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WorldSeptember 1 2014

Standard Chartered Saadiq welcomes Islamic internationalisation

The increasingly international outlook of the Islamic finance market place is providing new growth opportunities for Islamic banks and, according to Standard Chartered Saadiq, Malaysia's chief executive, Wasim Akhtar Saifi, is also offering much-needed solutions to the industry's longer term liquidity management problems. 
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Standard Chartered Saadiq welcomes Islamic internationalisation

Traditionally, the Islamic finance industry’s growth has been driven by the domestic performance of markets such as Malaysia and Saudi Arabia. With total assets now close to $2000bn, this has been a considerable achievement. Today, however, a growing number of cross-border transactions point to the developing internationalisation of the sector. This trend is offering Islamic banks new growth opportunities along key international capital corridors, while also providing fresh solutions to long-term challenges, including their liquidity management. 

In a recent example, Turkish lender Turkiye Finans Katilim Bankas commenced its five-year RM3bn ($933m) sukuk programme through an RM800m issuance on June 30. This was the single largest Malaysian ringgit-denominated foreign issuance in the country, as well as the first time a Turkish lender has tapped the Malaysian market to raise capital.

“This has created an opportunity for other Turkish issuers to follow suit,” says Wasim Akhtar Saifi, global head of Islamic and consumer banking, and chief executive of Standard Chartered Saadiq, Malaysia.

Economies of scale

In a positive development for the industry as a whole, the scale and volume of cross-border sukuk issuances has been increasing, helped in part by Malaysia’s leading role in this dynamic. “I think in the past few years we have seen a greater trend towards the internationalisation of the Islamic market place. Malaysia really has been opening the ringgit market to foreign issuers and we have seen corporate and financial institutions from around the world issuing through Malaysia, which facilitates the creation of a global market place,” says Mr Wasim.

Yet, these issuances are also linked to the dilemma of short-term liquidity management for Islamic banks. While the volume of sukuk issuance in local currencies has grown, there is a dearth of options in US dollars and euros, which has created significant challenges for the banking sector. “The banks have been facing a real challenge on what to do with liquidity in these hard currencies. Traditionally, the banks would look at the unmatured tenors of existing sukuk, with remaining maturities of three months or six months, to try and take care of short-term liquidity,” says Mr Wasim.

The formation of the International Islamic Liquidity Management Corporation (IILM) in 2010, an international institution designed to enhance cross-border investment flows and international links in the Islamic finance space, has helped in this regard. To date, the Kuala Lumpur-based body has issued $1.35bn in largely short-term highly rated paper, which has provided Islamic banks with an additional liquidity management tool.

As the frequency and scale of IILM issuances grows, it is expected to go a long way to meeting the liquidity management demands of Islamic banks. Similarly, as cross-border sukuk issuances increase and a number of non-Islamic sovereigns enter the market, it is hoped that a greater number of corporate issuances in these hard currencies might emerge.

Outside of the box

In tandem with the liquidity management quest, building on the recent growth of cross-border Islamic finance flows will be vital. “The industry as a whole must work hard to facilitate a greater role for trade and capital flows in its current activities. At present, the substantial trade and capital corridors that exist between Malaysia and the Middle East are structured along conventional lines. If these flows were to become sharia-compliant, it would provide additional impetus for the further internationalisation of the Islamic finance sector,” says Mr Wasim.

To this end, Malaysia, which is acting as a hub of innovation and expertise for the global industry, is pushing forward with the development of new regulations and products designed to expand the scope of the Islamic finance industry’s activities. This is providing fresh hope in terms of the maturation of the market, particularly as it expands into new sectors such as trade finance. For the Islamic banks in particular, this trend is promising.

“Traditionally, Islamic trade finance was quite a limited offering. Therefore, exporters and importers tended to be more comfortable engaging with the conventional space because they didn’t see the availability of products and options in the sharia-compliant sector. But the Islamic trade finance offering has expanded, and now we are seeing innovation and product development comparable to what you are seeing in the conventional space,” says Mr Wasim.

Moving forward, the industry will require greater levels of global institutional and multi-lateral co-operation. In February 2014, the Bursa Malaysia and the Saudi Tadawul signed a memorandum of understanding to formalise greater long-term collaboration aimed at enhancing financial and economic links between the two exchanges, an agreement that could have significant implications in terms of cross-border Islamic finance flows. This kind of international engagement will be a significant boon for the industry, and the banks, as they tap into this growing global market. 

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