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Move towards more trade between MENA and East Asia

A number of new initiatives have given Islamic trade finance and export credit insurance a major boost. MUSHTAK PARKER explains Trade facilitation between member countries of the Organisation of Islamic Cooperation (OIC), especially the Middle East and North Africa (MENA) states, and an increased role for Islamic trade finance and export credit insurance, is set for a major boost. This is due to the launching of several new initiatives and the fact that the stated target for intra-Islamic trade of 20 per cent of the total trade of OIC countries has been achieved.

It is hoped that the impact of these initiatives will be pervasive across the multilateral agency and private sectors. The stark challenge ahead for the global economy are underlined by the spectre of ordinary people protesting across capitals around the world against economic mismanagement and the perceived greed and failure of the western banking and financial system, together with the manifold fallout of the global economic recession, the sovereign debt crisis in the Eurozone, the continued bailout of the banking sector, flatline GDP growth especially in the developed economies, rising unemployment and the continued difficulty businesses have in getting credit.

Whether the G20 meeting, or the EU finance ministers summit in October will make much meaningful progress, given the lack of political leadership and the ambivalence of the politicians, remains a moot point.

But in the MENA region, in the wake of the so-called “Arab Spring” and the on-going situations in Iraq, Libya, Yemen and Syria, there is an increasing recognition that the best way to create jobs, especially in a demography where some 65 per cent of the population is under the age of 30, is through stimulating economic growth.

This in turn requires more robust trade and investment facilitation between the MENA and OIC regions spearheaded by government agencies, multilaterals, the banking sector and small-and-medium-sized enterprises (SMEs), which is the backbone of most of the MENA and OIC economies.

Indeed, the buzzwords these days in the corridors of power in Ankara, Riyadh, Kuala Lumpur etc are “intra-Asia trade and investment”. This pitches West Asia (the MENA region) with south and East Asia. Over the past decade or so the direction of trade between MENA and East Asia has been increasing robustly to the extent that most Saudi, Kuwaiti and Abu Dhabi oil exports go to countries such as China, Japan, Taiwan and South Korea.

The latest trend for instance in sukuk origination is for GCC issuers to raise funds in the Malaysian local currency market. Already Gulf Investment Corporation (GIC), whose shareholders include the governments of the six GCC states, namely, Kuwait, Saudi Arabia, the United Arab Emirates, Qatar, Bahrain and Oman, and whose mandate is to promote private enterprise and support economic growth in the GCC region, in August issued a RM750m (US$254m) Sukuk Wakala bi Istithmar under its existing 20-year RM3.5bn (US$1.18bn) medium-term notes programme.

This is the second such issuance under the programme, and, according to Hisham Al-Razzuqi, GIC chief executive officer, “we anticipate more issuers from the GCC region following suit in tapping into non-traditional sources to obtain long term funds”.
Other GCC sukuk issuers in the Malaysian markets include National Bank of Abu Dhabi (a RM500m sukuk) and the Islamic Development Bank (IDB) (RM100m sukuk).

Dr Ali talking to Indonesian Ministry of Finance officials in Jakarta

The Abu Dhabi National Energy Company (TAQA) is also in the process of launching its debut sukuk in Malaysia as part of its RM3.5bn sukuk programme ostensibly to diversify its sources of funding.

Mohammed Mubaideen, investor relations manager at TAQA, emphasised that any sukuk offering will be subject to market conditions. “Markets are very volatile at the moment, and it is very difficult to have a clear vision. The company would like to diversify its sources of funding. The Malaysian market has great potential and is one of the markets that we are looking at. The proceeds of the proposed sukuk issuance will be used for general corporate purposes,” he added.

But he has no doubt that “the role of Islamic finance will become more important in the region” over the next few years especially to serve the oil and gas industry in the MENA countries.

