ALIFARABIA.COM - I was at two recent conferences, OIC Member States’ Stock Exchange Forum 5th Meeting in Istanbul, Turkey, and SWIFT’s SIBOS massive event in Toronto, and, folks, we have a lot of work ahead of us in Islamic finance/Muslim countries on build out of the capital markets, linkages, etc. (source)
Furthermore, I was speaking to a panellist colleague at the SIBOS event, and we were discussing some of the personalities who have come and gone in Islamic finance in last 15 years, yet provided nothing more than motivational speaking and financial dawah/Khutbaah to fellow Muslims and got compensated handsomely while collecting ‘Best This’ award.
Business & Customers
When you have senior executives in one place (Istanbul) from NYSE-Euronext, CME, SunGuard, Nasdaq OMX, and Euroclear to share their experience on stock exchange acquisitions/integration, hosting platforms anywhere in the world for trading instruments, trade and post trade, settlement and clearing, it provides a glimpse of what ‘can be’ for Islamic finance and Muslim countries.
These executives accepting the invitation of the host, Istanbul Stock Exchange, obviously says much about the rise and credibility of Turkey and its ‘capital’ vision for the Muslim world.
What made it more interesting is all the executives have been exposed to Islamic finance, from screening companies for compliance to clearing and settlement of Sukuk, yet a collective blink of eye was dedicated to Islamic finance. A trillion dollar industry did not seem to impress them, may be because billions and trillions of shares and FX traded every-day, respectively. Thus, Islamic finance transaction, say, commodity Murabaha of $6-10 billion/day is a rounding error in their eyes.
The essence of their collective presentations included:
1. Striving for efficiency via funding capital intensive technology because more nimble competitors are taking away trading volume from the exchanges. And constantly evaluating the weaknesses and how best to address it either organic build-out or buy-out. Someone is not only looking over their shoulder, but also listening to the clients.
2. The target stock exchange was open to acquisition as the alternative did not pass the fiduciary duty of the Board of Directors, hence, one order book for a number of combined exchanges. I’m not sure this makes cross listing less appealing, but lessons for the Muslim world (57 countries) with stock exchanges (42).
3. The role of regulators and working closely with them to avoid draconian regulations that have unintended and detrimental consequences of diminishing efficiency and capital flows. Its about understanding the various stakeholders and involving them in the process, as you’re going to deal with them eventually.
4. The vital function of clearing and settlement, backbone of the capital market transaction, was best described with an excellent example. The task of the post trade company is that of an airline to make sure the passenger (buyer) and luggage (confirmation) arrive to final destination concurrently. When luggage does not arrive at the carousel, there is anxiety and concerns of how long and how costly (replacement) to locate!
Obviously, the presentation and conversation on Islamic finance, linkages, trading platforms, and central clearing was not as robust, but this is an embryonic industry and capital markets in Muslim countries are typically classified either emerging or frontiers. But, explanations and excuses can be used only for short term, and there must be some exhibited leadership for integration and developments in Islamic equity capital market and OIC exchanges, possibly led by Turkey.
It would be interesting to see developments that include:
1. Union of Arab Stock Exchanges move beyond a common index (is there one?) and into a screen based trading platforms for available asset classes, like equities, Sukuk/bond, etc. Why are stock exchanges from Muslim countries not merging, yet non-Muslim country exchanges have stakes in Muslim country exchanges? Does the politics dominate the economic efficiencies? If so, the damage is eventually to the country as capital flight lands outside the country.
2. To have a Muslim BRICS, and suggestion was made for SAMI; Saudi, Ankara, Malaysia and Indonesia, as subset of OIC. These are G20 countries (3 of 4), these are growth stories (GDP growth), these have largest market capitalization among OIC exchanges, etc. Does Goldman Sachs need to issue a report for it to be taken seriously?
May be Alifarabia, having become a respected brand of western quality economic research output in short period of time, needs to issue a report on SAMI as the Muslim BRIC.
Jehovah v Khutbaah
We have some great speakers, some motivational and other educational, in Islamic finance, yet they seem to be mostly found at Islamic finance conferences and not at major events like SWIFT’s SIBOS or even the World Economic Forum (WEF) in Davos. I was told countries/cities actually compete to host SIBOS event, much like the Olympics or FIFA. At the recently concluded SIBOS event in Toronto, it had close to 8000 delegates, over 200 exhibitors and 4 days of sessions and one dedicated to Islamic finance!
I believe the 2014 SIBOS event will be in Dubai, and, with this long lead time, Islamic finance needs to tell a story beyond prohibition against ‘pork and interest!’
There is a lesson for Islamic finance and its speakers and spokesmen from those pounding the pavement to spread the message of the teaching of Jehovah. These dedicated Jehovah Witness people reach out to non-Jehovah followers and leave materials. Muslims, like the Jamaati in the subcontinent, go to fellow Muslims to be (more like them) Muslims. It’s a Friday Khutbaah, preaching to the converts, much like Islamic finance is for Muslims (myth that will probably be neutered if we call it Participation Finance) or be like the Jamaati Muslims.
The acid test for Islamic finance’s arrival is if;
1. Islamic finance is an agenda items at WEF in Davos
2. Islamic finance is part of the Clinton Global Initiative, as part to finance the alleviation of poverty and improvement of healthcare and education in the Muslim world
3. Islamic finance is part of plenary session at IMF/World Bank meetings and sponsored by western financial institutions, form banks to management consulting firms to law firms
4. Islamic finance is discussed in Brussels as possible option for inclusion on sovereign debt funding via Sukuk
5. Islamic finance is discussed by US Treasury Secretary and Federal Reserve Chairman as one possible option for inclusion for financing US ‘equity-debt.’
The message and take away is not about Islamic finance per se, but removing the label and veneer and focus on real due diligence on asset backed/based financial intermediation with recourse to asset in case of default. Its about financing and investing in the real economy, creating jobs, contributing to tax revenue, and building knowledge based economies. That’s sounds like sensible, and not wild west or casino, capitalism.
Finally, there are many lessons to be learned to from NYSE Euronext to Euroclear on making capital markets in the Muslim countries more efficient and effective as primary and secondary sources of deploying liquidity meeting opportunity.
(c) Rushdi Siddiqui. The opinions expressed are the author’s own.
the OIC Stock Exchange Forum in Istanbul took place Sept 17-18, 2011
