The larger Islamic finance transactions are almost exclusively lead managed by the world’s mega banks. Will we soon see the smaller players in lead roles and what do they need to do to ensure big ticket success? |
Most Islamic banks are primarily engaged in retail business and lack the capacity and expertise to get involved in investment banking operations such as Sukuk management on their own. For major Sukuk issues they wisely team up with major investment banks. The co-management involving Dubai Islamic Bank and Barclays Capital being a notable example. In Malaysia, CIMB Islamic is the market leader, but it can draw on the investment banking expertise of its parent, CIMB. Co-management arrangements can be seen as a transitional step for Islamic banks, and a good way of acquiring expertise and experience. Within five years I would expect to see the major Islamic banks acting as sole managers for Sukuk issuance and providing advice on IPO’s and mergers and acquisitions. Dubai Islamic Bank is likely to be the first to do it alone, but expect Al Rajhi and Kuwait Finance House to follow, although both the latter will most likely continue to focus on their profitable retail and real estate business rather than plunge too quickly into to the higher risk world of investment banking.
PROFESSOR RODNEY WILSON
The title of Muhammed Saleem’s new book – “Islamic Banking – a US300 billion deception” – says it all. The mega banks essentially have a monopoly due to economies of scale in particular, but are wedded to a fundamentally un-Islamic “deficit-based” monetary infrastructure in a way that smaller players need not be. It follows that smaller players could take a lead – as value-adding service providers, rather than value-extracting credit creators – in developing truly Islamic “asset-based” financing mechanisms rather than fighting over the crumbs from the table of the current Islamic Banking charade which Mr Saleem dissects. CHRIS COOK Principal, Partnerships Consulting LLP
It is a bit difficult for smaller players to take lead roles unless they have the placement capacity to handle the private placement exercise.
MOHAMED RIDZA
Managing Partner, Ridza Law (Mohamed Ridza & Co)
Deals are driven by balance sheet size that determines underwriting capacity, distribution capability (syndication) and track record. In the Middle East, given the tenors and project sponsors (often sovereign/semi sovereign), pricing is fine. Consequently, margins are only good in lead arranging and therefore given the above pre-requisites, the larger, international banks get the deals. Islamic banks are challenged on two fronts – size and tenor – where only a few institutions have the necessary critical mass to manage the larger sized transactions. We need to ask why the smaller banks would want to get involved in big ticket items. This is not where their competitive advantage lies. They would be better served focusing on local corporate and retail markets or developing niche investment banking operations. This also underlines the need for consolidation in the industry and to create better capitalized institutions. Finally, securitization can potentially add capacity to some of the smaller banks. They may be able to originate from their network and then churn the assets off their balance sheets. However, the regulatory environment in the region may pose some challenges here. YAVAR MOINI Executive Director, Global Capital Markets, Morgan Stanley
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