Until recently, the growth of the Islamic finance industry has been defined along regional lines. This has meant that the global Islamic finance market’s two dominant geographies – south-east Asia and the Gulf Cooperation Council (GCC) – have evolved somewhat independently of one another, both in terms of regulation and participating investors.
While this situation is beginning to change as Islamic banks expand outside of their domestic markets and sukuk issuance becomes increasingly global, this legacy of regionalism has shaped one of the key challenges facing the Islamic finance sector today: how to achieve greater cross-border regulatory and financial harmonisation.
A global outlook
On this topic, few market players have a better insight than Adnan Ahmed Yousif, president and chief executive of Al Baraka Banking Group. With an Islamic banking arm that has a presence in 15 markets across the GCC, the Levant, north Africa and south-east Asia, the bank has emerged as a truly global player in the sharia-compliant finance sector.
Reflecting on the ways in which the industry can better achieve cross-border harmony, Mr Yousif sees a role for both improved oversight as well as scholarly jurisprudence.
“To me, the answer is a mix of the market adjusting itself in conjunction with some regulatory push. For instance, the Malaysian experience of harmonisation highlights the greater role [that can be played by] central sharia supervision. On the other hand, sharia processes have been harmonised to a great extent by the consistent practices of the scholars in the GCC market,” says Mr Yousif.
In addition, Mr Yousif believes that the function of international organisations, including the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB), in promoting a more globalised marketplace through common professional, regulatory and sharia-compliant standards will continue to be vital.
“AAOIFI and IFSB are the perfect examples of two different sides of the industry. AAOIFI is a multi-stakeholder industry body that includes Islamic banks in its membership and the IFSB only comprises the central banks. Their respective works have been a great force for the success of the industry so far, and their roles and work will be critical for the future growth of the industry,” he says.
Outward push
This process of market globalisation is likely to be accelerated as a number of Islamic banks, particularly in Malaysia and the GCC, outgrow their domestic markets. Most sharia-compliant lenders, like their conventional peers, are pushing further afield and looking to higher growth jurisdictions for their longer term development.
“The GCC region is adequately banked. The competition is making the market more efficient and somewhat crowded. But it seems that future growth will come from other Organisation of Islamic Cooperation [OIC] member countries. I believe that the OIC member countries that have stronger market and economic fundamentals will be able to attract more Islamic banks to consider setting up operations there or acquiring existing ones,” says Mr Yousif.
“South Asia and south-east Asia have large unbanked populations with a strong demand for Islamic banking products. Several countries and north and south of Africa have tremendous unmet potential for Islamic banking.”
As Islamic banks continue their drive into new markets, the global sukuk space is following a similar trend of cross-border growth. For an industry sector that used to be almost exclusively dominated by domestically driven Malaysian ringgit issuances, it has globalised considerably in recent years. Sukuk are increasingly being issued across borders within Asia, but also between Asia and the Arab world.
Notable examples include Turkish lender Turkiye Finans Katilim Bankasi tapping Malaysian sukuk investors in 2014 in a $252m issuance, as well as Malaysia’s sovereign wealth fund, Khazanah, executing a S$1.5bn ($1.11bn) sukuk in Singapore in 2010. Mr Yousif expects this trend to deepen once sukuk are used more frequently as a tool to finance infrastructure development throughout the Islamic world.
“The global sukuk market can be the bridge to channel a good part of sharia-compliant liquidity to the much-needed space of infrastructure finance, especially in OIC member countries. Sukuk are a natural fit for infrastructure finance. Not only is Islamic finance concerned with economic development and growth, the asset-backed structures of infrastructure projects would be easier to develop and scale up for this purpose,” he says.
