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Gulf islamic banks extra product costs shrinking, study finds


Feb 20 The extra costs which Islamic banks in the Gulf charge consumers relative to conventional banks appear to be falling, according to a study by credit rating agency Standard & Poor's. For years, bankers have assumed that Islamic institutions charge higher costs because of several factors, including the relative complexity of sharia-compliant products compared to conventional ones, and the fact that Islamic financial markets tend to be younger, smaller and less liquid. Other factors that may push up costs are a lack of clear regulation, in an industry where scholars may issue contradictory rulings, and adverse tax treatment, since Islamic deals often involve multiple asset transfers. Now the cost gap for Gulf banks rated by S&P seems to narrowing, to as little as 30 basis points in the first half of 2013 from a high of 110 bps in 2009. The study used financial data from 2007 to 2013 to calculate the ratios of interest income to average assets for conventional banks and the equivalent ratios for Islamic institutions, said Paris-based Mohamed Damak, primary credit analyst at S&P.

Damak stressed the ratios were not perfect measures of the cost of banking products, and that other, macroeconomic factors could be influencing the numbers."The product mix might vary but the banks selected allow a clear comparison, as there is no data that allows comparing product by product. This is not a perfect measuring stick, but it gives a very good proxy for it."

Reasons for the drop in extra costs are not yet entirely clear but they may include the industry's growing familiarity with certain types of Islamic financial contracts and transactions, which could be leading to lower development costs, said Damak."The more you have standardisation in Islamic finance and the more products are commoditised, then you will see product costs falling. This is why standardisation is so important in Islamic finance."Increased economies of scale could also be a factor, as Islamic banks in Gulf Arab countries have been growing faster than conventional peers and now command roughly a quarter of all banking assets; in other countries such as Pakistan and Indonesia, the industry is still in single-digit territory.

It is not clear whether the cost gap might fall further or even disappear, Damak added. "This is harder to tell. This depends on continued standardisation and commoditisation of products in Islamic finance."Outside the Gulf, it is not certain whether Islamic banks charge consumers similar cost differentials or whether the gap is narrowing, Damak said. If they do charge higher costs, this may be more of an obstacle for their business expansion than the cost gap in the Gulf, where consumers are wealthy and therefore perhaps less price-sensitive. In North Africa, "a large portion of customers has a natural interest toward Islamic products but pricing will be the key factor of success in the equation." ; var median = (relatedItemsTotal / 2); var $relatedContentGroupOne = $('.related-content.group-one ul'); var $relatedContentGroupTwo = $('.related-content.group-two ul'); $.each($relatedItems, function(k,v) { if (k + 1 = median) { $relatedContentGroupOne.append($relatedItems[k]); } else { $relatedContentGroupTwo.append($relatedItems[k]); } }); } else { $('.third-article-divide').append($('div class="related-content group-one"h3 class="related-content-title"Also In Financials/h3ul/ul/div')); $('.related-content ul').append($relatedItems); } },500); } Next In Financials BRIEF-Ford Motor Credit files for notes offering * Ford Motor Credit Co LLC - files for notes offering; size not disclosed - SEC filing UPDATE 1-U.S. LIBOR breaks above 1 pct for first time since 2009 Jan 4 The rate banks charge each other to borrow dollars for three months rose above 1 percent on Wednesday for the first time since May 2009 as global interest rates extend their climb on expectations of accelerating growth and inflation. Deals of the day- Mergers and acquisitions Jan 4 The following bids, mergers, acquisitions and disposals were reported by 1330 GMT on Wednesday: MORE FROM REUTERS window._taboola = window._taboola || []; _taboola.push({ mode: 'organic-thumbnails-a', container: 'taboola-recirc', placement: 'Below Article Thumbnails - Organic', target_type: 'mix' }); Sponsored Content @media(max-this site) { #mod-bizdev-dianomi{ height: 320px; } } From Around the Web Promoted by Taboola window._taboola = window._taboola || []; _taboola.push( { mode: 'thumbnails-3X2', container: 'taboola-below-article-thumbnails', placement: 'Below Article Thumbnails', target_type: 'mix' } ); window._taboola = window._taboola || []; _taboola.push

