Islamic funds turn focus on India

India is fast emerging as the preferred destination for Islamic funds. In the last six months, the country has seen major Islamic finance players in the Gulf announcing investments of over $10 billion, said Shariq Nisar, chief executive officer of Bangalore-based Bearys Amanah Investment.

According to him, India is a more strategic option over countries like Malaysia and Pakistan because of the thriving stock markets . "It is estimated that Islamic finance business is worth $1 trillion and India can attract a sizable portion of it,'' said Nisar, who screened and launched the first list of Shariah-compliant stocks in India. The funds that entered India last year include Gulf Finance House with about $10 million in the Indian Economic Zone project in Maharashtra, HSBC Amanah/KFH investing Rs $50 million in Kolkata-based SREI Infrastructure Finance and the Saudi Economic and Development Company Limited putting in $20 million in Bearys Group's Global Research Triangle. These apart, Energy City of India secured $2,000 million from Gulf Finance House in October 2006. These are not inclusive of the funds that came through the foreign institutional investors' (FIIs) channel, he pointed out. The rise in Islamic investments is also seeing domestic players intensifying their businesses. For instance, Bearys Group, which received the country's first Shariah-compliant realty fund, has established an Islamic finance company focused on foreign investments in real estate. Similarly, Mumbai-based Taqwa Advisory and Shariah Investment Solutions is in discussions with a UAE-based Shariah advisory firm for bringing a suite of Islamic financing solutions. Ahmedabad-based Parsoli Corporation too is in talks with Delhi-based Taurus Mutual Fund for launching an Islamic mutual fund, he said. According to Nisar, 60 per cent of the companies listed on the BSE and NSE are Shariah-compliant, with less than five per cent of the total income coming from interest. For screening the companies, all businesses related to conventional financial sector where profits came through riba-based (interest) operations are prohibited. From the academia point of view, institutes like the Aligarh Muslim University, Indian Institute of Planning and Management (IIPM) and Institute of Chartered Financial Analyst of India (ICFAI) are looking to include finance courses. "The West Asian countries are fearing that the investment they make in the US would freeze due to the slowdown. Currently, they are earning about four per cent in the US on their capital whereas the returns in India are three times more," said Ashraf Mohammedy, managing director of Mumbai-based Idafa Investments that offers wealth creation opportunities in line with Islamic Shariah. Idafa is now spreading wings to Hyderabad, Chennai and Bangalore. For Ashraf, the booming real estate sector is an automatic choice for putting in Islamic investment. "Islamic finance is a theme-based finance and is ethical. The religion tag ensures that money is not put into hotels, film production, media, sugar and tobacco companies and gambling," he said. MY Khan, chairman of the Madhya Pradesh Stock Exchange, feels Islamic funds, like venture capital, can be used to promote small enterprises and can participate in infrastructure building like the special economic zones and real estate. "Islamic banks have to accept deposits, borrowed funds and funds through bonds, which involve interest. But interest is forbidden under the Shariah Law," he said, adding that amendments to banking law were needed for the Islamic banks to become a reality in India. Link: http://www.business-standard.com/india/news/islamic-funds-turn-focusindia/329191/

Islamic venture capital

If the Islamic private equity industry has failed to live up to its expectations then Islamic venture capital has followed the same path with even less spectacular results. Indeed discussion of Islamic venture capital is largely theoretical because real life examples are few and far between. The government of Malaysia has done more than any other body to promote and define the industry and indeed has launched a fund, albeit a small $10m fund, to help show the way

The private sector has a few examples of Islamic venture capital at work but the reality is that often these are misnamed Islamic private equity efforts, and yet venture capital and Islamic finance are tailor-made for each other.

Rather like its cousin private equity, venture capital is a mode of investing that seems

perfect for Islamic finance through the application of various Islamic financing concepts,

with the Mudarabah concept being the most common.

Venture capital here is defined as the provision of seed capital for a new venture in the process of being established, rather than the provision of capital to a small business to facilitate its growth.

As with its conventional counterpart, Islamic venture capital appeals most to investors

who understand a sector or an industry intimately and are prepared to risk a portion of their capital on the strength of a business plan, the management team of the proposed business, and their own ability to pick a winner.

Other similarities between Islamic venture capital and conventional venture capital include the fact that deal sizes are small when compared to private equity transactions, since the startup capital that is required for a burgeoning small businesses tends not to include monies for grandiose marketing and advertising plans but tends to be much more conservative in its outlook.

Some basic principles explained:

The principle of Mudarabah in venture investing

Mudarabah financing involves a contract under which the investor, or rabal-maal, brings financing to the table and the entrepreneur, the mudarib, brings expertise, effort, and in the case of Islamic venture capital, a business plan.

Collectively the parties share the proportionate profit from the results of the enterprise as per their pre-arranged agreement. The entrepreneur cannot be placed at risk of losing money since he has contributed only expertise. If the business venture fails, then the most the entrepreneur could lose is the investment he has already made in the business and the time and effort he had put into the venture.

In other words no one can come after the entrepreneur for cash compensation. In a similar way, no one should expect the venture investor to have any say in the management of the company or any responsibility for it, since his part of the deal is to providing financing only.

The principle of Musharakah in venture investing

In the context of Islamic venture capital Musharakah financing is a partnership formed

between parties to finance a business venture where the parties contribute capital either in the form of cash or in kind. Profits are distributed based on a pre-agreed ratio. Losses are shared on the basis of capital contribution to the venture.

The principle of Wakalah in venture investing

In Wakalah financing a contract from one party gives the power and rights to another party to act on his behalf, based on the agreed terms and conditions.

