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24 Nov | Tuesday
Weekly Round-up

Singapore’s nascent Islamic finance industry is finding it tough going amid volatile financial markets and depressed oil revenues. So far this year, there has been only one sukuk, or Islamic bond deal in a fairly brisk fixed-income market which saw 136 bond deals worth S$17.7bln sold in the first nine months of 2015. The lack of a natural pool of Islamic funds in secular Singapore is a major barrier to sukuk launches. The strongest indicator that it's not smooth sailing for Islamic finance players in Singapore came in September when DBS Group Holdings said it will be winding down its Islamic banking unit, which it said has been unable to achieve the necessary economies of scale. While growth in the Islamic finance business in Singapore is moderating in line with slower global growth in Islamic finance, it is important not to take a short-term view. This is because deepening trade and investment linkages between Asia and Middle East will continue to present opportunities for Islamic finance over time. In addition, the Islamic Financial Services Board (IFSB) has also embarked on efforts to promote a more consistent Islamic finance cross-border regulatory framework globally.

Indonesia’s Islamic banking and finance is expected to grow around 15 percent (y-o-y) in 2016. This projection is made with the assumption that Indonesia's economic growth will reach 5.0-5.3 (y-o-y), inflation at 4.7 percent (y-o-y), and a rupiah exchange rate at IDR 13,900 per US dollar. It is expected for Bank Aceh to become a full flung Shariah bank in 2016. This bank, majority owned by the local Aceh province, controls more than IDR20tln (USD1.5bln) in assets. Islam is the dominant religion in the province of Aceh (on the northern tip of Sumatra) where about 98 percent of the local population adhere to Islam. This region has been given a special status (autonomy) by the central government in 2001 (which made it possible for Aceh to implement Shariah-law). Overall, due to the low penetration rate, Islamic finance in Indonesia is an attractive investment prospect. Currently, foreign investors cannot own more than 40 percent of Islamic banks in Indonesia. However, the country's financial authorities are considering to raise the ceiling in order to boost the Islamic banking industry in Southeast Asia's largest economy. The Dubai Islamic Bank increased its operational activities in Indonesia in October 2015, while Al Baraka from Bahrain is expected to do the same. The Abu Dhabi Islamic Bank is considering to enter the Indonesian market in 2016.

Pakistan’s Al Baraka Bank, a subsidiary banking unit of Al Baraka Banking Group, announced that it had achieved a growth of 19% in its net profit in the first nine months of 2015 compared to the same period of 2014. The financial results of the Bank showed an increase in total operating income by 6.6% for the first nine months of 2015 compared to the same period in 2014. After deducting operating expenses, provisions & taxation, net profit reached USD1.87mln for first nine months of 2015, an increase of 19% compared to same period in 2014. As at the end of September 2015, the Bank’s assets totalled USD890mln, as compared to total assets of December 2014 amounting to USD899mln.

Dubai is expecting the increasing consumer awareness and growing demand for retail products to drive activity in Dubai’s Islamic financial services (IFS) sector, offering scope for sustainable expansion despite forecasts of slower short-term economic growth. According to a recent report by the London-listed asset management group European Islamic Investment Bank, as Dubai pushes ahead with plans to expand its offering in Shariah-compliant financial services, it will be tapping into significant pent-up global demand for Islamic asset management, which could reach as high as USD185bn by 2019. Additional measures that could be considered in order to raise Dubai’s profile as a centre for IFS among others include wider consultation between fund managers and the authorities, with a focus on identifying ways to spur the creation of multi-asset-class and multi-geography funds, closer interaction between the UAE’s state-owned savings institutions and sovereign funds, such as the Investment Corporation of Dubai, creation of a GCC-wide pension fund framework and etc. Although Islamic financial institutions are rapidly growing their market share, conventional banks continued to dominate in categories such as payroll, credit cards and personal finance. Therefore the expansion of IFS into other areas could help to unlock a wider variety of revenue streams.

Turkish government is hard at work to create better enabling conditions for Islamic finance. Islamic lenders now account for about 5.3 percent of Turkish banks' total assets, and this is more than twice the level a decade ago. The value of Islamic finance assets in Turkey was USD51.2bln in 2014, making the country the eighth in the world. Only about 3.6 percent of global sukuk issuance comes from Turkey, according to World Bank statistics. The Turkish legal framework for the issuance of sukuk is in the process of completion where laws passed in 2012 and 2013 have established the use of these instruments. However there are still legal obstacles to the development of the sukuk market in Turkey mainly due to tax-related issues that limit the development of sukuk. However work is currently underway at the Ministry of Finance to overcome these obstacles. For now, almost all sukuk issuance in Turkey is made by participation banks and the Turkish Treasury. In 2014, the Treasury has also created the basis for a wider range of Islamic finance instruments, such as “Mudarabah”, “Murabahah”, “Musharakah”, and “Wakalah”.

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