By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

To grow, Islamic banks must compete with conventional lenders

Dedicated Islamic banks are generally national in nature and in certain markets have reached their ‘natural market share’ for Islamic banking, according to an A.T. Kearney study.

A recent report by the consulting firm A.T. Kearney, The Future of Islamic Banking, and a Reuters article, ‘No windfall from Qatar ban on Islamic windows’, have generated much productive chatter globally.
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By Rushdi Siddiquim, Global Head of Islamic Finance, Thomson Reuters

The retirement of Tan Sri Zarinah Anwar as chairman of Malaysia’s Securities Commission (SC) was a defining moment on the need to establish a ‘bench’ strength for women in Islamic finance.
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By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

The New York Times recently interviewed several American Muslims, including me, working in the financial arena for an article Muslims on Wall Street, Bridging Two Traditions. It explored two ‘conflicts’: Muslims working in conventional finance may encounter ‘interest’ against their faith, and challenges of abiding by Islamic ‘traditions’ in a secular workplace.

Today, it seems to an outsider, the burning issues for Muslims on Wall Street include prayer breaks, fasting and productivity, bonding after-office drinks, shaking a woman’s hand wearing a hijab, and structuring instruments dealing with (the prohibited) interest.

This cannot be what Muslims are about. Also, more credit must be given to working non-Muslim colleagues on understanding Muslim sensitivities.

Common shared values

Muslims, like other people with strong beliefs, do not see themselves exclusively focused on or defined by such issues. Islam has spread throughout the world because of its dynamic nature, where it influences local customs and is ‘influenced’ by the older local culture.

Religion is a private matter and it’s looked upon as foundation for building inner discipline and external strength to address challenging situations. People of faith, like their secular colleagues, want to climb the corporate ladder and break the glass ceiling to get to the executive floor, if not the corner office. Muslims have been on Wall Street and High Street for many years, if not decades, and it’s only now they are being noticed. The difference between then and now is there are more Muslims in the financial sector and non-Muslim colleagues know more about Islam because of a combination of internet, 24-7 news, 9/11, documentaries, Dubai’s accomplishments, Islamic finance and personalities like His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai.

It should be noted that many Muslims were involved in the Occupy Wall Street movement because of common shared values. In the New York Times article there are two quotes that best summarise how Muslims, residing in a non-Muslim country such as the US, should think about and approach a place of work and perception of fellow workers. “I think Muslim professionals are too sensitive and underestimate our co-workers,” comments a consultant in the article.

“Seek the opportunities and firms that speak to their set of values, expertise and passion,” said Mohammad Al Arian, CEO of Pimco.

Just as an employer interviews a potential employee, the latter also needs to interview the former.

I have worked at two multinational companies in the US, heading their Islamic finance business, in New York. First at Dow Jones Indexes for 10 years and now at Thomson Reuters.

A common denominator for international companies is their diverse employee base due to extensive international presence, including many Muslim countries. The corporate culture in these companies reflects common shared values formalised in codes of ethics. Thus, these companies understand ‘sensitivities’, and have high expectations of all employees.

As Muslims working in the West we do have a tendency to initially “underestimate our co-workers” in understanding our rituals (prayers, fasting, etc.), and our prohibitions (alcohol). While it could be attributed to many things, such as prejudices, with time there is a mutual understanding and respect.

The New York Times article used examples of Muslims finding places for praying during working hours or Friday prayers, and fasting during Ramadan. The article should have taken this one step further, and asked the Muslim worker about non-Muslim colleagues fasting or visiting a mosque.

Most, if not all, of us have non-Muslim colleagues who have fasted, some partially (till lunch time) and others until sunset. One of the great attributes of Americans is they like challenges, and will push the envelope of endurance. Others have visited mosques, and made observations such as “nothing fancy inside”, “where are the stained glass windows, pews, gold crescent and star?”

Maybe the article should have interviewed non-Muslims working in senior positions in Islamic finance in Saudi Arabia, the UAE or Malaysia on drinking alcohol, shaking hands with conservative women, breaking meetings for prayer time and so on. As senior executives, they are deemed ambassadors of the Islamic financial institution, and it does imply abiding by a certain level of Islamic code of conduct in public places.

Bottomline

The bottomline is that there is understanding and respect for rituals as long as teamwork, quality and deliverables are not compromised.

Muslims working in non-Muslim countries do understand work is for work, even in Islamic finance, and informed non-Muslim colleagues understand basic tenets of Islam. Muslims need to continue taking a pragmatic, over dogmatic, approach to finding the balance between faith and finance.

