Choosing Islamic finance

Governments in Muslim nations in the Middle East and Asia are increasingly turning to Islamic finance to raise funds, giving a necessary but perhaps not sufficient shot in the arm for the $1 trillion industry.

Deeper liquidity is essential to winning investors back to the Islamic finance market after the credit crisis sapped demand and issuance and triggered the first ever major defaults of Islamic bonds, or sukuk, this year.

While government backing would allow international investors to gain exposure in the fast-growing region via safer debt, it would highlight the risk of owning non-sovereign sukuk from firms with weaker balance sheets in an industry where regulation is less advanced than in the conventional bond marketplace. Sukuk are structured as profit-sharing or rental agreements and returns are derived from underlying assets because Islamic laws prohibits paying or earning interest.
Government involvement is just what the industry needs to avoid cutting off inflows from international investors after some defaults and a series of debt restructurings.

Dubai’s state-owned developer Nakheel is currently undergoing a restructuring of its $3.5bn sukuk, due to mature in December. Prices had taken a hit earlier this month on speculation its owner and government conglomerate Dubai World might offer equity to its Nakheel bondholders.

“I think without greater government help it’s doomed anyway. Risk is just too high. But there is a lot more risk appetite from investors and definitely the government implication is a huge help,” said Nathalia Barazal, fund manager at Lombard Odier Darier Hentsch & Cie in Geneva.

“I wouldn’t buy it unless it’s a big company, good balance sheet,” she said, adding that more government issuance might drive people away from debt from firms with weak fundamentals.

Barazal, who sold Nakheel’s December sukuk less than a fortnight ago, said she would consider an exposure if it were from a safer issuer and the type of sukuk which was attractive, for example, exchangeable convertible bonds.

“I would definitely get involved in the region, I don’t want to start with real estate... probably with exchangeable convertible bonds,” she said.

So far this year, four out of five sukuk deals have been issued by sovereign or quasi-sovereign entities.

Jordan is considering issuing its first-ever sukuk this year to help fund its spiralling budget deficit. Indonesia’s finance ministry is raising around $160m from sukuk next week, while the Dubai government kicked off a roadshow in London last week to test investor appetite for bonds including sukuk.

Malaysia’s sovereign wealth fund Khazanah Nasional plans to sell US dollar exchangeable sukuk next year.

It has raised some $550m by issuing sukuk that were exchangeable into the shares of Hong Kong-listed Parkson Retail Group.
Despite its earlier billing as a safer alternative to traditional banking due to its requirement for assets to underpin deals, Islamic bondholders have found they may not have any more legal safeguards than conventional counterparts in case of default.

The lack of a single regulatory framework and consensus on investment ratings as well as the debate over the definition of sukuk have prevented more investors from participating.

Scholars say the majority of sukuk adhere to Islamic principles only in form but not in substance as ownership rights are typically not transferred to sukuk investors.

Sheikh Muhammad Taqi Usmani, one of the prominent scholars who decides whether investment products adhere to Sharia law, ruled in late 2007 that most sukuk did not comply with Islamic law as their repurchasing agreements at maturity violated the principle of sharing risks and returns.

“We cannot piggyback on the old system, you have to be courageous enough in quantifying the risk of Islamic assets,” said leading scholar Mohd Daud Bakar.

Still, the Islamic finance industry is expected to grow 15-20 percent in the next three years. Standard & Poor’s estimates new sukuk issuance topped $9.3bn in the first seven months of 2009 compared with $11.1bn during the same period in 2008. It says the issuance fell 56 percent to $14.9bn in 2008.

Governments, which themselves also want to promote the Islamic finance industry, are increasingly under pressure to raise debt to fund budget deficits or pay for infrastructure. For example, Saudi Arabia, the Gulf’s biggest economy, is spending around $400bn in the next five years mainly in infrastructure.

“It helps keep the market alive. International investors are still interested in sukuk and they still like the risk from the region. In diversifying the portfolio they need emerging markets,” said Hussein Hassan, head of Islamic Finance at Deutsche Bank. “However, the industry will not grow just on the back of sovereign issues. It’s not sustainable.”

Link: http://www.arabianbusiness.com/571928-govts-must-step-up-to-deepen-islamic-finance-markets?start=1

Barwa Bank set to start operations

Barwa Bank, a major new financial services provider in Qatar yesterday announced the soft launch of its operations in Doha.

Established in Doha with an authorised capital of QR1bn, Barwa Bank is licensed and regulated by the Qatar Central Bank (QCB) and is a fully owned subsidiary of Barwa Real Estate Company.

Built on the firm principles of Shariah finance, the bank will provide an inclusive and friendly retail banking environment. It is also committed to being a first class local employer, with a comprehensive staff training programme to ensure the delivery of excellence in customer service, the bank’s officials said.

The main branch, located on Doha’s Grand Hamad Street, will have both men and women’s branches and will offer current, savings and fixed deposit accounts with a view to rolling out a range of innovative banking products and services in the coming months.

Customers can currently access bank services via ATM, mobile phone banking, e-banking and 24 hour customer call centre.

Barwa Bank also yesterday announced that it has been appointed as Mandated Lead Arranger by Qatari Diar Real Estate Investment Company (Qatari Diar), the leading Qatari real estate developer and investment firm, to provide QR500m as part of a QR4bn Shariah-compliant syndicated facility to help finance European investments.

Mohammed Abdul Aziz Al Saad, Acting CEO of Barwa Bank said of the soft launch, “Today marks the beginning of a new era in banking in Qatar. We will offer the public a totally fresh and exciting approach to modern banking practices. The Barwa Bank brand will stand for quality of service, creativity and innovation.”

“Barwa Bank will not only be a bank for the post credit-crunch era but also one that is perfectly aligned with Qatar’s future ambitions and aspirations,” he said.

“We aim to lead the way in innovative Shari’ah banking for the current and future generations of Qatari society. We will remain totally committed to setting the newest standards in customer service.”

He added that the launch was a major step. “Having carefully consulted on the banking needs of today’s society, we have designed a fresh and creative approach that will break the mould, creating a wholly new, easier and innovative customer experience. In the next few months and into 2010 we will introduce these new products and services which will be totally unique and set us apart.”

Pointing to the Murabaha syndicate participation with Qatari Diar which follows the bank’s recent Murabaha financing agreement with Masraf Al Rayan, Al Saad said: “We expect to help originate and participate in Qatar’s most prominent investments both locally and internationally and look forward to making further high profile announcements in the coming months.”

Link: http://www.thepeninsulaqatar.com/Display_news.asp?section=Business_News&subsection=Local+Business&month=October2009&file=Business_News2009102991815.xml

Pakistan's experience in Islamic banking

Growing outreach and promising future

ISLAMIC banking industry in Pakistan remained least affected by the global financial crisis. It experienced some problems only after this crisis had snowballed into recession in advanced economies affecting growth prospects of Pakistan and other developing countries.

More importantly the industry has almost overcome these problems and now most of its indicators are showing a "reversion towards the usual high growth trend," according to the latest State Bank report.



The share of the assets of Islamic banking in overall banking industry grew from 3.4 per cent in June 2007 to 5.1 per cent in June 2009: in terms of value these assets increased 97 per cent-from Rs159 billion to Rs313 billion.

Total deposits jumped 120 per cent-from Rs108 billion or 3.1 per cent of the banking industry to Rs238 billion or 5.2 per cent. And total financing and investment also rose from Rs90 billion to Rs 195 billion showing a handsome growth of about 117 per cent.

In last two years, the share of financing and investment of Islamic banks in overall banking industry also went up from 2.6 percent to 4.2 per cent.



Three things have apparently helped in this phenomenal growth in Islamic banking. "First, it had a narrow base in June 2007," says head of Islamic banking at a large local bank. "Second, Islamic banking has a mass appeal in Pakistan both on religious grounds as well as being a relatively new concept. And third, it has some inbuilt characteristics that offer a better cushion against man-made crises."

That the unique features of Islamic financial institutions do protect them from the elements of man-made crises is all but evident: Total assets of top 100 Islamic banks grew more than 66 per cent to US$580 billion in 2008 from US$350 billion in 2007. In contrast to this the asset of top 100 commercial banks in Asia (the region that was not in the centre of the financial crisis) posted only 13.4 per cent growth. And according to reports, global Islamic banking is set to grow up to 30 per cent in 2009 as well.

What has boosted the reputation of Islamic banks as the institutions that can shield their clients against crises is their conservative approach to business, a balanced and ordered appetite for growth, a more equitable risk sharing and focus on the basics of banking as opposed to innovation.

"All these factors, which used to be perceived as weaknesses before the credit crisis began, are now being used as shields against the potential damages of imported stress," says a Moody's report adding that in the short term, in times of crisis, "clients may find it more comfortable doing business with an Islamic bank."



