Islamic finance goes global

Two banks announced sales of sharia-compliant securities, meaning they comply with the principles of Islam.

At first glance, Islamic finance is anathema to western capitalism. Sharia law forbids usury or ‘riba’ – the charging of interest. If Islamic finance sounds like a niche market product in global markets, consider this: Moody’s Investors Service is forecasting the market for Islamic financial products to surpass US$1 trillion this year.

Sukuk are Islamic financial assets and Takaful are insurance products.

"The outlook is vast and the potential market in the long term is $5 trillion," Anouar Hassoune, vice president, banking at Moody's, told Reuters in June.

To the outsider, Islamic financial instruments may seem complex attempts to step around the problem of interest. Deals use terms like profit sharing and leasing. For example, instead of lending money on a home mortgage, an Islamic bank may buy a property outright then sell it to the intended purchaser at a profit. The purchaser could make payments on installment just like a regular mortgage but with no interest.

Can there be benefits down under? Australia thinks so. Assistant Treasurer Nick Sherry led a trade delegation to the Middle East in April which he said would be “focused very heavily on high-level talks on Australia’s tax treatment, regulation, promotion and export of Islamic finance, banking and insurance.”

In the Northern Hemisphere, the UK has already amended its tax rules to accommodate aspects of Islamic financing.
 
New Zealand could offer Islamic compliant finance structures that would allow wealthy Muslims to invest while keeping to the tenets of their beliefs, said Faris Azimullah, an Auckland-based partner at Deloitte and a Muslim.

That includes being confident an investment is “clean” in that it doesn’t involve gambling, or liquor or the like. The Muslim world has funds to invest but wants to be its own style of ethical investor.

Azimullah was involved in promoting the concept some years back, even inviting experts from Malaysia to address business groups in New Zealand. There was a mild response. Larger companies were luke-warm, he recalls. SMEs were more intrigued.

The re-emergence of Islamic finance in the 20th century followed the increasing oil wealth and resurgence of interest in the religion but growth in the sector is now most intense closer to New Zealand’s borders – in nations like Malaysia and Indonesia.

In July, Japan’s Nomura Holdings hired Kuwait Finance House to arrange its first-ever Sukuk Al-Ijara, an Islamic bond that gives the holder a share of an underlying asset rather than a schedule of interest payments. The two-year, US$100 million sale was a first for a Japanese corporate in Malaysia.

Sumitomo Corp. went one further, according to Reuters, planning a yen-denominated issue in Japan that is as close to complying with Islamic law as Japan’s banking regulations will allow.

The Japanese issuance sends “a signal that the sukuk market is continuing to march toward globalisation,” said Mohamed Damak, a credit analyst at Standard & Poor’s. “Many issuers around the world may be willing to enter the market as more favourable conditions materialise.”

“We see sustained growth for the second half (of 2010), given issuers’ interest in tapping the market, both in historical locations in Asia, especially Malaysia, and in other regions newer to sukuk,” he said.

Malaysia is positioning itself as a key hub for Islamic financing and in fact won ‘Islamic Finance Hub of the Year’ at an awards ceremony in Kuala Lumpur last month.

Zeti Akhtar Aziz, governor of Bank Negara Malaysia (the central bank) said her country was one of a few where a credible secondary market has emerged for trading in sukuk. Issuers are seeking issuance of sukuk instruments as an alternative class of capital while investors view it as a new asset class she said, according to Arab News.