ISLAMIC FINANCE: TURKEY, OMAN AND LONDON SHOW THE WAY

As the global economy shows signs, yet again, of significant stress, as well as hopes of recovery in the US and Europe, bankers, politicians, diplomats and investors will be descending on the annual IMF/World Bank meetings in Washington in mid- October to debate the way forward. Meanwhile, those who seek a form of finance that is more ethical than modern-day, unbridled capitalism are in the ascendant, and this sentiment is now being translated into new hubs for Islamic banking and investment, especially in Turkey, Oman and Britain, where the prestigious annual conference, the World Islamic Economic Forum, is due to take place at the end of this month.

“There is enormous demand for ethical banking all over the world, especially in the aftermath of the global financial crisis,” Tirad Al Mahmoud, CEO of the Abu Dhabi Islamic Bank, told a conference in London earlier this year. Now that Islamic banking values are moving from niche to mainstream, worldwide business: “We need to join forces to promote them in the best interests of the global banking industry,” he added.

By banning speculation, excessive risk and usury, Islamic finance is rooted in “the belief that parties should deal with each other equitably and without exploitation,” notes Hamed Ali, acting chief executive of the stock exchange, NASDAQ Dubai. People are seen, as another commentator on Islamic finance put it, as “brothers rather than as gullible consumers to be exploited.”

Figures produced by the international analysts, Ernst & Young, show that global Islamic financial holdings currently total more than $1.8 trillion. Although growth has slowed in the past few months, it has averaged almost 20% a year over the past four years. In the Middle East and North Africa (MENA) alone, E&Y estimates, the Islamic banking industry could be worth $990bn by 2015, more than double the 2010 figure of $416bn.

Although Turkey, along with Oman, is a relative newcomer to Islamic finance, it is now seen as a potential global powerhouse in the industry. Its first issue of a sovereign Islamic bond, or sukuk, in September last year, for $1.5bn, was five times oversubscribed and attracted huge interest from investors in the Arab Gulf states, including Saudi Arabia, Kuwait and the UAE, as well as other parts of both the Muslim and non-Muslim world.

Abdullah Celik, a senior executive with Bank Asya in Istanbul, now expects the Turkish Treasury to launch other sukuk issues twice a year in Turkish lira. “The secondary market will follow,” he adds. Islamic banks, which are known as “‘participation banks’ in the country,

“will have a proper Treasury debt, just like conventional banks,” helping to increase liquidity in the sector. Action by the Borsa Istanbul to update its regulations to support the issuance of sukuk will also support such moves, other bankers report.

In the future, as yields come down, Celik expects that Turkish corporations will become regular issuers of sukuk along with the government. Still other sukuk may be launched by the Islamic banks themselves, analysts in Istanbul report. Al Baraka Turk, the local subsidiary of the Bahrain based Islamic banking group, has already announced plans to raise up to $200bn in a sukuk by the end of 2013 or early 2014. Executive Vice President Ayhan Keser says the term is likely to be five years.

In addition to enhancing the funds available for project finance, such developments, Celik notes, are also helping to promote strong growth prospects in Islamic pension funds, not least because the Turkish government currently subsidises 25% of investments in such funds. Altogether as Uğurlu Soylu, Managing Director of Istanbul-based Kuweyt Türk bank notes, the Islamic banking sector in Turkey is growing by some 5% annually, much faster than that of the conventional banks, not least because of the expansion of their branch networks by the sharia-compliant banks. As a result, the country’s Islamic banking sector, according to E&Y, could be worth $100bn within the next 10 years, more than three times the current level.

Oman’s new Islamic financial institutions are expected to capture up to 8% of the country’s banking sector within the next three to five years, according to the international rating agency, Moody’s. This includes Islamic banking “windows” that may be introduced by conventional banks in the Sultanate, such as those in three of its branches opened by Bank Sohar in Dhofar, and others planned by the government-owned Oman Development Bank, which specialises in finance for small- to medium-sized enterprises (SMEs). Still other sharia-compliant financial services are currently being offered to Omani clients and customers by the international banking giant, HSBC.

