Beyond Islamic Finance for SAARC Countries

Why are selected countries in SAARC, South Asian Association for Regional Cooperation, looking towards GCC or even Malaysia for validation for, say, their Islamic finance?

Is the money there? 

[‘The South Asian Association for Regional Cooperation (SAARC) is an economic and geopolitical organisation of eight countries, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka, and Afghanistan…primarily located in South Asia...combined economy of SAARC is the 3rd largest in the world in the terms of GDP(PPP) after the United States and China and 5th largest in the terms of nominal GDP. SAARC nations comprise 3% of the world's area and contain 21% (around 1.7 billion) of the world's total population and around 9.12% of Global economy as of 2015…The SAARC policies aim to promote welfare economics, collective self-reliance among the countries of South Asia, and to accelerate socio-cultural development in the region.’ Wikipedia]

The same Islamic finance that thrives when price of oil is $90/barrel and dives when its at $40/barrel. The surpluses are just not there for the tapping. So, is Islamic finance cyclical in nature as linked to a commodity?

The same Islamic banking that has a bias toward their home country market. QUERY: Ex- Sh. Saleh Kamel’s Albaraka Banking, how many Islamic banks are truly international? For example, Al Rajhi and Kuwait Finance House are both in Malaysia, but does their presence (KFH is possibly closing operations in Malaysia) make them international? 

The same Islamic finance that has resulted in the former Islamic Bank of Britain, the only deposit taking bank in UK, to be sold (after capital rescue injections), and Singapore based Islamic Bank of Asia winding down operations.

These may be one-off series of events and not a predictor of the future, but the more important point is one need to understand the external landscape of headwinds, tailwinds or calmness before embarking of a vision with strategy.

SAARC Subs

Lets set aside three important SAARC countries, Pakistan, India and Bangladesh, as they are various stages of Islamic banking/investments, and look at smaller countries with bigger ambitions.

I just returned from Maldives and Sri Lanka, and found them to be ‘searching for some badge of acceptance’ from the usual suspects in Islamic finance. Interest from GCC, its petro-liquidity actually, encouraged countries Japan, Singapore, Hong Kong, France, Canada, and others to plant the flag of wanting to be Islamic finance hubs. Then the credit crisis happened (2008) and derivative version happened again (20110). Now, where are these hubs with respect to Islamic finance?

Some assumptions that some people and countries make about Islamic finance:

-Islamic finance is the economy, when its just a financial lubricant for the economy. It finances the real economy sectors, hence, its collateral based finance and becomes a challenge for financing knowledge based economy (today).

-Islamic finance is a savior for the modern western casino capital fueled by leverage and enhanced by derivatives. Its just 1% of global banking assets and none of the 57 Muslim countries have ‘Islamaszied’ their financial system. It is a suggested path with defined rules of engagement that require an infrastructure approach with many aligned stakeholders, cooperating and coordinating over a period of many years. It should not be forgotten that during the credit crisis one, Islamic banks, although did not have exposure to toxic assets, had non-performing realty loans and write-offs in places like Bahrain and UAE (contagion?). 

-People on the street may want Islamic finance in the country, but the powers to be may not, witness the situation in north African countries pre-Arab Spring. The perception is Islamic finance is linked to extremist movement or back-door entry to financial system, and the irony of the thinking is some western countries/people have similar (mis)understanding, hence, an unusual alignment of two segments that naturally dislike/mistrust each other.

-Malaysia or UAE model for Islamic finance is applicable for their countries, when the reality is many of these countries are at the embryonic and early stages and need to look at, say, Malaysia’s model of 1983 and not 2015. The law of unintended consequences may kick in and the blow-back potential could set back the introduction of Islamic finance.

-Islamic banks and (Shariah friendly) high net worth investors (in GCC) are not looking to invest in these frontier markets even if its Islamic. The reality is they invest in their home markets (better and stable returns) and/or European/US (legal certainty) realty linked projects. The HNW investors are more private equity oriented, however, they may be looking to vacation in places like Maldives and Sri Lanka.

Maldives and Sri Lanka should continue to examine Islamic finance, but must expand their thinking to the other sectors of the Islamic economy. The Thomson Reuters survey of the global Islamic economy, in conjunction with Government of Dubai and Dinarstandard, highlights eight sector opportunities of this growth market based upon demographics, rising per capita income and consumerism, internet penetration via mobile phones, and so on.

For example, Maldives presents a captive opportunity for expanding their tourism sector to include high end ‘halal” tourism. Today, we are stage one of ‘halal’ tourism with arrows on hotel ceilings for Kibla direction, Koran and prayer rugs in room, separate pool times for men/women, alcohol free min-bar, halal food, and so on. 

Technology is beginning to disrupt, where apps provide direction of Kibla, prayer times (even on planes), location of halal restaurants and mosques (including non-Muslim countries), and so on. At stage two for halal tourism, the committed hotel brands will include CSR, from sourcing materials locally to reducing waste, hence, becoming good corporate citizens, which has natural cross-sell capabilities. Stage two discussions are for a future article.

Furthermore, Maldives needs to undertake efforts to establish seed stage funds, incubators, and accelerators (as space is very expensive) for the sharing economy to keep the brightest minds in the country. This will also spark the diversification of the economy from tourism. For example, at www.zilzar.com, we have an intern from Maldives and he doing the work of a full time IT person on coding, programing, trouble shooting, etc.

Sri Lanka’s new leadership (based on inclusion with leaning towards US) presents an opportunity for not only tapping the halal tourism market because of the country’s beauty, attractions, diversity, culture and foods but also tap into the Muslimah fashion and halal pharmaceutical sectors.

For example, designers in, say, Malaysia, need to look beyond Indonesia and China to source materials and factories, and Sri Lanka’s export quality apparel are generally of premium quality. Thus, connectivity-cum-collaboration becomes the need of the hour.

Furthermore, there are a number of halal wellness products made in Sri Lanka, and the links to Malaysia presents upside opportunities.

Conclusion

There is life and opportunities beyond Islamic finance for SAARC countries. Islamic finance, as a financial lubricant, can provide, say, compliant trade financing or resort financing (via REIT structure) and then insure (via takaful) both trade and conception-to-completion of project.

At the end of the day, to tap compliant funds from, say, GCC, these countries need to prove their business model works (fills a gap or solves a problem) and outside funds will be used to scale. Thus, not much different from the life-cycle of a start-up.

Where do you see opportunities for SAARC countries in the Muslim Lifestyle marketplace?

Rushdi Siddiqui, Co-Founder & CEO, www.zilzar.com and www.zilzarlife.com

@rushdisiddiqui