion in 2012, just 4.2 per cent of total investments in the region’s industrial sector.

Investments in Gulf SMEs estimated at $14 billion by GOIC

Investments in Gulf SMEs estimated at $14 billion by GOIC

KUNA quotes GOIC Secretary-General Abdulaziz Al-Oqail as saying, “The meagre percentage highlights the need to pump more investments to the SMEs so that they could play a bigger role in socio-economic development in the GCC countries on equal footing with their peers in the advanced countries.”

Al-Oqail was speaking in Doha on the sidelines of the Qatar International Exhibition for Small and Medium Industries (QATAR SME-2013).

“In 2012 the United Arab Emirates and the Kingdom of Bahrain were the biggest GCC economies in terms of SMEs with the UAE SME sector ccounting for 85.5 per cent of the country’s industrial projects and the Bahraini SMEs representing 81.8 per cent,” he added.

“The GOIC data show that the total number of the SMEs in the region topped 12,684 representing 83.6 per cent of the industrial projects in the GCC member countries. These enterprises employ 46.1 per cent of the total workforce of the industrial sector, mainly expatriate workers.”

Major Islamic finance push

Posted on » Friday, November 08, 2013

DUBAI: Djibouti is promoting Islamic finance to increase banking penetration in the tiny African nation and help fund upgrades to the country’s infrastructure, its central bank governor said.

Major Islamic finance push

Major Islamic finance push

Djibouti sees Sharia-compliant finance as a way to pull itself out of poverty. That’s because most people are still not customers of banks, which limits the economy’s ability to assemble capital for investment.

Central bank governor Ahmed Osman said banking penetration had risen from 10 per cent of the population six years ago to 17 or 18 pc now, but that conventional banks were not attractive to many people for religious reasons.

The spread of Islamic banking will also help authorities move more business activity from the informal economy, which is unregulated and untaxed, to the formal sector, he added.

The Islamic banks, which now account for about 15pc of the country’s total banking assets and 12pc of deposits, are backed by investors from Yemen, Somalia, the UAE and Egypt – regional links which Djibouti hopes to strengthen.