In Pakistan clients have really begun to find it comfortable doing business with Islamic banks-a fact that is evident from the growing numbers of the Islamic banking branches across the country. In June 2007 there were 162 bank branches providing Islamic banking. These included the branches of six fully-fledged Islamic banks as well as those of the conventional banks. In June 2009 the number of Islamic banks shot up to 18 and the number of total bank branches providing Islamic banking more than tripled to 528.



One of the reasons for the popularity of the Islamic banking in Pakistan is its growing outreach. Islamic banking facilities are available in almost all parts of the country and they have a strong presence in Karachi-the hub of commercial banking. Besides, Islamic banking now offers a wide range of products for both depositors and borrowers.



The availability of suitable modes of financing has attracted corporates as well as consumers towards Islamic banks. These banks have also been able to attract deposits of various types and from different classes of bank clients.



Lately, Islamic banks expanded their corporate clientele also because conventional banks became a bit averse to lending to the private sector after their NPLs went up. A conservative approach to banking has also kept consumer loans portfolio of Islamic banks more stable than that of the conventional banks. And Islamic banks have a better mix of fixed and saving accounts than the conventional banks. This is primarily because it is possible for Islamic banks to design fixed deposits schemes without the element of Riba. Despite all these plus points of Islamic banking it did not entirely escape the aftereffects of the global financial crisis and recession. The pre-tax profit of the Islamic banking industry declined about 18 percent in the last fiscal year. But here again the rate of decline was lower than in case of conventional banks that saw their earnings fall by 31 per cent during this period.

Officials of Islamic banks, however, point out that profitability of Islamic banking has picked up from April-June 2009 quarter wherein its pre-tax profit showed an increase of more than 150 percent.

They hope that the trend would continue as the economy is showing signs of a higher growth after posting a growth of just two percent in the last fiscal year.

They say that in case of Islamic banks it is the domestic economic slowdown that directly affects them rather than the global financial crisis and recession. Islamic bankers say that Islamic banking would grow faster in future once they are able to penetrate into so-far-unexploited area of agricultural financing and increase their portfolio of SMEs financing. Till June 2009 Islamic banking had very negligible exposure to agricultural financing and the share of SMEs in overall financing by this industry was a mere 8.6 per cent.



Islamic bankers admit that despite a rapid expansion of Islamic banking branches rural areas are still least-served. And even in those rural areas where Islamic banking outlets operate they focus on consumer financing rather than on agriculture loaning.

The State Bank has already issued guidelines for agricultural financing by Islamic banking outlets and Islamic banks have made a modest Rs100 agricultural financing, for the first time, in April-June 2009. Islamic banks are drawing strategies to tap this area of financing keeping in view the thorniest issue of recovery of loans.

Mohiuddin Aazim is a senior Pakistani journalist with two decades of experience in print and electronic journalism. He worked as an Executive Producer at CNBC Pakistan. He writes for Pakistan's Dawn; Outlook Afghanistan, in Kabul, and The Financial Express, in Dhaka. He contributed this article to The Brunei Times.

Link: http://www.bt.com.bn/en/business-asia/2009/10/29/pakistans-experience-islamic-banking

Faseun And Islamic Banking

Dr. Frederick Faseun needs little or no introduction in Nigeria. A medical doctor and self-styled President/Founder of the Odu'a Peoples' Congress (OPC), the ethnic militia that claims to be the defender of the Yoruba, he is a veteran of the organization's intermittent civil wars and of its battles against the regime of late General Sani Abacha and any one or group it regarded as anti-Yoruba.

Lately the man has been waging a personal war against Malam Sanusi Lamido Sanusi, erstwhile chief executive officer of First Bank who President Umaru Yar'adua recently appointed to replace Professor Chukwuma Charles Soludo - he of the banking consolidation fame and now controversial candidate of the PDP in the forthcoming governorship election in Anambra State - as governor of the Central Bank of Nigeria.

Sanusi, a Hausa/Fulani aristocrat like the president, says Faseun in a series of full page advertisements in newspapers entitled "Questions after Sanusi raided 5 banks," is unfit to be CBN governor for at least two reasons; he is an ethnic bigot and a Muslim fanatic. In Part 3 of the series in The Guardian of October 9 sub-titled "The Man Sanusi - Prey to Predator", Faseun quoted extensively from the man's numerous interventions in the past in national debates to prove his point.

Of the thirteen questions he posed in the advert about the character and competence of Sanusi to manage our apex bank, I found the sixth indicative of how shallow an otherwise educated person can get when he allows blind prejudice to get the better of his rational thinking.

"We have seen how his views are coloured by ethnic bigotry, what about his devotion to Arabic and Sharia Studies?" Faseun asked. "Of course," he said in self-reply, "all such derogatory comments against other nationalities within the Nigeria project surely put a question mark on Lamido Sanusi's qualification for the office of the Governor of the Central Bank of Nigeria. As soon as he seized the key to the CBN, he launched a personal campaign for Islamic banking, a very alien and sensitive affair in a country still mired in the Organization of Islamic Countries (OIC) and Shari'a controversies. But the question is whether Sanusi's first acts are not measures aimed at giving conventional banking a bad name in order to promote his pet ideas of Islamic banking."

Sanusi is, of course, very much capable of defending himself as he has shown in his many encounters with journalists and in his testimony before the Senate as governor-designate. So this piece is not out to defend him.

Even then I must say I found it strange that anyone would accuse the man of "seizing" the key to the CBN presumably to pursue an agenda of Islamic banking. As Faseun knows all too well, far from seizing the key to the CBN, the man got the job in spite of a most vicious and well-funded campaign in open and in secret to stop him from succeeding Soludo. He also got it after giving a good account of himself before the Senate on how he intended to sanitize the banking industry that was galloping towards a catastrophic implosion under Soludo's watch, in spite, some would even say indeed because, of his heroic effort at consolidation.

Similarly it is also strange that Faseun would argue that the measures that Sanusi has taken so far to sanitize the industry amounted to merely giving conventional banking a bad name in order to hang it. Only someone living on another planet would not have known that if anyone gave conventional banking a bad name it was the conventional bankers themselves, what with their opaque governance culture and the obscene and indefensible executive pay they gave themselves.

It is unfortunate that a man of Faseun's education would allow himself to be so driven by personal animosity that he finds it impossible to acknowledge that even the devil has his due, let alone someone whose villainy is debatable. And if the texts I received from the readers of my column in The Nation of August 26 on Sanusi's reform of Soldo's reform are anything to go by, Faseun must be among a tiny minority who believe Sanusi is a villain; of the 95 texts I received on the article, less than a dozen said he was pursuing any sectional or sectarian agenda.

Even more unfortunate than Faseun's apparent personal animosity towards Sanusi is his obvious disdain for Islam.

Faseun claims Islamic banking is "a very alien and sensitive affair" in this country. Sensitive? Perhaps. But alien?

If Islamic banking is sensitive in this country it is not because its application would do any damage to our economy. It is simply because people like Faseun who do not like Islam and whose views dominate our media suffer from this knee-jerk beggar-thy-neighbour attitude of objecting to anything the other person or group holds dear even when it could be of universal benefit.

I am sure Faseun and those like him who are instinctively opposed to anything Islam know all too well that Islamic banking has since established a global presence in Europe, Asia, America, Africa and, of course, the Middle-East. The last region may be overwhelmingly Muslim, but the rest are not. By some estimates Islamic banking in all these regions is now worth over $750 billion in assets. And the on-going global financial crisis has only led to even greater interest in it among financial experts and laymen alike the world over. This is for the simple reason that Islamic banking - and not surprisingly, the Holy Bible itself - forbids speculation which is the root of the crisis in Faseun's "conventional" banking.

Here I would like to refer Faseun and others like him who seem to think nothing good can come out of Islam to a survey entitled "Islam and the West" by The Economist - the West's pre-eminent newsmagazine whose editors are by no means Islamic Jihadists - dated August 6, 1994.

In a section of the 18-page survey sub-titled "The cash-flow of God", the author concluded thus: "The economics of Islam, in short, is not as special as its enthusiasts claim; but neither does it deserve the usually rather ignorant sneer it gets from many non-Muslims. As one bright Malaysian banker says, 'If the scholars of the Koran had economic degrees, they would understand what we are trying to do!' And if Western economists knew more about the Koran, so would they."

Even without any understanding of the workings of Islamic banking anyone with half an eye can see that there is nothing inherently bad about it. And as for Faseun's claim that it is alien to Nigerians, nothing could be more fallacious and untenable.

Islamic banking alien in a country at least half of whose population is Muslim? Haba! How blinded by our prejudices can we get!

