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Country reportsNovember 7 2012

Noor Islamic Bank pushes Islamic finance towards maturity

Islamic finance is increasingly being viewed as a credible alternative to conventional finance, but Hussain Al-Qemzi, group chief executive of Dubai-based Noor Investment Group and chief executive of Noor Islamic Bank, recognises that Islamic institutions must work together if they are to compete with conventional banks.
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Noor Islamic Bank pushes Islamic finance towards maturity

Q. What is Noor Islamic Bank’s growth strategy?

A. Our growth strategy is one of prudent growth, as we seek to extend the reach of our corporate advisory, capital market and structuring capabilities. This year will be our first full year of sustained profitability, in line with our five-year forecast when we launched in 2008. We are continuing to develop our retail offerings, with a strong focus on enhancing our customers’ online and mobile banking experience. At the same time, we continue to seek opportunities in international markets as cross-border investment opportunities emerge. Currently that is Turkey and south-east Asia.

In Turkey, we have closed Islamic mandates valued at nearly $3bn in the past three years, the latest of which is a $450m facility for Al Baraka Turk Bank, the largest Islamic finance deal in the history of Islamic banking in Turkey. In south-east Asia we believe the growing economies will provide significant opportunities to expand our cross-border business. We are keen to build relationships and co-operate with other banks on cross-border deals. We believe this route offers us greater growth opportunities than establishing a physical presence in markets outside the United Arab Emirates.

Q. Which area of Islamic finance do you see as holding the greatest growth potential for the Middle East region?

A. The International Monetary Fund has estimated that $800bn will need to be invested in infrastructure projects in the Gulf countries in the next five years. This represents a tremendous opportunity for Islamic finance. At a time when the world’s conventional banks are offering fewer and shorter loans, Middle Eastern governments and companies are being forced to consider other options for finance. Islamic financial instruments have the potential to become a key funding source for infrastructure needs. 

In fact, the regional shift to Islamic finance is already under way. According to international ratings agency Standard & Poor’s [S&P], the Gulf Co-operation Council [GCC] market saw $19bn of sukuk issuance up to July 2012, roughly equivalent to total issuance in 2011. Of that $19bn, infrastructure financing represented 30%, compared with just 7% in 2011. I expect to see this trend continue, with governments and companies tapping the sukuk market as it becomes more liquid, reaches across borders and grows in scale.

Q. To what degree has the Arab Spring favoured the emergence of Islamic finance in north Africa and how promising a market do you see it as being?

A. On the surface, north Africa is fertile ground for the Islamic finance industry. However, despite majority Muslim populations in Egypt and the Maghreb countries, Islamic finance in north Africa is underdeveloped in comparison with the Gulf region. As a result of the Arab Spring, governments have begun to put in place measures aimed at encouraging the development of Islamic finance. Certainly, the economic case for Islamic finance cannot be denied.

In Egypt, youth unemployment is in excess of 20%; Tunisia is staring at a budget deficit of 7% this year and may require international financial support; and in Tripoli, the Libyan authorities face an uphill battle to restore confidence in the country’s battered economy. It is unlikely that conventional banks will provide the necessary funding to get these countries back on their feet. So, the reality is that these countries cannot afford to ignore Islamic finance, whether it is for infrastructure development, or corporate and sovereign sukuk issuance aimed at attracting investment funds from the Gulf.

At Noor, we are keeping a watching brief on the situation. For the present, the political situation remains unclear. Further unrest could negatively impact the investment environment in the Arab Spring countries but if the situation stabilises, I anticipate the Arab Spring economies will steadily improve, along with investment appetites. When that happens, we will assess the business opportunities that emerge.

Q. To what extent is Islamic finance in the Gulf serving as a conduit for trade and capital flows between Asia and the Middle East? And also in helping to build bridges between the banking sectors of the two regions?

A. Historically, Asian investors used to come to the Middle East. However, I foresee the reverse happening as Asia grows and proves its resilience. There is already strong evidence that Gulf-based investors are becoming increasingly active in Asia with an estimated 10% to 11% of total Gulf outward investment going to Asia. This trend has been fuelled by a number of factors including changes in the investment preferences of GCC countries, a more attractive investment climate in Asia, geopolitical interests and the strengthening of trade links between the GCC and Asia.

