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How Islamic finance could be about to take off in China

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By Nafis Alam and Chew Ging Lee

Islamic finance has been growing rapidly across the world in recent years. Today, the operation of Islamic banks and their associated financial institutions has created a trillion-dollar industry and is becoming a crucial mechanism for countries looking to increase their trade with Muslim nations in Asia and the Middle East especially.

Its popularity largely stems from operating under the principles of risk sharing and interest-free transaction. In contrast to conventional finance, transactions under Islamic finance operate under strict, risk-averse conditions.

Britain became the first non-Muslim country to issue an Islamic bond or sukuk in 2014. Hong Kong then raised US$1 billion from its inaugural issuance of sukuk in 2014. And recently, Goldman Sachs became the first conventional US bank to issue a sukuk, raising US$500m with its debut sale of one. And the Bank of Tokyo-Mitsubishi UFJ, Japan’s largest lender, has also got in on the game.

Despite this global spread, mainland China remains a major market that Islamic finance has not yet reached. But this could be set to change in the coming years – and one province in particular is leading the way. Ningxia, in the north-west of China, is an autonomous region where 35% of the population is Muslim and there has recently been talk of establishing an Islamic Financial Centre there in the next five to seven years.

Developing the Chinese market

The development of an Islamic capital market in Ningxia could be the start of a new financial relationship between China and the Islamic world. For this to flourish, however, Islamic finance must be open to and adopted by non-Muslims as well, so that it can gain a larger foothold in the country.

Perceived by many in China as being for Muslims only, Islamic finance has struggled to take off. Ningxia’s initial focus should therefore be on developing a wholesale Islamic capital market, including Islamic bonds, equities and funds and making sure it is seen as a real alternative to the conventional market.

Ningxia can learn from the best practice of its neighbours, where Islamic finance is the norm: Malaysia, Indonesia and Singapore. This includes establishing separate regulatory standards for Islamic finance and developing a well-functioning Islamic capital market. This way the region can immediately serve the international Islamic market.

There is also a need to change local laws so that Islamic finance is on an equal footing with conventional finance. Local laws and tax regulations need to be modified to permit shariah-compliant investments. This needs the central and local government to set up an administrative mechanism to push things through to make it happen.

Attracting outside interest

Ningxia is also spearheading the development of a halal market in China, which will play an important role in boosting the country’s ties with the Muslim world. In September 2014, Ningxia Halal Food International Trade Certification Centre that established in January 2008 became the first Halal certification body in China with government’s stamp of approval. This is an important signal that they are serious about shariah-compliance.

China must be careful that it comes across as sincere in this endeavour, however. The effort could be undermined by cultural insensitivities such as allowing Muslim restaurants to serve alcohol alongside halal food. This is commonly found in big cities such as Shanghai, Beijing and Guangzhou. Muslims outside China may conclude that these restaurants are not Halal and may lose confidence in China’s commitment to it – and by implication, Shariah law more generally.

In recent years, trade between China and the Middle East has considerably increased. For example, trade between the UAE and China has increased five-fold over the past ten years – a growth rate of 395%. This will only have a positive influence in developing Islamic finance in China.

The launch of the Shanghai Free Trade Zone in 2013 has generated a great deal of interest in the growth possibilities of financial services in general. Many of the big Islamic banks have stated their interest in opening branches in China and Bank Muamalat Malaysia has already teamed up with China’s Bank of Shizuishan to establish its first Islamic bank in Ningxia.

Banks from the Gulf are taking a greater interest in China too. Qatar International Islamic Bank and its compatriot QNB Capital recently signed an agreement with China-based Southwest Securities to develop Shariah-compliant finance products in the country.

These banks are no doubt attracted to the huge number of infrastructure projects that China has planned. With 9% of GDP per year spent on infrastructure projects and an expression of interest in Islamic finance for projects from hospitals to metro stations, according to London-based Dome Advisory, there is a huge market to tap.

The growth potential of Islamic finance in China is huge given the country’s 1.3 billion population. If we take on an optimistic approach, that Islamic finance is for everyone and is just an alternative to conventional finance, there is a tremendous pool to tap, given the huge banking and capital market opportunities in China. But even if you take the worst-case scenario and narrow the target to just the Muslim population, the prospects are still bright. At 2% of the Chinese population, there are still about 23m Muslims in China.

