Wednesday 13 December 2017

'Inertia' to blame as we may miss out on Muslim trillions

New IFSC plan pins false hope on booming market for Sharia-compliant funds to create jobs, warns insider

SUKUK: You could probably count the number of jobs created in Ireland through Islamic finance on less than five fingers
SUKUK: You could probably count the number of jobs created in Ireland through Islamic finance on less than five fingers

Simon Rowe

It was a move that went against many prejudices. While many in the western world like to criticise Islam these days for the actions of a small minority of fanatics, two of Ireland's most senior civil servants huddled in an office on Merrion Street and hatched a plot to make Ireland a European hub for the booming Islamic finance sector.

It seemed an unlikely turn of events - with an even more uncertain outcome.

But with heavyweight mandarins such as the then secretary -general of the Department of Finance John Moran and his colleague Neil Ryan - both of whom had extensive private banking experience while at Zurich and UBS respectively - championing the potential of Islamic finance, Taoiseach Enda Kenny weighed in behind the initiative.

Now an estimated 20pc of the Islamic funds market outside the Gulf is located here, with €2.5bn worth of Sharia-compliant funds administered in this jurisdiction.

NCB Capital, Saudi Arabia's largest wealth manager, became the first Saudi institution to establish a range of funds here leading to over a dozen Sharia-compliant funds being listed on the ISE as well as $12.2bn in 'sukuk' programmes - a sukuk is the Islamic equivalent of bonds which are structured to pay profits or rent, rather than traditional coupon interest, which is forbidden under Sharia law.

The rapid growth of Islamic finance worldwide - and Ireland's role in it - has been one of the most fascinating consequences of September 11.

Three factors were instrumental in making it happen.

First, many Muslim investors withdrew their US investments fearing the effects of the Patriot Act, which led to Stateside bank accounts being probed and assets being frozen following the 9/11 attacks.

Second, this flight of capital saw a surge in Islamic investors moving their funds to Malaysia, Dubai and Europe and choosing to invest in Islamic institutions and Sharia-compliant Islamic products.

Third, because Islamic finance regards speculative trading as immoral, Sharia-approved funds avoided the worst excesses of the 2008 crash, which saw global markets lose an estimated $600 trillion on options, futures and derivatives. Islamic-type investment funds have, in contrast, enjoyed spectacular growth rates.

The total global value of Islamic finance is expected to hit $2 trillion this year and the sector is growing by nearly 20pc per year.

Furthermore, more than a quarter of the world's population or 2.2 billion people will be Muslims by 2030 - and a large proportion of those Muslims in developing countries are unbanked - which opens up massive opportunities in terms of retail banking.

The Irish Government wants a bigger chunk of this business. A key plank of its newly launched five-year plan to revitalise the Irish Financial Services Centre is Islamic finance.

The Government set out a vision for the sector last month with ambitious targets to create 10,000 new jobs in the financial services sector by 2020.

However, one of the poster boys of Islamic finance in Ireland, Noel Lourdes, is concerned that the Government is "misleading" the public about the true potential of Islamic finance to boost job creation.

Lourdes, who heads the Dublin office of global Islamic finance advisors Amanie, is considered a star of Ireland's nascent sector. He is a former advisor to the Central Bank who participated in the first Government-led discussions to position Ireland as the western hub for Islamic finance five years ago. Prior to this he worked in KPMG Corporate Finance.

Nearly five years on from engaging in those initial talks, Lourdes' assessment is damning.

"What happened since then is pretty disappointing. Around 12 months ago we would have seen that this isn't going to happen. We have now taken our focus away from Ireland," he said.

"We would have sat in different government discussion groups and we would have seen the activities, we would have seen the behaviour, and it is very visible to one with a little bit of emotional intelligence to know that this is not going to happen for Ireland. We don't see much potential for Ireland," he said.

Lourdes blames "inertia" for Ireland Inc losing its 'first-mover advantage'. He says London and Luxembourg have stolen a march on us and have since cornered the market for European-based Sharia-compliant funds.

"Ireland had an 18-month window. The Government had an open goal - and they kicked the ball wide," he said.

The IDA - the key agency tasked with attracting Islamic finance - is putting a brave on it, however, and talking up the investment figures.

Kieran Donoghue, head of IDA's International Financial Services Division, says: "IDA continues to market Ireland as a location to Islamic investors both portfolio and direct. It is still early days. Interest in Ireland is growing."

"Significantly, 20pc of Sharia-compliant funds outside the Middle East are domiciled in Ireland. This is a huge vote of confidence in Ireland's international funds industry by Islamic finance investors," he said.

"But a crucial development of strategic importance will be when a corporate or State-owned company in Ireland issues a sukuk," said Donoghue.

"This will send a very positive signal about Ireland's long-term interest and intentions to the Islamic finance world and help take us to the next phase in developing this exciting area of opportunity."

Certainly there is growing interest in the sector. University College Dublin is hosting the First Islamic Finance and Law Conference next month. The theme of the two-day event is 'Challenges for Islamic Finance and Law: The Need for Innovation and Regulation'.

Lourdes is full of praise for Donoghue and his team's efforts at the IDA to generate interest in what Ireland has to offer.

"If there is any State agency in Ireland that has really gone out and pushed the boat in terms of promoting Ireland as a centre for Islamic finance it is the IDA and Kieran Donoghue and his team. There is nobody else who has done it to that level."

But Lourdes says he also witnessed at first-hand "a lot of passing the buck" in Government circles with disagreements over policy and strategy - and the ball was dropped.

He is therefore sceptical when he hears the Government "talking up" Islamic finance.

"There is now an over-reliance on the ISE to create the statistics to make Ireland look like a growing centre of Islamic finance. How much of that €2.5bn listed has created additional jobs in Ireland?", he asks pointedly.

"You could probably count the number of jobs created here through Islamic finance on less than five fingers. Pointing to ISE statistics as a measure of Ireland's success in Islamic finance is misleading. A lot of this is ticking boxes. It creates statistics," he said.

"Most of the work is done and dusted before the funds come to Ireland. All it is coming here to do is to basically register itself, which simply means going to the Central Bank and applying for a licence.

"Most of the deals are structured in London, Dubai or Kuala Lumpur. And that's where the high-value work is done."

While the growth in Islamic finance products has sparked a cottage industry of Sharia-compliance advisors - religious scholars who rule on the acceptability of financial products - Lourdes insists that to be successful in this sector "you don't need to be Sharia scholar, you don't need to be able to speak Arabic, you just need to understand how to structure a deal. It's all about structuring a deal."

However, he fears that Ireland has missed the boat on Islamic finance."It's going to take a monumental effort for Ireland to catch up with Luxembourg and London."

And even if Ireland does begin to aggressively target this market, he says, "I don't think Luxembourg or London are going to sit still and allow that to happen," he warns.

"The potential is there but the question is does the Government really want to do it?" asks Lourdes.

Sunday Indo Business

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