Islamic investment and finance set to grow despite many challenges, says top Islamic banker

In a significant speech at The 10th Arab Investment and Capital Markets Forum (ACM 2004) in Lebanon, Mr. Esam Janahi, CEO of the leading Bahrain-based Islamic investment bank, Gulf Finance House B.S.C (GFH), said that the Islamic financial industry is still largely made up of small players and finding suitable investment opportunities which offer high returns remains one of the many challenges.

"The challenge is in finding the right opportunities to invest which yield the higher return that investors in this region have become accustomed to," Mr. Janahi, who was nominated as the `Islamic Banker of the Year' at the World Islamic Banking Conference in Bahrain in 2003 said.

He added that many in Islamic banking highlight the rapid growth of the industry pointing out that there are now over 250 institutions managing assets and client money of over US$400 billion.

"The reality is that our industry is very small and is largely made up of very small players. Yes, the larger conventional banks have opened Islamic windows or subsidiaries but the fact remains that their operations today are small," he said.

Mr. Janahi said, despite this negative note, GFH is confident of a robust and excellent future for Islamic investments and finance. "Our experience is that at this time we are actually seeing exponential growth in demand and we are working hard to find the opportunities to invest," he said.

Pointing out some of the problems the industry is currently facing, Mr. Janahi said the lack of an inter-bank Islamic money market and Islamic money brokers hindered treasurers of Islamic financial institutions from making sound judgments on investments.

He said the banks also faced a dilemma when it comes to investments of a medium and long-term nature. "Yes, today there are asset backed Sukuk issues available that offer good yields but these suffer from relatively poor liquidity, unpredictable spreads between bid and offer prices, unreliable or non-existent market makers and so the list goes on," Mr. Janahi said.

According to him, in the absence of a capital market populated by market makers with sufficient financial power, issuers are forced to turn to structures that return a proportion of the capital in tranches.

"Many investors are unwilling to hold to maturity Islamic paper with a term of 5 to 7 years unless the issuer is sovereign or the yield is very high," Mr. Janahi said, adding that GFH however has seized upon the opportunity presented by the lack of deep, liquid capital markets.

"We have successfully arranged and placed investments in the GCC and in Europe yielding 9 to 10 per cent per annum cash dividends with maturity profiles of 5 to 7 years. These real estate backed deals have helped plug the gap in medium term Islamic product offerings," Mr. Janahi said.

He said that one of the major drawbacks Islamic investment and finance industry suffered from was the lack of tools with which to manage and mitigate risk. "Up and until very recently it was presumed that foreign exchange hedging was not allowed according to Islamic Sharia'h. However, we are pleased that recently banks have introduced new products, compliant to Sharia'h, that allow the purchase of long-term forwards and foreign exchange options."

Mr. Janahi said the industry was also facing a dilemma because of differing interpretations by Islamic scholars in different countries on Sharia'h, which has served only to confuse and slow down the development of the industry.

Reiterating that there is an excellent future for Islamic investment and finance, Mr. Janahi said that the progress of the industry would depend on overcoming the problems that impede growth.

"There are no real capital markets for medium and long-term products, risk management products are still in their infancy and Islamic banks are still small and have insufficient capital," Mr. Janahi said.

He added that the problems also include the absence of a single authoritative industry body. However, Mr. Janahi said that GFH believes in turning these problems into profitable opportunities and the investment bank was confident of taking on these challenges.