Sunday, February 9, 2014

Mixed Outlook for Indonesian Retail

oxfordbusinessgroup.com--Expectations that rising incomes among Indonesia's burgeoning middle class will generate a retail boom were boosted by rosy end-of-year sales results. However, the upward trend is threatened by both global and domestic trends.

A Bank Indonesia (BI) survey published in January revealed that retail sales surged 14% year-on-year (y-o-y) in November, the fastest growth since July. The survey of 650 retailers in 10 major cities also predicted that December sales would increase 18.3% over the same month in 2012.

This result was in line with a steady climb in the central bank’s consumer confidence index over the last quarter of the 2013, which reached 116.5 at the end of December, up from 107.1 at the beginning of October.

“Consumers are more confident about economic conditions over the next six months, citing positive sentiment about their income, job availability and business activities,” the central bank said in November.

Recent financial statements suggest that retailers were doing well in the second half of last year, with third-quarter results from eight companies showing revenue growth of between 9% and 27%.

Singapore-based Lippo Malls Indonesia Retail Trust said its gross revenues increased to nearly $30m in the third quarter of 2013, up 13.6% from the same period in 2012, attributing the increase to "contributions from six new malls acquired in 4Q 2012 and the positive rental reversions within the existing malls ".

Demographic trends support growth

Such expansion underlines confidence in the market, underpinned by demographics. Boston Consulting Group (BCG) is projecting the number of middle class and affluent consumers (MACs) – which currently stands at 74m — may reach 141m people in 2020.

“These consumers are the sweet spot of this market,” said Vaishali Rastogi, a BCG partner and coauthor of the report, published last year. “They’re beginning to move beyond basic necessities to products that offer greater convenience and comfort, such as home durables, white goods, cars and financial services.”

However, despite the expectations and planned opening of several major malls over the next five years, not all observers see 2014 as an easy ride for retail.

“For 2014, in light of the incoming election and probable rupiah instability, it is quite likely that customer loyalty will go out the window in certain areas of the market as consumers become more concerned with the pricing of goods and value for money,” Paulus Ong, the president-director of Pongs Home Store Indonesia, told OBG.

Growth on the outskirts

Faced with an uncertain outlook in Jakarta, international and domestic retail firms are turning to the relatively untapped market of smaller cities and the capital's outskirts, according to Fernando Repi, spokesperson for department store operator Matahari Putra Prima. “Modern retail is still lacking in second-tier cities when in fact, people there have experienced economic and, therefore, income upgrades,” he told the local media in December.

It is a misperception that Indonesia's economic growth centers around Jakarta, wrote the McKinsey Global Institute in a December 2012 report. "Many other cities are growing more rapidly, albeit from a lower base. [...] These include Medan, Bandung and Surabaya as well as parts of Greater Jakarta".

The sentiment was echoed by the findings of BCG.

"Indonesia currently has 12 cities with more than 1m MACs. By 2020, however, this number will roughly double, to 22 cities with more than 1m MACs, including emerging cities such as Palembang, Makassar, Batam, Semarang, Pekanbaru and Padang.”

The lack of international retail giants in the country can be explained by the geographic fragmentation, according to research released last December by Deloitte. "Middle class consumers in Indonesia still show a strong preference for shopping at convenient locations near their homes, meaning that convenience stores and mini-markets continue to be the main destination for many."

The fact that retailers are identifying new sales strategies rather than losing confidence in the country reflects long-term optimism based on the country’s fundamentals. This suggests that while macroeconomic trends will buffet the sector in 2014, its future outlook beyond this year remains positive.

Islamic Finance Assets to Reach USD2.1trn by end-2014

ZAWYA.COM--JEDDAH - Islamic finance industry will continue to grow driven by both demand and supply factors, and further facilitated by government agencies and financial regulators, KFH -Research, a subsidiary of Kuwait Finance House Group KFH -Group, said in a report.

The report, which focuses on 2014 Islamic finance expectations, forecasts that Islamic finance industry will continue to draw tremendous double digit growth rates across all sectors. 



