JEDDAH – Islamic trade finance, a tiny part of global banking business, is starting to attract interest among big Western banks because of rapid growth of trade involving wealthy Gulf economies, bankers said on Tuesday.
Bank of America Merrill Lynch hopes to begin offering Islamic trade
financing in the future, Chris Jameson, the bank's regional head of
sales for global transaction services, said without giving a time frame.
"Our focus will be on Middle Eastern clients who are expanding their
footprint internationally," Jameson said on the sidelines of a banking
conference in Dubai.
"You can see that local banks are setting up Islamic units to cater for
the needs of their clients. This is driving more and more international
institutions to focus on the Islamic sector."
Islamic trade finance, which uses instruments that obey sharia
principles such as Islam's ban on interest, has remained a backwater
even as other areas of Islamic business, such as sukuk issuance, have
boomed in the last few years.
This is partly because Islamic banks are relatively small and lack the
expertise and large international networks of mainstream Western banks.
Foreign trade conducted by the 57 member states of the Organization of
Islamic Cooperation totaled $3.9 trillion in 2011. But only a tiny
fraction was financed in a sharia-compliant way; the Saudi Arabia-based
International Islamic Trade Finance Corp, which promotes Islamic trade,
approved transactions worth just $3 billion in 2011.
There are signs that this is changing, however, as trade flows between
the Gulf and Asia – including predominantly Muslim countries in
southeast Asia – become large enough to support specialist trade
Trade between the six Gulf Cooperation Council countries and emerging
Asia economies is growing at 30 percent annually, according to
Kuwait-based Asiya Investments, which launched an Islamic trade finance
fund with $20 million in seed capital last December.
Some Islamic banks in the Gulf are trying to expand in sharia-compliant
trade finance through tie-ups with Western institutions; this week Dubai
Islamic Bank said it would use Deutsche Bank's expertise to facilitate
its letters of credit in Europe.
Dubai's oldest and largest Islamic bank hopes to serve local companies
which are increasingly looking abroad for business, chief executive
Adnan Chilwan said in a statement.
"In this regard, trade flows have become a critical component of this
growth as has the provision of trade finance activities for businesses,"
Bank of America could opt for a strategic partner as well, Jameson said.
"We would consider that – that's the model we have followed to date on
cash management and trade. We can leverage the local expertise that they
Haytham El Maayergi, head of transaction banking in the United Arab
Emirates for Standard Chartered Bank , which provides Islamic services,
said he was seeing demand for Islamic trade finance that was partly due
to the convenience of its structures, not just just its religious
Islamic finance deals are backed by income from real assets, providing a
layer of security which is attractive for many exporters of goods.
"A lot of Islamic structures are more appealing to clients not only
because these clients are sharia-compliant, but also these structures
are suitable for their business models. Clients want the ownership
structure, less risky transactions and the ethical proposition that
Islamic trade financing provides."