Western banks eye Islamic trade finance

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 financing operations.

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," he said.

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 already have."

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 permissibility.

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."