Sign posts to Islamic finance 2.0

By Rushdi Siddiqui Available at: http://www.btimes.com.my/Current_News/BTIMES/articles/20101025000658/Article/

IS the AIR (authenticity, innovation and reach) out of Islamic finance? It has been operating in a viral vacuum of “Islamic on Islamic” as an over the counter fragmented industry without global connectivity.

In the inaugural article, I want to establish the “GPS sign-post” of issues on the road to IF 2.0., by way of “self-interview”, and ask questions that may not have been raised or answered.

Question: At a macro level, what is needed beyond short term liquidity and risk management, standardisation, scholars, qualified human capital, etc?

Answer: First, we need to scientifically establish the size and growth rate of the industry. Is it US$500 billion (RM1.5 trillion), US$750 billion (RM2.3 trillion) or US$1 trillion (RM311 trillion) as the range variance erodes the credibility.
Is Southeast Asia growing faster than Gulf Cooperation Council (GCC)? We should not be “embarrassed” if the size number and growth rates are smaller, it’s a beginning point.

Second, we need to establish leading and lagging economic/financial indicators for this geographically fragmented market, some will be same as “conventional”, but others will be different, i.e., more emphasis on applied over academic research. The world’s attention span is getting shorter, and we need to better capture the pulse and health of Islamic finance (IF) for the day, week, month and quarter for countries, regions, and IF world.

Third, post crisis, deposit taking Islamic banks need to under go a stress test, as exposure to realty is greater, risk and liquidity management is not as robust, issues with deposit insurance, etc., as a confidence building measure.
Fourth, an international Islamic dispute resolution centre, possibly housed in Malaysia much like the IFSB and newly announced International Islamic Liquidity Management (IILM), as industry embarks on 2.0. We need to preempt regulatory arbitrage and supplement the inefficient, expensive and time consuming legal process.

Fifth, sustainability is the century’s mantra, yet, how many Islamic institutions are signatories to the Carbon, Climate or Equator Principles as part of corporate social responsibility? Are there Islamic finance award categories for “Best Sustainability Islamic Bank” or is an Islamic bank in a sustainability index? We are vicegerent (khilafah) of the Almighty here, as the planet is not “owned” by humans, rather gifted to us for safe-keeping or trust (amanah) for future generations.

Finally, serious stakeholders have been commenting on finding alternatives to Libor as reference rate, yet, when serious attempts have been made, similar people have said it (reference rate) would be same for Islamic fixing, cause confusion, and so on. Empirical evidence shows that the delinking of Libor to, say, GCC inter-banks rates exist, hence, proposed Islamic fixing delinking to Libor has commenced.

Q. What areas need work?
A: There are many, but I’d like to focus today on syariah screening, funds, convergence of IF and halal industry, and venture capital (VC). The world’s first Islamic index, by an index provider, was launched in 1999, but what does it really measure? Low debt, non-financial, social ethical companies like Microsoft, Pfizer, ExxonMobil, etc, but do such companies provide a pulse for Islamic finance? Investing in them, via funds usually, provides investment flow information, and it’s usually capital flight out of Muslim country, i.e. as about 85 per cent of market capitalisation weighting of a global Islamic index is in G20 countries.

According to Lipper, about 96 per cent of (560) Islamic funds are actively managed, meaning managers attempting to capture alpha, why not an Islamic fund index capturing alpha? Lipper has one for GCC, why not one for Malaysia?

Islamic finance has neither addressed the needs of non-bankable Muslims (may be 70-85 per cent of the 1.6 billion Muslims) nor its brethren, US$640 billion (RM1.9 trillion) halal industry (HI), separated at birth 1400 years ago. Irony of the situation is the HI is looking for compliant capital, yet IF does not understand the halal model or deemed too small to finance.

Thus, can it be said IF has been driving the halal producers to Riba- based financing?

Finally, the chairman of Malaysia Securities Commission Tan Sri Zarinah Anwar, stated in a keynote speech in 2007, “… how can Malaysia distinguish itself in the emerging market venture capital pool? Our belief is that Islamic VC provides that distinguishing factor.” Where is Islamic VC in Malaysia today?

Q: What are some suggestions for Malaysia?

A: Malaysia’s holistic approach to Islamic finance over last 27 years has made it a global intellectual property leader, but the mainstream media’s attention is on size, hence, traditional bias coverage in GCC. Some of the suggestions include;
There are five FSA approved Islamic banks in the UK, a G20 country, but not one had a Malaysian founding shareholder, and, now, the European wholesale market may have potential for comparable profits to Indonesian retail.

Surely, the Malaysian Islamic finance thought leadership did not miss and does not continue to miss Europe?

Almost every presentation on syariah-compliant companies on Bursa Malaysia (BM) is about applying Securities Commission (SC) screening, yet there is very little GCC syariah-compliant portfolio investing on BM. Why not apply SC screens on Global, GCC, BRIC, Technology, etc, universe of companies? The end result just may be that the top 20 companies in these regions and sectors are similar to S&P syariah or AAOIFI screening, implying the Malaysian screening is not “liberal”.

Investors in the GCC are more interested in market share leading Islamic banks than their products, yet the major players in Malaysia are Islamic subsidiaries, CIMB and Maybank, of conventional bank holding companies. Spin-offs would not generate buzz and interest, but also contribute to build out of syariah based indexes.

We do not have an Islamic asset management hub, and it is here Malaysia can lead without cheerleading. A rich mixture of asset managers, ETF experience, a SWF openly invests Islamically, Hajj fund, etc., and combined with order flow platform and human infrastructure could cause concern for traditional hubs of Singapore, London and Geneva.

Q: Is Malaysia’s IF model exportable to countries?
A: Malaysia’s model is thought through, time consuming, holistic and stakeholder oriented, and led by visionary and committed leaders like prime minister, finance minister, central bank governor and SC chairman. Countries like Kazakhstan, Kenya, Australia, France, etc., all want to be IF hubs to tap the petro-liquidity, but all seem to be in a hurry.

Can the time frame be compressed without consequences? Maybe, but levelling the regulatory and legal playing field is only the beginning. Funds must be set aside for training (bankers and scholars), as seed money for funds (to jump start IF), marketing and PR (to address myths and misconceptions), and so on.

The visibility to IF 2.0 may be clear with fresh AIR, but climbing the narrow and winding mountain road will have challenging speed-bumps and potholes. It will be an interesting ride to stay within guardrails and avoid the unknown over the upcoming articles!

The writer is Global Head of Islamic Finance for Thomson Reuters and is based in New York.

Best Regards
ZULKIFLI HASAN

University of Glasgow, Scotland