March 5, 2010

Gulf strategies vary in uncertain times

The Islamic finance practices of firms in East Asia have been eyeing the Gulf as a growth strategy for some time. The question is, will recent global financial events put their ambitions on hold?

As Asian authorities have intensified their pursuit of a larger slice of the Islamic finance (IF) market, the region’s law firms have followed suit – some of them even establishing offices in the Gulf region. But how successful will this be in attracting more IF work?

It seems the main factors persuading firms to leap towards the Middle East are the proximity to the large client base and the region’s importance for new industry developments.

“The Middle East will recover from the economic downturn faster than other parts of the world, and this alone will provide enough incentive for forward-thinking law firms to be here,” said Farid Hussain, Dubai office head at Zaid Ibrahim & Co. “Here, the business communities’ exposure to and knowledge of Islamic finance is growing, so this will also create demand for work.”

Last year, Zaid Ibrahim & Co became the first law firm in Asia to be approved to operate in the region’s leading finance hub, the Dubai International Financial Centre. Hussain says that the growth of the Islamic finance market was a significant motivation for the firm to make the move. “We’ve found our niche in the Middle East market by focusing on Islamic finance, infrastructure projects, regulatory reform and, to a certain extent, ICT. [This, coupled with our positive outlook in Middle East,] means we’re confident that there will be considerable growth in demand for these type of work.”

“We’ve found our niche in the Middle East market by focusing on Islamic finance, infrastructure projects, regulatory reform and, to a certain extent, ICT”
Farid Hussein, Zaid Ibrahim & Co

Another firm keen on expanding to the Middle East, but taking a steadier approach, is Azmi & Associates. “We will do so only after consolidating and enhancing our position here in Malaysia and in the Southeast Asian region, something we intend to pursue in the next two years,” says managing partner Azmi Mohd Ali.

As the IF market is dominated by Middle East investors, being close to the biggest clients would seem to be crucial.

“[Expansion] meets the need to be close to Gulf clients – who require far more personal contact. It is their high liquidity that drives the Islamic finance market. Certainly, proximity to the Gulf is also needed to understand the developments in Islamic finance better,” explains Muthanna Abdullah, managing partner of Lee Hishammuddin Allen & Gledhill.

Client concentration in the Gulf means that while IF work in Asia is growing, ambitious firms still need to establish a regional presence.

“Middle East investors tend to come to Asia for business such as property investments and other business opportunities,” says Loong Caesar, managing partner of Malaysia-based firm, Raslan Loong. “Where we do have Islamic finance-related dealings with them, it’s more a case of our banks trying to sell their Islamic products to Middle East investors. So our guys are over there rather than the other way around.”

The global financial crisis has had a somewhat positive effect on the IF sector, as investors eye its simpler principles and lower exposure to risk. “There has been a move towards IF as… subscribers to IF products were not as exposed [to the crisis]. This realisation has led to more interest in IF products,” Abdullah says.

Other observers were less convinced. Loong remained uncertain about the outlook for increased work in the current global climate. “I think you’ll find more interest in Islamic finance now, but conventional bankers are still suspicious of what it’s all about,” Loong says. “When the economy picks up, people may be disillusioned with new financial products. They may go back to more conservative banking types, but it is not necessarily going to be Islamic finance.”

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And the steady growth of the IF market recently does not mean it has remained unaffected by the downturn. “A lot of people are saying that Islamic finance is not affected at all, but that’s not true,” Hussain says. “All the [Gulf] banks are still under one system at the moment, and the main issue now is liquidity.”

“At the moment the market in the Middle East is very quiet,” says Azlin Ahmad, head of WongPartnership’s Islamic banking & finance practice. “As a fact, there are several Islamic banks that are flushed with funds but are very cautious to extend loans and financing. IF is a pretty new area, so the fact that a lot of the banks have not quite collapsed yet does not necessarily mean that it is the better option - it just means that the banks at the moment are less exposed to [the global crisis]. [While that is the upside,] the downside is that a lot of the banks have been exposed to the property sector – and it’ll be quite interesting to see how they hold up.”

“[Expansion] meets the need to be close to Gulf clients – who require far more personal contact”
Muthanna Abdullah, Lee Hishammudin Allen & Gledhill

This in turn raises some doubts as to the viability of new office openings in the Gulf. Asian firms may have to resort to other means to break into the market. “We reckon that in the next two or three years, not many Asian law firms will be opening up a presence there, except maybe for toptier Singaporean or Malaysian firms,” Ali says. “Liquidity has been affected by the global financial crisis and firms will prefer to enter the Gulf by way of strategic moves. It is easier to obtain services through friendly law firms that are already in the Gulf region. It is also more cost-effective.”

ALB