Hong kong works to keep islamic finance momentum as firms balk


Dec 11 Hong Kong's government is trying to maintain the territory's momentum toward becoming an Islamic finance centre, as other potential sukuk issuers show little enthusiasm. In September, Hong Kong made the first U.S. dollar-denominated sukuk issue by an AAA-rated government, a $1 billion deal that put it on the map in the global competition among banking centres to attract Islamic finance business. Since then, however, there have been few if any signs of other sukuk issuers emerging in Hong Kong - demonstrating that however hard governments try, they may struggle to develop Islamic finance sectors if a strong economic rationale is absent. Hong Kong is a top centre for conventional finance, serving China and many customers elsewhere in Asia. Because of its fiscal strength, its sovereign sukuk issue attracted a massive order book of $4.7 billion, including many investors from the Middle East. But that does not necessarily mean other borrowers in Hong Kong will choose to issue sukuk instead of conventional bonds, which tend to be more familiar and less complex, and therefore cheaper to structure and sell. And for regional borrowers which do want to use sukuk, it is not immediately clear why they should choose Hong Kong instead of Kuala Lumpur, which has the world's most active Islamic bond market, or the Gulf, where most big Islamic investors are based. In the past, several firms in Hong Kong have been linked to possible sukuk issuance, including the Airport Authority , metro operator MTR Corp and Hong Kong Mortgage Corp (HKMC). So far, there is no sign of these firms following the government's lead, however. The Airport Authority said through a spokesperson that it had no further updates on its funding plans or the subject of sukuk financing. MTR Corp declined an interview request, saying it had no funding plans.

HKMC considered sukuk when the government first started to promote the sector, but a preliminary study found it difficult to proceed since HKMC's assets are not sharia-compliant mortgages, said treasury manager Rita Yeh."Nevertheless, we will continue to monitor the market development and be open-minded on any favourable funding options for the Corporation."PAVING THE WAY

In a written response to Reuters questions, the Hong Kong Monetary Authority (HKMA) said September's sukuk sale had demonstrated that the territory's legal, regulatory and taxation framework could support domestic issuers, paving the way for public and private sector firms to come to market. In July 2013, Hong Kong amended its tax laws to provide a level playing field for some of the most common types of sukuk transactions - ijara, musharaka, mudaraba and wakala - and lawmakers passed a bill in March this year to allow the government to issue its own sukuk."Whether more government sukuk will be launched in the future will very much depend on the additional benefits of such future issuances from a market development perspective. We will continue to keep this under review," the HKMA said. For years, proponents of Islamic finance in Hong Kong have dreamed of making the territory a bridge to Chinese buyers of sukuk.

So far, however, there have been few issuers of yuan-denominated sukuk, and these have opted to tap the Malaysian market instead, via locally domiciled special purpose vehicles. They include Malaysia's state investor Khazanah Nasional , which made a three-year, 500 million yuan ; var median = (relatedItemsTotal / 2); var $relatedContentGroupOne = $('.related-content.group-one ul'); var $relatedContentGroupTwo = $('.related-content.group-two ul'); $.each($relatedItems, function(k,v) { if (k + 1 = median) { $relatedContentGroupOne.append($relatedItems[k]); } else { $relatedContentGroupTwo.append($relatedItems[k]); } }); } else { $('.third-article-divide').append($('div class="related-content group-one"h3 class="related-content-title"Also In Financials/h3ul/ul/div')); $('.related-content ul').append($relatedItems); } },500); } Next In Financials Next slumps as European shares pause near 1-year high. For more see the European equities LiveMarkets blog LONDON, Jan 4 Live coverage of European markets now available on this site U.S. LIBOR breaches 1 pct for first time since 2009 Jan 4 The rate banks charge each other to borrow dollars for three months rose above 1 percent on Wednesday for the first time since May 2009 as global interest rates extend their climb on expectations of accelerating global growth and inflation. UPDATE 1-Norway's housing inflation at nine-year high in December OSLO, Jan 4 The inflation in Norway's housing prices accelerated to 12.8 percent year-on-year in December, the highest rate since mid-2007, real estate industry data showed on Wednesday, further reducing the probability of central bank rate cuts. MORE FROM REUTERS window._taboola = window._taboola || []; _taboola.push({ mode: 'organic-thumbnails-a', container: 'taboola-recirc', placement: 'Below Article Thumbnails - Organic', target_type: 'mix' }); Sponsored Content @media(max-this site) { #mod-bizdev-dianomi{ height: 320px; } } From Around the Web Promoted by Taboola window._taboola = window._taboola || []; _taboola.push( { mode: 'thumbnails-3X2', container: 'taboola-below-article-thumbnails', placement: 'Below Article Thumbnails', target_type: 'mix' } ); window._taboola = window._taboola || []; _taboola.push