London and Dubai are competing for the title of the biggest Islamic finance listing centre in the western world. But their financial firms are also cooperating in ways that a decade ago would have seemed unlikely.
Sheikh Khalifa, President of the UAE, and Queen Elizabeth of Britain are not likely to have discussed a niche subject like Islamic finance when they met yesterday in Windsor Castle. But it is a subject close to the heart of the UAE and United Kingdom's financial industry. Dubai, in fact, this year launched its boldest challenge yet to London's lead in Sharia financing.
Dubai set out in January its plans to become the "capital" of the Islamic industry, with global rules to enforce standards on industries as diverse as Sharia finance, halal food, pharmaceuticals and cosmetics, and charitable endowments.
Plans for a UK sovereign sukuk may have been shelved, but the British government recently established an Islamic finance task force, intended to rejuvenate the UK's Sharia-compliant industry.
For HSBC, the British banking giant that is the biggest underwriter of sukuk worldwide, it helps to have a foot in each city, Simon Cooper, the bank's regional chief executive, said last week.
"The Islamic capital markets are markets that we dominate, and trading of those bonds takes place in Dubai," he said. "As we look to continue the development of both the tenor and the structure of Islamic bonds, that will definitely benefit Dubai's expansion and its development of its financial centre."
The British capital - described last month as the "eighth emirate" of the federation by Boris Johnson, London's mayor, because of the large number of UAE nationals who travel there during the summer - is also presenting opportunities for the increasingly healthy UAE banking sector.
Emirates NBD, the biggest bank in Dubai, was seeking to grow its business in the UK through London, said Rick Pudner, the bank's chief executive, in a conference call on Thursday.
"As far as London perspective, we've said we want to build up our wholesale banking operations, treasury markets and the private bank. That's a key component there," he said. He added that the bank was a key supporter of Dubai's Islamic initiatives.
Islam is the fastest-growing religion in the UK and the potential gains from Sharia-compliant industries are attracting companies including Abu Dhabi Islamic Bank. The lender has established a private banking centre at One Hyde Park in Knightsbridge, one of the most exclusive addresses in the capital, where large numbers of the very wealthy reside.
The 2.7 million Muslims in England and Wales represent the second-biggest religious group after Christians, according to official census data from 2011.
Hussain Al Qemzi, who sits on the board of a Dubai committee tasked with overseeing the development of the emirate's Islamic economy, has said that there is no reason why Dubai could not take London's crown as the biggest listing centre for sukuk.
Dubai's Government, Emirates Airline and Dubai Electricity and Water Authority have raised a total of US$2.75 billion through listings on the Nasdaq Dubai and the Dubai Financial Market, according to data from Bloomberg.
So far, Dubai is way ahead - London, which raised four times more than Dubai with $9.7bn in listings last year, has listed no sukuk at all this year.
That said, Dublin's efforts to swipe a greater share of the sukuk industry from London are bearing fruit - the Irish Stock Exchange has listed $5.75bn so far this year.
But an increasingly global outlook was something that the industry currently lacked, said Moinuddin Malim, the chief executive of Mashreq Al-Islami, at a conference in Dubai last month.
"Islamic finance as of today is really a local if not regional business. There's no Islamic banks in the world that have a presence in 10 or 15 countries, they're mostly regional players and mostly local players," he said. "Today, we look at Malaysia and say that Malaysia is the leading Islamic hub, but the fact is it's all for the in-house requirements of Malaysia."
The setting up of a federal credit bureau will pave the way for a decriminalisation of failed security cheques for all residents if it is successful, said the Ministry of Finance.
Asked whether the UAE could decriminalise bounced security cheques if a pilot programme to create credit reports for individuals is a success, Younis Al Khoori, the undersecretary at the Ministry of Finance and vice chairman of Al Etihad Credit Bureau said: "Definitely. We're aiming towards that. It's one of the key purposes of approving this entity."
Mr Al Khoori did not give a time frame for when the law could be changed, although the ministry expects full credit scoring to become available next year.
Al Etihad Credit Bureau will begin a pilot programme in July, with a dozen UAE banks participating.
Currently, cheques account for payment of more than Dh1 trillion in the Emirates every year, with certain transactions such as mortgages required to be backed by security cheques. Bouncing a cheque is a criminal offence, although a presidential decree in October immunised UAE nationals from serving jail time.
