* Trade finance neglected by Islamic finance industry
* Direct lending preferred over trade business
* But shift in global trade patterns provide opportunity
* Some Western banks forced to cede market share
By Bernardo Vizcaino
DUBAI, Aug 5 Omar Ibn al-Khattab, ruler of a
nascent Islamic empire in the seventh century, once convened a
meeting in Medina to admonish his subjects "for avoiding trading
and leaving the markets in the hands of the foreign traders".
The story underscores the importance given by Islam to real
economic activity, said Muhammad Qaseem, head of the sharia
department at Dubai Islamic Bank-Pakistan. "One of the main
sources of earning pure wealth is true sharia-compliant trade."
Centuries later, however, the Islamic finance industry -
which is growing rapidly in some areas, such as debt issuance -
is neglecting merchandise trade, leaving trade finance for
conventional banks to dominate.
When the Paris-based International Chamber of Commerce held
its regional meeting in Qatar in March, for example, a five-day
agenda devoted just 30 minutes to Islamic finance.
The event brought together trade experts from around the
globe, but Islamic banks were not prominent. In contrast,
Commercial Bank of Qatar and Qatar National Bank
, both conventional lenders, were major backers of and
participants in the event.
Both the Morocco-based Islamic Centre for Development of
Trade (ICDT) and the International Islamic Trade Finance Corp
(ITFC) have called for "capacity building" activities such as
seminars and workshops to spur trade among Muslim countries, but
such efforts remain largely unmatched by Islamic banks.
"I have not seen a dedicated forum for Islamic trade
finance. There are some attempts...but they are not focused,"
Nazeem Noordali, general manager of corporate and structured
finance at the ITFC. "I don't know how ready they are."
Educational efforts by Islamic finance bodies are "not doing
well", said Arif Khalifa, head of global trade finance at Kuwait
Finance House. "They are only focusing on introduction and
definitions...Conventional banks are more developed."
The Saudi-based ITFC, a non-government entity promoting
Islamic trade, approved transactions worth $3 billion in 2011,
29 percent of which came from the Middle East and North Africa.
One problem lies in the relative youth of Islamic banks,
many of which have only had major international operations for a
decade or so and which do not have large numbers of experienced
staff with technical expertise in trade.
Some Islamic banks feel trade finance is operationally too
intensive for them, said Safdar Alam, chief executive of
London-based Siyam Capital. "Lading, transport, documentation -
Islamic banks are not geared up to do that".
Conventional banks, on the other hand, use trade finance to
win more business from clients across the whole supply chain,
said Alam, a former head of Islamic structuring at JP Morgan.
"If Islamic banks want to take it seriously, they need to go
through that intellectual hurdle."
At present, Islamic banks' preference is for straightforward
lending products, Alam said. "Islamic banks want financing to be
as simple as possible; all they know is debt financing - who and
how much. It all ties up into their cost-benefit analysis."
Islamic banks could address their limited size through
outsourcing, he added. "They can ask conventional banks for help
in execution, operation...The big trade finance banks will
In fact, global trends promise to increase the scope for
Islamic banks to expand in trade finance.
The Gulf region is outpacing global trade growth, noted
Vincent O'Brien, chair of the International Chamber of
Commerce's (ICC) Banking Commission Market Intelligence Group.
Trade between the Organisation of Islamic Cooperation (OIC),
which has 57 member countries, and the rest of the world reached
$1.59 trillion in 2010, representing 10.5 percent of the world's
total, according to the ICDT. Countries with the highest
increase in trade volumes last year included Bangladesh, Nigeria
and Indonesia, it said.
"There is an opportunity for Islamic banks to be more
involved in trade flows between Africa and the rest of the
world," said Noordali.
Meanwhile, the euro zone debt crisis is forcing European
banks, leaders in trade finance, to retrench. This is leaving an
opening for others, John Ahearn, managing director and global
head of trade for Citibank, said in an ICC report.
But that window of opportunity may close as non-European
conventional banks strengthen client relationships and realign
strategies. Conventional banks in the Gulf such as National Bank
of Fujairah aim to expand in the field; "business is
picking up, other banks are eyeing the sector," said R S Rangan,
head of trade services at NBF.
Another factor which may ultimately aid Islamic banks is the
phasing in of Basel III banking standards around the world over
the next several years.
This could make trade finance more expensive by requiring
banks to increase capital reserves. But because Islamic banks in
general already adhere to stricter capital requirements, they
will face less of an increase in costs, said David Vicary, chief
executive of the Malaysia-based International Centre for
Education in Islamic Finance.
Islamic transactions tend to be on-balance sheet, so banks
must hold more capital reserves; conventional banks have been
keeping more transactions off-balance sheet but won't be able to
do this as much under Basel III.
"Stronger and better Islamic banks will take Basel III as an
opportunity to strengthen their competitive positions," Vicary