The writer is Global Head, Islamic Finance and OIC Countries, Thomson Reuters. Opinion expressed here is the writer’s own

By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

Dear Dr. Ahmad Mohamed Ali, President, Islamic Development Bank (IDB) Group:

Asalaam Alaikum:

The Islamic finance world welcomes your comments on the ‘Mega’ Islamic Bank to effectively compete against well capitalized conventional financial institutions.

“…The ‘Mega Islamic Bank’ comes as an initiative of the Islamic Development Bank in its efforts to address the dearth of senior financiers, the absence of the Islamic tools of stock exchange and the absence of market liquidity between Islamic banks.”

However, $1 billion, with $500 million in paid capital by the three founders (IDB, Dallah Albaraka and Qatar Government), is smaller than three existing Islamic banks, which have never addressed themselves as ‘mega.’ The three include Saudi Arabia’s Al Rajhi, Qatar’s Mashraf Al Rayan and Kuwait’s Kuwait Finance House (KFH). Furthermore, it seems the ‘mega’ story may be incomplete without Malaysia’s participation.

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By Rushdi Siddiqui

Daud Vicary Abdullah is an authority on Islamic banking and has contributed to a number of books on the subject.

He has been in the finance and consulting industry for more than 38 years, with significant experience in Asia, Europe, Latin America and the Middle East. Meet Daud Vicary Abdullah, the president and CEO of International Centre of Education in Islamic Finance (Inceif), the global university of Islamic finance.
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“We must remember that one determined person can make a significant difference, and that a small group of determined people can change the course of history.” – Sonia Johnson

The recent BRICS summit in New Delhi, India, should be a wake-up call for the Muslim world’s own proposed BRICS, called SAMI: Saudi, Ankara, Malaysia and Indonesia.

The BRIC story, Brazil Russia, India and China, started in 2001 by a Goldman Sachs’ Jim O’Neill, “Building Better Global Economics BRICs”. In late 2010, an “S” was added for South Africa. These are growth markets with increasing political clout, and combining for nearly 50 per cent of the world’s population, US$14 trillion (RM42 trillion) GDP, and excess of US$4 trillion (RM12 trillion) foreign reserves (source: Wikipedia).

Today, politics is increasingly subordinated to economic capitalism, as ideology can no longer address the concerns associated with the “Misery” Index: unemployment, inflation, etc. The author initially raised the “Muslim BRIC”, SAMI, concept last year, as existing Muslim country clusters like OIC, GCC, MENA, CIS, etc., have not captured the imagination of investors.

However, after meeting with various institutions and individuals, like Dr Nasser Saidi, chief economist of DIFC, from the Muslim countries, one of the most commonly heard feedback was the four country clustering, SAMI, was too small and not representative sample of the 57 Muslim countries (OIC).

Another feedback was there are political sensitivities with OIC sub-clustering, hence, it seems the politics (cart) are placed before economics and finance (horse). Finally, sporadic comments included, “why include Malaysia?” Answer is below.

SAMI + 3

The collective market place is more intelligent than an individual, hence, proposed Muslim majority countries to add to SAMI could include: Nigeria, Pakistan and Egypt. If we look at metrics for present and growth concerning population, GDP, regional influence (politically and economically), Islamic finance, halal industry, nuclear capability (Pakistan), inclusion in other grouping (Egypt as part of CIVETS, and NIGERIA as part of Next-11), etc., these three countries are ahead of their brethren Muslim countries.

If we look at projections from the 2007 Goldman Sachs study, BRIC and N11 Nations, we see that Nigeria (percentage growth from 2006 to 2050 is 1416 per cent), Egypt (1600 per cent) and Pakistan (908 per cent) are mentioned in the top 22 countries for GDP by 2050.

The challenge now becomes what to call the new grouping (not political club)? The world is about sound-bites and catch-phrases, as goes to retention and recall, hence, the appropriate naming will goes to reach/traction, assuming the combined substance of the countries conveys a strong message of growth and opportunity.

Thus, do we call the proposed grouping as SAMI + 3, SAMI and Beyond (sounds more like a cartoon outer-space movie), SAMI-PNE (pronounced as symphony) or something else.

The ideal situation may just be SAMI + 3. Why? As other Muslim countries grow and develop, they can be added easily without having to reconfigure the name. The only issue with plus (+) Muslim country scenario is the additions to not get the branding in the marquee name. Well, there are trade-offs and difficult to satisfy everyone.

