By Christopher Watts
Sharia is compatible with the bank quickly move from niche to mainstream, "says Christopher Watts. But while growth seems certain, challenges remain.
In January this year at Sharjah in the United Arab Emirates Electricity and Water Authority (Sewa) need money to build a power and desalination plant in the city Hamriyah, Islamic finance provided Answer: The value of U.S. $ 350 m by the publication of its first sukuk - backed bonds that comply with sharia, the Islamic code, which prohibits interest.
In no way Sewa than venture into the Islamic capital markets. Corporate sukuk issue jump from 0.4 billion in 2000 to $ 24.5 billion in 2006, according to the International Islamic Financial Market (IIFM), an industry association. Completed 122% growth in 2006. "The Islamic finance is no longer a niche market," said David Pace, Chief Financial Officer of Bahrain-based Unicorn Investment Bank (UIB), a house conform to the Shariah. "It is increasingly a mainstream component of the global banking system."
To be sure, the first Islamic bank was founded in 1975, only the last five years, or Islamic finance has increased. Sniffing opportunity banks are now scrambling to activities in accordance with the Sharia, and there is a flurry of al-Islamic business, full-service investment banks to consultants. The products are in the form of loans, insurance and investment funds to take sukuk, hedge funds, swaps and more.
Despite this boom - largely concentrated in the Middle East and Southeast Asia - just the Islamic financial sector is not yet on a global scale. Rodney Wilson, professor of the Institute for Middle East and Islamic Studies at Durham University in the UK, estimates of Islamic banking assets speak for less than 0.5% of the world total. Sukuk and the stock of total debt amounted to 100 billion dollars perhaps - just 0.1% of the global bond market.
But signs of a continuous increase in Islamic finance. Take economic growth: The Middle East and Asia are the two regions with the fastest-growing in the world. Kuwait Finance House in 2007 GDP increased by 6.1% in the GCC countries and 6.2% in Southeast Asia - in contrast to 2.4% in the EU and 2.2% in the U.S. . Oil revenues are behind the boom in the GCC countries and South-East Asia is the "financial discipline in the wake of the Asian currency crisis," said Douglas Clark Johnson, Chief Financial Officer of chalice, another investment consultant in New York.
Sustained growth in the GCC countries and South-East Asia is rapidly creating a prosperous middle class between the regions' combined 410 million strong Muslim population. As the ranks of the "new rich snap up credit to buy houses and cars, and invest in savings and retirement, the demand for Sharia-compliant retail financial services is accelerating. Behind it is consumer demand for Islamic finance institutions.
Consider also the large cash flows in the GCC region and the South-East Asia: The IMF expects that Indonesia and Malaysia just a current account surplus accumulated $ 132 billion for the period five years until the end of 2008, against a deficit of 32 billion dollars in the same period of ten years earlier. And in the GCC countries, the surplus should reach U.S. $ 680 billion, compared to an initial deficit of $ 8 billion.
Encouraged by this money, regional governments are planning ambitious infrastructure programs: Indonesia hopes that USD 110 billion of expenditure in the five years until the end of 2010, and the consultant McKinsey estimates that the GCC will invest 200 billion over the same period. Many of these expenditures are already financed by sukuk - and the volume of the bubble: After the success of sukuk issue Sewa hopes for another U.S. $ 2.7 billion. And in neighboring Dubai, electricity and water authority are considering a first sukuk issue with the plans of USD 2.5 billion.
With foundations increasingly in the Middle East and Asia, Islamic finance is now taking root in London. Prime standalone Sharia-compliant bank opened its doors in 2004 and two others followed, the other is on the road. (Everything is supported by the Middle East settings.) And in April this year, the London Stock Exchange listed her maiden name sukuk should add a lot of depth and liquidity in the market. Another step is for the British government is mulling its sovereign sukuk issue first, perhaps early in 2008.
But problems remain. If Islamic finance is to plunge into the mainstream of global finance, industry needs to improve transparency and strengthen the credibility of the harmonization of standards and practices. Finally, the Sharia interpretation varies according to region and even institutions. Regulation should be strong. These measures - and others - can play a crucial role in broadening the appeal of Islamic finance and bridge the gap between Muslims and conventional financial systems.
The Islamic financial sector needs to work in the field of innovation, too. Shari's products conform May be more complex than conventional ones because each transaction is favorable to a non-negotiation. Many tools are still missing, including corporate treasury and derivatives. As UIB Pace says, "We [the industry] need to change our perception of R & D, and seen as a basic ingredient for success." But at the same time, innovation is hampered by the limited number of Islamic scholars to approve the financial products of Shariah compliance.
For some, industry practitioners are making progress. Earlier this year, the International Capital Market Association and the IIFM agreed to develop standards and best practices for the secondary market for Sukuk and other Islamic instruments. And that can help the global banking giants have their weight in Islamic finance. (Deutsche Bank, Barclays Capital and BNP Paribas are among the top five global sukuk issuers.)
The question whether Islamic finance has reached the critical mass to remain open, of course. But Johnson Calyx Financial is optimistic: "The Tipping Point May already happened," he enterprises. Although Johnson is wrong in his optimism, it seems unlikely the history to prove that it is very wide of the mark.
