Posts Tagged Islamic finance
Booz & Company’s Joe Saddi: The Arab Spring Toppled Governments, but High Unemployment Remains the Region’s Biggest Concern
Now a year beyond the first flush of the Arab Spring movements throughout Northern Africa and other parts of the Middle East, the difficulties of economic uplift in the area are becoming apparent. In a way, the sudden successes of the uprisings, particularly in Tunisia, Egypt and Libya, mask the real long-term difficulties of laying the foundations for sustained economic viability for the region.
Joe Saddi, the chairman of Booz & Company, has long done business in the region and spoke about both the Arab Spring’s upsides and downsides at the first Wharton Middle East North Africa (MENA) business conference recently.
“I hear often the phrase, ‘The Arabs never miss an opportunity to miss an opportunity’,” said Saddi. “But now that the opportunity to have an economic success is there, we can no longer afford to do that.”
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Despite Wealthy Appearances, the Middle East’s Oil and Gas Exporters Worry about the Future of Energy
One of the great lamentations of the Western world is that its economy is being held hostage to Middle Eastern oligarchies, that the nations of the Middle East and North Africa are becoming richer and richer from monies the United States and the rest of the developed world lay at their feet.
Yet at a recent panel at the first Wharton Middle East and North Africa Business Conference, experts who have spent years looking at the oil industry, often first hand from those oil countries themselves, painted a different picture. It is one of worry about the future of oil, and a move in many places toward not only different industries, but completely different kinds of energy production.
“The challenges in the Middle East transcend oil,” said Morten Klumb, a partner at McKinsey & Company, who has spent the last six years for the firm in the Middle East, often focusing on infrastructure and real estate, not solely the oil business. The World Bank, said Klumb, estimates that the region has to spend billions of dollars on infrastructure just to get up to speed.
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With Islamist parties dominating recent elections in Arab Spring countries, the Islamic finance industry will likely find opportunities to capture large volumes of new customers and emerging infrastructure projects, according to a report by global law firm Simmons & Simmons.
Intent on maintaining a secular financial system, regimes in Egypt, Tunisia and Libya were not supporters of Islamic finance, notes Tariq Hameed, a Dubai-based managing associate with the firm, and author of the report, ‘Blue Print for Islamic Finance following the Arab Spring.’
But in elections that have seen Islamist parties come to power, such as the Muslim Brotherhood in Egypt, Shariah-compliant banking has been endorsed as part of a larger social and financial reform campaign. “All of the parties have gone on record saying they support Islamic finance,” Hameed says. “It reflects their beliefs.”
Hameed says at the consumer product level, there is huge potential for growth. Partly because many people in these countries do not have bank accounts — approximately 25% of Moroccans and 33% of Tunisians with bank accounts, and only 10% of Egyptians, according to his findings. “There was a lack of offerings,” he says. “Many didn’t engage with the conventional banking system.”
While expected customer growth would be in volume, Hameed notes that the majority of such accounts would likely be low-income savers. Compared to Arab Gulf countries, GDP per capita among the Arab Spring countries is low: Libya is the wealthiest, but GDP per capita is estimated at just $14,000.
In addition to creating savings products, one opportunity could come from the further development in Islamic microfinance offerings, Hameed notes. Currently there is very little being offered to grassroots Muslims, he says, but institutions will have to serve demand from rural communities and micro-enterprises. The state can act as sponsor of such an initiative, he suggests.
Separately, Islamic finance will become an option for these governments as they seek foreign investment. According to Reuters, a number of Islamic financial institutions are opening branches in Libya, for instance, as it explores the industry. Successful Islamic financing of infrastructure projects already exist in Bahrain, Saudi Arabia and Bangladesh, Hameed says, so there are models states can study for implementation.
There remain challenges for the Islamic finance industry before they can reap the potential of these markets, Hameed adds. There are several issues that need to be addressed to ensure growth, his report notes, including the strengthening of consumer protection laws, clarifying governance, and establishing central Shariah boards for finance.
For Western financial firms and businesses seeking to be in the region, they will have to have a capability to engage in Islamic finance, Hameed notes. “If the customer wants Islamic finance, competitors will provide it if they don’t,” he says.
Investors with an eye on the Islamic world have witnessed parallel growth in two industries serving Muslims worldwide: Halal products, and Islamic finance.
Halal — Arabic for ‘allowed’ — signifies a product created in adherence with Islamic guidelines. Halal products are spread across several industries, including foodstuffs, cosmetics, fashion and healthcare. Islamic finance is banking that follows Muslim precepts, such as the banning of interest on savings and loans.
Intended to serve over 1 billion Muslims across the world, both markets boast compelling figures. Global Islamic finance is now considered to be a nearly US$1 trillion industry, while as of last year, the worldwide halal market was worth an estimated US$630 billion. That includes Europe and North America, which accounts for 12% of the global halal market.
The growth of the global halal and Islamic finance industries have spurred some financiers to develop new financial products that combine bits of both: Halal food indices and equity funds. In April, the SAMI Halal Food Index was launched, while in August, Malaysia-based OSK-UOB Islamic Fund Management started the Global Food Islamic Equity Fund.
