ft islamic finance report

8/9/2019 FT Islamic Finance Report

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ISLAMIC FINANCEFINANCIAL TIMES SPECIAL REPORT | Thursday May 13 2010

www.ft.com/islamic-finance-2010 | twitter.com/ftreport

Rich potential inemerging markets

Islamic finance is taking ten-tative steps towards regain-ing its mantle as one of thefastest growing asset classes

in the world. In spite of the con-tinuing aftershocks of the finan-cial crisis and the Dubai debtstandstill, the industry is expand-ing in many emerging markets

and introducing new standards

that should help develop productsand attract investors.

Although it is not seeing any-thing like the growth it experi-enced before the financial crisis,the sector has expanded, even asother markets have beenswamped by Europes sovereigndebt crisis.

Assets in Islamic finance rose to$822bn by the end of 2009, anincrease of 29 per cent comparedwith the end of 2008, according toMaris Strategies, the research andadvisory group. Anecdotal evi-dence suggests it has continued togrow this year, as more institu-tions gain Islamic licences.

The driver of this growth is

retail banking, which is attracting

more interest not just in theworlds two biggest hubs ofIslamic finance in the Middle Eastand south-east Asia, but in China,Russia and Africa.

Joe DiVanna, managing directorof Maris Strategies and one of theforemost experts in sharia-compli-ant finance that bans interest pay-ments in line with Islamic law,says growth is inevitable in theseemerging market countries.

This is because vast numbers oftheir populations do not

use banks, which makes themideal potential customers for a rel-atively new form of banking thatstarted out as an experimentalventure in the 1960s.

As an indicator of this potential,Mr DiVanna points to the factthat of the 1.6bn Muslims in theworld, only 14 per cent use banks.By comparison, 92 per cent of UShouseholds use banks: in the UKit is 95 per cent.

Figures from the Statistical,Economic and Social Researchand Training Centre for IslamicCountries (Sesric), support thisthesis too. While Islamic financerepresents just 1 per cent of theglobal financial system, the Mus-

lim world accounts for 7.6 per

cent of nominal gross domestiproduct. Growth among the 5Muslim nations is also muchigher than in the rest of thworld, Sesric adds.

As these Muslim and emerginnations become more sophistcated, more of their citizens arbound to start using banks anfinancial institutions, with manwanting to do so in line with thereligion.

Khalid Hamad, chairman of thInternational Islamic FinanciaMarket and another leading figurin the industry, agrees with MDiVannas optimism, although hemphasises that the industry istill in its early stages of develop

As more of the worlds1.6bn Muslims start touse banks, many will

want to do so in linewith their religion,says David Oakley

Continued on Page

FinancialMarketsseries


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FINANCIAL TIMES THURSDAY MAY 13 2010 FINANCIAL TIMES THURSDAY MAY 13 2010

tributorsOakleyMarkets

pondent

Wigglesworthsiness

pondent

onesFundspondent

ha SakouiMarkets

pondent

anie Grayssioning Editor

Birder

Andy MearsPicture Editor

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his Issue

i debt crisis fuels interestE FUNDS Sharia-compliant hedgehave been almost exclusively

ed on commodity markets,plicating their success elsewhereot be far off, writes Sam Jones4

ng for steady growth in marketIC BONDS

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mbersWorld debtwrites

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le East sharia standards agreedATIVES NICHE Bankers warn thattake time before the new

mentation is adopted, as most banksspent a lot of time and money on theirtructures, writes Robin Wrigglesworth6

ysia way ahead of the packNAL FOCUS The countrys lead

great that it is more likely tot than lose from the attentionpaid to the sector in other Asianls, writes Kevin Brown Page 7

amic Finance Islamic Fin

Plentyof room

forgrowth

Industrystrays toofar fromits roots

Modern Islamicf inance hascome a long way s ince it

started as a modest, experi-mental venture in the Egyp-tian town of Mit Ghamr inthe 1960s. It encompasses awide range of products andservices that aim to recon-cile conventional financeand Islamic law.

