Expanding Trade Financing Opportunities Through Islamic Finance By Scott Schmith The growth of alternative financial markets,Muslim countries and upward trends in Islam such as those that adhere to the principles ofic finance presents many opportunities for Islamic finance, provides substantial opporboth providers of Islamic finance and for U.S. tunities for U.S. exporters and financial instiexporters. tutions. Thispaper provides an overview of Islamic financial tools, trade trends with Mus Where are the markets? limmajority countries, and how U.S. finan cial institutions can use Islamic finance to in Islamic finance includes trade, deposits, leas crease U.S. exports. ing, real estate, and business lending and is concentrated in the Middle East and South What is Islamic finance?Asia but is spreading rapidly to other develop ingand developed markets. The Gulf Cooper Islamic financial services are essentially fiation Council (GCC) states (Saudi Arabia, nancial services that comply with IslamicKuwait, the United Arab Emirates, Bahrain, principles on interest, nonIslamic investOman, and Qatar) account for almost 36 per ments, and speculation. Islamic financial sercent of the total market of $500 billion as vices apply Islamic teachings in the creationmeasured by the Banker. The nonGCC Mid of trade, savings, and credit instruments thatdle East and North Africa region (35 percent resemble the same instruments that are com mon in conventional finance. The biggest im pact for most financial institutions that use Islamiccompliant products is that their Islam ic compliant products are structured to avoid the payment of fixed interest through mark ups, leasing, and etcetera. How large is the market? According to the Islamic Financial Services Board, an industry body, Islamic assets under management stand at around $700 billion and are growing faster than conventional financial assets. Muslims account for around 21 percent of total world population, yet the economies Source:TheAmericanBanker of Muslim countries account for only 8 per cent of global GDP.Islamic finance, despite of the total), is dominated by Iran (not open to its rapid growth, currently represents only a U.S. investment), with Lebanon, Egypt and small portion of total financial products used Turkey acting at significantly lower levels. in countries with large Muslim populations. Asia represents 24 percent of the total and is The convergence of growing populations in ITA/MAS/Services/Office of Financial Services Industries1
dominated by Malaysia, Pakistan and IndoneChart 2 shows that as expected, high income sia. countriescontinued to receive the biggest shareof U.S. exports from 20032007. How ever, opportunities for U.S. exporters appear Why is Islamicfinance important for much different when comparing growth rather conventional financial institutions? than the absolute share. Column 2 was calcu lated by indexing the four year growth rates Trade finance and leasing trends follow over for each global region and highlights U.S. ex all trends in international trade. As a result, porters’ substantially higher growth rates to U.S. finance and leasing companies have in developing regions. Significantly, trade to re creasingly focused on emerging markets, in gions with large Muslim populations has ex cluding those most promising for Islamic perienced much higher growth rates than to finance. According to Moody’s Islamic Latin America and the developed countries. finance has grown at a 15 percent annual rate in the last three years, significantly more ra What does Islamicfinance look like in pidly than the growth rate of conventional fi nancial markets.Exports to Muslim countriespractice? have also grown much more rapidly than con ventional finance and exports to other regions.There were only limited financial instruments Exporters can benefit from both these trendsand potential markets for Islamicfinance in by adapting their tradefinancing to the spethe early stages of this market’s development. cific needs of their customers.These options, however, have greatly ex pandedto include the bond, equity, and ven ture capital markets. Some of the most rele vant Islamic financial product structures for exporters and leasers include the following: •Murabaha a bank buys an item for a client and the client agrees to later repay the bank the price and an agreed profit. •Ijara(Lease)– alternatively, a bank buys an item for a client and leases it back for an agreed period. At the end of that period the lessee pays the balance on the price agreed and becomes the owner of the item. The varieties ofijaraallow for dif ferent treatment of the residual value of the leased item •Sellandbuybacka client sells one of – his or her properties to the bank for an agreed price payable now on condition that the client will buy the property back after a certain time for an agreed price. •Letter of credita bank guarantees im – Note:For2007and2004‐2007.Source:www.trademap.orgport payments using its own funds for a client based on sharing the profit from the sale of this item or on a markup basis. ITA/MAS/Services/Office of Financial Services Industries2
49 1 8 13 26 64 54 1,067 85 47 1,415
Industry Food and live animals517 Beverages and tobacco20 Crude materials95 Mineral fuels68 Animal & vegetable oils34 Chemicals 670 Manufactured goods1,087 Machinery & transport.11,049 Misc. manufactured1,252 Commodities 957 Total 15,749 Source:U.S.CensusBureau
141 4 28 4 24 201 212 1,789 232 84 2,719
55 3 2 2 0 29 39 496 77 128 830
