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With trade growing in countries with large
Muslim populations, and innovation happening
on the product side, Islamic trade finance is
looking set to expand. Ben Poole reports.
slamic trade finance is benefitting from the
increasing trade activity among member
countries in the Organisation of the Islamic
Co-operation (OIC). According to the
Islamic Centre for Development of Trade’s
annual report, trade between OIC countries
and the rest of the world increased from
US$3.9tn in 2011 to US$4.1tn in 2012, up
6.2% year-on-year, while OIC countries accounted for
11.3% of total global trade in 2012.
Even more importantly for the purveyors of Islamic
trade finance products, the trade volume purely between
OIC countries is also on the rise. This figure rose to
US$742.5bn in 2012, compared to US$681.6bn in
2011. This is a year-on-year increase of 9%.
“The increase of trade flows to the east and within
emerging economies, combined with growing interest

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ISLAMIC TRADE FINANCE REPORT
OIC
TRADE
WITH REST
OF WORLD
GREW 6.2%
FROM 2011
TO 2012
in Islamic finance, means that Islamic trade finance is
now a serious alternative,” says Ashar Nazim, partner
at Ernst & Young’s Global Islamic Banking Centre
of Excellence. “A constant challenge for business
leaders is to anticipate and interpret how global trade
is changing, while understanding the opportunities and
risks it creates. Boards and management of Islamic
banks must take note. Trade, technology, culture,
labour and capital will integrate at different rates
across these markets and need to be anticipated when
transforming the financial institution’s trade finance
operations.”
Countries such as Turkey, Indonesia, Malaysia,
Saudi Arabia and the UAE are developing into key
countries for global trade. The trade links that these
countries already have with Islamic finance markets
can help drive the usage of Islamic trade finance
instruments.
“Middle Eastern countries are trading increasingly
with other rapid growth markets, reflecting the faster
growth in demand from these countries,” says Gordon
Bennie, Mena financial services industry leader
at Ernst & Young. “Banking, insurance and other
financial services sectors in these countries will grow as
the economies mature and the middle classes expand,
offering new opportunities for trade. Demand for
more sophisticated financial services is already growing
rapidly as wealth levels rise,” Bennie adds.
The focus on trade in Asia, the Middle East and
Africa is also something that multinational corporates
will have to factor in to their own trade activities. Being
able to do business through Islamic trade finance
methods may be a requirement that increases for
exporters as their client base in these markets grows.
“It makes business sense for global organisations
that operate in and trade with many of these rapid
growth markets, especially those that are in the OIC
or have strong links to the bloc, to seriously look at
Islamic trade finance,” says Ernst & Young’s Nazim.
Islamic instruments
While Islamic trade finance instruments share
similarities with those available via conventional
finance, they of course must adhere to Islamic
principles. This means that areas such as interest
payments and debt trading are off the agenda. Instead,
trade is more focussed on financing, rather than
borrowing and lending.
“The most widely used instrument is the letter
of credit (LC) with a slight modification to make it
an Islamic LC,” says Bana Akkad Azhari, head of
relationship management in the Middle East and
North Africa for treasury services at BNY Mellon.
“The bank opens the LC on behalf of the corporate
and guarantees payment to the supplier. In turn, this
is settled between the buyer and the bank through a
profit sharing agreement, which is within the spirit of
Islamic finance and the mudharabah concept.”
One of the reasons for the popularity of this
instrument is that it is relatively easy to use. It bears
many similarities to a conventional LC. There are
also some slightly more complex Islamic finance trade
instruments that are based on the murabaha concept.
In this case there is a transfer of ownership, where the
intermediary (usually a bank) holds on to the ownership
of the goods until they are paid for. There is also
some trading on an open account basis that adheres to
Islamic principles as it promotes greater transparency.
“Many people in the Mena region would always like
to use shariah-compliant products,” says Rajai Ayyash,
client executive and country manager for the UAE,
Oman and Kuwait at BNY Mellon. “The question is
whether there are enough shariah-compliant products
and instruments for their needs. This is where the
challenge lies for banks today, to come up with
instruments and solutions to meet the demand.”
Role of the banks
Islamic banks cannot earn any interest on the dollar
balances that they have. However, they can take these
balances and invest them overnight in commodities
and then get a good return.