Oman became the last member of the six GCC countries to adopt Islamic finance when it issued regulations to establish the sector in December, after years of hesitation. It currently has two authorised Islamic banks – Bank Nizwa, which launched operations in January, and Al Izz Islamic Bank, which is expected to start business later this year.
Bank Nizwa’s chairman, Sayyid Amjad Mohammed Ahmed Al Busaidi, says he expects it to become the first bank in the country to enable Omani customers to open accounts with their identity cards or, in the case of expatriates, their resident IDs. CEO Dr. Jamil El Jaroudi, adds: “Our goal is to create an environment that serves as an inspiration for other Islamic banks, and for Islamic windows at conventional banks, to begin operating in Oman so that the customer benefits from the best practices.”

What is not yet known, however, is how competitive Oman’s Islamic financial sector will be, both locally and globally. The government’s tight regulations covering the use of sharia-compliant instruments for money market funds could raise costs, although both Bank Nizwa and Bank Sohar are introducing new Islamic financial agreements amongst themselves to address this problem.

Al Izz bank is hoping to obtain more than 3% of all deposits in Oman’s banking sector by 2017, according to its chief operating officer, Jamil Darwiche. Overall, it is aiming for annual growth in total assets, financing and deposits of 15-20%. By 2017, it expects to have a customer base of between 65,000 and 100,000 accounts, he added. London is also making a strong effort to enhance its role as a global financial centre by focussing on Islamic finance, a policy that is actively supported by the government of Prime Minister David Cameron and Baroness Warsi, who co-chairs the UK Government Task Force on Islamic Finance, as well as the Lord Mayor of Lon- don, Roger Gifford. Stella Cox, Managing Director of London-based DDCAP, an acknowledged international expert on Islamic finance. says ” Although ongoing work has taken place through the last decade to remove taxation and regulatory impediments to the further development of Islamic financial products, UK corporates have not yet taken advantage of the UK’s Islamic capital markets infrastructure and domestic sukuk issuance is yet to gain momentum” .”

Despite this, London’s central role in international finance has already led to the raising of some $22.3bn through 49 sukuk issues on the London Stock Exchange. The country is also garnering plaudits for the performance of its Islamic banks, such as the pioneering retail Islamic Bank of Britain, whose major shareholder is currently the Qatar International Islamic Bank, as well as the Bank of London and the Middle East (BLME) and Gatehouse Bank, both of which are growing significantly partly due to their wholesale banking operations.

Islamic finance, Baroness Warsi told a conference on Islamic sukuk in London in June, is not merely for Muslims, but for anyone interested in ethical and socially- responsible financial intermediation. “In the wake of the financial crisis, the principles upon which Islamic finance are based seem more important, more attractive, than ever before.” Principles, she went on, “that prevent you from selling what you don’t own, or attaching a value to assets that do not exist.” The sector, she added,

“is now a global mainstream one which is projected to grow fivefold by the end of this decade.”

In addition to hosting the World Islamic Economic Forum – the first to be held in a non-Muslim country – this month, the British capital is now laying the groundwork for another mega-conference, the London Islamic Financial Summit, which is due to be held next year. With several leading countries in rapidly expanding, commodity-rich emerging market countries, such as Kazakhstan, Oman, Azerbaijan, Kenya, South Africa, Nigeria and Indonesia also planning to launch their own sovereign sukuks in international markets, London’s role in Islamic finance could grow markedly, even if its own sovereign issue remains delayed due to current market conditions in the UK and Europe. London’s prospects could be underpinned even more given evidence that British depositors and investors, both non-Muslims as well as Muslims, are increasingly seeking financial institutions and financial products that are ethical as well as profitable.

Pamela Ann Smith

Each month we put a small selection of our stories featured in the magazine on our website. This is a sample of what you can expect to receive if you subscribe to our monthly edition. To receive the stories in full please subscribe to The Middle East Magazine, a link to which is found at www.themiddleeastmagazine.com. If you prefer to receive a digital subscription, please apply HERE.