Editor’s Note: This article originally appeared on and is reprinted here with permission. All views expressed here are solely those of the authors.

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Islamic finance’s global surge remains a missed opportunity for banks in US and Canada

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By Mohammed Ayub Khan

Islamic finance is surging across the globe, gobbling up an ever increasing share of the more than $220 trillion in international assets outstanding. It’s a trend that has accelerated since the 2008 crisis shook confidence in conventional banking, prompting most of the world’s financial capitals from London to Dubai to join the battle to dominate the industry.

That is, everywhere except in the US and Canada. How come? We can blame a combination of regulatory hurdles, a lack of proper rules and standards and general Islamophobia. But the result is that banks in the region risk missing out on a fast-growing and lucrative market and the patronage of wealthy foreign investors – not to mention the millions of Muslims living in North America eager for products and services that match their beliefs.

To be fair, most countries are struggling to craft rules and regulations that standardize Islamic finance and enable it to compete with its conventional counterpart. It’s just that North America is falling further and further behind.

To understand why – and see how the region’s banks could still grasp the industry’s reins – we must first explore the world of Islamic finance.

What is Islamic finance?

Islamic finance is much like traditional finance except that the services and products it creates conform to Islamic teachings, also known as sharia. The most well known of these is the prohibition against charging interest, known as riba in Arabic and a term whose explicit meaning is in dispute (more on that below).

Anyone who’s ever used a credit card knows you can’t borrow a dime without paying interest, but in Islamic finance, banks must find other ways to make money off their loans and other products. They usually do this by charging a service fee and/or engaging in profit-and-loss-sharing contracts. The most popular of such methods for home financing, for example, is called murabaha, which is similar to rent-to-own schemes. A bank purchases a house for a customer and then sells it back at an agreed-upon markup.

Islamic assets must also follow other ethical norms. Investments in high-risk ventures, gambling, non-halal foods, alcohol, pornography, and so on are all off limits. In addition, the rules generally require that risks be shared between the lender and borrower, and that all finance be directly backed by real assets – a far cry from some of Wall Street’s exotic creations that bear only a distant relation to an actual asset.

The industry is growing so quickly because its primary demographic comprises one-sixth of the world’s population, most of which is based in the Middle East and increasingly interested in parking its growing wealth outside the region. This is creating a pressing need for financial products and services that conform to Muslim beliefs.

A fast-growing market

The overall market in Islamic assets has grown at an average pace of 20% a year since the financial crisis struck in 2008.

According to the Dubai-based Al Huda Centre of Islamic Banking and Economics, the industry is projected to boast more than $2.5 trillion in assets this year.

Islamic bonds, or sukuk, are perhaps the most prominent segment, with companies and governments expected to sell about $145 billion of the debt in 2015.

Iran, Malaysia, and Saudi Arabia currently dominate the industry, but many Western countries are vying to become European and international hubs for Islamic finance.

The UK in particular has been pushing hard to get in the game. Last year, it became the first Western country to issue an Islamic bond. The former lord mayor of London, Roger Gifford, went so far as to say that Islamic finance should be as British as fish and chips.

Yet in a 2014 ranking of 42 countries with some form of Islamic finance activity, the US placed 15th and Canada last – a puzzling reality given the importance of each country’s banks to the global financial system.

Why did they fall behind?

It’s not that Islamic finance is new to the New World. Mutual funds and mortgages that adhere to Islamic laws have been around since the 1980s. And in 1998, the US comptroller ruled that certain Islamic mortgages were equivalent to mainstream mortgages, as far as banks were concerned, encouraging Freddie Mac and Fannie Mae to purchase millions of dollars worth of sharia-compliant housing loans.

But such activity was short-lived despite rising demand.

One key explanation why can be found in regulations and laws that discourage Islamic finance, even ones ostensibly designed to keep the overall financial system safe. Meanwhile, the overlapping regulatory layers between the states and federal government that make setting standards incredibly complex.

