Islamic finance attracts non-Muslim countries
According to Dealogic data, issuance of Islamic debt by non-Muslim countries is set to climb a three-year high in 2017
PHOTO: REUTERS
Islamic finance is extremely popular in Muslim-majority countries in the Middle East and South Asia. However, non-Muslim countries are now seeing the attraction in investing in it.
According to Dealogic data, issuance of Islamic debt by non-Muslim countries is set to climb a three-year high in 2017 due to the perception of more tranquil market conditions and an improving regulatory backdrop.
Islamic financial products comply with Islamic law and are based on the principles of risk and profit-sharing. Sharia prohibits earning an interest on loans and also disallows funding activities involving alcohol, pork, pornography or gambling.
The value of Islamic bonds issues outside the Middle East and Southeast Asia by non-Muslim countries reached $2.25 billion in 11 months in 2017, shows data by Dealogic. In 2016, it was $2 billion and $1 billion in 2015.
Cabinet allows $3b borrowing through Sukuk, Eurobonds
Islamic finance has transformed from a niche market of global banking to a growing source of funding through a storied list of borrowers who have sold sukuk in recent years.
The government of Singapore was one of the earliest non-Muslim countries to enter this market, followed by the United Kingdom, Luxembourg, and Hong Kong who sold their first sukuk in 2014. Recently, African nations including South Africa, Nigeria and Ivory Coast have made legal and tax changes to make it easier for borrowers to issue Islamic bonds.
Companies like Goldman Sachs and General Electric's GE Capital have also been selling Islamic bonds in the past few years.
Chinese entities such as Country Garden and Beijing Enterprises Water Group have also issued Islamic bonds through their Malaysian subsidiaries in 2015 and 2017, respectively. The companies then used those proceeds to finance projects in Malaysia.
According to experts, the global financial crisis led governments to diversify funding options. Islamic finance is seen as more stable when compared to the conventional banking system and thus appealed more to borrowers.
"Heightened appeal for sustainable and responsible investing could also be driving the growth for Islamic finance due to the commonalities in values and shared principles," Ruslena Ramli, head of Islamic finance at Malaysian credit rating agency RAM, told CNBC.
Sharia principles, which prohibit "speculative-type of businesses," ensured Islamic finance products were less volatile when global financial markets were rumbled during the debt crisis, said Ahmad Fuzi Abdul Razak, the secretary general of the World Islamic Economic Forum Foundation.
"The crisis that took place was a result of excessive speculation, which is harmful. Islamic finance has avoided such pitfalls," he told CNBC.
However, while Islamic finance is growing it is still small. Involvement by those outside the Muslim world is still 'sporadic' say experts.
Dealogic data shows that the Middle East and Southeast Asia still account for a large majority of Islamic financial assets. In the sovereign sukuk space, Middle Eastern countries raised $11.85 billion in the 11 months through November, followed by Southeast Asia at $3.96 billion.
Over the past decade, total Islamic financial assets have grown from 10 to 12 per cent and hit $2 trillion. But at less than 1 percent, they remain only a small fraction of global financial assets, according to the International Monetary Fund.
Islamic finance has potential to end poverty worldwide
According to Fitch ratings, one hurdle standing in the way is standardisation. Different Islamic jurisdictions interpret shariah differently and thus a variation in how Islamic finance products are structured. Differences in how disputes are resolved and reporting standards are monitored add to the complexity.
"In some cases, there is still little standardisation even at a local level, while in others, progress would be needed on a regional, or international, basis," Fitch said in a report.
However, experts stay despite hurdles the Islamic finance sector is still poised for growth. The industry's size is expected to expand to $3.5 trillion by 2021 as countries and companies look for alternative funding sources, and tap a larger pool of investors.
This story originally appeared on CNBC
According to Dealogic data, issuance of Islamic debt by non-Muslim countries is set to climb a three-year high in 2017 due to the perception of more tranquil market conditions and an improving regulatory backdrop.
Islamic financial products comply with Islamic law and are based on the principles of risk and profit-sharing. Sharia prohibits earning an interest on loans and also disallows funding activities involving alcohol, pork, pornography or gambling.
The value of Islamic bonds issues outside the Middle East and Southeast Asia by non-Muslim countries reached $2.25 billion in 11 months in 2017, shows data by Dealogic. In 2016, it was $2 billion and $1 billion in 2015.
Cabinet allows $3b borrowing through Sukuk, Eurobonds
Islamic finance has transformed from a niche market of global banking to a growing source of funding through a storied list of borrowers who have sold sukuk in recent years.
The government of Singapore was one of the earliest non-Muslim countries to enter this market, followed by the United Kingdom, Luxembourg, and Hong Kong who sold their first sukuk in 2014. Recently, African nations including South Africa, Nigeria and Ivory Coast have made legal and tax changes to make it easier for borrowers to issue Islamic bonds.
Companies like Goldman Sachs and General Electric's GE Capital have also been selling Islamic bonds in the past few years.
Chinese entities such as Country Garden and Beijing Enterprises Water Group have also issued Islamic bonds through their Malaysian subsidiaries in 2015 and 2017, respectively. The companies then used those proceeds to finance projects in Malaysia.
According to experts, the global financial crisis led governments to diversify funding options. Islamic finance is seen as more stable when compared to the conventional banking system and thus appealed more to borrowers.
"Heightened appeal for sustainable and responsible investing could also be driving the growth for Islamic finance due to the commonalities in values and shared principles," Ruslena Ramli, head of Islamic finance at Malaysian credit rating agency RAM, told CNBC.
Sharia principles, which prohibit "speculative-type of businesses," ensured Islamic finance products were less volatile when global financial markets were rumbled during the debt crisis, said Ahmad Fuzi Abdul Razak, the secretary general of the World Islamic Economic Forum Foundation.
"The crisis that took place was a result of excessive speculation, which is harmful. Islamic finance has avoided such pitfalls," he told CNBC.
However, while Islamic finance is growing it is still small. Involvement by those outside the Muslim world is still 'sporadic' say experts.
Dealogic data shows that the Middle East and Southeast Asia still account for a large majority of Islamic financial assets. In the sovereign sukuk space, Middle Eastern countries raised $11.85 billion in the 11 months through November, followed by Southeast Asia at $3.96 billion.
Over the past decade, total Islamic financial assets have grown from 10 to 12 per cent and hit $2 trillion. But at less than 1 percent, they remain only a small fraction of global financial assets, according to the International Monetary Fund.
Islamic finance has potential to end poverty worldwide
According to Fitch ratings, one hurdle standing in the way is standardisation. Different Islamic jurisdictions interpret shariah differently and thus a variation in how Islamic finance products are structured. Differences in how disputes are resolved and reporting standards are monitored add to the complexity.
"In some cases, there is still little standardisation even at a local level, while in others, progress would be needed on a regional, or international, basis," Fitch said in a report.
However, experts stay despite hurdles the Islamic finance sector is still poised for growth. The industry's size is expected to expand to $3.5 trillion by 2021 as countries and companies look for alternative funding sources, and tap a larger pool of investors.
This story originally appeared on CNBC