June 2014

Shariah Finance Transforms Business Banking Horizons
Asian financial markets are defined by their growth and their diverse opportunities, and a new wave of opportunities is developing through the growth of Shariah financial products.

Oft overlooked Shariah compliant financial markets are firming as a reliable foundation for further economic growth that can be sustained and quantified.

Islamic business banking markets are flourishing across Asia, offering valuable new growth opportunities to incumbent banks while providing a lucrative market-entry vehicle for new rivals.

Assets of Islamic finance related investments are forecasted to exceed US$2 trillion by the end of 2014 following an extended period of double digit growth. Shariah compliant investments are defined by their compliance with the principles of Islam. The word ‘Shariah’ translated means ‘the way’.

Investments in funds associated with alcohol or gambling are prohibited as they are deemed morally deficient, referred to as ‘Qimar’ (speculation), ‘Maysir’ (gambling) and ‘Gharar’ (unfairness).

Islamic finance strictly avoids any form of exploitation, therefore limiting the charging of interest, short selling and many other conventional banking processes.

Shariah compliant markets issue bond-like products called “Sukuk”, literally translating to “certificates”. Given interest bearing transactions are banned, Sukuk are used to raise funds using permitted contracts of this type.

A Sukuk holder is able to collect rental payments from the leasing of an asset but may not lend capital to a leasing company. There are several types of Sukuk however the most popular type are leasing based and applied to real estate, referred to as ‘ijarah’.

Standard & Poor’s estimate global Sukuk issuances will exceed $100 billion by the beginning of 2015 thanks to greater demand in traditional markets, particularly Malaysia where most Sukuk are raised.

Ventures involving highly leveraged companies are not pursued by Shariah compliant investment funds.

Entrepreneurship is actively encouraged however not without an active focus on the sharing of risk and execution of the sanctity of contracts.
For these reasons derivatives such as options, forwards and futures generally do not feature in Shariah compliant funds however a variety of creative financial structures effectively replicate these functions using alternative but accepted methods.

‘Bai Salam’ commodity market contracts mimic forwards yet remain compliant by ensuring the seller’s position is protected. This is carried out by extending payment to the provider following contract agreement in contrast to the conclusion of the contract.

Absolving the seller of the underlying risk results in compensation to the buyer in the form of a fixed delivery price set without a premium on the spot price.

Shariah business banking growth is underpinned by a number of influential factors including greater international trade flows, Islamic government infrastructure development and a broadening interest in fostering social responsibility - not at all dissimilar to investments in western ‘green’ funds seeking to generate positive externalities in the form of an emphasis on environmental or community development.

Islamic banks have grown by 15 to 20 percent on average in traditional markets including Malaysia, Indonesia and the Middle East with significant further growth to be derived from new markets in Africa, the US and Europe. UK Prime Minister David Cameron recently stated “I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world”.

Challenges to greater proliferation of Shariah compliant investments include price pressure, administrative burdens borne by the maintenance of strict adherence to Islamic principles, underlying risk framework costs and the relative lack of talented individuals well trained in the specific processes of structuring Islamic finance investments.

A glaringly deficient understanding of new demand for Islamic finance solutions in business banking markets has resulted in the establishment of the first ever demand-side Shariah compliant finance research program. Developed by East & Partners in conjunction with REDmoney, the report will provide a detailed, regular monitor of Shariah compliant business banking markets in Malaysia and Indonesia.

First round results from this new six-monthly service will be released on September 2014 and provide accurate market share, wallet share and cross sell statistics in addition to competitive customer satisfaction, advocacy ratings and key drivers of engagement with Islamic finance solutions.
Estimated Shariah Compliant Banking Assets
% of Total
Middle East 74.0
Asia 16.5
Rest of Word 9.5
TOTAL 100.0

Source: Central Bank Data

You are receiving this newsletter because your company is a client of East & Partners or you have requested a subscription from our website. We operate a firm no spam policy and should you wish to not receive this newsletter simply reply to this message and type "REMOVE" in the subject box.

(c) Copyright 2014 East & Partners Pty Ltd. All rights reserved.