Investments following Shariah principles present a bright future for Middle East economies

As the world looks ahead to a prosperous economic recovery, sustainable development plans, and the future of finance, the Middle East holds a jewel in its crown, poising it for success both regionally and globally. That jewel is the continued rise and evolution of Islamic finance

Islamic finance holds the key to unlocking transformative sustainable economic development

Trade and finance in the Middle East remain a central topic of debate for global businesses and governments, as some of the largest investors, financiers, policymakers and industry thought leaders convene at Dubai World EXPO – the region’s landmark event – and following the UAE Central Bank’s Future of Finance Conference.

In recent years, we have seen growing demand for, and adoption of, Islamic finance assets. Shariah compliant assets will play a valuable role in providing investors with a more accessible, familiar entry point into sustainable investment, as well as greater liquidity and global investment opportunities more broadly.

Since Islamic finance shares many common values with that of ESG investment models, aligned to several of the same social and ethical principles, there exists a compelling opportunity in the Middle East for investors to look to Islamic finance as a route to creating a more ESG-compliant, more socially responsible investment portfolio. The

Christophe Lalandre, Senior Executive Officer at Lombard Odier ADGM Branch and Soumaya Hissoussi, Senior Vice President, Lombard Odier ADGM Branch

economic, societal and environmental upside can be seen clearly.

For instance, with the growing demand for Islamic compliant investment solutions in the Middle East and the necessity for a circular economy, the Sukuk market is an ideal vehicle through which to finance projects focused on addressing climate change and environmental regeneration. The capital of a green Sukuk is used to finance assets or projects that address environmental issues and investors receive a profit that is derived from green revenues. What does this all mean? Essentially, that Islamic finance and Islamic compliant assets will be integral in unlocking the opportunity to increase access to investment strategies that offer more sustainable, long-term wealth creation. In doing so, investors can align with increasing demands for adherence

to ESG criteria, and most importantly, play a positive role in our society.

With significant wealth management expertise in the Middle East, investors come to Lombard Odier because of our longstanding heritage, depth of experience and specialist network of financial advisors. We have long placed significant importance on the role of Islamic finance in delivering more sustainable opportunities for value creation and as such, our reputation in Islamic finance has been recognised in the region. Testament to this is our partnership with Saudi Arabia headquartered global asset manager, SEDCO Capital, which has selected us as their investment manager to a global Shariah equity fund, which

marries Islamic finance and sustainable investment criteria in a UCITS fund structure, introducing broader investment opportunities in Islamic assets. build further as we enter Q4 2021 and beyond. The success of the region’s vaccination programmes coupled with increased oil prices will only support the rise of Sukuk issuance. Similarly, as governments and central banks around the world continue to implement economic stimulus measures and monetary easing, these efforts will only further increase the appeal of post-pandemic Islamic finance. In its July report earlier this year2, S&P Global Ratings suggested forecasts for global Sukuk issuance could rise 11% year-on-year, to reach $155 billion, up from $139.8 billion in 2020. With the right macroeconomic conditions in place, and ever-rising consumer demand for

AS THE MIDDLE EAST FORGES AHEAD ON ITS PLANS FOR MORE SUSTAINABLE ECONOMIC DEVELOPMENT, ISLAMIC FINANCE WILL BE A VALUABLE CATALYST IN ADVANCING THE REGION’S PLANS FOR THE LONG TERM

Safety in Sukuks will only further accelerate Islamic finance adoption

In the first of half of 2021, Sukuk sales reached a record high as the continued economic impact of the pandemic and ongoing volatility from Treasury rates prompted investors to seek safety and much-required stability in the capital markets.

Data from Bloomberg1 showed that global institutions issued more than $23 billion of Islamic-compliant bonds as of April 2021, the highest on record. This speed of adoption looks set to for Islamic finance, both in the Middle East and on a global scale. We have already seen the transformative impact of technology – increasing the speed of consumer access and savviness to financial services, from money transfer and payments to core banking and wealth management services. Shariah finance follows just the same trend.

As partnerships between established financial services institutions and fastmoving fintechs continues to rise, both within the Middle East and between the region and other global financial markets, we are seeing Islamic finance evolve to speak to the needs of a younger, broader generation of investors. With the tech savvy Next Gen, we are seeing younger investors engaging with Islamic finance as a means to remain compliant with Shariah family values and ethics of investing, whilst also accessing broader opportunities for wealth generation.

more ethical, sustainability-focused assets, investments following Shariah principles are poised for continued momentum and to bring significant opportunities for capital investments and liquidity to Middle East economies.

It is now for all industry participants and stakeholders to collaborate and create the right level of investor access to ensure Islamic finance can achieve its full potential, and for investors to capitalise on these catalysts.

Technology innovation is attracting a younger, more international Islamic finance user base

The convergence of innovative technology and mainstream financial services also presents significant opportunities

1. https://www.bloomberg.com/news/articles/2021-04-15/sukuk-sales-hit-record-as-issuers-and-investors-shun-volatility 2. https://www.thenationalnews.com/business/2021/07/05/global-sukuk-issuance-may-hit-155bn-in-2021-sp-says/

The road ahead…

Over the next years, we expect further investment opportunities in social and environmental aspects of sustainability – both across climate mitigation and adaptation, but also increasingly in the field of natural capital – and we expect demand for funds focused on natural assets to increase significantly.

Furthermore, we anticipate greater demand for newer, more customised models of Islamic finance, as the benefits of Islamic-compliant assets ring true with investors seeking to build a more ESGfocused investment portfolio. For many, sustainability continues to focus on the environment – and indeed, we see this as a crucial component. However, as more and more investors think more closely about the societal impact of their investment decisions on a global scale, the link between Islamic finance and sustainable finance will become ever stronger. The result? As the Middle East forges ahead on its plans for more sustainable economic development, Islamic finance will be a valuable catalyst in advancing the region’s plans for the long term.