Middle East and North African economies have faced a tumultuous past year in the wake of the Covid-19 crisis and a crash in oil prices. As governments work to restore economic growth, Felix Thompson examines some of the key trends to watch in the sharia-compliant trade finance space, which industry figures say could play a key role in the region’s recovery.


As with the conventional banking industry, the Islamic finance sector has faced a period of turbulence and upheaval over the past year.

In a report released in December, the Islamic Corporation for the Development of the Private Sector and data firm Refinitiv detailed how Islamic finance had been experiencing an uptick in growth prior to the onset of the Covid-19 crisis.

According to the paper, global assets for the industry – which is comprised of various segments, including Islamic banking and sharia-compliant bonds and insurance – rose by 14% to US$2.9tn in 2019.

However, as a result of being roiled by the economic shock of the pandemic, the analysis predicts growth of the Islamic finance industry to slow to single digits in the coming years, reaching US$3.69tn by 2024.

S&P Global Ratings echoed these forecasts in its 2021 Islamic Finance Outlook, released in May, pointing to the damaging impact of the pandemic on the Islamic banking sector in particular.

According to the report, conventional and Islamic banks across the GCC countries were hampered by “significantly reduced revenue and credit growth” in 2020 as they focused “on preserving asset quality rather than business expansion” in the wake of a sharp drop in oil prices and measures implemented by governments to contain the virus.

Nevertheless, industry players are optimistic about the role Islamic finance will play in kickstarting economic growth globally following last year’s downturn.

The Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) says in a statement that there are several sharia-compliant financing instruments that could be part of the integrated pandemic response plan to help nations prepare, respond, and recover.

According to the multilateral insurer, one way in which Islamic financial institutions can support recovery in the medium term is through the “key mechanism” of trade finance, which can help with the financing of equipment, resources, and other sources of livelihood.

It points to takaful trade credit solutions as a “critical offering to keep trade flowing” as another potential solution. The Islamic Development Bank (IsDB) Group member offers takaful solutions itself, as part of its broader remit to provide sharia-compliant insurance and export credit.

“Islamic financial institutions offer a range of financing instruments that can positively impact every group, from SMEs in least developed countries to policy makers in highly developed countries,” the ICIEC adds.

Against this backdrop, we take a look at some of the key trends likely to shape the sharia-compliant trade finance industry over the next year, including the International Islamic Trade Finance Corporation’s (ITFC) promise to provide even more funding to countries in need, a reported increase in activity amongst commercial banks and trade finance funds, as well as efforts to grow the use of digitised sharia-compliant trade solutions.


Public sector support set to continue

The International Islamic Trade Finance Corporation (ITFC) acted as a vital source of pandemic relief for many countries last year, and as governments look to gear their economies towards recovery, the development finance institution has said it will provide hundreds of millions more in Islamic trade finance support.

Last July, in the initial months of the pandemic, the World Trade Organization, ITFC and a host of other multilateral development banks issued a joint statement that took aim at private sector trade finance providers for withdrawing their exposure to certain markets globally.

“In addition to the ongoing shocks to supply and demand, international trade has been affected by a reduction in the supply of trade finance. Risk perceptions about non-payment in international trade are at the highest levels in a decade; banks are increasingly reluctant to take on payment risks in many countries where economic conditions are deteriorating,” the institutions said.

They added that they would work within their “respective remits to make trade finance available through this difficult period, just as we did during the global financial crisis of 2008”.

For its part, the ITFC announced its “rapid response initiative” in early April, which set aside US$300mn in immediate funding for Organisation of Islamic Cooperation (OIC) nations’ healthcare requirements and supplies of critical goods, such as food.

Abdihamid Abu, general manager for trade finance at the ITFC, tells GTR that the bank ultimately allocated US$605mn in support – more than double the original pledge – to a handful of countries across Africa and Asia in the initial phase of its support.

In one notable transaction in the early weeks of the pandemic, it helped Egypt secure US$100mn to bolster its food security.

Meanwhile, with trade and economic growth across the Middle East and North Africa having started to recover from last year’s malaise, the ITFC has now started the second stage of the IsDB Group’s broader “respond, restore and restart plan”.

Abu says that the ITFC has pledged US$550mn to aiding the “R2 phase” of the bank’s Covid-19 strategy, which is specifically focused on helping countries speed up their economic recovery and seeks to encourage private sector involvement.

While the initial “respond” phase primarily targeted sovereign transactions, Abu says the second stage is “primarily focused on the private sector and is looking at allocating lines of finance to banks in our member countries that, in turn, will on-lend and support the SMEs and the private sector”.

“In the restore phase, which is currently ongoing, the support is much broader [than with the first phase]. We are working with a lot of banks in the Central Asia region, as well as banks in Africa,” he adds.

The third phase, the “restart track”, will focus on “economic resurgence” among member countries.

The IsDB says in a report released last September that through this final phase, “project preparation will be launched for large-scale infrastructure projects identified as essential for enhancing the global value chains in the country”.

“This track will deliver long-term actions to build resilient economies on solid foundations,” it adds.

As well as sizeable packages of support, public institutions have also worked to develop new sharia-compliant solutions amid the recent turmoil.

The ITFC launched a new letter of credit (LC) confirmation instrument in December to help smaller businesses in OIC countries export, as well as mitigate the trading risks they face amid the pandemic.

Elsewhere, the UAE’s official export credit agency, Etihad Credit Insurance (ECI), released a suite of sharia-compliant export credit solutions in October to boost halal exports from the country.

Released under its new “ECI Islamic” brand, the products include various types of trade credit insurance, LC confirmation insurance, Islamic export finance, foreign investment insurance, and surety bonds.