One example involves a Tennessee mosque that lost its property tax exemption after it took out an Islam-compliant mortgage, which makes the bank the owner until the debt is paid off. Since the technical owner of the property was no longer a religious institution, the tax exemption (for the property) was lost.

Another is the requirement that US banks keep their risk ratios fairly low. In order to be compliant while also maximizing profit, banks usually invest in the huge supply of fixed-income securities such as Treasuries and conventional corporate bonds, which are prohibited by Islamic laws.

An entirely different reason also appears to be xenophobic fears of sharia spreading across the country. This even sparked an inquiry by the US senate in 2005 to look into whether Islamic finance supports terrorism. Experts at the hearing testified that there is no evidence suggesting Islamic finance is more prone to facilitate terrorism than its conventional counterpart.

Lack of standards a global problem

More broadly, the lack of standards in Islamic finance and costs and complexities involved in entering the market have made some mainstream financial institutions wary. For example, there continue to be disagreements over what actually makes an asset permissible under Islam and who is qualified to determine this in the first place.

In fact, even the most fundamental tenant of Islamic assets – the prohibition of interest – is under dispute. More orthodox schools of thoughts claim all forms of interest are forbidden, while modernists contend only its most excessive and exploitative forms (namely usury, the ninth-greatest sin) should be prohibited.

There are now increasing fears that this lack of standards will hurt the industry in the long run. But rather than serving to put off banks in North America, this actually presents an opportunity to lead the way in crafting regulations that set standards globally and developing products at the cutting edge of the industry.

A fresh opportunity

Both the US and Canada are a natural fit as homes to the bustling and dynamic Islamic finance industry, despite the above challenges.

The region’s energy and natural resources, as well as its stability, are a strong draw for wealthy investors from the Middle East, while the presence of highly educated and high-income Muslim populations offers a sizable domestic customer base.

This is a segment that has been much neglected despite its desire for sharia-compliant financial products. A new survey of US Muslims by Dinar Standard shows that 65% of respondents want Islamic finance available at their local bank and 57% want to know such products are verified as sharia-compliant.

As they are unable to find avenues within institutional finance to invest in ways that conform to their beliefs many Muslims have fallen victim to ponzi schemes and other scams. High profile cases involving an alleged ponzi scheme in Chicago and insolvency of a mortgage provider in Toronto point to the vulnerability of the nascent industry.

Regulators need to clear the way

Fortunately, banks have been showing increased interest in recent years in adding Islamic finance to their offerings, and mainstream lenders are exploring how to tailor their contracts to meet sharia’s requirements. Goldman Sachs issued its debut sharia- compliant bond last year, becoming the fourth US-based issuer to do so.

And there is also much interest in fusing the similarly fast-growing halal food industry with Islamic finance.

But even if the banks are growing more interested, regulators must get involved to provide sufficient guidance to allow them to move ahead. The fundamentals of Islamic finance need to be strengthened and standardized if it is to emerge as a viable alternative.

At its heart, the purpose of Islamic finance is to promote the social good through financial markets, allowing companies and consumers to raise money while following the moral precepts enshrined in the Koran. But the way it is currently practiced is far away from realizing this goal.

North America has the potential to start afresh and create products that meet both the letter and spirit of Islamic law and lead the world in that effort. That requires creativity, innovation and a great deal of financial engineering –- something US banks in particular have proven to be especially adept at.

Editor’s Note: This article originally appeared on and is reprinted here with permission. All views expressed here are solely those of the author.

Islamic Trade Finance Seen Lifting Growth of Sector

By Shaheen Pasha

DUBAI, June 9 (Reuters) – Islamic trade finance has benefitted from shifting preferences towards Sharia-compliant banking and could serve as one of the key growth drivers to help the nearly $1 trillion Islamic finance industry double in size.

The global Islamic finance industry, which has been growing between 15 to 20 percent a year, is widely expected to reach $2 trillion in the next three to five years.

While Islamic banking and Islamic bonds, or sukuk, are expected to lead growth, bankers say Islamic trade finance could serve as the dark horse emerging to propel the industry further.

