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Home :: ISLAMIC FINANCE CENTRES: Cities vie for sukuk leadership status

ISLAMIC FINANCE CENTRES: Cities vie forsukuk leadership status09/10/2014 |

Dubai wants to win the race to become the go-to financial hub for international Islamicfinance but it has many rivals, including London, Luxembourg, Kuala Lumpur and HongKong. EM takes a look at the runners and riders

When Dubai’s Sheikh Mohammed sets his sights ondoing something, he generally succeeds. Witness thegrowth of Emirates, the airline created by the Dubaigovernment in 1985, which is now among the largestin the world. Or the growth of Dubai airport, which isreportedly on track to eclipse London Heathrow as thebusiest international airport by 2015.

As with aviation, so with financial services and Islamicbanking. Building on the success of the DubaiInternational Financial Centre (DIFC), the Dubaigovernment aims to be the leading hub for the shariah-compliant capital market, establishing the DubaiIslamic Economy Development Centre (DIEDC) inDecember 2013.

Bankers say there has been a clear push by thegovernment to support local sukuk issuance. “Most of the borrowing by the government as well asby government related entities (GREs) has been in Islamic format, which is clearly helping volumesto reach a level that cements Dubai’s position as the key player in the sukuk market,” saysMohammed Dawood, global head of sukuk financing at HSBC in Dubai.

Walid Aradi is CEO of Dubai-based Tahseen Consulting, which has researched the competitivecredentials of Middle East financial centres. He believes Dubai has at least three advantages overother regional centres and further afield.

“Dubai has the necessary political backing for its Islamic financial industry and it has legislationwhich is generally aligned with Islamic law, which is not always the case in other financial centres,”says Aradi. “The fact that there are large and liquid pools of Islamic investment funds in the Gulf isanother advantage for Dubai.”

But what may frustrate Dubai’s ambitions, says Aradi, are bottlenecks in human resources.“Although Dubai boasted the first Islamic bank in the world, with the establishment of Dubai IslamicBank in 1975, many of the product innovations and regulatory best practices in the industry havebeen established elsewhere,” he says. “The biggest challenge Dubai faces is attracting anddeveloping a suitable workforce to keep pace with its growth as an Islamic finance hub. While it hasa number of executive training and higher education institutions targeting mid-level employees inthe Islamic finance sector, the UAE has been slow to develop programmes targeting new entrantsand senior level industry leaders.”

Others say that in the context of the Islamic capital market, Dubai has been successful in attractingmore than enough professional talent to support its growth as the main sukuk hub in the MiddleEast. “A lot of human capital now sits in Dubai,” says Dawood. “As well as banks, most of theleading law and accountancy firms have established a presence in Dubai.”

Dawood adds that in any case the growth prospects for the sukuk market are such that the MiddleEast can accommodate a number of financial centres contributing to rising diversity and liquidity inthe sector.

That will encourage other centres that are eager to position themselves as focal points for thefurther development of the sukuk market, with Doha one obvious competitor in the Gulf.

With sukuk attracting conventional investors, intermediaries and (in some cases) issuers, thesehubs need not be confined to financial centres in Muslim-majority countries.

Among the financial centres outside the Muslim-majority nations of the Middle East and Asia, the

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UK remains the focal point for the development of Islamic banking.

THE OUTSIDER

London’s credentials were enhanced in 2013 when it was chosen to host the ninth annual meetingof the World Islamic Forum — the first time that the event was held outside Asia or the Middle East.

According to a recent report published by TheCityUK, there are now six fully shariah-compliantbanks operating in the UK, more than in any other European economy. The same report points outthat Islamic finance has been used in the financing of London landmarks such as the Shard and theOlympic Village, as well as in the redevelopment of Chelsea Barracks and the iconic BatterseaPower Station.

More specific to the sukuk market, notable landmarks in London’s recent history include the listingson the London Stock Exchange of the GE Capital sukuk in 2009, which was the first by a UScorporate, and of the issue from Kuveyt Türk, the first by a Turkish bank. In 2010, meanwhile,International Innovative Technologies (IIT) became the first UK corporate to list a sukuk in London.

Although the Irish Stock Exchange stole a march on London in 2013, with 15 sukuk listings, therecent landmark in the development of the UK as a centre for Islamic finance was this year’s longawaited sukuk issue by the UK itself, which brought the total raised in London in the sukuk marketto $38bn in 54 issues. The £200m sukuk, say market participants, epitomised the UK government’scommitment to remaining at the forefront of the global Islamic finance market.

“The UK has been more prepared than many European countries to modify its legislative and taxcode in order to accommodate Islamic finance,” says Farmida Bi, a partner at Norton Rose Fulbrightin London.

