KEY ISLAMIC FINANCE ISSUES ARE REVIEWED

 Islamic liquidity management and financing were discussed at a key forum held in Bahrain.

The Bahrain Financial Exchange (BFX) and Bursa Malaysia organised a forum which also discussed contemporary issues relating to commodity Murabaha transactions and Tawarruq practices.

The forum was part of a two-day event marking the inauguration of a commercial relationship between the two exchanges.

The underpinning for this relationship is to provide financial products to Islamic market participants and strengthen bilateral ties between both organisations.

The event, held at the BFX offices, attracted over 50 key players from the Islamic financial markets and was attended by three eminent Sharia scholars within the industry.

Dr Mohammed Ali Elgari, Shaikh Nizam Yaqubi and Bursa Malaysia Sharia adviser Dr Aznan Hasan participated with the objective of providing insights and expert opinion on the concept of Tawarruq and its application and practices to facilitate Islamic liquidity management and financing.

"The use of Tawarruq and its role in money markets and risk management is important in further developing the industry and through discourses such as this, we hope to provide industry participants with greater understanding of the concept from a Sharia perspective as well as its commercial importance," said Bursa Malaysia global head of Islamic markets Raja Teh Maimunah Raja Abdul Aziz, who was also the moderator for the panel discussion,

The event also introduced a newly developed regulated Islamic commodity trading platform to industry participants specifically designed to facilitate Islamic financing and liquidity management aimed at tightening the application and enhancing integrity of Tawarruq practices.

Tawarruq is a sale of an asset to a purchaser on deferred payment with an onward sale by the purchaser to a third party on cash.

"It gives me great pleasure to host such a high-profile panel and audience from the Islamic finance community," BFX director Arshad Khan said.

"I am confident I can say from all involved, that this was an extremely informative and thought-provoking discussion with the practitioner community."

Link: http://www.gulf-daily-news.com/NewsDetails.aspx?storyid=269517

Banking business under Islamic shariah framework

WORLDWIDE assets of the Islamic banking andfinancial services industryare currently estimated approximately at US$1000 billion. More than 300 banks and financial institutions are providing their banking services under Islamic framework in more than 60 countries of Asia, Africa, Europe and America. 

The Islamic banking system in Bangladesh started with the establishment of Islami Bank Bangladesh Limited (IBBL) in 1983. Currently, seven full-fledged Islamic banks and eleven conventional banks with their 24 Islamic banking branches are providing Islamic banking services. Internationally reputed banks like the Hong Kong and Shanghai Banking Corporation (HSBC) Ltd., Citi Bank N.A., Standard Chartered Bank and Commercial Bank of Ceylon have introduced Islamic products. A state-owned bond called Bangladesh Government IslamicInvestment Bond (BGIIB) has been issued by the central bank. In Bangladesh, the share of deposit mobilisation and investments of Islamic banking in the banking industry is 16 per cent and 20 per cent respectively. In order to fully comply with the Islamic Shariah rules in banking transaction all the banks have their own Shariah Council. Besides, Bangladesh Bank has formed a Central Shariah Council and introduced Guidelines for Islamic banking to maintain liquidity, books of accounts and preparation of financial statements and related issues. In addition, they are also advised to follow the accounting and auditing standards prescribed by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). There are 70 standards on accounting, auditing and governance along with the code of ethics and Shariah Standards of AAOIFI. Islamic ethical standards etc. 

Deposit mobilisation 

Like conventional banks, Islamic banks are also dependent on the depositors' money as a major source of funds and they follow Islamic Shariah-based approaches for mobilising deposits from the public. The deposit mobilisation approaches of Islamic banks do not only comply with the general banking rules of the country but also follow the Islamic Shariah rules. In mobilising deposits, Islamic banks adopt two forms of Shariah-based approaches viz. Al-Wadeah Approach and Mudaraba Approach. First, the term 'Al-Wadeah' means the banks receive deposits of money from people for safe-custody with the condition to repay the money back on demand by the constituent either through cheque, draft, pay order or by any other means acceptable in banking. But the banks can use the depositors' money at bank's risk and responsibility with the prior permission from the depositors. 

In Islamic banking, current deposit account is conducted by the principle of 'Al-Wadeah'. In this account the depositors are not entitled to receive any profit or loss out of the utilisation of the funds by the banks. As per prevailing rules of the current account, the Islamic banks have the discretion to realise charges from the current account for safe-keeping money or for any other services if rendered. 

Second, the term 'Mudaraba' means a form of contract of partnership in any venture, trade, industry or service aiming to earn profit. The total profit resulting from such investment will be distributed between the bank and the depositors as per pre-agreed ratio. Any loss incurred is to be borne entirely by the depositors. The profit sharing ratio between the bank and the depositors has to be agreed upon or declared before opening any account under the Mudaraba principles. 