Venture capital in the context of Islamic finance

The sector of Islamic venture capital had been largely ignored in theGCC until recently because of the lack of an 'entrepreneur class' which is essential for the development of a healthy venture capital environment: young, bright people with great business ideas and a determination to make a success of 'their' business. As the world becomes more of a global marketplace, and as the education and skills level of young people in the region increases, then venture investing along Shariah-compliant lines may become more common.

This is not to say that the greater Middle East and North Africa region has been bereft of venture capital. Countries such as Egypt, Lebanon and even Turkey have long had an entrepreneur class of their own and the VC industry is consequently more developed in these countries. In much of the GCC there have been impediments to foreigners owning their own businesses outright and this naturally led to an absence of such businesses in the marketplace.

As countries like the UAE have introduced 'free zones' such as Dubai Internet City, Dubai Media City, Dubai International Financial Centre, Jebel Ali Free Zone, and so on where foreign nationals and corporates can own 100 % of their own business then the market for venture capital has opened up. Naturally the business idea that will attract Islamic venture capital has to operate within the constraints of Shariah and must not dabble in haram areas.

But having a young entrepreneur class is only half of the equation. The other half of the equation is having venture investors with the risk appetite to back the business plans presented to them with hard cash. This is not simply a matter of having the money, it is also about having the tools to analyse the business plan, structuring a deal, and ensuring that the short, medium, and long term investment interests of both the entrepreneur and the investor are the same. This requires a level of education and expertise that had been lacking until relatively recently but has arrived in the region on the back of the tidal wave of oil revenues and increasing globalisation.

The combined effect of this has been that the Islamic venture capital industry was virtually non-existent, except for a few cases where Angel investors in the guise of ultra wealthy merchant families have funded new start-up businesses with their own cash, after ensuring that the business had no likelihood of straying into haram areas of business practice.

The arrival of financial centres such as Dubai International Financial Centre, Malaysia International Islamic Financial Centre, Qatar Financial Centre, and Bahrain Financial Harbour has opened up the possibility that expert venture capital talent from more mature financial markets could be transplanted into rapidly emerging Islamic finance markets and bring with it the intellectual wherewithal to do lucrative Islamic venture capital deals.

Link: http://www.ameinfo.com/207206.html

Recession sparks interest in Islamic finance

LONDON, England (CNN) -- With irresponsible banking practices taking the blame for bringing about the global economic crisis, there has been a surge of interest in Islamic finance.

Islamic finance is estimated to be worth $700 billion and has been growing by 15 to 20 percent per year.

Now, a slew of academic courses are springing up to meet the demand of those wanting to break into an expanding market.

According to ratings agency Moody's, the global Islamic finance sector is worth $700 billion and has the potential to be worth $4 trillion.

What's more, the ethical principles underpinning Islamic finance are seen by some as offering a more sustainable alternative to profit-oriented conventional banking. The result is that academic institutions are lining up to offer formal training in the area.

"There is a huge demand for Islamic finance courses now, so large that it's difficult to cope with," Professor Habib Ahmed, Sharjah chair in the school of government and international affairs at Durham University, England, told CNN.

Durham will launch a Masters degree in Islamic finance from October, becoming one of a number of European institutions to offer Islamic finance programs.

"Islamic finance has been growing by 15 to 20 percent per year for some time and there is a lot of interest at the moment. People are looking for alternatives after the economic crisis."

"Islamic economists believe that if the principles of Islamic finance were followed the crisis wouldn't have happened. We are seeing a lot of non-Muslim countries, including the UK, France, Japan, Hong Kong and Singapore encouraging Islamic finance," he said.

There are many differences between Islamic and conventional banking practices. One fundamental difference is that Islamic banks do not charge interest. Rather than borrowers and lenders, the system is based on buyers and sellers.

"Conventional banking is biased to the seller. Islamic finance is trying to level the ethics between the two parties," Aly Khorshid, an Islamic finance scholar who writes for Islamic Banking and Finance magazine, told CNN.

"People think the Islamic system is based on faith, but it's based on justice. The system is based on justice for the two parties and how you get to the justice is extracted from Islamic faith," he said.

Khorshid said that there are similarities between "ethical investment" schemes and Islamic finance, in that the Islamic system does not allow investment that harms people or the environment. He credits the rapid growth of the Islamic finance sector on the success of "sukuk" -- Islamic bonds.

In the West, banks including Lloyds TSB, HSBC, Deutsche Bank and Citibank all offer Islamic finance products, catering to a niche market of Muslim borrowers.

But while Islamic banks allow Muslims to take advantage of financial services that are consistent with their religious beliefs, it is the ethics underpinning Islamic finance that are attracting the interest of conventional finance institutions keen to learn lessons from the banking crisis.

Although Islamic banks have suffered from the global repercussions of the economic downturn, they emerged largely unscathed from the initial banking meltdown that brought about that financial turmoil.

Ahmed told CNN that is because Islamic banks are not allowed to deal in mortgage-backed securities or credit-default swaps, two of the practices accused of helping bring about the banking crisis.

Khorshid said that although it's too early to say if Islamic finance has dealt with economic downturn better than conventional finance, the Islamic system has many more layers of risk assessment and management, which could help protect it from the problems afflicting conventional banks.

But the growth of Islamic finance has brought its own problems. Critics say some banks use Islamic finance to package what are essentially conventional products. "Islamic banks are also driven by the profit motive and sometimes that can dominate the ethics," Ahmed told CNN.

While Europe is catching up with the demand for these banking products, the U.S. is lagging behind. Ahmed says that regulatory and legal changes are needed for Islamic finance to grow in the U.S., but he adds there are signs that Canada may become a North American center for Islamic finance.

The lack of Islamic finance services in the U.S. is reflected in a relative lack of demand for Islamic finance courses, but in the UK there is the opposite problem.

