Sukuk Success: Islamic Finance Is Spreading Globally and Product Structures Are Evolving Rapidly. Can the Industry Keep Its Unique Identity amid All This Change?

By Watkins, Simon | Financial Management (UK), March 2011 | Go to article overview
Save to active project

Sukuk Success: Islamic Finance Is Spreading Globally and Product Structures Are Evolving Rapidly. Can the Industry Keep Its Unique Identity amid All This Change?


Watkins, Simon, Financial Management (UK)


The global Islamic finance industry has grown from about $10bn worth of invested assets in 1975 to $2.2trn today, according to the 1st Ethical Charitable Trust, an adviser on sharia compliance in the UK.

The tenets of Islamic finance generally forbid the payment of interest and investing in activities deemed speculative, uncertain or unjust (such as gambling, alcohol and the sale of certain foods). This has appeal beyond the Muslim world. Indeed, about 80 per cent of sharia-compliant investment products in Malaysia are held by non-Muslim investors. So will the rise of Islamic finance continue, particularly given the lack of trust in Western banking? And what changes can be expected in the global sharia investment mix?

By the end of 2010 5.5 per cent of the $2.2trn invested in Islamic instruments was held in dedicated Islamic funds, with 31.1 per cent in broader-based assets (mainly in sharia-compliant bank accounts and money-market vehicles). The rest was held in other Islamic instruments, particularly sharia-compliant bonds (sukuk), insurance packages (takaful) and equities products.

Where are the world's Islamic finance hot spots? "The main centres have stayed largely the same for the past three years: Malaysia continues to lead the way in sukuk and equities products, while Saudi Arabia does the same for bank deposits," says Sohaib Umar, a partner in Ernst & Young's Islamic financial services group in Bahrain. Dedicated multi-product Islamic funds are split largely among Malaysia, Saudi Arabia, Kuwait, Luxembourg, Bahrain, the Cayman Islands and Ireland.

Yet the focus of the Islamic finance industry - especially for bond and equity products - is set to change, says Sam Barden, chief executive of SBI Fund Management in Dubai. "Saudi Arabia, most notably, is likely to lose further market share to Bahrain, Dubai and non-Muslim investment hubs, particularly Luxembourg," he says, explaining that Saudi Arabia's lack of amenities for non-Islamic financiers will hold it back.

[ILLUSTRATION OMITTED]

In a bid to boost its growing dedicated Islamic bond and equity funds business, the Central Bank of Bahrain has introduced a new regulatory framework for collective investments. This allows for a wider range of activities, including hedge funds, derivatives and alternative investment vehicles.

Another Bahraini innovation, in March 2010, was the first globally standardised documentation for privately negotiated tahawut (hedging) products. This followed the publication of a "tahawut master agreement" by Bahrain's International Islamic Financial Market and the New York-based International Swaps and Derivatives Association (ISDA). "This should bring the similar benefits of efficiency, certainty and liquidity to the Islamic finance markets - as did the development of the original ISDA Master Agreements in the 1980s," says Yousef Battiwala, an associate at London-based commercial law firm Allen & Overy.

Dubai has also been making itself more attractive to foreign users of sharia-compliant instruments. In 2006 the Dubai Financial Services Authority (DFSA) signed up to stringent standards for information-sharing and assistance between regulators set out by the International Organisation of Securities Commissions. The DFSA made 46 bilateral agreements with regulators of strategic importance to the Dubai International Financial Centre. Financial centres outside the Middle East are also targeting Islamic finance investors.

[ILLUSTRATION OMITTED]

Luxembourg is the best placed to win business, according to Barden. "No laws or amendments are needed for sharia-compliant funds to set up there; they are not charged any taxes; and the whole process can take as little as six weeks for both collective investment schemes and specialised investment funds," he says. "This timeframe contrasts with an average of two months in Bahrain and Dubai - and three months in Saudi Arabia.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Sukuk Success: Islamic Finance Is Spreading Globally and Product Structures Are Evolving Rapidly. Can the Industry Keep Its Unique Identity amid All This Change?
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?