Prospects for 2008 are very favorable for Islamic capital markets, but the timing of developments will be important and there will be significant geographical differences. The Sukuk market should witness record issuance, especially in the GCC, but expect to see more activity in the second half of the year as issuance becomes more attractive as costs fall and the indirect effects of the subprime mortgage crisis fade. Southeast Asian markets will experience more modest growth, much of it concentrated as usual in Malaysia, with corporate Sukuk issuance in Indonesia slow to take off. The prices of Shariah compliant equities should move upward, but in 2H expect conventional investors to do better as the share prices of major riba-based banks recover. This will be a good year for careful stock picking, with strategies that focus on value expected to pay off and index tracking less profitable. Despite the stock market recovery in the GCC in 2007, price-to-earnings ratios for major listed companies still appear favorable. A steady stream of IPOs in Saudi Arabia in particular should help fund managers looking to diversify further their Shariah compliant portfolios. The key driver of the Sukuk market later in the year will be the need to finance Saudi Arabia’s huge infrastructure developments with the new economic cities. An unpredictable factor is the future for the US dollar. Any revaluation of local currency in the GCC would result in fewer new Sukuk being dollar-denominated.
PROFESSOR RODNEY WILSON
The clear leader in the Islamic capital markets in 2007 was Sukuk issuance, which rose to US$30.8 billion, up from US$18.1 billion in 2006, according to Bloomberg. The end of the year left some doubt about the structure of future deals after Shariah board chairman of AAOIFI, Sheikh Mohammad Taqi Usmani, questioned the Shariah compliance of Ijarah Sukuk that contain repurchase agreements. Despite these doubts, Sukuk issuance will continue to grow in 2008 with likely new Sukuk from both the UK government and the Japan Bank for International Cooperation, as well as the second Sukuk from a US company. The controversy revolving around repurchase agreements provides the first area where there is significant push-back from Shariah scholars about Shariah compliance. I see this as a good step signaling a new stage of development in the industry where products are forced to move from being Shariah compliant to more Shariah-based. It indicates that the primary focus will move from enabling Shariah compliant products to improving the stringency of requirements about Shariah compliance. As other areas of Islamic finance become more widely known and accepted, I foresee that they will experience similar adjustments. These changes will enable Islamic financial products to better demonstrate their solid ethical underpinnings and in the end, provide a substantial basis for future growth. BLAKE GOUD Executive director, Institute of Halal Investing
I think a key development was the evolution of Sukuk products into an investment that was ‘genuinely’ asset backed versus asset-based. It’s a critical difference that investors, issuers and scholars should be aware of as it is a lot closer to Shariah ideals than the ‘purchase undertaking’ form of Sukuk (which still have an important place). In this context, Tamweel PJSC’s Sukuk was a landmark deal that broke new ground and the management staff, arrangers and lawyers are to be applauded for their pioneering efforts. Aside from the Islamic aspect, and despite the recent market turmoil, securitization is also one of the most sophisticated and important forms of finance, and it represents another key step to maturity for Dubai and GCC capital markets as a whole. KHALID HOWLADAR Vice-president/senior officer, Moody’s Investors Service
Islamic finance is slowly growing out of infancy. The next seven to 10 years will be dominated by trial and innovation. Boundaries of existing contracts will be explored thoroughly. For a while, the regular structures may get more complicated and initially may feel a bit synthetic, but that will settle down and unravel. Also, new types of compliant contracts and structures will start developing. A tension between innovative practitioners and more traditional scholars will be the logical result. Because of the present shortage of qualified personnel, an influx of newcomers with new ideas will sharpen the edges. We are awaiting the AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) decision on the future of some guaranteed structured Sukuk. Maybe we will also see the first Sukuk failure, followed by compliance testing in litigation. Or maybe we will see an Islamic bank close down. Islamic finance is strong enough, however, to rebuke the outdated ‘sustainability’ questions from conventional finance. Any blows will be taken graciously and life will go on as usual. The recent development of mega banks will continue and further boost growth. And Islamic finance will grow out of ‘mimicking’ conventional products phase and labeling as ‘alternative’, to being a standalone. And that is the way it should be. Islamic finance is not an alternative, but an answer. And some of those answers will be acknowledged and absorbed by conventional finance and banking. In short: exciting times ahead. PAUL WOUTERS Partner, Bener Law Office
The key industry development for Islamic banking in 2007 may have taken place outside the industry itself: the dramatic stumbling of the conventional banking system in its attempts to measure and control mortgage-related risks. This fiasco may further open the door for the global financial-services community to view Islamic banking as an increasingly strong alternative to the traditional ‘borrow short, lend long’ model. While the Islamic banking industry may someday suffer its own shakeout, for now it will be propelled by a ‘mantle of confidence’. This, in turn, will help broaden its footprint across global financial centers and expand businesses into new geographies, such as South Asia. In the year ahead, one trend we expect to continue is segmentation of the industry into various business lines. Rather than an amoebic overlap among client groups, we anticipate more defined wholesale, private banking and asset management businesses. While assuredly there will remain cross-fertilization between these units, the skills and infrastructure required by accelerated growth will require greater and greater specialization. We expect more people, including regulators, to be asking for more rigorous definitions within what has been a loosely defined ‘Islamic banking and finance’ industry. DOUGLAS CLARK JOHNSON CEO, Calyx Financial LLC
We will see the Sukuk market grown even bigger. As it is, the appetite for Sukuk among investors has not been satiated. All new issuances of Sukuk were oversubscribed. There will be more Sukuk issuances especially among non-Muslim corporates and sovereigns as well as multilateral institutions. The UK and Japan have already made significant efforts which may be fruitful this year. Also, I foresee that the race for the Islamic finance global hub spot will heighten this year as more and more players join the race. Malaysia International Islamic Financial Centre, which aspires to be the center for origination, issuances and trading for Islamic capital market instruments, will face strong competition not only from Dubai and Bahrain but also new players like Singapore, Hong Kong and London. The one offering the best attractive value proposition will win the race. AZRUL AZWAR Senior economist, Bank Islam Malaysia
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