Interview: Aabed Al Zeera
How can Islamic financial institutions attain the critical mass necessary to better meet the needs of the real economy?
AABED AL ZEERA: The Islamic financial industry is evolving, with countries in various stages of development. Islamic finance has its roots in the “asset-backed” concept, which has worked well in the post-financial crisis environment, with most financial institutions, whether Islamic or conventional, reverting to the asset-backed concept and away from “exotic” products. As the financial world reshapes along these lines, I am optimistic that Islamic financial institutions will gain widespread recognition and there will be natural global demand for Islamic products and services to better meet the needs of the real economy. Consolidation of smaller institutions could also help optimise cost structures and contribute to a more efficient Islamic financial system.
In Bahrain, I think we have seen some movement in this regard, with the National Bank of Bahrain and SIO Asset Management Company recently coming together to purchase a 51.6% stake in Bahrain Islamic Bank. Nevertheless, consolidation among small and medium-sized Islamic banks should be further encouraged.
What additional measures can be taken to strengthen inter-regional connections and cross-border Islamic finance transactions?
AL ZEERA: Islamic finance needs to be thoroughly understood and appreciated by global financial institutions to be embraced by the investor community at large. Conferences and events with renowned sharia scholars at the helm will help to strengthen inter-regional connections. With several conventional banks already setting up Islamic windows, there is an established platform for cross-border Islamic finance transactions.
How should the regulatory environment adapt to enhance the internationalisation of Islamic finance?
AL ZEERA: Central banks in countries with a sizeable Muslim population need to recognise and formalise laws in Islamic banking to provide the required impetus towards internationalisation of Islamic finance. This would not only provide additional comfort to stakeholders in financial institutions but also enhance the cross-border exchange of Islamic products and services.
Which Islamic industry sectors will drive growth among investment banks in Bahrain and the region?
AL ZEERA: So long as the principles of sharia are met, there are no barriers to Islamic finance entering any sector. With an asset-backed concept, investment banks in the region have complete flexibility in offering products encompassing various instruments such as murabaha, ijara and istisnaa, to name a few. Traditionally, real estate has been the most accessible sharia-compliant asset class to invest in; however, there have been increasing investments in other sectors to better diversify investment portfolios.
For example, the industrial sector can always be sharia compliant. We have invested in industrial projects in Bahrain and the UAE, and all of these projects are sharia compliant. The recovery of the real estate market since 2011 has been very gradual even though there remains an abundance of liquidity, and so investors are being extremely cautious. The majority of activity among investment banks over the last few years has focused on private equity.
Does exposure to downgraded real estate markets remain a concern for Islamic banks? What is their appetite for risk?
AL ZEERA: Real estate has been an interesting asset class for Islamic banks in the region, with institutions earning significant profits in the pre-crisis era and then equally suffering losses in the post-crisis period. Whilst it is inappropriate to generalise about real estate as an asset class and comment on Islamic banks’ risk appetite, there are still opportunities in the kingdom’s real estate market in various segments that continue to offer a reasonable risk-return trade-off for sharia-compliant banks.
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