Financial centers scramble for Islamic finance pie
 

Fahim uz Zaman

Governments in Middle East and East Asia are eager to attract major chuck of financial activity by erecting expensive real estate infrastructure and adjunct entertainment facilities funded by generous budgets.

As global Islamic banking industry experience robust activity, Bahrain, Dubai and Labuan position themselves to become the primary jurisdiction for international Islamic financial activity.

Recently Dubai’s International Financial Centre (DIFC), after waiting for eight months, received the formal decree from the central government in Abu Dhabi which will clear the way for the issuance of licenses to international banks planning to operate out of 110 acre free zone.

Bahrain, which has an established position of being the centre of Islamic finance in Middle East, started work on its DIFC look-alike Bahrain Financial Harbor project.

Malaysia’s fifteen years old offshore financial centre, Labuan, is reinventing itself as Islamic offshore financial jurisdiction.

Grand Ideas and Tall Buildings

DIFC plans to offer services in five primary areas of financial services. Islamic finance is one of the five major primary business activities to be offered out of the international financial centre. Other activities include re-insurance, private banking for high net worth individuals, corporate finance and debt issuance.

The financial center is located behind the skyscrapers of Sheikh Zayed Road, slated for completion in 2008. The planned building structures include world’s largest car park.

DIFC is focusing on tier one banks to get them to establish banking operations here. So far the financial institutions that have applied to establish operations in the DIFC include Deutsche Bank, Julius Baer Holding, Credit Suisse Group, Standard Chartered Bank and Aon Corp. (AOC).

Amsterdam-based ABN Amro Bank is mulling a move to the new Dubai International Financial Centre (IFC) as the launch pad for its Islamic finance operations.

The bank's UAE country manager, Jan Willem Van den Bosch said, it was waiting for a formal announcement on the issuance of licences by the DIFC before taking its next step towards offering Islamic financial services.

DIFC is also planning to establish a regional stock exchange, DIFX. It has recently concluded agreement with Euronext to help build technical infrastructure for the exchange which is expected start operations from early 2005. Euronext, Clearnet and the London Clearing Houses will provide clearing and settlement services.

Lynton Jones, the exchange's chief executive expects between 30 and 40 stocks listed over the next three years. He also expects a similar number of corporate bonds.

The DIFX also plans to list Islamic instruments, funds (such as ETFs) and depositary receipts.

In the meanwhile Bahrain is working on its own billion dollar offshore building project which will house the financial and recreational activities.

The Bahrain Financial Harbor is a massive $1.3bn development, which began in March 2004, is scheduled for completion in 2007. The project is the brainchild of Gulf Finance House, an Islamic investment bank, headed by Essam Janahi.

Bahrain's financial regulator, the Bahrain Monetary Authority, has designated the BFH as a 'strategic investment zone', and investors relocating to the BFH will enjoy liberal terms.

BFH is a mixed use master-planned development currently under construction on the Manama Corniche covering 250,000 square metres and is intended to integrate finance, commerce and leisure.

The Financial Centre comprises Financial Mall, Dual Office Towers and the Harbour House. The Financial Mall houses the Bahrain Stock Exchange and the Capital Financial Market comprising a trading hall, clearing and settlement house, brokerage and trading firms.

The Dual Office Towers will be Bahrain's largest and tallest buildings with 50 floors each, while the Harbour House will be an ideal avenue for media-based industries.

GFH signed MOU in February this year with Credit Agricole Indosuez to raise $304 million of Islamically-structured finance for the harbour along with other projects. In November last year, Kuwait Investment Company signed an agreement to invest $25 million in the BFH development.

Commenting on the financing deal for financial harbor CEO of GFH, Esam Janahi, said, “The Islamic financing deal with CAI will allow us to expand our sources of finance further in the global markets.”

In East Asia, Malaysia’s government is presenting its offshore centre in Labaun as the regional Islamic centre in the Asia-Pacific region.

Among the efforts to develop the Islamic capital market is to promote Labuan as the centre for the issuance of financial papers such as sukuks, said Labuan Offshore Financial Services Authority’s chairman and Bank Negara Malaysia, Governor Tan Sri Dr Zeti Akhtar Aziz.

"We will also capitalise on the advantages of Labuan International Financial Exchange (LFX) for listing and trading purposes," Dr. Zeti added.

LOFSA is also reviewing the legal framework for promulgating Islamic financial services legislation besides promoting retakaful in line with the significant growth in the reinsurance market.

Meanwhile, Dr Zeti said LOFSA continues to adopt a consultative approach in developing the Islamic financial market in Labuan through several development committees.

The committees have identified products such as trade finance, cash waqf, takaful and Islamic capital market instruments, which can be developed in consultation with the Shariah Advisory Council for Labuan IOFC.

Established Players experienced continuous growth

Islamic-based assets of Labuan-offshore banks increased by 28.1 percent from US$465.4 million in 2002 to US$596.2 million in 2003 while total deposits of offshore Islamic banks rose by 33.6 percent from US$147.7 million in 2002 to US$196.9 million in 2003.

Earlier this year listing of the inaugural $700 million Trust Certificates Sukuk by the Government of Qatar on the Labuan International Financial Exchange (LFX) increased the market capitalisation of the exchange to $2.95 billion. According to LFX this is the 14th listing on the offshore financial exchange.

The Qatar Sukuk is the fourth Shariah compliant instrument listed on LFX after Kumpulan Guthrie Bhd's Serial Islamic Lease Sukuks due 2004 (US$100 million) and 2006 (US$50 million) and the Government of Malaysia Sukuk Trust Certificates due 2007 (US$600 million).

In January this year IIFM signed a Memorandum of Understanding with Malaysia's Labuan International Financial Exchange (LFX) to jointly develop the global Islamic capital market.

In the meanwhile Ex-CEO of Dalah Al-Baraka owned Al-Tawfeek Company announced the launch of a new offshore Shari'a compliant bank in Labuan, Malaysia.

"Rusd Bank is the first Malaysian offshore bank with extensive Middle East relationships, especially in the GCC and North Africa countries", Malaikah said. "These relationships", he added, "enable the bank to arrange investments in wide geographical area."

In Bahrain profits of Islamic offshore banking units grew 59 percent to US$15.1 million in 2003 from US$9.5 million in 2002. Their assets stood at US$2.2 billion at end 2003, compared with US$2 billion a year earlier.

Overall, the tiny Gulf kingdom's 29 commercial, investment and offshore banks, both conventional and Islamic, posted net profits totalling US$714.8 million for 2003, an increase of 134 percent over the 2002 profits of US$305.6 million.

Commercial banks represented 24 percent of 2003 profits, while the share of offshore banks and investment banks was 48.5 percent and 27.5 percent respectively.

Bahrain has recently given approval of licences to two local Islamic Insurance firms.

Methaq Reinsurance Company (Methaq Re), the region's first Islamic re-takaful company, has been granted preliminary approval to operate offshore in the kingdom. Methaq Re was recently set up following a feasibility study carried out by Ernst & Young and Dubai Islamic Bank.

Al-Ahli Takaful, a 75:25 joint venture between Saudi Arabia's National Commercial Bank and Germany's FWU, received final BMA approval. Capitalised at BD 1 million ($2.7 million), Al-Ahli will provide Sharia-compliant life and health insurance products primarily to local and Saudi investors.

At the end of 2003, 162 insurance companies had BMA licences.

As the different jurisdictions compete with each other for the business, one might safely assume that, it will be strength of the regulations, competence of the regulators and the transparency and efficiency of the system which will emerge as the winning attributes of leading financial centre.