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Islamic fi nance32

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The growth of Islamic fi nance

HSBC Amanah deputy CEO Razi Fakih discusses the growth of Islamic finance and the bank’s

development in opening up markets and offering alternatives to Western

banking practices.

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Islamic finance 33

Michael Jones: As a constituent of the global financial market, how much has Islamic finance grown in prominence in the last ten years? Razi Fakih: Estimates vary. According to The Banker, Islamic assets reached $894.9 billion in 2010, 9% higher than in 2009. While Shari’ah-compliant assets represent only 1% of global assets, the industry has been growing at a compounded annual growth rate of 23.5% from 2006 to 2010.

The Islamic Financial Services Board said in an April 2010 report that the industry’s assets have been growing by more than 20% annually since 2000. It forecasts Islamic profits reaching $32 billion over the next five years and that by 2012 Islamic assets are likely to reach about $1.6 trillion, with revenues of $120 billion. What are the main factors pushing Islamic finance to the fore? The Islamic banking industry has been growing at double-digit compounded annual growth rates over the past couple of years.

Malaysia and the Gulf Cooperation Council (GCC) countries in particular have been beneficiaries of the strong growth. According to management consulting firm Oliver Wyman, the Islamic finance industry is expected to grow at about 20% annually until 2012.

Growth, over the long term, however, is likely to extend beyond the traditional markets of Saudi Arabia, Malaysia and the United Arab Emirates (UAE) as more countries adopt regulations that support the Islamic finance industry. Indonesia and Bangladesh will be prime contenders, given their attractive demographics and regulatory changes to support Islamic finance. We expect India and China to open up to Islamic finance in the coming years.

After weathering the worst of the financial crisis, the Islamic finance industry has made significant progress, which is evidenced by efforts to address risk management issues and governance work being undertaken by the Islamic Financial Services Board, Shari’ah standards led by the Accounting and Auditing Organisation for Islamic Financial Institutions, standardisation of documentation under the leadership of the International Islamic Financial Market and the establishment of the Islamic Liquidity Management Corporation.

These efforts, combined with the sponsorship of customers and support from regulators in the Islamic markets, will ensure continued growth of Islamic finance in the emerging markets of the Middle East and Asia.

Another factor facilitating the growth of the industry is the development of its debt capital markets. There is certainly more room for progress but it has played an important role in supporting the funding needs driven by strong growth in Asia and key GCC markets. HSBC Amanah believes 2011 could see issuances from Europe and Far East countries other than Malaysia and Indonesia.

At HSBC Amanah, we continue to invest in our people and infrastructure with a view to increasing our market share in the emerging markets of the Middle East and Asia. We will continue to broaden

our product offerings and open more Amanah branches. Our launches of two new international banking services – HSBC Amanah Premier and HSBC Amanah Advance – are prime examples of our continued commitment to ensure our products are tailored to meet customer needs and are “best in class” when compared with traditional banking products and services.

Can its growth be quantified in any meaningful way? Besides the assets and revenue growth data provided earlier, competition is intensifying. Data from The Banker shows that about 150 new banks offering Shari’ah-compliant finance entered the market between 2007 and 2009.

In 2010, 18 banks started offering Shari’ah-compliant finance while six conventional banks began offering services via Shari’ah-compliant windows.

How fast and by how much has the business of HSBC Amanah grown in recent years? HSBC Amanah is the world’s leading international provider of Islamic financial services. We have achieved this through

our extensive geographical presence in Asia (Malaysia, Indonesia and Bangladesh), the Middle East (Saudi Arabia, Qatar, Bahrain and the UAE) and the UK.

We also have a complete array of products for a wide range of customers including retail, high net worth, corporates, private banks and institutions. We continuously invest in innovation of our products and services to ensure that we are meeting our customers’ needs.

What products and services are banks like yours most called upon to deliver? Our business is spread across all customer groups. We are consistently recognised as a leading sukuk house and we have led all supranational sukuk issuance. We are also proud to be leading more international sukuk deals than any other house.

Our aspiration is to provide world-class, Shari’ah-compliant banking that offers global connectivity across Asia, the Middle East and Asia. The launches of HSBC Amanah Premier and HSBC Amanah Advance are prime examples of this.

How receptive do you think Western organisations, including banks, have been to understanding and engaging with the principles of Islamic finance? In addition to fully-fledged Islamic banks, there are a significant number of conventional banks with Islamic windows. The majority of the Islamic windows of conventional banks have a dedicated Shari’ah advisory board which supervises their Islamic banking activities to ensure they are Shari’ah-compliant.