(It should be noted that metrics on political freedom, human rights, corruption, illiteracy, healthcare, infrastructure, per capita income, brain drain, capital flight, etc., were not factored into the equation in suggesting Nigeria, Pakistan and Egypt.)

SAMI + 3 Bank

The naming of the Muslim country cluster is only a beginning. The lubricant for any country that wants to become high income economy is finance, Islamic, conventional or combination.

For example, does the Muslim world need a development bank? We already have the Triple A rated Islamic Development Bank, and, it has done a remarkable job since its inception under HE Dr Ahmad Mohamed Ali Al-Madani. However, one cannot have enough capital, especially, when some of the least developed countries with the fastest growing population happen to be Muslim countries.

(Some “experts” have equated the volatile mix of “poverty, population and pulpit pronouncements” as breeding ground for opposition, coups and extremism.)

If the recent BRICS summit can raise the prospect of a development bank, “BRICS Bank”, to fund infrastructure and development projects in the emerging markets, which happen to be all Muslim countries, then SAMI + 3 needs to consider merits of comparable bank.

Thus, as an alternative to the multi-lateral World Bank, Asia development Bank, Africa Development Bank, etc., is being considered for not only infrastructure but also facilitating trade, the Muslim world also needs to have some parallel thinking/development to capture the sloshing liquidity.

However, it should not be another dedicated Islamic financial institution or proposed Islamic Mega bank, as many Muslim and non-Muslim countries (read India) neither have a regulatory infrastructure in place nor have made Islamic finance a priority.

The lack of interest in Islamic finance may be due to the now disproven argument (in North Africa) about catering to Islamists. The more important point is not to wait for the “‘i’ to be dotted and ‘t’ to be crossed” for arrival of Islamic finance in these jurisdictions, as the law necessity can be invoked as interim suggestion for finance to fund growth, development and trade.

Malaysia Leads SAMI + 3

Malaysia has never been equated to be a surplus capital provider vis-à-vis the petro-liquid GCC region, however, increasing number of entities in the Gulf are raising money in Malaysia via sukuk and bond.

Thus, Malaysia may actually be perched in a unique (window closing) position to lead not only the Muslim world, but also the emerging markets to establish what the BRICS summit suggested: lead, house and host a (SAMI + 3) development Bank.

Thus, for once, a Muslim country leads by providing a model for BRICS with a “go to market concept” model development bank.

Malaysia has history of “vision, will and means”, in achieving the imaginable, be it overcoming the Asian financial crisis without IMF medicine, becoming a globally recognised Islamic finance hub from a modest start in 1983 or spear-heading and housing a multi-jurisdictional entity, IILM, to address short term liquidity for the US$1 trillion (RM3 trillion) industry.

Answer: Malaysia should be included in SAMI + 3!

For example, five of the IILM supporting countries, Malaysia, Saudi, Turkey, Indonesia, and Nigeria, overlap with SAMI + 3, and the new Egypt and Pakistan should be amenable to a development bank that could assist in job creating trade and investment.

Reality v Rhetoric

The real work commences after the photo-op sessions are over, and one finds there are real world challenges, from subtle to real and in-between. For example, some of the BRICS challenges that may have application with the proposed SAMI + 3 clustering:

Border challenges: India and China

* Indonesia and Malaysia or yesterday’s news?

Governing Ideology: Communism (China), Democracy (India/Brazil/South Africa), Democratic Authoritarianism (Russia)

* Outside of Saudi Arabia, six of the seven SAMI + 3 are democratically elected governments.

* Military influence (budget as percentage of GDP) can be seen within Turkey, Egypt, Pakistan, Nigeria and possibly Indonesia.

Regional influence (financial, military, etc): Russia and China

* Saudi Arabia and (the new) Egypt?

* Interesting possibility of India (BRICS) and Pakistan (SAMI + 3) for regional influence.

Obviously, there are other areas were “intent concerns” may lie amongst BRICS countries, but it would appear there are fewer areas of mutual suspicion within the SAMI + 3 for, say, a development bank.

First Summit

Malaysia, unlike many Muslim countries, typically puts on good international shows, be it conferences or summits. The time may be right and ripe to put on the First SAMI + 3 Summit in Malaysia, like the first BRIC Summit in 2009, and, like BRIC, led initially by finance ministers to issue a declaration for a just, financially inclusive, impact investing multi-polar world order.

This could possibly be bigger than or complimentary to the Asean story. The political impact, within Malaysia and outside, is a needed “feel good” story today within the Muslim world.

Thus, the alliance, SAMI + 3, may be just counter-balance to BRICS and G-7 on geo-political affairs.

The faces and places of a New World Order: Control our destiny or be defined by others?