Innovation has explodedin the past five years in par-ticular, but rather thanbeing led by indigenousIslamic banks, most prod-ucts have been developed bythe structured financeteams of western invest-ment banks such as Deut-sche Bank and the Islamicarms of institutions such asHSBC, Standard Charteredand Citigroup.

Many have then licensedtheir inventions to fullyIslamic banks, particularlyin the Gulf, where few havehad the capacity to struc-ture their own productrange.

From profit-sharing ac-counts and crude products,Islamic finance now spansderivatives, bonds, fundmanagement, credit cards,car loans and even basichedge funds all of which

use often complex struc-tures to circumvent theIslamic ban on interest.

While the industry has aproduct range comparablein many areas to conven-tional finance, Islamic bank-ers say that there are stillgaps in some crucial areas.

The main shortfalls are inderivat ive s and f ixedincome, bankers say. Prod-uct development in theseareas has been complicatedby a prohibition on interestby sharia (Islamic law) andits requirement for realassets to be transferred aspart of any transaction.

Some progress has been

made. Longer-dated debt in the form of Islamicbonds, or sukuk is a stapleof many sharia-compliantfinancial institutions port-folio, even though maturi-ties seldom stretch further

than five years and the mar-ket has recently been rat-tled by several defaults.

The International Swapsand Derivatives Association(ISDA) and the Bahrain-based International IslamicFinancial Market (IIFM)have recently launched astandardised master agree-ment for Islamic derivativeswhich could pave the wayfor the greater use of hedg-ing in the sector.

Given the growing na ture o f the Is lamicfinance industry, the insti-tutions operating on shariaprinciples can no longerafford to leave their posi-tions unhedged, KhalidHamad, chairman of theIIFM and executive directorof banking supervision atthe Central Bank of Bah-rain, said at the time of the

launch. Hence, some keyhedg ing products a rebecoming common across jurisdictions to mitigaterisk.

But more needs to bedone, bankers concede. Itwill take time before theISDA-IIFM documentation iswidely adopted and deriva-tives remain tricky andexpensive to structure inaccordance with sharia.

Shorter-term Islamicmoney markets also remaincrude and underdeveloped,at least outside Malaysia,which stands somewhatapart from the rest of theindustry due to an oftenmore lenient sharia inter-pretation, experts say.

Most [Islamic] bankersyou talk to would say thatliquidity management is

their number one concern,says Daud Vicary Abdullah,head of Islamic finance atDeloitte. There is no silverbullet. [Islamic money mar-kets] just require time, hardwork and political willing-ness to develop.

Yet innovation has sloweddown significantly recently.The financial crisis coin-cided with a backlash fromsome senior sharia scholarsin the Middle East, who feltthat the indus try hadstrayed too far from itsroots and was mimickingconventional structures tooclosely, particularly in thesukuk sector.

No one wants any fancy,exotic instruments anymore, so innovation hasslowed down, says HusseinHassan, head of Islamicfinance at Deutsche Bank.People are now structuringproducts and transactions inline with more conservative

sharia standards.Bankers are focusing

more on simplifying andstandardising the vastswathe of existing productsrather than conjuring upinnovative ones.

Because of differences in

sharia interpretation inmany countries and regions and competition betweenbanks that were keen to

make names for themselvesas innovators the Islamicfinance market is highlyfragmented.

Divergent views onIslamic law are inevitable,given Islams global spanand different schools ofthought, but bankers saythe industry would benefitgreatly from more homoge-nous documentation andstructures.

We are no longer a nicheindustry. However, withoutstandardisation we will notachieve scale, says RaziFakih, deputy chief execu-tive of HSBC Amanah, theBritish banks Islamic arm.

Islamic finance would alsobenefit from more standardi-sation, not only in shariabut in the documentation ofproducts.

Nonetheless, experts ex-pect that innovation willcontinue albeit more cau-

tiously and they predictthat new products willadhere more closely toIslamic law.