Link: http://allafrica.com/stories/200910280453.html

Paris group given special session on Islamic finance

The Qatar Faculty of Islamic Studies (QFIS), a member of Qatar Foundation hosted a group of Executive MBA participants from HEC Paris.

In their study trip to Doha, the HEC Paris EMBA students were engaged in a study that aims at understanding the region’s present and future role in the global economy from the perspective of its own people. They aimed to identify the competitive advantages of the region’s businesses, explore alternative opportunities in the Gulf and be exposed to its cultural and social drives.

The HEC Paris group attended a special session on Islamic finance organised by the Qatar Faculty of Islamic Studies, led by Dean Hatem Al Karwanshawy.

“Islamic Finance system can nullify the chance for another recession. Many of the foundation of Islamic finance basically deals with real economy, which means gambling products or businesses, speculations about risk is prohibited. If we eliminate these factors in an economic system, no financial crash can occur,” he said.

Joshua Kobb, the group leader, said, “HEC Paris is pleased and honoured to be hosted by the Qatar Faculty of Islamic Studies. HEC has a long history of cooperation with peer institutions around the world, and we hope that in future we will have further opportunities to develop our relationship with QFIS.”

While in Doha, they visited some of the country’s leading organisations, including Qtel, Al Jazeera, Ras Lafan, QSTP and Total, who has been a long-time partner of HEC Paris, where the team also led a special session on the economics of the energy industry.

As leading academic institutions, QFIS and HEC Paris have many similarities.

The Qatar Faculty of Islamic Studies (QFIS) offers a diversity of programmes that include two General Diplomas in Islamic Studies and Finance, as well as four Masters’ Degree programmes in the fields of Public Policy in Islam, Islamic Finance, and Islamic Studies with two specialisations: one in Contemporary Fiqh and the other in Religion and Contemporary Thought. The QFIS has plans to add two additional Masters’ programmes that will come in the near future, one in Contemporary Muslim Societies and the other in Islamic Urban Planning and Architecture.

QFIS was established to achieve intellectual plurality that emphasises the richness and diversity of the Islamic heritage. QFIS organises several seminars on finance and other aspects of Islamic studies in an attempt to contribute to the development of Muslim societies and communities and to efficiently meet the challenges and demands of the era.

On the other hand HEC Paris that was founded in 1881 specialises in management education and research. The center offers a complete and unique range of academic programs for business leaders: the Masters Degrees (MSc programmes and Specialised Masters), the MBA programme (full-time and part-time), the Executive MBA (Paris, Beijing, Shanghai and St Petersburg), the TRIUM Global Executive MBA (In alliance with New York University Stern School of Business and the London School of Economics) and the PhD. HEC Paris is ranked as Europe’s top Business School by the Financial Times.

Link: http://www.thepeninsulaqatar.com/Display_news.asp?section=Business_News&subsection=Local+Business&month=October2009&file=Business_News200910288216.xml

Bond and Beyond

Dubai's government is returning to the open bond market, unveiling plans to raise at least $6.5bn through a mix of conventional and sharia-compliant instruments, looking to bank on renewed investor interest and growing confidence in the emirate.

On October 26, the Zawya Dow Jones news agency reported that the Dubai government had released a preliminary prospectus for a Euro Medium-Term Note (EMTN) programme to raise $4bn, with the funds to be used for infrastructure, financing and general budgetary purposes. Analysts predict that the EMTN coupon rates could be a healthy 6% to 7%, a reflection of the fact that a rating has yet to be given to Dubai's debt.

On top of this conventional bond issue, the Department of Finance (DoF) is also looking at raising a further $2.5bn in Islamic bonds or sukuk, seeking to tap into the sharia-compliant segment of the market as it works to spread its investment net as wide as possible.

Link: http://www.oxfordbusinessgroup.com/weekly01.asp?id=4660

Dubai officials have made it clear that the new issuances are not connected to the $10bn borrowed through the sale of bonds to the UAE's Central Bank in February to back state firms, or possible plans to raise a further $10bn through the same avenue.

Even before news of the two-bond issues broke, the DoF had already taken its campaign to market the emirate's debt on the road, staging a series of events to generate interest in Dubai's economy.

Having already taken its road show to Hong Kong, officials transited through Dubai for a presentation on October 25 before flying out to Europe, with both London and Frankfurt on the itinerary.

If the two issueances go ahead, they will be the first new bonds sold by the government in 18 months, its last entry into the open market being a $1.7bn bond with a five-year term sold in April last year, before the emirate's real estate sector started to retreat.

While investors may have previously been somewhat wary of buying Dubai bonds after it was announced the state and its various business entities had a combined debt burden in excess of $80bn, fears of possible defaults have been to a degree allayed.

Dubai's renewed activity in the bond market, and increased investor interest, come as confidence and growth start to reappear both in the emirate and across the region. On October 11, the IMF issued its economic outlook for the Gulf states, predicting that regional economies will expand by a solid 5.2% next year on the back of climbing oil prices, revival of global demand and continued government spending.

At the same time, investor confidence in the UAE is on the rise, climbing for the third month in a row according to the results of a survey conducted by Dubai-based bank Shuaa Capital in late October.

Though confidence and prospects may be on the rise, Dubai still has some pressing debt issues to deal with, both in the short and longer term. The government-owned property developer Nakheel has a $3.52bn sukuk maturing in mid December, while the Dubai Civil Aviation Authority has a $1bn bond falling due in early November.

Further down the track, analysts estimate that Dubai has to either refinance or pay-off $10.1bn worth of debt in 2010, with a further $12.1bn the following year and around $15bn in 2012.

Meanwhile, confidence in local capital markets was recently bolstered by Nakheel's repayment of a $1.1bn bank loan in mid-October, ahead of schedule, indicating that the developer would be able to meet its December obligations.

Chavan Bhogaita, the head of credit research at the National Bank of Abu Dhabi, said Nakheel's early repayment was an encouraging sign for bond holders.

"There have been ongoing concerns about Nakheel's ability to meet its financial obligations, and now we find out that Nakheel has paid back what is not an insignificant amount of money," Bhogaita said in an interview with local press on October 20.

While sentiment might be moving in the right direction, it remains to be seen if hard cash will follow. However, indications are that Dubai is on the road to recovery and an increasing number of investors are interested in following the trail.

Portal launches online Islamic finance training

IslamicAdvisory.com, the world's only Islamic finance training portal, has launched the first online accredited Islamic finance training certificate, with exams starting this month for the CIFE or Certified Islamic Finance Executive.

Recently nominated 'Best Islamic Finance Training Institution' by Islamic Business and Finance Awards, IslamicAdvisory.com rigorously tests and approves its training and certification with a team of leading scholars and bankers.

'This is a timely and much needed development in the industry. Qualified human capital is the most critical need for the industry to maintain its growth trajectory across geographies. Such solutions will go a long way in providing systematic tools for practitioners,' stated Afaq Khan, chief at Standard Chartered's Saadiq.

'For the first time ever, Islamic finance training is free of expensive, faraway conferences, CDs-by-mail, and outdated workbooks. We deliver standardised, streamable content 24 hours a day to any Internet connection in the world,' added IslamicAdvisory's MD Atif Khan.
Link: http://www.tradearabia.com/news/newsdetails.asp?Sn=BANK&artid=169485

Indian Islamic finance school signs agreement with Indonesian varsity

New Delhi: The India-based International Institute of Islamic Business and Finance (IIIBF) has entered into a partnership with Trisakti University, Indonesia that includes mutual recognition of each other's education programs, development of new courses in emerging areas, such as, Islamic microfinance and Islamic non-profits and charities.

According to Dr Mohammed Obaidullah, a Senior Economist with the Jeddah-based Islamic Development Bank and the founder of IIIBF, "The partnership should provide a tremendous boost to research and human resource development for the growing number of Islamic microfinance and poverty alleviation projects across the globe. IIIBF would now offer MA and PhD degrees in Islamic Economics in India, to be awarded by Trisakti. The degree programs would naturally focus on bringing into the class room the best practices of Islamic microfinance from the innumerable experiments being undertaken across Indonesia and encourage their replication in India.

An IIIBF statement says that IIIBF, sponsored by IBF Net (Islamic Business and Finance Network) has been offering professional certification programs in the field of Islamic banking, insurance and investments since 1999. Similarly, Trisakti, the largest private university in Indonesia has been a pioneer in Islamic economics and finance education in Indonesia. "The mutual recognition of certification programs should enhance the confidence of education seekers faced with the problem of choosing the right diploma or the right degree in Islamic finance to further their career opportunities", according to Dr Ausaf Ahmad, a renowned scholar of Islamic economics and President, IIIBF. "The partnership would also provide a fillip to the growth of the nascent Islamic finance sector in India by preparing professionals to take up managerial positions", he said.

