Emirate aims to become Islamic economy’s global capital

Dubai Islamic finance aspiration

Emirate aims to become Islamic economy’s global capital

MUSHTAK PARKER looks at how Dubai is ramping up its bid to be the hub of Islamic finance

The ink had hardly dried on Law No 13 of 2013 – the enabling legislation which was issued last December by Sheikh Mohammad bin Rashid al Maktoum, Vice President and Prime Minister of the UAE, and Ruler of Dubai, for the establishment of the Dubai Islamic Economy Development Centre – and the Emirate was sustaining the momentum for its much heralded Dubai Islamic Economy Hub with four new initiatives launched in recent weeks and aimed at internationalising the hub.

 These included:

• the Dubai Financial Market (DFM) launching the “DFM Standard for Issuing, Acquiring and Trading Sukuk”, which is a comprehensive set of guidelines for Sukuk origination out of Dubai
• the Dubai Department of Economic Development confirming that it is in the process of conducting a feasibility study of launching a Shariah-compliant Export Import Bank (Eximbank) to support trade and investment in and out of the emirate through the provision of short-and-medium-term export credit and investment risk insurance and guarantees
• the launching of a new comprehensive NASDAQ Dubai Murabaha Platform by NASDAQ Dubai in co-operation with Emirates Islamic to provide local and regional banks with Shariah-compliant financing and liquidity management solutions as part of Dubai’s Islamic Economy Vision
• the signing of a partnership between Dubai Multi Commodity Centre (DMCC) and BGC Partners, Inc., a leading global brokerage company servicing the wholesale financial and real estate markets, to promote a Shariah-compliant Commodity Murabaha Platform on the DMCC Tradeflow Platform. The aim is to facilitate a faster and more efficient method of Commodity Murabaha trading on the Tradeflow Platform and to further enhance Dubai as the “Global Centre of Islamic Finance”.

All these initiatives fit in with the objectives of the Dubai Islamic Economy Hub with the Dubai Islamic Economy Development Centre as its intellectual and administrative core.

Sheikh Mohammed’s stated vision is that of transforming the emirate into “the global capital of the Islamic economy” which he emphasised “will help the local economy to grow and bring prosperity to the various vital sectors as well as create new job opportunities”.

At the same time, the emirate is also positioning itself as a premier financial centre for Dubai corporate entities to raise longer-term financing, whether through syndicated Murabaha facilities or through Sukuk.

“Transforming Dubai into a global Centre for Islamic Sukuk is intended to cement confidence in our economy among international financial circles, emphasising that positive acts are the driving force of the human being to remain optimistic and to work actively and in a serious way,” explained Sheikh Mohammed at the launch last year of Dubai as a “Global Centre for the Islamic Capital Market.”

In many respects, the DFM Sukuk Standard is akin to the guidelines issued by the Securities Commission Malaysia and Bank Negara Malaysia, the securities and banking regulators respectively, in pursuit of the Malaysia International Islamic Financial Centre (MIFC) Initiative, which similarly is trying to develop the south east Asian country as an international Sukuk origination domicile of choice, with some success given the increasing number of issuers from the Gulf Cooperation Council (GCC) including inter alia Mumtalakat Holdings, the Bahrain sovereign wealth fund; Gulf International Bank; Al Bayan of Saudi Arabia; and Gulf Investment Corporation raising funds from the local ringgit market.

For Dubai to become a truly global Sukuk origination centre will require more than just a number of initiatives. The ambition has to be backed by the requisite policies and decision-making at both the federal and emirate levels; the comprehensive enabling legislation, regulatory and accounting frameworks; the proper dispute resolution and recourse to law in the case of disputes and defaults backed by a transparent court process; capacity building in terms of number of issuers and critical mass in terms of volume of issuances; a clear and present Shariah Governance Framework; depth in terms of product innovation; an active secondary trading platform and market to generate liquidity; democratisation of the capital market to ensure access to the Sukuk and Islamic capital market not only to high-end investors but also to the ultra-retail investor so as to enhance financial inclusion; and a culture of disclosure and transparency to inspire confidence in the market.