Moreover, the report forecasts that the total Islamic finance assets to reach $2.1 trillion by the end of 2014, and the total asset of Islamic banking sector to reach $1.6 trillion.
In 2014, gross contributions of the global takaful industry are expected to surpass the $20bln mark. The growth opportunities for the global takaful industry in 2014 and beyond are optimistic on the back of several economic, financial and socio-demographic trends. A number of regulatory developments and government policies that have been put in place are expected to spearhead the growth of the takaful and insurance sectors in various markets during 2014. 


Overall, Islamic finance in 2014, is set to experience another increased momentum, particularly in the sukuk market with the issuances by few sovereigns e.g. UK and Luxembourg.


The Islamic banking sector is likely to witness a surge in demand underpinned by greater economic participation of Muslim nations as well as driven by stronger demand from the population towards Shari'a compliant or ethical financing solutions. Instrumental roles played by multilateral organisations and regulatory bodies are expected to further benefit the Islamic banking and takaful industry especially to low-to-medium income customers as financial inclusion objective has been strongly emphasised moving forward.
Thriving interest of key global/regional financial centres in developing Islamic finance, for instance London, Hong Kong, Singapore Luxembourg, further adds weight to the strong prospects of Islamic finance as markets globally look for alternative sources of funding and investment avenues.


The Islamic finance industry's assets are estimated to have amounted to $1.8 trillion as at end-2013, recording an over 16% y-o-y growth. Leading the growth has been the Islamic banking sector which represented an almost 80% share of the global Islamic banking assets in 2013. Among the largest global Islamic banking jurisdictions (excluding Iran) in 2013 are Saudi Arabia which captured 18% of global Islamic banking assets, followed by Malaysia (13%), UAE (7%), Kuwait (6%), and Qatar (4%). In 2014, the Islamic banking sector's assets are expected to reach $1.6 trillion. Advanced Islamic banking markets in the GCC and Asian regions are expected to evolve in greater sophistication in terms of products offerings, as well as from the aspect of regulatory advancement by the financial regulators. On the demand side, Shariah compliant investments and financing products have been dominantly fuelled by a promising economic outlook in the GCC and abundant liquidity flows.


The industry will continue to grow driven by both demand and supply factors, and further facilitated by government agencies and financial regulators.
In a newly released report "Islamic Finance Outlook 2014" by Kuwait Finance House Research Limited (KFHR), the Islamic finance industry is forecasted to continue to chart tremendous double digit growth rates across all sectors, with total industry assets estimated to reach approximately $2.1 trillion as at end-2014. Over the next few years, KFHR foresee the industry's focus in four key spectrums that will take the industry to greater heights:


1) Strengthening of financial stability and enhancement in inter-linkages between Islamic finance jurisdictions
2) Tapping into potential real sector economic activities to expand market share for e.g. by supporting the financing needs of the infrastructural development programmes in GCC and Malaysia
3) Expanding the range of product offerings to appeal a wider customer base e.g. Islamic wealth management products for high net-worth individuals (HNWs) and Islamic trade financing solutions for corporates 
4) Enhancing talent, education and research development to improve on the industry's efficiency and innovative capabilities.
In 2013, the sukuk market, managed to once again breach the $100bln mark in terms of new sukuk issuances to close the year with a total of $119.7bln. However the amount fell 8.77% short of the recorded amount in year 2012. Malaysia once again led the 2013 new sukuk with a 69% share of total issuances, followed by Saudi Arabia at 12%, United Arab Emirates (6%), Indonesia (5%) and Turkey (3%).


The global sukuk market is all set to continue its upward trajectory in 2014 as a number of high profile debut sovereign issuances are expected to take place this year. The sovereign sukuk sector will continue to stoke stakeholders' interest in 2014 as sovereigns including the United Kingdom, Ireland, South Africa, Tunisia, Mauritania, Senegal, Luxembourg and Oman are expected to debut issuances in 2014.


Expectations are also build up on a debut sukuk issuance from the multilateral Asian Development Bank (ADB). Meanwhile, the Islamic Development Bank (IDB) has already announced its intention to issue a $10bln sukuk in the Dubai NASDAQ Exchange in 2014 with plans to continue similar listings on an annual basis.


The Islamic funds segment also registered an 8.4% year-to-date increase in 2013 with total assets under management (AuM) valued at $72.5bln as at 20-Dec-13. A total of 79 new Islamic funds were launched in 2013 with most of the newly launched Islamic funds domiciled Malaysia and Luxembourg.


