GLOBAL trade among the 57 Organisation of Islamic Countries member-states stood at $2.1tr in 2011, with an intra-OIC trade rate of 17.8pc. However, Islamic banking has yet to capture the potential that the bloc and its global trade offers.

Broadly, the overall asset size of the global Islamic finance industry was valued at $2.1tr at end-2014. The industry’s assets have grown at a compounded annual growth rate (CAGR) of 17.3pc between 2009 and 2014.

The Shariah-complaint mode of trade financing can turn into an important tool for economic growth, particularly for Muslim-majority and OIC states. There are a number of Islamic products offered across the globe for importers as well exporters that also facilitate routine local trade-related needs.

These products include Murabaha (cost-plus financing), Salam and Istisna (forward sales), Wakalah (agency-based contract), Musawamah (bargain sale) and Musharakah (partnership contract).

Unlike the Murabaha, which Islamic banking institutions (IBIs) use to finance baskets of goods, the Istisna, Salam and Musawamah are used to help clients finance their entire trading cycles, including meeting overhead expenses (i.e. immediate cash for payment of salaries, utility bills etc).

Salam and Istisna products are known as forward sales where the money is advanced by an IBI against the deferred delivery of goods by the customer on a predetermined future date. The Salam is used in sugar, food and other agriculture sub-sectors, while the Istisna finances the manufacturing sector. Istisna products are also used to facilitate customers requiring financing to meet export orders.

Shariah-compliant trade-related products can provide about 90pc of the financial solutions needed by small businesses

Import-financing and the purchasing of raw material is met through the Murabaha. And unlike the Murabaha, a The Musawamah is a sale with no reference to the cost incurred on buying the goods that are being sold by the client to get the financing facility. It is better known as a bargaining sale.

The IBIs have developed generally short-term financing products on a Musawamah basis, and various banks brand these products differently, like Al Bai by Habib Metro Sirat; Karobar Finance by Bankislami; and Tijarah by Meezan.

The Musharkah may be used as an alternative for running finance and discounting of export bills, and to meet the complete trade-inventory cycle.

Musawamah, Istisna and Salam-financing are sale- and agency-based products. The IBIs take the ‘goods’ in their ownership and sell them in the market, generally on a ‘cash or credit basis,’ by appointing the customer as their agent. This is a reversal of the Murabaha, where the goods are first purchased by the customer as the agent and subsequently a sale transaction is executed between the IBI and the customer.

As soon as bank takes possession of the goods from the customer against the financing facility (sale price), it authorises the agent (i.e. the customer) to sell the goods to the declared creditworthy buyers for the agreed tenor at the set price calculated on the prevailing benchmark (Kibor or Libor).

In addition to the agency fee, the agent may be provided an incentive for selling goods at a price higher than what was agreed with the customer or arrange the proceeds earlier than agreed.

Global spending in the food and lifestyle sectors by Muslim consumers surpassed $1.62tr in 2014 and is expected to reach $2.47tr by 2018. The OIC economy makes up about 9pc of the total global economy. The halal food industry, clothing and various commodities may be traded through Islamic products among the OIC member states.

Shariah-compliant trade-related products can serve the largely untapped and faith-sensitive clientele among Muslim nations. The trade-related products can provide about 90pc of the financial solutions needed by small businesses.

Islamic finance, if tackled properly and in a planned way, can lead to a high growth of the Shariah-compliant banking system in the Muslim world in particular, and worldwide, in general. Broadly, it all depends upon conducive and supportive legal and policy frameworks and the channelising of the robust demand for Shariah-compliant products in the right direction.

The writer works at Islamic Banking Group, ABL

Published in Dawn, Business & Finance weekly, October 12th, 2015

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