The industry is still on alearning curve, but I thinkequity-based products aregoing to lead the way now,

as they fit betsubs tance ofinance, says M

There is a gcern that thstrayed too faroots and mimictional finance to

Products

Innovation slowsafter backlashfrom scholars,says RobinWigglesworth

Bankers say theindustry wouldbenefit from morehomogenousdocumentationand structures

ment. Mr Hamad, who isalso executive director ofbanking supervision at theCentral Bank of Bahrain,says: Islamic finance hasmade progress, but it hasonly been around in ameaningful way for about30 years and its possibilitieshave not yet been fullyexplored.

However, there has beenprogress in the market in anumber of economies. First,China, the new powerhouseof the global economy,

which has 83m Muslim resi-dents, is starting to wakeup to the opportunities thatcould present themselves inthis field of finance.

It awarded its first licencefor Islamic banking to Bankof Ningxia in Septemberlast year and now a numberof the countrys biggest con-ventional banks are alsoreported to be looking athow they can create or offerIslam-compliant products.

Second, Russian investorsand financiers are increas-ingly looking at ways todevelop sharia-compliantproducts and develop theindustry.

Finally, Africa, which haslong posed the biggest chal-lenge for investors, is start-ing to look as if it couldeven challenge the maincentres of the industry,although this is probably along way off.

Mr DiVanna says: Thereare great hopes for growthin Africa. This is a conti-nent where people are start-ing to open bank accountsfor the first time. For exam-ple, Kenya is looking toexpand its banking systemand Islamic finance. About80 per cent of customershave never used bankingservices before.

This month, NjugunaNdungu, governor of theCentral Bank of Kenya, saidthe country had made

adjustments to its bankingsector to let Islamic financeinstitutions set up and pros-per. However, analysts aremindful of the setbackssince the financial crisis,which has stalled the corpo-rate and investment bank-ing side of many Islamicfinancial groups.

The fallout from theDubai debt standstill anddebate over the evolution ofthe sukuk, or Islamic bond,market also raise uncertain-ties. Although many com-mentators expect the sukukmarket to see furthergrowth this year, hopes thatmore western issuers might

consider raising moneythrough these bonds havefailed to materialise.

Many analysts say themarket needs more sover-eign sukuk to give it someimpetus. Although this ishappening in the tradition-ally strong Islamic financecentres of Bahrain andMalaysia, other govern-ments are failing to issuethese bonds.

Certainly, progress onthis front among the west-ern economies appears tohave stalled, with doubtsthat the UK will introduce asovereign sukuk and fewwestern companies seekingto issue sharia-compliant

debt. The UK governmentneeds to rediscover its appe-tite for developing this mar-ket. Should the UK issue asovereign sukuk, this wouldalmost certainly encouragecorporates to turn to thismarket too.

General Electric, the USconglomerate, launched thefirst Islamic bond by a west-ern industrial company atthe end of last year, butsince then there has beenvery little activity.

However, London stillremains the main hub forthis kind of finance outsideof the Muslim world. Ger-many, France and Luxem-

bourg are also keen todevelop Islamic finance, butare a long way behind Lon-don.

A big growth area islikely to be in the small-to-medium business market(SMEs), which could giveIslamic finance a freshvibrancy and pave the wayfor more entrepreneurs inthe developing world. Thisis one area we need todevelop, says Mr DiVanna.

Mr Hamad adds: Provid-ing financial services forSMEs can open up hugebusiness opportunities forIslamic finance.

On a more technicalfront, one of the mostimportant developmentshas been the creation of thefirst worldwide standard-ised documentation for pri-vately negotiated Islamicderivatives. This paves theway for much greater use ofhedging in Islamic finance.

The move by the Interna-tional Swaps and Deriva-tives Association in Marchshould help codify individ-ual transactions that needapproval by sharia scholars.

Such a pan-Islamic docu-ment should also help con-solidate interpretations ofIslamic law. This wouldmake hedging easier andaccelerate product develop-ment.

The failure to standardisehas been a drag on growthand highlights the indus-trys infancy compared withconventional finance.

Mr Hamad says: Thistook almost two years ofsometimes complex discus-

sion between banks andauthorities in several coun-tries to standardise defini-tions and terms and overalldocuments.

The next step should bethe launch of the firstproper sharia hedging prod-ucts. That would representa landmark. Significantinterest is being shown inthis because Islamic financehas now reached the stagewhere it really needs hedg-ing instruments, he says.

