Western banks eye growth in Islamic trade finance

Tue Sep 17, 2013 9:41am EDT
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By Mirna Sleiman and David French

DUBAI (Reuters) - Islamic trade finance, a tiny part of global banking business, is starting to attract interest among big Western banks because of rapid growth of trade involving wealthy Gulf economies, bankers said on Tuesday.

Bank of America Merrill Lynch (BAC.N: Quote) hopes to begin offering Islamic trade financing in the future, Chris Jameson, the bank's regional head of sales for global transaction services, said without giving a time frame.

"Our focus will be on Middle Eastern clients who are expanding their footprint internationally," Jameson said on the sidelines of a banking conference in Dubai.

"You can see that local banks are setting up Islamic units to cater for the needs of their clients. This is driving more and more international institutions to focus on the Islamic sector."

Islamic trade finance, which uses instruments that obey sharia principles such as Islam's ban on interest, has remained a backwater even as other areas of Islamic business, such as sukuk issuance, have boomed in the last few years.

This is partly because Islamic banks are relatively small and lack the expertise and large international networks of mainstream Western banks.

Foreign trade conducted by the 57 member states of the Organization of Islamic Cooperation totaled $3.9 trillion in 2011. But only a tiny fraction was financed in a sharia-compliant way; the Saudi Arabia-based International Islamic Trade Finance Corp, which promotes Islamic trade, approved transactions worth just $3 billion in 2011.

There are signs that this is changing, however, as trade flows between the Gulf and Asia - including predominantly Muslim countries in southeast Asia - become large enough to support specialist trade financing operations.   Continued...