Thursday, February 18, 2010

Reuters Islamic finance summit

I don't have as much time to comment as much on the articles today, so I'll just give a few general comments. Any forum or conference is unlikely to get a full, detailed overview of any of the topics covered, but the Reuters summit, in my opinion, has done a good job at describing some of the issues raised by participants in the articles released about the summit.

The four themes that I took from an article about the Reuters summit before it happened were all covered with differing degree of depth (from my reading of the articles about the summit; I wasn't there). The maturity mismatch was not covered in particular depth, although it was mentioned within the context of the second theme of a reliance on transitory sources of profits like private equity and investment banking. It is becoming more evident that at least some players in the industry are willing to say that there has been too much focus on big real estate projects, private equity and investment banking at the expense of plain vanilla banking. With the higher returns from the transitory sources of profits, there will always be a bias towards those areas in boom times because there is more money to be made there and periods of recession and financial crises will see some of these go away. This is unlikely to change, although one would hope that the most recent crisis will instill some more risk management in the riskier areas of Islamic finance to prevent the next crisis from being even bigger for Islamic finance than this one was.

The issue of size of Islamic financial institutions was barely touched with the exception of a timetable for the launch of a mega Islamic bank. Much more attention was paid to the regulatory challenges facing Islamic finance and there are still major differences among different institutions and people within the industry, which is not out of line with the conventional financial industry's views on regulation. There are some special areas where Islamic finance regulation is different from conventional regulation, but in both segments of financial services, regulation is one of the slower moving areas that cannot be resolved by a 3 or 4 day conference covering so many different topics. In this area, there will be much more work to come and hopefully the need for sensible regulatory standardization (across countries and between Islamic and conventional banks) should be more in the forefront of people's minds.

Reuters Islamic finance summit

  • The Islamic mega-bank is expected to launch within six months to a year according to Sheikh Saleh Kamel, one of the founders of the bank. The launch was delayed by the financial crisis, but is expected to have capital of $3 billion to $4 billion when it is launched.
  • The head of Islamic finance at Ernst & Young, Sameer Abdi, says that Islamic finance should refocus its efforts on building a retail base, which provides a more stable base than wholesale funding and investment banking and could allow Islamic banks to compete with global financial institutions with Islamic windows. One comment that may explain the lack of push for retail business is particularly accurate: "What you make in one transaction [in investment banking] may take you three years in a retail book, but ... retail is sustainable". Mr. Abdi also spoke about the need for Islamic finance to move away from real estate.
  • Not surprisingly, there are differences in opinion between regulators, Shari'ah scholars and practitioners in Islamic finance about the best way to regulate the industry and ensure there is adequate transparency to protect investors in Islamic financial products. One of the interesting things, which I have raised before, but which has not received much attention in articles about Islamic finance is that corporate restructuring involving Islamic finance need to be reviewed for Shari'ah-compliance. This point was raised by Muneer Khan, a partner at Simmons & Simmons. Looking forrward, there will be much more discussion of these topics at the 7th Annual IFSB Summit, which will be held in May in Bahrain.
  • France or the UK should move forward on bringing corporate sukuk to market to retain their leadership role in Western Islamic finance, according to several participants in the summit. Several participants expressed skepticism that any European sovereign sukuk will be issued in 2010, although expressing optimism for corporate sukuk from European companies.
  • John Sandwick says that Swiss banks should focus on providing Islamic wealth management services. He criticized the focus of the industry on private equity at the expense of other areas that would help asset managers be able to invest in more prudent asset allocations.
  • Indonesian banks should focus on providing Shari'ah-compliant financing according to Achmad Riawan Amin, chairman of an association of Islamic banks in Indonesia.
  • An executive at Citi Islamic Investment Bank, Samad Sirohey, said that sukuk funds should develop not just to purchase distressed assets, but to draw other players into the Islamic securities market. This would, in my opinion, provide greater liquidity that could spur supply of new sukuk because issuers would have to pay lower liquidity premia to investors who now are limited in their ability to sell sukuk in the secondary markets and find other sukuk to replace it with.
  • Dubai World is planning to present its restructuring plan to creditors in march, although the details will not necessarily be released publicly. According to a spokesperson for the Dubai Government, "That's a confidential matter between the company and its lenders". While that may be strictly the case, the uncertainty about the restructuring of the debts, including several Shari'ah-complaint debts, is very important to the regional credit markets and it would be beneficial to investor perception of the creditworthiness of the Dubai government for these details to be made public. Given their importance to sentiment, they may be leaked anyway. A number of participants at the Reuters summit reiterated the valid point that the problems at some of the Dubai government-related entities like Nakheel should not be taken and generalized across the Islamic finance industry. I agree.
  • Global sukuk issuance last year (February 2009 to January 2010) was $19 billion, of which $5.6 billion originated from Saudi Arabia and $4 billion was from the UAE.
  • An article describes the countries where Islamic finance could expand and the factors that could hamper this growth.
  • A Malaysian takaful firm Etiqa Takaful has seen strong growth recently as many Muslims and some non-Muslims in the country choose takaful over conventional insurance. However, the growth could be restrained by a shortage of long-term Islamic instruments for them to invest in and a shortage of retakaful providers. An Indonesian takaful provider said that it is considering investing directly in domestic equities which rose 87% in 2009 in Indonesia (measured by the Jakarta composite index) for investors with high risk profiles. It will be seen whether this investment in the stock markets will be beneficial for the investors after the significant rise last year.

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