Focusing on trade finance in an effort to diversify income and boost foreign exposure

Since the 2007-08 international economic downturn, revenue diversification has been a major focus for financial institutions around the world. In Kuwait, where a handful of Islamic financial institutions (IFIs) were forced to enter into restructuring in the wake of the financial crisis and most others saw a major drop in income, this has taken many forms over the past five years. In an effort to reduce their exposure to the troubled domestic property market, many local sharia-compliant banks, investment companies (ICs) and other entities have expanded their foreign business activities, moving into rapidly expanding markets in Asia and Africa. Aiming to diversify their revenue base, some local institutions have moved or are planning to move into the sharia-compliant segment. In April 2014, for example, the Commercial Bank of Kuwait announced that, pending shareholder approval, it planned to convert to an Islamic institution in the near future.

Cross-Border Trade

Trade finance is increasingly considered to be a major growth area among IFIs in Kuwait. Defined as the funding and facilitation of the movement of goods or services across international borders, trade finance allows for varying degrees of exposure to international economies, which is in line with the diversification drive currently under way among sharia-compliant institutions in Kuwait and the GCC. Until recently, most GCC-based Islamic banks and other local financial institutions had not ventured into the trade finance arena, which has traditionally been dominated by major Western multinational institutions.

In 2011, for example, sharia-compliant trade deals accounted for less than 10% of total foreign trade carried out by the 57 member states of the Organisation of Islamic Cooperation, according to data published by the International Islamic Trade Finance Corporation (IITFC), a Saudi Arabia-based institution. Demand for these deals is widely expected to grow, given the common view that sharia-compliant structures are more stable and convenient than conventional arrangements. Many local sharia-compliant banks, including Kuwait Finance House and Kuwait International Bank, offer such programmes. In May 2013 Asiya Investments, a Kuwait-based IC, announced plans for a trade finance fund, managed by an Asiya subsidiary in Hong Kong, with the goal of investing in short-term, sharia-compliant trade deals throughout the Middle East and Asia.

Fund investors will gain exposure to a variety of Asian markets and an annual return target of 5%. “Currently there is a shortage of opportunities which offer both attractive income streams and lower risk profiles, especially for those investors who require their investments to be sharia-based,” Mohab Mufti, the CEO of Asiya’s Dubai office, told local media.

Further Afield

The recent jump in sharia-compliant trade finance investment has taken place throughout the Gulf. In September 2013 Dubai Islamic Bank (DIB), the UAE’s oldest and largest sharia-compliant bank, announced the news of a memorandum of understanding with Deutsche Bank to extend DIB’s reach into Europe, with the specific objective of building up the bank’s trade finance portfolio. “With economic activity in the UAE continuing to accelerate at a strong pace, companies are increasingly looking beyond traditional borders to business opportunities across the world,” said Adnan Chilwan, DIB’s CEO, at the announcement of the deal. “In this regard, trade flows have become a critical component of this growth, as has the provision of trade finance activities for businesses.”

In late November 2013 EIIB-Rasmala, a joint venture between Dubai’s Rasmala Investment Bank and the UK-based European Islamic Investment Bank, launched an Islamic trade finance fund. Like Asiya’s Kuwait-based fund, the EIIB-Rasmala fund aims to tap into growing trade between Gulf countries and other markets around the world. For example, according to data published by the IITFC, in recent years trade between the six GCC member countries and a handful of emerging Asian nations has grown at 30% annually. The new fund, which is based in the Cayman Islands and will target returns of 4%, aims to eventually attract $100m from investors.