Hesham Al Qassim, CEO of wasl Asset Management Group and Chairman of Emirates Islamic Bank, explains the emerging trends in the real estate sector and the lessons learned from the 2008 crisis. As one of the most renowned financial experts in the Middle East, His Excellency explains the strengths of Islamic finance and also the challenges ahead such as standardization.
Islamic finance has been growing at a double-digit rate and part of His Highness Sheikh Mohammed’s vision is to make Dubai the global capital of the Islamic economy. What is your perspective on this?
Until 35 years ago, there was nothing called Islamic finance. There was no concept of Islamic banks. In Islam, there existed a system for Islamic businesses, but there was no financial institution.
The first Islamic bank in the world was Dubai Islamic Bank, 35 years ago. They wanted to convert the Sharia into a financial system. It was weak, but it has grown throughout time. I think it has become the right system for banking.
I do not think the conventional system will stop 100% at a certain point in time. I think that there will always be a conventional bank and an Islamic bank.
If you ask me if Dubai can make Islamic finance take over conventional banking and become the worldwide financial center, I would answer ‘Why Dubai? Let us ask London that.’
They are the number one hub in the world. Today, the biggest Islamic finance platform is in London. And the second one is in Malaysia.
However, Islamic finance can contribute to the global finance by complementing the conventional system. By doing so, Islamic finance introduces different factors that can be seen as more sustainable, such as for instance with the principle of risk-sharing.
If we look at the challenges in the Islamic financial sector, what do you think have been the steps forward so far in order to standardize Sharia regulations across the banking sector and markets?
Sharia does not vary from one place to another. The main elements of Sharia cannot change, they are standard for everyone.
But the rules around it, such as financial regulations can change from place to place and it depends on the Sharia board.
Every board consists of certain people that come from different schools of Islam, and they will give a different opinion.
To unify the opinions together on the elements of finance, we need to standardize it. I believe a document that will standardize all the elements related to Islamic finance is in the works here in the UAE, and once completed it will be sent it to the UAE Central Bank to be approved.
Once it is approved, I think the UAE will be the first to have a standard booklet for Islamic finance. Nobody has done it in the world yet.
Going back to Islamic banking, when we talk about Sharia there are certain elements that are very clear. For example, if you are lending money, it has to be in the form of a partnership – I cannot call it a loan.
I have three ways of lending you money for a building: I can build it for you, by taking your land and developing the construction; I can be your partner; or build it for you and collect the rent on your behalf. There is always a risk-sharing principle involved.
If we look at the World Islamic Economic Forum that will be held in Kuala Lumpur this year, what would you like to see on the reform agenda? What do you think are the hot topics that should be discussed?
Worldwide standardization. In 1995, I was working in the National Bank of Dubai in the LC department. The LC or letter of credit department is the heart of any bank.
It is the only department that deals with international markets, so you are dealing with international financial institutions.
I entered this department as a junior employee, eager to learn, and the first thing they gave me was a small booklet called S&P 500.
This was a very old book on how to write a letter of credit to a third-party trader.
When you prepare a letter of credit, which has the description of the good, where it is coming from, the trader information, the shipment company, you cannot commit a single spelling mistake.
If you write good and instead of a ‘g’ you spell a ‘k’, then there is a discrepancy and the letter is invalid. When there is a discrepancy in the letter of credit, the recipient can keep the money and not deliver the goods or they can ask for money to cover damages.
Traders are waiting for discrepancies. The first thing they do is check for spelling mistakes, silly mistakes, not content-wise. So, the first thing I did was to read the S&P 500 booklet, and the second thing I did was spell checks.
Spell checks are done by six different people. I wish one day Islamic finance will be like the LC department, where people can read a booklet and do not require a Sharia board.
The Islamic finance system has become so advanced today that, realistically, there is little difference between conventional and Islamic finance. It depends on the client.
I am on the board of a conventional and of an Islamic finance institution.
I have 15 years of experience in the banking and financial system. At one point of time, there was a huge difference between both systems working in parallel, but today I think there are enough products within Islamic finance that can compete with the conventional one.
How would you describe the way Dubai managed to transform itself from one of the most arid areas to one of the most distinctive skylines in the world?
The story of Dubai started a long time ago with trade, as the city was always in the middle between Asia, Middle East countries and Africa.
And in all that time, there were a lot of traders going to and from places like Iran and India, and shipments of merchandise were made through Dubai. This has been going on since the city’s beginning.
Trade has increased throughout time, with Africa and Asia using Dubai as a hub. Many goods were coming from Japan, China, and Singapore to Dubai, and going from Dubai to India, Pakistan, Sudan, Egypt, and the rest of Africa.
The location of Dubai has always helped, and His Highness Sheikh Rashid bin Saeed Al Maktoum, former Vice President of the UAE, Prime Minister, and Ruler of Dubai, has always supported transshipment trade in this country.
His Highness Sheikh Rashid bin Saeed Al Maktoum started the first port in Dubai, called Port Rashid, which turned out to be a very important port for the region and for the country as a whole.
Trade volume started becoming bigger and bigger, and at a certain point His Highness thought that we needed to have a free zone area and a port hub.
That is how the idea to build Jebel Ali Port came around, which is currently over 30 years old. At the time, nobody thought it was a good idea to build such a big port in the middle of the desert, but time proved that His Highness had great vision.
The same port that many were skeptical about is now one of the most successful ports in the world and Dubai is now exporting its knowledge and managing other ports around the world.
Dubai’s population and residents were always traders, it is in our DNA. We always say that every culture starts next to water. It has to do so.
So when people started settling here, they did so next to the creek in Dubai. All the residents of Dubai, by default, had to be traders or business-people, as they were interacting with lots of businessmen from all over the world.
