In economic flux, Islamic banking and finance are gaining ground

In economic flux, Islamic banking and finance are gaining ground

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Sat, 27/10/2012 - 12:48

The economic stagnation of the past year and a half has taken a toll on many businesses, but a fleet of Islamic investment banks in Egypt sees opportunity in the new emerging order.

Ridge Islamic Capital, one such investment bank, has found a niche in the finance sector and made plans to capitalize on it. It offers Sharia-compliant investment banking, asset management and wealth management services to a market that experts say is primed for Islamic finance.

Launched in late September, the firm is among a slew of banks offering, or planning to offer, Islamic investment products. Others are the National Development Bank and partners EFG Hermes and QInvest.

Officials have repeatedly touted the resilience of Islamic finance, with the new government keen on broadening the industry. Officials said Egypt would introduce sukuk, or Islamic bonds, in a bid to ease the funding crisis brought about by diminished foreign reserves and a widening budget deficit.

The government is looking to raise the market share of Islamic finance to 35 percent from 5 percent, according to a Bloomberg report.

Ridge Islamic Capital has garnered significant attention for its quick move into the market and a promise of US$100 million in investments in the coming two years. Bank officials recently announced that they are looking to buy a local brokerage, and have so far shortlisted three from 10 that are for sale.

Egypt Independent sat down with its director, Ahmed Rizkallah, to discuss the bank’s mission and plans in Egypt, and why he thinks Islamic finance could help solve the speculation ills in the world economy.

Sustainable system

First set up in May, Ridge Islamic Capital is the Islamic financial arm of Dubai-based regional investment company Ridge Solutions International Holding, which is part of the Angola-based Ridge Solutions Group.

In Angola, the conglomerate grew famous for financing projects in the aquaculture, agriculture and industry sectors, amid the country’s real estate boom. At the peak of the financial crisis in 2008, though, the bank saw a new opportunity in the weaknesses of traditional free-market finance.

“Our chairman had a vision of capitalizing on the sustainable and resilient Islamic banking and finance industry,” said Rizkallah.

Bank officials saw over-speculation as one of the main causes of the financial crisis and saw Islamic finance as an anecdote, with its built-in prohibitions against speculating.

“In the derivatives market, the trades and volume at one point reached $600 trillion a year, while the combined GDP of the whole world is $60 trillion,” said Rizkallah. “One type of trade and activity was 10 times the GDP of the whole world.”

Less speculation means fewer market distortions.

“We believe that Islamic finance, in essence, is a very sustainable system,” he said.

An untapped market

The initial plan was to open an Islamic commercial bank in the region, Rizkallah said, but after some fine-tuning, the company decided to get into the specialty of Islamic investment banking.

In 2011, bank officials flagged Egypt as an ideal place for this expansion because of its “strong fundamentals.”

“For us, Egypt is the anchor of the region,” he said.

There was also room for expansion. Despite being the region’s most populous country, it is only seventh in terms of Islamic banking assets. The smaller Gulf nations have a much larger array of Islamic financial products.

Egypt’s banked population is estimated to be less than 10 percent, though it is likely slightly higher. Of that segment, even fewer bank customers use what little Islamic finance services and products are offered on the market.

There are only three full-fledged Islamic financial institutions operating in Egypt, and 11 with Islamic banking operating windows, Rizkallah said.

It’s an environment poised for growth in the banking sector, and especially the Islamic banking sector, many experts say.

Angus Blair, founder of the Signet Institute, a Cairo-based think tank on Middle Eastern and North African economies, said the banks currently offering Islamic investment products include Faisal Islamic Bank, Al Baraka, Bank Audi and Ahli United Bank.

Other institutions have offered Islamic forms of products to clients, said Blair, but not on a large-scale level. Previously, he said, a number of offshore companies offered services to Egyptians, although these transactions are now limited due to capital controls.

These customers will now have to go to local Islamic finance institutions for their banking and investment needs.

In comparison, there are more than 30 conventional banks in Egypt.

“The banking segment of Egypt is small but growing — there’s still a cash-based mentality — and Islamic banks have a niche they’ve been leveraging,” said Rizkallah.

And it certainly seems the high rate of growth will continue. The Islamic financing industry — still nascent, compared with conventional banking — has expanded considerably in recent years, with experts putting the annual growth rate between 10 and 15 percent.

“Islamic banking is considered the fastest growing segment in the global financial system,” Jose Ramos, chairman and executive president of Ridge Solutions Group, said in a statement.

Modern Islamic products

Ridge’s assets currently being managed weigh in at LE50 million, of which LE30 million are in the Misr Iran fund of funds, and the remaining in individual portfolios, Rizkallah said.

A “fund of funds” is one that invests in a number of funds, either locally or regionally, without investing directly in the stock market.

“This considerably reduces the risk to investors and gives them more diversity,” he said.

The firm also plans to inject roughly $100 million into different funds and investments in Egypt, and aims to place $15 million as an initial capital increase in the coming months, which Rizkallah said would be used for expansions and to support the funds under management.

But, again, he sees room to grow.

“Outside Egypt, there are more than 50 mature products available in Islamic banks,” Rizkallah said, but locally, “we are only trading around 15.”

Islamic banking assets are about 5–7 percent, compared with banking assets in general in Egypt, he said.

“The theme is modern Islamic services,” he said. “By saying Islamic, we are not alienating anyone. It’s not about stereotyping or segregating investors, it’s about showing that we have a different way of offering services.”

The firm plans to soon launch a regional fund of funds with a target size of $150 million, which has already been approved by the Central Bank of Bahrain.

“We’ll screen the Sharia-compliant funds in the region, filter the best performers, invest in those funds, and keep reallocating and balancing among those funds,” he said.

Other products allow investors to put money in the stock market, in a Sharia-compliant way, using fixed-income securities.

“The main challenge to developing such a structure in Egypt is the limited offering of Sharia-compliant fixed-income tools,” said Rizkallah.

They are also looking into creating a real estate fund for investors.

“Real estate in general is one of the strong projects in Islamic finance industry because it is a solid asset,” said Rizkallah.

In Egypt, Rizkallah sees middle-income housing compounds as a particularly profitable segment, due to their “payback after three years and a yield of 20 or 30 percent.”

Changing perceptions

Locally, there’s a negative perception of Islamic finance due to previously unregulated attempts in the market to provide these services. In the 1990s, the sector was marred by several scams, which gave the niche market a bad name.

“The result was people segregated into two parties: people who want Islamic because of religious reasons, without caring about the impact and regardless of the bank’s modernization [or lack thereof],” said Rizkallah. “The other party is completely against it, thinking it’s just an emotional and sentimental sort of a business.”

He said residents in the Gulf, Europe and Asia have a better approach.

“People look at what you’re offering them and giving them in return,” he said. “They just care about how this is going to affect their wealth.”

On the political level, Rizkallah is confident that the people in power will continue to promote Islamic finance.

“After the revolution, politicians realized that we need to be open for everything,” he said. “We should accept anything that might benefit the country.”

This story originally appeared in Egypt Independent's print edition.