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Middle East

Top Dealmaker: The Islamic Banker

Dr. Adnan Chilwan is a leading authority in the field of Islamic Banking & Finance, and a driver of change and innovation in this segment which is now fast becoming a global phenomenon. With a career spanning nearly two decades with both reputed conventional and Islamic banks in the gulf region, he currently serves as the Group Chief Executive Officer of Dubai Islamic Bank, the world’s first sharia compliant player and the largest Islamic Bank in UAE.

Apr 22, 2016 // 8:17AM

What is your view on the growth outlook for the Islamic capital markets this year, and what do you see as some of the big drivers of credit activity in the MENA region?

The outlook for the sukuk market looks bright. We already saw some new issuances last month in January amounting to more than USD 1bn coming from the Middle East and Malaysia of which included the first sovereign issuance for the year - Emirate of Sharjah’s US $500mln which despite economic uncertainties drew orders of US $950mn.

There is also a healthy list of pipeline for potential issuances from around the world including a planned benchmark sized US dollar denominated sukuk issue in the first quarter of 2016 from IDB (Islamic Development Bank), a potential debut sukuk from government of Kenya, and a planned bigger sukuk in Asia (Indonesia) of up to IDR150 trillion (US$10.67bn) pending parliamentary approval in 2016.

Governments, particularly in the GCC, are aiming to diversify their funding in the coming years to support infrastructure growth in the region due to the low oil prices which is constraining the amount of funding available to Gulf sovereigns. It is estimated that Gulf government spending on projects including infrastructure contracts for the period 2016 – 2019 could be about $330bn, majority of which being transport related projects.

How is the liquidity situation in the region impacting the bank’s strategy and demand for certain services, particularly on the corporate financing side?

The declining deposits from oil revenues has led to some liquidity pressure in the region’s banking sector. However in the UAE, commercial banks are maintaining comfortable levels of liquidity, particularly with the Central Bank which is measured by CDs (Certificates of Deposits) amounting to more than USD $30bn according to the Central Bank. In addition, the UAE Central Bank has acted to protect the liquidity in the system with informal moves to limit excessive dividends, whilst also allowing for emergency liquidity generation via repo facilities based on CDs or fixed income instruments held by banks such as sukuk.

In Saudi, we saw a recent easing of rules on bank lending to stimulate growth wherein banks can now lend up to 90% of their deposits, up from a limit of 85%. In addition, the country is also tapping the local debt market to fund budget gaps. In Qatar, the regulators have already recently announced that they will use fiscal policy if needed to prevent a liquidity crunch in their domestic banking system.

At DIB, we continue to hold a healthy liquidity position with our net financing to deposit ratio at 88% as of 2015. Over the last two years, since entering the growth phase, we have successfully mobilized deposits (nearly 20%) year on year and are comfortable that we can manage the required liquidity to continue our growth agenda in 2016.

Many of the stakeholders investing in sukuk are FIs from the MENA region, but is the recent economic environment – particularly the liquidity crunch – changing the demographics of those looking to invest in Islamic instruments?

Though majority of the stakeholders investing in sukuk are FIs, we have also seen other key players investing in Islamic instruments such as fund managers, insurance and pension funds, as well as treasuries of larger companies. We continue to see strong interest from local investors from the Middle East and Asia for Islamic instruments. However, there is also a growing base of investors outside these regions that are increasingly investing in sukuk.

For instance, the South African sukuk in 2014 saw some investors from Europe and the USA represented more than ¼ of the total investor base. Other sukuk transactions such as the retail (Majid Al Futtaim), the aviation sectors (Emirates Airlines), as well as sovereign’s issuances have also received strong investors’ interest from Europe and the US. In addition, our roadshows across North America, Europe, Asia and the Far East have always been inundated with meetings from a variety of investors hungry for quality credits in the Islamic capital markets.

SMEs form a significant part of the economic base in many of the countries DIB operates in, but they often struggle to raise capital for a variety of reasons. How do you see them faring in the current economic environment, and what do you think the Islamic banking industry should be doing to support them further?

A SMEs are the backbone of both developed economies and emerging markets as they generate employment opportunities and broader economic growth. In parts of Asia, their contributions to GDP can be over 30%, as the small and medium enterprise businesses not only promote economic trade but engagement with the basic needs of society.

Islamic banks have, throughout the years, supported the growth of this sector through a portfolio of asset and equity-based financing solutions for SMEs and the contributions of Islamic finance institutions having been recognized by regional economies. Multilateral institutions such as the OIC have also set up plans to develop this sector across its member nations. Even though there is a huge demand for Islamic products by SMEs, particularly in this region, Islamic banks have yet to evolve fully in this area, primarily due to questions around risks, collateral situation and credit history of startups.