"IIIBF and Trisakti have ambitious plans for the future that includes launching a joint website for Islamic microfinance and development (www.imad.in) and the first ever research journal in Islamic microfinance," says the release.

Link: http://twocircles.net/2009oct26/indian_islamic_finance_school_signs_agreement_indonesian_varsity.html

China the next big market for Islamic finance: Prudential

CHINA is the next big Islamic finance market, as demand grows for ethical funds, but Asia's fastest-growing economy must first sort out tax issues, a unit of British insurer Prudential said yesterday.

A large Muslim population and growing wealth provide a ready retail Islamic banking market in China, a senior executive of Prudential's Kuala Lumpur-based fund management unit said.

The US$1 trillion (RM3.47 trillion) Islamic finance industry is targeting rapidly growing Asian economies such as China and India and new markets like Kazakhstan and Sri Lanka to offset slowing growth in its traditional base of Gulf states.

Islamic banks are touting wheat-based deposit products and metal-based funds as ethical investments to appeal to investors burnt by the recent conventional banking crisis.

"China is like Indonesia, a sleeping giant," said Zulkifli Ishak, syariah investment director with Prudential Fund Management Bhd which manages about US$4.03 billion (RM13.98 billion). Kuala Lumpur is Prudential's Islamic finance hub.

"If Islamic finance can tap Muslims, especially in Xinjiang, then there will be a huge potential for the Islamic space in China," he said in an interview.

China has a Muslim population of about 37 million.

Non-Muslims make up over half of the investors of most of Prudential's Islamic retail funds in Malaysia, Zulkifli said. - Reuters

Link: http://www.btimes.com.my/Current_News/BTIMES/articles/3ischin/Article/index_html

Five Indonesian Banks To Set Up Islamic Units

Removal of double taxation is expected to encourage more banks to enter into Islamic banking in the nation

In order to give an impetus to the Indonesian sharia market, five banks including Bank Central Asia (BCA) are expected to launch standalone sharia units next year – reported Reuters. Industry officials are of the opinion that the removal of double taxation, which made transactions expensive, would encourage more banks to enter into Islamic banking susidiaries.

Adiwarman Karim, chief of Karim Business Consulting, said: "I expect to see more banks spinning off their sharia units as the new VAT law which scraps double taxation from sharia transactions will take effect next year."

Other banks planning to set up sharia banking units in Indonesia include Bank Panin, Bank Victoria, Bank Negara Indonesia and unlisted Bank Jabar Banten.

Reportedly, conventional banks usually establish Islamic subsidiaries by first setting up Islamic banking departments and then converting them into separate Islamic banks. BCA may buy small conventional banks and convert them into Islamic subsidiaries.

Barno Sudarwanto, head of planning and development at the sharia unit of Bank Negara Indonesia, said: "We hope that it would be easier for us to expand business and seek strategic partners. We also hope to grow faster and attract investors from Middle East," reported the news agency.

Link: http://retailbanking.banking-business-review.com/news/five_indonesian_banks_to_set_up_islamic_units_091023/

Middle East, India and Islamic finance: Is the drought over?

Author: Farmida Bi

When the fast-growing sukuk market ground to a halt in 2008, the future looked grim. But as the Islamic capital markets turn, will a deluge of issues come with it? Farmida Bi reports

The sukuk market was substantially affected by the global economic downturn with sukuk issuances at the end of 2008 being less than half those at the end of 2007, according to a report issued by Standard & Poor's. The drought in sukuk issuances, which took hold in the fourth quarter of 2008 now appears to be ending. The rapid growth of the sukuk market from 2004-07 was brought to an abrupt halt at the end of 2008, and undermined the theory that the Islamic capital markets had decoupled from the conventional capital markets.

As at the end of 2007, global sukuk issuance equalled $46.65bn (£28.4m) thanks to high oil prices, easy access to financing and a sentiment in favour of Islamic products in much of the Muslim majority world. In September 2008, it was generally believed that the Islamic markets had matured and were not dependent on the price of oil. In addition, the real assets that underlay Islamic structures provided protection against the credit crunch.

The Islamic markets were therefore expected to weather the storm that followed the collapse of Lehman Brothers and to resume normal business at the beginning of 2009. By the end of November 2008, however, there was a profound change of mood caused by the fall in real estate prices, the drop in the oil price and the realisation that many Islamic institutions were heavily dependant for funding on conventional financial institutions which were experiencing a liquidity shortage that then impacted the Islamic financial institutions. There was no longer any talk of a decoupled sector.

There was hope, however, that the Islamic capital markets would be the first to recover, based on the belief that these markets are most active in the developing economies which were expected to recover more quickly than the mature markets. The oil rich investors who had supported the rise of the Islamic finance market still had access to funds, although these investors are now more cautious about how those funds are spent. The optimism may have been justified, since we are now beginning to see green shoots appearing.

New issues

The first positive sign was the inaugural $650m (£396m) sukuk issue by the Republic of Indonesia in April 2009, which is reported to have been seven-times oversubscribed and priced more tightly than its conventional bond issued two months earlier. Indonesia is not investment grade rated.

The success of Indonesia was followed at the end of June 2009 by a $750m (£457m) sukuk issued by the Central Bank of Bahrain, which is also reported to have been significantly oversubscribed and to have been increased from an initial size of $500m (£305m) in response to investor demand. This is the first international sukuk issue from the Gulf in 2009, an area which, prior to the credit crunch, had accounted for most of the large international sukuk issues.

It is expected that the Islamic Development Bank will also access the markets shortly with its own AAA-rated sukuk issue.

It is typical for sovereign and quasi-sovereign issuers to access the markets first, thus paving the way for well-rated corporate issuers before the market opens up generally. The fact that we are now seeing a pattern of sovereign issuers gives reason to hope that the many corporate issuers believed to be ready to issue sukuk when the market opens up cannot be far behind. There appears to be demand from both issuers and investors, and all that is lacking at the moment is confidence. All eyes will now turn to how the market will perform after the Eid holidays in October

Defaults

The economic crisis has also resulted in the first sukuk defaults, including by The Investment Dar, a Kuwaiti Islamic investment firm which owns 50% of Aston Martin and East Cameron Gas, a Texan oil and gas company. Some commentators believe that these defaults will impact the sukuk market generally, but they should be seen simply as the signs of a maturing market. An economic downturn is likely to see some sukuk fail just as some bonds will fail in the conventional markets. What is more important is how defaults or restructurings are managed so that investors feel they are participating in a transparent and fair process.

The East Cameron Gas sukuk has raised issues as to where sukukholders stand in the line of creditors and even whether they are creditors or owners. The company has stated before the courts in Louisiana that there was no transfer of production revenues (royalties) to the special purpose issuer of the sukuk and that the sukuk transaction constituted a loan secured on the royalties, which the sukukholders must share with other creditors. The judge in the first instance, case has dismissed this argument stating that the transfer of the revenues constituted a true sale to the special purpose issuer of the sukuk, but he has given East Cameron Gas leave to find further arguments to support its case. The decision in the first instance is therefore beneficial to sukuk investors, and the greater scrutiny that legislation or defaults will bring to sukuk instruments will help the market produce more robust structures in the future.

The East Cameron Gas litigation has highlighted one of the biggest structuring issues for sukuk: are they asset-based or asset-backed? Most sukuk in the market are asset-based, where the asset is placed in the structure to generate profits that are paid to investors but, in the event of a default, the investors have no recourse to the assets and must rely instead on their contractual rights under a purchase undertaking issued, typically by the originator of the transaction.

This is usually clearly described in the sukuk documentation, including the prospectus, but some investors, especially in distress situations, continue to believe they have rights of enforcement against the assets themselves because an interest in the sukuk grants them a share of the ownership of the asset pursuant to the definition of sukuk issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

That ownership interest, however, is usually transferred to an interest in the proceeds generated, if any, by the exercise of the purchase undertaking. There are very few asset-backed sukuk where the recourse of the sukukholders is purely to the assets.

A statement made by AAOIFI in February 2008 that fixed price purchase undertakings for certain types of sukuk (including musharaka and mudaraba based sukuk) were not permissible has sometimes been blamed for the low level of sukuk issuances in 2008, and there is a concern that the continuing impact of that statement could affect future issuances. It is probable, however, that the number of sukuk issuances in 2008 was affected more by the general state of the capital market than the impact of the AAOIFI statement. It is likely, however, that most of the sukuk issuances in the coming months will be ijara-based, since that structure was not affected by the AAOIFI statement, and this will require potential issuers to have assets equal to the value of the proposed sukuk available to be placed in the structure. The ijara structure also responds to the demand for simplicity by investors

Global interest

There is huge global interest in the sukuk market. The UK Government has expressed its willingness to issue a sovereign sukuk when it is able to obtain value for money. It has also passed a series of Finance Acts, culminating in the Finance Act 2009, to put Islamic finance on an equal footing with conventional finance and, in particular, to enable UK companies to issue real estate based sukuk without suffering adverse tax consequences. The French Finance Minister, Christine Lagarde, has announced that she would like to promote Paris as a global Islamic finance centre and has introduced both tax and trust legislation to enable the French system to accommodate Islamic structures.

