Banking in accordance with the Koran By Donald Greenlees
International Herald Tribune, THURSDAY, JUNE 2, 2005 SINGAPORE John Lim was traveling the Middle East in 2002, searching for investors, when he realized something was missing from his pitch. His audience liked what he was selling: Asian real estate investments via a boutique fund management business he had set up with the Hong Kong billionaire Li Ka-shing. But potential clients in the Middle East wanted the investments to comply with the strictures of their religion. Two years later, Lim's ARA Asset Management entered one of the fastest-growing financial sectors in the world. ARA, based in Singapore, started a $450 million Asian property fund that would invest and be managed according to Shariah, or Islamic law. "We think there is a huge market to be tapped in Islamic capital," Lim said. In Asia, Europe and North America, bankers, fund managers, business consultants, accountants and lawyers are showing a growing interest in the potential of the Islamic market. As of mid-2004, the Islamic financial market comprised 265 banks with assets of more than $262 billion and investments of more than $400 billion, according to a report by the International Organization of Securities Commissions. The report estimated that Islamic banking, insurance and capital markets, although still only a small part of the global industry, had been growing at 10 percent to 20 percent a year for a decade. Within 8 to 10 years, the report estimated, as much as half the savings of the world's 1.3 billion Muslims would be in Islamic banks. Moreover, leading bankers and analysts say the development of Islamic finance has recently surged as more Muslims seek to place money in Islamic investments and the sophistication and the range of their investment choices grow. "There has been a real acceleration in the past 12 months, from my perspective," said David Vicary, a Kuala Lumpur-based banking consultant and expert on Islamic finance. "We have moved from 12 months ago saying this is an interesting little niche to actually saying this is mainstream." He estimated that if the pattern of growth continues, "20 percent of the world's assets could be attracted to Shariah-compliant products" in 10 to 15 years. And as the quality of Islamic financial products improves, Vicary said, growth will come from both Muslims and non-Muslims. Bankers and analysts attribute the upsurge to a number of factors: historically high oil prices, leaving the Middle East awash in money; the wider choice of products now available that comply with Shariah; and greater consciousness of religious duty among wealthy Muslim investors. "We have looked at numbers on the growth of Islamic wealth," said Ng Nam Sin, executive director of the Financial Center Development Department at the Monetary Authority of Singapore, the nation's central bank. "A large proportion is being generated from the Middle East, arising from the oil money, in addition to wealth from this region. The momentum is there for further growth and demand for Islamic finance as an alternative to conventional finance." Shariah, which is drawn from the Islamic holy book, the Koran, and the example of the life of the prophet Muhammad, governs all aspects of a follower's life, including financial affairs. Forbidden commercial activities include production and sale of alcohol and tobacco and investments in casinos and hotels where alcohol is sold. One of the most basic rules of Islamic finance is the prohibition of paying interest on loans or deposits. Islam also forbids certain kinds of risk-taking, especially financial activity akin to gambling, and it encourages the linking of income to productivity, profit-sharing and equitable contracts. In the simplest Shariah contracts, known as musharakah or mudarabah, banks avoid charging or paying interest by sharing profit and risk with the customer, effectively playing the role of equity partner. "You should not expect huge returns for doing nothing, is basically what Islam is saying," said Vicary, a 33-year veteran of banking in Britain and the United States who converted to Islam a decade ago. In a sign of the enthusiasm for opportunities in this field, Singapore, a bastion of conventional capital markets, is now chasing the Muslim dollar. Goh Chok Tong, former prime minister of Singapore and now chairman of the monetary authority, last year signaled plans to build links to the Middle East with the goal of turning his nation into the regional center for Islamic capital market investments, private banking services and fund management. The monetary authority has established an advisory group to provide guidance on development of the Islamic financial market. In April, Singapore gained full membership in the Islamic Financial Services Board, a global body that advises on Islamic financial market regulation and supervision. Underpinning Singapore's push into Islamic finance is the hope that it can act as a conduit between the fast-growing Chinese market and wealthy Middle East investors who want to invest in a Shariah-compliant way. Savvy investors, like Li Ka-shing's property empire, Cheung Kong Group, see the potential. In September, ARA Asset Management, in which Cheung Kong is a partner, signed a deal with Dubai Islamic Bank to create the Al Islami Far Eastern Real Estate Fund, with a forecast of 20 percent annual returns. "We have enough expertise and professionalism to bridge between the Middle East and China and East Asia as a whole," said Lim, the ARA chief. But the growth and interest in these new financial products are global. Major international banks including Citigroup, HSBC, Standard Chartered, BNP Paribas and Deutsche Bank all have Islamic units. What started in the 1960s as a Middle Eastern niche is taking off as a global banking phenomenon. Hedge funds, bonds, derivatives - almost every conventional financial product - now have Islamic equivalents. Executives at Deutsche Bank's Islamic finance operations, based in London, say they will start offering as many as 50 new Islamic products in the next six months after adapting their practices to meet the requirements of Shariah scholars. "We have always seen that the constraint in the Shariah market was on the offerings side," said Geert Bossuyt, the Deutsche Bank head of Islamic retail structuring. "The limitation has to do with the type of products that were offered, access to different asset classes and the costs attached to it. We have taken away those constraints." Deloitte, a New York-based business and financial consultancy, decided to get into the business globally in February. The company plans to offer just about everything from advice on structuring Shariah-compliant deals to Shariah accounting audits and Shariah compliance reviews for those already in the business. Vicary, who until recently headed Deloitte Consulting's practice in Kuala Lumpur and steered the firm's move into Islamic finance, said he had overcome executives' initial skepticism by reaping rich profits in the field. "We have grown from practically nothing to a business which is generating a few million dollars' worth of revenue a year; that is just in the first 12 to 18 months," he said. Although Vicary recently left Deloitte to join an Islamic bank in Malaysia, his former team is working on a blueprint to quickly expand the business. His ambitious forecast: "We could be looking at a $500 million consulting business within five years." 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