We have seen many of the non-Islamic countries, such as the UK, Singapore, Luxembourg and Hong Kong engage with the Islamic finance industry and changing their regulations to facilitate this.

Does Islamic finance provide a real alternative to Western practices, or are they likely to evolve a complementary or even symbiotic relationship in the future?

‘The Islamic banking industry has been growing at double-digit compounded annual growth rates over the past couple of years.’

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Over the past 30 years, the Islamic finance industry has transformed itself from a peripheral financial system to a sizeable complementary system. Islamic banking is for anyone seeking Shari’ah-compliant financial products and services. The users of Islamic finance comprise Muslims as well as non-Muslims. For example, a large portion of HSBC Amanah’s customers in Malaysia are of Chinese origin. The vast majority of Islamic finance customers are, however, followers of the Islamic faith.

What are the most significant challenges that the business of Islamic finance will face in the next decade as it grows in prominence on the world stage? As Islamic finance grows and becomes mainstream in more markets, the key challenges that Islamic banks will face are:

moving beyond core Islamic finance •markets and preparing to embrace the

trade and capital flow from the Middle East to Asiathe need to consolidate•enhancing the industry’s infrastructure •to ensure sustainable growthembracing customers’ evolving needs. •

The industry has grown in the past few years and diversified out of traditional territories into countries with large minority Islamic populations. Besides Saudi Arabia, the UAE and Malaysia, which are the main markets for Islamic finance, other countries that have or are looking to participate in the growth of the industry include China, India, Africa and France. The challenge for Islamic banks is to help and participate in the opening of these new markets.

To advance to the next stage of evolution, there is likely to be consolidation among Islamic banks to gain the scale needed to compete. HSBC believes the industry will have a different landscape in the next five to ten years. Small, single-country players will lack the scale to compete, making them potential acquisition targets. Consolidation in the industry will create

regional players that are better able to meet customers’ increasingly global interests. For this reason, multinational banks are more likely to be able to grow robust Islamic finance businesses.

The industry’s infrastructure will also need to be enhanced to support growth. Steps include building more conducive regulatory frameworks through proactive dialogues between regulators and industry players, encouraging the growth of local currency capital markets, harmonising accounting and Shari’ah standards globally, and increasing the number of branches and call centres so that customers will be more aware of Islamic finance offerings. Lastly, there is a need to focus on building a pool of Shari’ah-trained talent to drive the business. This includes Islamic bankers, risk managers, industry support professionals and Shari’ah scholars.

In the past year, HSBC Amanah has made significant investments to reduce turnaround times for clients and the necessary documentation process, which have traditionally been time-consuming. As a result, some of the documentation process in Malaysia has been halved. In the UAE, HSBC is planning to launch a simplified commodity Murabaha process, which will reduce the amount of documentation needed from customers.

To build a pool of qualified, Shari’ah-trained talent, HSBC Amanah has established a graduate trainee programme to prepare potential business leaders. The bank has also made the Certificate in Islamic Finance by CIMA accessible to staff who want to understand Islamic finance better.

The last challenge involves keeping pace with customers’ needs so that Islamic banks can thrive. Over the past few decades the industry has developed a comprehensive set of products and services, but these are mainly replications of conventional banking products. There is now a need to innovate and enhance the

product offerings so that customer needs will be better met in future.

As the industry strives to meet these challenges, HSBC Amanah has been able to benefit from the resources of the wider HSBC Group. We have been transferring the best practices of HSBC to the growing Islamic finance industry.

In what respect do you feel Islamic finance and Western financial instruments contrast most significantly? Islamic finance differs from conventional finance in that it forbids the payment and receiving of interest and also restricts what funds can be invested in. This precludes alcohol, pork and casinos, among others.

What challenges do scholars face in approving Islamic finance instruments? Are there issues over the number of scholars available or the presence of scholars on multiple bank boards? Shari’ah approval is a thorough process that includes a careful review of a product structure, documentation, execution process, and a post-execution audit by the Shari’ah scholars.

The scholars need to deal with regulatory restrictions, customer requirements, tax regimes, technological limitations and the complexity of some products’ commercial requirements. Based on all these, the scholars will then come up with Shari’ah-compliant solutions. ■

‘In 2010, 18 banks started offering Shari’ah-compliant finance while six conventional banks began offering services via Shari’ah-compliant windows.’

Razi Fakih

Razi Fakih is the deputy CEO of HSBC Amanah. He was one of the founding members of the business and was previously managing director and head of HSBC Amanah’s Global Onshore Banking unit.

HSBC Amanah is widely recognised as a market leader in terms of global reach, innovative products and services and investment in industry-building initiatives.