If we look at the real estate sector, after the recovery in 2008 approximately 24% of the world’s cranes are placed in Dubai. Now stakeholders and investors are giving cautious looks ahead, towards 2020. What is your perspective on the macroeconomic scene? How are the depreciation of the euro or the Russian ruble and the appreciation of the US dollar impacting the real estate sector in Dubai?
When we talk about the euro and the US dollar, we are almost covering 80% of the worldwide currency – as many countries, like the UAE, have their currencies 100% pegged to the US dollar.
From that prospect itself, you could realize that Dubai is more than a normal national city, it is a multinational city. Our clients, the ones that are buying or are interested in real estate, come from all over the world.
Today we are not dependent on buyers coming from a specific country, for example India, Egypt, or Ireland. We have clients from Western and Eastern Europe and the US as well.
We have a wide range of clients. If my clients have dollars, I will get a benefit out of it. If my clients have euros or rubles, it will affect me. But currencies go up and down all the time.
The day there is a strong dollar, there is a weak euro, and vice versa.
Diversification of clients is a positive factor, as you can take advantage from this global portfolio...
I agree. When we talk about 2008, there was a crisis. The market rebounded in 2011, and it is now going in the right direction. I think people have learned from their mistakes back in 2008.
What we are planning for the future is to build the city with what is required. Today, the major developers in Dubai, including wasl, are always trying to add to the successful story of the city.
We are not developing for the sake of creating new projects. The major developers today are developing around the area of Expo 2020. Why are they doing that?
All the major developers in Dubai, governmental, semi-governmental entities or public shareholding company, are all focused on the opportunities arising from this global event.
Since you mentioned Expo 2020, I am interested in gathering your thoughts regarding how much of a pulling factor can Expo 2020 be in terms of office spaces or commercial spaces in the real estate sector.
Expo 2020 is a grand exhibition. I do not think we can count on how many customers are going to stay or occupy our offices or homes in the future.
But ultimately, Expo 2020 is a grand exhibition in a major city, which already is so popular and gathering people from everywhere around the world.
Not all cities can promote themselves like this, unless they have the infrastructure, the capacity and the ability to receive such a number of people.
Unless they have these factors, they can never do this kind of exhibition.
The people coming here are a great promotion for any city in the world to ever have. Another positive factor regarding the Expo 2020 is that it is an exhibition that will last six months.
This is not a one-day thing. Moreover, it will give people the time to travel and visit the city and truly experience it.
What we are doing in Dubai, in terms of support of infrastructure, makes the whole city look as one corporation. Dubai always works as one story.
His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President of the UAE, Prime Minister, and Ruler of Dubai, set the strategy for Dubai as one does for a company.
So when you look at the city as one commercial entity, every vertical within the commercial entity has to work towards the success of the corporation.
Ultimately every section, from the government to the commercial companies, are all working towards this aim.
So today, all the authorities are working on building the right infrastructure. For instance, the airport expansion; Emirates Airlines is working on the expansion of its global reach; development companies such as wasl are working in different sectors in order to develop the hospitality sector.
We are trying to build more affordable rooms to make Dubai more attractive for everyone.
Statistically, 20% of the visitors coming to the city are business-related. We wish Dubai had a higher percentage. I think the city is catered to be the hub for international business from any part of the world.
What are the major projects of wasl hospitality and leisure that are geared towards Expo 2020?
Dubai is in a unique position. People coming to the city will start to experience what Dubai is all about even before reaching here. It all starts as soon as they step foot into an Emirates Airlines aircraft.
They will find that hospitality starts there; followed by the experience of entering Dubai airport, the way they will be received by the immigration and customs people.
The ride to the hotel, by bus or taxi or metro, and until they get to the hotel room, will be so pleasant. This is a chain the city has created, and it has set a benchmark for the global tourism industry.
In 2011, at a time of crisis, we announced a three-star hotel. Why during that time, if there was no Expo 2020? People were wondering why.
We knew we did not have enough three and four-star hotels when compared to the number of five-star hotels.
The mix was not sufficient. Under that prospect, we identified as a company that we needed to cover the gap, and therefore we needed to introduce more rooms.
In one go, we announced we would build five hotels consisting of more than 1,200 rooms.
The first one opened last year. It consists of 290 rooms. It is a very successful model. One more opened in August this year, while two more are expected to be opened for business before the end of the year.
The fifth hotel will open next year.
Then Expo 2020 was announced, and we realized our model was what Dubai required as it had a big shortage in the mid-range quality hospitality offering, especially in three and four-star hotels.
Because of this, we have decided to go for another 15 hotels, meaning another 4,000 rooms. This will take us from 5,000 rooms today to 10,000 rooms in 2020.
So you don’t think there will be an excess supply of rooms...
Never! I will tell you why. I do not think that what we are building today is only for Expo 2020. Dubai is an expo itself, 365 days a year.
I think tourism in Dubai grows more than an annual 5%. Expo will add value to the tourism business. And that added value will be on the trade side, as there will be more international companies based in Dubai.
You once said “wasl is a semi-governmental organization, we feel great responsibility in supporting Dubai’s vision and development, especially when it comes to promoting the city’s image before the world.” What do you think will be the contribution of Expo 2020 in order to transform even further the image of Dubai?
I think Dubai will be very different from what it is now. In 2020, whatever you have seen in a master plan prepared for the city and for the exhibition site will be even better.
Every project that has been shown to the public will be perfectly done, and will even be better than the pictures or the plans.
It will really create a second center for Dubai. Today, Dubai’s center is close to the old market. This will be Dubai’s second center, with a new airport and close to the new developments: hotels, offices, theme parks, etc. It will be a new city.
Many people will wonder how fast we can build all this, but I assure, if you come in 2019 you will see it all built.