In The Driving Seat

What is the position of KFH as a primary service provider for Islamic finance and as a driver for the industry?

Our vision is to be the leading sustainable Islamic bank in the world. One of our core principles is to educate the world about Islamic finance and promote it as an alternative to conventional banking. We believe Islamic finance involves ethical banking solutions that would interest and attract many customers from around the world today, be they Muslim or non-Muslim. Most of our customers are attracted to sharia-compliant banking because it is line with their beliefs, but many others see the value of the ethical dimension and safety that these products imply. There is no interest rate, just a profit rate, and at maturity the amount remains the same without accruing any additional charges. It is also asset-based, which makes the recovery much easier, and there is a limit on over-leveraging of the same asset. Once it is moneyed, there is no way it could be leveraged again. That provides assurance and prevents things like credit derivatives that we saw in the conventional finance sector, and which were instrumental in bringing about the 2008 economic crisis. So Islamic finance is an attractive field for investors looking for an ethical and secure source of financing.

In 2016, the volume of sukuk traded via the KFH exceeded USD11.4 billion, nearly doubling the amount of the year before. Why has the sukuk market gained so much momentum in recent years?

What has helped is the change in oil prices. Most GCC governments are hydrocarbon based and have been affected by oil prices, thus having to fill gaps in their fiscal budgets. They have tapped the international bond markets for a long time but have not been able to attract Islamic funds due to the form of the financing. We are now seeing more diversity in the financing pools and more appetite toward Islamic financing. In essence, it is a complementary liquidity product that suits Islamic banks because it has liquidity features and tradability, and because it also suits the investor in the sense that it comes at the right price in relative terms, and accesses a larger audience of participants rather than limiting yourself to purely conventional banks. Relative to conventional issuances, it is still small, and the question is how we can grow in terms of diversifying the funding sources between Islamic and conventional.

Large-scale infrastructure projects and other megaprojects have been the bedrock of the Kuwait government’s five-year plan for 2015-2020. Have you seen a concomitant growth in Islamic financing to fund these projects?

Definitely. To give an example, last year the KNPC deal included an Islamic tranche for the first time, opening the door for potential future deals in Islamic finance, be it in local or foreign currency. For example, EQUATE was looking to raise KWD500 million and the book closed at 3.7 billion, so it was significantly over subscribed, with a price that was actually lower than conventional bonds. I see this trend continuing, and the valid proposition of sukuks and the demand we are seeing for those issuances significantly outweighs any conventional bank issue.

How important are common international Islamic finance standards, and is there a need for a body to bring about standardization?

What needs to be standardized are transparency, accounting standards, agreement, and contract regulations. In terms of products, it helps create flexibility and innovation to have different sharia boards, enriching the Islamic finance world and the products on offer. To centralize would be to kill innovation. However, standardization of processes and procedures is beneficial and important, and is being done by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).