Analysts hope the New Year will be relatively better for Islamic finance after a bad 2008.
"[Last year] was a very tough year, for both Shariah and conventional investments. Unfortunately, in 2008 it was about asset class loss rather than finding those that made you gains. It was a very unusual year, and investors across the world were very happy to welcome 2009 and bid farewell to 2008," said Jahangir Aka, senior executive officer for SEI in the Middle East.
As per reports, the Islamic bond, or Sukuk market, took a beating last year due to global financial crisis after years of remarkable growth. The Standard & Poor's reported in September 2008 that global Sukuk issuance stood at $14 billion (Dh51.3bn) for the first eight months of 2008 compared to $23bn in the corresponding period in 2007.
According to Aka, this is an extremely difficult time for any asset class, including Islamic finance, as it is not immune from the world economy.
"Overall the markets remained very difficult for both the conventional and Islamic markets. We are moving from an institution/market correction to an economic correction," said the SEI executive.
"Economies around the world have slowed down significantly, and outside the Middle East a number have already entered into a recession, including the United States and the United Kingdom. This means that core demand and supply is now moving towards excess supply versus the excess demand that we have seen over the last few years. This drives down the price of assets, and the recent events have driven down the price of almost all assets, ranging from real estate to commodities to equities across the world. This is definitely an unusual event," he told Emirates Business.
In such a scenario, Islamic finance is bound to have a negative impact.
"Islamic finance requires an underlying asset to be traded and the profit or loss on trading them provides the return stream. In an environment such as the current one, where all asset classes have been significantly impacted, all existing investors are also going to be severely impacted by the drop in values," he added.
Giambattista Atzeni, Mena strategic business development manager - global corporate trust, The Bank of New York Mellon in Dubai, said: "The exceptionally high levels reached by interbank lending rates and the general lack of liquidity specifically in the second half of 2008 made raising of capital through Sukuk transactions extremely expensive and there was a dramatic slowdown in the number of new issues coming into the market." At the same time experts hope, the sector will show better results this year and the big pains of 2008 can be avoided.
"We do not expect the markets to suffer the same level of pain in 2009 as in 2008. Hence, we do hope to see 2009 as a better year for Islamic finance," said Aka.
Economic experts believe Islamic finance in the region and elsewhere is sill better placed than conventional banking, despite the lacklustre performance last year.
"So far Islamic investors have retained their edge over the conventional investors during the two year period that we are defining as the credit crunch," said Aka.
Atzeni hopes for a better 2009 and believes all was not bad last year.
"On the positive side, towards the end of 2008 some of our top clients began to lay the groundwork for their future activity by setting up Sukuk programmes possibly with a view to have their platforms ready when they decide to issue new securities as soon as the market stabilises [as early as first quarter of 2009]," he said.
"On the equity side, our colleagues at Newton Investment Management, which is part of BNY Mellon Asset Management, have a view that the crisis in financial markets in 2008 proved to be a humbling experience for most parties involved in it.
"Despite having no exposure to conventional financial services (such as banking and insurance), and despite filtering out companies with unacceptable levels of debts, Shariah equity investments were not immune to the market falls.
"The extent to which the leverage had built up in the global economy, as well as the implications of the unwinding of this leverage, was almost impossible to estimate. The contagion that ensued across asset classes, regions, industries and currencies during 2008 was marked," he said.
"That said, while global equities fell some 40 per cent in aggregate during 2008 in dollar terms, the Islamic World Market Index fell slightly less (-37.8 per cent)," said the development managerAtzeni.
And there are many opportunities on the horizon even in such a gloomy situation, said Aka. "These markets present an opportunity to investors who have liquidity and cash. [They can] purchase these assets at discounted valuations. However, these types of investments are not for the short-term. Investors with a medium- to long-term time horizon are well positioned to benefit in this current environment. I believe there are going to be a number of regional investors that look to make investments in Shariah compliant investments and take advantage of this environment," he said.
Going forward, there are several other issues that have to be taken into consideration when we talk about 2009. These issues will have to be dealt with for a better performance and for the growth of this particular sector.
"Regulation, standardisation, market infrastructure, project financing and investor confidence are all issues that will determine future activity in Islamic finance. Although these variables are correlated to conventional finance, they assume different connotations when considered under a Shariah-investment perspective," said Atzeni.
Until now there have been some credible developments on the regulatory and infrastructure fronts.
"From a regulatory and infrastructure point of view, government bodies across different regions have launched initiatives targeted specifically to the Islamic finance sector. The joint consultation between HM Treasury and the FSA on the legislative framework for Sukuk in the UK is a clear example of the fact that Shariah products represent an important area and one of the fastest growing sectors in the financial markets," he said.
"Across the Atlantic the US Treasury Department has recently sponsored a dedicated learning programme to educate government officials on the particulars of Islamic finance. In Dubai, the DFSA has recently passed a legislation that facilitates special purpose vehicles (SPVs) to be domiciled within the DIFC (it is worth mentioning for reference that SPVs are the issuing entities of Sukuk)," he added.
"Clearly some of these initiatives aim to provide a framework that would enable Shariah investments to operate and grow on a level playing field with conventional finance and therefore are all very positive developments. However, there is still work to be done regarding, for example, the proper treatment of Sukuk products by Central Securities Depositories and the formation of an infrastructure able to facilitate an active secondary market for Sukuk.
"More specifically to the GCC, the enforceability of mechanisms linked to securitisation-type of instruments is something that may require some attention and targeted regulation," said Atzeni.
"Taking security over assets is crucial for all those infrastructure projects that will be undertaken in the next few years in the GCC. A public-private financing methodology in a Shariah-type of fashion may represent a solution in this space. The Middle East has the opportunity to link Islamic finance to those projects that will set the fundamentals of future economic growth in the region.
"Also, liquidity pools available under these type of projects will require solutions that are able to generate a return demanded by parties, therefore we believe that Islamic liquidity funds will be another fast growing product. These liquidity funds follow the Murahaba approach but have the same characteristics as stable NAV and 'AAA'-rated money market funds," said Atzeni.