Dec 10, 2010
Oct 27, 2010
Oct 18, 2010
Islamic Investment and Finance Industry
Islamic Investment and Finance Industry
Post 2009 and beyond
(A sustainable alternative)
After 3 decades of uneven and sporadic growth, the strength and the health of the Islamic financial institutions (IFI) as an industry is well articulated by the fact that the industry is 430 IFI strong in 75 countries out of 195 with a total asset exceeding One Trillion dollar. The industry continues to enjoy an impressive growth rate that is hovering between 15% -20% for the most part the last decade during which witnessed the accelerated Growth. The humble start was thirty years ago to serve the Muslim population, that stand today at about 1.4 billion Muslim. The industry growth could have been exponential, if each country of the 57 Islamic countries established a true Islamic system under its central bank.
On the asset management and funds side, as an industry came along way since its start in the early 90’s , presently, the number of funds is exceeding 700 funds globally with asset under management (AUM) touching $ 1/2 Trillion dollar globally for all asset classes.
On the other side, Sukuk manage to reach in 10 years of its existence an issuance of about $ 24 billion in 2009 and it’s expected to climb by 50% in 2010 reaching around 30 billion dollar near the level of 2007 which is line with the expected growth in governments spending during 2010 and beyond.
Those figures confirm that, growth will continue to be the nature of the industry for years to come, with plenty of room for more growth in the asset management activities and Sukuk issuance parallel to that the generic growth in the IFIs with more countries adding Islamic investment and finance at the national level instead of standalone Islamic financial institution.
Those numbers take into account the year 2009 crisis, with that in mind , the year 2009 will be remembered as one of the important milestone and a landmark year for Islamic investment and finance industry as well as the debt and capital market where it passed the ordeal of the crisis and confirmed its resilience and strength, regardless of the fact that few IFI’s witnessed different level of difficulties during the crisis due to operation problems i.e. heavy asset concentration, green field projects, valuation and weak risk process as those IFIs are few, similarly transactions, in particular Sukuk have its share of the crisis as well as Funds that experienced the liquidation of about 30 funds.
The recent financial crisis and its aftermath present the industry with a unique opportunity to join forces and resources to come to the forefront and reinstate itself as a main stream provider for debt and equity globally, as well as a lawful and genuine alternative that is sustainable and reliable. As the world come to know, it is the first time that Islamic investment and finance is being considered as an alternative to the present structures and schemes in term of products and solutions, accordingly we should capitalize on this reality i.e. Islamic investment and finance, which is no longer a phenomena or a hype, and enhance Shari’ahsim system presence globally.
In view of that, we should label the year 2009 as the year of the rebirth of Islamic investment and finance in the form of a new paradigm that have to evolve under the name; Shari’ahsim System considering that we already went through three decades of extraordinary growth that was filled with ups and down, marked by trials and errors thus creating a fragmented industry which is natural for the proper evolution of Islamic investment and finance leading toward the industry institutionalization, standardization and globalization.
With that in mind, the Islamic countries as well as IFIs operating in those countries as a whole should be, and must be turned into the main source for the industry i.e. Shari’ah; in term of innovations, development, groundbreaking structures, and new funds as well as regulations and standardization while preserving and protecting the industry reliability and integrity. This could only be possible if the Islamic countries consider seriously the implementation of Islamic system for investment and finance through their central banks and capital market authorities which will eventually, lead to a worldwide regulatory and supervisory structure.
In the same line of thinking, national and international institutions jointly with their regulators should collectively invest in research and development of Shari’ah complaint products and structures including Sukuk and funds to foster uniformity and conformity of Shari’ah compliant structures and products. In parallel contribute to the education of the public and its awareness about the Shari’ah complaint investment and finance.
Taking advantage of this new reality could only come through Innovations; as innovation is one of the major drivers for the industry which will in turn expand the products and services offerings and mix. As a result, growth will be ignited in the industry as a whole; however, innovations should come only from within the Shari’ah guidelines and not mimicking or Islamize conventional structures and products. Also innovation should be driven by needs and demands and not just for the sake of innovations.
Taking into consideration the future of the global financial industry and it is growing regulations and complications, existing Shari’ah complaint structures and their Fatwas should be revisited, reviewed and consolidated as well as documented, thus establishing a stronger foundations by going back to the basic which will pave the way to standardization and eventually the globalization of uniform structures and formats that is Shari’ah complaint and acceptable to the critical mass both Muslims and non-Muslim without compromising its authenticity and integrity.
We should also concentrate on the fact that Islamic investment and finance revised and new products should be accepted globally through embracing best international practices in term of transparency, disclosure, compliance, governance and risk without compromising the adherence to Shari’ah guidelines as a threshold to globalization.
