Islamic banks manage US$ 500 billion

By Alexandre Rocha*

São Paulo – Islamic banks, i.e. financial institutions that operate according to religious principles, are currently managing approximately US$ 500 billion worldwide. The information was given yesterday (10th) by the international director at the ABC Brazil Bank, Angela Martins, during a lecture held at the head office of the Brazilian Association of Capital Market Analysts and Professionals (Apimec-SP), in the southeastern Brazilian city of São Paulo. Angela specialises on the subject and wrote the book "Islamic Banking," issued by publishing house QualityMark.

"The set of Islamic banking institutions is expanding at an phenomenal rate. This is a new industry, but it's growth is brutal," she stated. Just to give an idea of the sector's broadening, little less than four years ago, as of the launch of her book, Angela said in an interview to ANBA that those banks were then managing funds of approximately US$ 200 billion.

Since then, the price of oil has more than tripled, flooding producer countries – many of which are Islamic – with capital. According to Angela, the current volume of funds managed by Muslims is estimated to touch at US$ 1.3 trillion, thus hinting at the space that the segment has to expand.

To that extent, she claims that Brazil should look intently at this activity, both in terms of availability of funds in oil-producing countries, and expansion of trade with nations in which Muslim populations reside, especially Arab countries. "This is an industry with a promising future, because the volumes of capital that it can attract are quite sizeable," she declared.

Presently, the segment is little known in Brazil. The ABC Bank, which is controlled by the Arab Banking Corporation, from Bahrain, even offers contracts structured according to the Sharia. Although they are negotiated in Brazil, these contracts are established abroad, though, as Brazilian financial regulations do not provide for certain practices widely adopted in the Islamic system. This, however, might change, and is being discussed by financial agencies.

For the development

The Islamic system is based on the notion that "money exists for the development of the world," meaning that it cannot be a commodity in itself. Therefore, the system does not allow for usury, so it vetoes the charging of interest; forbids speculation and excessive risk; and cannot be used whenever the object of contract is deemed illegal by religion, as would be the case with funding the purchase of a batch of alcoholic beverage, or building a factory for products made of pork meat.

One of the most widely used contracts, according to Angela, is the "Murabaha", used for financing purchase and sale deals. As the bank cannot charge interest, it buys the product from the supplier in a lump sum, and then sells it in instalments to the customer, taking on any eventual risks involved in the deal, and earning the right to profit from the operation. "The fact that the bank assumes this risk adds value to the deal, therefore the bank is entitled to profiting from it," said the executive.

Sukuk

Other models are the "Musharaka" and the "Istisna," used for issuing "Sukuk" bonds, which are similar to Eurobonds (fixed-income securities issued by governments or companies to shop for funds in foreign countries). "The first 'Global Sukuk' ever was issued in 2002 by the government of Bahrain," stated Angela.

She also explained that being a Muslim is not mandatory for one to use these contracts. A Brazilian company, for instance, may issue "Sukuks" in the international market in order to fund an operation that is in accordance with the Sharia, such as the construction of a Halal food plant. "Brazil can adapt and offer these products," she said.

In addition to local banks based in Muslim countries, various international banks have established divisions turned to Islamic contracts, such as Citibank and HSBC. Deals within this system are being closed in many non-Muslim countries, such as Japan, Hong Kong and especially Britain.

However, Angela underscored the fact that the Islamic financial system is not yet a sector that offers "off-the-shelf products." In other words, there is not an international standard. There are different schools of Muslim thinking, therefore that which is accepted in one country or by one institution may not be accepted by another. "The industry is still developing," she said. According to her, each institution has a Sharia Board that assesses the validity of contracts. Hence the need for operators to have thorough knowledge of the system.

Markets adapt quickly to Islamic finance

The market for financial products that conform to Islamic rules is expected to grow by up to 15% a year. Financial centers around the world are scrambling to get in on it. Stephen Beard reports from Dubai.

Scott Jagow: This week, we're showing you the Middle East at work. One area seems to be working quite well: the market for Islamic financial products. It's expected to grow by up to 15 percent a year. Financial centers around the world are scrambling to get in on it. Stephen Beard reports from Dubai.

Scott Jagow: This week, we're showing you the Middle East at work. One area seems to be working quite well: the market for Islamic financial products. It's expected to grow by up to 15 percent a year. Financial centers around the world are scrambling to get in on it. Stephen Beard reports from Dubai.

Stephen Beard: So what is an Islamic bond?

Islamic lawyer: The nature of the sukuk transaction is such that the actual amount is already predetermined, and that's done at a lower level within the structure . . .

He's lost me already. To unravel some Islamic financial products requires a small army of lawyers. And the lawyers have been duly descending on Dubai:

Oliver Ahga: This is the result of the explosive growth that we've experienced in Dubai.

Eighteen months ago, Oliver Agha had four attorneys on his staff. Now he has 65, soon there'll be 100, many of them trained in Sharia or Islamic law to meet the growing demand for Islamic financial products.

Agha: Islamic Finance has awoken from a very long slumber, and I think will sort of light up the financial scene here in the Middle East and in particular in Dubai.

Dubai wants to specialize in the issuing and trading of Islamic bonds called sukuk. These are designed to get around the Islamic prohibition of charging interest. For example, they treat the bondholder as the owner of some of the company's assets. The bond holder then receives rent, not interest, for the use of these assets.

Rodney Wilson of Durham University says demand for these Islamic bonds can only grow -- in the Gulf and in other neighboring muslim countries:

Rodney Wilson: Pakistan has already raised money through a sukuk issuance, even potentially India. So there would be an interest in raising money in this way, and Dubai could be a trading center for this.

Dubai has already launched two of the world's biggest sukuk. They raised more than $6 billion to finance, among other things, major construction projects.

Lawyer Oliver Agha thinks the emphasis on Islamic finance will aid the city's global ambitions:

Agha: That Dubai may one day become a financial center that might rival London or New York, as unfathomable as that might seem quite at this minute.

Chris Davidson finds it quite unfathomable. He's written two books about Dubai. He questions how the city can pose as a guardian of Islam in financial matters, while at the same time offering the kind of lifestyle that will attract Western investors and tourists.

Chris Davidson: You'll see billboard posters for Islamic banking products, Dubai Islamic Bank and so on. And then a few meters further on, you will see swim wear adverts. The two don't really seem to go together.

He thinks muslim governments and companies would prefer to raise money in a more orthodox Islamic financial center, like Kuala Lumpur in Malaysia. They might feel a trifle queasy about Dubai. After all, among the city's recent foreign purchases was a large stake in a Las Vegas casino.

In Dubai, this is Stephen Beard for Marketplace.