Islamic Finance Industry Must Broaden Portfolios

8/14/2019 Islamic Finance Industry Must Broaden Portfolios

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Islamic finance industry must broaden portfolios

Islamic finance is winning many fans but further evolution is necessary.

Islamic investment banking is being described as the darling of the new

financial age. At least that has been the overriding theme of much of theindustry talk and articles written since the onset of the global crisis. OneAsian newspaper recently described Islamic finance as the emerging "blueocean", which is a reference to the business strategy book written by W.Chan Kim and Renée Mauborgne of INSEAD, an international businessschool. The two business gurus promote creating new market space or"blue ocean" rather than competing in an existing industry.

Islamic finance certainly fits this description. However, much of what hasbeen written fails to acknowledge that the sector has been hurt by the

global financial crisis too - and it would be unrealistic to think otherwise.And moreover, it may turn out that Islamic investment banking will finditself reproducing some of the characteristics which make conventionalfinance so successful.

Of course, that is not to say that a prudent, asset-backed banking modelsuch as the one on which the Islamic finance model works does not havegood reason to look to the future with optimism. Unquestionably it does.

The industry is currently worth $700 billion (Dh2.6 trillion), according to

rating agency Moody's, but has the potential to amount an impressive $4trillion. Although precise figures are not available, the rate of theindustry's expansion is estimated at somewhere between 10 per cent and20 per cent annually.

Another reason for optimism is the fact that many recession-weary financeexperts in the West are coming round to an acceptance of merits of Islamic banking.

The ethical principles which form the cornerstone of the industry are seen

as a more sustainable alternative to conventional investment banking,which has found itself accused of unhinging the global economy.

So it is almost inevitable that the current furore in international bankinghas resulted in the surge of interest in Islamic finance we're now seeing.

The Sharia-compliant sector is emerging from the global financial crisis ina relatively healthier position than its conventional counterparts.

Any Islamic bankers who migrated from conventional institutions must

think themselves most fortuitous when they look at the position their oldcolleagues now face.



Their favourable situation, however, did not come down to luck. Rather,Islamic banking made its way through the worst of the financialconflagration primarily on the back of its more prudent risk managementprinciples.

That is not to say that the sector did not suffer at all - according toStandard & Poor's, sukuk issuance globally fell 56 per cent year-on-yearto $14.9 billion last year, largely mirroring the same curve as theirconventional version, the bond.

It remains to be seen quite how fully regional states and corporates willuse debt issuance in the post-crisis era, though there is a feeling amongstinsiders that the private sector will be more inclined toward it if centralbanks take a lead.

Islamic funds are struggling, too. The average return for Islamic equityfunds for 2008 was the equivalent of -39 per cent, while the averagereturns for the first quarter of 2009 stood at the equivalent of -3.7 percent, according to Ernst & Young.

Meanwhile, Islamic private equity is also hobbled by the slump and thebroader issue of exit strategy, which has long dogged this particularsector.

While these nasty side effects of the global slump will pass in time, twochallenges remain to be tackled, especially in the Gulf, if the industry is toreach what many see as its significant potential.

Firstly, Islamic finance currently lacks diversity in its investment bankingportfolio. Put simply, the product and service offering is not deep enough.If the industry wants to evolve from being a niche player - albeit operatingprofitably in its "own space" - Islamic innovators would do well to look formore equivalents to conventional vehicles. Just like traditional investmentbanking, a diverse range of asset classes offering multifaceted products

will be necessary.

Secondly, and this is interrelated to the need for more products, thesector, just like the whole region, has become over dependent on realestate. But given the real estate asset deflation witnessed across the Gulf over the last year, that strategy, at least for now, has lived out its lastdays.

A more balanced spread of asset classes will help the industry to reduceits vulnerability in any one sector. This, in turn, will give it the depthneeded to win over more customers, and at a time when many are lookingfor alternatives to the conventional system this can only be a good thing.



(By Trevor McFarlane/Gulf News)

Islamic finance links:

www.gifc.blogspot.com

www.globalpro.com.my

Islamic Finance Industry Must Broaden Portfolios

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