At the moment, Dubai has snippets of the above in place, but it lags in some respects to its co-Islamic financial centres such as the MIFC in Kuala Lumpur; and other Sukuk listing domiciles such as London.

For instance, the Securities Commission Malaysia approved a total of 49 Islamic commercial papers and Sukuk issuances amounting to RM99,129m in 2013 – an increase on the 41 approvals totalling RM71,091m in 2012.

In 2013, of the total nominal value of up to RM148.1bn of bonds and Sukuk approved by the Securities Commission Malaysia, according to the commission’s latest 2013 Annual Report, a staggering 67 per cent were Shariah-compliant papers.

According to a study by Kuwait Finance House (KFH) Research, global Sukuk issuances totalled $119.71bn in 2013, a decrease of 8.77 per cent on the record $131.2bn of issuances in 2012. Of this Malaysian Sukuk issuances accounted for 69 per cent of total global Sukuk issuances amounting to $82.4bn. This was followed by Saudi Arabia (12 per cent), UAE (six per cent), Indonesia (five per cent) Turkey (three per cent) Qatar (two per cent), Bahrain (2 per cent), Pakistan 0.37 per cent) and others (one per cent).

As far as listings are concerned, the latest data according to NASDAQ Dubai suggests that there are 22 Sukuk listed on the Bourse from regional and international issuers. The total value of Sukuk currently listed in Dubai is $18.98bn, making it the third largest domicile in the world for Sukuk listings after Bursa Malaysia and the London Stock Exchange.

Dubai as a listing domicile recently got a major boost when the Jeddah-based multilateral development bank, the Islamic Development Bank (IDB), listed six Sukuk totalling $5.4bn on NASDAQ Dubai. In a statement, the Bourse stressed that the listings make the IDB the largest Sukuk issuer on NASDAQ Dubai by value and add significant momentum to Dubai’s expansion as the capital of the Islamic Economy globally.

Dr Abdul Aziz Al Hinai, vice-president (finance) of the Islamic Development Bank (IDB) who officiated at the bell ringing ceremony at Dubai Financial Market in the presence of several local officials, emphasised that “by operating a sophisticated listing venue regulated to international standards in which investors can have full confidence, Dubai is providing important support for the positive work carried out by the IDB across scores of countries. The bank looks forward to listing further Sukuk valued at billions of dollars on NASDAQ Dubai, when these are issued in due course to provide funding for further development projects and activities.”

The six Sukuk listed are issued under the IDB’s $10bn Islamic Trust Certificates Programme.

Essa Kazim, chairman of Dubai Financial Market (DFM) and secretary general of the Dubai Islamic Economy Development Centre, emphasised at the Bell Ringing Ceremony “the IDB’s Sukuk listings reflect Dubai’s commitment to further expanding its Islamic finance sector, which will include attracting more issuances of Sukuk and other asset classes from both the public and private sectors, as well as offering new services to issuers and investors. In 2014 and beyond, Dubai will prove an increasingly attractive capital markets base for Islamic companies and organisations that are active internationally as well as in the region”.

Abdul Wahed Al Fahim, chairman of NASDAQ Dubai, in a statement expanded on Dubai’s listing vision emphasising that the Bourse aims to develop the world’s most competitive Sukuk admissions framework and infrastructure in order to further strengthen its position in the marketplace.

To what extent the latest DFM Standard For Issuing, Acquiring and Trading Sukuk”, which is approved by its Fatwa and Shariah Supervisory Board, will generate that much-needed traction which the Dubai Islamic Economy hub is so much in search of, only time will tell. The hub will have to earn its reputation and market development like any other. The emirate may also be trying to achieve this in record time. The danger is that throwing money and endorsing it with Royal Patronage may not suffice.

Nevertheless, the “DFM Standard For Issuing, Acquiring and Trading Sukuk”, is a comprehensive document and covers Definition of Sukuk, Types, Parameters and Listing Requirements.

An interesting feature of the Standard is that it derives from other Sukuk standards to come to a “Comprehensive Sukuk Standard”, presumably universally applicable.