With students coming from Asia and the Middle East to get the qualifications that will help them take advantage of the Islamic finance boom, Ahmed says it is difficult for universities to find qualified teaching staff. "Most people with PhDs in Islamic finance are working in the industry, making a lot of money," he told CNN.

He added that Islamic finance products have the potential to appeal to the non-Muslims market, pointing out that in Malaysia the majority of customers for Islamic banks aren't Muslims.

"If people look at the principles they'll see something beneficial in terms of economics, rather than just religious reasons. It's a type of ethical finance that may be attractive to a lot of people."

ink: http://edition.cnn.com/2009/BUSINESS/08/25/islamic.finance/

Qatar's riches

Being ranked as one of the richest countries in the world is not enough for Qatar, which is focused on doubling its current visitor numbers by 2010. Louise Oakley discovers how sporting bids and cultural events aim to drive a new leisure traveller to the market.

Qatar is the richest nation in the GCC and one of the richest in the world with a GDP per capita in 2008 of almost US $72,000, according to the latest Global Insight from Jones Lang LaSalle (February 2009).

During the current global economic downturn, Qatar stands out from the crowd, with GDP growth of 6% predicted for 2009 (Kuwait Finance House, Global Insight, February 2009), the fastest economic growth rate among the world's richest nations.

This has led Jones Lang LaSalle to conclude in its World Winning Cities report entitled Doha: Global Ambition, Regional Influence that Qatar is, as a result of its huge natural gas reserves, "punching well above its weight as one of the world's richest and most dynamic economies".

And in a strategy that will no doubt attract more hotel investors and developers - and ultimately, more tourists - Qatar has, according to Jones Lang LaSalle, taken "the art of place making further" as it develops a combination of "best-in-class sporting, cultural, leisure and other attractions to create a strong brand and identity on the global stage". In a sporting context, although unsuccessful in its bid for the 2016 Olympic Games, Qatar has since bid for the 2020 Olympic Games, as well as the FIFA World Cups in 2018 and 2022. If there is a positive outcome, the market will become ripe for hotel development.

In addition, tourism arrivals and hotel occupancies are planned to be bolstered through the creation of a new international airport, as well as the growth strategy of Qatar Airways and cultural attractions such as the Museum of Islamic Art, which opened earlier this year.

Alongside these "place-making" efforts, Qatar is also focused on infrastructural development, with two key projects including The Pearl-Qatar - which features three five-star hotels and a two million m² leisure hub - and Lusail, featuring the Entertainment District.

However, real estate market transparency is well below advanced markets, and Jones Lang LaSalle suggests that "the establishment of an active real estate regulator and the creation of more publicly-listed companies could stimulate the pace of change and market maturity".

And, although Qatar was the first market in the Middle East to open to outright foreign real estate ownership in 2004, most investors remain local or regional players, meaning foreign investment has been relatively untapped to date.

Hotel scene

The existing hotel stock in Qatar is approximately 5100 rooms. A further 2300 rooms are expected to be introduced by 2011 within the four- and five-star hotel market. Occupancy during Q1 averaged at a healthy 73%, but the typical summer drop witnessed by Qatar caused occupancy to drop below 50% in June this year, according to STR Global.

The total number of visitors in 2007 was 780,000, with this targeted to reach 1.4 million by the end of 2010.

Link: http://www.arabianbusiness.com/565405-qatars-riches

Sukuk attracts cash-rich banks

With debt markets gingerly reopening, Gulf companies eager to raise cash through issuing bonds have to make a decision: should they issue conventional or Islamic bonds, known as sukuk?

The SR7bn ($1.9bn) sukuk issued by Saudi Electricity Company, the kingdom’s state power utility, this summer could be a useful indicator.

Investors flocked to it, rewarding the company with a price of 160 basis points above the Saudi interbank offered rate. A large part of the attraction was the creditworthiness of SEC. “The company keeps the lights on, and, more importantly in Saudi Arabia, the air-conditioning working,” quips Rajiv Shukla, head of debt capital markets at HSBC Middle East, who led the issue.

Yet the SEC sukuk also benefited from a glut of local capital seeking investments that comply with sharia Islamic law. Saudi banks, all of which in theory operate according to Islamic principles, have as much as SR150bn sitting in the central bank, says Shukla, where the funds earn virtually no returns. Demand for fresh Islamic debt is therefore healthy, bankers say.

“The sukuk market has seen very little issuance recently, and a lot of Islamic banks are still awash with capital,” says Nish Popat, regional head of fixed income at ING Investment Management. “The success of the SEC sukuk shows how cash-rich the Saudi banks are now.”

After exploding in popularity during the past half-decade, the sukuk market was last year hurt by doubts over the Islamic compliance of several structures, and the credit crunch depressed demand for all forms of debt.

But like its conventional counterpart, the sukuk market has begun to show signs of thawing. Indonesia, Bahrain, Ras Al Khaimah and Malaysia have all tapped it recently. All the Islamic bonds were oversubscribed, and yields have tightened further as global financial sentiment has improved.

Ras Al Khaimah Investment Authority’s $400m, 8 percent coupon sukuk now trades at a yield of 7.15 percent, and Bahrain’s $750m, 6.25 percent central bank sukuk now yields 5.15 percent.

Yet while bankers say there is plenty of appetite for Islamic issuance at sharia financial institutions, issuers should not expect to pay less for an Islamic bond than they would for a conventional one.

SEC’s sukuk was a success because it was a local currency bond. “International markets are more expensive than local markets, and dollar liquidity is more expensive than local currencies,” says an Islamic banker. Institutional investors are also eager to see how the restructuring of sukuk issued by Kuwait’s The Investment Dar and Saudi Arabia’s Saad Group - both of which have recently defaulted - are resolved. “It could set an important standard for sukuk settlement,” says Popat.