Trade finance, the lifeblood of global commerce, underpins 60-80 percent of the $12-13 trillion trade in global merchandise and practitioners say it is safer than other forms of lending.

Total trade finance among the 57 members of the Organization of the Islamic Conference, which includes Saudi Arabia, Malaysia and Turkey, is expected to reach $4 trillion by 2012, said Mohamad Nedal Alchaar, secretary-general of the Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI).

“(Islamic finance) could tap 20 percent of the total trading financing, that’s very reasonable,” Alchaar said, adding that while the current Islamic trade finance market remains fragmented and non-competitive, there has been a shift towards pushing trade finance among Islamic practitioners.

Part of the increased interest in Islamic trade finance is that the Islamic finance industry, which prohibits interest, has matured and can provide complicated instruments, such as Sharia-compliant hedging products to protect trade transactions, said Yakub Bobat, global head of HSBC Amanah commercial banking.

“If you don’t have access to Islamic hedging, there will be a currency conversion impact. In the absence of those solutions, people go for conventional,” Bobat said. “But the proposition is now complete and you can now use Islamic hedges for trade transactions.”

Bobat said such innovations in the industry will help persuade people inclined toward Sharia-compliant business to opt for Islamic trade finance over conventional forms.

In Islamic trade finance, a bank will provide a letter of credit, guaranteeing import payments using its own funds, for a client based on sharing the profit from the sale of the item.

But some banks are still wary of providing Islamic trade finance services, citing it as more costly and time consuming.

In addition, some see little difference between conventional and Islamic trade finance as both are fee-based products, resulting in lower demand for the Islamic product.

Changing that view will be key for the industry, said Shabir Randeree, chairman of the European Islamic Investment Bank.

East-East Trade Flows Grow

“There is a very compelling reason to promote this product given that the returns of trade financing can be very attractive, much more than real estate financing, for example,” he said. “Providers of this product have not been as aggressive in promoting it.”

But with increasing cross-border trade among Asian and Middle Eastern countries, demand for more Sharia-compliant financing from Muslims is still expected to increase.

Asia to Middle East trade flows more than doubled between 2005 and 2008, according to the World Trade Organization.

“If I compare three years back, volumes have gone up overall in the Islamic trade finance market,” said Ghazanfar Naqvi, managing director, Islamic origination and client coverage at Standard Chartered Saadiq.

“It’s a function of more awareness and more offerings. Today we are seeing customer preference changing and trade finance is a key component of growth in Islamic finance.”

Naqvi said it was difficult to pin down tangible global figures for Islamic trade finance as the majority of deals are not public transactions.

The International Islamic Trade Finance Corp. (ITFC), an independent entity within the Islamic Development Bank, said in its annual report that it approved $2.17 billion in Islamic trade finance transactions at the end of 2009.

That grew to around $2.55 billion in 2010, with a majority of transactions taking place in OIC member nations.

HSBC Amanah’s Bobat said Islamic trade finance will be a significant contributor to growth in Islamic finance but the industry will have to look beyond asset finance.

“The industry today is pretty much focused on asset finance and it needs to have the ability to capitalise on trade,” he said. “(Islamic trade finance) should be as much bread and butter business as it is for conventional trade flows.” (Reporting by Shaheen Pasha; Editing by Jon Hemming)


Islamic Trusts Could Revive Gulf Property Market

By Shaheen Pasha


A dhow sails during the Al-Gaffal 60ft traditional dhow sailing race between the island of Sir Bu Nair near the Iranian coast, and Dubai May 28, 2011.


DUBAI, June 2 (Reuters) – Jordanian Ashraf Hamdan began investing in Dubai’s real estate market in 2006, with a few modest rental investment forays before turning his sights on flashier projects as a wave of luxury developments hit the market.

The real estate bust in 2008 left investors like Hamdan with half-finished projects sitting in the desert sun and losses that were unlikely to be recouped.

“It was a costly learning experience for a real estate investor,” said the 53-year-old businessman. “But real estate is in our blood here in the Arab world. It’s a tangible investment, and from an Islamic perspective, that appeals to me.

“I’m just going to be looking for smarter, alternative ways to get into the market in the future.”

