Islamic finance roundtable: The new contest to be the capital of Islamic finance
After the World Islamic Economic Forum was held in a Muslim minority country – the UK – for the first time. Euromoney quizzed the envoys of rival centres on their ambitions.
|Source: World Islamic Economic Forum|
The initiative illustrates the emirate’s commitment to diversifying the UAE economy and establishing Dubai as a global leader in the Islamic economy, focusing on several sectors including finance, the halal food industry, family-friendly tourism, the digital economy, fashion, economic education, and standards and certification.
As the most international financial and business centre, with a leading position in emerging markets, we want to make sure a big proportion of those investments are made in and through the UK. And engaging in Islamic finance is also an important part of the government’s strategy to diversify and rebalance our economy, working with new markets and taking advantage of emerging trends.
Istanbul is a safe haven that can attract savings from the Gulf region. This is going to be the first step in attracting long-term investments from the Gulf area to help Turkey to cope with its current-account deficit problem
Luxembourg is already recognized as the leading Islamic fund centre outside the Muslim world. According to the 2013 Lipper global Islamic asset management report, it lies in third place globally, both by the number of funds (111) and assets under management ($4 billion).
Finally, as with any financial centre, Islamic finance will not thrive unless there is an experienced, well-trained local workforce in place. After all, it isn’t the buildings that matter: it’s the people you put in them.
However, the deal is likely to be clinched by two further factors that are regularly cited as of top priority by Islamic investors: stability and political support. Stability – evidenced by political and fiscal continuity – is the first priority. This is closely followed by high-level political engagement. Islamic investors expect easy access to the relevant authorities and for these authorities to create a level playing field by confirming or adopting an appropriate legal and tax framework.
Reporting lines to the top level of government are short and access to informed decision-makers is not difficult. The tax directorate has ensured equal treatment for Shariah-compliant structures and is prepared to sign pre-launch tax rulings.
Another important attraction is the legal framework, which offers a range of Shariah-friendly structures along the full spectrum from EU retail funds through to non-regulated structures suitable for sovereign and quasi-sovereign investors.
Nevertheless, there is a natural tendency to attract business in those sectors for which it has an international reputation: capital market listings (sukuk), private banking, structured finance and investment funds.
Two other areas have the potential to develop into key sectors. The recent launch of a cross-border life assurance product reflects one of Luxembourg’s main business lines: 90% of premiums in conventional life assurance are from cross-border business. The other area to watch is high-net-worth banking.
This will help integration of Islamic finance with global markets, and ensure efficient allocation of capital on a global scale.
The DFSA has developed a unique Shariah systems model, which provides a regulatory structure to ensure compliance with international standards as well as Islamic law. One notable underpinning is the law regulating Islamic financial business. Under this law, any firm conducting Islamic financial business must have a special endorsement on its licence, which allows the firm to operate as a wholly Islamic firm or as an Islamic window.
This will continue to be the case, but as with elsewhere in financial services, we are expecting strong demand within those financial sectors that cater to the needs of the rapidly expanding mass-affluent population in the Gulf. As we see a greater demand for more sophisticated financial services, it is likely that a proportion of this will be for Islamic financial products.
The creation of the first stock market transactions for these institutions, mutual funds, [the] Dow Jones Islamic Market Turkey ETF, and Turkey’s first Islamic index, the Participation Index, are among these.
The World Bank’s Global Centre for Islamic Finance will be founded in Istanbul [as announced in October 2013, in partnership with the Turkish government, as a training, advisory and technical assistance body].
On October 29, the London Stock Exchange Group announced it was launching a world-leading Islamic market index; strengthening FTSE’s leading position as a developer of innovative, alternatively weighted indices. This index will be another global first for the City of London. Using some of the most advanced techniques, it will allow investors to identify Islamic finance opportunities.
Another important development was the launch of the first Shariah-compliant underwriting agency on the Lloyd’s market, Cobalt Underwriting, which recently underwrote its first risk. Insurance is a core pillar of financial services, helping business manage risks, and the government is committed to developing London’s expertise in Islamic insurance and to working with insurers and wider partners to consider options to grow the market.
Likewise, the purchase by Qatar’s Precision Capital of two big Luxembourg banks, KBL Private Bankers and BIL, Banque International à Luxembourg, in 2012, sent a message to other Muslim markets and provided a boost to the domestic Islamic community.
Innovative product launches have included the first Shariah-compliant sustainable forestry fund and the first EU retail fund to invest in an international Islamic sukuk portfolio.
As well as this history, Bahrain is also home to many of the leading [international] organizations within Islamic finance, including the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), International Islamic Financial Market (IIFM), the General Council for Islamic Banks and Financial Institutions (CIBAFI), Islamic International Rating Agency (IIRA), Thomson Reuters Global Islamic Finance Hub and Deloitte’s Islamic Finance Knowledge Centre. Bahrain is also the home of the global Islamic finance arm of Ernst & Young.
A good example of how this cluster can work to benefit the wider international industry was the recent development of the Tahawwut Master Agreement by IIFM and Isda [the International Swaps and Derivatives Association], which provided a Shariah-compliant hedging framework.
There was a real need, as the industry expanded and institutions took on larger positions, for an agreed framework on hedging. The Central Bank of Bahrain worked very closely with IIFM (of which I am fortunate to be the chairman) and the industry to help to develop an answer to this need.
The concentration of expertise and long track record among institutions and banks mean that Bahrain is well placed to continue to develop these sorts of solutions.
DIFC had an early start on the laws and regulations around Islamic finance and a number of firms have located to the centre to be involved in the industry. There are many products that are being created out of the DIFC that are tailored for Islamic investors and are then regulated by the DFSA.
DIFC is well placed to cultivate Dubai’s status as an Islamic international financial centre. For example, DFSA’s Sharia systems method of regulation provides flexibility for firms seeking to offer products through an Islamic window or to operate as an Islamic institution. There is no central Shariah board, but firms are required to nominate their own Shariah supervisory board and make appropriate disclosure to clients. Our last important measure was to remove the obligation for Islamic firms to use AAOIFI standard of accounting as a consequence of lobbying by the Islamic industry.
The capital markets law, restructuring of the stock market and investment products are important developments. But the biggest development is the Turkish Treasury’s issues of dollar-denominated and lira-denominated lease certificates [sukuk].
We are already a global player in Islamic finance, but I want us to be an even bigger force in this area. My aim is to move from a UK focus to a global focus. I will work with our global partners to identify the key factors that will drive the Islamic market over the next five years. And we want to work with those partners to spearhead that growth.
To help achieve this, I will be bringing together the key decision makers and experts from the public and private sectors [including CEOs and central bank governors from Kuwait, Bahrain, Qatar, UAE, the UK and Malaysia] into a global Islamic finance and investment group to look at the key questions and issues.
In addition, three members of the board of directors for Sheikh Mohammed bin Rashid Al Maktoum’s Dubai Islamic Economy Development Centre now sit on DIFC’s higher board of directors, including His Excellency Essa Kazim, the recently appointed governor of DIFC.
Where existing business is concerned, we expect to see a recovery in volumes to pre-crisis levels. In the area of private banking, we expect to see an increase in entrepreneurial customers from Muslim countries in line with a steady market shift in this direction.