Perhaps it is not surprising that in his 2012 budget, Malaysian Finance Minister Mohd Najib Abdul Razak, who is also the Prime Minister, announced several initiatives to attract overseas issuers to use the Malaysian International Islamic Financial Centre (MIFC) as the hub for sukuk origination and also to enhance the internationalisation of Islamic finance.

Dr Ahmad Mohamed Ali, president of the IDB

The measures announced include the extension of income tax exemption given for non-ringgit sukuk issuance and transactions by another three years until the year of assessment in 2014; a tax deduction on expenses incurred for Sukuk Wakala (Agency Sukuk, which is usually complemented with a Commodity Murabaha component) for a three-year period commencing from the year of assessment 2012; the provision of a RM200m seed capital fund by I-VCAP, a subsidiary of Value Cap Sdn. Bhd., an investment vehicle of the Malaysian Ministry of Finance, to promote Shariah-compliant exchange traded funds (ETFs) and exchange traded commodities (ETCs) by providing matching loans subject to a maximum of RM20m; and the establishment in 2012 of a RM2bn Shariah-compliant SME Financing Fund to be managed by selected Islamic banks with the aim of further strengthening the contribution of SMEs to economic growth and where the government will finance two per cent of the profit rate.

Trade and finance are inextricably linked. Not surprisingly given the proliferation of Islamic finance in Asia and the Middle East over the last two decades with an estimated average annual growth rate of 20 per cent, the role of Islamic finance in financing trade, investment, SMEs and economic growth is assuming greater importance. This is reflected in the economic and financial policies of several countries and multilaterals.

“The recent developments in some Arab countries,” emphasised Dr Ahmad Mohamed Ali, president of the IDB, at the influential 84th development committee meeting at the 2011 annual meeting of the World Bank Group/International Monetary Fund (IMF) held in Washington at the end of September, “make it imperative for the IDB Group to assist in the country-owned formulation and implementation of employment-focused reform and development agenda. In this regard, the IDB Group has formulated a multi-tiered programme to assist the affected Arab countries in achieving better alignment between economic growth and employment generation objectives, particularly through support to SMEs and improved access to trade and micro-finance facilities.”

This programme, according to Dr Ali, includes several initiatives such as:

• the Arab Financing Facility for Infrastructure recently established by the IDB in cooperation with the World Bank and its private sector funding arm, the International Finance Corporation (IFC), which “will mobilise new resources of up to US$1bn to support inclusive economic growth objectives”

• the Cross-Border Trade Facilitation and Infrastructure Programme, which is in the final stages of being jointly launched by the IDB, the World Bank, the Arab Fund for Economic and Social Development, the Arab Trade Financing Programme, the African Development Bank, the European Investment Bank, and the Agence Francaise de Developpement
• The SR1bn Saudi SME Fund, which is in the process of being launched by the IDB and its private sector funding arm, the Islamic Corporation for the Development of the Private Sector (ICD) along with other partners with the aim of supporting the growth of SMEs in the non-oil private sector
• the IDB’s Interim Assistance Strategy for Egypt and Tunisia, two “Arab Spring” countries undergoing political and economic transformation, which covers the period 2011 to 2013 and comprises an estimated financial envelope of US$2.5bn and US$1.5bn, respectively. The strategic thrusts of the interim strategy will be to support those sectors, which will rapidly help in economic revival and employment generation
• the Arab Youth Employment Creation Fund whereby the IDB and the IFC will mobilise up to US$2bn over the next five years to support job creation and skills training opportunities for Arab youth.
According to IDB figures, the cumulative net approvals for 19 MENA member countries of the multilateral development bank of the Muslim World at the end of August 2011 totalled US$39.5bn, which is about 52 per cent of the total approvals of the bank since it started operations in 1976. Total gross approvals of the IDB to date amounted to US$78,854.6m. Total trade finance operations approved by the IDB to date has reached US$36,959.3m. But put this against the total trade of the 56 IDB member countries of US$3.374 trillion in 2009, then the sheer scale of the challenge faced by the IDB as a group becomes apparent.