These would not be usedfor speculation, but formanaging risk, which isvital to help the sectorexpand further.

One of the mostimportantdevelopments has

been the creationof standardiseddocumentation

Bank branch: London is the main hub for Islamic finance outside the Muslim world Alamy

age Illustration Meeson

By the book: experts expect innovation will be cautious and new products will adhere more closely to Islamic law

Continued from Page 1


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FINANCIAL TIMES THURSDAYMAY 13 2010 FINANCIAL TIMES THURSDAY MAY 13 2010


ustained recovery expected in second half of the year

Dubai World, the state-conglomerate, asked

rs for a debt standstillovember, it shook globalts.

a nnounceme nt froz earkets across the region.gotiations between the

aden conglomerate andrnational and local cred-ave unfolded, confidence

arted to rebuild.s, however, taken untilweeks for the debt mar- reopen to Dubai-based.

There are a number finan-cial andsukuk [Islamic bonds]restructurings going on in theregion at the moment, withDubai World being the most

prominent, says Farmida Bi, apartner at Norton Rose, theinternational law firm.

Investors are keen to seehow these restructurings areconcluded. In particular, thesukuk defaults last year gaverise to investor anxiety overwhether they have taken creditrisk on the asset or on the orig-inator.

Spurred by progress over theDubai World debt restructuringand the improving investorsentiment in the region, thestate-owned Dubai Electricityand Water Authority (Dewa)was the first to reopen thebond market for issuers fromthe region last month.

The sale of $1bn of five-yearbonds, yielding 8.5 per cent,a t tra cte d mo re t han $11bnworth of orders. Dewa was ableto price the deal lower than

initially expected.This time last year, bond

issuance by both Abu Dhabiand Qatar, kick-started capitalmarkets issuance in the regionafter the financial crisis, saysAnz al M o ha mme d, he ad o f Is lamic fina nce a t Allen &Overy, the law firm.

He says: It seems we haveco me full circle s ince t heannouncement by Dubai Worldin No vembe r re g a rding it srestructuring.Sukuk specialists now ques-

tion what the future holds forthe Islamic finance market. W e ha ve ye t t o s e e hig h-profile sukuk issues from theGulf, says Mr Mohammed.

T he re a re a numbe r o f potential issues being workedon that we hope will restart themarket, from sovereigns andsovereign-related issuers. The

market remains nervous ands o me w ha t uncert ain a s t owhere it goes from here.

Mr Mohammed is positive onthe outlook for the market.We believe that we will see as us ta ined re cove ry in t hesukuk market in the secondhalf of this year, he says.

Up to May 3, there was $2bnof Islamic issuance globally.Islamic bond issuance hit ahigh of $27.17bn internationallyin 2007, with 100 issues.

The majority of issuance,however, this year has comefrom Malaysia with 13 deals.

There have only been a fewdeals from the Gulf, with DarAl-Arkan Real Estate Develop-

ment Company and Saudi Hol-la ndi Ba nk is suing Is lamicbonds.

Most recently, Saudi Electric-ity Co m pa ny issu ed a sukuk.

The strong Islamic investorinterest for Gulf Co-operationCouncil credits is evidenced bythe Saudi Electricity Companytransaction that has generatedsignificant investor interest,says Mohammed Dawood, direc-tor in the global markets depart-ment of, HSBC, the UK bank.

However, iniatives to developnew markets for sukuk issu-a nce o uts ide t he G ulf ha vestalled.

There was speculation lastyear about a French sukuk, butw e h a v e h a d n o f o r m alannouncements yet, says MsBi.

We will also have to waitand see if the newly elected UK

government will reconsider thesukuk issuance which was con-sidered in 2008 but did not hap-pen.

She adds that there has been

comparatively little innovationin the Islamic capital marketsin t he la s t co uple o f ye ars ,because there have been fewerdeals as a result of the finan-cial crisis.

What I am hoping for thisye ar is t ha t t he re w ill besteady growth. It would be niceto see a few corporate deals aswell as sovereign rated issues,says Ms Bi.

