Collaboration is driving innovation in the Islamic capital markets
Collaboration is the lifeblood of the capital markets. This has been true for many decades in conventional finance, where close relationships involving global financial centres such as New York, London and Hong Kong have spurred the rapid introduction of a sophisticated range of new asset classes and securitisation
structures, as well as the expansion of different types of fund and cross-border investment opportunities. The conventional capital markets landscape of today would be largely unrecognisable to an investment banking professional of the 1980s.
The Islamic finance sector, being much newer, has been able to learn a great deal from this example. It has been increasingly successful in achieving cooperation both within financial centres and between them. The UAE, for example, has a successful internal track record of governments, exchanges, regulators, financial institutions and investors all working together inside the country to build one of the world's great Islamic finance centres in just a few years. At the same time, the UAE has reached out within the region and beyond – to Malaysia and the UK, for example – to build the international bridges that are essential for the global success of the Islamic finance sector. In turn, we have found those same centres reaching out to us, in the same spirit of collaboration.
As we grow together, we are taking on board another lesson learned from the experience of the conventional financial markets, which is that growth and innovation must be measured, considered and well thought out. Not every new idea is a good one; not every new asset class contributes to financial stability. Islamic finance is all about responsible and ethical investing, after all, and staying well away from risky activities. The relatively strong showing of Islamic financial institutions and Sharia’a asset classes during the global financial crisis that began in 2007 is evidence of the wisdom of this strategy.
Those working in the Islamic financial sector have done a remarkable job in developing the sector over a short time in a range of areas, from commercial banking and Sukuk to Islamic funds and takaful. As Islamic finance continues to progress through collaboration, exchanges are playing a central role in innovation and development in a number of areas. Some of the main ones include:
Retail Sukuk Exchanges have created listing frameworks that are proving increasingly attractive to issuers of Sukuk for institutional investors, by offering them a disclosure regime that supports transparency as well as extra visibility to investors. More than 90 billion dollars of Sukuk are listed on exchanges around the world. This critical mass is supporting pioneering moves toward bringing Sukuk trading on to exchanges and away from the over the counter (OTC) market. A further radical innovation, if it catches on, will speed up this process; this is the introduction of Sukuk aimed at retail investors. A small number of these have been issued in the last year or so including in Malaysia and Indonesia. Retail Sukuk, if structured and marketed correctly, have the potential to become highly popular among individual investors who are searching for new Sharia’a-compliant financial asset classes as an alternative to bank deposits. They need to be issued in much smaller denominations than issuers are used to and, to encourage participation, they need to be listed on an exchange as OTC trading is not a viable option for the ordinary investor. Many potential issuers are now aware of the opportunity that retail Sukuk can provide and we are likely to see many of these come to market.
Murabaha financing The appetite for Murabaha financing solutions among both institutional and retail investors is growing. The use of commodities is widespread but does not satisfy everyone, including some who have concerns about adequacy Sharia’a compliance. Some exchanges now offer alternative possibilities, including trading in certificates that can make use of a wide range of underlying assets, from shares and property to Sukuk. Transactions can be executed in minutes. Other advantages include a fixed price for the certificates and absence of any spread.
Alternatives Exciting new asset classes in Islamic finance are emerging. One is real estate investment trusts (REITS). In 2014 Emirates REIT, a still rare example of an Islamic offering in this sector, became the first REIT of any kind to list on an exchange in the GCC. Exchanges are gearing up to welcome further Islamic products such as close-ended mutual funds and exchange-traded funds in order to broaden the opportunities available to investors.
Growth in the global Islamic finance sector is running at 15-20% in many markets, from a base of about 1.3 trillion dollars in 2012 by some measures. To meet the growing appetite for Islamic solutions, continual innovation is vital. Development must be considered, rather than rushed, and based on sound principles, rather than uncertain foundations. I am confident that the industry is up to the challenge and that exchanges will play an expanding role in the sector’s success.
About the author
Chief Executive Officer, Nasdaq Dubai
Mr Ali was appointed Chief Executive Officer in July 2013, after serving as Acting Chief Executive Officer since August 2012. He previously served as Executive Director of Nasdaq Dubai from 2006 to 2008. His experience includes serving as Chief Operating Officer of DIFC Authority and most recently as Executive Director at the Dubai Knowledge & Human Development Authority.
Mr Ali played a key role in the development of the Dubai Strategic Plan 2015 and participated in number of strategy development exercises. These included Nasdaq Dubai’s strategy in 2006 where he had the role of overseeing the implementation of the Market of Markets strategy expanding the exchange’s activities beyond the equity and debt markets into derivatives and other sectors.
Mr Ali holds an Executive MBA from London Business School, a B.Sc. in Applied Computing from Leeds Metropolitan University, and a Master Certificate in Project Management.