The market is expecting a benchmark e1bn sukuk issue to be launched by a French financial institution in the near future. In January 2009, the Monetary Authority of Singapore announced the completion of its sukuk issuance facility to provide Sharia compliant regulatory assets to respond to investor demand in Asia. Many other countries, from Turkey to Japan, in both the Muslim majority and the non-Muslim majority worlds, are considering sukuk issues and reviewing their legislation to remove tax and regulatory barriers for their potential issuers.

The future

There is widespread expectation that many of the planned Saudi infrastructure projects will be funded through sukuk issues and it may be the Saudi market, rather than the UAE, that could lead a resurgence of the sukuk market next year. Market participants expect the first non-sovereign issues of sukuk to access the markets after the Ramadan and Eid holidays at the beginning of October.

A trickle of issues could quickly turn into a flood if the initial sukuk issues do well, strengthening both issuer and investor confidence. These new issues are likely to be more robustly structured than their predecessors with, in particular, the rights of sukukholders and the powers of the Delegate/Transaction Administrator more clearly delineated as the market learns from the issues highlighted by the sukuks which are in default or are being restructured today. There seems little doubt that sukuk are here to stay as an integral part of the global capital markets and are not simply a niche product for a faith community.

Farmida Bi is a partner at Norton Rose.

Link: http://www.legalweek.com/legal-week/analysis/1495499/middle-east-india-islamic-finance-is-drought

Shariah indices do well in all weather

Shariah indices performed well during the financial crisis compared to their conventional counterparts but this performance far from being limited to volatile times&is spread across the full market cycle.

Over the past 11 credit-challenged quarters, the MSCI World Islamic Index has maintained a good track-record with lower volatility than the MSCI World Index.

Moving into the third quarter of 2009, the assumption was that the alpha that Shariah indices had built up over the credit crisis would give way as markets and financials moved into recovery.

Jahangir Aka, Senior Executive Officer, SEI Investments (Middle East), said: "August and September saw equity markets across the world rally and perform strongly. During these months we saw Shariah indices underperform their conventional counterparts.

"However, single months of the conventional indices rallying have not dampened the strong absolute performance of Shariah indices.

"Considering the MSCI World Islamic Index versus the MSCI World Index back to January 2004, we see that as of end of September 2009, the Islamic index not only outperformed but also consistently performed well through a bull and bear market." Global recovery, analysts at SEI Investments believe that the market has turned a corner and evidence is mounting to suggest that the global economy is recovering.

Aka said: "As companies report better-than-expected results and credit conditions continue to improve, investors are returning to the market and positioning themselves for a global economic recovery.

"After the risk aversion of last year, we are now seeing a sharp recovery in stocks as the reduction in economic and financial stress leads to normalisation in investors' risk appetites. Equity investors have begun shifting to riskier asset classes and are favouring cheaper and lower quality stocks."

A low-quality rally does not favour Shariah-compliant securities, which tend to be of higher quality as they are restricted by Shariah guidelines on level of debt.

As a result, the MSCI Islamic indices underperformed on average their traditional MSCI counterparts in August 2009. August saw the MSCI World Islamic Index return 0.72 per cent and the MSCI World Index return 1.93 per cent for the month in US dollar terms.

In September, the MSCI World Islamic index edged ahead of the conventional as a higher level of volatility returned to the markets, with investors retracting slightly away from financial stocks amid fears that they had rallied too far too fast.

Additionally the poad expectations of recovery have bolstered the Shariah preferred sectors such as manufacturing and healthcare.

September saw the MSCI World Islamic Index return 6.03 per cent and the MSCI World Index return 5.82 per cent for the month in US dollar terms, said Aka.

"While the conventional index has edged forward and year-to-date has returned 19.95 per cent compared to the Shariah return of 16.82 per cent in US dollar terms as of end of September 2009 this switch in leadership has only come about in the past two quarters"

"Over a long-time period, January 1, 2004, to September 30, 2009, the MSCI World Islamic has outperformed the MSCI World."

By Shuchita Kapur

Link: http://www.muslims.net/news/newsfull.php?newid=287338

Is a career in Islamic finance right for you?

Mohammad Khan, director, Islamic finance at PricewaterhouseCoopers talks to Gavin Hinks about the opportunities available to those who want to move their careers into this fast-growing area.

Click the following link for video:
http://www.accountancyage.com/accountancyage/video/2251893/video-opportunities-islamic

Accountants Hail Measures To Boost Malaysia As Islamic Finance Hub

The Malaysian Institute of Accountants (MIA) has hailed measures to further develop Malaysia as an Islamic finance hub.

In a statement, MIA president, Abdul Rahim Abdul Hamid, said these measures would increase Malaysia's relevance in the eyes of the world while at the same time help create more value within the Malaysian economy.

Abdul Rahim said this in response to Budget 2010 unveiled by Prime Minister Datuk Seri Najib Razak at Dewan Rakyat here on Friday.

To promote Islamic financing, the government has proposed that the existing tax incentives be extended to 2015.

These include stamp duty exemption of 20 percent on Islamic financing instruments, tax exemption on banking profits derived from overseas operations which is also extended to profits of insurance and takaful companies as well as deduction on expenditure incurred in the establishment of Islamic stockbroking companies.

He was confident the accountants would respond positively to the measures announced in Budget 2010.

Abdul Rahim said in taking the Malaysian economy to the next stage, there certainly was a need to address matters at the most fundamental level and nurture a society that has the knowledge and the values to support a robust and sustainable high-income economy.

"The six key national key result areas were covered by the various measures introduced and that there has been significant emphasis in the area of education," he said.

He said the private sector played a critical role to market and commercialise products and services at a scale that was meaningful to the economy as they rose to the call to become the main engine of growth for the Malaysian economy.

"The Budget 2010 will spur the development of the new economic model and set the pace for the 10th Malaysia plan," he said.
Link: http://www.bernama.com/bernama/v5/newsbusiness.php?id=449258

FM to discuss Islamic Banking feasibility with RBI Governor

New Delhi: In a major development today in efforts to start Islamic Banking system in India, Union Finance Minister Pranab Mukherjee assured a delegation of Indian Centre for Islamic Finance that he would soon discuss the feasibility of interest-free Islamic banking system in India with Reserve Bank of India Governor.

To discuss about the feasibility of interest-free Islamic banking in India, a delegation headed by H Abdur Raqeeb, General Secretary, Indian Centre for Islamic Finance (ICIF), New Delhi, met Pranab Mukerjee today at his home in Kolkata, and submitted a memorandum to him.

After meeting with Mukherjee, Abdur Raqeeb told TCN: “The Finance Minister went through the 3-page memorandum and keenly read the recommendations of Raghuram Rajan committee on Financial Sector Reforms - CFSR recommendations on Interest-free banking which says: the Committee recommends that measures be taken to permit the delivery of interest-free finance on a larger scale, including through the banking system.

This is in consonance with the objectives of inclusion and growth through innovation. The Committee believes that it would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact.”

He noted down that Interest-free Banking is not only for Muslims but for all. In Malaysia 40% customers are Chinese, who are Non-Muslim and In Britain 20% of customers are Non-Muslims. He also noted Vatican has recommended Islamic finance to western Banks for its emphasis on ethical investments and being socially responsible investment and an alternative to the conventional banking.

Finance Minister was informed about the decision of the Government of Kerala which had launched an Islamic investment company with Rs.1000 crore after the feasibility report of Ernst & Young and has plan to turn it to a Global Islamic bank after prevailing upon RBI to amend its Banking regulations.

Among the five options provided in the memorandum (Options of GOI) issuing directions and administrative guidelines, creating a subsidiary and going for an Act of Parliament also attracted his attention and he took note of it.

“FM said that he is going to meet RBI governor next week and will discuss with him on this issue. He also said that he will be visiting Saudi Arabia and will be available in the second week of November and then a meeting can be arranged with the secretaries and officials of Banking Department of Finance Ministry to interact with ICIF,” Abdur Raqeeb said.

Link: http://www.ummid.com/news/October/25.10.2009/fm_on_islamic_banking.htm

Islamic finance standardisation needs to be tackled carefully

Standardisation, a long-standing issue in Islamic finance, should be addressed properly to avoid damage to consumer confidence in the retail sector and confusion in the corporate sector.

According to Islamic finance analysts, while Islamic business is growing by the day, its growth is hurdled by the lack of standardisation and homogeneity.

