The proliferation in the desire to revamp regulations and tax guidelines as governments look to entice a new breed of investors is expected to enhance cross-border trade across jurisdictions. NAZNEEN HALIM reports.
Industry players are growing more optimistic about the channeling of GCC investments into Asia and Africa: particularly via infrastructure development projects and African agricultural land projects, and many of these are expected to be financed in a Shariah compliant manner. The increase of infrastructure development projects is expected to occur predominantly in the emerging markets of Asia, due to its growing population, as well as in North African countries: specifically Egypt, Libya and Tunisia - all of which were affected by 2011’s Arab Spring.
At the recent World Islamic Economic Forum, it was revealed that total trade finance among the 57 OIC members, which include Saudi Arabia, Malaysia and Turkey, is expected to reach US$4 trillion by this year; making up one third of the current US$12 trillion global trade flows. Tourism and telecommunication are also high growth areas in Asia which have begun to entice GCC investors, while average income countries such as India and Malaysia have become prime choices for high net worth GCC investors looking to invest into financial institutions.
“There is a natural affinity in the Middle East and Asia for Islamic finance, but of course there has to be a genuine growth story for any investor. For Middle East investors, the key concerns are returns and strategic reasons, such as the relationship between countries and how it fits into their investment agenda,” an analyst revealed.
Industry players are also becoming increasingly aware of the importance of a standardized regulatory framework in order to promote the cross-border flow of deals and to create an internationalized Islamic banking system. Hussain Al Qemzi, CEO of Noor Islamic Bank, commented: “If we are to challenge the conventional banks’ entrenched position in international financial deals, we must develop the capacity to structure multi-currency and cross-border transactions and to build scale. To do that we need to build deeper relationships between the key markets and between individual banks, so that we are better placed to compete on a global scale.
“The time has come for us to stop focusing on our differences as reasons for not doing business. It is time to talk about how Islamic finance can contribute to long-term inclusive, equitable and sustainable economic growth not just in Muslim countries, but in every country across the globe.”
According to a Malaysia-based practitioner, the main challenge in pushing products abroad - including Sukuk issuances - and particularly in creating a new investor base for Malaysian Sukuk, is a lack of products which can translate across borders into jurisdictions with varying requirements. “There is currently a lack of products in the market. To achieve internationalization of the Sukuk market and boost cross-border financing, we need more complex products and need to innovate to sell the product further. This is mainly because the global market is different from the Malaysian market in terms of yield and tenor; and there is definitely demand from foreign investors for higher yields. There is quite a challenge in swapping back to different currencies, and in order to encourage more Middle East investors into the Malaysian market in particular, there is still much room for innovation.”
The practitioner also added that the main reason why Malaysian paper suffers from a lack of international interest, despite its quality, is because the acceptability of products across jurisdictions is not uniform: “There needs to be more differentiation and more convergence in Shariah acceptability. I foresee products being much more complex- not merely based on Bai Bithaman Ajil or Murabahah, but a mixture of principles involved to adapt across borders,” he said.
For Middle East investors in particular, high returns are very much desired, and strategic reasons such as the relationship between countries and how this fits into their investment agenda are among the key concerns. “There are multiple scenarios to look at to determine the goodness of a deal, because it is not as simple as doing trade intra-Asia whether they have access to the highest levels of governance and are able to comprehend business cultures and norms,” another analyst revealed.
With Middle East institutions such as Elaf Bank and AlKhair Investment Bank (previously known as Unicorn Investment Bank) being the latest entrants to the Southeast Asian market via Malaysia, following Dubai Islamic Bank’s 60% acquisition of Bank Islam in 2006, it is evident that interest in growing cross-border capabilities and reaching a new investor segment is high on the agenda of these banks. With a more standardized outlook on regulations and tax allowances for Islamic instruments, there is no doubt that cross-border trade between the Middle East and the rest of the world is set for positive growth.