A global oil price boom in the past two years that has armed some of the Arab world’s most affluent investors with extra cash now presents them with the challenge of putting their cash in a variety of investments ranging from bank deposits to equities.
Not far behind the decisions from mainstream investors lie the demands of the Arab world’s Islamic investors. Such investors primarily include devout Muslims who eagerly seek to invest in ways that are compliant with norms established by shariah (Islamic jurisprudence).
These norms include prohibitions on investments in businesses that clash with Islam such as those that allow gambling, the sale of alcohol and the sale of pork. Other financially driven prohibitions include refraining from investments offering a fixed interest based return, while scholars argue that investments in companies that are heavily indebted and obliged to pay large interest on servicing their debt may also be restricted.
Asian focus
There is additional pressure on Muslim investors, hit by the recent crash of some of the Arab world’s stock markets, to invest outside the region, with many analysts predicting that investments in Asia may become the trend this year as the region oversees the rise of some of the world’s most robust growing economies.
Bankers in the Middle East say many affluent investors are still reluctant to return to the western world from where there was a large scale withdrawal of Muslim capital after the 9/11 attacks triggered an anti-Muslim backlash. “Scepticism over returning to the US and Europe still runs high,” says the country head of a foreign bank in the Middle East.
Combining cash with the search for new investment opportunities, many affluent investors are positioning themselves to use Dubai as an increasingly important point of origin – a base from which to establish new links with eastern Asia. The interest in Dubai as a staging post for investors follows its emergence as a thriving financial centre in the Middle East as well as its proximity and frequent flight connections to eastern Asia.
The promise of sharply rising economic growth prospects in the Asian countries of India, China, Japan, Malaysia and possibly Pakistan, presents powerful alternatives to investors at a time when they may be searching for other markets.
The move by investors from the Arab world, using Dubai as an intermediate venue to reach out to Asian financial markets and banks, coincides with a time when Arab governments are taking extraordinary measures to stem uncertainty across their financial markets.
Saudi Arabia recently gave permission to the six million expatriate workers who live in the desert kingdom to begin investing in local equity markets as a way to boost weak investor sentiment after a recent stock market crash. Expatriates living in Saudi Arabia are believed to earn about $35bn annually. They send almost half of their annual earnings to destinations outside the kingdom – a hefty sum which could lift the markets’ sentiment.
“The high oil prices in the past two years have fuelled the Middle East economies. But now, after the losses in the Middle Eastern stock markets, investors are searching for other markets where they want to diversify,” says Majid Dawood, chief executive of Yasaar, a Dubai-based outfit that advises its individual and corporate clients on solutions based on shariah for banking and the financial sector.
Mr Dawood says prospective clients are increasingly seeking advice on solutions for challenges that are essentially about structuring new products. “The demand is rising and the trends are changing. People who invest in keeping with shariah norms don’t just want to park their money somewhere. They want to actively manage it in innovative ways” he adds.
Sukuk growth
The push for expansion of Arab Islamic money outside the region comes at a time when there’s much speculation over new opportunities for the growth of sukuk Islamic bonds this year. The sukuk bond is structured in compliance with Islamic principles but is intended to give investors an opportunity that is similar to the workings of a regular bond.
Middle East bankers say the sukuk market is worth about $15bn but may be poised to grow significantly as investors seek outlets offering fixed incomes rather than face the unpredictability of the financial markets. In Dubai, one leading banker explains the emerging trend when he says: “Stock markets have become places of high risk, the bond markets are relatively more secure.”
Bankers such as Rafe Haneef, the Dubai-based head of ABN AMRO’s Islamic banking arm, however, believes investor appetite alone will not give a large scale impetus to the future of the sukuk market. Issues such as finding mechanisms for global ratings of sukuk and seeking large corporate investors to head in to this market would be vital to make it noticeable globally, he says.
Across Asia, bankers say that the emergence of Dubai as a financial centre with global linkages has helped improve the comfort level among bankers and fund managers seeking to build bridges with the oil-rich Middle East.
“Islamic investors and those seeking to attract them have a need to know where the funds are coming from,” says Ridzuan bin Salleh, the Bahrain-based vice-president of MayBank, a Malaysian Islamic bank. According to Mr Salleh, investors may primarily be seeking the best possible returns for the money but “equally important is to track the flow of funds”.
Western bankers in the Middle East say that local banks and investors still need to deal with issues raised by concerns over money laundering in recent years. After 9/11, central bank officials from the US and other western countries were reported raising concerns over the unregulated flow of funds, in some cases to and from the Middle East.
The case of hawala or hundee was widely cited as an example at the time. This was the mechanism where money deposited with money changers in one country was subsequently delivered through money changers in another.
Concerns over the need for tighter regulations surrounding Islamic funds are still raised by western bankers as an unresolved issue. This is partly because unlike the relative openness of locations such as Dubai and Bahrain, the two emerging centres of finance in the Arab world, a number of other countries remain relatively closed to the outside world.
“Transparency has to be built upon a number of pillars. One is to have locations with relatively free access to outsiders and a publicly verifiable commitment by regulators to maintain a regulatory regime that people outside understand,” says a Middle East-based western banker.
Islamic vs non-Islamic
As Middle East-based financial analysts and advisers position themselves to advise clients on investment destinations, one question on the minds of many is the choice of destinations in Asia. This follows an ongoing debate on the extent to which Asia’s predominantly Islamic countries can attract the bulk of new investments.
However, the push for investments driven by Islamic principles does not necessarily confine investors to Asian Muslim countries. India and China, the primary destinations of choice, are home to minority populations of Muslims, while primarily Asian-Islamic countries include Indonesia, Malaysia, Pakistan, Bangladesh and Brunei.
But analysts believe the world’s most affluent Muslim investors have had a sufficiently long experience in the western world to be tolerant towards investing in a variety of countries as long as the Islamic norms surrounding investments are followed. Before 9/11, a number of such investors ventured out to the western world and invested in some of the world’s leading companies.
“When investors sit down to decide exactly where they would like to invest, they primarily seek out companies, banks and other outlets that do not present a fundamental clash with Islamic norms,” says a former western banker who served in Riyadh and now advises a group of Middle Eastern investors. Others believe pious Muslim investors are bound to return to western countries in the long run.
