Bankers Tailoring Their Products to Islamic Investors

THE rapidly growing economies of southeast Asia contain some of the largest Islamic populations on earth. Bankers targeting the region are discovering a burgeoning market for Islamic investments and are rapidly tailoring their products to meet the needs of these investors.

Islamic banking is based on the sharia, Islam’s unwritten religious law. Interpretations vary, but bankers must avoid charging or benefiting from interest, which is viewed as usury, and investments in forbidden commodities such as alcohol.

These constraints have not hindered the development of sophisticated investment products. Islamic investments have come a long way from the simple savings funds for prospective pilgrims, known in southeast Asia as Tabung Haji funds. Investors are now able to participate in equity markets and commodity futures funds and back property and trade finance deals.

The newer products often come with a large helping of risk, however. Trade arrangements can be vulnerable to political changes and few equity funds are available that are not tainted by gains from interest or commodities forbidden under the sharia.

Islamic equity funds can be volatile because they are based on a small number of shares, bankers say.

Bankers are now trying to develop investments that can have a secondary market and are Islamically acceptable. Mortgage-backed securities are a possible area of growth if interest payments can be replaced by charges related to the pay-back period.

RICHARD Thomas, manager of the United Bank of Kuwait’s investment management department in London, said investors in many countries in Southeast Asia, most notably Malaysia and Indonesia, are being encouraged by their governments to choose Islamic banking products.

“The governments want to mobilize their Islamic resources,” said Mr. Thomas. “They can sense the popular demand for these products and they want to help provide them, rather than excluding these investors from the financial systems or pushing them into the black market or overseas.”

Most of the foreign banks operating in the region continue to focus on the corporate market for Islamic investments, rather than retail investors. The region’s governments are more eager to encourage the participation of foreign banks on an institutional level and on its offshore centers. They remain somewhat protective of their consumers, bankers said.

“The private market is still strictly controlled,” said Mr. Thomas. “It has more to do with currency and foreign exchange considerations than with Islamic investments. But the governments are actively encouraging the banks already in the region to promote Islamic products.”

Stella Cox, head of the Islamic investment and trade finance department at London stockbroker Kleinwort Benson Securities, said Kleinwort is exploring opportunities with Islamic investors in the Far East although the focus of its business is still with Middle Eastern institutional investors. “Certainly, there is huge interest in Islamic banking products, especially in Malaysia,” she said.

Islamic investors in Southeast Asia differ from their counterparts in the Middle East in that most are eager to invest in their own region. Middle Eastern investors often do their banking in London or Geneva. But Asian investors don’t feel under the same pressure to send their money abroad in case of political upheaval, bankers said.

Also, in contrast to the Middle East, there are ample investment opportunities in the region.

So foreign banks and investment companies are coming to the investors. The local banks, including Bank Islam Malaysia and Bank Negara, have long offered Islamic products designed for retail investors.

AMONG the Western banks selling Islamic investments in Southeast Asia are Citibank of the United States, Britain’s Standard Chartered, France’s Crédit Lyonnais and Banque Indosuez and the Geneva-based Islamic investment bank Dar Al-Maal Al-Islami. Competition for this market is keen and many bankers are reluctant to comment on their Islamic products.

“There is strong consumer demand for Islamic financial instruments in the region,” said Will Manfer, spokesman at Standard Chartered’s headquarters in London. “It is a very important market for us.” He declined to comment on the bank’s retail operations except to say that Standard Chartered is able to offer a “broad spectrum” of Islamic banking services throughout Southeast Asia.

Banks and investment companies are also discovering that their Islamic products are of interest to non-Muslims as well as Muslims in the region because people respect the morality of the investments.

ALINE SULLIVAN is a London-based journalist who specializes in financial topics.


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