Source: Economist.com
Sharia is compatible with the bank quickly move from niche to mainstream, "says Christopher Watts. But while growth seems certain, challenges remain.
In January this year at Sharjah in the United Arab Emirates Electricity and Water Authority (Sewa) need money to build a power and desalination plant in the city Hamriyah, Islamic finance provided Answer: The value of U.S. $ 350 m by the publication of its first sukuk - backed bonds that comply with sharia, the Islamic code, which prohibits interest.
In no way Sewa than venture into the Islamic capital markets. Corporate sukuk issue jump from 0.4 billion in 2000 to $ 24.5 billion in 2006, according to the International Islamic Financial Market (IIFM), an industry association. Completed 122% growth in 2006. "The Islamic finance is no longer a niche market," said David Pace, Chief Financial Officer of Bahrain-based Unicorn Investment Bank (UIB), a house conform to the Shariah. "It is increasingly a mainstream component of the global banking system."
To be sure, the first Islamic bank was founded in 1975, only the last five years, or Islamic finance has increased. Sniffing opportunity banks are now scrambling to activities in accordance with the Sharia, and there is a flurry of al-Islamic business, full-service investment banks to consultants. The products are in the form of loans, insurance and investment funds to take sukuk, hedge funds, swaps and more.
Despite this boom - largely concentrated in the Middle East and Southeast Asia - just the Islamic financial sector is not yet on a global scale. Rodney Wilson, professor of the Institute for Middle East and Islamic Studies at Durham University in the UK, estimates of Islamic banking assets speak for less than 0.5% of the world total. Sukuk and the stock of total debt amounted to 100 billion dollars perhaps - just 0.1% of the global bond market.
But signs of a continuous increase in Islamic finance. Take economic growth: The Middle East and Asia are the two regions with the fastest-growing in the world. Kuwait Finance House in 2007 GDP increased by 6.1% in the GCC countries and 6.2% in Southeast Asia - in contrast to 2.4% in the EU and 2.2% in the U.S. . Oil revenues are behind the boom in the GCC countries and South-East Asia is the "financial discipline in the wake of the Asian currency crisis," said Douglas Clark Johnson, Chief Financial Officer of chalice, another investment consultant in New York.
Sustained growth in the GCC countries and South-East Asia is rapidly creating a prosperous middle class between the regions' combined 410 million strong Muslim population. As the ranks of the "new rich snap up credit to buy houses and cars, and invest in savings and retirement, the demand for Sharia-compliant retail financial services is accelerating. Behind it is consumer demand for Islamic finance institutions.
Consider also the large cash flows in the GCC region and the South-East Asia: The IMF expects that Indonesia and Malaysia just a current account surplus accumulated $ 132 billion for the period five years until the end of 2008, against a deficit of 32 billion dollars in the same period of ten years earlier. And in the GCC countries, the surplus should reach U.S. $ 680 billion, compared to an initial deficit of $ 8 billion.
Encouraged by this money, regional governments are planning ambitious infrastructure programs: Indonesia hopes that USD 110 billion of expenditure in the five years until the end of 2010, and the consultant McKinsey estimates that the GCC will invest 200 billion over the same period. Many of these expenditures are already financed by sukuk - and the volume of the bubble: After the success of sukuk issue Sewa hopes for another U.S. $ 2.7 billion. And in neighboring Dubai, electricity and water authority are considering a first sukuk issue with the plans of USD 2.5 billion.
With foundations increasingly in the Middle East and Asia, Islamic finance is now taking root in London. Prime standalone Sharia-compliant bank opened its doors in 2004 and two others followed, the other is on the road. (Everything is supported by the Middle East settings.) And in April this year, the London Stock Exchange listed her maiden name sukuk should add a lot of depth and liquidity in the market. Another step is for the British government is mulling its sovereign sukuk issue first, perhaps early in 2008.
But problems remain. If Islamic finance is to plunge into the mainstream of global finance, industry needs to improve transparency and strengthen the credibility of the harmonization of standards and practices. Finally, the Sharia interpretation varies according to region and even institutions. Regulation should be strong. These measures - and others - can play a crucial role in broadening the appeal of Islamic finance and bridge the gap between Muslims and conventional financial systems.
The Islamic financial sector needs to work in the field of innovation, too. Shari's products conform May be more complex than conventional ones because each transaction is favorable to a non-negotiation. Many tools are still missing, including corporate treasury and derivatives. As UIB Pace says, "We [the industry] need to change our perception of R & D, and seen as a basic ingredient for success." But at the same time, innovation is hampered by the limited number of Islamic scholars to approve the financial products of Shariah compliance.
For some, industry practitioners are making progress. Earlier this year, the International Capital Market Association and the IIFM agreed to develop standards and best practices for the secondary market for Sukuk and other Islamic instruments. And that can help the global banking giants have their weight in Islamic finance. (Deutsche Bank, Barclays Capital and BNP Paribas are among the top five global sukuk issuers.)
The question whether Islamic finance has reached the critical mass to remain open, of course. But Johnson Calyx Financial is optimistic: "The Tipping Point May already happened," he enterprises. Although Johnson is wrong in his optimism, it seems unlikely the history to prove that it is very wide of the mark.
Source: Economist.com
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