Trading of Islamic debt also remains a marginal pursuit. Saudi Arabia launched an electronic sukuk market in June, but since then only five securities have been listed and only 10 trades made.

Link: http://www.thepeninsulaqatar.com/Display_news.asp?section=Business_News&subsection=market+news&month=August2009&file=Business_News2009082704536.xml

The Promise of Islamic Finance

Source: Bingham McCutchen LLP - Islamic finance had its start in the 1960s and 1970s with the influx of petrodollars into the Gulf region. The rapid development of Middle East markets - Saudi Arabia, Kuwait and the United Arab Emirates - has stoked interest in a type finance that is based on the principles of Shari'a. Industry experts estimate that Islamic finance has enjoyed double digit annual growth with nearly USD 1 trillion put to work in Shari'a structures. This summer several experts came together to talk about the development of Islamic finance, some of the structures used by its market participants and examined this developing market's future.

Link: http://www.linexlegal.com/content.php?content_id=101250

Some FAQs about Zakat and charity

Compiled by Shafee Ahmed Ko,

What is meant by charity in Islam?

Charity, for which the expression used in the Holy Quran is "spending out of what God has given you", means using your energy, talent, resources, money, possessions, or whatever else, to help and do good to those in need. In Islam charity is very often mentioned alongside prayer because just as the latter is man's relation with God, or man's duty towards God, the former (charity) represents his relation with his fellow-beings, and indeed with all the creation of God. Prayer expresses love for God, submission to Him, and a desire to bring out the Divine qualities that lie hidden in every person. Charity is an expression of sympathy and benevolence towards God's creation, putting into actual practice the lessons you learn in prayer.

Please give some examples of what are acts of charity in Islam.

Innumerable examples can be given because doing any kind of good to anyone, even to yourself to make you more capable of benefiting others, by using what God has given you, is an act of charity. Feeding the hungry, helping the poor, taking care of the destitute such as orphans, lending a hand to the disabled, helping an unemployed person to find a job, etc., are the more obvious examples of charity taught by Islam. But it also teaches that there are other, smaller acts of charity which one has the opportunity to do everyday. Helping someone in any way, showing the way to a stranger, speaking a kind word to cheer someone up, giving useful advice or imparting knowledge to someone, removing from the road something that could cause an accident, even simply refraining from hurting anyone, are all acts of charity in Islam.

Charity is usually thought to be giving money or alms to the begging poor, and is said to degrade them and make them feel inferior. This is not so in Islam, then?

Most certainly not. Firstly, charity in Islam is much broader than giving money to the poor, and can be exercised just as well even where there is no poverty, as shown above. Secondly, giving charity, or the doing of any good to someone, must be done as a duty, not to degrade them or to ask for thanks. The Holy Quran tells us:

"A kind word with forgiveness is better than charity followed by injury.. . . O you, who believe, make not your charity worthless by reproach and injury, like him who spends his wealth to be seen by people. . ." (2:263-264)

Thirdly, charity should be given solely out of love for God, out of the desire to do good to His creation, as the Quran says about the righteous:

"They give food, out of love for Him (Allah), to the poor, the orphan, and the slave, saying: We feed you only for Allah's pleasure - we desire from you neither reward nor thanks." (76:8, 9)

How important is charity?

Being charitable is very strongly urged upon the Muslims, so much so that the Holy Prophet Muhammad has said that on every limb of the body, doing a charitable deed is due every day, whether it is with the hands, feet, or tongue. There is no person at all who cannot do a deed of charity to others. According to the Holy Prophet, if someone has nothing to give, he should work and earn, and give out of that; if he still does not have anything to give, he should help someone in distress; and if he is unable, for some reason, to do even that, he should try to do any good he can and refrain from doing any harm to anyone.

Apart from general charity, Islam has made compulsory a sort of tax on one's possessions, known as Zakaat, to be spent on the welfare of the disadvantaged. This is explained further in no. 83.

To whom can a Muslim give in charity?

Just as acts of charity have the broadest possible significance in Islam, similarly the circle of those towards whom charity is to be exercised is the broadest that can be conceived. Starting with the people around us - our relations, friends, and neighbors - it extends to all Muslims, and to followers of other religions. In fact, a Muslim's charity covers even animals. The Holy Quran emphasizes that one should keep a special look-out for those who may be in need but who do not ask for help (2:273).

What kind of things should be given in charity?

In case of those acts of charity when we give something away, the Holy Quran teaches that we should only give good and useful things, not useless and worthless ones, and they should be the kind of things we like to have ourselves (2:267). Moreover, things given in charity must have been earned or acquired lawfully by the person giving them away.

Please explain what is Zakaat?

Just as Islam has prescribed a set form for prayer, to enable us to keep it up regularly, similarly it has given an outward form for charity and made it compulsory, in order to make it a regular duty. That outward form of charity is known as Zakaat, and consists of giving a specified fraction of one's wealth every year into a fund. This fund is administered by the Muslim community or Muslim government, and is used to help the poor, the disabled, the unemployed, and others in need.

Is Zakaat just like a tax?

In the sense of being collected and spent by the Muslim government Zakaat is like a tax. However, the great difference is that paying Zakaat is a religious duty to be done out of obedience to God and sympathy for people. So giving Zakaat is morally beneficial to the payer because it develops the spirit of self-sacrifice in him and curbs feelings of greed. Notice that the word 'tax' means a burden, but zakaat means something which purifies you.

Why is general charity and Zakaat a basic duty in Islam?

