Hussein Al Qemzi, group chief executive officer of Noor Investment Group and CEO of Noor Islamic Bank, believes that Islamic finance has the potential to evolve beyond its niche market and become the globally accepted norm in banking. But before it can do this, it must diversify its products and services, as well as achieve greater standardisation.

Q. What are the key forces driving growth, new opportunities and emerging risks in the Islamic finance industry today?

A. The expanding wealth of Muslim countries, especially in emerging economies such as Turkey, Malaysia and Indonesia, backed by the exponential growth of the global Muslim population has led to an increased demand for sharia-compliant products. For their part, non-Muslim populations have also begun to realise the ethical nature and sustainability of such products, a realisation driven by the recent eurozone crisis. This interest has been further sustained by the delivery of innovative, customised sharia-compliant products that can compete with the offerings of conventional financial institutions.

It is not surprising that issuers and investors eye Islamic bonds and sukuk with great interest. For issuers, including government agencies, multinational corporations and development institutions, sukuk help meet funding requirements for large infrastructure projects and business expansion. From the investors' perspective, the value of sukuk is largely stable as it is asset backed, while the bond is convertible to shares and is exchangeable with shares. Sukuk also help investors diversify their portfolio. Given these benefits to both issuers and investors, the Islamic bonds and sukuk sector is projected to register significant growth in the short term.

Despite the bright picture, the Islamic finance industry faces several unique risks. Since Islamic financial institutions do not provide fixed returns in exchange for customers’ deposits or investments, investors may move their money to other financial institutions should the returns not match their expectations. Thus, they could face a liquidity risk with customers withdrawing funds too quickly. To add to this challenge, the financial institution is also required to pay returns to fund providers even if the underlying assets do not earn profits. To avoid such an eventuality, the only solution is to establish a macro liquid inter-bank market that affords liquidity to Islamic institutions.

Q. One of the major challenges facing the Gulf’s Islamic finance industry is the fragmentation of the banking sector. What can be done to resolve this?

A. Global Islamic financial institutions need to come together and look at achieving standardisation of the regulations governing Islamic finance. The lack of such efforts is limiting the growth of Islamic finance. There is a need for balanced, globally accepted regulations that drive growth and stem misuse. The industry itself needs to take a greater responsibility for driving the development of Islamic finance. This is not the responsibility of the regulator. The regulator’s role is to regulate. It is the industry’s responsibility to challenge the regulator with new products that meet the needs of both Muslim and non-Muslim clients.

It is also imperative that we create an enabling environment for cross-border connectivity through Islamic finance. This will require measures to develop domestic capital markets and should go hand in hand with national market reforms, based on international standards. Domestic markets should be strengthened by widening the issuer and investor bases, with more issuances in international currencies to attract investors from around the globe.

Aggressive research and development is needed to ensure the development of products that are competitively priced and truly meet the consumer’s aspirations even while remaining sharia compliant. To this end, institutions offering Islamic financial services, particularly major industry players, must combine their resources to carry out relevant research and development.

A reliable and constantly updated database of global Islamic financial services is critical to monitoring operational efficiency. This too requires concerted efforts from global Islamic financial bodies and institutions.

Q. A report published by ratings agency S&P in September 2013 notes that, while Gulf Islamic banks are outgrowing conventional peers, profitability rates for the two banking models are converging as Islamic banks are taking a more pronounced hit from lower interest rates and non-core banking revenues. What new avenues can Islamic banks look to for boosting their returns going forward? 

A. Given the ethical nature of the concept of Islamic finance, and in light of the eurozone crisis and public anger over the excesses of conventional banks, Islamic banks have recently had the opportunity to emerge as the more reliable financial vehicle and to capture a greater share of the world’s banking industry.

Islamic banking, therefore, has the potential to establish itself as the world’s preferred banking system. But it is simply not enough to say that Islamic finance offers a better way of banking. Nor should our appeal be just to Muslims. We need to offer a real alternative to both Muslims and non-Muslims.

A greater diversity of products and services for the Islamic finance industry to achieve its full potential is the need of the hour. It is important to recognise one simple fact – that the pace of innovation is just too slow. What the industry lacks at the moment is the breadth and depth that investors enjoy in the conventional market.

Greater connectivity between key Islamic financial centres, especially in the Gulf and south-east Asia, will facilitate investor access to a wider range of sharia-compliant products beyond those available in domestic markets. Islamic banks also need to increase cross-border transactions, co-operate more and compete less. An immediate way forward would be to leverage digital, mobile and social media opportunities.

