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sector report
Cross-border financing: A growth game
The current global environment demands that economies demonstrate
their ability to sustain growth, through increased economic connectivity
and trade between the global economies.
Islamic finance now has an excellent opportunity to prove its
competitiveness and enhance its profile in the global financial
landscape. Islamic cross-border financing in particular, has
the potential to enhance its position in facilitating international
trade and economic linkages between different parts of
the world and influence the patterns of global financial and
economic integration. This article focuses on cross-border
financing in the form of Sukuk and syndicated financing.
2012: A review
The Islamic finance sector is undoubtedly well-placed to play a
vital role in facilitating cross-border financial flows, particularly
between emerging economies, hence the year 2012 marked a
turning point as new markets proliferated in the industry. Several
countries initiated Islamic finance operations, predominantly in
the MENA region, Africa and central Asia, and this resulted in
an increase in the quantity of cross-border financial flows and
international participation in Islamic financial markets.
The global Sukuk market has been the fastest-growing sector in
facilitating cross-border financing. As the credit markets continue
to tighten, market players have found Sukuk an attractive and
effective source of funding due to the need to diversify businesses
and expand funding streams. New issuances of Sukuk reached
approximately US$40 billion globally and this has fostered a
significant boost in cross-border linkages. There have been
sovereign Sukuk issuances by countries including Malaysia,
Qatar, Indonesia, Dubai, Bahrain and Turkey; numerous Sukuk
issuances by private entities including Axiata Group, Jebel
Ali Free Zone Authority, Saudi Electricity Company and Majid
Al Futtaim Group; and various Sukuk issuances by financial/
multilateral institutions including Qatar Islamic Bank, Islamic
Development Bank, First Gulf Bank and Abu Dhabi Islamic Bank.
Islamic cross-border syndicated financing on the other hand,
has generally slowed down in the Islamic finance space. Market
observers have commented that this is a result of greater reliance
on financing being obtained domestically within each region and
a decreasing reliance on transatlantic economies for direct and
indirect financing due to the uncertainty surrounding the economy
of the US and the Eurozone. However, project financing has been
seen as one area which has markedly increased cross-border
financing and there have been a number of project financing
facilities structured particularly in the GCC. There is a continued
trend in the use of the Tawarruq and Murabahah structures
whereby a significant number of financial institutions continue to
utilize them as a rapid and flexible way of acquiring financing. A
reason behind this is because structures such as Musharakah
and Mudarabah do not generally fit in with the regulatory and
tax regime of most countries. Syndicated financing has also
become prevalent among industry participants because of the
current economic climate and is utilised in restructuring existing
transactions or as an added feature to Sukuk issuances.
2013: A preview
The new global horizon in the year 2013 is expected to see
the continued rapid internationalization in Islamic finance with
cross-border financing continuing with more entrants to the
industry especially from Africa and central Asia; more Sukuk
issuances by new issuers; more Sukuk issuances dealing with
the restructuring of existing transactions; and more syndicated
financing, in particular, project financing. Although it is expected
that we will continue to see the use of Tawarruq and Murabahah
as the main structures utilized in syndicated financing, market
players are keen to see some movement of Islamic financing
structures away from such traditional and dominating debt-based
instruments to the more participatory risk-sharing structures of
Musharakah and Mudarabah that support entrepreneurship
endeavours. The development of such risk-sharing transactions
under participatory finance models is needed to meet the
differing needs of various businesses and thus facilitate cross
border investments. Its wider use will have significant scope in
developing a broader representation of Islamic financial products
to drive the growth and development of the industry.
It is anticipated that there will be more effort put into creating
standardized base documents. While there has been work done
with respect to this by international bodies, there is still room for
disagreement between the advisers. It is an area that needs to be
further developed to assure market players that their transactions
and structures are Shariah compliant, meet the regulatory and
legal requirements within the relevant jurisdictions and fulfil
the economic objectives of the contractual parties. This further
increases market efficiency, transparency and reduces the
transaction costs as the industry strives towards seamless global
cross-border inter-linkages.
Another challenge which remains with respect to cross-border
financing is the development of policies and frameworks that will
have a universal application. The landscape of growing crossborder
financial flows between regions underscores the need
for enhanced recognition and understanding of practices in the
different jurisdictions. It is predicted that there will be continued
effort in this area at a regional level based on existing policies
and frameworks, domestic political initiatives and the regional
economic cooperation structures in place. Such policies are
essential to provide a comprehensive legal and regulatory
environment under which effective cross-border financing
activities can take place and at the same time, be fully compliant
with the requirements of the Shariah.
In essence, there is a need for market participants to continue to
develop the Islamic finance industry with the same (if not more)
perseverance and intellectual rigor that has been applied in the
past years to develop more effective cross-border financing. This
is particularly important because cross-border financing remains
an important segment of Islamic finance which may spearhead
the industry and has become even more important in the current
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Fara Mohammad is a senior lawyer and consultant in Islamic
finance. She can be contacted at fara.mohammad@ymail.com.
8 February 2013