Since the financial crisis of 2008, Islamic trade finance has grown from being a niche, regional product to a respected source of funding across the world. Finbarr Bermingham talks to Nazeem Noordali, general manager of corporate and structured finance at the Islamic Trade Finance Corporation (ITFC) to discuss the organisation’s work and to find out how far Islamic trade finance has come.
GTR: To what extent has Islamic trade finance reached its potential?
Noordali: Islamic trade finance has made great inroads within the global trade finance community as a direct consequence of the fallout from the global financial crisis. Indeed, it has facilitated the acceptability of this way of providing funds alongside the conventional market. It has enabled a rapid shift in mindset and opened the doors for new entrants, with the traditional players receding in relative terms, particularly in emerging markets.
Islamic trade finance has grown both in size and reach among the alternative banking systems and contributed significantly to the revival of trade finance. It limited the potential damage to the real economy following the drying up of liquidity by mid 2009. These events brought Islamic trade finance into sharp focus, creating a platform conducive to its growth.
The ITFC, for example, has grown from an average US$2.4bn in annual business approvals to US$4.5bn last year, thanks to a forward-looking strategy to seek new clients in new markets. However, there is still a lot more to do for Islamic trade finance to reach the level of efficiency you would expect from conventional banking. Islamic finance still lacks optimisation and economies of scope due to the limited amount of differentiated products on offer.
GTR: In what ways could the offering be improved across banks?
Noordali: Islamic trade finance has undergone a number of transitory phases in its development but has yet to reach its desired level. There are a number of tools being currently used and others are under development. From our own experience, the ITFC has introduced a number of trade financing instruments aimed at appealing to a wider segment of the short-term trade finance business, directly related to the real economy. It is noteworthy that the financial crisis with its subsequent downfall effects has brought structured commodity trade finance into the limelight.
The main strength [of Islamic trade finance] resides in the ability of the Islamic banks to innovate. It is important that they don’t only package products in a manner to make them ‘Islamic’. It is critical to approach any transaction from the start as being shariah-compliant. It therefore requires thinking outside normal parameters. It requires trade finance practitioners to help academics in Islamic finance roll out new products in response to market challenges and realities.
GTR: What challenges have the Islamic trade finance market faced and how have they been met and addressed?
Noordali: The main impediment is determining what is shariah-compliant. Some products are considered acceptable in certain markets, while some shariah scholars in other markets have not given their clearance.
Islamic trade finance is facing three major challenges in establishing its shariah-compliant offerings.
The first is the lack of global consensus among Islamic banks on the type of financing instruments that can
be developed and applied uniformly. The second is the more complex documentation and legal due diligence requirements – there is an absence of any formalised system of accreditation of shariah scholars. And the third is the limited number of qualified personnel well-versed in financial market issues both from shariah and commercial perspectives to originate and structure deals.
Innovation is the key to sustainable success on this front. Islamic finance will require improvement in risk-mitigated innovative products, enhancing governance structures as well as implementing state-of-the-art IT infrastructure.
Raising funds for trade finance is another of the challenges ahead. With the forecasted growth of trade finance opportunities for Islamic banks, the supply side may struggle to meet demand. As a source of providing much-needed liquidity, the securitisation of shariah-compliant short-term trade finance assets can play a major role.
GTR: How has the market changed over the years and what are the current opportunities for Islamic trade finance?
Noordali: The world is looking for a new financial system that will promote transparency, fairness in distribution of wealth and sustainable profitability. It’s time for Islamic finance to seize this tremendous opportunity, as it is inherently linked with the real economy and physical transactions.
The prime tenet of Islamic trade finance is that it must have a productive and constructive purpose and not be involved in controversial activities or speculative trading. Parallels are often drawn between Islamic finance and the promotion of economic, ethical and social justice. Even as confidence returns and credit begins to flow again, the crisis underlined the need for an alternative system. Islamic finance should not be considered as a peripheral funding source, but a force to be recognised in mainstream banking.
