Cutting Through the Challenges
Islamic Banker speaks to BLME’s Chief Executive Officer Humphrey Percy.
ISLAMIC BANKER (IB): In a relatively small span of time BLME has become the largest standalone Shari’a compliant bank in the EU region. What are the factors that attributed to its success?HUMPHREY PERCY (HP): BLME is a well-capitalized bank with a focus on wholesale Sharia financing in the UK. Over the last seven years, BLME has developed a lull service corporate banking offering and is a leading participant in the UK mid cap corporate market. Products include equipment leasing, property development and working capital ,cash flow financing. We have also developed investment products and services for Middle East investors in fixed income, real estate assets and cross border financing
IB: BLME has access to a wide range of investors in Shari’a compliant assets from the MENA region, the UK to major Islamic financial markets, including South East Asian countries and Turkey. What are your strengths in these market and how can BLME leverage from these market?
HP: BLME has been a pioneer in developing Shari’a compliant products in an advanced tax environment such as the UK. Our clients value our principles that combine ethical banking with a competitive financing offer. With our deep understanding of Shari’a compliant financing products that have stood the test of time, we are able to serve our customers through the development of innovative new solutions.
IB : Availability of Shari’a compliant liquidity is a major point of discussion in Islamic finance forums. How do you overcome this challenge?
HP: Within the Islamic finance industry) there does not currently exist the same breadth of liquidity management tools available to the conventional banking fraternity. Liquidity management issues arc not insurmountable, though challenges do remain, as Islamic finance is still relatively young. Conventional finance permits the use of a multitude of interest-based products and their derivatives, which have created a volume of investors generating greater liquidity Islamic Financial institutions tend to hold a higher quantity of cash — often unremunerated — than a conventional bank. The level of cash depends on the domicile of the institution, with liquidity levels influenced by the maturity of the Shari’a market and the extent to which their population actively participates in Islamic finance. Malaysia provides an example where local Shari’a compliant banks are provided with a regular liquid short-term issuance programme in local currency. Most other markets only recognise the international Islamic Liquidity Management Corporation’s (IILM) recent foray into US dollar denominated short term Sukuk issuance as anything close to providing regular liquidity management instruments. We are hopeful this will evolve in 2015 and help towards further efficiencies for liquidity management in Islamic finance. During 2014, there were a number of new sovereign Sukuk issues in regions outside the GCC, including the UK, the Grand Duchy of Luxembourg and the I long Kong Monetary Authority This will help international Islamic banks to diversify their liquid asset base, both in tcrms of issuer and currency denomination. More recently the Bank of England announced further moves to provide access to the UK Monetary Policy Framework and BLME looks forward to participating in this initiative.
IB: With growing number of HNWIs, the demand for sophisticated wealth management solutions is on the rise. The recent MoU between BLME and Malaysia’s Bank Muamalat together with the presence of other foreign banks in this market signals strong growth in the private banking segment. What does BLME bring to the market to meet the demand for this segment?
HP: Islamic private banking has a significant opportunity to grow, as more products and services become available to investors choosing Shari’a compliant products. BLME can play can an important role in this market by delivering new products and services to partners such as Bank Muamalat who need to offer their customer robust investment products outside of their domestic markets to diversify their risk. BLME’s experience in wealth management products range from managing funds (fixed income and real assets) to direct investment opportunities (for example, in real estate in London) in addition to other financial products. This will allow us to manufacture or source products quickly and efficiently for Bank Muamalat’s customers.
IB: More than one-third of the sovereign sukuk issued by the UK this June was absorbed by investors from within the UK itself. Do you think this has set a solid precedent for further issuances from developed western markets?
HP: The UK Sovereign Sukuk was to some extent a special case. Past and present UK Government have striven to promote Islamic banking in the UK for the purposes of inclusion amongst practicing Muslims otherwise excluded from the financial sector because of their religious beliefs. This has also helped to promote the UK as the Western European centre of excellence for Islamic finance, contributing to the prosperity of the UK economy. Given the tight regulation surrounding liquidity as a result of the banking crisis UK based Islamic finance would be constrained by a lack of high quality liquid assets without further efforts from the Bank of England and HM Treasury. The lack of a template for the legal framework of Sukuk issuance was also an issue to a lesser degree. The launch other UK Sukuk served to provide the UK banks with another liquid asset to include in our regulatory liquidity buffer. Ibis also laid a framework for alternative methods of raising capital. The degree of take-up in future issues will depend on the size of those issues, the Western Sovereign issuers’ standing, and the extent to which the domestic Islamic finance industry is established within that domicile. Provided the issuer is of a sufficient quality to make international investors comfortable, then there is no reason why a healthy future demand for issues from both existing and new issuers cannot be maintained.
