Building the Foundation for Islamic Finance in New Zealand

Auckland-based conventional finance wholesaler Foundation Capital Markets Limited (Foundation) is the first to introduce a Shariah compliant product in New Zealand through an Islamic mortgage product called “Manzil”, which means home in Arabic.

The product, which was made available in late 2006, was tailored following a series of consultations between Foundation, the Federation of Islamic Associations of New Zealand (FIANZ) and its ulama (religious scholars). Foundation managing director Prem Maan (pic) told Islamic Finance news that Manzil was among many other products developed to cater for sections of the New Zealand market other providers had ignored. “We do have aspirations to develop other products for the Islamic capital markets as and when the opportunity arises,” he said.

In a frank interview with Islamic Finance news, Prem admitted that developments in Islamic finance have been slow in New Zealand, where Muslims make up less than 1% of the population. He tells us why and relates Foundation’s journey.

What propelled Foundation to come up with Manzil?
Foundation has a corporate philosophy of empowering home ownership. With this in mind, we have designed products to cater for those sectors in New Zealand society with needs that are not met by products by traditional banks. We identified the growing Muslim population as one such sector that had no products and set about designing a product based on Shariah and New Zealand laws.

What challenges did Foundation face in structuring the product?
One of the key challenges from a design perspective, as a conventional Western capital markets-based organization, was in getting adequate information on Shariah. Another problem that we feel many parties underestimate or ignore is making a Shariah compliant product work within New Zealand law.

How did you overcome these challenges?
We studied products that existed in the comparable markets of the US and especially the UK, and consulted widely with local Muslim community leaders and eventually with some key offshore clerics. FIANZ was very helpful in this regard.

How long did it take the company to realize the product, from conceptualization to its launch?
This was a very long process. It took us around 2½ years. Being a pioneer is never easy and this was no different — every step of the process took far longer and cost more than we had anticipated.

Does the company screen the credibility of the companies that wish to market the product?
A company has to qualify as an approved mortgage manager in order to market any of our residential finance products. To become an approved mortgage manager, the company has to meet our qualitative and quantitative criteria (which include an evaluation of historical performance and the requirement to have a minimum net worth applied in the business).

The company has to sign our standard origination agreement. We retain the right to, and do, undertake random unannounced audits to ensure that our criteria are being enforced and our operating procedures are being followed.

There have been reports that Foundation plans to introduce more Shariah compliant products. What are the products, and when are they expected to be launched?
We are working with another wholesale partner in developing commercial property financing products based on Shariah. We are also interested in developing Shariah investment products to provide Muslims with an alternative to interest-bearing bank deposits. We have not finalized a launch timetable. This is due to a desire to see how much value there is in the Muslim market in New Zealand through the growth of Manzil.Based on our experience, product development is a costly exercise and we need to be convinced that we will achieve an adequate return on our investment before we launch another offering.

How does the company view the potential of Islamic finance products in New Zealand?
The Islamic population in New Zealand is small and as such, the potential for the market can only ever be described as niche. It is unlikely to attract any existing major global participant as the investment will struggle to show an adequate return.

What is the standard of awareness among those in the domestic banking and finance industry on Islamic finance?
(The awareness is) absolutely minimal. From time to time, there is a campaign to educate the market (and Deloitte has been active in this regard) but to be honest, the market is too small for the traditional institutions to get excited about.

Is there no interest to attract investments from petrol-producing countries in the Middle East?
(This is a) good question. There have been some Middle East investments in New Zealand, primarily in property and private equity. However, the ‘local’ market (New Zealand and, given its closeness in every respect, Australia) has generally not been short of capital. Australia is now a significant net exporter of capital.

Local investors require a lower return on projects than Middle East investors and the New Zealand markets are too small and illiquid to attract any sizeable market investments. Middle Eastern investors also have a preference for USD (or euro) exposure and, of course, many consider hedging to be inconsistent with Shariah. However, given the current global credit crisis, local issuers would be much more willing to consider the Middle East while Middle Eastern investors may be more amenable to (relatively) lower returns for lower risk.

It would seem that the Islamic finance sector is developing very slowly there. Why is this so?
Primarily because the market is small and product development is costly. The risk/return equation is not very exciting.

What do you think needs to be done (by both the private and government sectors) to speed things up?
Organizations need to be convinced that there is a value proposition in developing the market.