Mr Dawood says financialinstitutions have a very sizea-ble amount of refinancing to bedone. There is about $26bn ofG ulf Co -ope rat io n Co uncil[financial institution] debt tobe refinanced over the next 12to 18 months.

uk

usha Sakoui

rts on a slown of confidence

We have comefull circle sincethe Dubai WorldNovemberrestructuringannouncement

Anzal Mohammed,Allen & Overy

ndustry oncemore at centre

f attention

F

o r t h e p a st t woyears, the develop-me nt o f a shariah-

co mplia nt he dgendustry once one ofttest topics at alter-

investment confer- has been on hold.as the asset manage-

i n du st ry a ndhy institutions andduals in the Middle

pick themselves uphe damage wrought

financial crisis, thef whether an Islamicfund industry is via-

indeed even desira-being taken up again.notion is attractive

ast because the pastonths have seen aof developments inh finance t ha t g oway to overcomingof the obstacles thatced hedge funds look-

comply with Islamicres.

ula r t re nds in t hemanagement industry

o be on the side of

some form of Islamic hedgefund market too.

T h e f i e ld o f shariahfinance remains one of thefastest growing areas in theglobal finance industry,with estimates from ana-lysts varying between 20a nd 40 pe r ce nt g ro w thannually for the next fiveyears at least.

Furthermore, interest inhedge funds and alternative

products in the Middle Easti n p ar t ic u la r i s o n a nupward trend.

According t o a re ce nts urve y o f ins tit utio nalinvestors in the region bythe consultancy Capintro,36 per cent of respondentssaid they were planning toincrease their hedge fundallocations, while a further5 3 p e r c e n t s a i d t h e yintended to hold allocationssteady.

If anything, the recentDubai debt crisis, has madeint ere st in he dge fundsmore pronounced. Manyinstitutional investors int h e r e gi o n h a ve s e enproperty-linked holdingsfall sharply in value and arelooking to reallocate port-folios.

A comprehensive reporton the hedge fund industryconducted by the consul-t a ncy Ca se y Q uirk a ndBank of New York Mellon

in April last year projectedt hat mo ney inves t ed inhedge funds by Middle East-ern investors would rise to$194bn by 2013.

Fundamental problemsremain, however.

By de finit io n, a he dgefund is a n unreg ulat e dinvestment vehicle openonly to qualified investorsthat has free reign to picka nd cho o s e a cro s s t he

gamut of financial instru-ments and securities indis-criminately to reduce riskw h il e d e li v er i ng h i ghreturns.

Islamic finance, however,can be strictly prohibitiveon certain types of financialpractice.

Most notably, as far ashedge funds are concerned,shorting a bet that aimsto make money from thedecline in value of a secu-rity is banned.

Shorting is fundamentalto almost every hedge fundstrategy and is the mainme ans by w hich he dgefunds look to fulfil theirgeneric mandate as aninvestment class deliver-ing returns uncorrelated toregular markets.

C o ll e ct i ng i n te r es t ,kno wn a s riba, i s a l soproscribed, again reducingthe investment universeopen to hedge funds. And

mo re g e nera lly, inves t -me nt s de te rmine d t o bemaysir or gharar that is,speculative or involvingunavoidable uncertainty

a re t o be s hunne d t o o .As a result, successful

shariah-co mpliant he dg efunds ha ve be e n a lmo s texclusively focused on com-

modity markets. Funds thattrade in commodities tan-gible assets face fewerrestrictions under shariahlaw than those trading in

ge funds

fundamentalulties have yet

e resolved,es Sam Jones

mo re a bst ra ct financialinstruments.

Such shariah-compliantco mmo dity funds ha ve,however, been successful.

Dubai Shariah Asset Man-agement Kauthar runs fourco mmo dit y funds , a ll o f them shariah-compliant.

The companys flagship

multi-strategy fund, whichblends investments in itsfour underlying funds, hasbeen one of the most suc-cessful fund-of-fund struc-tures so far this year.