Because it brings out the best and highest qualities in a person, which is really the object of existence according to Islam. God has given to each person various capabilities and resources, such as knowledge, money, strength, some talent or skill, etc. Every individual must use whatever he or she has been given to benefit other people as well as the rest of God's creation, and not for selfish ends. If this principle is neglected, then not only is there there no relief for the distress and the suffering of the needy, but man's increased selfishness makes him his fellow-man's deadly enemy; and society as well as mankind become divided into factions and groups all trying to grab things from one another

Sukuk: Alternative Financing in Sri Lanka

RAM Ratings Lanka’s one-day conference on Sukuk: Alternative Financing (“AF”) in Sri Lanka will kick off today at the Colombo Hilton.

The conference will bring together market participants, regulators and policy makers to discuss both the opportunities and challenges that this new financing option offers to both investors and businesses.

The conference will be officiated by the Governor of the Central Bank of Sri Lanka, Mr Ajith Nivard Cabraal and the Chairman of the Securities and Exchange Commission of Sri Lanka Mr Udayasri Kariyawasam. In addition, there will be a panel of international and local speakers to share their insights and experience on AF.

AF has been rapidly gathering momentum in the last few years, from various corners of the globe. This industry is estimated to have charted an impressive annual growth rate of more than 25% over the past 5 years. According to Moody’s estimates, the global AF industry has the potential of reaching USD5 trillion. Not surprisingly, even economies such as the United Kingdom, France and Hong Kong are keen to participate in this expanding market, and have made provisions to nurture their respective AF segments.

In this context, Sri Lanka has a unique opportunity to position itself as the AF centre of the SAARC region. An increasing number of institutions are already offering Shariah-compliant financial services/instruments. AF is principally based on risk-sharig contracts. Consequently, profits are shared and losses are divided or borne by the capital provider, as specified in the respective contracts. This implies that the lender has to be convinced of the viability of the project, and hence discourages excessive risk exposures. Apart from prohibiting business activities that are deemed harmful to society, Shariah law (or Islamic jurisprudence) also ensures that contracts promote fairness and justice. This is an environment where everyone can invest and receive returns based on their morals, ethics and risk appetites. However, this financing option should also be complemented by a corresponding accounting, tax and supervisory framework to protect the interests of the investing public and stakeholders.

Link: http://www.dailymirror.lk/DM_BLOG/Sections/frmNewsDetailView.aspx?ARTID=59158

Moody’s Report on Islamic Banking

Riyadh, Asharq Al-Awsat- Moody’s Investors Services recently issued a report on Islamic banking in which the credit-rating agency identified several points of weakness that it believes in future will threaten these Islamic financial institutions and their credit rating.

The truth is that the report brought nothing new to the table with regards to highlighting the points of weakness that Islamic banks suffer from as highlighted by many specialists in this industry. Many of these points have previously been made in this column, as they are no secret to any of the observers who follow the Islamic banking industry.

For example, the report mentioned that Islamic banks suffer from managing excessive liquidity, and this is a fact especially with regards to the management of short-term liquidity, or ‘overnight’ liquidity.

Islamic banks today are suffering from the fact that there is no Islamic-compliant tool that serves as an alternative to the loan that is used in conventional banking and that is prohibited in Islamic Shariaa. The Murabaha is considered too costly in this case and therefore unsuitable, let alone its lengthy documentation procedures. As a result, some Islamic banks resorted to exchanged loans to manage such liquidity. In fact, this tool is ineffective in terms of the way it operates, let alone the fact that several religious figures believe that it is illegitimate. Therefore, in many cases, management of short-term liquidity in these banks is considered inefficient. This problem is not a new one; it is as old as Islamic banking itself.

According to the report, Islamic banks suffer from weak risk management, particularly in terms of the handling of asset-liability maturity mismatches. This is also an old problem, as many Islamic banks rely on current accounts as a major source of deposit, being a short-term source, moreover it is among the most critical kinds of deposits that can be used in finance, especially if it is long-term as in cases of real-estate finance and infrastructure projects, which form the core of Islamic funding.

In order for many of these banks to rely on current accounts as the most important source of their deposits, we find that many of these banks are not interested in covering the risk of changeable interest rates because these accounts are free accounts. In other words, the bank pays no interest to account holders, so it is no cost to the bank.

This may explain to us, as well as to Moody’s, why Islamic banks are not keen on creating products that coordinate between asset-liability discrepancies. However, I think that this situation will not continue as the era of free finance regarding Islamic banks is on the verge of disappearing as conventional banks have strongly entered the field of Islamic banking. Moreover, the number of Islamic banks is on the rise and this increases the heat of the competition over this finance whereby the ways of attracting finance vary. We have seen signs of this competition in Saudi Arabia where the Kingdom’s bank launched a current account that allows the account holder to gain part of the bank’s profits, in addition to the pressures that the credit rating agencies may put on Islamic banks to coordinate between the due dates of assets and liabilities in these banks aimed at limiting the risk they have because of these discrepancies and the effect that these discrepancies will have on the bank’s credit rating. Therefore, Islamic banks must develop products that can achieve such a balance.

What is new in the report is the indication that the Islamic finance sector has maintained stability despite the global financial crisis thanks to ample liquidity, safe debts, and high-profit margins. This is crux of the matter with regards to the effect of the Islamic banking industry on the crisis. This is to silence those who cast doubts on the strength of this industry and to disprove the idea that it has been directly affected by the global financial crisis. This testimony is issued by a notable and a neutral international agency based on accurate and carefully-studied information. Therefore, there is no room for sceptics to contest this or cast doubts.

