Mohieddine Kronfol of Franklin Templeton believes overall demand for sukuk sales is robust and healthy. Pawan Singh / The National
Mohieddine Kronfol of Franklin Templeton believes overall demand for sukuk sales is robust and healthy. Pawan Singh / The National

Cautious approval for Dubai sukuk ambition



After the initial burst of enthusiasm that greeted the initiative to make Dubai the capital of the global Islamic economy, a gentle note of caution has crept in.

Some analysts see the ambition, and especially the goal of overtaking London as the world capital of the sukuk business, as a challenge perhaps too tough even for the emirate's "can-do" mentality.

Mohieddine Kronfol is in a good position to judge. He is the chief investment officer for global sukuk and fixed income business for Franklin Templeton, one of the world's biggest asset managers with some US$800 billion (Dh2.93 trillion) of funds under management around the globe.

"I welcomed the announcement of the Islamic [bonds] initiative, and I certainly think Dubai can establish itself in a leadership position. But it is a long-term vision and it has to be done holistically," he says.

His firm made its own contribution to the enterprise a couple of weeks ago with the announcement in Dubai that it was launching three Sharia-compliant investment funds.

The launch had the blessing of Mark Mobius, the legendary head of emerging markets at Franklin, who said its global sukuk fund in particular had "enormous potential". Mr Kronfol shares that enthusiasm. "You don't get firms with $800bn or people like Mr Mobius getting that excited every day."

But he believes Dubai, and the region, need to be more mature in their overall approach to finance if they are to lead the Islamic economy. "If you want liquid and deep financial markets you need more variety, and to behave in different ways than they do now.

"You need multiple actors to do business at different times and in different ways."

He cites the lack of a pension fund industry, the relative immaturity of the insurance and asset management businesses as examples of lack of financial depth.

That does not mean Franklin is in any way lukewarm about the Islamic financial business.

The firm has been running Sharia-compliant business for 10 years, and took the bold step of opening an office in Malaysia in 2008 when the rest of the financial world was running scared during the financial crisis.

Malaysia is the world's second biggest sukuk trading centre, after London, and Mr Kronfol believes the attitude of the Malaysian government has been significant. It has helped harness funds by big institutions, he says. "We have a good track record in Malaysia of working with the government, and would like to see it replicated in the GCC region."

The region's sovereign wealth funds have been putting more of their resources in the region in recent years, and he hopes this will continue. "Not just to repay debt, which isn't an issue anyway in places like Abu Dhabi and Saudi Arabia, but to help with the overall diversification of the economy. Outside Dubai, there's been a conspicuous absence of government issues over recent months."

He believes that overall demand for sukuk issues remains "very robust and healthy" - which is perhaps the main reason for Franklin's recent triple launch.

The Global Sukuk Fund, with some $20 million of seed capital, will channel investors into Islamic bonds around the world; the Sharia Asian Growth Fund, with $5m start-up funding, will focus on commodity, consumer and bank sectors; the Sharia Global Equity Fund, also with $5m, will look at share investment in Sharia-compliant industries round the world.

Although the sukuk fund will be managed from Dubai in cooperation with Kuala Lumpur, all three funds will be domiciled and regulated in Luxembourg, where many of Franklin's funds are based.

The decision to chose the small European financial centre rather than Dubai illustrates another of the challenges the emirate faces in its bid for world leadership.

"Luxembourg is the most accepted and respected regulatory body. In Dubai, the regulatory environment is going through some changes, and I believe Dubai is not yet 'passportable' in terms of having access to other countries.

"Maybe it will down the line, but at the moment its difficult to make products portable, for example to Muslim investors in European countries. We've been in talks with the regulators here and they are cooperative and reaching out, but it may take a little time."

He points to other challenges in Dubai's initiative. The emirate has proposed a sukuk trading platform run by the Nasdaq Dubai exchange, but Mr Kronfol sees a flaw in this approach.

"Where you list a sukuk doesn't really matter, because most are traded on the over-the-counter [non-exchange] market. Yes, there are attractions to a platform, but you have to have the right service providers and regulatory environment. Investors won't go to an exchange for no reason."

Despite these reservations, Franklin is committed to Dubai and to the Islamic financial industry. The recent launches were "a milestone for the firm, and the industry. It is good for Sharia, and for the world."

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