Sukuk and the global banking village
The exponential growth of Islamic banking since its emergence in the late 1970’s was interrupted by the ice age in the post-Lehman capital markets in 2008-09, the default of international sukuk issues by high profile borrowers, the Nakheel standstill shock and subsequent Dubai World debt restructuring, and now the MENA unrest.
With assets estimated at a trillion dollars, Islamic finance is no longer a miniscule, exotic niche of the global banking village.
Islamic banks in the GCC are exposed to property, capital markets and banking risks in Egypt, Syria, Bahrain, Libya, Yemen and Tunisia. While the sukuk has emerged as the most successful innovation in Islamic finance since the murabaha (a quasi-money market instrument) in the money market a generation ago, it has still not resolved Islamic banking’s traditional lack of central bank lender of the last resort guarantees, exposure in property/illiquid assets and lack of standardisation.
The inability of Shariah boards in Malaysia and the Gulf to agree on common standards for sukuk new issues has also limited the growth of an instrument whose appeal has a global resonance for companies, governments, banks and investors.
Islamic finance has addressed the standards of regulation, liquidity and risk management with the creation of institutions such as Bahrain’s AAOIFI, IFSB and Malaysia’s IILMC. The sheer growth potential of Islamic finance is indisputable, with banking penetration rates barely in double digits in several major Muslim countries. London, Luxembourg, Dubai, Bahrain, Kuala Lumpur and Singapore have all emerged as global hubs for Islamic capital markets, banking, insurance and fund management subsidiaries, such as HSBC Amanah and Citi Islamic Investment Bank and all leading GCC banks now boast Shariah-compliant retail, corporate and investment banking franchises. Turkish and Singaporean banks have also created Islamic finance subsidiaries, such as DBS’s Islamic Bank of East Asia. Even China’s Bank of Ningxia and UK High Street banks offer Shariah-compliant auto loans and mortgages! Turkey, France, Nigeria, Kenya and even Russia have made no secret about their ambitions to scale up Islamic finance in their domestic capital markets milieu. While Islamic finance is commonplace in the Gulf, Pakistan and Malaysia, its assets are not even two per cent of all global banking assets. However, Shariah-compliant finance will only grow in the West’s money souks. There are six Islamic banks regulated by the Bank of England in London, which has become a global hub for structured Shariah-compliant property investing, private equity, commodity finance and even the issue of UK corporate sukuk!
The systemic shocks, sukuk defaults and banking crises and scandals since 2008 have led to a paradigm shift in Islamic finance. It is no longer sufficient to project an image of Shariah compliance to build a franchise and charging a premium on conventional banking products. Product innovation, strategic vision, state-of-the-art IT risk management are mission critical and even prudent regulation is a source of competitive advantage, as London and Luxemburg have demonstrated. China, Turkey, Latin America and the US could be the exiting new frontiers of Islamic finance. New banking models must replace the go go, high risk banks whose sukuks defaulted in Kuwait and Bahrain. Several Shariah-compliant banks and investment firms in the GCC failed because they relied on excessive leverage, fickle offshore funding, illiquid balance sheets and poor risk management. The post-default fate of several ex-GCC investment banks should be a lesson for the next generation of Shariah-compliant financiers. Making leveraged bets on property with borrowed money via sukuk issuance is simply not sustainable in the new era of Islamic finance.
Researched and compiled by MATEIN KHALID. Mr Khalid is a fund manager, a Wharton MBA and Director of a securities firm. He can be contacted at: [email protected] m