In the first nine months of 2011, IDB Group approvals for the MENA region amounted to US$2.4bn. In addition, the bank has allocated an extra US$250m for 2011 specifically to support youth employment generation in the countries undergoing transition in the Arab region.

The pressure on IDB Group entities such as the Dubai-based International Islamic Trade Finance Corporation (ITFC) to boost intra-Islamic trade is immense. Currently intra-Islamic trade accounts for a mere 16 per cent of the total trade of member countries and the stated target of the bank is to boost this to 20 per cent by 2015.
At a meeting last month at IDB headquarters in Jeddah aimed at promoting intra-Islamic trade and finance, Waleed Al-Wohaib, CEO of ITFC, warned that “OIC countries have to include intra-trade in their national plans”, and rued the fact that intra-Islamic trade is still stagnant at 16 per cent. Thus far, ITFC has approved US$13bn in trade finance and this year alone the figure is set to top US$3bn.

The IDB Group has a major perception problem in that its terms of financing trade, especially commodity Murabaha and Instalment Sale facilities, is perceived by the market to be less competitive and flexible compared with the general banking sector.
At the IDB board of governors annual meeting held in Jeddah in June this year, Egypt’s alternative governor to the IDB, Sameer Sayyad, strongly urged “a periodic review of the IDB Group’s pricing policy and its mobilisation of resources at competitive prices, to help reduce the cost of financing projects in member countries, under conditions as easy as those applied by similar financing institutions”.

The ICD has been the first to respond, making it clear that it is already reviewing its mark-up and repayment schedules to make them more flexible as well as lowering its financing costs. It is also giving priority to targeting its financing to SMEs in member countries.

One area where increased competition is beckoning is in Islamic liquidity management primarily through Commodity Murabaha (Tawarruq) platforms. In Istanbul last month, Muhammed Bin Ibrahim, the deputy governor of Bank Negara Malaysia, the central bank, leading a Malaysian Islamic Finance Road Show to Turkey, highlighted three key areas of collaboration between the two countries.

These include encouraging the Turkish financial and business community to use Malaysia as a platform to raise funds such as sukuk and Islamic syndication. Also, Malaysia’s Economic Transformation Programme (ETP) offers the Turkish business community investment opportunities; and Turkish financial institutions and relevant entities are invited to become members of Bursa Suq Al Sila’, the world’s first end-to-end Islamic multi-currency commodity trading platform, which facilitates liquidity management, in the Islamic financial market and institutions.

“This fully-electronic platform,” explained the deputy governor, “facilitates sukuk structuring, Islamic financing and investment transactions, including inter-bank placements and customer deposits, by applying the concept of Murabaha and Tawarruq. Since its establishment in 2009, 23 commodity trading participants from Malaysia, the Middle East and Europe have been registered in Bursa Suq Al-Sila’, contributing to the growth in its trading volume where 1370 trades were recorded in Q1 2011 with a total value of US$18bn as compared to 728 trades in the final quarter of 2010 that totalled an estimated US$11bn.”

The two countries are due to sign a Strategic Framework Agreement, which would identify important bilateral areas of cooperation and which is aimed at boosting Turkish-Malaysian trade from the current US$1.5bn to US$5bn over the next few years.
The other Commodity Murabaha trading platforms are Bahrain’s Bursa Al Bait and the warrants issued on the London Metals Exchange (LME), which has traditionally been the “backbone” of Commodity Murabaha trading, primarily used for short-term liquidity management and for servicing investment and current accounts at Islamic banks.

But in October a new Commodity Murabaha trading platform was launched at the Jakarta Futures Exchange (JFX) in Indonesia, one of the world’s largest suppliers of primary commodities such as palm oil. The platform is a collaborative effort between JFX, Bank Indonesia (the central bank), the Commodity Futures Trading Supervisory Board and the National Syariah Board of the Ulema Council of Indonesia.

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