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Sun 1 Apr 2007 05:49 PM

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Best of both worlds

The CEO of Standard Chartered Middle East and North Africa, explains how Islamic products are bringing greater opportunities to regional trade.

People might think that Islamic financial institutions in the Far East, having had decades to develop the sector, are far more sophisticated than their Middle East counterparts, but one man is well placed to judge.

Shayne Nelson, regional CEO, Middle East and North Africa, for Standard Chartered, previously headed the bank's operations in Malaysia, so he has seen the growing sophistication of the Islamic finance sector for himself. However, he says that the Middle East is not far behind, despite its relatively recent adoption of Islamic banking.

"People think it is more advanced in Malaysia, but the market here is doing pretty well, especially on the consumer side," says Nelson.

"There's a big capital market in Malaysia, a big bond market - now 70% of bonds there are sukuk. So if you decided you didn't want to participate in Islamic banking, you've just wiped out 70% of the bond market.

"I think the lesson I take from that is that you had better get into it.

"This is not a passing fad, this is a faith-driven product that consumers, corporates and governments are demanding. You'd better be good at it and you'd better be quick at doing it."

The bank has a history of coming up with innovative new Islamic products to solve business problems. "We've had a lot of world firsts," says Nelson. "For most derivative products - profit rate and forex cross-currency spots, for example - we have an Islamic Shariah compliant version of those products.

"When you're doing cross-currency capital flows, at one stage you would have a lot of profit rate risk and foreign exchange risk because you couldn't hedge [Islamically]. Now these capital flows can go across to different countries with protection, and it's the same with doing business. You can hedge now, whereas before the instruments weren't available."

As well as helping to manage trade and currency risk, he points out that the region's stock markets have embraced companies that finance themselves by Shariah compliant means.

"In some of the stock markets - Saudi Arabia would be a good example - Islamic companies are getting a premium to conventional companies when they're listing," says Nelson.

"Therefore we're getting a conversion of conventional debt to Islamic debt on the basis that it's best for their shareholders and there's liquidity in the Islamic market looking for investment destinations. Companies are going that route because they can get a better return and they can get a wider shareholder base."

In Malaysia, the government actively made efforts to become an Islamic finance hub, something that prompted many multinational companies in the country to change the way they financed themselves. Nelson says: "We're seeing similar things here where there are a lot of aspirations in the Middle East for regional Islamic banking hubs - albeit there are a lot of countries competing for that space."

As well as being regional CEO, Nelson is head of Standard Chartered's Islamic bank. The majority of research and development of Shariah compliant instruments will be done at the bank's new headquarters at the Dubai International Financial Centre, where it was the first bank to buy a building.

"One of the reasons we do that is that the Shariah interpretation in places like Malaysia and Indonesia is less strict than it is in places like the Middle East," he says. "Therefore building products in Malaysia to export here isn't really the way to go.

"It's better to build them here, and if it's acceptable here it's very likely it will be accepted in Malaysia."

All of the bank's Islamic finance products are thoroughly studied by Shariah scholars and external institutions before they are approved.

Due to the role that interpretation plays in deciding whether a product is Shariah compliant, this can often mean that the same product is studied by several different Shariah boards before all of the parties involved give their approval - something that can slow down the time to market.

"In some regard, one of the things we'd love to see, and which certainly the UAE government and the Malaysian government are working on, is uniform Shariah interpretation for financial products," says Nelson. "Many products now are very standardised. They become very acceptable over time and the structures become very well known to the scholars.

"You develop products, you structure them to be Shariah compliant, more and more scholars understand the products and the requirements for them, and the industry grows on that basis. So I think my mission is that there should be no conventional products that don't also have an Islamic version of that product."

Standard Chartered might be committed to growing its product lines, but as an international bank, it faces some physical limitations on expansion.

The bank is limited in the number of branches it can open in many of its Middle East markets, but is using distribution channels including additional ATMs and direct sales agents to reach its existing client base and other potential customers.

It currently has the largest number of branches of any international bank in the UAE at 11. The bank has branches in Oman, Bahrain, Qatar, Lebanon and Jordan, as well as a representative office in Iran, and serves Saudi Arabian customers from its Bahrain office.

Size could be crucial as the market enters a period of consolidation triggered by the announcement of the merger between National Bank of Dubai and Emirates Bank International last month.

"Certainly there are a lot of players in the [UAE] market, including local players, and if you look at the population base here you would have to say that this was a pretty heavily banked market," says Nelson. "In banking there is a need for bulk and in any of the markets you get consolidation when you have as many players as we currently have, especially at the local end.

"I've worked in many markets where this has been the case. Some markets are forced to consolidate while some do it through commercial means. If you look at the competition, size is important, it certainly helps things like efficiency, it helps when it comes to risk appetite because you've got a bigger balance sheet therefore you can take bigger deals, it allows you to have the capital to look at regionalisation and going offshore."

He adds: "I think size does matter in banking these days.

"Yes, you can be a small bank if you play in a niche market, but it's hard to be a bank that plays in all markets."

Standard Chartered's Middle East and Africa operation is showing how a bank with strong backing can succeed in several areas of finance, with its consumer and wholesale divisions going from strength to strength in both their traditional and Islamic varieties.

By developing new Shariah compliant products and instruments to enable more efficient trade, it could spur other institutions in the region to innovate in the Islamic finance sector.

Eastern fortune

Shayne Nelson may have brought his experiences of the banking industry from Malaysia, but Standard Chartered’s new DIFC office also bears another influence from the Far East. It has been designed with feng shui principles in mind to enhance the working environment – something that even extends to a goldfish tank in the building’s trading room. The tank contains 188 fish, a lucky figure, since in Chinese the numbers one and eight sound like ‘certain’ and ‘money’ respectively.

“The number you don’t want is 14,” says Nelson. This sounds like ‘certain death’.

Chartered accounts

Standard Chartered reported profits before tax of US$3.18 bn during 2006, an increase of 19% on the previous year.

Operating income was up 26% to $8.62 bn, while total assets increased by 24% to $266 bn. Double-digit growth is expected to continue for the group in 2007.

The UAE was one of the strongest performing markets for Standard Chartered in 2006, with income there growing by 32% in 2006, but the Middle East as a whole has been a well-performing region.

Peter Sands, group chief executive, Standard Chartered, said: “Growth momentum is occurring across the region, not only in Dubai but also in Abu Dhabi, Qatar and elsewhere. We see great potential in the Dubai International Financial Centre, are leveraging opportunities in Islamic finance, and are also building our presence in Abu Dhabi. We believe the Middle East is one of Standard Chartered’s biggest opportunities for continued growth, alongside China and India.”

Standard Chartered’s new office in the DIFC will house 500 employees initially. The bank is the designated settlement bank as well as the clearing bank for the Dubai International Financial Exchange, also housed in DIFC.

Dr Omar bin Sulaiman, director general of DIFC, said: “With the arrival of Standard Chartered Bank at the DIFC, we have its firm commitment to the region and the acknowledgment of our growth potential.

“We look forward to a long and mutually beneficial relationship.”

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