The deputy CEO of HSBC Amanah, Razi Fakih talks to Stephen Timewell about how the bank is balancing its focus between key traditional Islamic finance countries and products, and expanding into less well established areas.

Q: How do you see the Islamic finance market evolving in 2011 and what are the significant changes taking place?

A: The Islamic banking industry has been growing at double-digit compound annual growth rates over the past few years. Malaysia and the GCC [Gulf Co-operation Council] countries have been particular beneficiaries of this strong growth. According to management consultancy Oliver Wyman, the Islamic finance industry is expected to grow at about 20% annually until 2012.

Growth over the longer term, however, is likely to extend beyond the traditional markets of Saudi Arabia, Malaysia and the United Arab Emirates [UAE] as more countries adopt regulations that support the Islamic finance industry. Indonesia and Bangladesh will be prime contenders, given their attractive demographics and regulatory changes that support Islamic finance. We also expect India and China, both with significant Muslim minorities, to open up to Islamic finance in the coming years.

Razi Fakih, Deputy chief executive officer, HSBC Amanah

Razi Fakih, Deputy chief executive officer, HSBC Amanah

After having weathered the financial crisis, the Islamic finance industry has made significant progress. There is evidence of this in the efforts to address risk management issues, governance work being undertaken by the IFSB [Islamic Financial Services Board], sharia standards led by the AAOIFI [Accounting and Auditing Organisation for Islamic Financial Institutions], standardisation of documentation under the leadership of the IIFM [International Islamic Financial Market] and the establishment of the Islamic Liquidity Management Corporation. These efforts, with the sponsorship of customers and support from regulators in the Islamic market, will ensure the continued growth of Islamic finance in the Middle East and Asia.

The Islamic debt capital market [DCM] will continue to play an important role to support funding needs driven by strong growth in the Asian and key GCC markets. Next year could also see issuance from European and Far Eastern entities (other than those in Malaysia and Indonesia).

Q: The sukuk market declined this year. How do you see this development and what can be done to open up this market?

A: Although the year got off to a slow start, momentum has picked up. The $1.25bn sukuk by the government of Malaysia and the SR7bn [$1.9bn] issue for the Saudi Electricity Company acted as the catalyst for opening up the market. HSBC was the joint book runner and lead manager for both transactions. More recently, HSBC was involved in the $750m sukuk issuance by Qatar Islamic Bank, which garnered the largest order book for a GCC financial institution to date. This points to the current strength of the sukuk market.

Sukuk is an important part of the overall Islamic financial proposition. We continue to see interest in sukuk from sovereigns and corporate issuers. HSBC is positive on the outlook for sukuk because we continue to work with many issuers and have a strong pipeline of Islamic DCM transactions.

Going forward, we think there is likely to be more sukuk issuance from Asia because of the high economic growth and funding needs there. Governments can help to add depth to their sukuk markets by using them as a means to raise capital.

Q: Where do you see areas of growth for HSBC Amanah?

A: Since its launch in 1998, HSBC Amanah has continued to grow and now has a presence in the Middle East, Asia and Europe. Our growth is supported by a team of dedicated Islamic banking professionals and by our ability to provide a full-service proposition to our retail customers, high-net-worth individuals and corporate and institutional clients, as well as by our significant physical distribution network.

We will continue to retain our focus on the emerging markets of the Middle East and Asia and to strengthen our presence in the key markets - Saudi Arabia, Qatar, the UAE, Bahrain, Malaysia, Indonesia and Bangladesh.

Q: Has the growth of Islamic finance in the GCC, especially Saudi Arabia, stalled since the global financial crisis?

A: The global financial crisis did not affect the Islamic industry as much as it did conventional banking, primarily because [the Islamic sector] did not have exposure to derivative instruments. The industry did, however, suffer from customer defaults and a lack of diversification. The defaults do not question the viability of Islamic finance. The industry has learnt from these and is now better equipped to deal with these challenges.

Saudi Arabia is the largest Islamic banking market in the Middle East and we expect it to retain its lead position in the near future. Positive growth in Saudi Arabia will continue to drive the demand for Islamic banking solutions. The long-awaited [new Saudi] mortgage law is also likely to be a significant opportunity. There is clear demand for Islamic finance across the GCC. The Banker has reported that, during 2009, Islamic banking sector assets grew by 29%, versus 7% for the conventional banking sector.

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