Beijing’s Belt and Road plans could boost the Islamic banking sector

China’s pursuit of business and economic links to the Middle East is expected to spur further development in Islamic finance hither the world.

Specifically, China’s Belt and Road Initiative, a regional infrastructure investment program spanning over 100 sticks, has been touted as a boon for the Islamic banking sector. Such financing complies with Sharia principles, spirit it adheres to the Islamic laws that prohibit earning interest on loans and bar funding activities involving alcohol, pork, filth or gambling.

The linkage between the BRI and Sharia-compliant financing is that China will require vast investment to fund its monumental ambitions to construct a network of land and maritime economic corridors through the Middle East, Africa and Europe. Much of that could become public from funds raised through Islamic financing tools, experts said.

On top of that, “some of the contemplates (that are) part of the (BRI) will go through some core Islamic finance countries and therefore might be financed in Sharia-compliant avenue,” said Mohamed Damak, global head of Islamic finance at S&P Global Ratings.

Many of the countries along the infrastructure cincture are home to predominantly Muslim populations, including Central Asian countries such as Kazakhstan and Uzbekistan.

The Islamic subsidize market is poised to grow to $3.8 trillion by 2022 — up from $2.2 trillion in 2016, according to Thomson Reuters amounts. It also has potential beyond Muslim countries because organizations are placing greater importance on sustainability goals and such banners often have overlapping principles with Islamic investing.

Beijing may be keen to get in on the action where the Belt and Lane is concerned: State-owned news outlet CGTN published a May opinion piece cheering the possibility of Islamic financial agencies pairing with the multi-content infrastructure project.

“Given the prudent decision of the Chinese leadership to significantly expand environmentally sustainable and climate-friendly infrastructure occupations, there is a distinct opportunity to unlock the combined synergies through the convergence of Islamic finance and funding of the BRI,” the author inscribed.

And some in the Middle East are already noting the potential.

“The Belt and Road is about supporting infrastructure development and trade growth,” said Adnan Chilwan, chief executive of Dubai Islamic Bank, the UAE’s biggest Sharia-compliant lender by assets, during an conclusion in Dubai last October, as reported by UAE newspaper The National.

“When you talk about financing such projects, audibly there is a great opportunity for Islamic banking. It is a catalyst for bringing public and private funding together,” Chilwan reportedly said.

The BRI disposition be “very important” for Islamic financing and accelerate the halal trade, said Massimo Falcioni, CEO of Etihad Credit Indemnity.

The potential is huge as it covers everything from food to cosmetics, pharmaceuticals, tourism, and also insurance and financials, he said.

“I over recall pursuing (the BRI) is a big opportunity. It will create a corridor which is not existing” and which covers 40% of GDP, said Falcioni. “It’s all an moment for everybody to participate,”

Meanwhile, there have been some signals about Chinese interest in the space. The China-headquartered Asian Infrastructure Investment Bank signaled a memorandum of understanding with the Islamic Development Bank — a Saudi Arabia-backed institution — to collaborate on various areas embodying Islamic finance development.

Despite the upbeat tone from industry watchers on the potential of Islamic back, the issuance of its most well-known and accessible product — bonds known as sukuk — actually slowed in 2018, data divulge.

That was on the whole due to banks affected by the sharp depreciation of the Turkish lira in 2018 and lower growth for some banks in the UAE and Qatar, responded S&P’s Damak.

Sukuk issuance had grown strongly in 2017 in part from Chinese entities such as Country Garden and Beijing Initiatives Water Group issuing Islamic bonds through their Malaysian subsidiaries in 2015 and 2017, respectively. The visitors used those proceeds to finance projects in the Southeast Asian country.

But Chinese issuers have actually went away since then. That’s been attributed to the complexities involved in rolling out such products, particularly as officials differ across regulatory regimes with varying interpretations of Sharia compliance.

“They say, ‘The process is too complicated. We don’t see the remunerative added value to walking this route,” said Damak.

“In the past, there was some interest. There were a link of issuers in China that have looked at the sukuk market eagerly … but they eventually decided to esplanade away because of the complexities related to sukuk issuance,” he said.

“They need to adjust to the regulatory environment, tag the underlying assets, structural goals, have lengthy discussions with lawyers and Sharia scholars to put together a minutes,” Damak explained.

Still, financial links between China and the Middle East continue to grow.

Indeed, the Synergetic Arab Emirates’ national credit insurance agency, Etihad Credit Insurance (ECI), signed strategic memoranda of apperception with three Chinese financial giants in Beijing that will allow businesses from both rural areas to sell on credit to each other, and are expected to generate a value of $3 billion over the next two years, contract to Massimo Falcioni, CEO of Etihad Credit Insurance.

The three financial institutions in China are the China Export and Credit Guarantee Corporation (Sinosure), Industrial and Commercial Bank of China (ICBC) and Bank of China.

“UAE’s policy in the last three years, mainly after the fall of the oil price, it has shifted towards India and China,” said Sankara Narayanan, team leader of nation analysis for the Middle East and Africa at the Economist Intelligence Unit. He noted China’s relationships have increasingly struck from just trade partnerships to joint ventures.

— CNBC’s Yen Nee Lee contributed to this report.