Islamic trade finance poised for change

Monday 16 July 2018 14:31 CET | News

Islamic trade finance is poised for change with the launch of new products and common standards.

The Islamic banks look to grab market share away from traditional lenders, which are retreating from the sector because of regulatory constraints.

These banks have been laggards in trade finance but some see a business opportunity, attracted by strong global trade growth in regions where Islamic banks are active such as Southeast Asia, North Africa and the Middle East.

Digital tools such as blockchain can support this by helping to lower costs and speed up sharia-compliant transactions, the Bahrain-based General Council for Islamic Banks and Financial Institutions (CIBAFI) said in a report.

Islamic trade finance is estimated at around USD 186 billion, compared to the USD 4.4 trillion worth of trade finance activity in Muslim-majority countries, CIBAFI said.

Some companies are now introducing digital Islamic trade finance platforms, including Emirates Islamic Bank which has launched an online supply chain tool, CIBAFI said.

Most sharia-compliant trade contracts are based on four Islamic structures, but the market is exploring new products such as bank payment obligations, trust receipts, shipping guarantees and acceptance bills, CIBAFI added. There is also a push towards standardisation of practices.

The Bankers Association for Finance and Trade (BAFT) and the Manama-based International Islamic Financial Market (IIFM) are developing standard documentation for both Islamic-funded and unfunded trade finance deals.

The standard is important because trade finance transactions tend to be bigger than most and the arranging bank cannot always bear the full risk due to exposure and diversification limits.

Global banks have been ending correspondent relationships in response to consolidation, low profits and concerns over tougher anti-money laundering rules, a policy known as de-risking.

This is encouraging specialised companies to step in and fill the void, including an Islamic trade finance fund managed by UK-based Rasmala Investment Bank.

The fund, launched in 2014, now has over USD 250 million in assets, up from USD 100 million in September and it could reach USD 500 million by year-end.

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Keywords: Islamic, trade finance, blockchain, standards, digitalization
Countries: World