Dubai
With the establishment of Dubai Islamic Economy Development Centre this December, an entity with a legal personality and financial and administrative independence, the emirate may be uniquely positioned to be in the forefront of creating these regulatory benchmarks.
“At this point in time there is no consensus on globally acceptable regulations. However, if you ask me if there will be globally acceptable regulations in the future, I believe there will be,” Abdulla Mohammed Al Awar, CEO, Dubai Islamic Economy Development Centre, tells GN Focus.
Last January, the Dubai Financial Market (DFM) released new draft standards for the structuring of sukuk, calling for industry comments. The emirate has announced plans to set up a Central Sharia Board to oversee all Islamic financial products used locally. The Dubai Financial Services Authority (DIFC) has developed a regulatory regime for Islamic finance providers within DIFC, supported by a series of handbooks that serve as a guide for companies wishing to undertake Islamic finance activities.
However, these steps need to lead to a larger goal. Oliver Agha, Managing Partner of Agha & Co, a boutique legal consultancy focusing on Islamic finance and financial advisory, says, “There is a real opportunity to develop a legal and regulatory structure that can say whatever your concerns are we have them covered.”
This February, Kuwait’s central bank governor, Mohammad al-Hashel, called for establishing an independent legal entity that will take the responsibility for the regulation and development of the work of Sharia audit and supervision, saying that the practice of individual sharia supervisory boards is “by no means in line with the sharia supervision governance fundamentals”. He recommends applying conventional guidelines and using the profession of audit as a role model and urges that this be done in cooperation with competent regional and international authorities. Dubai’s work could be a part of future discussions with other jurisdictions. Says Awar, “The practitioners and the regulators, and that includes the scholars, must come together to create the framework to enable Islamic finance houses to develop globally accepted products that appeal to both Muslims and non-Muslims. The alternative is that Islamic finance will continue to be a niche offering in the global financial sector.”
United Kingdom
Europe’s financial capital of London has made clear its ambition to become one of the leading centers for Islamic finance worldwide and to enter the competitive race with other hubs in Southeast Asia and the Middle East, UK Prime Minister David Cameron said in October 2013.
“I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world,” Cameron told the World Islamic Economic Forum being held in London in that month.
The UK already has more Islamic banking institutions than any other Western European country and boasts a number of business schools and university courses that are offering education in Islamic finance. Among the UK’s largest Islamic banks are the Islamic Bank of Britain, a subsidiary of Masraf Al Rayan, the fifth largest Islamic bank in the world and the second largest bank in Qatar. Others are The Bank of London and The Middle East, ABC International, European Islamic Investment Bank, Gatehouse Bank, branches of GCC banks such as Abu Dhabi Islamic Bank, Mashreq and Qatar Islamic Bank, as well as Shariah windows of large financial institution such as Citi, Standard Chartered and HSBC with the full range of Islamic finance products. As of end-2013, the London Stock Exchange has developed into a key global venue for the issuance of sukuk or Islamic bonds with over $34 billion raised through 49 issues. The UK will also be the first Western government to issue a sovereign sukuk this year valued at 200 million pounds. Projects in London that were privately financed through Islamic finance instruments are the Shard building and the athletes’ village for the 2012 Olympic Games, as well as the Malaysian investment in the Battersea Power Station and Dubai’s investment in the London Gateway, the UK’s first deep-sea container port.
Malaysia
Malaysia is the country with the strongest Islamic finance market. The country’s Islamic banking assets are expected to make up 40 per cent of Malaysia’s total banking sector assets by 2020 from about 25 per cent as of now, according to Wasim Saifi, global head of Standard Chartered’s Islamic consumer banking. Presently, Malaysia’s Islamic banking assets are valued at $65.6 billion.
“With the continuous double-digit growth momentum, as well as the regulatory framework that Malaysia’s central bank has put in place, the target is easily achievable,” Saifi said at a press conference of the bank on March 11, 2014 in Kuala Lumpur.
Currently, Malaysia has 16 licensed Islamic banking institutions, the largest being Maybank Islamic, AmIslamic, CIMB Islamic, RHB Islamic, Standard Chartered Saadiq, Kuwait Finance House (Malaysia) and Bank Islam Malaysia. The latest newcomer in the Islamic finance sector was American International Group (AIG), saying it will build up an Islamic reinsurance service by June 2014 and may eventually offer a fuller range of services later.
