IFC could help in growth of Islamic finance industry
Event can provide forum for global dialogue to boost the sector
KUWAIT CITY, Nov 10, (KUNA): Governor of Central Bank of Kuwait (CBK) Mohammad Yousef Al-Hashel has said the Islamic Finance Conference (IFC) to be hosted by Kuwait tomorrow can provide a forum for global forum to develop a vision for the sustained growth of the Islamic financial industry.
The conference will build a platform for continued work in order to further cultivate and exploit the core competencies of Islamic Finance that make sustainable growth possible, he said in an interview with the International Monetary Fund (IMF) published on its website Tuesday.
Although still a comparatively small share of all global financial assets, the role and relevance of Islamic finance in the global financial system is gaining significance, he added.
He noted that the first theme concerns increasing financial inclusion through access to finance, which is vital in stimulating the economy and improving the welfare of the underprivileged, adding research suggests that over one third of the world’s adult population — about 2.5 billion people — lacks access to formal financial services.
Islamic finance can help remedy this situation by promoting Islamic microfinance, financing to small and medium-sized enterprises, and micro Takaful (pooled insurance where shareholders contribute money to protect against loss or damage), he said, indicating that nevertheless, financial inclusion also requires enhancing access to basic banking services, creating a conducive regulatory environment, and promoting public awareness on financial matters.
He further said second, we will discuss how to strengthen regulation and supervision to foster financial stability, elaborating a recent IMF study noted that Islamic standard setters, including the Islamic Financial Services Board, have established “rules of the road,” but these are not being applied consistently, potentially stifling the development of Islamic finance and creating systemic vulnerabilities.
He added continued efforts are needed to refine regulatory frameworks for Islamic finance institutions — in line with recent recommendations of both the Basel Committee on Banking Supervision and the Islamic Financial Services Board — while ensuring greater consistency in their application.
The governor said the third theme will cover the development of Sukuk (the Islamic equivalent of bonds) and other longterm Islamic finance instruments for infrastructure financing and sustainable development.
Sukuk have the potential to serve as high quality liquid assets, which is of increasing importance to regulators in the implementation of Basel III liquidity and capital adequacy frameworks, he said, noting but developing the Sukuk market requires further improvements to legal, regulatory, and disclosure norms, and stronger market infrastructure-including developing the secondary market.
Asked about the success factors that have led to the recent growth of Islamic finance, Al-Hashel said the key success factors anchoring the recent growth of Islamic finance have evolved over time and, to a certain extent, have changed the landscape of the industry.
He added there are many main reasons for the success: First, the characteristics of Islamic finance - such as the concept of sharing profit and loss, investments that are socially responsible and environmentally sustainable, and linking finance with real economic activities - have grown in popularity since the global financial crisis of 2008, and provide an alternative to more traditional financial products.
Among the reasons is the demand for Shari’ah-compliant financial services and products (retail, corporate), or for building infrastructure projects, in both Islamic and non-Islamic countries, has been on the rise, resulting in a large number of institutions entering the Islamic finance field for the first time, he said, referring that some of these institutions have been conventional banks eager to capture a share of a promising market through their Islamic window operations.
The third reason is the development of a broad range of innovative products and instruments by Islamic financial institutions, he stated, indicating such innovation has provided additional services to clients, but has also brought some added challenges to those institutions, as well as to their supervisors.
He said the fourth is the availability of a conducive regulatory framework and enabling infrastructure has been a key factor in the development of Islamic finance, adding this factor is prevalent in many countries where legal and regulatory amendments have been undertaken to accommodate Islamic finance.
Despite these positive developments, Islamic finance is still fragmented and many challenges lie ahead, Al-Hashel said, adding it remains to be seen whether the past successes can be sustained, particularly in light of the recent decline in oil prices.
Continued innovation and the collective effort of all stakeholders will be required to ensure sustainable growth and success going forward, he said.
Concerning key challenges facing Islamic finance, Al-Hashel said there are two interrelated challenges: one related to market development; and the other, establishing robust supervisory and regulatory frameworks.
