Islamic Finance’s Higher Calling Calibration
The World Bank and Islamic Development Bank (IDB) issued their first joint Islamic finance report underscoring its potential contributions to reducing global income disparity and achieving sustainability goals, while advocating specific policy and banking and capital market changes for “shared prosperity.” Mutual risk and asset-backed redistribution principles undergird the concept, with priority small business and infrastructure purposes. Industry assets are almost $2 trillion spread across 50 countries, as a dedicated Malaysia-based financial services board tries to promote best practice and common rules. The sukuk bond market has grown “considerably” the past decade, but equity is often hampered by “perverse” tax treatment, and corporate access has lagged sovereigns in the absence of a long-term yield curve. Non-bank institutions like takaful insurers are not as prominent, and adaptation for public social spending on education and housing has been slow. The IDB prepared a 10-year strategy and the G-20 presented recommendations for greater sharia-compliant application in government development plans, but major gaps remain, according to the study. Poverty rates in Islamic Conference countries in Asia and Africa exceed non-members, and financial inclusion indicators are also low with borrowing frequently confined to informal channels. No stock exchange yet operates in full observance, although index providers offer screens and performance data. Sukuk issuance peaked in 2012 and has leveled off recently, but Gulf external sovereign entry could boost the hybrid asset class, and investors may turn more to share alternatives as tax-deductability becomes more even. Accounting and auditing standards are increasingly similar through the technical work of a specialist body, but liquidity is still constrained by the lack of secondary trading, price discovery and rapid settlement. Islamic fund managers controlled $60 billion as of 2014 on annual double-digit expansion and have attracted socially-responsible mandates. For smaller firms crowd funding techniques could be adapted, and ijarah houses could increase leasing coverage. In religious and practical guidance a divide lingers between the leading national authorities in Malaysia and Saudi Arabia, and clarity is urgent on allowable participation in hedge funds and derivatives which should not automatically be considered “speculative.” Malaysia’s regime dates back decades, and has the most comprehensive and sophisticated regulation and products, while Pakistan has a strategic plan that extends to Islamic micro-finance.
The Banks’ vision was unveiled as S&P Ratings warned of “continued hurdles” for Middle East banks this year with political and economic risks. They have ample retail deposits, but with thin fixed income markets government securities and direct lending dominate balance sheets. Debt-GDP ratios range from 80-135 percent in Egypt, Jordan and Lebanon, and Moroccan and Tunisian banks have less sovereign exposure but asset quality is in doubt. Foreign currency liabilities are a looming problem as longstanding exchange rate pegs are modified, and private sector creditworthiness is a “drag” with emphasis on “cyclical and vulnerable” tourism, real estate and commodities sectors. Construction and mortgages are 40 percent of the total for the region, but Egypt is “subdued” as an exception. Tunisia has low loan loss coverage generally as write-offs are rare, and residential property softness has spilled over to the commercial segment. Lebanon’s housing loans have surged under a central bank subsidy program, as Syrian refugees continue to seek shelter with scant conventional or Islamic finance recourse.