The emergence of Islamic real estate investment trusts (REIT) in the Middle East, which offer the chance to own shares in a portfolio of real estate assets with a steady paid dividend from the income earned on those assets, may lure investors like Hamdan back to the sector again.

Islamic REITS differ from their conventional counterparts by banning investment in any assets that pay interest or conduct business in any forbidden industry, like gambling, alcohol or adult entertainment.

Aside from providing an alternative investment in the Gulf Islamic finance industry it could also inject more transparency and regulation in a property sector plagued by unrealistic expectations of returns and occasionally murky dealings.

“Over the last two or three years, people have been in freeze mode where the focus was cash and other liquid things,” said Daniel Diembers, principal at Booz & Company in Dubai.

“The Dubai bubble really helped the (property) market to mature. Now is the moment where it is all shifting. There is a lot of wealth up for grabs.”

Globally, the market capitalisation for REITs was around $570 billion at the end of 2009, a 2010 Ernst & Young study said. Islamic REITs play a small role, with Asia serving as the predominant hub for sharia-compliant trusts.

Renewed Confidence

Malaysia’s Axis Global Industrial real estate investment trust (REIT) is planning an initial public offering with an asset size of $1.05 billion, making it the world’s largest Islamic REIT.

Islamic REITs launched in Bahrain and Kuwait have been relatively small in size – Bahrain’s Inovest REIT and Kuwait’s Al Mahrab Tower REIT launched with less than $95 million in capital each – and neither has been publicly listed.

But an anticipated infrastructure boom in hot markets such as Saudi Arabia and Qatar and the launch of the UAE’s first Islamic REIT may buoy faith in real estate investments, creating a wider niche for the Sharia-compliant trusts to thrive.

Emirates REIT, which launched with seed capital from Islamic lender Dubai Islamic Bank last November, is aimed at medium-income investors and offers returns of 6 to 8 percent annually, said Mark Inch, director of Eiffel Holding and founding shareholder of Emirates REIT.

“There is a discipline and transparency that comes with a regulated REIT,” he said. “Buildings will not only be properly managed but financial management will also be completely transparent. It’s a prerequisite of bringing back confidence.”

Emirates REIT has 40 deals under review ranging between 40 million dirhams to 500 million dirhams and will be fully operational by the summer, Inch said. An initial public offering is planned within 18 months to two years once it secures assets of 1.5 billion dirhams.

The interest is growing. National Bank of Abu Dhabi is considering creating an Islamic REIT while the FTSE Group may develop an Islamic REIT index as the industry grows globally, officials at both said.
The Gulf region has dabbled in the REIT market over the years with little success.

A 2008 Islamic REIT launched by Saudi Arabia’s Sumou Holding and Geneva-based Encore Management fizzled in the kingdom as the financial crisis sapped enthusiasm. Other attempts to launch a REIT in the region, including a conventional one by troubled property developer Nakheel, were quickly squashed.

Asia, by comparison, has seen a boom in sharia-compliant REITS. Malaysia, considered to be at the forefront of Islamic finance, launched its first Islamic REIT in 2006. Singapore’s Sabana REIT, launched in 2010, was 2.5 times oversubscribed and saw heavy investor interest from the Gulf.

The Gulf has been held back by the slow pace of innovation in the real estate sector, as well as the Islamic finance industry in general, experts said.

In contrast to Malaysia, where the government is active in creating a strong regulatory environment, there is no regulatory standardisation in the Middle East. And investors are understandably wary of investing in a new real estate venture given the spectacular property collapse in the region.

Oz Ahmed, associate director of wholesale banking at HSBC Amanah in Malaysia, said Mideast investors seem ready for homegrown REITS given the high participation in Asian ones.

“There’s definite potential for issuers within the GCC to identify assets but people have to become comfortable with them,” he said.

