Interview: Adnan Ahmed Yousif, Aabed Al-Zeera
What new asset classes are emerging that could provide sustainable profits for the future?
ADNAN AHMED YOUSIF: The Islamic finance industry today manages almost $1.8trn, and over 60%, or $1.1trn, of this is managed by the major segment of the industry, Islamic banks. These are by nature classified as retail banks that manage a highly diversified portfolio. Real estate could be one of the segments for some banks, and if we exclude real estate as a major component of Islamic banks’ portfolio, we would be looking at almost 38% of the industry.
Even in this segment, real estate is not as big as it appears in some media. We, therefore, cannot consider it a phenomenon. I believe both the microfinance and the small and medium-sized enterprise (SME) economic sectors will attract attention and focus in the near future.
AABED AL-ZEERA: The next phase of growth for sharia-compliant banks will arise from the crossover of Islamic finance to investors and financial intermediaries in the conventional finance sector as the strong appeal of Islamic finance migrates to our conventional counterparts. In terms of new asset classes, sharia-compliant funds investing in underlying public equities are likely to emerge, providing Islamic investors with access to wider equity markets.
How could Islamic finance be taken to the next level and develop a truly globalised attraction?
AL-ZEERA: Many indicators demonstrate that Islamic finance is becoming a truly global product. This relatively young industry, which only saw the first Islamic banks receiving their licences less than 40 years ago, has now transformed from a domesticonly service into an industry with billions of dollars in assets being managed in accordance with Islamic principles. Stronger platforms and enhanced regulatory frameworks need to be developed over the coming years if Islamic finance is to have a truly globalised capability. As stated above, the relative safety and stability exhibited by Islamic financial institutions is a testament to the relatively secure and robust underpinnings of Islamic finance.
YOUSIF: The growth and expansion of the Islamic financial sector outside of traditional markets, particularly in the eurozone, has already started and resulted in it becoming an integrated industry in terms of applied techniques, as well as legislation. One of the key issues for the Islamic banking sector at present is establishing and promoting internationally accepted regulatory and legal frameworks. More efforts are needed to strengthen the role of the current bodies responsible for setting standards, such as the Accounting and Auditing Organisation for Islamic Finance Institutions and the Islamic Financial Services Board (IFSB). Another important issue is the need to strengthen risk management and research and development capabilities to gain a better understanding of customers’ needs and to come up with innovative solutions on both sides of the balance sheet. In this regard, special emphasis is needed to provide low-cost funding for the microfinance sector, as well as financing for SMEs. There are many challenges restricting the access of Islamic banking to European markets, but given the nature of these challenges, relating as they generally do to systems, regulatory and legal issues, those markets are capable of evolving, and subsequently accommodating and integrating Islamic banking into their systems.
How can critical mass be created to facilitate large-scale, multi-jurisdiction transactions?
YOUSIF: In order for this to happen we need a strong legal platform that meets the specific needs of the various segments of the Islamic financial services industry, with a particular emphasis on the needs of profit- and loss-sharing models of financing, such as musharakah, joint ventures in which parties share profit and loss, and mudarabah, profit-sharing agreements where one partner provides the capital and the other the effort. A strong legal and regulatory approach would give market participants the confidence to engage in new and more advanced lines of business, such as infrastructure and project financing. Simultaneously, there could be continued effort to harmonise regulations in each jurisdiction towards international standards and best practices, such as those issued by the IFSB.
AL-ZEERA: A number of measures are taking place internationally that will see the percentage of Islamic financial transactions increase. In late 2013 announcements were made regarding the establishment of the first full-fledged Islamic bank headquartered in the eurozone. With more than 20m Muslims in the EU, there is foreseeable potential in that market for growth of the sector. Furthermore, providing Islamic banking platforms to countries such as China and India, which together have populations of nearly 200m Muslims, will create the much required critical mass needed to facilitate large-scale, cross-border transactions.
To what extent has the global regulatory frame- work been harmonised?
AL-ZEERA: Due to the relative newness of the Islamic financial sector greater harmonisation of the regulatory framework has still not been accomplished. With increased alignment across the regulatory framework, accounting standards and financial practices, Islamic finance would benefit the financial system in several ways, such as allowing for large-scale internationalisation, higher levels of activity and business confidence, and a decrease in the risk of the sector being compromised.
YOUSIF: Markets always require stability and confidence. Of course, by stability I mean going beyond simply political stability, policies, standards and global enforceability. Currently, there are numerous efforts being made by governments and global financial institutions, such as the World Bank and the IMF, to achieve an acceptable level of harmonisation and to bring back lost confidence. I believe, to a large extent, this has started to bear fruit.
Could the emergence of London as a centre for Islamic finance change the global industry? If so, how would this affect the sector?
YOUSIF: It will have a positive impact given the position of London as one of the major financial centres of the world. But I do not think this will change the dynamics of the Islamic finance industry because we are talking about two different financial systems. I disagree with the spirit of competition regarding which country or state should be the centre for the Islamic financial industry – be it London, Bahrain, Dubai or Kuala Lumpur. It is not about competing to become the world capital of Islamic finance. It is about complementing each other by establishing a foundation and legal framework, as well as creating a friendly environment for capital to move freely for the well-being of societies.
AL-ZEERA: The UK government, the first non-Islamic country to raise a sukuk, or sharia-compliant bond, recently sold its securities for $339m. This very strong demand saw investors bidding for more than 10 times the amount offered. With this groundbreaking step being made by the UK government, we could certainly see an overall increase of interest in Islamic finance internationally, rather than a paradigm shift per se. This move would be for the benefit of the industry as a whole, as increased knowledge sharing at international conferences and larger active participation by industry leaders worldwide would ensure that the community can share ideas for the benefit of Islamic products. The strong signal of commitment to Islamic finance seen in the UK will help create a benchmark for other issuers, and London’s world-class supporting industry and service providers are sure to help maintain high standards and allow for the sector’s growth going forward.
Read More from OBG
