Banking in the Middle East: Islamic Finance for All

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If we learned anything from the financial crisis, it is that access to capital and diversification of funding sources is of paramount importance for the survival of a firm. It pays to nurture and develop different pools of investors, and one such avenue is the Islamic investor base, a growing pool of liquidity that provides excellent diversification of funding sources for a global conglomerate such as GE.

As more institutions and countries across the western and eastern parts of the globe look to Islamic finance for potential sources of capital, it becomes clear that Islamic finance is complementing conventional banking rather than competing with it. This acts as a bridge and is a win-win situation for all parties involved, as it allows institutions to diversify their financing requirements and sources, as well as meeting portfolio diversification needs of the Islamic investors.

When GE issued its inaugural Sukuk, it set the benchmark for international conglomerates to use Islamic finance as a viable form of capital raising. Furthermore, it set a precedent for other institutions across the world to recognize the place of Islamic finance in the global banking and capital markets, highlighting their need to study it more closely to see if it can add value to their institution. Becoming conversant in Islamic finance principles helps global institutions have engaging conversations with their counterparts across the Middle East and Asia about new ways of finance as the preferences in these markets shift toward Islamic finance.

During the past few years, the Islamic finance market has clearly moved beyond the perception of a “niche” market and geographically expanded from its traditional hub in the Middle East and Southeast Asia. The entry of international financial institutions such as Standard Chartered Bank has helped the development of new products such as Sukuks (i.e., capital market instruments) as well as other value-added investment and hedging solutions. Furthermore, governments and regulators across the world have welcomed Islamic finance into their countries by bringing about legal, regulatory and taxation changes to make Islamic finance products on par with conventional banking products in terms of pricing and risk analysis.

At this stage, it is more pertinent to encourage leading western multinational corporates and sovereigns to develop the Islamic finance markets by introducing more transactions in a Shariah-compliant format. As observed in other geographies, governments and public sector, entities have shown an active interest in developing the Islamic market through regulatory assistance as well as issuing sovereign Sukuks. Through both formal and informal platforms, Shariah scholars have ensured that common standards are adopted on a best-effort basis so that the market can work cohesively. This helps to develop critical mass within the industry.

The participation in Islamic finance by institutions such as GE acts as a catalyst for future transactions. Proper execution and diverse distribution are therefore crucial factors for the success of such transactions as they become a benchmark for the next one.

How GE adds value to Islamic finance:

1. Acting as a catalyst to open the international Islamic capital markets for investment-grade corporates out of the Americas
2. Building an active secondary market and yield curve for itself by frequent issuance of different sizes and tenors, thereby allowing Islamic investors to fully invest in GE risk at all times
3. As a next step, access local-currency Islamic markets across the Middle East and Malaysia in its presence countries—this will indirectly spur the local Sukuk markets