Islamic financial activity tends to reflect trends in gross domestic product growth. This year saw a slowdown in global GDP growth which had a negative effect on Shariah compliant deposits and Islamic financing in the UK. Fortunately economic activity has been more buoyant in most Muslim countries than in Europe and the US. Islamic retail banking continued to grow in the GCC countries and Malaysia with 2012 a record year in terms of deposits and financing. Islamic capital markets also fared well with Malaysia continuing to dominate in Sukuk issuance but a significant amount of new issuance in Saudi Arabia, the UAE and Qatar.
The major disappointment has been the performance of Islamic finance in the Arab Spring countries. Despite the election of Islamist political parties in Egypt and Tunisia, Islamic banking still accounts for only a small proportion of deposits and financing. The Turkish market also continues to disappoint with the slowdown in its economic growth reflected in stagnant Islamic financing activity when adjustments are made for inflation. Iran’s banking system, which is completely Islamic, has been adversely affected by tightened US and EU sanctions. The outlook for the Islamic republic’s banks will remain problematic unless the sanctions are eased.
RODNEY WILSON
Emeritus Professor, Durham University UK and Visiting Professor, Qatar Faculty of Islamic Studies
The Islamic financial industry has continued to grow at a similar pace as previous years which, given the current economic climate, is an achievement in itself. However, the issues regarding available liquidity still need to be resolved and the fact that the IILM has not yet issued any instrument has been disappointing. The focus of the industry is still largely on being a player in the global market and often ignores what can be achieved by focussing on the local market. This could, incidentally, also provide an outlet for excess liquidity. Perhaps not as exciting as announcing a large international transaction, but ultimately a very worthwhile consideration.
DR NATALIE SCHOON
Principal consultant, Formabb
My comments are focusing on the Takaful industry.
The most outstanding developments have been on the regulatory side with the introduction of the RBC framework in Malaysia, the new Takaful rules in Pakistan and the decision by the Saudi regulator to forbid the Takaful model in the country. All of these regulations will have a profound effect on the Takaful industry in the respective market.
The biggest achievement has been the growth of Takaful in Africa which can be considered as one the new growth engines for the industry.
The biggest disappointment was the decision by the Saudi regulator to forbid the Takaful model in Saudi Arabia as this puts the viability of the Takaful model in question.
MARCEL PAPP
Head of Retakaful, Swiss Re Retakaful
The year 2012 could be considered as one of the most memorable years in Islamic finance and no doubt the record Sukuk issuances is an outstanding development. Several innovative Sukuk were introduced and in my view issuance of perpetual Tier 1 Sukuk as well as medium/long-term sovereign Sukuk is step in the right direction and will pave the way for further innovation and growth in our industry.
The Islamic finance industry’s inability to work together on unification efforts is a matter of concern and I hope in coming years greater attention and support is provided by more jurisdictions, institutions and market participants to infrastructure institutions. Moreover, the industry is yet to overcome challenges in issuing asset-backed Sukuk which is disappointing.
IJLAL AHMED ALVI
CEO, International Islamic Financial Market
Sukuk continues to dominate the Islamic finance industry in 2012. A series of milestone transactions, both in terms of innovation and size, shows not only the remarkable flexibility of Sukuk but also its importance in generating finance and high return. While Malaysia has emerged as an unchallenged global leader in Islamic banking and finance, with further marginalization of Bahrain and Dubai, one may also look at Turkey as a rising star of Islamic banking and finance. Following the rise to power of Islamist governments in Egypt and Tunisia and a new regime in Libya, there is expectation that Islamic banking and finance in these countries will flourish in the next few years.
Overall, this year has shown some signs of vulnerability of Islamic banking and finance. HSBC has wound up their Islamic businesses in most countries except Saudi Arabia and Malaysia; though in my opinion, it is only a matter of time before HSBC Amanah decides to call it a day even in Malaysia. This is certainly disappointing for HSBC, which invested greatly in creating a global Islamic brand. Some other western institutions have also shut down their Islamic businesses but rather quietly.
It is also disappointing to see Islamic Bank of Britain still struggling. Islamic retail banking in UK has not been successful at all. One questions the quality of market research and intelligence available to the people who started Islamic retail banking in UK. Similarly, despite some real estate success, Islamic investment banks have not been able to make a mark on the market. I have always argued that there is no need for fully-fledged Islamic investment banks in the UK. Islamic investment companies are easier to run and cheaper to maintain than investment banks constrained by the dictates of regulation.
It was also disappointing to see a former non-Muslim senior executive of Gatehouse Bank in London drag its former employer into a labor tribunal, accusing the bank of making him redundant because of his Christian faith. Obviously, his case is weak, as more than half of the said Islamic bank’s top management (including its CEO) is Christian and none of them have been treated unfairly because of their faith. It is interesting to note that the person in question was perfectly happy when he drew over a million pounds in wages and bonuses working for the bank. It was only when he was made redundant that he maliciously used his faith as a factor contributing to the termination of his employment. This was an interesting incident, which many Muslims would like to use in favor of their argument that CEOs of Islamic banks in UK should be Muslims (at present four out of six Islamic banks in UK have non-Muslim CEOs; Islamic Bank of Britain is without a full-time CEO but has never had a Muslim CEO since its inception). It would be really damaging for an Islamic bank in UK if its non-Muslim CEO after being removed from his job decides to take the matter to a court.
Overall, not a bad year for Islamic banking and finance, but the players in this market must be more cautious in the New Year.
PROFESSOR HUMAYON DAR
Chairman, president & CEO, Edbiz Consulting