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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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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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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By Rushdi Siddiqui, Global Head of Islamic Finance

NEED FOR CONTROL ROOM: The industry has alphabet bodies that deal with various issues but when it comes to public relations and marketing, there seems to be a gaping hole that is getting larger

Is there a media and public relations (PR) “control room” for Islamic finance that educates, creates awareness, undertakes damage control, etc, so that the industry is “conventionally efficient” media-savvy?

Some recent headlines, by-lined articles, blogs and press releases from Islamic finance provide the answer:

* Is Islamic Finance a Failure? Reuters (Guest Columnist)

* KFH: Banking Products that Cement Value of Savings in Society, press release

* Islamic Banks Misleading: Clients Emirates 24/7 (Dubai, UAE)

* Reporters Notebook: The Ethical Aspects of Islamic Banks, www.greenprophet.com

* Most Trusted Middle East Banks, www.Alifarabia.com

* Questionable Islamic Banking Principles, www.freemalaysiatoday.com

* Shining Star of the Middle East, Financial News

* The Trillion Dollar Hoax, The Islamic Globe

* The Lessons from the Goldman Sachs Proposed US$2 Billion Sukuk Saga, Arab News

* Mega Islamic Bank Plans Cancelled, Gulf Daily News (Bahrain).

Let’s put aside those writers seeking publicity, cheerleaders of the industry, the anti-syariah movement and the well-meaning purest, and those who, unfortunately, have had a bad experience, from inappropriate products to fraud to customer service, in Islamic finance. The truth about Islamic finance is somewhere between “today’s offering and where we eventually want it to be tomorrow”.

The continued “conflicting” headlines should be the “cold water” wake-up call for the industry on two fronts:

ADDRESSING the substance, over form, of the Islamic finance, and;

CONVEYING its message, as the perception of the industry is not aligned to the objectives of movement, including raising/writing comments after “unbalanced, out-of-context, exaggerated, or untrue” articles in the media circles.

Industry body

Usually, industries, from finance and healthcare to technology, have financed a designated company/industry body to educate, lobby, promote to new customers and market, undertake damage control, and so on. Their broad message is supplemented and complimented by local institutions with customised local message.

For example, in many of non-Muslim countries with an established Muslim population, there are Muslim organisations, like Council of American Islamic Relations in the US or Muslim Council of Britain and so on, that, in effect, act as the “PR” arm for “righting wrongs, damage control, or addressing media/political errors of omission and commission”.

In Islamic finance, we have alphabet industry bodies: for accounting and auditing (Bahrain-based AAOIFI), for prudential regulations and governance (Malaysia-based IFSB), for Islamic capital and money market (Bahrain-based IIFM), etc.

Although, they have some common shareholders, let’s put aside the inability of these industry bodies to host one Islamic finance event that is supported by all of them. Let’s put aside lack of speaker invitation of one industry body to the head of its sister industry body for a presentation slot.

Notwithstanding present “turf” challenges, these industry bodies have done a commendable job of raising awareness and educating the wholesale stakeholders of the technical aspects of Islamic finance, in Muslim and non-Muslim countries, on standards, governance, and regulations. However, when it comes to the public relations and marketing of Islamic financial institutions or even damage control, there is a gaping hole and it is getting larger.

In fairness to the above-mentioned industry bodies, they have resource constraints, from manpower to finance, and, furthermore, expanding their mandate to include marketing and public relations for a geographically- dispersed and fragmented industry at various stages of development is unreasonable. However, something more needs to be done as Islamic finance is only strong as the weakest link.

The continued negative headlines will not go away even if we continue to ignore them or convince ourselves that it’s the growing pains of an emerging industry. They should be seen as the tip of the iceberg of issues and feedback on the industry’s perception/message.

Funding of body

The time has arrived for the majority to conclude there is need for an industry body that is tasked with public relations and marketing of Islamic finance at, say, the “wholesale level” - governments, regulators, financial institutions, law firms, western media, and so on. It allows for a universal message, a necessary pre-requisite to achieve harmonisation-cum-standardisation, that builds the foundation for local Islamic financial institutions to customise and add local content.

After determining a need for an industry body to promote and educate Islamic finance, the funding question must be addressed. Fortunately, the experience of AAOFI, IFSB, IIFM, etc, suggests the stakeholders could include the Islamic Development Bank (IDB), Islamic financial institutions (possibly one from every country that has declared itself an Islamic finance hub), forward-looking governments like Malaysia, the United Arab Emirates, and possibly the existing industry bodies (to include their technical message).

One of the lessons learned from the existing industry bodies is the need for adequate capitalisation and annual budget (adjusted for demand). It makes no sense to provide a shoestring budget when the objectives are global and the awareness and education is on-going and expanding.

Location of industry body

One of the takeaways about an industry body’s location is that it raises the profile of the country and the country raises the profile of the industry body, as there is now a “go to” place on the global map. Thus, bodies like the AAOIFI, IIFM and IIRA have raised the profile of Bahrain, while the IFSB, ISRA, and INCIEF have raised that of Malaysia.

Therefore, Dubai (UAE), Qatar, Pakistan, Indonesia, Brunei or even London, Paris, or Luxembourg have an opportunity to host an industry body that promotes awareness and information about Islamic finance and shows their commitment to the industry. Furthermore, much like the phrase “think global, act local”, it makes to have geographically situated satellite offices to address local time zone challenges.

Mandates

Beyond awareness, education, damage control, etc, one of the areas that require immediate attention is a more robust investor relations depart of Islamic financial institution, including addressing media training for executives. The media, especially western, wants access to senior executives, which implies challenging questions, and, it is here that the industry can best utilise them to send its message to the masses globally.

