A solution just in time

Reuters
Published: February 09, 2008, 01:04

While conventional finance in Western Europe and North America is wracked with turmoil and many market participants filled with gloom, in the world of Islamic finance there is a refreshing burst of optimism.

Speakers at the Reuters Islamic Banking and Finance Summit last week in London sprinkled their comments liberally with words like "positive", "growth", and "opportunity".

Recent conventional finance events, by contrast, have featured muted conversations laden with doom.

Some recent credit strategy notes from Societe Generale have referred to "catastrophe" and "the daily dross of bad news that has beset the ... markets since July last year".

Largely shielded from the subprime crisis, although not entirely immune - credit spreads have widened and issuance has slowed - Islamic financiers are upbeat.

Opportunity

"As the conventional banking system goes into the credit crunch there will be an opportunity for the Islamic financial system to expand and to offset the deduction in credit and liquidity in the Western system," said Nor Mohammad Yakcop, second finance minister of Malaysia.

"Ten years ago during the Asian financial crisis there was a flow of funds from the Western financial system in Asia ... that helped in some way to overcome the crisis. Interestingly this time around this flow is reverse.

"The flow is now from Asia and the Middle East," he said.

Issuance of sukuk, or Islamic bonds, is still expected to grow this year, albeit not at the breakneck pace of recent years. There is talk of growing use of Islamic securitisation, and work on Islamic derivatives markets. Companies spoke of pressing ahead with merger and acquisition plans.

"There is a great opportunity for the Islamic industry generally, not to take advantage, but to play their due role in providing capital where capital is required," said Afaq Khan, head of Islamic banking at Standard Chartered.

Khan suggested that Islamic principles would help the industry avoid the problems that Western bankers are wrestling with: among them excessive use of leverage and the increased use of derivative instruments for speculation rather than investment in underlying economies. Both would be banned by Sharia law.

Principles

Islam bans interest and stipulates that deals must be based on tangible assets - money cannot be made from money alone.

"I'm not saying it can never ever be abused, but to create a bubble in the Islamic industry is much more difficult," Khan said.

If there is a banner deal that shows what Islamic finance can achieve, it is the $300 million convertible bond for Tamweel, the second-largest mortgage lender in the UAE, launched in December last year.

As mortgage lenders from the United States reeled and many Western companies untouched by subprime found that financing markets were shut, Tamweel said its bond, earmarked to fund expansion, was oversubscribed "within hours of launch".

Growth

Speaker after speaker at the summit pointed to the issue as evidence of how Islamic finance could power forward.

"The perfect example is Tamweel," said Rossitza Haritova, European convertibles analyst at Nomura.

She noted that the company had been able to raise funding at a rate below Libor, the inter-bank rate, just as planned, despite the turmoil.

"I certainly think it's going to be a strong year," she said.

All of that could lure international investors to the Islamic finance market, seeking stability from the subprime storm and in need of some relief.

"We are getting positive vibes from international investors about Middle Eastern credit, such as Tamweel," said Arul Kandasamy, head of Islamic finance at Barclays Capital.