Institutionalizing Shari’ah complaint products and structures should be a priority at the national level for the institutions as well as the regulators, and that could only become a reality through creating a Unified Shari’ah Supervisory Board under the Central Banks and Capital Markets Authorities, thus enhancing the standardization of Fatwas and structures while eliminate doubts and suspicions about the industry and its products and structures. Also eradicate disputes over conformity among practitioners, scholars and investors.
Sukuk is one of the pillars as well as an anchor product of Shari’ah complaint investments and finances even though as instrument its only one decade old, which went recently through a long waited questions and queries that become later a discrepancy and a test of existence. In particular the conflict between the Sukuk documents and the governing law of the Sukuk, besides the transfer of asset to Sukuk holders through the trust in case of default. Such set backs was needed to refine Sukuk. Accordingly, the time is right for the Sukuk to move to the next level of its development and evolution.
First; Shari’ah Supervisory Board duties should go beyond issuing Fatwa for Sukuk, they must be fully responsible and accountable, from the fatwa to implementation, execution ending with operations and trading. (This role should apply to all related Shari’ah complaint structures and products)
Second; Introduce Sukuk at the retail level, thus expanding the trading platform of Sukuk to augment accessibility.
Third; Expand the secondary market, which will enhance its liquidity and marketability.
Fourth; Long Term Sukuk ( + 10 years) is to be introduce to increase its diversity and attractiveness of the Sukuk.
Fifth; advance and encourage issuance of Sukuk for all three terms (short/medium/long) to expand the depth of secondary market.
Sixth; Sukuk to become a saving instrument option for individuals.
Seventh; Sukuk issuance cost to be to driven down, allowing Med - cap businesses to become an issuers.
Eighth; infrastructure and mega projects originators and sponsors should utilizes Sukuk for its financings.
Considering those recommendations will restore confidence in Sukuk and attract sizeable liquidity while opening a new window for individual’s savings, also expanding the secondary market. Similarly, give flexibility to asset manager for better asset allocations as well as developing more innovative products with different tenors and value involving Sukuk. In the same time, governments will have additional tool to manage its money supply.
The year 2009 will also be remembered for the rediscovery of the importance of risk issue as well as compliance. A new risk that becomes very obvious to be considered seriously. It is called Shari’ah Compliance Risk, which is the possibility that the financial services or products is not or will not be in compliance with established Shari’ah principals and standards.
As a term, definition and process, this risk should be incorporated in the risk management for IFIs as well as transactions and funds. This risk should be integrated in every risk assessment and treat it as a standalone risk in the risk management process by every risk officer involving the Shari’ah internal auditor and the Shari’ah Supervisory Board. The regulators should check this risk for all IFIs as well as their products. The recent troubled transactions and Sukuk were a strong testimony for the need of a well identified Shari’ah Compliance Risk and it’s mitigates that is usually is not found in the fine print. The impact of non-Shari’ah compliance on IFI goes beyond the financial losses to negatively damage credibility and reputation of the IFI.
While waiting for the recovery to accelerate in the financial sector and most recently the euro zone problems to be resolved, the industry should be taking advantage of the abandoned opportunities, which will position them to enjoy the upside of the global economy; Islamic financial institutions (IFIs) should rediscover their niche and grow into those untapped segment and products as well as geographic areas as dictated by needs and demands not by trends or imitations. For example Private equity, particularly the med-cap segment is one of the asset classes that yet to be tapped by Islamic investors with great potential for growth. In a nutshell, IFIs and Asset Managers should find the need to fill a niche.
Knowing that strategies are not time oriented, but events driven, for that reason we need new strategies for new realities, and as a result strategies must be revisited and reviewed, if not a completely revamped. Both internal and external environment of the IFIs should be involved including clients and services providers. IFIs and
Asset Managers should be ready to bounce back and be transformational.
In closing, going back to basic is not an option under the present market conditions, it is a must process to master our basic products and services while rebuilding our industry future on a solid and sound foundations, thus creating a real economy for the benefit and prosperity of individuals, societies, institutions, businesses and countries regardless of their beliefs and political orientations.
Looking forward, the industry should be categorized and viewed as well as criticized by the other camps through transparency and compliance to Shari’ah guidelines by institutionalization and standardization which eventually enabling the new Shari’ahsim system to be a worthy contender and player in the growing global financial market. Thus, making it a sustainable and consistent alternative.
May 14, 2010
Mar 13, 2010
Mar 5, 2010
Feb 28, 2010
Feb 22, 2010
Feb 21, 2010
Subscribe to:
Comments (Atom)