Q. Islamic financial institutions currently face many challenges of working with different sharia structures and interpretations across geographies. Has any tangible progress been made to achieve greater standardisation over the past few years?

A. Standardisation of the regulations governing Islamic finance is a must to ensure the globalisation of Islamic finance. Although regional standardisation bodies exist, adherence to their standards varies from country to country and region to region. It is a matter of serious concern that there is no authoritative global body to regulate and promote Islamic finance. Disagreement and diverse interpretation over what is sharia-compliant and what is not continue to pose problems in establishing the necessary regulations for the industry to develop globally accepted products.

Some people argue that standardisation is an unrealistic goal given the fragmented nature of Islamic finance. I do not agree. There is a need for balanced, globally accepted regulations that do not impede growth or permit misuse.

Q. Do you think Dubai’s ambition to be ‘the capital of the global Islamic economy’ is realistic?

A. Here, I would like to quote the words of His Highness Sheikh Mohammed bin Rashid Al Maktoum, vice-president and prime minister of the United Arab Emirates and ruler of Dubai, who said: “Dubai has the experience, the expertise, the infrastructure and the perfect location to become the capital of the global Islamic economy.”

Dubai was the birthplace of contemporary Islamic finance institutions, with the first Islamic banks emerging way back in 1975. In 2010, the UAE was home to more than eight Islamic banks and financial institutions with 260 branches and whose assets represented 17% of the UAE banking sector’s aggregate assets, according to the UAE central bank. Over the past three years, the Islamic finance sector has witnessed steady growth, particularly in Dubai.

Dubai has carved out a niche for itself as the Middle East’s trade hub of choice, backed by its strategic location as the geographical centre of the world. The emirate offers a convivial and welcoming business environment and is home to millions of expatriates from all over the world. It also boasts a solid government-owned transportation network for trade and passenger traffic to ensure seamless global connectivity. Add to this a sophisticated infrastructure featuring commercial zones and a state-of-the-art communication system – both enabling factors that I am confident will validate Dubai’s bid to grow as the capital of the Islamic economy.

As one of the leaders in global trade today, the UAE shares cordial bilateral ties with a large number of countries. This strengthens Dubai’s potential to develop a state-sponsored but internationally accepted quality standard for the global Islamic economy.  

Q. Addressing short-term liquidity management of Islamic financial institutions on an international basis remains a key challenge facing the industry. How best do you think this challenge can be met?

A. Islamic banks lack a mature Islamic inter-bank market. The present Islamic liquidity vehicles are few and far between, and cannot withstand the injection or withdrawal of significant cash amounts.

A truly macro liquid inter-bank market solution enabling institutions to park funds for the medium to long term is needed. An ideal solution is one that involves standardisation and facilitates transactions of substantial size.

Competition between conventional and Islamic banks has segmented the market and delayed the development of robust liquidity. Islamic banks need to practice greater co-operation with one another and with their conventional banking counterparts.

In August 2013, the International Islamic Liquidity Management Corporation, an international institution established by central banks, monetary authorities and multilateral organisations, launched the $490m inaugural sukuk. This was done to raise liquidity in sharia-compliant markets for Islamic financial institutions, which in turn would drive international investment flows, trade and financial stability. Such efforts have helped Islamic finance capture a share in the global financial system through offering sharia-compliant products and services, helping the industry to evolve as a more sustainable and equitable alternative to conventional finance.

Q. In what ways do you see the global Islamic finance industry evolving in 2014 and what are the key challenges and opportunities?

A. In 2014, the industry will witness an expansion of its global footprint with more multinational financial institutions offering Islamic finance options. Undoubtedly, this growth will trigger the delivery of innovative Islamic financial solutions in the short term and eventually greater standardisation.

Five years after the onset of the global economic crisis, there is still much cynicism and anger directed at the conventional banking system. People across the globe have a hunger for a more ethical, transparent and robust financial system. Islamic finance could fill that need, but to do so it must be able to deliver products and services that are globally accepted. Today, that is not possible.

Apart from standardisation, the biggest challenges facing the Islamic finance industry are its fragmentation, lack of innovation, weak liquidity and weak accounting and disclosure frameworks.

At the product and service level, we need to move away from simply mimicking conventional finance. We need to think outside the box to innovate and better understand market behaviour and customer psychology. What is it that the customer requires from a bank or takaful company? We will only be able to compete with our conventional counterparts effectively when we can answer that question. 

Hussein Al Qemzi is the group chief executive officer of Noor Investment Group and CEO of Noor Islamic Bank.

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