Link: http://aawsat.com/english/news.asp?section=6&id=17873

Indonesian gov't urged to seriously develop Islamic banking

Indonesian Islamic banking required real steps of the government to make it par with those in other countries, head of the Islamic banking association Riawan Amin said on Aug 13th, 2009

Indonesian Islamic banking required real steps of the government to make it par with those in other countries, head of the Islamic banking association Riawan Amin said on Aug 13th, 2009. Riawan said that Indonesian Islamic banking needs a quick real supports from the government through its policies in settling various problems that linger the banking system in developing itself. Comparing with what have already been applied by the government in the neighboring country Malaysia, Riawan said that as of now, the Indonesian government is yet to make actual moves to settle the problems. "The Malaysian government has provided tax incentives, but our government is yet to take any policy on the double tax issue that persists in national Islamic banking system," he said. According to the director of the largest Islamic bank in the country, the double tax has been the most problem complained by Islamic bank customers and investors who want to put their investments in Indonesian Islamic bank's portfolios. Due to the minimum assistance from the government, the Islamic banks in Indonesia failed to comply with the target that their assets accounted for 5 percent from total asset of banks operating in the country by 2008. According to the data issued by the Indonesian central bank, the asset of national Islamic banks stood at 47.18 trillion rupiah(about 47 billion U.S. dollars) by the end of 2008, or lower than the asset of conventional banks that reached 1,632,587 trillion rupiah (some 164.2 billion dollars) in the same period. Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=4594&Cat=0

HARDEV KAUR: The world must open its doors to Islamic finance

THERE is all-round consensus and agreement that the world finance system is broken and needs mending. It is not just governments and regulators that are vulnerable to the risks created in "shadow banking" but investors, intermediaries and society at large.

Raja Muda of Perak Raja Dr Nazrin Shah summed up the current situation clearly when he said that "all of us would like to believe in the system of finance, but it seems to have let us down".

The system is damaged and needs to be repaired urgently. Regulations, including those in the United States, are outmoded and need to be revamped. The conventional financial system has been found wanting. The question now is: how should the world move forward and pull itself out of the current global economic crisis?

Raja Nazrin offered an answer: "Let's put faith back in finance." There is a need for all "to work together to rebuild the trust in finance... the cornerstone of modern finance".

The challenge, he said, was "to break the vicious cycle of mistrust and greed and give the world an alternative that they can put their trust in".

In an interdependent and globalised world, countries cannot work in isolation to rebuild the system and trust. Prime Minister Datuk Seri Najib Razak said a clear and shared vision was needed as modern markets had become too big, too interconnected and too complex to operate on laissez faire.

By some accounts, the worst may be over. Eminent economists, including Nobel laureate Paul Krugman and economic adviser to President Barack Obama, Laura Tyson, agree that the world has pulled back from the brink. But a lot of work still needs to be done to rebuild the trust that has been lost and remodel the system.

"Trust begets trust", said Raja Nazrin, who is also "financial ambassador" for the Malaysia International Islamic Finance Centre, adding: "We must ensure that the investments we make and allow are sustainable, that they will fuel real economic activity and that the commitment of capital is met with an intention of creating real value in the economy and benefit for society."

In moving forward and seeking alternatives, the lessons from the current crisis must not be forgotten or ignored. Krugman listed five lessons: bubbles happen; the financial system is not safe; monetary policy has its limits; in a crisis, deficits can be your friend; and, Keynesian policies work.

The prime minister added a sixth: over-reliance on self-regulation is a mistake.

Regulators around the world must begin to work together "to create a comprehensive approach to ensure a compatible, sustainable and effective regulatory surveillance system" to prevent market crashes, Najib said.

He stressed that global regulators should "err on the side of investor protection and financial stability rather than rely on a 'buyer beware' regulatory regime".

The conventional financial system and the regulatory system need to be re-examined. Status-quo reversion to the old system is unacceptable.

Even as there are signs of "green shoots" in the global economy, and that Keynesian policies and stimulus packages around the world are beginning to produce results, it is too early to stop government spending.

In fact, Krugman said, there was still room for Washington to increase spending to boost growth despite concerns over its swollen budget deficit.

Alternatives must be considered. Islamic finance, which has not been impacted by the ongoing crisis, offers one. Raja Nazrin noted that Islamic finance had borrowed from conventional finance in terms of products and "the time has come where the flow of information and knowledge can and should flow the other way".

Islamic finance can help create an infrastructure of honesty, fairness and integrity -- qualities that have taken a severe beating in the current crisis.

"At its heart, Islamic finance is an inspiration towards good finance (and) good finance is about trust," Raja Nazrin said, "and trust is a cornerstone of stability... Islamic finance can help break the vicious cycle of boom and bust that has come to characterise global finance".

Trust must be restored. The centuries-old motto, "my word is my bond", must ring true again. In today's interdependent world, "finance is not delineated by the boundaries of a city or even a country".

The challenge and the goal of the Islamic finance industry, if it is to play an important role, should be to integrate into the global financial system.

At the same time, global finance must open its doors to Islamic finance.

Link: http://www.nst.com.my/Current_News/NST/articles/17hardev1408/Article/index_html

Expert puts Islamic banking market in Nigeria at N4.35tr

IT has been revealed that as at December 2008, the estimated Islamic banking market in Nigeria was N4.35 trillion.

The Managing Director, Jaiz International Plc, Mohammed Bintube in Abuja, revealed this recently during the second innovation forum of Enhancing Financing Innovation & Access (EFInA).

The theme of the forum is "Increasing Access to Finance Through Non-Interest (Islamic) Banking."

Also EFInA's Chief Executive Officer, Modupe Ladipo, stated that the results from EFInA's 'Access to Finance 2008 Survey' showed that 92 per cent and 86 per cent of the adult population in the Northwest and Northeast geopolitical zones respectively were not involved in banking activities in the light of which Islamic finance was considered a potential innovative approach to increase access to finance.