But that means the potential to grow in this area is huge as long as the Islamic banks remain progressive and continue to evolve – essentially two things that are very much a part of DIB’s DNA. Hence, we have already established an offering specifically for this sector and are committed to the small businesses and entrepreneurs in the markets we operate.

You once said your goal was to turn DIB into a ‘globally recognised bank’, rather than a ‘global bank’, and to be the most progressive institution. Given the nascent state of Islamic finance outside the MENA region, and some parts of Asia, what does this mean for the bank’s strategy as it expands to new services and regions?

Over the last few years we have started to see some activities happening in non-traditional Islamic finance markets, such as in South Africa, Luxembourg, UK and Hong Kong to name a few. These countries have started to tap into Islamic finance to help grow their domestic economies, denoting a clear trend that Islamic finance is expanding beyond the traditional markets of GCC and East Asia.

DIB has embarked on a growth strategy for the past few years. In line with our ambitions to grow beyond our borders and enhance the presence and penetration of the overall Islamic finance industry, we have entered into new and young markets where vast opportunities exist and are yet to be fully tapped, such as Indonesia and Kenya. Both these markets have significant consumer and corporate banking opportunities given the nature of their economies. We do not distinguish a specific segment to serve in the market as we look to bank all segments. This is how we have managed to grow so successfully over the years in the UAE and now are looking to carry the same strategy across all key markets we operate in.

Clearly, our strategy has worked well as the DIB brand and franchise has increased its value in recent years and the bank is now recognized as one of the world’s top 200 most valuable banking brands. In addition, the inclusion of DIB within the UAE emerging markets basket of index by MSCI has significantly increased the bank’s marketability to the international investor community.

Further, in 2015, we received numerous domestic, regional and international accolades and awards for our products and services, which has further strengthened our position as a globally recognized bank. As the bank continues to grow locally and internationally, both within niche and traditional Islamic finance markets, as well as the general banking and finance sector, I am confident of on-going success in the coming years as we make Islamic finance the norm rather than an alternative.

Many are looking to Africa as one of the next big regions for growth of Islamic finance, and DIB has settled on Kenya in terms of setting up operations. What were the drivers for setting up in Kenya specifically? And, what do you see as some of the big challenges involved with breaking into the region and establishing DIB as a leading Islamic finance player there?

Our set up in Kenya is through a green field operation, with Africa being a part of our overall strategy to grow our international business for some time now. There are attractive demographics in Kenya with about 44 million Muslims and low penetration of Islamic finance, but more so, Kenya is a stepping stone for us providing easy access to the neighbouring countries within East Africa, which is a massive market with huge potential.

Regulations are some of the challenges when entering new markets. Fortunately, in Kenya, the regulators over the past few years have been keen on developing their domestic Islamic finance industry as Kenya aims to be a capital markets investment hub of the African region. However, greater awareness of Islamic finance in the region will be crucial to the success of the industry in Africa and this is where we step in. We have the experience, the know-how and the expertise to further this agenda and the franchise holds recognition, value and respect that opens doors where ever we go.

What do you see as some of the most promising regions for the growth of Islamic finance, particularly capital markets, and why?

Africa will be a promising region in the coming years as it is still a region with relatively untapped potential. The region has benefited from a decade of solid economic expansion averaging around 5% since 2005. A key driving force here will be its more than a billion population, increasing urbanization with a growing need for more foreign investments. Infrastructure financing requirements are increasing continuously in the continent with a growing halal industry which encompasses food, travel and lifestyle products all of which have a great potential in Africa.

In 2014, we saw a landmark leasing agreement with Ethiopian Airlines after a Bahrain based bank successfully structured a 12-year agreement for acquiring four brand new aircrafts for Ethiopian Airlines. This deal paves the way for further Islamic capital markets opportunities in the continent.

Working in one of the oldest Islamic banks in the world, and having personally seen the evolution of Islamic finance in a number of institutions puts you in a unique position relative to some of your peers. What do you think the Islamic finance sector needs to get better at as an industry?

We need to take Islamic banking and Islamic financial services to new markets. As leading institutions, we have to take the challenge of reaching out to new growth markets of Asia, Africa and beyond. If we look at the overall penetration level of Islamic banking in Organisation of Islamic Conference [OIC] countries, the penetration level is about 4 per cent.

There are markets like Indonesia, India and some of the African nations with large Muslim populations, where Islamic finance has huge potential but extremely low penetration. Legislations, laws and regulations are obviously key, but that is where institutions like DIB can work with governments and regulators to build the framework and infrastructure to support and promote the growth of Islamic banking and finance. In addition, Dubai’s ambitions to become the global capital of Islamic economy is a key initiative to the success of the industry and we at DIB are fully aligned to support this ambition.

Middle East Islamic Finance Global

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