With regards to market development, despite the notable strides that have been made, market penetration remains low - with Islamic financial assets accounting for only 1 percent of global financial assets, he explained.
Further, the structure of the Islamic finance industry is still very bank-centric and concentrated in a few countries, he noted.
“In addition, we face two types of regulatory and supervisory challenges. The first relates to the foundation of Islamic finance, including ensuring an enabling supervisory, regulatory and legal environment; a suitable accounting and auditing framework; supportive financial market infrastructure; and, capacity building. Addressing these is a prerequisite for the successful development of Islamic finance,” he said.
The impact of lower oil prices, especially on the six hydrocarboncentric Gulf producers, is being keenly watched as governments tackle budget deficits created by reduced revenues and sovereign wealth funds, after years of deploying significant oil cash, adapt strategies towards recycling existing capital.
Whether the same trend is being felt in private wealth has been less clear, although one of the biggest names in Middle Eastern private equity believes the sector isn’t immune from regional sentiment.
“There are few PE firms in our markets that are geared to taking institutional capital.
Diversifying the sources of capital is helpful as some pockets such as family offices can come and go, depending on
ramping up production from some of its other fields. The authorities remain committed, despite the drop in oil prices, to investing in oil infrastructure and enhanced oil recovery (EOR) techniques in order to reach their production capacity target of 4.0 mb/d by 2020.
Iranian output also remained steady in September, at 2.85 mb/d. Iran’s potential return to the oil markets in early 2016 (assuming the country complies with IAEAinspections and sanctions are lifted), with probably an additional 500,000 b/d within 6 months, is the largest source of downside risk to oil prices next year. The Iranian authorities anticipate that production would reach 2011’s, pre-sanctions, level of 3.6 mb/d almost immediately. That would imply an extra 750,000 b/d over current output hitting international markets during 1Q16. This amount seems optimistic, even accounting for the 40 million barrels (60% of which the IEA estimates is condensates) Iran could access quite quickly from storage aboard its fleet of very large crude carriers (VLCCs).
While OPEC output remains stubbornly high in the face of low prices, nonOPEC supply growth is finally showing signs of slowing down. US oil production, which has been the largest source of non-OPEC supply growth in recent years, thanks to the shale oil revolution, has clearly declined over the last 6 months. Cutbacks in capital spending by oil majors and reductions in drilling activity are beginning to take their toll. According to weekly data provided by the US Energy Information Administration (EIA), US output had fallen from 9.6 mb/d in early June, which was a 44-year high, to 9.1 mb/d by the 23 October, a drop of 500,000 b/d, or 5%.
market conditions,” Mustafa AbdelWadood said in a summit interview at the firm’s offices in Dubai.
“From this part of the world, you will see perhaps a little bit more caution around investing.”
Abraaj would be unaffected though as the “significant majority” of its investment cash came from outside of the Middle East and was from institutional investors who were “less jittery” about the short-term volatility.
Having grown from its Dubai home since it was set up in 2002, Abraaj has bases in around 22 countries across the Middle East, Africa, Asia and Latin America.
With just under $10 billion of assets under management, Abdel-Wadood says Abraaj is the largest private equity firm looking at emerging markets exclusive of the BRIC countries.
Among the acquisitions it has made this year include stakes in Egyptian education firm Tiba Group, two Moroccan oncology clinics and Latin American courier firm Urbano.
It also bought into Saudi Arabian fastfood chain Kudu in collaboration with TPG Capital and announced on Tuesday a co-investment in Dubai-based car service app Careem, although Abdel-Wadood stressed it usually pursues investments on its own.
While it mostly targets sectors which are immune to economic swings, such as healthcare and education, Abdel-Wadood talks of the “global consumer” at the heart of its investment decisions.
“I don’t think Middle Eastern consumers are that different from their counterparts globally in other growth markets, as consumption patterns are converging,” he said, noting fast-food restaurants in Thailand and Saudi Arabia may have different menus but both need to focus on securing the right locations and supply chains.
“So at a high level it’s all the same thing, but then you operate within a local context and that is where on the ground presence is key.”