Latin America has emerged as one of the most vibrant markets for business and trade in recent times. With increasing ties with Halal markets, the prospects of Islamic finance seem to be growing brighter in the region. SYED SIDDIQ AHMED explores.
Business environment: As per a recent report by the IMF, Latin America and the Caribbean is set to grow from 3% in 2012 to 3.5% in 2013, supported by stronger external demand and favorable financing conditions; forecasting brighter prospects for the region. The Latin American economy is one of the few economies around the world that has recovered from the global financial crisis relatively quickly.
Institutions such as Arab-Brazilian Chamber of Commerce have played an increasingly important role in integrating business relationships between the Middle East and Latin American countries. As a result there has been a surge in Halal exports from Latin America. Excess oil liquidity and geographical limitation to produce agricultural commodities within Arab countries also seem to augur well for Latin America to export their vast agricultural produce. The strengthening of business ties has resulted in an exploration of other business avenues. For example the UAE, a major Islamic finance hub, recently signed a US$996 million deal to take over the control of a Brazilian iron-ore super port through the Abu Dhabi’s government’s Mubadala Development Company and Dutch Trafigura Group. The region has explored different growth markets to strengthen its position as the one of the leading emerging markets in the world. Brazil’s participation in the BRICS bloc is an evident example.
Banking and finance: There are at least two Middle East banks that are currently operating in Brazil which have Islamic subsidiaries: the Bahrain-based Arab Banking Corporation (ABC) and National Bank of Abu Dhabi (NBAD). ABC has a 58% shareholding in Banco ABC Brazil. Over the last 22 years, the bank has built a solid customer base through its many branches in major cities of the country. It also has a branch in the neighboring Cayman Islands which is one of the most sought-after destinations for structuring Shariah compliant instruments. In 2004 Angela Martins, a senior representative and country manager at NBAD Latin America, wrote the first book on Islamic Banking — ‘A Banca Islâmica’— in the Portuguese language. Martins is also involved in organizing group studies on the subject at the University of São Paulo.
In December 2008 Securities and Exchange Commission of Brazil (CVM) and the Brazilian Securities, Commodities and Futures Exchange (BM&FBOVESPA) held talks with Malaysian authorities and discussed ways to enhance Islamic finance presence in the country. BM&FBOVESPA is Latin America’s biggest securities exchange. Applications for banking licenses in Brazil from foreign players are on an increase and Islamic finance players can take advantage by establishing their subsidiaries.
First Shariah compliant deal: Recognizing the vast opportunities in agri-business Abu Dhabi Equity Partners (ADEP), a Cayman-registered Islamic investment house, concluded the first Shariah compliant financing to emerge from Brazil in January 2013. The deal participants were White & Case, Deutsche Bank, Macquarie Bank, Khalij Islamic and Peterson Control Union Group.
Panama and Caribbean: A highly placed source in one of the UN offices in the region, on condition of anonymity, commented that: “I do believe there could well be important opportunities [for Islamic finance], particularly in Panama and also in some of the Caribbean Islands. The challenge will be to establish local contacts, perhaps through local mosques or prominent Muslim businesses.”
Opportunities: Latin America has more than four million Muslims and offers considerable opportunities to make Islamic financial services available to them. Muslim immigrants from Arab and other countries form a significant number with some holding prominent government positions. These populations have played a significant role in setting up Islamic centers in the region and development of Islamic finance may be a natural progression. The fact that Latin American people have liberal views on Islam may ease the spread of Islamic finance footprint.
Prospects in real estate and infrastructure: Potential for investments in public private partnership (PPP) projects for the region’s growing infrastructure development needs could be tapped by Islamic financial institutions. For example, projects to build and operate under the concession programs of the Brazilian government which plans to transfer about 7,500km of highways, 10,000km of railways and 159 ports to the private sector can be targeted. With Brazil getting ready to host FIFA 2014 World Cup and 2016 Olympic Games, massive investments have already gone into infrastructure development. There are further viable funding needs that Islamic financial institutions can tap including telecommunications, industrial, agricultural and urban development sector.
Challenges: “The major obstacles facing the Islamic finance industry when considering Latin American countries are currency and regulatory risks (where local regulations are not generally aligned to Islamic countries OR even the English legal system which has been favored by IFI’s venturing out of their local markets)” opined Yahya Abdulla, the head of Middle East capital markets at Cushman & Wakefield. In exploring new non-Muslim dominated territories, challenges to demonstrate viable financial alternatives and provide good returns to the investors would be paramount. The lack of awareness of Islamic finance and its benefits will require sustained lobbying with Latin American authorities. Global Islamic finance institutions together with existing institutions in the market such as ABC can play a bigger role in creating market visibility and building investment track records.
Outlook: With a booming economy, Latin America provides fertile ground for Islamic finance to develop. There are however many challenges that any non-Muslim jurisdiction must face in this endeavor. With the region’s excellent trade and business relations with some of the most developed Islamic finance economies,Latin America could be a virgin place in which Islamic finance can thrive.