Growth opportunities seen in Gulf as world trade shifts to emerging markets

JEDDAH – Islamic trade finance in its current state is still a small sector compared to global trade finance industry as a whole, a report issued by KFH -Research, a subsidiary of Kuwait Finance House KFHabout international Islamic trade finance “Reality and Growth Opportunities” said.
However, the strong capabilities for commercial growth of the countries of the Organization of Islamic Cooperation, especially Middle East area and the GCC countries in particular, in addition to the increased interest in Islamic finance enable Islamic trade finance sector to be a promising sector in the near future. The report explained that the Islamic finance focuses on supporting concrete economic businesses, and commercial finance is one of businesses sectors that fit with the principles of sharia.
Therefore, sharia compliant banks are in a good position to take advantage of financial flows from Organization of Islamic Conference.
Moreover, due to the fact that the overwhelming majority of Middle East and Islamic Cooperation Organization Countries are highly interested in enhancing the Islamic finance, the increase of commercial flows into these countries represents a promising opportunity to finance Islamic trade to substitute traditional one.
Globalization and advances in modern information and communication technologies have led to a surge in the number of organizations being involved in cross-border trade. Consequently, as the volumes of global trade expand into the 21st century, trade financing offers remarkable opportunities to financial suppliers to tap into the ever expanding market.
As per various industry estimates, the trade finance sector generated approximately $29 billion in revenues for the suppliers in 2011. In the near future, it is expected the sector would expand to generate revenues worth $38 billion by 2015.
The geographic composition of world trade has shifted to reflect the divergent growth performance of the developed and emerging economies.
Emerging countries are now an increasingly significant part of the global economy as these economies grow wealthier, entailing shift towards higher domestic demand. Within the emerging markets, the Organization of Islamic Cooperation (OIC) countries and in particular Middle East and North African (MENA) region countries are also gaining importance in the global trade sphere. As per an earlier study, the MENA region is expected to experience an impressive 131 percent compound annual growth rate (CAGR) increase in trade during the period 2012-2026. The corresponding figure for the increase in global trade during the same time period is 86 percent. In addition, intra-OIC trade rate is targeted to be 20 percent by 2015.
Given that majority of the MENA and OIC countries are showing keen interest in promoting Islamic finance, the increase of trade flows within these regions represents a promising opportunity for Islamic trade finance to become an alternative to conventional trade financing. The global Islamic financial industry flamboyantly progresses ahead into 2013 with total assets estimated to exceed $1.8 trillion, marking approximately a 15 percent year-on-year growth compared to $1.6 trillion assets as at end-2012. Consequently, the various sub-sectors of the Islamic finance industry such as Islamic trade financing stand to benefit and share in the increasing growth. As per market estimates, total trade financing amongst the OIC member countries, including Saudi Arabia, Malaysia and Turkey stood just under $4 trillion as at end-2012.
There is general market consensus that Islamic trade finance transactions are roughly 1.5 percent of total world trade finance value. Hence as at end-2012, it is estimated Islamic trade financing would have supported approximately $250 billion worth of merchandise trade while as at end-2011, revenues generated for Islamic trade finance suppliers is estimated to be $435 million. In MENA and OIC in general, the Islamic trade finance sector has been supported by Islamic Development Bank (IDB), the leading multilateral development agency.
A major IDB initiative for promoting Islamic trade financing is the setup of International Islamic Trade Finance Corporation (IFTC). As per ITFC 2013 statistics, it has approved Islamic trade transactions worth $4.446 billion in 2012, reflecting a 47 percent increase from $3.033 billion in 2011. The corresponding figure was $2.554 billion in 2010 and $2.167 billion in 2009. Furthermore, the Asia/CIS region held the largest share (69 percent) of the total approvals in 2012, followed by the MENA region (26.0 percent) and Sub-Saharan Africa (5 percent).
Islamic trade financing in its current state is a small sector of the global trade financing industry. Yet, the strong trade growth potentials of the OIC/MENA/GCC countries coupled with growing interest in Islamic finance enables it to be a promising sector worth Islamic financial institutions attention in the coming future.
Looking forward, Islamic finance players need to explore new growth areas for Shariah-compliant solutions in order to maintain the industry growth momentum. Islamic trade financing offers a fantastic opportunity for these institutions to venture into given the strong fundamentals of the OIC/MENA/GCC economies where Islamic finance is making strides. Globally, trade finance is facing funding pressures as European banks, who have been traditionally strong in this sector, continue to deleverage and adjust to the requirements of Basel III. Given Islamic finance’s emphasis on supporting tangible, real economic activities, trade finance is a business segment which fits well with Shariah principles and business model. Banks with Islamic operations are therefore well-placed to take advantage of the sizeable trade flows of OIC/MENA/GCC.