There are already numerous Islamic funds and indices for Muslim investors, such as the Dow Jones Islamic Index, that shun companies engaging in anything un-Islamic, such as the production of alcohol, and carry a low level of debt and interest earnings.
But the halal index’s chairman, Rushdi Siddiqui, also the global head of Islamic finance for Thomson Reuters, claimed in a statement that it specifically targets the halal market to investors wanting a piece of its growth.
“Why not create a halal food index that captures those companies and have it available for all investors of the world?” Siddiqui asked. “A Halal food index would build bridges to Muslim investors, generate Sukuk (Islamic bond) issuance for financing halal food companies, and the money stays in Muslim countries for the development of the halal food industry.”
The chief executive officer of OSK-UOB, Md Noor A. Rahman, noted that increased pressure on foodstuffs availability provided investors an opportunity to profit. “An increasing global demand for food coupled with the growth of the halal food industry have resulted in a niche market,” he said in a statement.
But would-be investors into halal should take into consideration its pitfalls, detailed in a May report by the Canadian government’s agricultural department on the global halal market.
Overseas companies trying to break into the Western halal market have stumbled over export and logistics costs, and losing savvy customers to bad packaging and labeling, the report notes. The halal market is also fragmented because of different Muslim sects, income disparities, ethnicity, and several other factors, it adds, demanding a local approach to the market, rather than a one-fits-all scheme.
“Finally, consumers may lose confidence in the product’s halal status,” the report concludes. “It is important to ensure that halal certification comes from a reputable body. Halal status should be preserved, not misused. If consumers lose confidence in the product’s halal status, they will not continue to buy it.”
There is also the reality that halal products in the West can sometimes cause public relations issues for retailers, as a Muslim tag on a product or service is a cause for concern for some customers. In August, Whole Foods was forced to do an about-face and provide a mea culpa after one of its stores in Texas sent out an email instructing employees not to promote Ramadan, the Muslim holy month, in conjunction with the promotion of a halal food line on its shelves.
Dubai’s economy is on the mend, largely benefiting from the regional instability created by the Arab Spring. According to the International Monetary Fund, the glitzy sheikhdom in the United Arab Emirates (UAE) will experience annual growth of 3.5%; some of that comes at the expense of its neighbors, particularly Bahrain.
Following its bloody crackdown on Shiite protestors, Bahrain has seen law and financial firms flee to Dubai, or set up temporary offices there. The flow of new businesses has been welcomed by Dubai’s beleaguered commercial real estate sector, which has over 6 million square meters of vacant office space currently available, according to a July report by international property firm CB Richard Ellis.
Still, the influx of business has not provided the boost commercial lessees were seeking — according to the same report, office lease rates have dropped 18% year on year, and 75% from the market’s peak in 2008.
The outlook is even bleaker for the residential market, which is caught up in a vicious cycle of oversupply and lack of demand. At its peak in 2008, price increases in the UAE’s real estate market were on a six-year run. But the global financial crisis and Dubai’s debt issues derailed the market.
Since then, Dubai real estate prices have sunk nearly 60%, according to a Reuters poll. Building meanwhile continues, as developers attempt to capture what they can from old projects: An estimated 18,000 new homes will be added to Dubai’s market by the end of the year, according to property consultancy Jones Lang LaSalle.
Dubai has attempted to drum up new investors for its real estate market, offering three-year visas to anyone buying over US$272,000 worth of property, and also instituting an Islamic REIT to draw in institutional investors. But not enough buyers have entered the market yet, preferring to wait it out — according to the Reuters poll, a majority feel that the market is still two years away from hitting bottom.
The one bright spot in Dubai’s real estate market has been hotel occupancy. According to a report from Cluttons, an international real estate firm, overall hotel occupancy in the peak season for Dubai this year averaged 86%, a 4% year on year increase. Thanks again to the UAE’s relative calm in the region. “To what extent Dubai’s current performance is being buoyed by the recent political uncertainty in the region is not yet known and it is unclear how long this situation will continue,” noted Steven Morgan, head of Cluttons UAE.
Things are looking up for the Islamic finance industry in the Middle East. HSBC Amanah, the bank’s Islamic finance arm, sees Islamic sukuk mandates above pre-financial crisis levels. Interested issuers are seeing lower borrowing costs and tightening spreads which is lifting demand for the industry. Recent high-profile sukuk issues such as HSBC Middle East and Sharjah Islamic Bank were oversubscribed and show that the prospects for Islamic bonds through the end of the year are positive.
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Civil unrest in Egypt and Tunisia has created uncertainty in the Middle East, demonstrating that even the region’s established economies and their security apparatuses can stall under pressure from the street. Global consulting firm Oliver Wyman found in a recent poll of regional executives that such events are viewed as the biggest threats to business there. John Drzik, the firm’s CEO, tells Arabic Knowledge@Wharton that regional governments and businesses need to have strategies that see linkages between various risks and provide inclusive solutions for them.
Read the interview here: http://bit.ly/hWYeJl