In 2009, the DSAM Kau-thar commodity fund wasup 41 pe r ce nt, no t o nlymarking it out as one ofthe best shariah-compliantinvestments that year butalso one of the best hedgefund performers globally.The average hedge fundreturned just over 20 percent in 2009, according toindustry indices.

Replicating such shariah-

co mplia nt s ucce s se s inhedge funds that trade inassets other than commodi-ties may not be as far off asmany believe, however.

On 1 March, the Interna-tio na l Sw a ps a n d Der iva -tives Association, the globaltrade body responsible forsta n dar d- settin g in th ederivatives market, issuedthe ISDA TaHawwut agree-ment that will allow marketparticipants to enter intoderivative contracts that are

shariah-compliant and doso on a level playing field.

Such uniform standards,potentially open to a host of

different types trade, may finhundreds of prehibited markeplanning to macompliant inves

The key in evwill be for funto persuade Islars that their are hedges rathright speculativ

O ne big qinves t ors muhowever: even ible to construchedge fund, wilble t o run o nforms?

Palm Island developer Dubai Worlds debt crisis has made interest in hedge funds more pronounced as investors seek to get out of property and look to reallocate portfolios

Uniform shariastandards mayunlock hundredsof previouslyprohibitedmarkets to funds

Corporates and sovereignsare looking to the sukuk mar-ket for access to capital. Wehave several mandates and wesee a strong outlook for the

market this year. Liquidity int he re gio n a mong Is lamicinvestors is strong.

T he s pre ad o n sukuks ofsome borrowers in the regionare lower than their conven-tional bonds, indicating thatthe sukuk market offers compa-nies lower costs.

T he re is a lo t o f pe nt -updemand for strong credits,says Mr Dawood.

Another dynamic that willsupport supply is that severalregional banks are convertingto Islamic institutions and incertain regional jurisdictionsthese could soon outnumberconventional banks, says MrDawood.


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FINANCIAL TIMES THURSDAYMAY 13 2010 FINANCIAL TIMES THURSDAY MAY 13 2010


In need of robust architecture

tructuring derivatives thatcomply with the principlesof sharia has long been oneof the most complex nichesmic finance. But it is aningly important one, as the

ry continues to grow andanagement becomes vital.ia scholars, who have to

all products and services

by Islamic banks, havebeen reluctant to approvetives, because of Islamsn interest, speculation andessary risk riba, maisirharar in Arabic and theement for real assets toe all transactions.varying scholarly opinionsworld of Islamic jurispru-

on the legitimacy of deriva-as so far translated into a

an on these instruments incountries and actual imple-

ion albeit on a limited in others, Moodys, the

agency, noted in a recent

etheless, while innovationowed in the wake of the

international financial crisis andclerical criticism of some high-profile instruments, the structur-ing and use of Islamic derivativesis g radua lly g a ining g ro und,experts say.

There was a time when deriva-tives was a dirty word for schol-ars, but theyve come round toaccepting them, as long as theyare for hedging and not specula-tion, says Harris Irfan, head ofIslamic products at Barclays Capi-tal.

Theyre still in their infancy,but were starting to see themused more and more.

The most common Islamic prod-uct used to structure sharia-com-pliant derivatives are waad, a

type of unilateral promise, andmurabaha, one of the most popu-la r, w hich ca n be like ne d t o aconventional sale and deferredpayment structure.

You use Islamic finance prod-ucts such as murabaha and waadlike Le g o t o build de riva tiveinstruments that comply withsharia, says Priya Uberoi, direc-tor of Islamic derivatives at Clif-ford Chance.

About half of Islamic deriva-tives use murabaha, and the restare based on waad, but there areother products out there that canbe used. They just havent beentapped yet.

Other products include arbun,which is similar to a conventional

option, and bai salaam, w hichresembles forward contracts.

Existing types of Islamic deriva-t ives include cro ss -curre ncyswaps, foreign exchange options,total return swaps and profit rateswaps, the Islamic equivalent toan interest rate swap.

Lawyers, bankers and scholarshave even managed to engineerIslamic credit default swaps, asharia-compliant version of thepo pula r co nvent iona l fixedincome insurance product.

Islamic banks are banned from

speculating in a credit default, butcan in theory protect themselvesagainst an Islamic bond failure.