“The interest of Dubai Financial Market,” says the Preamble to the Standard, “was towards the establishment of its own standard for acquiring of and trading in Sukuk. However, in order to prepare this standard, the Fatwa and Shariah Supervisory Board of Dubai Financial Market has reviewed and studied the existing Shariah Sukuk standards and the relevant Fatwas (Islamic legal opinions) that were issued by the reliable boards, and then it prepared this new standard.

“This new Standard aims at subjecting Sukuk to the principles and rules of Shariah in order to assure Sukuk holders and to enable the Islamic finance industry to achieve more progress in the future.”

 The Standard Classifies Sukuk into:

1. Finance Sukuk (Murabaha, Istisna’ and Salam Sukuk)
2. Ijarah (Leasing) Sukuk
3. Investment Sukuk (Mudaraba (trust financing), Wakala (agency), Musharaka (profit-sharing) Sukuk)
4. Produce Sharing Sukuk (Muzara’a (sharecropping), Musaqat (irrigation of a planted land), Mugharasa (land plantation) Sukuk)
5. Sukuk of Investment Funds and Portfolios.

It also lists Sukuk issuance arrangements and another interesting aspect is the function of the Shariah Advisory Committee. “For every Sukuk issuance,” says the Standard, “there must be a Shariah Committee comprising three members with PhD in Islamic law, or two members with PhD in Islamic law and one with a PhD in economics or finance. This committee shall be selected by the Sukuk originator, who can also choose the DFM Fatwa & Shariah Supervisory Board to handle the Shariah Committee’s responsibilities.”

This latter suggestion is controversial because choosing the Shariah Advisory Board of the DFM would constitute a conflict of interest in a Sukuk transaction. By issuing the Standard, the DFM in effect is the standard setting body-cum-regulator. As such, its Shariah Advisory Board should serve as the Apex Shariah Board for the Islamic Capital Market.

The Shariah-compliant Eximbank feasibility commissioned by the Dubai Department of Economic Development, on the other hand, is a much greater challenge given the underdeveloped culture of export credit, commercial and investment risk insurance in the GCC and the Organisation of Islamic Conference (OIC) member countries.

And yet such an export credit agency (ECA), which the Eximbank effectively would be, has the greatest potential for the Islamic finance, investment and insurance market going forward. The developments in the so-called Arab Spring countries undergoing political and economic transition, has increased demand especially for political risk insurance, according to the Multilateral Investment Guarantee Agency (MIGA), the investment guarantee agency of the World Bank Group.

An ECA is a private or quasi-governmental institution that acts as an intermediary between governments and exporters to issue export financing, which can take the form of credits (financial support) or credit insurance and guarantees (pure cover) or both, depending on the mandate of the ECA. In general, an export credit is an insurance, guarantee or financing arrangement that enables a foreign buyer of exported goods and/or services to defer payment over a period of time.

Export credits are generally divided into short term (usually under two years), medium-term (usually two to five years) and long-term (usually more than two years) and can be offered by multilateral agencies, state-owned agencies and private companies. Export credits may take the form of “supplier credits” extended by the exporter, or of “buyer credits” where the exporter’s bank or other financial institution lends to the buyer (or his bank).

The business case for the proposed Dubai Eximbank is implicit. The 56-member countries of the OIC, for instance, recorded total merchandise exports (fob) and imports (cif) amounting to $3,936.9bn in 2011. Of this, intra-Islamic trade, according to Islamic Development Bank (IDB) data, amounted to a mere $674,228.3m or 17.1 per cent of total trade of IDB member countries in 2011. The stated policy of the IDB Group going forward is to achieve an intra-Islamic trade target of 20 per cent by 2015, going up to 30 per cent by 2020.

Similarly, total resource flows (net official development assistance (ODA) and net private foreign direct investments (FDI)) of IDB member countries amounted to $100.96bn, of which $51.64bn was through ODA.

Furthermore, the combined assets under management (AUM) of some 24 sovereign wealth funds (SWFs) from the OIC countries totalled a staggering $2.1101 trillion at end February 2013, which represents just under 40 per cent of the total SWF assets of $5.324 trillion ranked by the US-based SWF Institute.

