Islamic finance is attracting even non-Muslims due to perception of more tranquil market conditions and an improving regulatory backdrop, experts have revealed.
Islamic banking has traditionally been dominated by Muslim-majority countries in the Middle East and Southeast Asia, but that’s rapidly changing with banks revealing that more and more outsiders are seeking finance from them.
According to analysts, issuance of Islamic debt by non-Muslim countries is set to climb to a three-year high in 2017.
One of the major differences between traditional banking and Islamic financial products is that the latter comply with Sharia, or Islamic law, wherein earning interest on loans is prohibited. Further it bars funding activities involving alcohol, pork, pornography or gambling.
The value of sovereign sukuk, or Islamic bonds, issued outside the Middle East and Southeast Asia by non-Muslim countries reached $2.25 billion in the 11 months through November which is higher than 2016’s $2 billion and more than double the $1 billion recorded in 2015.
Islamic finance’s metamorphosis from a niche corner of global banking to a growing source of funding for rest of the world has been aided by a storied list of borrowers who have sold sukuk in recent years.
The government of Singapore was one of the earliest non-Muslim entrants into the space, followed by the United Kingdom, Luxembourg and Hong Kong, which issued their first sukuk in 2014. More recently, African nations such as South Africa, Nigeria and Ivory Coast have made legal and tax changes to, among others, make it easier for borrowers to issue sukuk.
Companies haven’t been far behind, with the likes of Goldman Sachs and General Electric’s GE Capital also selling Islamic bonds in the past few years.
Chinese entities such as Country Garden and Beijing Enterprises Water Group have also issued Islamic bonds through their Malaysian subsidiaries in 2015 and 2017, respectively. The companies used those proceeds to finance projects in the Southeast Asian country.
There are several categories of Islamic financial products, according to the World Bank:
- Mudaraba — a financial expert offers specialist investment advice to a customer and they share any profits at an agreed ratio.
- Musharaka — an investment partnership in which two or more parties, such as the bank and its clients, share profits and losses from a pooled investment at an agreed ratio.
- Murabaha— the financial institution buys the asset, such as a home or a car, and sells it to a client at a profit. Payment could be in a lump sum or in instalments.
- Ijara— the financial institution buys the asset and leases it to a customer for a fixed rental payment. The bank retains the ownership but may transfer that to the client eventually.
- Sukuk — similar to a bond but a sukuk buyer owns part of the underlying asset that is invested for returns.