Interview: Mohammed Bucheere
What strategies are being pursued by Islamic banks to reignite growth within the industry?
MOHAMMED BUCHEEREI: The multiple economic challenges of the past few years have helped Islamic banks reassess their risk management framework and pushed investors to focus on the benefits of Islamic banking and finance. They have also highlighted previously neglected areas of potential growth across the MENA region.
As a result, 2011 was a year of significant growth in new areas for Islamic finance. The global Islamic finance industry today manages about $1.3trn – 1% of the total global financial system. According to estimates, it has been growing at a rate of 17-20% per annum since the mid-1990’s and growth in 2011 exceeded 20%. The sukuk, or Islamic bond, market continues to expand. In the GCC alone we have seen numerous new issues, both in the sovereign and corporate space. According to recent figures, the value of new sukuk issues crossed the $6bn mark in the first quarter of 2012. Sharia-compliant funds have continued to outperform conventional funds, demonstrating the advantages of their cautious approach to investing. Across the GCC region, most funds launched in 2011 were sharia-compliant.
This sustained growth is a result of the industry’s improving relative performance, coupled with increased innovation and the introduction of new products. These two strategies are likely to continue to be the drivers of future growth. In addition to offering a more conservative approach, Islamic banking and finance presents a compelling ethical position, and that, in my opinion, is an increasingly important consideration. Moving forward, the key challenge for sustainable growth will be the industry’s ability to maintain innovation and the individual bank’s abilities to enhance customer service or, in some cases, introduce differentiation.
What affect, if any, has the aftermath of the Arab Spring had on investments in Islamic funds?
BUCHEEREI: It has certainly been an extremely tense and challenging year for Arab economies. For much of 2011, the investment arena remained quiet as the region’s capital markets and issuers waited to see how multiple events – not just across the MENA region but also in Europe and North America – would play out. Fortunately, individual and institutional investors in the GCC and MENA region are extremely sophisticated. Being able to withstand industrial and capital market cyclicality as necessary, they tend to take a more prudent medium- to long-term view of the markets.
For example, we did not see knee-jerk reactions with the significant investments in Tunisia, Egypt or even Libya. Instead, towards the end of the year, we saw a flurry of bonds, including sukuks, entering the market despite sub-par market conditions. Bahrain was able to issue a $750m sukuk in November despite the very significant damage that the Kingdom’s financial services industry had suffered due to the political turmoil during early 2011. The sukuk proved to be an overwhelming success and was oversubscribed.
What more needs to be done to improve standardisation within the industry to help facilitate growth?
BUCHEEREI: The three most important aspects that need to be addressed are: the standardisation of products and related documentation; the establishment of regional sharia committees to provide guidance on differing sharia legal pronouncements; and the standardisation of ratings for Islamic banks. The larger part of an institution’s day-to-day operations, particularly bilateral dealings with other Islamic institutions, require efforts in improving market unification, including standardisation. This will significantly improve efficiency and facilitate growth. This is as true for domestic market considerations as for cross-border operations.
Given the current trends and growth in Islamic banking, banks in the segment must take a leading role in standardisation initiatives, particularly with regard to financial documentation, products and related processes. Of course, unification efforts with regard to sharia policies and laws must also be further strengthened.
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