Islamic finance is going global. South Africa has joined the UK and Hong Kong to become the third non-Muslim country to issue an Islamic bond or sukuk. And this follows American investment bank Goldman Sachs raising US$500m from its first Islamic bond sale. These moves reflect the desire to effectively tap into the wealth of Muslim investors around the world.
Fuelled by booming industries in the Middle East and South-East Asia, the Islamic finance industry is booming. Forecasts estimate it will double over the next five years to more than US$3.4 trillion. The two global centres for it are currently Malaysia and the UAE (where Goldman is issuing its sukuk). But London too has staked its claim on standing alongside Dubai and Kuala Lumpur.
Playing host to the 9th World Islamic Economic Forum last year, London appeared to make a deliberate challenge to rival the traditional Islamic financial powers. Opening the forum, David Cameron said:
London is already the biggest centre for Islamic finance outside the Islamic world … I want London to stand alongside Dubai and Kuala Lumpur as one of the greatest capitals of Islamic finance anywhere in the world.
London followed this up by launching a £200m sukuk in June 2014 and a groundbreaking new Islamic index on the London Stock Exchange. But can the non-Muslim power really challenge the traditional centres and how do they compare?
Malaysia’s market share
In terms of market share, Malaysia leads the pack with 16 fully-fledged Islamic banks including five foreign ones. Its total Islamic bank assets total US$135 billion (£82.7 billion), which accounts for 21% of the country’s total banking assets. By comparison the UAE has seven fully-fledged Islamic banks accounting for US$95 billion of assets and this represents around 19% of its total banking sector. Meanwhile, the UK has just six Shariah-compliant financial institutions, with total assets of US$19 billion.
If we focus on Islamic capital market development, Malaysia is once again a long way ahead of its competitors. The country boasts more than 60% of the global sukuk market amounting to US$164 billion worth of outstanding sukuk in the first half of 2014. London on the other hand has US$38 billion of outstanding sukuk raised through 53 issues on the London Stock Exchange since 2009. Dubai fares the worst with just US$21.08 billion as of May 2014 in sukuk on its exchanges. In fact state-owned companies in the UAE have gone to London to seek further capital.
But Goldman Sachs’ debut sukuk was, of all the favourite Islamic finance locations, listed on the Luxembourg Stock Exchange. Intent on avoiding the controversy of their failed 2011 sukuk, Goldman this time adjusted the sukuk structure and enlisted several heavyweight Gulf banks including Abu Dhabi Islamic Bank, the National Bank of Abu Dhabi, Dubai’s Emirates NBD Capital and the investment banking arm of Saudi Arabia’s National Commercial Bank to arrange the sale.
This is only the second such deal from a conventional bank outside a predominantly Muslim country and so a significant step in Islamic finance going mainstream. It will also act as a big boost for GCC investment banks and give one more thumbs up for Dubai as the centre for Islamic finance.
Malaysia is also way ahead when it comes to regulating Islamic finance. Malaysia passed an authoritative Islamic Financial Services Act in 2013, which built on its earlier Islamic Banking Act of 1983 to oversee operations within the country. Dubai, London and other would-be centres meanwhile both rely on their common banking law with some Islamic finance add-ons to govern Islamic finance operations.
Islamic finance future
In relation to the Islamic finance education infrastructure, the UK is actually ahead of the game. The UK has been ranked as the global leader in Islamic finance education with more than 60 institutions offering Islamic finance courses and 22 universities offering degree programs specialising in Islamic finance.
Malaysia and the UAE followed. Malaysia has 50 course providers and 18 universities offering degree programs, while the UAE has 31 course providers and nine universities offering degree programs. But when it comes to research output in Islamic finance, Malaysia stood first with more than 100 peer-reviewed research papers released in the past three years. The UK followed with 56 peer-reviewed research papers and there was no data available for the UAE.
Based on the above observations, it is apparent that Malaysia is still the superpower of Islamic finance. But with the recent developments in the rival centres this position is going to be under continuous threat.
The Islamic Development Bank has set up a US$10 billion sukuk issuance program on the Nasdaq Dubai exchange that will be a big boost to Dubai’s efforts to become a top centre for Islamic finance. And London, which is already a global financial centre, is making its moves to bolster Islamic finance from education to cultivating relationships with Muslim banks and investors.
Malaysia, however, still has the advantage of a vibrant market in sukuk issuance, thanks to the Islamic hinterland of southeast Asia and a good reputation for strong Islamic finance regulation. So, it’s not a surprise that other international banks are going there to do business. And we can expect this to continue for the foreseeable future. But how Malaysia reacts to its competitors and can maintain its position is another matter.