Muhammad Arif
Muhammad Arif: Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan.

Growth of Islamic Finance in Central Asian States

In the next five years from a very low base Islamic Banking driven by government initiatives would grow to a substantial level, Particularly in Central Asian states like Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. These countries have large Muslim populations, and are notable for their governments’ commitment and progress in establishing better legal and regulatory infrastructure for Islamic finance.

The level of government commitment to develop the sector and the degree of advancement in establishing legal and regulatory infrastructure is very high in these countries. Kazakhstan’s government aims to boost the share of Islamic banking assets to 3 per cent of total banking assets in the country by 2025 from the current 0.2 per cent. In Kyrgyzstan, the national bank aims to expand the share to 5 per cent by 2021 from the current 1.4 per cent.

Development Bank of Kazakhstan has already sold $76 million of five-year sukuk, to become the region’s first-ever issuer of sukuk in 2012, no other bank, sovereign or corporate has followed this suit.

Some governments in Muslim Countries are intensifying efforts to reduce these regulatory hurdles and develop Islamic banking, in line with global trends that have gathered momentum in the past decade. One reason they are keen on expanding Islamic finance is to meet the cultural and religious needs of their Muslim populations. Another reason is that most of the world now sees the development of Islamic finance as a way to foster investment ties with fast-growing economies in the Gulf and Asia that have large Muslim populations with large pools of capital.

According to Moody’s, regulatory disadvantages, along with weak public awareness, are the biggest obstacles to Islamic banking growth? Among other regulatory hurdles, in Muslim countries, asset purchases and resales, which are part of many standard Islamic finance transactions are still subject to value-added taxes, unless authorities grant an ad hoc exemption. Also, in some countries, including Kazakhstan, Islamic banks’ deposits are not covered by state deposit insurance systems. Further, Islamic banks cannot use central banks’ conventional liquidity and funding facilities because they all bear interest. These disadvantages result in higher funding and operating costs for Islamic banks than for mainstream lenders.

Although Russia has the weakest growth potential but there as well some individual banks are seeking to meet potential demand for Sharia-compliant products and services under existing laws. According to Moody’s Sberbank, the largest commercial bank by assets in Russia, for example, is looking to offer such services and it has launched an Islamic payment application in 2019. AK BARS, the largest bank in the Republic of Tatarstan, introduced a pilot Islamic mortgage product in 2019.

Moody expects the participation of majority of Muslim countries in China’s Belt and Road Initiative will provide an impetus for the development of Islamic finance for infrastructure projects in Central Asia with Muslim majority population. Further, the increasing use of internet and mobile devices will help expand the reach of financial services in general, including Sharia-compliant ones.

UK to remain financial Hub of Islamic Finance in 2019 among western countries

The United Kingdom intends to remain the “western hub of Islamic finance” as it prepares to launch another sovereign sukuk, or Sharia-compliant bonds. Even going forward Brexit, Britain is looking to remain committed to work with international markets along with development of Islamic finance.

The UK was the first non-Islamic country in the world to issue a sukuk when it raised £200 million (Dh923.3m) in 2014.

Although sparse on details, the government says the new sukuks will be Sterling denominated, “which should help UK-based Islamic finance institutions to meet their mandatory liquidity requirements without extra FX risk”.

The London Stock Exchange listed its first corporate sukuk in 2007 and its first sovereign sukuk in 2008. Since then, 72 Sharia-compliant bonds have listed in London amounting to $53 billion (Dh194.64bn), with 2018 being a record year with $8.6bn.

Including Al Rayan, there are five fully Sharia-compliant banks in the UK with assets of $5.5bn as of the first half of last year. This includes: Gatehouse Bank, Qatari-owned Al Rayan Bank, Bank of London and the Middle East, Abu Dhabi Islamic Bank and a unit of Qatar Islamic Bank. There are more than 20 firms in Britain that offer sharia-compliant financial products, the most of any other Western country.

Global Sukuk (Islamic Bonds) Market in 2019

Sukuk issuance remained flat in the first nine months of the year, and total volumes for 2019 depend on “geopolitical developments that could have a positive or negative effect on investor appetite”, as well as the needs of individual borrowers, according to Fitch Ratings.

Sukuk issuance with a maturity longer than 18 months reached $30.6 billion in the first nine months, slightly lower than the $31bn (Dh113.8bn) issued in the same period last year, the ratings agency says. The figures tracked issuance from the Arabian Gulf, Malaysia, Indonesia, Turkey and Pakistan.

“This supports our view that volumes normalized rather than declined last year after hitting record levels in 2017,” the agency said in a note. Sukuk issuance over the nine-month period averaged $29.3bn between 2012-16.

The market for sukuk, or Islamic bonds, has grown strong over the past decade as more investors have sought Sharia-compliant assets.

Turkey and Indonesia were among the main sovereign issuers of US dollar-denominated sukuk, and the Islamic Development Bank Trust and First Abu Dhabi Bank were two of the biggest corporate issuers, tapping debt markets for $1.5bn and $850m, respectively.

However, these figures do not include numbers for sukuk issued in local currencies, which is rising rapidly as Gulf countries set up their own debt management offices and issue debt in local currencies, even when these are pegged to the dollar.

Saudi Arabia, for instance, has an ongoing sukuk issuance program in Saudi riyals which saw it issue 8.8bn riyals (Dh8.61bn) in September alone. The kingdom also issued its first 30-year sukuk denominated in riyals in April this year.

“GCC debt markets are still relatively developing, and individual sovereign funding decisions can profoundly affect total supply. For example, the Saudi Debt Management Office said earlier this year that it plans a new benchmark international Islamic bond issuance as part of its plans to diversify the financing of its national budget deficit, which could boost the 2019 total if executed before year-end,” Fitch Ratings says.

The ratings agency added that lower oil prices will also lead to increased borrowing by oil-exporting sovereigns. It forecasts an average oil price of $65 per barrel this year, down from $71.60 per barrel last year.

In August, rival ratings agency Moody’s projected that total sukuk issuance (in any currency) would increase by 6 per cent to $130bn this year, after hitting $87.4bn in the first six months.

Pakistan to issue Sukuk for international Market

Pakistan has planned to raise at least one billion dollars from international market by issuing Sukuk bonds in next couple of months that would help in building the country’s foreign exchange reserves. The federal cabinet had already allowed ministry of finance to initiate Medium-Term Notes (MTN) program covering both Eurobonds and Sukuk. An official of the ministry of finance informed that government is expecting to raise at least one billion dollars from the Sukuk bonds.

Meanwhile, the government would also issue local Sukuk bonds worth Rs 400 billion in next few days.

The amount raised from international Sukuk would improve the country’s foreign exchange reserves. The total liquid foreign reserves held by the country stood at $15,089.7 billion on 25th October, 2019. The State Bank of Pakistan’s reserves are at $7,914.3 billion. The federal government in annual budget for current fiscal year 2019-20 had projected to generate Rs450 billion (around $2.8 billion) for the Sukuk bonds.


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