Thursday, August 19, 2010

Trade push reshaping Islamic finance's regional rivalry

MANAMA/KUALA LUMPUR: Arshad Khan, the chief of the Bahrain Financial Exchange, had envisaged a global Islamic trading platform when he set out to work with Malaysia's stock exchange this year.

Though the talks fell through, Khan thinks there may be other partnerships in the future, reflecting a desire to collaborate that could help close an age-old divide between the two regions which has impeded the growth of Islamic finance.

"The agreement (with Malaysia's stock exchange) is still there and we're still exchanging information," Khan said. "We can still create synergies later on."

Split by an age-old rivalry stemming from the fight for market share and differences in syariah interpretation, Islamic banking hubs Malaysia and the Middle East have struggled to work together in the past, resulting in fragmented standards and localised markets which have divided the industry.

Some Malaysian Islamic products have not been accepted in the Gulf because authorities there say they are not syariah compliant.

But narrowing differences over syariah interpretation, the quest for new markets and Asia's growing economic clout have begun to turn the tide, offering investors hopes of a deeper sukuk market, improved transparency and more uniform syariah standards.

"Institutions around the world, whether they're Malaysian or Middle Eastern, will end up using very similar contracts for fairly standard types of products like hedging contracts and repos," said Harris Irfan, Barclays Capital's head of Islamic products.

"Therefore, the industry growth that should have been realised will now be realised."

As commercial realities force a closer partnership, trade flows between the two regions have increased and banks are discarding contentious syariah financing concepts to court a broader swath of investors.

Malaysia's national mortgage firm Cagamas Bhd recently targeted Gulf investors with a novel sukuk structure aimed at pleasing more strict Gulf syariah standards

Middle Eastern investors accounted for a third of the RM1 billion, 3-year issue from the first tranche.

Gulf lenders Al Rajhi, Kuwait Finance House and National Bank of Abu Dhabi all have Malaysian bank licences and Bahrain's Al Baraka wants to buy a stake in Malaysia's Bank Muamalat.

"In the last few years we've seen more progress and cooperation," said Mohamad Safri Shahul Hamid, deputy CEO at MIDF Amanah Investment Bank, a sukuk arranger.

"The market is still very small ' and in order to grow, we need to have cooperation between those two regions."

The need for greater harmonisation and clarity has taken on added urgency as the industry tries to calm rattled investors.

Islamic finance claimed the moral high ground during the sub-prime mortgage crisis which floored the global banking system, but its reputation has taken a beating after the slowdown exposed gaps in the relatively young US$1 trillion (RM3.13 trillion) industry.

For some investors, Islamic finance has become a byword for inconsistent standards and opaque markets as soured sukuk and syariah banking deals are played out in courts.

In particular, investors are demanding more transparency after wrestling with patchy data and gaps in company disclosures, particularly in the Middle East.

As more Gulf banks expand in Asia, the industry has increasingly embraced globally accepted Islamic contracts such as ijarah and avoided controversial concepts like the bai bithaman ajil in structuring new financing.

Bai bithaman ajil makes up a sizeable chunk of Malaysian Islamic banks' financing portfolio but the authorities are offering a tax deduction on expenses for the issuance of other sukuk such as musyarakah and istisna to encourage the use of less contentious contracts.

But the regions must still overcome a vast sukuk price differential which makes it hard to sell the same paper globally, said Simon Eedle, Credit Agricole CIB's Islamic banking head.

While issuers in Malaysia look to similarly rated firms for price guidance, Middle Eastern banks have a higher cost of funding which results in them asking for higher returns, he said.

Syariah supervision is also a tricky area. Malaysia, which has the world's largest sukuk market, adopts a top down approach in regulating its Islamic finance industry, with national level syariah advisers and a regulatory framework complete with a legal dispute resolution mechanism.

"In the Middle East, in certain jurisdictions, it's not even regulated ' so how can you harmonise?" said Megat Hizaini Hassan, who heads the syariah banking and finance transactions practice at Malaysia's top law firm Zaid Ibrahim & Co. ' Reuters


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