Banks use cheques as a means of providing security, because without effective credit scoring it is impossible to determine a potential borrower's likelihood of default.
However, a total of 1.4 million cheques failed at the point of use during 2012, representing about one in every 20 cheques used for payments worth Dh46.8 billion. The rate of failure is about 10 times higher than developed countries such as the United Kingdom, despite Britain clearing many more cheques per head of population.
Banks have lobbied the Central Bank to find a replacement system after the financial crisis laid bare the flaws in the current model.
The new federal credit bureau would "introduce transparency" into consumer borrowing, Mr Al Khoori said. "Whoever wants to have his own personal information, collectively throughout the banks, they can come to the bureau and collect his record," he said.
Those individuals that believe they are being charged too high a rate of interest may be able to appeal their credit rating by providing other information such as consistent utility bill repayments, he added.
At present, the rates of interest available on unsecured consumer finance compare unfavourably to other markets where credit data is more readily available.
The average annual rate of interest on a UAE credit card is 37.8 per cent, which bankers have attributed to the lack of an operational federal credit bureau.
That compares with an annual interest payment of 17.5 per cent on a credit card in the UK, where the adult population is fully covered by credit scoring companies.
The main benefit of a credit bureau is to reassure banks that a customer has not spread debts out across the financial industry by dealing with many different lenders, said Surya Subramanian, the chief financial officer at Emirates NBD and a former adviser to Singapore's accounting regulator.
"We think pricing will improve and products will improve," he said last week.
Additionally, the large amounts of personal financial information which Al Etihad Credit Bureau will store should make the process of gaining approval for personal loans and credit cards better for consumers. "They certainly speed up the credit approval process," Mr Subramanian added.
"As long as every bank is able to provide quality data, the entire industry takes back quality data."
Dubai: A $500 million sukuk from Turkiye Finans this week was just the latest in a flood of international debt issues from Turkey. But the identity of the arranging banks, and the investors who bought the issue, pointed to a shift in capital markets.
Of the four banks arranging the deal for Turkiye Finans, an Islamic bank majority-owned by Saudi Arabia’s National Commercial Bank, two were based in the Gulf: NCB Capital and Dubai’s Noor Islamic Bank.
And Middle Eastern investors dominated buying of the sukuk, taking 51 per cent of the deal, which received just under $2 billion in orders.
In the past, European arrangers and investors dominated issuance of international bonds from Turkey. But in recent months the Gulf has started to play a major role, for commercial and possibly even political reasons.
“You will find more demand from investors in this region, in particular banks which are fairly liquid and sovereign wealth funds, to invest in financing in Turkey, be it through private placements, new issuances, or the public debt capital markets space,” said Georges Elhedery, head of global markets in the Middle East and North Africa (Mena) for HSBC.
“These investment flows are a developing trend as Turkey, which has a low savings rate, looks to tap the deep and liquid capital pools in Mena to fund its 2023 Vision, which includes investing some $350 billion in transport and other infrastructure.”
Turkey’s upgrade to investment status by Fitch Ratings last November, and expectations that it will secure similar ratings from the other two major agencies, have fuelled an explosion of international issuance this year.
Turkish companies have issued about $9.5 billion of US dollar-denominated bonds so far this year, compared to a total of $16.5 billion for the whole of 2012, accoding to John Bates, corporate fixed income analyst for emerging markets at PineBridge Investments.
About $10 billion of last year’s Turkish issuance came in the final four months of the year, and was dominated by banks.
A few years ago, Gulf arrangers and investors might have been expected to play only a small role in Turkish bond sales; their attention was fixed on their own region, and Turkey focused on Western capital markets.
But the Gulf is central to the current stream of issuance.
Another Turkish bank, AlBaraka Turk, the local unit of Bahrain’s Al Baraka Bank, is expected to price a bond early next week, and three of the mandated arrangers are Gulf-based: Dubai’s Emirates NBD, Abu Dhabi’s Al Hilal Bank and Qatar’s Barwa Bank.
One reason for the shift is Turkey’s move into Islamic finance. After developing the industry only slowly for years, Turkey issued its first sovereign sukuk last September; nearly 60 per cent of the $1.5 billion issue was placed among Middle Eastern investors.