Additional responsibilities could include establishing and hosting a Davos-type event, including the US$640 billion (RM1.9 trillion) halal industry, in Europe, the Gulf and Southeast Asia. Thus, not Islamic finance per se, but the link of Islamic finance and funding education, healthcare, infrastructure, know-ledge-based economy, etc.

Some examples where the proposed PR Islamic body could have provided guidance for clear, coherent and concise clarifications:

SCHOLARS (confusion as to their role in the West), purification and zakat (not funnelling money to financing extremists), money exchange places in Muslim countries are not Islamic financial institutions, etc.

COORDINATE with other industry bodies for job openings, direct inquiries to appropriate industry bodies and Islamic financial institutions (reduce information cost for existing/potential users)

PRODUCT launches, new bank/takaful launched, etc. I’m not convinced that a general or financial PR firm can provide the needed specialised message and follow-ups that a dedicated body can direct.

DAMAGE control includes recent media frenzy on Islamic banking in Nigeria, Goldman Sachs’ US$2 billion sukuk, sukuk defaults, Islamic funds closing, Islamic bank (Dubai Bank and Islamic Bank of Britain) rescue, etc.

BRANDING of Islamic finance. Has time arrived to survey the stakeholders on the naming? In Turkey, its called Participation Banking and it conveys the essence and objective of the movement and is less politically charged, especially if Islamic finance is for all mankind.

Continuing to call it “Islamic”, combined with marketing materials emphasising syariah board and adherence, may not convey its universality.

Many of these issues also go to trust and confidence of Islamic finance by depositors, investors, shareholders, etc.

Conclusion

Although Islamic finance is less than 40 years old, the time has arrived for the industry to have a dedicated well-financed body to send a coherent and consistent message about the industry. This is an investment and not a cost, and not having such a body is to have continued schizophrenia headlines and resulting systemic brand risk.

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

Feb 17, 2012
By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

Q: We are hearing more comments from Islamic bankers who are saying Sukuk are bonds with an Islamic wrapper, and the industry needs equity/investment sukuk, what are your comments?

YTD: Let’s consider the question and its source and then boil it down to a statement. Islamic investment bankers say they (when they say “the industry” I have to assume they are speaking of themselves) need equity/investment sukuk. Simple answer? AAOIFI has developed them. I have always maintained that the market will determine the direction of Islamic finance. It may well be at the present time that the market for sukuk is driven by the needs of Islamic bankers in treasury departments. These needs include predictable pricing. Thus, they have their own preferences for certain types of sukuk, maybe not the same types as Islamic investment bankers. And when the saturation point is reached, by which I mean when the treasuries of Islamic banks have sukuk holdings sufficient for their needs, regulatory and otherwise, the secondary market that everyone is hoping for will develop. It’s beginning already in a limited way. And I share the frustration of our bankers. But we need to keep working.

Q: A large number of Sukuk defaulted in last several years, about 30 from Malaysia with 10 BBA and 16 Murabaha structure, are defaults a cause for concern or actually beneficial for the industry?

YTD: At the 2005 IFSB conference in London on the subject of law and sukuk the subject of defaults, then only a possibility, was discussed often and widely. After all, until there are defaults, it is next to impossible to know how judges will view sukuk. The problem is multiplied when different jurisdictions and legal systems are involved. We are now, therefore, in discovery mode. And while it is indeed lamentable that sukuk have failed and investors have suffered losses, it is now the responsibility of all involved to study the cases to see what might be done better in the future.
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Jan 30, 2012

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

There are two lasting bequests we can give our children. One is roots. The other is wings. — Hodding Carter

LET’S take a break from sukuk structuring and stock screening, and talk about the children of parents in Islamic finance. They may well be the industry’s future. I suspect many of us in Islamic finance do not come from Islamic banking parents or banking family dynasties.

We come from parents that were traditional bankers, engineers, physicians, scientists, journalists, merchants, civil servants, politicians, regulators, academics, and so on. And growing up, Islamic finance was probably not on our radar screen as a career.
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January 17, 2012

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

“The proper man understands equity, the small man profits.” Confucius.

The year 2011 was the year for [Malaysia] Shariah compliant index out-performance against all conventional developed and emerging market country indicies and almost all frontier countries.

The Islamic finance industry has not talked up the Islamic equity capital market story, as the Islamic debt capital market poster child, ‘Sukuk,’ has become the alter-ego of Islamic finance. But, does that amount to concentration brand and business risk for a $1 trillion, where Sukuk are, at best, 20% of Islamic finance?
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Will 2012 be the year of “come together” consolidation for Islamic banks?

Size is often the justification for achieving economies of scale, used to access deals for league table prominence, used as a buffer in a challenging environment, used as defensive measure to ward off unwanted suitors, and so on.

Islamic banks are very much like Islamic (equity) funds. There are hundreds of Islamic banks and funds, but the paid-up capital and assets under management, respectively, is too small to be meaningful. Yet, both, more so Islamic banks, present a unique situation (of an industry risk) of “too small to fail”.

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

The time has arrived to take a deeper dive on better understanding of Shariah compliant companies in an Islamic (or Shariah compliant) equity indexes. To many informed and uninformed observers of Islamic equity investing, it seems to imply investing in publicly listed companies in Muslim countries.

The end results contradict the assumptions. This also rebuts the often heard allegations by many from the anti-Shariah movement that Islamic investing is about investing in companies linked to terrorism or financing terrorism. The largest companies in the S&P Global BMI Shariah include ExxonMobil, IBM, Chevron, Nestle, Microsoft, etc.
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