Sunday, February 16, 2014

RUSHDI: Knowing the numbers game in Islamic Finance

‘A good decision is based on knowledge and not on numbers.’ — Plato.

A day does not go by in the global media without an article on Islamic finance, but it’s mainly rear view coverage and/or analysis.

Yes, we know about the prohibitions, as stories are generally about the “don’ts,” no interest, pork, alcohol, gambling, etc. Surely, the spirit of Islamic finance is about the “positives” of sustainability, governance, stewardships, financial inclusion, etc.

Yes, we know about the connection to ethical finance, meaning financing, investing, and insuring in the non-sin economic sectors. But, is ethical finance talking about Islamic finance? Yes, we know Islamic finance is about connecting the real economy to finance economy, hence, excesses, derivatives and speculation are prohibited. But, if Islamic finance is both commodity Murabahah centric and real estate biased, then where is the innovation that finances the other nine economic sectors?

Yes, we know the size, US$1.3 trillion (RM4.3 trillion), and growth rates, 15%-20% per annum, but is it profitable growth? What happens to Islamic finance when the price of oil goes to less than US$50 per oil barrel? When will it de-link from oil?

Yes, we know about sukuk, from size, issuance, growth, league tables, etc. If sukuk has become the alter ego of Islamic finance, when will we see Mushrakah and Mudarabahah Sukuk spark development of the Islamic equity capital market?

Islamic Finance 1.0

It took Islamic finance 40 years to reach 1.0, that is, US$1 trillion in size, or less than the 1% of global banking assets. During the launch phase, the KPI (key performance indicator) was general awareness about the collateral based finance niché market, ie, rules of engagement.

It was a Muslim country phenomenon, led by the UAE (Dubai), Malaysia, Bahrain, etc, and “international” transactions took place in London and money was managed in a compliant manner by the private Swiss banks for high net worth individuals.

The key takeaway question during this time period: Was the enabling foundation and infrastructure for growth, innovation, development, and cross border expansion established?

Islamic finance 2.0

Depending on how one views the numbers games, Islamic finance has not breached the US$2 trillion mark, but is expected to reach the milestone before 2016. But, if it’s still Murabahah centric with real estate biased, and continues to focus on the Islamic debt capital market (DCM) with nominal compliant SME, VC, and micro-financing, then we are quick-sand stuck in stage 1.0.

The best way to describe 2.0 is to mention sampling of its attributes, as that will get us to US$2 trillion, satisfying those who are numbers obsessed. It should be remembered that a milestone is just a sign post on the road to development and the positioning of Islamic finance as an efficient alternative to conventional finance.

Some of the signs for 2.0 include:
(1) Wakala based Islamic inter-bank benchmark rates;
(2) short term sukuk (programmes) to address asset/liability mismatch and liquidity;
(3) expansion of project based sukuk to build out infrastructure in Organisation Islamic Cooperation (OIC) and municipality needs indebted western countries;
(4) Islamic bank and Takaful consolidation to achieve critical mass, and robust Retakaful to address “leakage”; and
(5) establishment of OIC (subset is Islamic) asset management hub which implies expansion of Islamic asset classes to include, say, compliant trade finance funds (implies increased trade).

Notice, I have deliberately omitted the usual suspects of standardisation, arbitration, cross currency swaps, bankruptcy/lender of last resort, Shariah scholars, qualified human capital, etc., as we need to “do rather than rehash talk of the known knowns”.

Islamic Finance 3.0

It should no longer be a numbers game, at, say US$3 trillion, as it will still be less than 5% of conventional banking. Islamic finance 3.0 should be about:

(1) Branded as Participation Finance, where focus is on business and over religion and does not represent a “threat” or favouritism towards one religion by a country.
(2) A dedicated sovereign wealth fund that builds out Islamic asset classes and acts as feeder to pension funds in Muslim (and non-Muslim) countries.
(3) An authentic (electronic) Islamic stock exchange of only Shariah based (OIC/Non-OIC) companies (Islamic banks, Takaful operators, leasing companies, iREITs), Islamic closed end funds, exchange-traded funds, listed tradeable Sukuk, etc. Starts process (a) financing a knowledge based economy and (b) reducing DCM bias!
(4) Harvard-like business school for Islamic finance and the US$2.6 trillion halal industry, as today’s kaleidoscope of Islamic finance certificates, courses, diplomas, training, etc, scattered in many countries produces varying qualities of graduates! Furthermore, Islamic finance industry seems to cherry experienced conventional bankers to train them in Islamic finance over few weeks/months, and the graduates cannot compete!
(5) Convergence by financing Muslim consumerism of the US$2.6 trillion halal industry’s six silos, food/beverage, clothing/fashion, media/ entertainment, pharmaceutical, cosmetics, and tourism/travel.


“Anyone who thinks there’s safety in numbers hasn’t looked at the stock market pages.” — Irene Peter.


Rushdi Siddiqui, a former global director at Dow Jones Indexes and global head at Thomson Reuters in Islamic finance, is now president/ED of a (halal) US-based agro-food company. This article first appeared in The Malaysian Reserve, 17 Feb 2014

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