Tuesday, July 31, 2012

Malaysian banks, ITFC working to open up more Islamic trade finance

Three local banks in Malaysia are working with the International Islamic Trade Finance Corporation, part of the Islamic Development Bank Group, to provide trade financing for Malaysian companies working in emerging markets, including in the OIC.  The realm of trade finance has been developing under the radar within the Islamic finance industry, but it should get more attention.

The idea of providing financing and insurance for intra-OIC country trade (and for trade with non-OIC emerging markets) is an excellent place for Islamic finance to operate since many of the contracts used in Islamic finance are based on trading contracts (the most prevalent being murabaha).

There are also many other reasons to develop trade within emerging markets in general and specifically within the OIC whose member countries represent diverse geographies spanning from Indonesia and Malaysia to Western Africa.  Within the OIC, the countries with the largest total exports includes Malaysia (third behind Saudi Arabia and the UAE, whose economies are based on oil and gas exports, and behind Turkey, which is geographically near to the large import market of the European Union).

Encouraging trade between these countries financed by Islamic finance should develop connections that will help Islamic finance grow in the trade partners, but more importantly should lead to more pressure to open up bilateral trade flows so that countries with smaller economies can export their own products into other OIC countries in a way that helps their economy grow.  Islamic finance should work to be at the forefront of encouraging these trade linkages for the countries' mutual benefit.

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