As a result of these greater links, we are seeing more Asian and GCC institutions tapping the investor appetite for Islamic finance. During 2012, both the Abu Dhabi National Energy Company and the Bahrain-based Gulf Investment Corporation have issued sukuk in Malaysian ringgit, a first for Gulf companies. And Malaysian-issued sukuk have attracted GCC investors in greater numbers than ever before. These types of cross-border deals are not only helping to develop the trade relationship between the two regions but also contributing to the more efficient mobilisation and allocation of funds between the Gulf and south-east Asia, strengthening the financial and economic linkages.

Q. How actively is the Gulf Islamic finance industry working to develop the capacity to structure large-scale, multi-currency and cross-border transactions?

A. In recent years, there have been a number of notable examples of cross-border transactions. As just mentioned, during 2012, two Gulf-based companies have issued sukuk in Malaysian ringgit. Meanwhile, at Noor, as mentioned earlier, we have closed multi-currency Islamic mandates valued at nearly $3bn in the past three years, the latest of which is a $450m facility for Al Baraka Turk Bank, the largest Islamic finance deal in the history of Islamic banking in Turkey.

A major challenge for the Islamic finance industry in the Gulf is the fragmentation of the banking sector. There are only a few Islamic banks with the capacity to take on the large international conventional banks. So if Gulf banks are to compete in the international finance market we need to co-operate more and compete less. International banks leverage their relationships with other banks. Why can’t Gulf Islamic banks do this too?

It is a model Noor has successfully used in Turkey where, in the past three years, we have worked with more than 85 financial institutions to close Islamic market mandates. It is only by working together that we can build the scale necessary to challenge the conventional banks.

Q. Which areas of Islamic finance regulation in the Gulf do you think need to be improved to realise the future potential of the market?

A. I would like to see a more balanced, standardised approach to regulation, one that does not impede the sector's growth or open it up to abuse. The different interpretations of what is sharia-compliant and what is not are stifling innovation and the development of products with universal appeal. As an industry we have been too willing to accept the pre-eminent role of the regulators, often under the guise of protecting shareholders or market share. As a result it has been the regulators that have driven the growth of Islamic finance. But I believe that has to change if we are to fulfil our potential as an industry.

Unless we, the practitioners, are more willing to challenge the regulators we will not create the new products, based on the core principles and values of Islam, which will entice customers away from conventional banks. It is our collective responsibility to sit together to develop these products and structures. It is our duty to leverage our collective expertise in order to push regional boundaries of understanding closer towards each other. It is only when we commit to crossing these boundaries that the regulators will be able to do what should essentially be their primary role, to protect customers, to reduce risk and to minimise disruption. All other aspects are our responsibility.

Q. In what areas do you see the global Islamic finance industry evolving in 2013, and what are the significant changes that are taking place today?

A. The global financial crisis has raised the question – is Islamic finance a credible alternative to conventional finance? More and more issuers and investors are coming to the conclusion that it is and that the risk-reward balances in Islamic finance and conventional finance are not that different. As a result, I anticipate that more countries will move to create regulatory and tax frameworks to support and encourage Islamic finance, by providing a level playing field between Islamic and conventional financial instruments.

This broader consensus on Islamic finance structures will help drive investors’ interest in sukuk as they seek alternative sources of funding and investment. Sukuk issuance will cross the $100bn threshold before the end of this year and S&P projects growth of 25% between 2012 and 2015 to reach $200bn. A key driver of this growth will be an increase in cross-border transactions, particularly between the GCC and Asian Islamic finance markets. The recent sukuk issuances by GCC companies in Malaysian ringgit will help to provide the impetus needed for the development and globalisation of the sukuk market.

Q. What needs to be done to build deeper relationships between key banks and markets to enable Islamic finance to compete on a global scale?

A. It is vital for the long-term success of the Islamic finance industry that Islamic banks enhance their capabilities for cross-border activities. If we are to take on the large conventional banks’ entrenched position in international financial deals, we must learn to co-operate with each other, rather than compete. As mentioned, it is a model that we have successfully used in Turkey, where we have worked with more than 85 financial institutions from 26 countries to close Islamic market mandates.

Building deeper relationships between the key markets and between individual banks is critical to the future success of Islamic finance. At the very least, the industry needs to commit itself to finding solutions for basic needs, such as simple cross-border utilisation of liquidity and short-term funding instruments. Only when we are able to take these kinds of preliminary steps will we be able to compete with conventional banks on a global scale.

Hussain Al-Qemzi is group chief executive of Noor Investment Group and chief executive of Noor Islamic Bank

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