Speaking at the innovation forum, the Central Bank Governor, Sanusi Lamido Sanusi lauded EFInA for hosting a forum on such a topical and important issue that could have a significant impact on improving access to finance in Nigeria.

He said that the introduction of non-interest banking would deepen the financial sector, open new markets, enhance product offerings engender new competition and enhance investment in the economy.

He reaffirmed that establishing non-interest banking was one of the initiatives to establish Nigeria as a hub for financial services in Africa. He stated that Central Bank of Nigeria recognised that the critical success factors were promotion and collaboration between stakeholder agencies, finance ministry officials, judiciary and securities industry regulators to develop a robust framework.

The international guest speakers at the forum Mr. Omar Shaikh and Mr. Safter Sarwar from the Islamic Finance Council, United Kingdom a not-for-profit organisation, established to promote the Islamic finance industry both locally and globally shared their views on the state of the global Islamic finance industry, and highlighted that the industry was worth approximately $1 trillion and growing between 15 per cent to 20 per cent per annum.

Among leaders in the Nigerian financial sector who shared their perspectives on the opportunities and challenges of providing Islamic finance in Nigeria was Mrs. Hajara Adeola who highlighted the potential of Islamic bonds (Sukuk) to attract local and foreign investments for infrastructure, citing the $1billion Emirates Airport, Dubai as an example.

The managing director, Jaiz International Plc, Mohammed Bintube, stated that as at December 2008, the estimated Islamic banking market size in Nigeria was N4.35 trillion.

Link: http://www.ngrguardiannews.com/business/article07/indexn2_html?pdate=130809&ptitle=Expert%20puts%20Islamic%20banking%20market%20in%20Nigeria%20at%20N4.35tr

Bangor University considers launching Islamic finance MBA

Following on from the launch of its Islamic finance MA and MSc programmes last September, Bangor University in Wales is considering introducing an Islamic finance MBA.

Courses and postgraduate qualifications in Islamic finance are becoming increasingly popular in the UK as students look to take advantage of the growing industry. According to the head of Bangor University’s business school, Philip Molyneux, there is a particularly strong demand from international students.

“If you look at most universities, the schools that attract most international students tend to be the business schools, and if you look at the business schools where the international students tend to study, they tend to be the international financial programmes, particularly the Masters in banking and finance,” he said.

“We were one of the first to offer banking and finance, but now if you look a lot of places offer banking and finance. They are big recruiters for international students,” he added.

According to Molyneux, the course has attracted students from Saudi Arabia, Sudan, and Pakistan.

“We also have some which we never, ever predicted – people with a quite strong religious background. Not experienced religious scholars, but with backgrounds on the religious side.”

Source: Western Mail

Thailand Keen To Learn Islamic Banking From Malaysia

Thailand has expressed interest in learning Islamic Banking from Malaysia, especially Sukuk bond.

At a joint press conference after the second Joint Development Strategy (JDS) for Border Areas and the 11th Joint Commission for Bilateral Cooperation, Thailand Foreign Minister Kasit Piromya said cooperation in Islamic banking was also discussed at the meetings.

"We (Thailand) already have an Islamic banking industry, but it is still small, so we would like to develop it further.

"We have also agreed to explore a 'triangular cooperation' on Islamic banking with the Gulf Cooperation Council (GCC)," he told reporters.

Kasit said Thailand are also interested in learning how to develop the halal food production industry in the private sector and work together, instead of competing against one another, in the industry.

On Sabah itself, he expressed amazement on the vast development here and said he would be encouraging Thai businessmen to come here and explore possibilities of international cooperation.

"At the same time, I will try to meet Sabah Chief Minister Datuk Seri Musa Aman to extend an invitation to him to lead a delegation of Sabah officials and businessmen to look at the possibilities and opportunities for socio-economic, investment and tourism cooperation between both parties," he added.

Meanwhile, Foreign Affairs Minister Datuk Anifah Aman said the two areas Malaysia are keen to work with Thailand are in agriculture and health sector, namely the procurement of vaccines.

"Producing vaccines is one area of importance that we want to work together, especially in the current situation of the Influenza A (H1N1) outbreak.

"But we would like to work not only to curb the current pandemic but also others ... We want to develop biotechnology for particular vaccines," he added.

Malaysia is currently Thailand's fourth largest trading partner after Japan, United States and China.

Link: http://www.bernama.com/bernama/v5/newsgeneral.php?id=432658

IFSB takes a look at legal angles in Islamic finance

Fourth IFSB seminar on legal issues in the Islamic financial services industry to be held in Malaysia.

The specificities of Shari`ah-compliant financial services offered by banking and financial institutions need to be supported by a strong legal framework, according to the Islamic Financial Services Board (IFSB).

It says that legal firms rendering services to institutions Islamic financial services (IIFS) need to understand the specificities of these institutions and the parameters in which they operate as well as establish a legal framework within these parameters.

The IFSB is orgranising it’s fourth seminar on Legal Issues in the Islamic Financial Services Industry on 28-29 September 2009.

The IFSB said the seminar aims to achieve the following objectives:

• To collect and record data on the various legal environments in which IIFS operate, and draw from the experiences of different jurisdictions in order to better understand and analyse the effectiveness of appropriate legal and regulatory framework for Islamic finance;
• To review the legal requirements in specific areas which are developing but critical in driving the industry forward. In particular, to focus on areas such as Shari`ah Board's functions, liquidity management and dispute resolutions; and
• To discuss in depth the interface between the Shari`ah and modern legal frameworks, as such interaction is fundamental to every single Shari`ah-compliant finance contract used by IIFS. This requires that the knowledge and understanding of Shari`ah scholars and legal practitioners of these issues are both hands-on and up-to-date at all times.