Currently the only dedicated Shariah-compliant multilateral insurer of export credit and investment in the world is the Jeddah-based Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), which was established in 1994 and this June celebrates its 20th anniversary. ICIEC is the ECA of the IDB Group and provides investment and export credit insurance, guarantees and reinsurance for member countries. With a paid-up capital base of $158m, the corporation has managed to support more than $24bn of member countries’ exports, imports, and investments since inception.

There are several other ECAs that offer Shariah-compliant export credit and investment insurance, but not on a dedicated basis because they also offer such products on a conventional basis. These include Export-Import Bank of Malaysia Berhad, whose Islamic offerings are, perhaps, the most comprehensive in the market comprising 13 facilities encompassing cross-border financing, guarantees, trade finance and credit takaful.

Similarly, the Kuwait-based Arab Investment Guarantee Corporation (Dhaman), which was established in 1974 as a joint-Arab agency with the mandate to promote capital mobility into Arab countries and to enhance Arab exports worldwide through the provision of guarantees and export credit insurance, also offers a limited number of Shariah-compliant solutions, albeit most of its products and services are exclusively done on a conventional insurance basis.

The “globalisation” of Shariah-compliant export credit and investment insurance received a major boost in October 2009, when ICIEC and Dhaman agreed to establish the AMAN Union, the professional association of Export Credit and Investment Risk Agencies and reinsurers in Member Countries of the OIC and Dhaman.

The caveat though is that the AMAN Union promotes both conventional and Shariah-compliant export credit and investment insurance, and because of a lack of differentiation especially in the AMAN Union data between the two systems, the true progress of export credit and investment Takaful becomes difficult.

The huge challenge for both conventional and Shariah-compliant ECAs in the OIC countries could not be more starkly reflected in the fact that New Business Insured (both conventional and Shariah-compliant) by the 17 AMAN Union members in 2012, according to a study by Mourad Mizouri, totalled $19.4bn, which is a mere drop in the ocean compared with the New Business Insured of $1.81 trillion by the members of the Berne Union, an association of ECAs primarily from the Organisation of Economic Cooperation and Development (OECD), which represents 10 per cent of global trade volumes.

As such, the Dubai Department of Economic Development initiative has its work cut out. But this should not detract from the ambition especially as the emirate and the UAE seeks to boost its trade and investment dramatically over the next decade.

The good news is that Dubai has a location complete with global communications links second to none in the region. ICIEC, for instance, recognised this way back in 2009 when it established a regional office to further assist in its marketing and distribution of its products and services to local and regional corporates.

ICIEC’s parent, the IDB itself, opened a representative office in Dubai last year while its trade finance fund, the International Islamic Trade Finance Corporation (ITFC) is headquartered in Dubai. Perhaps those involved with the Dubai Eximbank feasibility would be wise to draw on the considerable experience of ICIEC in the provision of Shariah-compliant export credit and investment risk insurance.

The preliminary study for the proposed Dubai Eximbank has been completed by the local Noor Investment Group which is the sole advisor on the project to the Dubai Department of Economic Development. A detailed feasibility study is in the process of being done.

The new financial institution will deal directly with international bodies and organisations and other Exim banks around the work to promote UAE trade. It will also co-ordinate with local authorities, regulators and companies in the trade sector to enhance co-operation. In March this year, Dubai announced that its non-oil foreign trade in 2013 reached a record AED1.329 trillion, up AED94bn on the AED1.235 trillion in 2012.

The emirate’s top trading partners include India, China and the US. Both India and China are potentially risky markets. In fact, the US Eximbank is one of the pioneer ECAs in the world, while the Eximbank of India is a pioneer ECA in the developing countries. China’s economic ascendancy in recent years inevitably has propelled Sinosure (China Export Credit Corporation) as the largest ECA in the world.

In a statement, Sami Al Qamzi, director general of to the Dubai Department of Economic Development, explained that, “Dubai has one of the best infrastructures to serve as a regional hub for international trade flows and remains focused on further investing in and enhancing this position. It is our aim to double trade flows over the next five years. The proposed Exim Bank aligned to some of the best global operating models will support the achievement of this objective and further enhance our existing position. The view is to assist businesses in the UAE to grow their trade flows by providing risk mitigation, financing and market access.”