In terms of geographical coverage, the market has definitely undergone significant changes as highlighted by a general shift in international trade towards Asia. Already, 11 G-20 countries have emerged from outside North America and Europe and four of them are member countries of the ITFC, namely Saudi Arabia, Turkey, Indonesia and Nigeria.
South-south trade is definitely developing outside of the traditional players. A distinctive feature of this is Turkey’s trade with Africa: it grew to US$10.3bn in 2011, up 390% from 2003. Turkey is now considered among Africa’s top five emerging trading partners alongside China, India, Brazil and South Korea.
GTR: We read, with interest, the news of the ITFC doing business in Malawi. Could you tell us about expansion into new markets?
Noordali: The ITFC has vowed to expand its business into markets that commercial banks perceive to be too risky. Malawi, where the ITFC finances petroleum products for the domestic economy, is a good example. We have developed a structure that suits the needs and repayment capacity of Malawi, while providing diesel oil with minimum disruption, thereby contributing to the stability of the country.
The ITFC has devised a programme for Sub-Saharan Africa aimed at creating value in the strategic agri-commodities exported and for the import of much-needed basic commodities. In North Africa, we’re putting forward a three-year plan to help governments weather the effects of the eurozone crisis and the Arab Spring. This will be done by financing exports and imports of strategic commodities. The ITFC also introduced the first large-scale structured commodity finance transaction in Morocco.
In Central Asia, the ITFC is expanding its presence in the region by financing the import and export of agri and energy products such as wheat, cotton, petroleum products and aluminium. The next new frontier is the Balkans, and countries such as Albania, Kosovo and Bosnia, with Turkey being used as a base.
Syndicated Murabaha commodity structured finance, Morocco
Borrower: Societé Anonyme Marocaine de l’Industrie du Raffinage (Samir)
Amount: US$200mn (revolving every 12 months)
Tenor: Up to three months
Mandated lead arranger and bookrunner: ITFC
Other banks: Apicorp, Opec Fund for International Development (Ofid), Bank Islam Brunei Darussalam, British Arab Commercial Bank, BSIC, May Bank, MCB, Al Baraka, Jordan Islamic Bank
Law firm: Legal Council of the Islamic Development Bank (IDB)
Samir is Morocco’s sole oil refinery, responsible for 80% of the country’s petroleum products. At the time this transaction
was agreed, Samir had just completed a US$1.2bn upgrade project, which allowed it to increase its refining capacity and to boost the quality of its produce. The ITFC-led loan helped Samir bring its added volume of products to the market, as well as assisting with the amortising of the previous debt.
This was the first Islamic structured commodity financing in the history of Morocco – one of the oldest Islamic states in the world. Its significance on a national level lies in its potential to give an industrialising country reliable access to a steady stream of energy. 94% of Morocco’s energy comes from imported fossil fuels, many of which come from Saudi Arabia and Iraq to be refined at Samir. Continued investment in the facility is crucial if Morocco’s energy supply hopes to keep pace with demand.
Structured finance for the import of broken rice, Senegal
Borrower: Tiger Denrées du Sénégal (TDS)
Mandated lead arranger and bookrunner: ITFC
Law firm: Legal Council of the Islamic Development
This was the first structured Islamic finance transaction in Senegal. In fact, the concept is still in its infancy across Western Africa, although the ITFC hopes that this one will herald a sea change in regional trade finance.
Rice is integral to Senegalese cuisine, consumed by the majority of the population at least once a day. Lack of availability and affordability can lead to food insecurity and civil unrest. This shariah-compliant transaction allowed for
its import at a competitive price, helping to satisfy Senegal’s social and economic needs.
The ITFC says: “This was the first structured Islamic finance deal in the private sector in Senegal. Therefore, the deal serves the dual purpose of advancing trade and improving lives (the core objectives of ITFC) in the IDB member countries.”