The Seminar will attempt to contribute to the Shari`ah and legal aspects of the Islamic financial services industry by discussing the following topics:

• Recent experiences in introducing legal and regulatory framework for Islamic financial services;
• Shari`ah and legal issues in Islamic structured products;
• Insolvency and asset recovery framework: gaps and challenges;
• Interlink/interface between civil law systems and Shari`ah rules and principles and effective dispute resolution mechanism; and
• Challenges in managing legal risks in Islamic financial services: case studies.

The keynote address of the seminar will be delivered by Sir William Blair, High Court Judge of the Queen's Bench Division while the opening address will be by Professor Rifaat Ahmed Abdel Karim, Secretary-General of the IFSB. Joining them are 17 chairpersons and speakers from among the leading industry experts. The confirmed personalities are:

1. Y.Bhg. Tun Abdul Hamid Haji Mohamad, Member, National Shariah Advisory Council, Bank Negara Malaysia and former Chief Justice of the Federal Court, Malaysia

2. Gopala Krishnan Sundaram, Assistant-Governor, Bank Negara Malaysia

3. Thomas C. Baxter, General Counsel and Executive Vice President, Federal Reserve Bank of New York

4. Dato’ Dr Nik Ramlah Nik Mahmood, Managing Director, Securities Commission, Malaysia

5. Dr. Mohamed Akram Laldin, Executive Director, International Shariah Research Academy

6. Stefan Gannon, General Counsel, Hong Kong Monetary Authority

7. Ashraf Mohammed, Principal Counsel, Asian Development Bank

8. Roberta Calarese, Legislative Counsel and Director in Policy and Legal Services Division, Dubai Financial Services Authority, UAE

9. Mansoor Shakil, Director - Asset Management Group, Al Rayan Investment L.L.C., Qatar

10. Dr. Mahmood Ahmad Ghazi, Professor of Shariah, Qatar Faculty of Islamic Studies, Qatar

11. Muddassir Siddiqui, Partner, Head Islamic Finance – Middle East, Denton Wilde Sapte, UAE

12. Hanim Hamzah, Resident Partner, Roosdiono & Partners, Indonesia

13. Michael J.T. McMillen, Partner, Fullbright & Jaworski LLP, New York, USA

14. Yeo Wico, Partner, Allen & Gledhill, Singapore

15. Hamid Yunis, Partner, Taylor Wessing, UK

16. Dr. Charles Proctor, Partner, Bird & Bird, UK

17. Me Nada Abdelsater-Abusamra, Partner, Raphael & Associes Law Firm, Lebanon

Link: http://www.cpifinancial.net/v2/News.aspx?v=1&aid=3081&sec=Islamic%20Finance

INTERVIEW-Top scholar sanctions Islamic tawarruq structure

* Scholar says tawarruq structure valid if conditions met

* Structure must comply with AAOIFI rules

* Structure should be part of a series of transactions

* Debate over validity has split Islamic finance sector

KUALA LUMPUR, Aug 11 - Tawarruq must meet the standards of industry body AAOIFI and cannot be a standalone funding tool, a top scholar said, outlining conditions for the use of a structure that has split the sharia banking sector.

Tawarruq is a bedrock of the $1 trillion Islamic finance industry and is widely used as a financing and liquidity management instrument.

But growing disputes about the permissibility of some forms of tawarruq under the sharia have thrownmarkets into disarray, with practitioners warning of catastrophic consequences if the structure were to be revoked.

Seeking to calm investor worries, influential sharia scholar Sheikh Yusuf Talal DeLorenzo said tawarruq is allowed when it is applied properly, adding arguments against it are removed from commercial realities.

"Tawarruq from my perspective has been carefully researched and explained by AAOIFI," the 60-year old American scholar told Reuters in an interview, referring to the Accounting and Auditing Organisation for Islamic Financial Institutions, which sets guidelines used by much of the industry.

"AAOIFI has developed a standard through its own methodology which is very thorough and that standard, as far as I'm concerned, still stands. There's a great deal of misunderstanding in the marketplace that's a disconnect between scholars who are actively involved in the field of finance and scholars who are not."

Other prominent sharia scholars such as Sheikh Nizam Yaquby, Mohd Daud Bakar and Mohammad Akram Laldin have also recently defended the use of tawarruq.

The International Council of Fiqh Academy, a leading industry body driven by the Organisation of Islamic Conferences, had earlier ruled organised and reverse tawarruq to be "a deception" that seeks to disguise the use of usury.

Confusion over the structure's status has been compounded by by the fact that compliance with standards of Islamic finance industry bodies such as AAOIFI and IFSB is voluntary, and there is no ultimate arbiter incase of disputes.

In its basic form, tawarruq is an asset sale to a purchaser with deferred payment terms. The purchaser then sells the asset to a third party to get funds. Organised tawarruq is similar although the transactions are executed through banks.

Reverse tawarruq is akin to organised tawarruq, although the buyer would be a financial institution seeking liquidity.

"If tawarruq were suddenly withdrawn, this would have a dramatic effect because many Islamic financiers routinely use this instrument as a means of liquidity management and to provide their customers with working capital facilities," law firm Denton Wilde Sapte had said in a note in May.

DeLorenzo, however, said tawarruq should not be used as a financing instrument on its own.

"Modern tawarruq is not intended as a transaction in and of itself. Rather it is intended as a means to an end," said DeLorenzo, a scholar of Islamic transactional law, who sits on about 15 sharia boards including AAOIFI.

"What people don't understand unfortunately is that they think tawarruq is just a way of disguising a loan. It's really a link in a transactional chain."

Link: http://news.alibaba.com/article/detail/markets/100152911-1-interview-top-scholar-sanctions-islamic-tawarruq.html