TMR: Stakeholders urged to explore trade financing

By Kazi Mahmood

Trade financing, one of the ready opportunities available for Islamic banks to tap, is among the many areas where the industry has not yet made its mark, said a report published by the Kuwait Finance House Research Ltd (KFHR).

However, one of the challenges to the Islamic trade financial sector is the readiness of the Islamic financial institutions to proactively develop products to meet the changing needs of the market players involved in global trade, the report said.

“By expanding this part of Islamic financial product, it will open up to wider sets of opportunities to Islamic finance eg the halal industry.” the report, entitled “Islamic Finance Outlook 2014” indicated.

The general preference of the Islamic banks is attributed to be a direct lending over trade financing, keeping transactions straightforward and simple, and they should move away from that by expanding into other areas of business.

According to the report, these are the sectors in which Islamic banking and finance could penetrate, as there are substantial market potential for industry suppliers to tap into. The sectors are:

• Infrastructure and government developmental plan in the Organisation of the Islamic Conference jurisdictions.

• Increasing participation of western financial centres to tap the industry and this will create a healthy competition and encourage greater innovation.

• Greater partnership among the regulatory and supervisory bodies to enhance regulatory frameworks for Islamic financial institutions.

• Low penetration rates of the various Islamic finance sectors in most jurisdictions.

• Strong support from various multilateral and international organisations.

• Increasing trends of cross-jurisdictions partnership and financial linkages to facilitate cross border financial activities of Islamic finance.

• Increasing awareness and familiarity among stakeholders on the value propositions of Islamic finance.

In order to be able to join these sectors, Islamic financial institutions need to demonstrate how Shariah-compliant products are economically feasible and competitive as per the conventional finance, in order to generate further growth and acceptance of the industry’s offerings.

Meanwhile the report noted that in 2013, of the top 10 largest sukuk issuances in terms of issue size for 2013, six of these sukuk were issued by non-Malaysian issuers domiciled outside Malaysia.

The increases in shares of other jurisdictions in 2013 were supported by some notable sukuk issuances in non-Malaysian domiciles.

In 2013, Malaysia once again led the primary market issuances with a 69% share of total issuances, followed by Saudi Arabia at 12%, United Arab Emirates (UAE) (6%), Indonesia (5%), and Turkey (3%).

In 2012, the respective shares of top primary sukuk market issuers were as follows: Malaysia 74%, Saudi Arabia 8%, UAE 4.7%, Indonesia 4.6%, Qatar 4.2% and Turkey 1.8%.

Compared to the previous year (2012), the share of Malaysia declined as a proportion of total issuances while those of others increased. The increases in the shares of other jurisdictions in 2013 were supported by some notable sukuk issuances in non-Malaysian domiciles.

Overall, Islamic finance in 2014, is set to experience another increased momentum, particularly in the sukuk market with the issuances by few sovereigns (eg) the UK and Luxembourg.

The Islamic banking sector is likely to witness a surge in demand underpinned by greater economic participation of Muslim nations as well as driven by stronger demand from the population towards Shariah-compliant or ethical financing solutions.

Instrumental roles played by multilateral organisations and regulatory bodies are expected to further benefit the Islamicbanking and takaful industry, especially to low-to-medium income customers as the financial inclusion objective has been strongly emphasised moving forward.

Thriving interest of key global/regional financial centres in developing Islamic finance, for instance London, Hong Kong, Singapore, Luxembourg, further adds weight to the strong prospects of Islamic finance as markets globally look for alternative sources of funding and investment avenues.

The industry will continue to grow, driven by both demand and supply factors, and further facilitated by government agencies and financial regulators. In the next few years, we foresee the industry’s focus into four key spectrums that will take the industry to greater heights, the report added.

[THE MALAYSIAN RESERVE, 10 Feb 2014]