Kuwait China Investment Co. (KCIC), part owned by the Arab Gulf nation’s sovereign-wealth fund, wants to tap what it says is Asia’s $2 trillion trade finance market with an Islamic fund to give commodity producers access to cash.
The fund, set up this month with Singapore-based EuroFin Asia Group, will help fill a gap left by European banks that scaled back their business in Asia, Managing Director Ahmad al- Hamad said in an interview. Producers and traders of agricultural and energy products in India, Singapore, Malaysia, Indonesia and Thailand can draw on the facility, he said.
Asian trade finance “is a significantly sized market” with plenty of growth potential, Hamad said in his office in Kuwait City. “The main players who control about 80 percent of it were French and German banks, and with the pressure on them to retrench to their home markets, they’ve left a funding gap, which we’re trying to target.”
Kuwait China, also known as Asiya Investments, is seeking to capitalize on growing demand for Shariah-compliant finance as Standard & Poor’s forecasts the industry’s assets will double by 2015 to as much as $3 trillion. Trade between Asia and the Middle East also doubled in the five years to 2011, as the Arab Gulf’s oil exporters shipped fuel to Asian customers and imported cars, textiles, raw materials and food, according to World Trade Organization data.
Asiya’s fund is open-ended and aims to offer investors annual returns of between 5 percent to 6 percent, Hamad said. Islamic bonds have returned 9.5 percent this year, HSBC/Nasdaq Dubai’s U.S. Dollar Sukuk Index shows.
The fund offers an alternative to sukuk investments at a time when “there’s been a massive shift toward” financing that complies with principles of Shariah, Hamad said. The Kuwait Investment Authority, which manages about $296 billion of assets according to Las Vegas-based Sovereign Wealth Fund Institute, owns 15 percent of Asiya.
Global sales of sukuk reached a record $45 billion this year, according to data compiled by Bloomberg. Demand for the securities sent their average yield tumbling 117 basis points, or 1.17 percentage points, to 2.83 percent yesterday, HSBC/Nasdaq Dubai data show. The difference in borrowing costs between Malaysia’s sukuk and Dubai’s 6.396 percent November 2014 notes is 78 basis points, a record low.
“Currently, the only kinds of instruments that cater to the industry are sukuks, which are still very illiquid and is a deep market,” Hamad said. “On the other hand, trade finance is very easy to understand and is a very straight forward exercise for investors who like the Islamic side.”
Islamic credit relies on the principle of wakalah, under which a bank acts as an agent and is paid fees and commissions in the place of interest. Islamic law prohibits non-Islamic trade financing, which typically involves loans and the payment of interest.
Most Shariah-compliant banks, with the exception of those in Malaysia, have limited offerings of trade finance products, said Badlisyah Abdul Ghani, chief executive officer of Kuala Lumpur-based CIMB Islamic Bank Bhd (CIMB), the second-biggest arranger of Islamic bonds this year. The products include letters of credit, guarantees issued by banks that the importer has sufficient funds to pay for the shipment.
“Islamic trade finance is very much an untapped market,” Abdul Ghani said. “At the moment, many Islamic banks are not rated internationally, as a result of which there is less visibility in international markets and it makes it difficult for counter parties to accept their letters of credit.”
CIMB relies on the investment-grade rating of its parent, CIMB Group Holdings Bhd, for Islamic trade services, he said.
Still, Shariah-compliant trade finance may reach as much as $800 billion a year should Islamic banks strengthen cooperation with financial institutions in other countries, the Accounting & Auditing Organization for Islamic Financial Institutions, a Bahrain-based regulator, said last year.
The opportunity for growth has expanded as European banks outside Britain, under pressure from the region’s sovereign debt crisis, reduced claims on the Asia-Pacific region by more than $75 billion since a peak in the second quarter of 2011, according to a Bloomberg Industries report last month.
Asia is the Middle East’s biggest trading partner, accounting for 53 percent of its exports, WTO data show. The region’s merchandise exports to Asia rose to $660 billion in 2011 from $340 billion in 2006, while Asian exports to the region more than doubled in the same period to $242 billion.
Asiya Investments, which opened offices in Dubai and Hong Kong this year, manages investments in publicly traded shares and private equity assets in 11 Asian markets including Taiwan, Philippines, Korea. The company is seeking to double to $1 billion the amount of funds it manages in the next two years by persuading Arab sovereign funds and wealthy families to boost investments in Asia, its Dubai unit said in June.
“The Asian trade finance market is a $2 trillion market with a funding gap which we’re targeting to fill,” Hamad said.