GLOBAL - Funding for global infrastructure will increasingly become Shariah-compliant as highly liquid Gulf sovereign wealth funds look to invest according to the tenets of Islam outside their own borders, leading bankers have said.
Speaking after a panel session on Islamic finance at a banking conference last week, Yakub Bobat, global head of HSBC Amanah Commercial Banking, said an available pool of capital from Gulf-based sovereign wealth funds - combined with demand from the Islamic financial industry for ethically acceptable asset classes - had created a natural market for infrastructure investment.
Bobat said: "Islamic finance has a propensity toward core values in financial products, but we need to be thinking about new frontiers, including risk-sharing products and project finance [for infrastructure]."
He indicated that Islamic investors were well placed to capitalise on infrastructure investment opportunities in high-growth emerging markets, including China, because one of the key tenets of Islamic finance is that investments must involve a physical asset.
He also pointed to a relative price advantage for Shariah-compliant finance, pointing to a HSBC Amanah capital-raising for an Islamic bond that came in 20 basis points cheaper than in conventional markets.
Despite forecasts that Shariah-compliant assets will account for 50% of assets in some markets by 2020, Islamic finance has been held back by a lack of product availability and lack of standardisation across markets.
Shariah-compliant assets currently account for 1% of assets globally, and the range of available Islamic financial products remains rudimentary.
At the same time, Malaysian Islamic financial products are broadly believed to be more flexible than those originating in the Gulf, which contributes to an increase in the size of the market, but not necessarily to universal cross-border acceptability.
However, Afaq Khan, chief executive of Islamic banking at Standard Chartered and a fellow panellist, predicted that non-Islamic counterparties would increasingly factor in Islamic requirements, as these effectively became a condition of trade.
"If you want trade relationships, you need to understand the preferences of your trading partners," he said.
"Every chief financial officer should be excited. This isn't an arbitrage opportunity that happens on the market from time to time. It's a stable source of capital looking for diversification and a balanced return."
Unequal regulation - especially on tax - remains a potential obstacle to greater Islamic participation in the global infrastructure market.
Khan said benevolent treatment would be necessary to encourage capital inflows.
"These are institutional players," he said. "When they do their investment-horizon analysis, they want to see their capital is safe and treated equitably."