The founding capital will most likely come from the Dubai government and government-related entities, but include smaller capital contributions from local, regional and international financial institutions and multilateral agencies.

Capital is vital because it governs the capacity of the ECAs underwriting and reinsurance business. Similarly, as any ECA would emphasise, capital base is one of the most important drivers of such an agency’s business. Whenever any potential investors, financial institution or even large exporter wishes to do business with the ECA, the first factor they take into account is the share capital as this will dictate whether the ECA will be able to pay claims.

In April, Dubai also launched the NASDAQ Dubai Murabaha Platform, a partnership between Nasdaq Dubai and Emirates Islamic, to provide local and regional banks with Shariah-compliant financing and liquidity management solutions based on modern technology, enabling the execution of transactions within minutes.

In a test run, more than AED7bn worth of transactions were completed through the Platform. In a statement, Nasdaq Dubai made the point that transactions on the Platform are completed in minutes and eliminates the risk of losses that often occur in traditional transactions through spreads, price movements, or poor liquidity.

Sheikh Ahmed bin Saeed Al Maktoum, chairman of Emirates NBD Group, which is the parent company of Emirates Islamic, explained that, “this platform is highly significant for our national economy, which will greatly benefit from it as a result of its high level of liquidity and daily trading volumes. However the ultimate goal is to provide a regional and international platform to further fortify Dubai’s position as the capital of Islamic economy and support other sectors which contribute to the Islamic economy, including halal industries and products and financial services”.

The Commodity Murabaha Platform of DMCC Tradeflow is equally significant because no Islamic Finance Hub of substance can be complete without one simply for the reason that local, regional and international banks and corporations need mechanisms to facilitate short-term liquidity management whether in surplus or deficit.

The bane of the global Islamic finance industry has been a dire shortage of such mechanisms. Hitherto, the reliance has been on the Murabaha warrants based on contracts on the London Metals Exchange and, more recently, the Bursa Suq Al Sila at Bursa Malaysia. Suq Al Bahrain similarly is another platform launched in recent years.

As Charlie Sleightholme, head of commodity murabaha business at BGC in Dubai, explained in a statement, “BGC is delighted to partner with the DMCC and launch a Sharia-compliant Commodity Murabaha mechanism. While trading of this product has been in existence for some time, our joint offering brings a modernisation to the process, offering speed, convenience and innovation to the execution of this popular product.”

Another institution co-operating with DMCC Tradeflow is the local Shariah-compliant Noor Bank, which recently rolled out its interbank online commodity Murabaha settlement capability developed on the DMCC platform for its Corporate and SME clients. Noor Bank already has a similar service to support Treasury transactions.

The structure established with DMCC for the settlement of commodity Murabaha for corporate and SME financing transactions, explained Noor Bank in a statement, enables a higher degree of process digitisation, shorter turnaround time and better cut-offs for clients with same day processing. The platform also allows for greater Shariah compliance as the goods are in existence in the UAE, and are accessible for inspection and full possession.

To Paul Boots, director, DMCC Tradeflow, “partnerships like these further demonstrate how DMCC Tradeflow is becoming an indispensable tool for Islamic banks to trade commodities for Murabaha financing and expanding the scope of activities Islamic banks can offer to their clients. Our dedicated platform is proven to be well equipped to facilitate the growth of this thriving and rapidly expanding sector and we will continue to innovate to ensure industry participants can trade with confidence”.

The above initiatives are a mere taster of things to come in the Dubai Islamic economy and finance space. As the Crown Prince of Dubai and the patron of the “Dubai, Capital of Islamic Economy” Initiative, Sheikh Hamdan bin Mohammad bin Rashid Al Maktoum, strongly hinted at the launch of the Nasdaq Dubai Murabaha Platform, “the strategy we launched a few months ago to position Dubai as the capital of Islamic Economy is moving forward according to plan, and simultaneously in various sectors to achieve the aims and within the required timeframe.

“We will launch further initiatives in the near future according to the strategic plan, which will create new products and add value to various institutions active in the Islamic economy sectors”. n