Ms Uberoi says: Islamic CDSsare still controversial, and thestructures arent perfect, but youcan, with innovative thinking,probably replicate most conven-tional derivative structures.

However, the complexity, costand disparate standards of Islamicderivatives almost every indus-try institution uses its own struc-

tures and documentation ham-pers their frequent use, expertssay.

To stimulate the use of Islamicderivatives, the InternationalIslamic Financial Market (IIFM), aBahrain-based Islamic capitalmarkets industry body, and theInternational Swaps and Deriva-tives Association (ISDA), recentlydra ft e d a T aha ww ut M a st e rAgreement with standardiseddocumentation for Islamic deriva-tives.

In Malaysia, Bank Islam andBank Mumalat Malaysia executeda pro-forma derivative masteragreement for documentation ofIslamic derivatives in 2006.

But Asian sharia standards are

often seen as too lax for MiddleEast clerics, and the IIFM andISDA hope their new documenta-tion can be more widely adopted.

The Tahawwut Master Agree-me nt ha s be e n ble s se d by t heIIFMs board of sharia scholars,which includes some of the indus-trys most prominent and widely-respected clerics.

These include Sheikh Nizam ofBa hra in a nd S he ikh Hus se inHamid Hassan from Egypt.

The ISDA-IIFM documentationw ill bring mo re rig oro us a ndrobust architecture to the devel-opment of Islamic derivatives,says Ms Uberoi.

Its a very new development,but a lo t o f Is la mic ba nks a re

looking at how they can tailortheir existing derivatives platformto fit with the master agreement,she says.

Bankers warn that it will taketime before the Tahawwut docu-mentation is widely adopted, asmost banks have already spent alot of time and effort on their ownagreements and structures.

Hussein Hassan, head of Islamicfinance a t De uts che Ba nk,explains: If lot of banks moveover to the IIFM-ISDA standards,it will help us toward some stand-ardisation, but there will have tobe a lot of effort on getting banksto use it.

Nonetheless, the implications ofmore widespread use of Islamic

derivatives could be significant,experts say.

Sharia-compliant institutionswould be able to hedge againstcurrency movements, credit expo-sures, interest rate movements oreven commodity inflation allrisk management tools that con-ventional banks take for granted.

The golden principle of thesharia in human dealings is thatall is permissible except thatwhich is specifically prohibited,says Muddassir Siddiqui, a sharias chola r a nd he a d o f Is lamicfinance at Denton Wilde Sapte,the law firm.

There is a need for these prod-ucts, and God would not give us aneed without a way to fulfil it.

vatives

n Wigglesworthrts on effortsandardisationcuments

nt documents: the International Swaps and Derivatives Association (ISDA), recently drafted a master agreement with standardised documentation for Islamic derivatives AFP

There was a timewhen derivatives

was a dirty wordfor scholars buttheyve come aroundto accepting them

Ahead ofthe game in local contest

Malaysia, which has a sub-stantial lead in the competi-tion to emerge as Asias pri-ma ry ce ntre fo r Is lamicfinance, is facing increasingcompetition from Indonesia,the worlds most populousMuslim nation, and other

countries in the region.Ho we ver, e xpert s s a y

Malaysias lead is so greatand its ambitions so exten-sive that it is more likely tobenefit than to lose fromthe attention being paid tothe sector in other Asiancapitals.

M ala ysia ha s a ve ryinternationalist view of itsrole in the financial sys-tem, says Hooman Sabeti-Rahmati, an Islamic financee xpe rt in t he S inga poreoffice of the internationallaw firm Allen & Overy.

I t hink t he y ha ve t heambition, they are develop-ing the institutions, andthey are far ahead of someof the people in the Gulfand elsewhere, he adds.

A c co r di n g t o B a nkNegara, the central bank,Malaysias total outstand-ing sukuk amounted to$66bn a t t he e nd o f la s tyear, or 62 per cent of glo-bal outstanding issuance.

A bo u t 1 9 p e r c e n t o f banking assets are sharia-co mpliant , a s a re 88 pe rce nt o f lis te d s t o cks o nBursa Malaysia, the KualaLumpur stock exchange.

