Cost of Islamic finance needs to be tackled

26 November 2013

Market needs to become bigger and more liquid to drive down price

The price charged on sharia-compliant finance can sometimes be between roughly 10 and 15 basis points more than other banking instruments, and this trend is constraining the growth of the Islamic finance sector, according to panellists speaking at the Islamic Economy Summit in Dubai on 26 November.

To bring costs down, the market needs to be bigger to increase the pool of available liquidity, Adnan Yousif, president and chief executive officer (CEO) of Al-Baraka Banking Group in Bahrain told delegates.

He also added that the new Basel 3 banking regulation, which requires banks to put aside more capital, has not adequately focused on how to treat Islamic finance fairly.

A requirement to put more capital against sharia-compliant financing could push up the price of Islamic finance.

Panellists recommended developing a wider secondary market for Islamic finance assets, such as sukuk (Islamic bonds), could also help increase the liquidity of the market and reduce costs.

The sukuk market is “not yet deep enough” said Aamir Rehman, managing director at Fajr Capital Advisers based in the UAE, noting that typically institutions are holding on to their sharia-compliant assets rather than selling them on to other banks and institutions.

The selling down of assets should be encouraged, as the “market is hungry for sharia-compliant paper”, he added.

The Islamic finance market is expanding rapidly by 15-20 per cent a year in its core markets. In 2012, Islamic finance assets were thought to value $1.35trn, according to data from Thomson Reuters.

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