The appearance of the sovereign sukuk has facilitated more issuance by Islamic banks in Turkey, which is meeting strong demand among cash-rich Islamic funds in the Gulf that are unable to satisfy their appetite for sukuk within the region.
“Turkish issuers want to tap the liquidity that sits with money managers in this region,” said Chavan Bhogaita, head of markets strategy at National Bank of Abu Dhabi.
The fact that three of Turkey’s four Islamic banks are affiliates of Gulf banks has also helped steer sukuk issuance to the region.
Sales of Turkish sukuk to Gulf investors may increase further as Turkey expands its offerings; Istanbul is working on new regulations to allow use of a wider range of sukuk structures, which could see Islamic bonds used for project finance and infrastructure development.
There are other factors behind the trend, however. One is Turkey’s increasing emphasis on developing political and economic ties with the Gulf, rather than merely focusing on the West, as the country seeks to play a more active diplomatic role in the Middle East and diversify its trade.
Two-way trade between Turkey and the six countries in the Gulf Cooperation Council jumped 60 per cent to $22 billion in 2012, according to a report from a joint economic committee. Growing economic ties have familiarised Gulf institutions with Turkish issuers.
Pricing is also a factor. A dramatic compression of yields in the Gulf over the past 18 months, partly because of increasing investor confidence in the area, has reduced the returns from bonds issued within the region.
That is prompting Gulf investors to take a fresh look at the yields on offer from Turkey, which are generally higher for similar credit ratings.
For example, Sharjah Islamic Bank, based in the UAE and rated BBB+, priced a five-year, $500 million sukuk this month at a profit rate of 2.95 per cent.
That was one full percentage point below the 3.95 per cent profit rate offered on the five-year Turkiye Finans sukuk, which is rated BBB, just one notch lower than the Sharjah issue.
“Despite the flurry of recent issuance, the Turkish corporate sector is still relatively limited in scale and is dominated by the banks,” PineBridge’s Bates said.
“The banks still offer decent value when compared to their EEMEA (Eastern Europe, Middle East and Africa) peers, yielding about 50 basis points more than other BBB-rated banks. In general, they also compare well on credit fundamentals.”
Dubai: While cash is still king for many travellers in the UAE, prepaid cards are now becoming a preferred payment tool for a number of residents who regularly take leisure and business trips abroad, a study showed.
Considering that business travellers in the country take about 2.7 trips overseas and spend an average of Dh8,830 each time, and leisure travellers take 1.6 trips and spend Dh10,388 out of pocket, there is a huge opportunity for prepaid providers in the UAE.
According to the Visa Prepaid Travel Card study, more than one-third of travellers in the country now see prepaid cards as a viable alternative to cash.
For nearly half of business travellers (40 per cent), they like the idea that prepaid cards allow them to lock in good exchange rates prior to their trip. Those who travel for leisure (41 per cent) said the believe that prepaid is safer to use than carrying cash or traveller’s cheques.
Francesco Burelli, a frequent business traveller and partner at consultancy firm Value Partners, uses a range of payment cards, such as debit, credit and prepaid for various transactions. However, when it’s time to travel, his prepaid card proves very useful, especially when securing good exchange rates abroad.
“With the prepaid card, I can lock in the currency exchange rate and enjoy a much better rate than having to exchange money at the airport. If I expect to travel to a specific region, say US for example, I keep an eye out on the dollar rates and buy dollars in advance,” Burelli told Gulf News.
In Visa’s study, close to half (47 per cent) of the residents who spend holidays abroad and 40 per cent of those who take business trips said that a prepaid card’s flexibility to be used at ATMs, in store and online, is another major reason they would choose prepaid.
“Instead of carrying wads of cash, travellers want an easier and more convenient way to pay while overseas. This is what makes the prepaid card so appealing,” said Marcello Baricordi, general manager, UAE, Visa.
The study questioned 608 respondents from the UAE aged 18 to 59 across the student, leisure and business traveler segments.
Prepaid cards issuance in the Middle East and North Africa markets is forecast to grow at a compound annual growth rate (CAGR) of 18 per cent every year between 2013 and 2017.