As there is no single interpretation of Islamic law, each financial institution has a board of religious scholars who determine which products are Islamic. So what one bank considers Shariah-compliant may be unacceptable to another.

Industry players, speaking to Emirates Business, said some standards already exist, but due to the nature of Islamic finance, establishing a body to set global standards is not only difficult to attain, but also almost impossible to achieve.

They said an Islamic accounting standard has already been established and is recognised by the world's multinational institutions such as World Bank and International Monetary Fund. It is called Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

Rather, what is needed today is a more consistent application of the standards promulgated by AAOIFI, said Omar Shaikh, Executive Board Member at Islamic Financial Council UK. "We do have a degree of consistency on Shariah standards. I think we need more consistency on the application of the AAOIFI standards," he said.

Dr Mohamad Akram Laldin, CEO and Executive Director of International Shariah Research Academy for Islamic Finance, said there is still a "long way to go" as far as implementation is concerned. "We have a Shariah parameter and that's the AAOIFI, but not many jurisdictions are subscribing to it. Only certain countries are subscribing, but in other jurisdictions. The case is they may adopt or they may not adopt."

Shaikh said standardisation has not been much of an issue in the corporate world, which has been endowed with more sophisticated investors. The problem is that conflicting views of scholars have at times affected retail investors and individuals.

"Quite frankly the Muslim world today is not governed by a structure – like the Vatican where you have a Pope structure – so you will always have conflicting views," he said.

"Some scholars say it is healthy as it gives you more options. But retail investors get confused when one scholar says this is Islamic and the other say this is not Islamic. That is a challenge that needs to be addressed because consumer confidence gets hit significantly with different opinions," he said.

Although Islamic instruments have in the past gained rapid popularity thanks to abundant sukuk issuance, corporate players are also facing the challenge of distinguishing the Islamic from the non-Islamic transaction.

"It has to be made clear what constitutes a sukuk and what a non-sukuk," said Jan Willem Plantagie, Managing Director of S&P Middle East, adding lack of clarity has caused confusion in the business community.

Regulators are also in need of more guidance and clarity.

Paul M Koster, Chief Executive of Dubai Financial Services Authority, told the Sixth IFSB Summit that standards setting, including regulatory, accounting and market standards, constitutes a "challenge" in the Islamic finance realm.

"As non-Islamic regulators around the world come to deal with Islamic finance, they will not simply tear up their rulebooks, based on the standards of Basel, or Iosco or Iasb; they will seek to adapt them, and they look for standards that are as well thought out as those they are used to. If they cannot find them, they will either ignore Islamic finance or press the conventional standards setters to address the issues," he said.

With regards to Shariah infrastructure, Koster said while Shariah advice is critical to the proper conduct of Islamic finance, there are also many areas in which there is not full consensus, and that Shariah governance imposes material costs.

"There is much discussion of how greater consensus can be achieved in important areas, and how the number of Shariah scholars can be increased," he said. "But there is also scope to discuss how the need can be reduced, in areas where transaction forms can be standardised, and also the infrastructure of what is now becoming a profession."

Abdulla Al Awar, CEO of Dubai International Financial Centre, said standardisation is needed in contracts to better facilitate transactions. "We have worked with many initiatives in terms of standardising, for example the commodity Mudaraba transaction – we have already achieved that. From a tools and contracts perspective, there is a call for standardisation," he said.

"But there is a misconception in the market. When they talk of standardisation they also talk of standardisation of scholars' opinions, which I don't think you will ever have."

He stressed variety is also good for business because it gives the institution the opportunity to target a specific group or niche.

"However, let's not forget that Islamic finance globally constitutes one per cent of the entire financial services industry. Ratio-wise it is still small and the priority is to increase that ratio," he said.

The so-called "differences" and "divergence" are in fact only minimal, but people tend to zero in on them, said Laldin.

"Sometimes we tend to focus too much on certain differences between Malaysia and the GCC, but that is not the case," he said. "There is more convergence in the views of scholars rather than divergence, but the problem is we always think about the differences.

"If you look at Malaysia, we are very much open in a sense that we do have products subscribing by the GCC standards. Some of the instruments in Malaysia are also using interpretation that comes from the Middle East. It is a question of business strategy or targets."

Laldin said the industry is now moving away from controversial interpretation of Shariah to lesser controversial interpretation.

"The most known controversial contract, which is contractable in Malaysia and Brunei, is the Bay' Inah, a buy-back arrangement," he said. "That is allowed in Malaysia, but not in the Middle East. Another is the selling of debt. Malaysia's commission of Shariah board and the Central Bank allow selling of debt in certain conditions, which is not acceptable in the GCC."

Under Islamic principles, the sale of debt is not allowed. A loan or debt to be repaid in cash is considered as "money" hence this system does not allow it to be sold for anything other than its par value. Secondly, the concept of risk management is different. In the current system, risk is transferred – split and sold. In the alternative system, risk is shared, almost like a collective insurance scheme.

This means that instead of a sub-prime loan risk being sold until it reaches a bank in the Middle East or Asia, it will be managed by the institutions that can assess and react to any changes in circumstances.

But is standardisation indeed needed?

"Not really," said Laldin. "The issue in Shariah is that the law is not given ready-made. It does not work like this is right and this is not. If you look at the Quran and Sunnah, you'll find broad principles, which are to be applied in different areas of Islamic commercial transaction."

"In the retail product, there are different concepts such as Wadiah and Mudaraba."

Asked whether it is possible to create a global body that will decide what is acceptable and what is not, Laldin said: "You just can't have it because it is not practical."


Bay' Inah contract

Bay' Inah, meaning sale with immediate repurchase, is a contract that involves the sale and buy-back transaction of an asset by a seller.

A seller will sell the asset to a buyer on a cash basis. The seller will immediately buy back the same asset on a deferred payment basis at a price that is higher than the cash price.

It can also be applied when a seller sells the asset to a buyer on a deferred basis. The seller will later buy back the same asset on a cash basis at a price that is lower than the deferred price.

Under Islamic principles, the sale of debt is not allowed. This is because money is not considered to be a commodity, which has a price of its own. Instead it is only a medium of exchange and a measure of value.

A loan or debt to be repaid in cash is considered as "money" hence this system does not allow it to be sold for anything other than its par value.
Link: http://www.business24-7.ae/Articles/2009/10/Pages/24102009/10252009_baacb75e1a5c4893a385ccf3eeaee5e0.aspx

Economics Versus Extremism

Eight years after 9/11, many in the West still think of Islam as a threat. Islamic extremists are seen as brainwashed robots, and the rest of Muslims as only a step behind in their blind acceptance of what their leaders preach. But this view misses a larger point: Islamic extremism is the direct result not of a problem with doctrine but of sclerotic, overregulated economies that stifle entrepreneurship; isolate people from the global economy; and deprive them of jobs, services, and hope for a brighter future. And there is a glimmer of good news: all this can change. Indeed, it already is. Recent years have seen the tentative emergence of a middle class throughout the Muslim world. And this capitalist trend, if encouraged by the West, offers the single best hope for combating Islamic extremism worldwide.

Consider the problem first. For too long, standards of living have been falling in many parts of the Muslim world. Populations are getting younger, putting more pressure on weak growth rates. By one estimate, the Arab world alone will have to create 100 million new jobs by 2020 to meet the surging demand, and the prospects don't look good. Unemployment is growing, and those lucky enough to have jobs must endure menial, demeaning work. Social mobility is too rare, and extremism thrives on anger and hopelessness. Radical Islam promises despondent youngsters the kind of meaning they can't find in their daily lives. As one Pakistani father of a would-be jihadi told me recently, "Let [my son] be martyred. There is nothing for him here. He has no future. At least if he dies in jihad he will bring honor to his family."

Underneath this gloom, however, one can glimpse sparks of change. Economic reform in Turkey, Dubai, and Malaysia, and even the modest loosening of government control in places such as Egypt, the West Bank, and Pakistan have begun allowing space—though rarely enough space—for commerce and global trade. Local entrepreneurs and businessmen have begun to take advantage of these changes.

The result is the birth of a small but growing middle class. In the 1960s, on average no more than a third of the populations of large Muslim countries such as Turkey, Iran, or Pakistan lived in cities, and by most estimates no more than 6 percent of the populations counted as middle class. Today, around two thirds of the populations of those countries live in urban areas, and on average, twice as many count as middle class. If you define the group as those who have a regular income and formal employment with a steady salary and benefits, and who can afford to devote a third of their income to discretionary spending, the middle class now amounts to around 15 percent of the population of Pakistan and twice that in Turkey. The numbers are even higher if you broaden the definition to include those who have adopted modern family values, especially the desire to have fewer children and to invest in their advancement. One estimate puts as many as 60 percent of Iranians in, or ready to enter, that group.