IB: Shari’a compliance and risk management are central to any Islamic financial institution. How do you manage these, and how do you overcome challenges, if any?
HP: Shari’a compliance has to sit at the forefront of considerations. Without a Fatwa confirming a product’s adherence to Shari’a we cannot transact in it. ‘With that in mind we then manage our various types of risk including — amongst others — credit, market rate and of course liquidity. These risks are essentially no different across many financial institutions whether Islamic or conventional. BLME are cognisant of the requirement to evolve with the increasingly fluid regulatory framework we now operate in, and with market developments and improvements in risk management techniques. This is borne out at BLME by our recent decision to install a state-of-the-art Risk Management System to help us better understand those risks and manage the Bank in a dynamic and challenging environment.
IB: What are your views on regulations and and standardisation for Islamic capital market instruments in the markets you operate in?
HP: Islamic finance is still a young industry that is growing at different paces in different markets. While Malaysians have taken a standardised approach in regulating Islamic banking in their own market, the Middle East countries have preferred a more discretionary approach. The role of industry bodies, such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB), and central banks, such as Bank Negara Malaysia, have been critical in setting the ground rules for Islamic finance by laying the foundations for its growth. As Shari’a is the guiding principle for legislation in most Muslim countries, finance and capital market legislations will adapt to address and accommodate the Islamic financing requirements, such as taxation due to transfer of ownership, leasing (or Ijarah), and enforcement obligations such as guarantees.
IB : In your opinion, what are the growth drivers, and what factors that act as catalysts for the growth of the Islamic finance marketplace on a global platform?
HP: The growth of Islamic finance has been retail led, and its continued growth will be underpinned by the ability to provide more products to meet the demand of retail customer. The wholesale banking and capital market activities should provide more assets, which can be used to develop investment products. The growing interest of the international market and sovereigns to new Sukuk is a testament to the global interest in Islamic finance. With the growth of Islamic assets, other industries such as the Takaful and Islamic pensions will increasingly offer products for retail and corporate customers, and will play a greater role in the sector.
IB: BLME has significant exposures to real estate investments in Sukuk in the Middle East. Do you think the real estate market in the region is poised for substantial growth?
HP: Real estate is and will continue to be a key asset class in the emerging markets, including the Middle East, for both the private and public sector investments, it is natural that many banks in these economics will have large exposures to real estate, which they can use as assets to issue Sukuk for the purpose of their funding. Whilst this market can get overheated and correct itself from time to time, as we saw with the property correction in Dubai market in 2011, in the long term real estate has proven to be a robust asset class for most investors. BLME’s principal to real estate is in the UK, where we have a large team that manages our risk and exposure in this sector. In 2013, our global exposure to real estate was 29% of our balance sheet, most of which was in the UK. ihis exposure to real estate is significantly lower than) most Islamic banks in the Middle East. ‘[here is little liquidity in real estate finance, but our investments in Sukuk allow our treasury team to manage this exposure through trading in the markets within the prudent limits set by our Board Risk Committee.
lB: At a personal level, how different has been your experience working with BLME, a relatively new Shari’a compliant financial institution, as compared to working with Barclays or West LB?
HP: BLME is the largest Islamic Batik in Europe an privilege to serve our customers and clients. Whilst I part of the Middle East business in both Barclays and West LB the experience has been very different given that BLME is an entirely standalone Islamic institution. Having been at the forefront of both firms of banking cultures, my experience allows me to meet lace-on the challenges of establishing Shari’a compliant Funds within a Western investment culture.
IB:You might agree that finding the right talent mix in the Islamic finance industry is paramount to succeed. How do you deal with this challenge?
HP: We always look to tap into the talent pool of Islamic finance professionals. Given the relatively recent arrival of Shari’a compliant products into the London market, it can be difficult to find these talents directly in London. Our preference first and foremost is to hire established Islamic finance professionals globally. We augment our investment expertise by hiring experienced conventional finance professionals who we train within Islamic finance principal and ethics.