In order to support the growth of Islamic trade
finance products, many banks are looking at how
they can drive greater efficiencies and cost savings
into the process in a way that still sticks to the Islamic
principles of finance. This has improved over the
past decade, but there is still a long way to go before
they meet all of these demands. As a result, there are
still importers, exporters and investors that will use
conventional banks due to the limits on what Islamic
“THE QUESTION IS WHETHER THERE
ARE ENOUGH SHARIAH-COMPLIANT
PRODUCTS AND INSTRUMENTS.”
Rajai Ayyash, BNY Mellon

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banks can offer from a shariah-compliance perspective.
“There has been a lot of innovation by the banks
to improve their Islamic trade finance offering and
processes,” says Azhari. “This has minimised the
difference with conventional instruments in terms of
processing time and cost, though the process is more
complex from a documentation perspective.”
Some of the differences that exist between the two
product sets cannot, by their very nature, be removed
in the drive for efficiency. “What we are finding is
that if customers are offered like-for-like terms by
conventional and Islamic trade finance instruments,
they will choose the Islamic instrument,” says Ghazi
Naqvi, global head of Islamic origination and client
coverage at Standard Chartered. “The clients that are
adopting this are doing it on their belief systems.”
Market innovation
For Islamic trade finance providers to truly use the
growth of OIC trade as a catalyst for an increase in
product use, they need to demonstrate innovation in
delivering products that are simple to understand and
use while remaining within the clear remit of Islamic law.
“From my perspective, I am seeing some
development on the insurance side,” says Naqvi. “There
are more banks in the market that are offering purely
Islamic products. They are looking for counterparties
purely on an Islamic basis, which is another driver of
growth, in terms of acceptance of the product.”
Another important factor is regulatory and the
market support. “If you look at the key markets, the
regulators are actively promoting Islamic banking,”
Naqvi adds. “This has resulted in a greater awareness
of the solutions available. You have customers who
would prefer an Islamic solution wherever possible.
Then there are customers who are looking for a
solution-based approach. Pakistan has been supporting
Islamic banking, and it is very new if you look at the
regulations introduced in that market. Then there
are organisations, such as the International Islamic
Trade Finance Corporation, that have been promoting
Islamic trade. This has given Islamic trade finance a
boost in the Mena region.”
Challenges to progress
The trade finance offerings from Islamic banks have
to align with global common practices in order for
corporates to consider them as a viable alternative.
These banks will need to demonstrate how the products
that they offer are not just shariah-compliant, but are
also capable of adding value to their clients. It is true
that in some cases clients will only want Islamic financial
instruments and will take whatever their institution
can rustle up for them, however inefficient it may be.
However, to truly capture the opportunity presented by
the high percentage of Muslim populations in rapidly
growing markets, Islamic institutions need to present a
compelling proposition to persuade corporates to move
over from conventional finance.
Banks that are based in the Mena region also
have to improve their global connectivity and offer
solutions to their clients that can go beyond domestic
deals. As many Islamic banks are quite local in terms
of their scale, there is a challenge for them to offer
trade finance tools that can link deals across different
countries or regions.
Another key challenge is the relatively small pool
of Islamic scholars and experts that can oversee and
confirm that the trade instruments being used are
indeed shariah-compliant. Talent management is a key
concern for Islamic banks, both in terms of keeping the
current practitioners within the sphere of finance, and
also in terms of identifying and promoting new talent
as demand for Islamic trade finance services grows.
“The road to Islamic trade finance is not one
without obstacles,” says Nazim at Ernst & Young.
“But if the correct framework is used and awareness
about shariah-compliant initiatives continues to grow,
Middle East and North African markets will be able
to strengthen their trade focus on the growing Muslim
populations in emerging markets. These initiatives
have the potential to significantly increase the value
and volume of trade of these expanding markets.”
With the positive trade growth statistics being
provided by the OIC nations, both Islamic and global
banks will be focussed on increasing the scale and
scope of their Islamic trade finance solutions.
“IF CUSTOMERS ARE OFFERED LIKE-
FOR-LIKE TERMS BY CONVENTIONAL
AND ISLAMIC TRADE FINANCE
INSTRUMENTS, THEY WILL CHOOSE
THE ISLAMIC INSTRUMENT.”
Ghazi Naqvi, Standard Chartered
11.3%
- OIC
COUNTRIES’
CONTRIBUTION
TO GLOBAL
TRADE IN 2012