With a strong and well established financial services sector, Bahrain’s role in expanding the global reach of sharia-compliant financing looks set to broaden further through three developments firmed up in July. Two new partnerships were announced last month that will expand the number of Islamic Financial Services (IFS) institutions in the kingdom, while an agency already active in the sector is furthering its work to globalise the industry.
On July 9 a joint venture was formed between the kingdom’s Economic Development Board (EDB) and the Islamic Corporation for the Development of the Private Sector (ICD), an arm of the Islamic Development Bank (IDB), to promote the sector by offering training, software and sharia-compliant financing.
A week later, a second partnership offering training programmes and research was announced between the UK-based consultancy Islamic Finance Advisory and Assurance Services (IFAAS) and the Bahrain Institute of Banking and Finance (BIBF), a business education provider.
Finally, the International Islamic Financial Market (IIFM), a non-profit based in Manama, is working on a contract template for sukuk (Islamic bonds), due in early 2015, which it hopes will standardise the product into a form that will be more accessible to Islamic businesses around the globe.
Such efforts aim to bolster the rising popularity of IFS in the financial world. In the past five years, global Islamic financial assets grew by a compound annual growth rate of 22.8% a year, reaching $1.8trn at the end of 2013, according to a June report by Kuwait Finance House (KFH). Of this, $75.1bn is being actively managed by Islamic funds – after a 4.9% rise in the first half of 2014 – while the number of such funds has grown from some 800 in 2008 to 1069 as of mid-June.
Progress through partnership
Under the first of the two partnerships, the ICD will establish a new enterprise, called Ijara Company after a type of Islamic leasing agreement, through which it plans to lend assistance to small and medium-sized enterprises (SMEs) in Bahrain. The agreement includes setting up both a training centre and a centre for developing software on Islamic financial products, with the intention of exporting any tools it creates to foreign markets. “The new Ijara Company will add to the wide range of sharia-compliant products and services on offer, particularly for SMEs,” said Kamal bin Ahmed, the EDB’s acting chief executive. To supplement this, the two agencies will also discuss the possibility of setting up a special fund to invest in SMEs based in Bahrain.
The second agreement, signed July 16, focuses on education and research. The BIBF, which already provides instruction in both conventional and Islamic finance, will use the partnership with IFAAS to launch new training programmes and conduct research, drawing from the latter’s experience in the IFS industry since 2007. From offices in Paris, Manama and Birmingham, UK, consultants at IFAAS conduct audits, develop products, carry out feasibility studies and assist with regulatory compliance. The first new course being offered by the partnership, “Fundamentals of Finance and Banking Operations”, is scheduled to be held in September in English; others to follow will be taught in French and Arabic.
Training centres are key to sustaining the rapid growth of IFS. According to Barry Cosgrave of finance group Shearman & Sterling, the industry has long been viewed with caution by conventional investors due to the general mystique surrounding such concepts as sukuk, takaful (Islamic insurance) and musharakah (joint ventures). “Much of this was down to a simple lack of understanding of what were perceived to be mysterious structures with complicated names,” he wrote last month in Acquisition International, a finance journal. “However, as an increasing number of sukuk have run through the maturity cycle, it has provided an illustration of how Islamic instruments bear many of the characteristics of conventional finance products.”
Setting standards for sukuk
As awareness grows, standardising IFS instruments is seen as a way to help facilitate their wider acceptance. The new contract template being developed by IIFM should boost the importance of sukuk – which already accounts for 15% of total sector assets, the second-largest category after Islamic banking (80%), and well above the portion from real estate investments, according to the KFH. The main business of the IIFM, an industry non-profit, is to harmonise practices in the sector by creating specifications and templates for finance contracts.
With a working group composed of representatives from the IMF, the IDB and a range of other banking institutions, the agency will look at several different structures, including mudaraba (profit-sharing agreement), wakala (management fees) and sukuk that can be converted or exchanged.
Lack of accepted standards has been one factor holding back new issuances, as IFS clients are reluctant to invest where the details of sharia-compliance are hazy or the authority on which they are based questionable.
Even with such hindrances, sukuk has seen rapid growth. Global Islamic bonds reached $117bn in 2013, spread over 811 issuances, according to Zawya, a MENA news outfit run by Reuters. The IDB issued $1bn in five-year sukuks in July, following a $1.5bn sale in February and a $100m round in April, with plans for another issue of about $500m in May 2015.