The signs of this emerging middle class and the capitalist surge it's helping to drive can be found everywhere in the Muslim world, even war-torn Beirut and fundamentalist Tehran. While the overall picture in these countries looks grim, an economic renaissance has tentatively begun. Between 2002 and 2008, real GDP in the Middle East and North Africa grew by 3.7 percent, up from 3 percent in the previous decade.

This matters for one key reason: middle-class capitalists represent the best hope for the advancement of their societies—and the most potent weapon for combating extremism. While it's true that the 9/11 attackers were middle class (as have been many other terrorists), what matters is whether or not the middle class as a whole supports extremism. The problem in the Muslim world until now has been that the tiny middle class has had few ties to free markets and has depended on state salaries and entitlements. The growth of local capitalism—and integration with the world economy—could help change that.

Already these forces are having an impact. The recent election controversy in Iran can be seen as a struggle by its rising middle class to protect its economic interests against President Mahmoud Ahmadinejad, a populist who has sought to increase state domination of the economy. Turkey, meanwhile, has already arrived at the future; it is a successful Muslim democracy fully integrated into the global economy.

The same pattern will replicate itself elsewhere. One and a half billion consumers have clout, and as they move up the economic ladder, they demand a blending of traditional and moderate Islam with the opportunities and material benefits of liberal capitalism. They want distinctly Islamic goods: not just halal food and headscarves, but Islamic housing, haute couture, banking, education, entertainment, media, and consumer goods.

This demand has already created waves in global markets, best demonstrated by the boom in Islamic finance (financial services that abide by Islamic rules forbidding the collection and payment of interest). The growth of such services is tying the Muslim world more closely to the global economy. Although it remains a niche market—there are currently some 300 Islamic banks and investment firms operating in more than 75 countries, overseeing banking services totaling close to $500 billion and an Islamic bond market worth $82 billion, a mere one 10th of 1 percent of the global bond market—some estimate that the assets of this sector will grow to as much as $4 trillion by 2015. This trend might look, at first glance, like an attempt to defy the global economy. But what it really represents is an attempt to join it on terms that make sense to Muslims, that combine capitalism with piety.

Some members of this new middle class are the children of the old bureaucracy, but a far larger percentage comes from the provinces and from lower social classes. These sons and daughters of the rural poor have made the jump to the middle class by accepting the requirements of modern economics. Many are devout, but their wealth and aspirations put them squarely at odds with extremism. After all, with wealth comes conspicuous consumption, liberal social and political values, and a vested interest in engaging the world. This does not mean there will be no more middle-class Muslim terrorists. But terrorism as a whole will stop resonating with a truly integrated Muslim middle class—a process similar to what occurred in Latin America in the 1990s. Those with a stake in commerce and trade will not subscribe to destructive ideas that endanger their futures. The alienation and rage many Muslims feel toward the West is a product of historical grievances but has been great-ly aggravated by their exclusion from the global economy. Were that to change, many Muslims would begin looking forward rather than backward. The rise of this "critical middle" is a trend every bit as powerful and important as extremism. And it holds the key to changing the hearts and minds of the Muslim world once and for all.

It's too soon to say whether Muslim businessmen in Lahore, Tehran, or Cairo will lead a full-fledged capitalist revolution akin to that spearheaded by Protestant burghers in Holland four centuries ago. But European history does suggest that only such actors and the robust breed of capitalism they embrace have a chance of truly modernizing the Muslim world. The modern capitalist West was invented by children of the Reformation, but it was not their puritanical faith that transformed things. It was, rather, their newfound belief in trade and commerce, which took hold in Europe's backwaters like Scotland and gave birth to Adam Smith and David Hume. Similarly today, the agents who will vanquish Muslim extremism will not be secular dictators, enlightened clerics, or liberal reformers but entrepreneurs and businessmen.

This truth has obvious implications for Western governments. Values gain currency when they serve the economic and social interests of the people, and they shape states' behavior when those who hold them gain power. If moderate, capitalist values have not yet been fully embraced in Muslim lands, that's not because of the fundamental nature of Islam, but because the commercial class leading the process is still too small. Helping that bourgeoisie to grow and dominate its societies is the best way of making sure the right values take root.

So what should Washington and its allies do? The first answer is trade. The West has committed much in blood and treasure to protecting its interests in the greater Middle East, yet it does very little real business with the region (apart from Turkey). If you don't count oil and weapons sales, U.S. trade with the whole Arab world amounts to barely a fraction of its trade with Latin America, Eastern Europe, or India. The United States now has free-trade deals with Jordan and Morocco, and Europe is considering an economic partnership with the Arab countries of the Mediterranean rim. These are positive steps, but there are still far too few Arab-made goods on Western shelves.

Trying to reform someone else's religion is a fool's game, and when it comes to nation building, the West's record is spotty. But if there is one thing America and its allies are good at, it is unleashing the transformative power of business. To encourage the middle-class Muslim revolution, therefore, the West should help free Muslim economies from the clutches of state control. Local governments must be pressured to submit to the rule of law, to accept constitutional checks and balances, to open their economies to direct foreign investment, trade, and the free flow of goods and resources, and to reduce regulation. Developed countries should push for fewer and smaller state-run enterprises, reduced public sectors, and fewer people on government payrolls. The West, in return, should open its markets to products from the Muslim world and ensure that the money it pours into the region goes to support the right kind of change.

This won't turn the tide in just a few years. The Muslim world suffers from too many problems. But change is possible, so long as the rich world builds strong ties with the "critical middle" and helps it prosper. The great historical process that changed the West has just begun in the greater Middle East. The United States and Europe must help it along, to ensure that they're standing on the right side of history as it evolves.

Nasr is a professor of international politics at Tufts University and the author of the forthcoming Forces of Fortune: The Rise of a New Muslim Middle Class and What it Means for Our World, From Which This Article Was Adapted.

Link: http://www.newsweek.com/id/219341/page/2

Prime Minister confirms Malta will allow Sharia compliant banking

Malta is preparing legislation to allow Sharia compliant banking and other financial services to attract investment, Prime Minister Lawrence Gonzi told Hedge Funds Review in an interview.

An excerpt of the interview was published online yesterday.

He revealed that the government is keen to expand the financial services industry offering to the Arab world by allowing banking in consistency with the principles of Islamic law.

“The concept is to grow exponentially. The potential is there. When the times come we will target other regions and states but first we are looking to develop our relationships with the Middle East,” confirmed Dr Gonzi.

He believes the area has enormous potential growth “and that’s the future sector for our growth”. Dr Gonzi was speaking about the potential of the hedge funds industry in Malta. Although a newcomer to the industry, Malta is one of the few, if not only, significant hedge fund jurisdictions to have seen substantial growth in 2008 and in 2009.

Dr Gonzi explained that Malta is strategically positioned geographically and culturally as the “only financial centre in the European Union and eurozone able to offer a range of services. The advantage Malta has is that we are comfortable with the Arab world and the Arab world trusts and engages with us.”

Commonwealth membership is another significant advantage, he continued, as Malta’s associations with 52 former British colonies are “natural”. This will help Malta expand the reach of the financial services industry globally.

The government has prioritised development of the financial services industry and is particularly keen to boost its standing as a hedge fund jurisdiction of choice within the EU.

The full interview with Dr Gonzi will be published in the Malta supplement with the November issue of Hedge Funds Review.
Link: http://www.independent.com.mt/news.asp?newsitemid=96012

Malta seen as the 'Bahrain in the Mediterranean'

Malta is strategically well-positioned to act as the “Bahrain in the Mediterranean” from where Islamic Finance Institutions may reach and penetrate the markets of the European Union and North African. An international meeting on Islamic Finance was held in Malta.

The five-day event held between October 12 and 16, based on daily workshops, attracted world renowned speakers such as Dr Mohammed Nedal Alchaar, Dr Hussein Hamid Hassan, Prof Abdulla Al Shami, Mr. Reuben Buttigieg, Mr Nazmi Camalzaman and Mr. Oliver Agha. The delegates were from throughout the European Union and elsewhere, including Italy, Luxembourg, Latvia, the United Kingdom, Turkey, Malta and Slovenia.

The first session concentrated on an overview of Islamic Finance and its potential in Europe and the Mediterranean. The other four days addressed different pillars of Islamic finance, including Insurance, Banking, Funds and Sukuk and Islamic Capital Markets. The workshops were chaired by different personalities including Malta’s Dr Max Ganado, Mr Francis J Vassallo, Mr Peter Grima and Mr Reuben Buttigieg.

The advantages identified with regards to Malta’s potential as a centre for Islamic Finance in the Mediterranean include its geographical position, the extensive network of double taxation treaties that mitigate the tax effects of certain legislations on Islamic finance transactions, including with Libya.