The move is expected to mitigate risks such as insolvency and non-payment for UAE exporting companies, while also allowing them to secure loans and additional funding capacity from local banks at a concessional rate.

Massimo Falcioni, ECI’s CEO, tells GTR that it will benefit halal exports in a number of sectors, including food and beverage, pharmaceuticals and cosmetics.

“There is a huge gap for trade finance globally, and specifically in sharia-compliant trade. We want to fill the gap as much as possible,” he says.


A return of private sector activity?

Anecdotal evidence suggests that commercial banks that offer Islamic trade finance products are also ramping up their activities.

Muneer Khan, a Dubai-based partner at law firm Simmons & Simmons, says that “banks seem to have become more confident, possibly because there’s more liquidity in the market”.

“It’s become clear that that we’re on the road to recovery, and we’ve seen more of an uptick in both conventional and Islamic trade financing across Asia, Europe and the Middle East,” he tells GTR.

He notes that commercial banks remain the predominant and established providers of Islamic trade finance across the Middle East and North Africa.

Specialist Islamic finance banks such as Abu Dhabi Islamic Bank, Emirates Islamic Bank and Dubai Islamic Bank are some of the main players in the Mena region, but there are also conventional financial institutions, such as Mashreq Bank for instance, which provide sharia-compliant services through so-called “Islamic windows”.

Khan reports that his firm has also seen increasing activity from asset fund managers based in Dubai, Bahrain and Saudi Arabia, which could be an “important factor” in growing the Islamic trade finance market in the coming months.

Paul Wilson, chief investment officer at London-based credit asset manager Channel Capital Advisers, which launched a sharia-compliant trade finance fund in 2019, tells GTR that many potential investors in the Islamic trade finance sector “hit the pause button” for much of 2020.

However, since the final few months of last year, “a significant number have started to re-engage and push their processes forward”.

“It’s fairly characteristic of these kinds of investors to be relatively slow moving and cautious. At this stage, it’s unclear to what extent the sector will grow this year, or what the trajectory will be. However, there’s a lot of noise and increasing interest in the trade finance sector from investors who require their investments to be sharia-compliant – and that is usually a good indicator of future growth,” Wilson adds.


Digitisation efforts

According to the ICIEC, even before the Covid-19 pandemic, Islamic banks had been trying to “catch up” with conventional banking counterparts by stepping up investment in trade digitisation to reduce operating expenses, boost revenue and automate internal processes.

With the pandemic forcing financial institutions to impose remote working measures, it adds that “there has been a considerable increase in digital banking transactions and activity, which in turn is providing added force to drive the digital transformation push across Islamic banks”.

In one example of this digitalisation push, the ITFC tells GTR that it plans to ramp up its use of blockchain-based and other digital trade finance solutions in the coming year.

In January, it partnered with Bangladesh-based City Bank to complete a cross-border sharia-compliant blockchain-based LC transaction on the Contour network.

The ITFC acted as advising and financing bank on the deal, which saw an LC issued on behalf of Bangladeshi garment manufacturer Debonair Group for the import of garment accessories from Hong Kong-based exporter, Apparel Link.

This marked the first time a sharia-compatible transaction was completed on the Contour network, which the platform’s CEO Carl Wegner described as a “major milestone”.

ITFC is now looking to grow its use of digital solutions, and according to Abu has created a dedicated team to focus on increasing the digitisation and innovation of its trade finance business.

Away from blockchain, he adds that the financial institution is also “experimenting” with Bolero’s digital trade finance platform, having facilitated a transaction involving the export of cotton from Burkina Faso to a buyer in Asia using the solution earlier this year.

“The Covid-19 pandemic has accelerated the need to adopt digital trade solutions and our management is very ambitious about ramping up digitisation within our ecosystem. I would expect that we’ll be seeing more transactions involving digital solutions in the coming year,” says Abu.

Commercial Islamic banks are also bolstering their efforts to engage with blockchain-based solutions.

Abu Dhabi Islamic Bank (ADIB) announced in April last year that it had become the first Islamic bank to use blockchain technology for trade distribution, having partnered with TradeAssets, a blockchain-powered e-marketplace for digital origination and distribution of trade assets.

The bank says it has executed over 60 trade finance cross-border transactions with multiple regional banks in the first year of the partnership.

Away from the Islamic trade finance space, in 2020, ADIB was one of the banks to join a consortium backing blockchain-based trade finance platform, UAE Trade Connect (UTC).

UTC aims to address the risk of double financing and fraud across the UAE. It has been in development since 2017 through an initial collaboration between telecommunications firm Etisalat and tech company Avanza Innovations – as well as First Abu Dhabi Bank (FAB) – and formally went live with seven UAE-based commercial banks in April.

UTC allows banks to send invoice information into a private permissioned blockchain network through a node on the blockchain. This information is then run through Etisalat’s fraud detection system, which uses AI to check invoice data against other invoices and external sources for duplication and fraud.

ADIB was ultimately not mentioned as one of the banks to initially move into full commercial production. However, UTC’s CEO, Zulqarnain Javaid, told GTR in April that the bank had not withdrawn its commitment, and had simply chosen to defer its go-live date.

As of press time, Commercial Bank International, Commercial Bank of Dubai, Emirates NBD, FAB, Mashreq Bank, National Bank of Fujairah and Rakbank have joined the platform. Alongside the UAE Central Bank and Etisalat, they will assume a role on UTC’s steering committee.

In terms of expansion, Javaid says there are plans to start looking towards providing other solutions on the platform, such as electronic invoices and electronic bills of lading.