DUCHY AND ORIGINALS

Luxembourg, too, is positioning itself as a key European centre for Islamic finance and has beengiven an important vote of confidence by the backers of Eurisbank, Europe’s fully-fledged Islamicbank, which chose the Grand Duchy as the location for its headquarters.

Of all the world’s centres for Islamic finance, however, none has been more explicit about itsambitions than Kuala Lumpur, with the growth of shariah-compliant financial services a pillar ofgovernment policy in Malaysia. Bankers say that while Kuala Lumpur has emerged as the regionalhub for the sukuk market in southeast Asia, until recently its focus has largely been on building thedomestic Islamic capital market rather than focusing on its potential as an international financialcentre. According to data published by Moody’s, international issuance in Malaysia accounts forless than 10% of the $178bn in total outstanding sukuk, a share which is unlikely to change muchover the short term.

“Malaysian issuance volumes will remain dominated by local currency transactions in the nearfuture, driven by the country’s large and deep base of domestic institutional investors as well as thegovernment’s supportive policies towards Islamic finance,” notes a Moody’s report.

A recent trend has been that this deep pool of institutional liquidity has allowed overseas issuers toaccess the sukuk market, in ringgits and other currencies, significantly strengthening KualaLumpur’s credentials as an international hub for the Islamic capital market.

Indeed, the striking feature of recent non-Malaysian sukuk issuance is the geographical diversity ofits provenance. Bank of Tokyo Mitsubishi (BTMU), for example, has announced plans to issue theworld’s first yen denominated sukuk in Malaysia alongside tranches in ringgit and US dollars.

More recently, Türkiye Finans Katilim Bankasi issued an M$800m ($248m) sukuk out of its ringgitMurabahah programme, the first of its kind from a Turkish issuer.

This bodes well for Malaysia’s ambitious Kuala Lumpur International Financial District project. Nowa 70 acre expanse of wasteland in the centre of the Malaysian capital, this could be transformedover the next decade into the Tun Razak Exchange (TRX), which its developers claim will developinto southeast Asia’s answer to Canary Wharf.

Moody’s comments in its report that it expects Malaysia to remain the world’s largest sukuk marketfor the foreseeable future but regional competition will develop over the next two to three years.None of the emerging sukuk hubs in the region, however, will build anything approaching the criticalmass needed to challenge Kuala Lumpur’s leadership. “We expect the market fragmentation tocontinue amid increased competition as a growing number of new and emerging sukuk issuancemarkets such as Indonesia, Singapore and Hong Kong pass new legislation and roadmaps in aconcerted effort to tap into this fast growing market,” says the agency.

FIRM FAVOURITES

Based on the size of Indonesia’s Muslim population, Jakarta is an obvious candidate to establish anIslamic finance hub. The Financial Services Authority in Indonesia, where there are 11 dedicatedIslamic banks, is drawing up a five year roadmap for the development of a range of shariah-compliant financial services including sukuk issuance.

Based on their pedigree as financial centres, however, Singapore and Hong Kong look likelier hubsfor the issuance and trading of sukuk. “Singapore and Hong Kong both have their own competitiveadvantages as financial centres,” says Ahsan Ali, managing director and head of Islamic originationat Standard Chartered in Dubai. “For example, Singapore has the advantage of being the privatebanking hub for the Asian region while Hong Kong is obviously the gateway to Greater China.”

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Of the two, Hong Kong appears to be the more committed to developing its capabilities as ashariah-compliant hub, with the sovereign’s sukuk designed as a significant step in the process.

Peter Pang, deputy chief executive of the Hong Kong Monetary Authority (HKMA), was clear aboutHong Kong’s ambition as an Islamic financial centre when he spoke about the government’s plansin the sukuk market at a conference in April.

“As an international financial centre and given our unique role as a gateway to China, Hong Kong iswell positioned to provide an effective platform to channel the surplus funds from the Islamic worldto this part of the world where there is a huge financing need to sustain the high growth of the Asianeconomies,” said Pang.

“Our platform will enable Islamic investors to access investment opportunities in Asia, particularlyChina, while at the same time allowing fundraisers to tap into the liquidity pool in the Islamic world.”

Rather than regard Hong Kong as a competitor, the Malaysian central bank has publicly said that itregards the SAR as a key partner in helping to develop a stronger and more liquid Islamic capitalmarket in Asia. This may take the form of multiple listings. “We expect to see more issuers followingthe example of the Islamic Development Bank, which opted for a triple listing in Dubai, KualaLumpur and London for its recent $1.5bn benchmark,” says Ahsan at Standard Chartered.

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