Is­lamic fi­nance goes global

The Pak Banker - - COMPANIES/BOSS -

Is­lamic fi­nance has come a long way in re­cent years, with the range of prod­ucts and struc­tures widen­ing, and mar­kets across Europe, North Amer­ica and Africa look­ing to play a big­ger role.

Glob­ally, Is­lamic fi­nance as­sets are ex­pected to sky­rocket to $1.8 tril­lion (Dh6.6 tril­lion) by 2020, with is­suance of Sukuk (Is­lamic bonds) con­tin­u­ing to in­crease sharply across a widen­ing geo­graphic foot­print.

Not bad for a mar­ket that only four years ago was more or less con­fined to its tra­di­tional strong­hold of Malaysia and the Gulf Co­op­er­a­tion Coun­cil (GCC) states.

Whereas in the past, the prod­uct range was lim­ited, aimed mainly at gov­ern­ments and cor­po­rates, and re­ly­ing on as­set-based struc­tures such as Ijara (sale and lease­back), there's now a grow­ing ar­ray of in­no­va­tive Is­lamic fi­nanc­ing in­stru­ments avail­able on the mar­ket.

Hong Kong, UK, Lux­em­bourg and South Africa are among a grow­ing list of non-Mus­lim mar­kets that have is­sued sov­er­eign Sukuk, amend­ing their le­gal, reg­u­la­tory and tax­a­tion frame­works to ac­com­mo­date Is­lamic fi­nance struc­tures.

Cross-bor­der is­suance has grown rapidly, too. Is­suers from around the world have flocked to is­sue in Malaysian ring­git, with Malaysia be­ing the largest lo­cal-cur­rency Sukuk mar­ket in the world. Last year Türkiye Fi­nans, the Turk­ish par­tic­i­pa­tion bank, is­sued the largest se­nior sin­gle ring­git Sukuk tranche by a for­eign fi­nan­cial in­sti­tu­tion.

Up un­til 2012, most of the Sukuk is­sued around the world mir­rored the se­nior, un­se­cured debt struc­ture of "plain vanilla" con­ven­tional bonds. Now, how­ever, is­suers and in­vestors can ac­cess pro­ject-fi­nance Sukuk, amor­tis­ing Sukuk, ex­port-credit-agency-based Sukuk, hy­brid cap­i­tal Sukuk, and a range of other fi­nanc­ing in­stru­ments. This bur­geon­ing prod­uct in­no­va­tion is open­ing up much-needed new sources of cap­i­tal. Pro­ject-fi­nance Sukuk, for ex­am­ple, gives emerg­ing economies around the world an­other pool of cap­i­tal to tap into for cru­cial in­fra­struc­ture projects. Like­wise, ex­port-cred­ita­gency-backed Sukuk means gov­ern­ments and com­pa­nies can tar­get a new in­vestor base. Emi­rates Air­lines be­came first to is­sue this type of Sukuk last year, fully guar­an­teed by the Ex­port Cred­its Guar­an­tee Depart­ment of the UK Govern­ment.

Sukuk are also mak­ing their mark in eth­i­cal in­vest­ing. In 2014, the In­ter­na­tional Fi­nance Fa­cil­ity for Im­mu­ni­sa­tion be­came the first to is­sue so­cially re­spon­si­ble Sukuk, to sup­port NGO Gavi's im­mu­ni­sa­tion pro­grammes in the world's poor­est coun­tries. Don't be sur­prised to see the first green Sukuk en­ter the mar­ket soon. Just like other green bonds, they'd be fi­nanc­ing projects that ben­e­fit the en­vi­ron­ment. Tra­di­tion­ally, mar­ket prac­ti­tion­ers used mainly 100 per cent as­set-based struc­tures to cre­ate Sukuk.

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