Egypt?

Rushdi Siddiqui is the global head of Islamic finance at Thomson Reuters

By Rushdi Siddiqui, Global Head of Islamic Finance at Thomson Reuters

We already know about displaced commercial risk, credit, liquidity, operational, Shariah non-compliant, and markets risks in Islamic finance. What about ‘key-person’ risk in Islamic finance?

What does a former Minister of Economy of France (Christine Lagarde), former Prime Minister of United Kingdom (Gordon Brown) and former under Secretary for International Affairs, US Treasury (John Taylor) have in common? They were all high profile public sector personalities pushing Islamic finance in their respective jurisdictions, and, upon leaving office, the movement’s momentum has been meandering or has stop ‘cold’ in the tracks.
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By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

“Interest equals disinterest because the lender has nothing to do with the borrower and his business. Islamic finance aims at creating an economy in which one financial dollar equals one real economy dollar.” Yusuf Talal DeLorenzo, Shariah scholar
Today’s attention span can be described by a seven letter word “Twitter”. The amount of seconds in a minute, minutes in an hour and hours in a day is the same as far as one can remember, yet we seem to be busier than ever in an information overload world.

It seems the typical time for processing, analysing and drawing conclusions of, say, news headlines is confined to the first few paragraphs of a story and we must act fast in scrolling headlines in real time.

In a world of “hyper-trading” and “flash crashes”, information is the new currency of choice for the informed. John Naisbitt, a futurist and best-selling author, stated it eloquently, “… the new source of power is not money in the hands of a few, but information in the hands of many”.

However, it seems we have also reached the point of being “efficiently destructive” as the US subprime and eurozone debt crises may be examples of “over-reaction” to data points.

The attention span in Islamic finance also seems shorter. In the course of the last few years, I’ve tried to explain aspects of the industry in catch phrases and sound bites. It is not meant to be a gimmick or attributed to laziness, but reflects the financial world landscape we operate in today. It’s well accepted that Islamic finance is a subset of conventional financial, and today, a better understanding may just require sound bites that conjure up a mental picture of what the user has already encountered.

Thus, financial industry participants have heard or read phrases like “efficiency, intermediation, 1.0 or 2.0, eurobond and shelf registration”, etc, and such words produce a mental picture of what is being described. It then becomes an easier task in describing parts of Islamic finance, from work in progress to existing offerings, to open minded interested parties.

SOUND BITES
Boring finance is in vogue: Several years ago, I was presenting on structuring, screening and product offerings in Islamic finance. After the polite “golf clap”, an audience member, probably a trader or hedge fund manager commented “this stuff is boring, how do you juice returns?” I replied, “boring finance” meaning lack of use of excessive leverage and turbocharged derivatives, has (typically) a narrower bandwidth of returns, but a global target market. He replied, “what is the point when financial engineering is not allowed to lead your industry?”

Well, the subprime and sovereign debt crises have flushed out one important takeaway: Investors had more risk than they thought they had. The transparency associated with “boring finance” seems to be vogue today as “risk” is better understood.

Islamic Finance 2.0: We need to speak in the language of the worldwide web (www), as it’s the “lingua franca” of the community seeking connectivity to undertake collaborations for the benefit of Islamic finance contributions. It took the Islamic finance industry nearly 40 years to reach the magical US$1 trillion (RM3.07 trillion) size, i.e., 1.0. Now, the consensus is that it should take five years to reach US$2 trillion (RM6.14 trillion), hence, 2.0.

Information intermediation: To get to Islamic finance 2.0, information intermediation (prerequisite for financial intermediation) needs to be conventionally efficient. In certain quarters, the western financial model or system may be discredited, however, it is difficult to deny the information side of the model is discredited.

Today, information about Islamic finance, from news to data to structures to fatwas, is fragmented, scattered and (oftentime) stale. For example, today Islamic finance news is not time sensitive. Hence, there may be 10 stories on, say conventional funds in one hour globally on the wire service, but only 10 Islamic fund stories in a month.

For an effective output, one needs to have an informed input. The information intermediation must be to the standards of a western/conventional terminal user.

Conventionally efficient: It is assumed that the financial sector is the lubricant of any well functioning G-20 economy, which includes three Muslim countries — Turkey, Saudi Arabia and Indonesia — where Islamic finance exists.

Today, Islamic finance is best categorised as an emerging market phenomenon and national/domestic in nature. Therefore, Islamic finance information as part of pre-trade work flows for various existing asset classes, from treasury to sukuk to compliant investing, needs to become conventionally efficient.