“We’ve gotten to the point where we’re working well in the banking paradigm. Now practitioners are looking to develop products that come closer to Islamic finance principles.” (Editing by Amran Abocar and Jon Hemming)


$640b Halal Industry Needs to Align with $1tr Islamic Finance Sector

By Rushdi Siddiqui, Gulf News

I wanted to take a sukuk break, as the last few months seem to be only about sukuk default, restructuring, conferences/seminars, etc. Islamic finance is not sukuk, its much bigger than an instrument. I wanted to look at an area that Islamic finance (IF) has not been linked to: the $640 billion (Dh2.3 trillion) halal industry (HI). There is a link, but it’s associated with IF ignoring HI!

The halal industry believes that Islamic finance has long ignored its little ‘halal-half’ brother, because it either does not understand the business model or its financing needs.

Islamic finance continues to have expected ‘challenges’ with standardisation, and the halal industry, the issue of certification and certifying bodies appears to be even more nascent. In IF, we have generally accepted guidelines on accounting (AAOIFI and Malaysia), prudential regulations (IFSB), ratings (IIRA), hedging (IIFM), but what and where are the leading HI standard bodies; Malaysia (Jakim), Brunei (Brunei halal), but there are more ‘bodies’ in OECD than OIC countries. Query: is the certification process accepted outside the home country?

The GCC countries are major importers of billions of dollars in foods/products, projected to touch $53 billion in 2020. Now, what if large importers like Saudi Arabia or the UAE impose ‘their’ halal certification criteria for exports from these countries, including G20 countries like Australia (red meat) and Brazil (chickens)? Because of the GCC’s volume of imports, could there be a risk of back-door certification via the GCC? However, if GCC countries do not have certifications or it’s not yet harmonized, then halal exporters still have time to establish certification before externally imposed.

In Islamic (equity) investing, we have Sharia-compliant screening from the five index providers plus AAOIFI and Malaysia, however, what criteria, if any, for investing in listed halal companies. Meat or poultry [and food] companies should have their products according to Quranic guidelines, “O mankind! Eat of that which is on earth, lawful and good…” 2:168.

Global market

Although a Sharia-compliant food-only index may not yet exist, S&P has, as of March 30, 15 Sharia-compliant food companies in the GCC (15 Saudi and one in each Oman and the UAE) and 123 global Sharia-compliant food companies from China, Taiwan, Japan, Korea, Mexico, the US and others.

Is it correct to assume that GCC public listed food or meat or poultry companies’ offerings are halal, because large local populations and percentages of the expatriate communities are Muslims in these Islamic countries? Assuming correctly, then the Halal Index is possible with ensuing Halal Funds/ETFs off of such indexes.

Thus, two sets of indexes: Sharia-compliant and Halal index, but what about Sharia-compliant Halal Food Index? Would this be a ‘low-debt non-financial social-ethical counter-cyclical halal index? This could benefit ‘investors of conscience and appetite.’

The reality is the halal industry needs to establish an initial screening methodology for publicly listed companies in the halal industry globally, as the Sharia-compliant screens may not capture them. The present awkward situation is: one can consume the food or products of listed halal companies, yet cannot invest in them because they may fail the present Sharia screening!

Islamic banks (in the GCC) have traditionally financed the chain of ‘borrowers’ associated in real estate industry, commercial and residential, as they allegedly better understand the business model, risk, and recourse. The banks have stayed away from halal companies, possibly ex-Al Islami, hence, the latter has relied on the ‘friends and family finance’ (upstarts) and traditional interest based loans (established companies).

There are halal funds set up, but they are more for acquisition than financing. It would seem the fragmented global halal industry, in OIC and G20 countries, would be ripe for a consolidation strategy, hence, no different than the often heard quest for a big balance sheet Islamic mega bank created via consolidation.

Thus, financing of viable halal companies via roll-up acquisition strategy? Surely, more must be done, otherwise we may continue to consume halal products or meats financed with Riba-based finance companies!

The halal industry needs to get (1) its act together on process, auditing, and certification, and get into the face of Islamic banks and better explain the (2) inter-relatedness of the sectors, (3) better explain the business model, risk and its mitigation, (4) better explain that it establishes the foundation for diversified lending, and increased investor options for Islamic banks’ customers, and (5) allow Islamic finance to talk the talk of a $2-trillion ‘niche’ market in the making!

The writer is the Global Head of Islamic Finance, Thomson Reuters. Views expressed in this column are of the writer.