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Banks should eye Middle East

Published on Friday, 11 Mar 2011
Khoo Guan Seng says the outlook for the Islamic finance sector looks promising.
Photo: David Wong
Portrait of Chinese Muslim admiral Zheng He

Despite the unrest and uncertainty in the Middle East, the outlook for the Islamic finance sector looks promising. "The future for Islamic finance is moving in one direction and that direction is growth," says Dr Khoo Guan Seng, head of the innovative unit at the Singapore Stock Exchange and an internationally recognised Islamic finance expert.

Speaking at the "Islamic Finance: Opportunity and Risk" seminar, jointly organised by Classified Post and Kornerstone, Khoo said the global Islamic financial market is worth around US$1 trillion and is expected to grow by 15 per cent annually. He believes Hong Kong, which plays a key role in financial intermediation of conventional finance instruments, is ideally positioned to provide a range of Islamic finance products and services.

"While countries like Malaysia and Indonesia have an established head start, it is not too late for Hong Kong banks and financial services firms to compete for business in Islamic finance. To be successful, they will need to establish a more prominent presence in the region, as have their competitors," Khoo said.

He said for Hong Kong to successfully make inroads into the Islamic finance sector requires a better understanding of the mechanisms that drive and govern Islamic finance markets. Hong Kong also needs to implement regulatory changes to establish a level playing field between traditional financial products and their Islamic counterparts.

Khoo said developing an Islamic finance platform could also create employment opportunities for accountants, tax professionals and investment analysts familiar or willing to learn the skills necessary to provide services that meet Islamic religious practices referred to as Sharia compliance.

Under this concept, investment in alcohol, gambling, pornography, tobacco, weapons, pork products and businesses that produce media gossip columns are not allowed. Investments should also conform to Islam's avoidance of receiving or paying interest. 

Khoo added that Hong Kong is strongly placed to provide Middle Eastern investors with a platform to invest in the region. He believes the city's best opportunities are in the wholesale market.

According to Khoo, Islamic investment opportunities are not confined to Asia. For instance, Saudi Arabia and other Gulf states are investing heavily in infrastructure projects. Khoo said because of the size of the new deals, Islamic banks need to collaborate with international banks to take advantage of their larger distribution networks.

He also cited the opportunity to develop back-office transaction clearing services, just as Luxemburg has developed a strong footing as an Islamic finance transaction-clearing centre.

However, prior to the launch of any Sharia-compliant investment products, financial institutions must receive the approval of Sharia advisers for compliance with Islamic legal principles. These are typically Islamic law or finance scholars able to blend Islamic investments with international banking and legal practices to help banks devise Sharia-compliant products ranging from mortgages to hedge funds.

"Looking beyond the current situation in the Middle East, wealthy individuals, companies and Middle Eastern sovereign funds are looking to diversify their investments through opportunities that meet Islamic compliance structures. An obvious choice is the dynamic range of opportunities in the Asia-Pacific region," said Khoo, who is an adjunct professor at the Singapore Management University.

"In many ways, Islamic finance is similar to venture capital and private equity investing because the profit and loss is shared between the investor and the borrower. We should look less at the religious aspects of Islamic investment concepts and instead focus on the opportunities the asset class offers as an integral part of the international financial system."

He said that while Islamic finance is structured to avoid risk - such as that associated with fluctuating interest rates - the asset class is still exposed to liquidity risk because of undeveloped money markets. With restrictions on the type of investments allowed, there is also a sector risk with tendency for investments to be heavily weighted towards property, commodities and technology.

"As with any type of investment structure, there is no such thing as a totally risk-free investment strategies," Khoo said.

Historical ties open doors for HK

While the Islamic finance sector has only registered on the international investment radar for about three decades, the mainland's ties with the Middle East date back many centuries. Evidence exists that Zheng He, the Muslim Chinese admiral who inspired the Sinbad-the-Sailor legend in The Arabian Nights saga, repeatedly journeyed to ports of the Persian Gulf during the early 1400s.

Islamic finance expert Dr Khoo Guan Seng, head of the innovative unit at the Singapore Stock Exchange, believes it is these historical ties and the recent rejuvenation of trade relations between the mainland and Middle Eastern countries that is opening doors for Hong Kong to build an Islamic finance platform.

"Hong Kong could be part of the new economic Silk Road," Khoo told participants at the "Islamic Finance: Opportunity and Risk" seminar jointly organised by Classified Post and Kornerstone.

Despite the unrest in the Middle East, Khoo believes now could be the time for Hong Kong to seize the opportunity to expand Islamic finance activities. "The Chinese word for `crisis', which some people believe the Middle East is facing, is the same as that for `opportunity', which Hong Kong could tap into," he said.

Khoo high-lighted the growing trend of cross-investment between the mainland and the Middle East and the vast opportunities that exist for Hong Kong to play a strategic role as an intermediary.

In the decade since diplomatic ties were established between China and Saudi Arabia, bilateral trade has grown from about US$1 billion to more than US$40 billion.

Elsewhere, home to about 4,000 enterprises dealing in Chinese products comprising showrooms, shopping areas, restaurants and warehouses, the Dragon Mart in Dubai is one of the largest Chinese trading hubs outside of the mainland.

Khoo also pointed out that investment opportunities are two way. For instance, Saudi Arabia estimates it will invest about US$90 billion in domestic power generation over the next 15 years. Other Gulf states are also investing heavily in infrastructure projects. "Because of the size of new deals, Islamic banks need to partner with international banks to take advantage of their larger distribution networks," he said.

Khoo believes the time is ripe for Hong Kong's financial institutions to follow Citigroup, HSBC, Deutsche Bank, UBS and Standard Chartered Bank, which to varying levels offer Islamic investment opportunities in Hong Kong.

Managed from Dubai, HSBC's Amanah global Islamic financial services division is the largest Islamic financial services team of any international bank and provides opportunities for employees to work in the Middle East and the Asia-Pacific region, including Hong Kong. "The opportunities for Hong Kong to develop an Islamic platform are wide ranging. However, to succeed requires commitment," Khoo said.  


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