Case study: The aircraft industry Already some U.S. exporters are taking ad vantage of these changes in the tradefinance sector to create opportunities for additional exports. For example, a U.S. aircraft manu facturer has used Islamic compliant leasing to increase aircraft sales and leases to the Middle East. According to AME Info, a Middle East business resource, the Middle East aircraft market is valued at $260 billion in the next two decades which translates into an expected need for an additional 1,580 commercial jets. Islamic finance’s emphasis on assetbased sales is wellsuited to aircraft and other equipment manufacturers. U.S. exporters that provide Islamic financing options might also gain a competitive edge on companies that do not provide these services but are otherwise competitive in a given product sector. According to theAirFinance Journal, one of the main benefits of Islamic financing for air lines and lessors is the diversification of fund ing sources.Fewer banks are lending to sup
Table 1: 2008 U.S Exports by 1digit Commodity Groupings ($millions)
1,570 5 894 509 69 415 223 1,768 448 130 6,031
440 35 782 34 7 791 496 9,297 807 274 12,963
1,029 39 1,687 96 1 761 222 1,822 177 79 5,913
681 53 3,011 1,300 217 766 496 3,380 392 144 10,440
28 2 6 1 0 114 144 2,426 290 66 3,077
ITA/MAS/Services/Office of Financial Services Industries
660 23 226 40 137 796 764 8,833 759 240 12,478
What are the largest exports to Mus lim countries? Table 1 (below) shows 2008 U.S. exports to the largest Muslim markets. Although each country’s market is different, there was gen erally a large demand for construction equip ment and transportation items, due to growth in public infrastructure projects. Countries with large Muslim populations are not always the largest markets for Islamic finance, as th evidenced by Turkey, the 4largest Muslim country for U.S. exporters but proportionally a much smaller market for Islamic finance. Importance of regulation and official finance Standard setters, both governmental and non governmental, play a key role in shaping the rules within Islamicfinance markets. Non government organizations such as the Ac counting and Auditing Organization for Is lamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) en sure the convergence of product standards and the development and improvement of ac
counting and management standards.
port trade transactions. Islamic finance canSome export credit agencies (ECA) and de help bridge this shortfall by widening financvelopment banks are also using Islamic ing sources and tapping into some of the relafinance to increase exports of aircraft and oth tively more liquid banking sectors in the Mider products and services to the Middle East. dle East.For aircraft and other equipmentFinland’s Finnvera and Germany’s Euler manufacturers the key structure is theijaraHermes, for example, have recently begun to, or Islamic lease. The return is in the form of rentcover export credits to finance new power rather than interest, and the lease structure canplants. The Islamic Development Bank (IDB), be adapted into an operating or finance lease.a multilateral financial institution, focuses on advancingthe development of Muslim One of the main difficulties of expanding Ismajority countries. The IDB has adopted its lamic finance to the aircraft segment, howevlendingpractices to conform to the demand er, is a reluctance to finance aircraft for theirfor Islamiccompatible financing. In the next entire operating lives. For other equipment,few years the IDB plans to increase Islamic with much shorter operating lives, however,compatible lending by 15 percent a year. Al this is not an issue. Another important considthough it is not yet clear to what extent ECAs eration for aircraft and other exporters is theand multilateral financial institutions will difference between transaction costs for Issupport Islamic tradefinance for the aircraft lamicfinance and conventional instruments.and other industries, their increasing in In some instances, Islamiccompliant transacvolvement suggests that the use of this trade tion costs may be higher than for conventionalfinance option will continue to grow. finance. As demand for these transactions in creases these differences could diminish.The renewed interest of airlines and lessors in Islamic financing has not yet transferred into Emirates Airlines, the international airline ofa significant number of Islamicfinance deals, United Arab Emirates, has made frequent usebut that may only reflect the emerging charac of theijarato finance its fleet expansion. Theteristics of the market. If current difficulties in advantage of Islamiccompatible trade financethe traditional loan market continue, then Is is clear to the management of Emirates Airlamic financing could become more than an lines. According to theMiddle East Economicalternative form of funding for those U.S. ex Digest, Islamic financing is an integral part ofporters seeking to increase their competitive Emirates Airlines’ history. Emirates Airlinesness by broadening their tradefinance hori had earlier raised US$1.3 billion from the Iszons. lamic market, including asukuk, or Islamic bond, issuance. Emirates Airlines’ manage ment said that they will continue to rely heavFor further information on Islamic tradefinance please contact Scott Schmith at (202) 482 ily on Islamiccompatible financing to support 0351(firstname.lastname@example.org. its aircraft purchases.
ITA/MAS/Services/Office of Financial Services Industries
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