full story at: <http://www.businesswithoutborders.com/may/page10.htm> P R O J E C T F I N A N C E High Finance Without Interest Financial Institutions That Follow Islamic Religious Precepts Are Growing Worldwide By Jean Parvin Bordewich Abdulkader Steven Thomas, CEO of the Islamic Investment Banking Unit at the United Bank of Kuwait PLC in London, knows exactly the moment Islamic banking came into its own in the West. It was about five years ago, when the Middle East manager of a major New York bank was urging his employer to acquire a bank in Bahrain. The bank’s executives in New York resisted, skeptical that there was much growth potential in the Islamic market. The discussion grew heated. During a break, the manager followed his boss into the men’s room. There he took out a black magic marker and scrawled on the mirror: "7242MA." "There’s your answer!" he declared. The cryptic graffito meant, Thomas explains, that the prototypical Islamic banking customer is 42 years old, earns at least US$72,000 a year and has an M.A. degree from a western university. "Our customer is no longer the stereotypical aging Middle Eastern man," Thomas says. "It could be a man or a woman. And it doesn’t matter whether he or she lives in Iowa, Jakarta, London or Riyadh. Our typical customer is a member of the younger generation of educated and highly compensated young Islamic professionals." These younger Muslims, says Thomas, are often more committed to following Islamic law than their parents. "However, no one is noodling out how to help these Muslims prepare for their hajj or their children’s education or their retirement," he says. "And there is only limited help for them in acquiring their homes." Thomas estimates that about one-third of the world’s 1 billion Muslims attempt to follow Islamic principles in their financial dealings. There are no reliable estimates of the size of the Islamic banking market or its rate of growth, but Thomas’s experience provides some insights. The Islamic Investment Banking Unit’s assets under management rose from zero in 1991 to about US$1 billion in 2000. Among the hottest markets are the United States and United Kingdom, both countries in which Islam is the fastest-growing religion. IIBU services include equipment leasing, trade finance, property acquisition, Real Estate Investment Trusts and other business and personal financial transactions. In March, IIBU closed on a contract that financed US$62 million of telephone equipment switches for one of its business clients in the Middle East. Two years ago, the Unit established Al-Manzil Islamic Financial Services NA in New York, headed by Acting CEO Abdul Hakim Dyer. Its initial focus is real estate services, such as financing for homes, mosques and schools. A handful of Western and international banks have Islamic banking units. One of the largest is Citibank, whose Citi Islamic Investment Bank, chartered in Bahrain, is capitalized at US$20 million. In February 1999, the Dow Jones Islamic global market index was launched. It was so successful that seven Islamic indexes are now available, focusing on industry sectors such as U.S. technology or geographic areas such as Canada and Asia. They track about 650 stocks acceptable to Muslims–companies that do not deal in tobacco, gambling, alcohol or pork for instance–out of the 3,000 in the Dow Jones global index. The Islamic index companies also must clear financial hurdles dictated by Islamic scholars and based directly on the Qur’an. Ratios of debt to assets and accounts receivable to assets, as well as non-operating interest income, are scrutinized carefully. An Islamic stock index was initiated on the London stock exchange in November 1999. "The Dow Jones index has had very substantial impact," says Thomas. "It has caused a broader universe of financial people to take our products seriously; it has raised consumer consciousness among Muslims; and it has helped Islamic business owners see that these Islamic issues aren’t barriers. It will create a new spurt of growth." PROJECT FINANCE DEMAND One market that has caught the attention of Islamic bankers is large-scale project finance. The need for investment in modern infrastructure in Islamic countries is huge. In 1996, Islamic countries represented US$32.8 billion, or about 20 percent of the total global infrastructure spending. Most Islamic countries do not insist that financing for such projects meets the requirements of Islamic law, and only recently have Islamic financial vehicles been developed that could handle such complex projects. Now, says Thomas, "new techniques allow for longer-term profiles and a greater capacity to finance infrastructure and industrial projects, as well as to draw non-Islamic investors into the investments." The new techniques include securitization, accrual and tiering. Under Islamic law, there is no objection to the sale or transfer of equipment and its re-pricing, a process that matches conventional Western hard-asset securitization. Accrual, which can be used for build-to-suit construction projects, handles risks similar to the kinds of risks non-Islamic investors are willing to take in construction projects. With tiering, several types of asset-based leasing and securitization are combined and applied to different aspects of a large-scale project. Bricks and mortar qualify for one type of Islamic financing, for example, equipment for another. "The first to buy into this integration of Islamic and conventional finance were global companies such as Shell in Malaysia," says Thomas. "They come with the capacity to execute major projects financially and technologically. Their willingness to apply Islamic financial structures to deals that they control has broadened the market." THE QUEST FOR HIGHER YIELDS The growing number of affluent, devout Muslims is one factor driving demand for Islamic financial services worldwide, but strictly financial considerations are starting to attract even non-Muslims in the search for high yields and socially responsible investing. (Cont. on pg. 11)