T he s e ct o r ha s s t ro ng g o ve r nm e nt s u pp o rt ,including a friendly t a xregime and predictable reg-ulation, which have pro-vided a high degree of legalcertainty for issuers andinvestors.

This mix, combined withgovernment encouragementto state institutions to useIslamic financing wheneverpossible, has helped makeMalaysia significantly moreinnovative than other juris-dictions.

Last year, for example,Bursa Malaysia launchedt he w o rlds first sharia-compliant commodity trad-ing platform, intended toprovide a mechanism forIslamic banks to managetheir liquidity.

Malaysia faces considera-ble potential competition,however. Neighbouring Sin-gapore is much better estab-

lished as an internationalfinance centre and, whileM uslims a re in a s mallminority in the city-state,the Singapore governmentis ke e n t o e xpa nd int oIslamic products.

It changed its regulationslast year to allow banks toundertake musharaka andmurabaha transactions, andmore recently issued guide-lines on istisna, or projectfinance deals, and officialsin bo t h Ho ng K o ng a ndSouth Korea have talked offacilitating Islamic financial

ins trument s , e s pe ciallysukuk.

Indonesia, the biggesteconomy in south-east Asia,also has ambitions to buildan Islamic finance sector,and will be taken seriouslybecause of its sheer size. Indo ne sia ha s s e e n arenewed focus on Islamicfinance a nd is building momentum, says DavidVicary, g lo ba l Is lamicfinance leader at Deloitte inLondon.

However, much of thisactivity may be less signifi-cant than it appears.

Fe w t hink Ho ng K o ng and South Korea are likelyto amount to more thanniche pla ye rs in Is lamicfinance, while Singaporesmo tivat io n is ma inly t oe nsure t hat it s g row ing financial ce ntre ha s t hecapacity to deal with trans-actions of all sorts, conven-tional and Islamic.

Indonesia is a more pow-erful and long-term compet-

i t or , s a ys M r S a be t i-

Rahmati, but the diffusionof authority that has grownup in the vast archipelagosince its democratic revolu-t i on i n 1 9 98 m i li t at e sagainst the rapid introduc-tion of an effective Islamicfinancial system alongsidethe conventional one.

If this were happening 15years ago and there was acentral decision to facilitateIslamic finance it would just happen very readily.But nothing happens veryquickly now in Indonesiabecause of the diffusion ofauthority there, says MrSabeti-Rahmati.

Thats why we have seen

m o re o f a p i ec e me a lapproach, he adds.

For example a new lawca me int o e ffect a t t heb e gi n ni n g o f A p ri l t ore mo ve s o me o f t he t a ximpediments for murabahatransactions, but not forsukuk.

There is no reason toremove it for one but notthe other, but it just didnthappen in this particularround and no one knowswhen it might happen.

Raja Teh Maimunah, glo-bal head of Islamic marketsat Bursa Malaysia, says theincreasing activity in thesector in other south-eastAsian countries is a gooddevelopment.

We need more players int he ma rke t, be caus e w easpire to become an inter-national financial centreand we cant quite be inter-na tio nal if w e re do ing something on our own, sowe need everybody to sub-scribe to this as well, she

says.It assists Malaysia in a

fe w w a ys . If yo u lo o k a tIndonesia, a number of ourba nks a re t he re a nd o urbanks would have Islamicw indo w s o r bra nche s.Growth and activity therew o uld me an he ight e ne dbusiness for our Malaysianbanks.

We dont look at Malay-sia being a financial centrewhereby [business] has toco me a nd phys ically bepresent in Malaysia thewhole exportation of thetechnology of MalaysianIslamic finance is what weare looking at really.

Malaysia

But this is no timefor complacency,says Kevin Brown

Kuala Lumpurs big role: Malaysias total outstanding Islamic bonds amounted to $66bn at the end of last year

The sector hasstrong governmentsupport, including afriendly tax regimeand predictableregulation


5/5

8 FINANCIAL TIMES THURSDAY MAY 13 201

ft islamic finance report

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