Is Dubaiâs ambition to be a hub for sharia-compliant finance realistic? Orlando Crowcroft finds some optimism, though there is a need for trained financial advisers.
The announcement at the start of the year from Dubai’s ruler, Sheikh Mohammed bin Rashid, that he wants to turn the emirate into a world capital for Islamic finance may have raised eyebrows in the global business community. Talk is cheap, after all, and new initiatives ten-a-penny since the global recession took an axe to the United Arab Emirate’s breakneck economic growth.
But a closer look at this latest push from Dubai’s ruler suggests the sceptics may be wrong. Maybe the emirate can carve a slice of the lucrative Islamic market, currently dominated by London, Malaysia and Bahrain. Bloomberg data revealed recently that Gulf Cooperation Council sales of sharia-compliant bonds, or sukuk, tripled to $21 billion last year, with yields dropping to all-time lows.
Dubai, which derives about 11% of economic output from financial services, is looking at expanding the market for Islamic funds, sukuk and loans, according to Sami Al Qamzi, director general at Dubai’s Department of Economic Development. On the ground, plenty are taking the setting up of the new Islamic Finance Council very seriously.
“I’ve been in sharia now since 1998 and I have seen many initiatives come and go, some successful, some not,” says Eric Meyer, executive chairman at Dubai Shariah Asset Management. “But this ain’t some small time, feel good initiative – it is serious stuff.”
Dubai has rebuilt its reputation as a business hub since the global recession, adds Meyer, and caution has been replaced with ambition.
“I feel, from everything I see, that Dubai is starting to go into a growth mode.”
Mike Cowley, head of direct securities services for the Middle East and North Africa at Deutsche Bank points out that Dubai and the UAE have always had an edge when it comes to structuring and executing Islamic finance transactions. Not only does Dubai benefit from the regulatory platform of the Dubai International Finance Centre (DIFC), it has solid roots in the industry dating back to the Dubai Islamic Bank, which became the first commercial Islamic bank when it was set up in the 1970s.
“Just as London is seen as a global Western hub for capital markets because of its accessibility, infrastructure and intellectual talent, Dubai is well positioned to take a regional leadership role as it is increasingly attracting and developing the same,” says Cowley.
The emirate has already emerged as an important destination for Islamic structuring skills, complementing existing locations such as London and Kuala Lumpur, he says.
“I would expect Dubai to peacefully co-exist not just with those established players but the nascent ones from other continents as well.”
Others agree that the influx of talent over the past few years, particularly in the financial services industry, sets Dubai up to enter the Islamic finance market more formally.
“Dubai has already become a hub for the regional finance market,” says Giambattista Atzeni, senior relationship manager at BNY Mellon Corporate Trust, who is also chairman of the Gulf Bond and Sukuk Association steering committee.
Many of the debt transactions in the Mena region are arranged, serviced and structured by financial service workers in Dubai, he says.
But the role of the asset management industry in Dubai’s shift into Islamic finance raises questions. There is a perception that restrictions imposed on Islamic funds, including those on derivative structures, make them less popular, as well as less profitable to investors. Atzeni says achieving clarity on what is permissible for Islamic funds can be difficult.
“You start from the assumption that money is not a commodity. You need to have an element that traces back to a tangible type of investment in some shape or form. The more exotic derivatives may not be compliant, but this is up to the relevant sharia scholar. Perhaps things are perceived differently in different regions, and certain people more strict than others,” he explains.
“That said, restrictions are there only for one thing: in order to provide a level of risk which is in line with what is acceptable by the investor.
If an investor doesn’t like a certain type of instrument because he doesn’t perceive it to be sharia compliant, then he is not going to buy it. So ultimately the demand is going to create the offer, it’s not the other way round.”
Another challenge lies in selling Islamic products.
Meyer, of Dubai Shariah Asset Management, has been involved in Islamic funds in Dubai for over five years as a major shareholder in Shariah Capital, which developed a sharia-compliant platform for alternative investments with Barclays Capital in 2007.
The Kauthar Gold Fund, from Dubai Shariah Asset Management, has frequently been ranked in the top ten mining and metals fund tracked Barclay Hedge, a research firm.
The company is working with Dubai-based investment advisory firm Mondial to market the Kauthar Gold Fund to retail investors in the UAE, but Meyer says there is a lack of independent financial advisers trained in Islamic finance who are capable of tapping into the local market.
“As of last year we’ve converted our gold fund from an institutional offering… to allow retail investors to get involved with as little as $5,000 with weekly liquidity,” he says. “But over 75% of the retail investors in our fund, through Mondial, are non-Muslims, which suggests to me that the customer base for Mondial is based on total returns. They love the fund because it works.
“[Islamic finance] is a big opportunity for the asset management industry if it is done right and if it comes with a solution. There needs to be an educated sales force as well. I am so frustrated that we’ve built state-of-the-art Islamic products, but I can’t teach a sales force what is special about them or how to position them.”
Atzeni agrees that the potential market for sharia-compliant funds is huge. Gulf residents enjoy playing the stock market, and retail investors make up some 80% of investors on both Dubai and Abu Dhabi’s exchanges.
“If you put together all the Gulf as a whole, in terms of a population, we are talking about very large numbers, volumes and a very diversified market. We’re probably talking about 50 million people in the GCC region; as many as Spain,” he says.
As for demand outside the Islamic world, Meyer and HSBC’s Cowley believe there is no reason why it couldn’t increase, despite the perception that sharia compliance means a more restrictive investment strategy. Meyer, for his part, cites the success of his three funds and the popularity of them, through Mondial, for non-Arab investors.
“When you take the word religion away, it’s just another set of rules, and they’re prudent rules,” he says. “There will always be detractors saying that sharia is going to cause hindrances, but then I say: ‘OK, how can we get in the top ten for performance? If we have consistency, is it just plain luck?’
“I don’t know what else to say other than that I am an empirical guy.”
©2013 funds global MENA