Islamic syndicated finance is a growing facet of Shariah compliant finance which has seen its popularity surge in recent years. HODA ABDIKARIM ASHOUR discusses the opportunities and challenges that arise when promoting innovation in the sector.
Islamic syndicated finance has existed for more than 20 years, but recently has become increasingly popular as an alternative source of liquidity following the constraints on the conventional market from the credit crisis. Yet things don’t always go as planned. Numerous factors have come into play in boosting the growth of the sector: such as the global economy, the Islamic finance market and the credit market outlook in particular. In lieu of the continuing credit crisis, the sector has suffered from the latest economic recession.
Nevertheless, in the first half of 2013 Islamic syndicated finance regained some of its pace, possibly due to the positive impact of the growth of the wider global Islamic finance market. Reports suggest that Islamic banking assets globally are set to reach US$1.8 trillion in 2013, and forecast to grow beyond US$2 trillion by 2014.
In addition, the growth of syndicated finance correlates with the appetites and trends of the credit market. According to a recent credit market outlook, studies show that Asian growth in 2013-14 will be stronger than 2012, while the GCC credit market will continue to offer diversification benefits.
The increasing interest in Islamic finance in major markets across the globe portends robust future development for Islamic finance. Currently, the sector has witnessed a great transition to the next stage of development through international integration. Recently, the GCC and Turkey have emerged as remarkable players in the sector, making significant Islamic syndicated deals. The most recent deals to emerge in Islamic syndicated finance have also entailed distinctive features which could be a sign for vigorous development in the sector. With the recent positive attitude of Islamic finance alongside the Islamic syndication taking place outside the MENA region, the scenario looks quite promising.
In spite of the increasing growth in established regions, it is worth noting that several potential markets with large Muslim populations remain largely untapped. Up-and-coming geographic regions need to take steps to capture the interest of large-scale institutions which have the capabilities to penetrate the sector. The SME market is a relatively untapped space with huge potential, for example, especially in emerging markets where economic growth is robust. By extending Islamic syndicated transactions to such regions with the delivery of appropriate returns for the risks involved, the sector might reach the next wave.
In contemplating the challenge of developing such sub-sector markets, studies in all critical areas, mostly in strategic change, are required. In the face of financial distress, Islamic financial institutions need to adopt new strategies in response to market demand. One of the most important issues in improving the sector is the consistent development of market-winning products. Due to the flexibility of Islamic syndicated financing scope and structures, it is relatively easy to create more innovative and rewarding products. Despite this however, there are important points to be considered in developing Islamic syndicated products: such as commercial objectives, suitability of the structures and the requirement to satisfy Shariah. There is a wide range of Islamic financial principles that can be useful for market participants in offering successful Islamic syndicated finance strategies.
Innovation should not be confined only to the development of the products but should extend to the documents used. It is common for the documentation of innovative Islamic financial products to present ongoing challenges for Islamic banks. The absence of a standard documentation for Islamic syndicated finance restrains the potential of an increasing and effective growth rate. This is because the lack of a standardized document for Islamic syndicated finance increases the risk of non-compliance with Shariah, thus the hazard is that the contract will not provide, in the light of Shariah, sufficient protection of both parties’ rights.
Well-established documentation might, to certain extent, reduce Shariah risk, time and cost as well as contribute to financial stability and greater transparency in financial reporting. Moving globally requires a common platform for the international transactions in connection with Islamic syndicated finance, hence reducing the legal risk.
It is observable that certain regulatory bodies in the industry made remarkable efforts in regulating various aspects of the industry. It is expected that a well-executed strategy will take considerable time to be introduced, understood and implemented. However, with the support of the financial and legal sectors, regulatory authorities might develop further to meet the market’s demand for a new dimension of innovative, attractive and competitive products in the Islamic syndicated finance sector. Hence, collective efforts by key market participants will help to further propel the prospects of the sector moving forward.
Hoda Abdikarim Ashour was previously a legal/Shariah researcher at Azmi & Associates and is an associate member of the Amanah International School of Islamic Economics who is currently pursuing her PhD degree in Islamic finance law. She can be contacted at
[email protected]
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