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Product development for Islamic banks discussed at MEFX conferences

Product development for Islamic banks discussed at MEFX conferences
By: Mike Gallagher

Greater visibility needed if Islamic finance is to become internationally acceptable. International listings and uniformity of standards key to spread say delegates.

MEFX, Islamic real estate investment trusts, Sukuk, Qatar, Alpen Capital, Sanjay Vig, Saadiq, Ghazanfar Naqvi, Mobily Sukuk, standardisation

Delegates at the Future Proofing Your Bank MEFX conference in Dubai on Sunday discussed the vexing issue of product development from an Islamic finance perspective. Standardisation was given the most attention, as it always seems to at conferences where Islamic finance is discussed, but how much progress is taking place with regards to the subject is still not certain.

Sanjay Vig, managing director of Alpen Capital, which was behind several high profile Sukuk, such as the Berber Cement Sukuk in Sudan and the Mobily telecoms issuance in Saudi Arabia, pointed out that the issue of standardisation was not just an issue between regions, but also sometimes between countries. He said that while the Mobily Sukuk was accepted in Saudi Arabia, it was not in the UAE.

Vig also said that sorting out the critical issue of uniformity was vital if Islamic finance wanted to become globally acceptable. Uniformity and replication of products would speed up the process because the complex documentation that is part and parcel of the current trend in Islamic finance was slowing down its spread. Any bank that became involved had to run the product past its Shari’ah board, which also added to the time it took to bring it to market. Uniformity would greatly speed up that process, he said.

Ghazanfar Naqvi, director of Islamic products for Saadiq in the UAE added that very few law firms in the region understood Islamic finance and he said they needed “to gear up” to be able to meet demand. One thing that would help product development, said Naqvi, would be if more conventional bankers moved over to Islamic banking. “You cannot teach banking to everyone, but you can teach Islamic [law],” he said.

Delegates were told that not more than 20 to 30 per cent of Islamic banks portfolios from the GCC are invested outside the region and that more diversification of risk was required. This, they were told, would also help to increase the awareness and popularity of Islamic finance.

Vig said that more international listings of Sukuk on exchanges like New York, Hong Kong and London would increase its visibility and he said would assure investors that by listing there, that they were meeting internationally recognised standards.

There was also talk among delegates about the role of Takaful in markets such as the UAE and Qatar where a huge real estate boom was taking place. Many wondered why Takaful had such a small share of the market, compared to conventional insurance, when so much money was being invested in real estate. Others expressed wonderment at why Islamic real estate investment trusts were not more popular, given that India, Pakistan and Malaysia were actively considering them.



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Islamic investors ‘ignore’ important assets

Islamic investors ‘ignore’ important assets
by Reuters on Wednesday, 28 May 2008

Lack of diversity in their investments could mean Islamic asset managers lose out to conventional firms, a report published this week said.

Accounting firm Ernst & Young said Muslim investors hold $1.6 trillion in assets of all kinds, a figure forecast to rise to $2.7 trillion by 2010.

Islamic funds, which invest in accordance with Islamic law, ignore important asset classes and in Saudi Arabia, one of the world’s two biggest markets for Islamic asset management, fund subscription has fallen since 2005, the report said.

“As demand for diversification grows, Islamic institutions will face the risk of losing significant market share to conventional institutions that can provide more comprehensive coverage,” Ernst & Young said in the report.

By the end of March there were more than 500 funds globally that comply with Islamic law, Ernst & Young said in its Islamic Funds and Investments report, launched at a two day Islamic banking conference that ended on Monday.

Some 153 Islamic funds were launched last year, and the figure is projected to rise to 1,000 funds by 2010, Ernst & Young said.

A key gap in the variety of investments offered by Islamic funds are fixed income assets, such as Islamic bonds. Only 7% of Islamic funds target such assets, compared with 22% of conventional mutual funds.

Issuance of Islamic bonds, or sukuk, has been slowed by a global credit crunch triggered by defaults on US home loans last year

The secondary market for the instrument is small, as most sukuk buyers hold the asset to maturity, and bankers complain of a lack of market makers.

Other assets under-utilised by Islamic funds include commodities and Islamic Real Estate Investment Trusts (REITS).

Equities are the dominant asset class for Islamic funds, with allocation above that in conventional funds. In Saudi Arabia, a stock market crash in 2006 continues to weigh on investor sentiment.

“Saudi investor confidence remains low following stock market corrections in 2006,” Ernst & Young said.

Despite the lack of diversity in asset classes, Islamic funds have increasingly diversified the geographical reach of their investments, and last year 76%t of them targeted regions outside the Middle East and Africa, Ernst & Young said.

Last week, Bahraini Islamic lender Ithmaar Bank was among a group of firms to launch a Latin America real estate fund, while fellow Bahraini lender Gulf Finance House has launched an energy fund in Kazakhstan.

Islamic law prohibits interest, and bans investment in certain business sectors, such as alcohol, pornography and gambling.


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