Kuala Lumpur, together with London, is seen as the major future competitor to Dubai in the race for the most relevant Islamic finance center globally. Malaysia has the advantage of being a vibrant market in local-currency sukuks, thanks to a Muslim-majority population, and Kuala Lumpur accounted for about two-thirds of all sukuks issued globally in 2013 while Dubai still lists relatively few sukuks on its exchanges. However, Malaysia is increasingly seeking ties to Gulf countries in an aim to step up cooperation in Islamic finance and reach a common standard of Shariah compliance. In the latest step, the exchanges in Kuala Lumpur and Riyadh signed a cooperation agreement in Islamic finance in February 2014, and more are expected to follow.
Singapore
The city state, in its role as a renowned international finance center, has also stepped up its activities in Islamic finance in line with the sector’s growth in the past. Its largest Shariah-compliant bank is The Islamic Bank of Asia, launched by DBS as early as 2007. The bank’s shareholders include 34 Middle Eastern investors from prominent families and industrial groups from GCC countries. There are a number of other banks with Islamic windows in Singapore, as well as the Islamic branches of Malaysia’s CIMB, RHB Bank and Maybank. Islamic banking in Singapore mainly builds upon the city state’s favourable credentials in wealth management, project financing and trade financing, but, however, Islamic retail banking still remains underdeveloped, experts say.
“There is just a small percentage of Muslims in the country along with low awareness of Islamic finance value propositions,” says Alhami Abdan, head of international finance and capital markets at OCBC Al-Amin Bank, the Islamic branch of the Oversea-Chinese Banking Corporation, one of the largest banks in Singapore. He added that traditional banking was well-established in the city state and there were little incentives for Islamic finance to reach a “critical mass”. However, especially large Malaysian player in Islamic finance such as Maybank and RHB are broadening their activities in retail banking as they believe cross-border transactions and access to the Southeast Asian region are among the key selling points for Singapore as an Islamic financing hub.
North Africa
Islamic finance is now also making headway into the North African region, albeit at a slow pace. There has been some capital market development in certain countries such as Egypt, Morocco and Tunisia, and sovereign and corporate sukuk could attract investment funds from the GCC and provide liquidity especially after the countries are restructuring their economies as an effect of the Arab Spring.
Rating agency Standard and Poor’s in a report published in February 2014 has found out that local banks in North Africa are still “slowly familiarising” themselves with Islamic finance and sukuk issuances as financing alternatives.
“Islamic finance in North Africa remains underdeveloped but regulatory changes are laying the groundwork for its growth,” Standard & Poor’s credit analyst Mohamed Damak said in the report titled Islamic Finance Could Make Inroads Into North Africa. “However, we believe that success will depend on their ability to offer products at a cost competitive with conventional banking activities,” he added.
Currently, North Africa’s contribution to global Islamic banking assets stands at just 1 per cent, the report revealed. But Tunisia and Egypt implemented new laws allowing for the issuance of Islamic bonds in late 2013, while Morocco January 2014 put in place a legal framework for Islamic institutions. With four Islamic banks – the largest being Faisal Islamic Bank -, five takaful companies and twelve Islamic funds, Egypt’s Islamic banking assets are valued at $11.6 billion, the largest share of the Islamic banking market in the region. Morocco’s Attijariwafa Bank, one of the biggest banks in North Africa, is also looking to boost Shariah-compliant finance as soon as an Islamic finance bill passes the country’s parliament. Future potential in the sector is also seen in microfinance, namely in countries such as Libya, Algeria and Mauritania.
Australia
With a population of close to 500,000 Muslim and a double-digit annual growth of this population segment, Australia seems to be a destination for Islamic banking to look at. The number of Muslims in the country is projected to reach 714,000 by 2030, statistic research of the government says. Australia in fact can look back at a relatively solid development of the sector in recent years. The National Australia Bank introduced Shariah-compliant microfinance loans back in the middle of 2009, and the bank also has a dedicated Islamic capital markets division, which eventually hopes to tap into the sukuk investor base as soon as the Australian financial sector development permits such a step. Australian banks or financing institutions such as Westpac, Macquarie as well as the Muslim Community Cooperative (Australia) are offering Islamic banking services, in the wholesale banking sector especially financing in the agro industry, mining and infrastructure, and on the retail side mostly for property finance. Growth in Islamic finance should be further facilitated by government promotions, private sector involvement, developing Islamic finance skills and considering a future sovereign sukuk issue, the Australian Trade Commission recommended.