The conventional efficiency of Islamic information can be seen as:

MORE precisely measuring, mitigating and monitoring risk, including capital charges for compliant participatory instruments,

CROSS selling Islamic finance to non-Islamic community, including joint ventures, and

REACHING the non-bankable and disenfranchised customers. Put differently, such information efficiency will act as growth factors and facilitators.

A.I.R. (Authenticity, Innovation & Reach): One of the battle cries in Islamic finance is (indigenous) authenticity as it goes to:

DELINKING or decoupling from the law necessity and conventional finance, and

ADDRESSING the question for the man on the street, “what’s the difference?” The authenticity (A), less standardisation, will typically set the foundation of innovation (I), and where there is “A and I”, reach (R) generally follows.

However, some in Islamic finance have commented it may be just “hot air”. An example of indigenous authenticity that has been classified as innovation is the alternative Libor, Islamic Interbank benchmark Rate (IIBR) launched in November 2011. It has been an ongoing industry issue, delinking from Libor and it was addressed by industry institutions and market participants. IIBR is now reaching the early acceptance stage whereby its being discussed by lawyers for inclusion into modalities of contracts as reference price.

Malaysia is nearing Shelf Registration Efficiency for sukuk: The sukuk has become the poster-child for Islamic finance and no one country has done more sukuk growth and development than Malaysia and its stakeholders, from Bank Negara Malaysia to the Securities Commission to the Association of Islamic Banks Malaysia (AIBM) to the Bond Pricing Agency of Malaysia (BPAM) and so on. Thus, the time to market is measured in weeks and not months. Hence, Malaysia sukuk market development seems to be following the early growth patterns of the eurobond market.

Furthermore, the sukuk development flushes an important point about debt capital markets (DCM): It is about liquidity and not just listings. Thus, jurisdictions that issue press releases about number of sukuk listed or the total size (dollar amount) of listed sukuk are missing the bigger point — DCM development is about liquidity as liquidity begets liquidity and listings.

Islamically over-leveraged: As one can be conventionally over-leveraged, one can be Islamically over-leveraged. Thus, there is no “divine put” in Islamic finance as the “syariah” will not save someone from bad business decisions, bad documentation or be “lender of last resort”. Thus, there have been sukuk defaults and bankruptcies, Islamic investments banks (really real estate project banks) changing the business model, etc.

Islamic finance (today) is about personalities: When Christine Lagarde was the French Minister of Economic Affairs, Islamic finance was moving forward in France and now seems to have been put on hold after she left for the IMF. When Gordon Brown was the UK Prime Minister and Chancellor of Exchequer, Islamic finance was also moving, and upon his leave, Islamic financial seems to have taken a sabbatical in the country.

Thus, it seems there may be “key-person” risks in Islamic finance, and more so in Muslim countries where it is flourishing; Malaysian central bank governor Tan Sri Dr Zeti Akhtar Aziz, Securities Commission chairman Tan Sri Zarinah Anwar (she is to leave at the end of the month and there is much confidence in her successor Datuk Ranjit Ajit Singh), Islamic Financial Services Board (IFSB) secretary general Rifaat Abdul Karim (his successor Jaseem Ahmed has carried on the work to the next level) and others.

As with any new industry, personalities will give way to institutions, and institution like Malaysia’s AIBM is a good case study on how to formalise a movement.

Islamic finance is a sunrise industry: The US$1 trillion industry has moved from viability (an alternative to conventional finance) to credibility (establishment of Islamic windows/subsidiaries) and has arrived at durability (global financial crisis). It is now beginning the journey to sustainability and scalability, with the hope of A.I.R. for mankind.

Rushdi Siddiqui is the global head of Islamic finance at Thomson Reuters

March 14, 2012

By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

Provocative statements are commonplace in the world of politics, academia, business and finance. They serve a ‘perception of purpose’, from distraction to direction and denial to dissatisfaction.

Put differently, such comments are viewed as ‘info-tainment’ to stand out in a competitive market environment.
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Feb 27, 2012
By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

Dr Mohammad Daud Bakr, president and CEO of Amanie Advisors, has the distinction of being both a globally-renowned Sharia scholar as well as an acclaimed entrepreneur.

His decades’ worth of industry experience is both Amanie’s pillar of knowledge as well as the focus of its clients’ attention.

In an exclusive interview with Gulf News, Dr Daud provides insights into Arab Spring countries’ potential for Islamic finance, scholars sitting on multiple Sharia boards and some of the challenges faced by the $1 trillion (Dh3.67 trillion) industry.
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