Malta can cater for small funds which no other EU jurisdiction can. It is considered by the World Economic forum as the 10th safest country to invest in and it has excellent relations with all EU countries and North African countries.

During the workshops various structures were considered particularly vis-a-vis Italy, Malta and Spain. The Malta formula was seen as a potential vehicle to assist Muslim Communities and Investors in these countries to have the alternative financing they require.

The opportunity of Borzamed as a Mediterranean platform for Islamic Capital Markets was also discussed.

Link: http://www.di-ve.com/Default.aspx?ID=72&Action=1&NewsID=65184&newscategory=4

Sharia Banking Comes to Germany

Germany's Muslims are finally getting a bank offering financial products that comply with Sharia law. It is a market worth billions, and one that many major banks around the world have long discovered.

There are four million Muslims living in Germany. They eat, drink and pray in accordance with the precepts of the Prophet Muhammad. But when it comes to monetary transactions, the principles of the Koran have played hardly any role in Germany. That is about to change.

Early next year, the first Islamic bank in Germany to offer products that are in compliance with Sharia law will open its doors. The bank, Kuveyt Türk Beteiligungsbank, will open a branch in the downtown area of Mannheim, a city in western Germany, and branches in other cities are also planned.

The regulators with Germany's Federal Financial Services Authority, known as BaFin, recently issued a limited license to the subsidiary of a Turkish-Kuwaiti bank. It is only permitted to collect funds that are transferred to accounts in Turkey that conform to Islamic rules.

In other countries, the banking industry initially catered to Muslims on an equally small scale. But less than 10 years after first entering the market, all major banks in Great Britain now have Islamic divisions, and there are also five Islamic banks in the country.

The Prophet Muhammad's Prohibition of Interest

Worldwide, assets worth well over $700 billion (€470 billion) are now being managed in accordance with Islamic principles. In Germany, on the other hand, virtually no banks have so far even addressed this market.

The underlying concept of the Islamic banking business is the Prophet Muhammad's prohibition of interest. Like Jesus in the New Testament, Muhammad took action against the usurers of his time, who exploited their contemporaries by charging them exorbitant interest, sometimes well over 100 percent. Muhammad summarily prohibited charging interest unless something was provided in return. Since the 1970s, Islamic banks have sought to satisfy this requirement by offering their customers financial services on the basis of interest-free transactions.

Instead of interest, customers are promised a share in the profits of the bank. However, commercial activities can also be financed in which the Islamic saver collects a surcharge at a level similar to conventional interest.

Instead of taking out a loan to build a new factory, for example, a company would offer its investors a share of its profits. The important aspect of all of these transactions conducted in the name of Allah is that they are in fact based on a real exchange of goods or services. "The connection to reality must be clear," says Michael Saleh Gassner, a financial expert with the Central Council of Muslims in Germany.

Since the financial crisis, the principles of Islamic investors have also attracted the interest of conservative Christian investors. After all, the underlying concept seems so pleasantly removed from the speculative greed of Western financial executives.

Besides, the stock indexes that contain companies selected according to Islamic principles have sometimes outperformed comparable indexes without the religious association. Sharia-compliant banking transactions are "in a position to assume a global leadership role," says Susilo Bambang Yudhoyono, president of the world's most populous Islamic country, Indonesia.

No Investment in Gambling or Sex Trade

Investments that comply with the Koran still represent only 1 percent of the total market, but the market is growing is by 15 to 20 percent a year. Customers from the oil-rich Persian Gulf region, in particular, insist that their capital must be invested in accordance with religious criteria.

In addition to the prohibition of interest, it is also important to ensure that funds are not invested in gambling or the sex trade. Companies that are heavily in debt are excluded, because the large amount of interest they pay is seen as the work of the devil.

The Munich-based insurance giant Allianz and Deutsche Bank have set up funds and certificates to satisfy Sharia-based criteria, but these products are only actively marketed in Islamic countries. "It is a business requirement in the Gulf region to offer products that conform to Sharia," says Hussein Hassan of Deutsche Bank in Dubai. The bank's Gulf region division is already responsible for 20 to 25 percent of profits.

There is no absolute certainty over which transactions conform to the principles of the Koran. Banks address the problem by appointing well-known Islamic scholars to so-called Sharia supervisory boards, which examine all bank products. In the Gulf region, there are about 10 religious scholars who provide consulting to almost every major Western bank and now have their own large staffs.

This leads to the creation of quasi-religious rating agencies, whose pronouncements have many a London investment banker shaking in his boots. Because different religious leaders interpret the Koran in every country, Deutsche Bank has appointed different Sharia supervisory boards for its businesses in Malaysia, Saudi Arabia and the Gulf region.

Markets Paralyzed by a Fatwa

It is clear that clerics can paralyze entire markets with a fatwa, as Muhammad Taqi Usmani demonstrated in 2007. The renowned religious scholar from Pakistan decided that most modern versions of Islamic bonds, known as Sukuks, were not in compliance with Sharia. He imposed a ban, which affected a booming market in which governments, real estate developers and companies raised about $50 billion in capital in 2007 alone.

The business collapsed. The Dubai-based real estate developer Nakheel is currently fighting to survive. The company had borrowed $3.5 billion to build dozens of artificial islands off the Dubai coast for tenants like football star David Beckham. In December, it will become clear whether the largest Sukuk ever issued can be disbursed. Muslims worldwide hope that Dubai will intervene on behalf of the borrower.

This investment sector is at least showing initial signs of recovery. Deutsche Bank introduced two Sukuks, for the Kingdom of Bahrain and for the Islamic Development Bank, into the market this year. Within a few years, the German bank has become one of the major players in the Islamic banking business. Its investment bankers are considered to be particularly creative when it comes to complying with the interest prohibition, while nevertheless offering investors the greatest possible security.

"The products the investment bankers dream up are sometimes bizarre," says Volker Nienhaus, the president of the University of Marburg in western Germany, who has been studying the Islamic banking industry for 30 years. The circumvention of interest stimulates the fantasy of financial engineers, says Nienhaus. For example, an important part of the platinum trade on London's derivatives exchange is indirectly attributable to Sharia. Because platinum, unlike gold and silver, was not a means of payment in Muhammad's day, the precious metal is now used as collateral for short-term financial transactions.

With some creative finesse, a surprising number of Western financial products can be executed in accordance with Islamic law. "The key Sharia products could be offered in Germany," says Robert Elsen, an advisor in BaFin's international division. According to Elsen, there are "no insurmountable obstacles."

Inspired by the British Model

The German financial regulators plan to host a major international conference next week in Frankfurt am Main to address the issue in Germany. If only to attract more business to German markets, BaFin, inspired by the success of the British model, is now eager to approve more financial institutions that offer Islamic products.

Although the Islamic banks were originally established for wealthy Arabs from the Gulf region, British Muslims are now among their most devoted customers. There is also political support for the development of Islamic financial centers in Paris, Zurich and Geneva.

So far the boom has bypassed Germany, despite the results of new studies showing that no other country in Western Europe has such a large Muslim population. The official explanation is that the Turks living in Germany are not particularly interested. But German financial professionals also fear that they could lose more of their existing customers by introducing Sharia-compliant products than gain new customers.

That argument, says Zaid el-Mogadeddi of the Frankfurt-based Institute for Islamic Banking, is pretty arrogant. He cites surveys that conclude that 75 percent of all Muslims in Germany would like to avail of Islamic financial products. According to Mogadeddi, between 1995 and 2002 Turks lost many billions of euros with "Islamic" shares in companies that had been floated by swindlers, and they now have a strong interest in products from established banks.

Islam-compliant real estate financing arrangements are considered particularly promising. In these situations, banks and customers purchase real estate together, with the customer contributing a share corresponding to his equity. The bank pays rent for the rest, gradually acquiring the remaining shares. As a result, no interest accrues, but the property acquisition tax is charged twice.

Sharing the Risk

The same problem used to exist in the UK. Then Prime Minister Gordon Brown, who was finance minister at the time, insightfully abolished the double tax burden. The Central Council for Muslims is now calling for similar measures to be taken in Germany.

A second stumbling block can also be removed with a bit of good will. Under Sharia law, Muslims who deposit money with a bank must also participate in the bank's risk. But what happens to the deposit insurance, which is set by the government? It comes into effect when a bank becomes insolvent. In fact, consumer advocates across the board have welcomed a recent increase in the deposit insurance limit to €50,000.

In Great Britain, a Muslim customer can expressly waive the insurance of his deposits in an individual agreement. The fact that the British government, in the course of the financial crisis, has nationalized entire banks is probably something like an Act of God under Islamic law. At any rate, there are no signs so far that a significant number of Sharia supporters have legally challenged the government's bailout of their bank.

Translated from the German by Christopher Sultan

Link: http://www.spiegel.de/international/germany/0,1518,656448,00.html