In 2014, the global Islamic funds industry should benefit from steady global economic recovery which will bolster investor confidence and performance of underlying invested assets. Much of the anticipated recovery will come from the advanced economies, while the growth trajectory of emerging countries will remain stable. In this light, greater investor focus will be placed on policy decisions and reforms in individual emerging economies.


The global takaful industry has experienced strong double-digit growth rates in recent years with worldwide gross takaful contributions estimated to have amounted to almost $19.87bln as at end-2013, reflecting a more than 15% y-o-y growth while recording an impressive 18.1% CAGR during the last 5 years (2007-2012). Saudi Arabia and Malaysia continue to drive the global takaful industry being the two largest takaful markets in terms of total gross contributions.


© The Saudi Gazette 2014

Morocco Weighs Pursuing $1.7 Trillion Industry: Islamic Finance


BLOOMBERG.COM--Morocco plans this year to allow Islamic banking for the first time as the only North African nation with an investment-grade rating at Standard & Poor’s seeks to tap the $1.7 trillion industry.


The country’s cabinet approved a draft Islamic finance bill on Jan. 16, according to Abdeslam Ballaji, a lawmaker who worked on the proposed legislation and a member of the ruling party. The draft, which also regulates Islamic banks and allows for sukuk sales, is pending parliamentary approval and may be enacted within five months, he said last week.

Demand for financing that complies with Islam’s ban on interest is accelerating worldwide, with assets expected to climb to $3.4 trillion by 2018 from about $1.7 trillion last year, according to Ernst & Young LLP. More than 95 percent of Morocco’s population of 34 million back the introduction of banking that adheres to Shariah, according to Said Amaghdir, secretary general of the Moroccan Association of Participative Financiers, an Islamic finance business association.

“Given the choice, Muslim retail customers on the street generally prefer to bank Islamically, even if there are higher costs,” Khalid Howladar, a senior-credit officer at Moody’s Investors Service, said by phone from Dubai yesterday. “Islamic banks historically have tended to grow at twice the rate of conventional banks in Muslim countries, and as such they tend to take a market share from the conventional system.”

Billions Required

The Moroccan Association of Participative Financiers estimates total investment in Shariah-compliant products to reach $7 billion by 2018, provided the law comes into effect by the middle of the year, Amaghdir said by phone yesterday.

“Plans to expand solar and wind energy, tourism and industrial parks will require billions, and the Gulf Cooperation Council will be keener on putting money here when the law is enacted,” he said. The six-nation GCC, which includes Saudi Arabia and the United Arab Emirates, is predominantly Muslim.

Banks may also sell short-term sukuk to fund Islamic subsidiaries, Amaghdir said.

Morocco’s central bank allowed lenders and insurers to sell three Islamic products in 2007 to help develop the nation’s financial industry. The country is “almost” ready to sell its first sukuk, Prime Minister Abdelilah Benkirane said in October.

Regional Competition

“We can’t afford to drag our feet any longer because regional competition for the Islamic finance pool is heating up, not just from our Muslim neighbors,” Ballaji, the lawmaker, said in a phone interview Jan. 20.

The U.K. plans to sell debut Islamic bonds this year as Prime Minister David Cameron seeks to revive a blueprint that’s been stalled since at least 2007. The Hong Kong government this month gazetted legislation to allow the sale of Shariah-compliant notes.

Moroccans may be misinformed about the benefits of Islamic banking, Ismail Douiri, co-chief executive officer of Casablanca-based Attijariwafa Bank, said in May.

“Islamic finance is often portrayed as low-cost type of finance,” Douiri said. “Islamic finance is not charity. One should not expect financing costs to decline.”

Shariah-compliant products are typically more expensive when they’re first introduced, Howladar of Moody’s said.

“Islamic products tend to come at a premium, because the creation of the products requires substantive investment,” he said. “Orthodox customers are willing to pay more to bank Islamically. Eventually, in the face of competition, those costs fall and are comparable to conventional products.”

To contact the reporters on this story: Dana El Baltaji in Dubai at delbaltaji@bloomberg.net; Souhail Karam in Morocco at skaram5@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net