The general rules of banking to operate savings and time deposits account are also equally applicable in Islamic banking in addition to Islamic Shariah rules. 

Deployment of funds 

In ordinary parlance, investment means to buy shares, stocks, bonds and securities, which already exist in the capital market, particularly the secondary market. But this is not real investment because it is simply a transfer of existing assets. Hence this is called 'financial investment'. In Keynesian terminology, investment refers to real investment that adds to real capital. Investment thus includes new plant and equipment, infrastructure, building, inventories and stocks and shares of new companies. In line with the Islamic Shariah framework, Islamic banks offer different investment products according to their convenience as well as to fulfill the requirements of the clients. 

Investment activities under Bai mode are done through market mechanism. The term 'Bai' means buying and selling of goods and 'Bai-Murabaha' means a form of contract between a buyer and a seller under which the seller sells certain quantity of specific goods permissible under Islamic Shariah and the laws of the land to the buyer at a cost plus agreed upon profit payable in cash or on any fixed future date in lump sum or by installments. 

Bai-Muajjal is a form of contract between a buyer and a seller under which the seller sells certain quantity of specific goods permissible under Islamic Shariah and the laws of the land to the buyer at an agreed fixed price payable at a certain future date in lump sum or within a fixed period by fixed installments. 

In Bai-Murabaha cost/purchase, price of goods and profit mark-up are to be declared to the buyer but in Bai-Muajjal mode of financing only sale price is declared to the buyer, profit and purchase price are not to be declared. 

Bai-Salam is a contract between a buyer (the Bank) and a seller (the Client/Customer) under which the seller sells in advance certain commodities/products permissible under Islamic Shariah and the laws of the land to the buyer at an agreed price payable on execution of the said contract and the commodities/products are delivered as per specification, size, quality, quantity at a future time at a particular place. Here price is fully paid in advance in cash to the seller and the delivery of the commodities/goods is deferred. 

The word Bai-Istisna means to manufacture. Bai-Istisna is a sale contract under which goods are manufactured and delivered to the buyer (the Bank) as per order placed by the buyer with proper specification of goods, agreed upon price and method of settlement. 

In Bai-Salam, the price is paid in full in advance while it is not necessary in Bai-Istisna. However, Bai-Istisna is always applicable where goods are manufactured but Bai-Salam is applicable whether goods may be manufactured or otherwise procured. 

In Islamic banking, Bai-As-Sarf mode of investment is applicable only fortrading foreign currencies. 

'Mudaraba' is a contract of partnership in profit whereby one party provides capital (who is called 'Shahib-al-Maal') and the other party provides skill and labor (who is called 'Mudarib') to run a business. In banking, the bank is Shahib-al-Maal while the investment client is Mudarib. Shahib-al-Maal (bank) has no right to participate in the management of the business but all the goods purchased by the Mudarib (client) are solely owned by the 'Shahib-al-Maal' and the Mudarib can earn his share in the profit only in case he runs the business profitably. Mudarib is not entitled to claim his share in the assets themselves, even if their value has increased. 

Besides the above mentioned modes of investment there is a scope to adopt more modes of investment under Shariah principles by continuous R&D by the Muslim scholars with a view to increasing the contribution of the Islamic banks and financial institutions in the economy. The modes of investments practicing by the Islamic banks carry some superiorities. First, some modes of investment (say, Mudaraba & Musharaka) do not create debt obligations for the investment clients of the banks. Second, due to the adherence and existence of Islamic Shariah principles in banking the unexpected or haram commodities/goods or any product which conflicts with the moral value of Islam can not be entered into the country by import financing as well as by manufacturing with the local projects. Third, all the investment facilities except Quard Hasana are backed by commodities/assets (like plant & machinery, buildings etc.). So these modes of investment have direct contribution to the production, employment, consumption, savings, inflation, misuse of funds etc. Forth, Profit & Loss Sharing (PLS) characteristics of investment modes encourage the entrepreneurs to come forward to make investment with the help of banks. This is the most remarkable risk bearing feature of Islamic banking system. Fifth, Islamic banking system is much more concerned about the profitability and creditworthiness of the customers because the bank will receive the return subject to the earnings of the customers. Sixth, through this system efficient allocation of resources can be achieved. Since Islamic banking system gives emphasis on the profitable and productive investment only. Finally, by availing investment facility under Shirkatul Meelk the entrepreneurs may get the opportunity to become the owner of the property which will be purchased with the contribution of risk bearing equity participation of the bank. 

The author is a trainer in finance & banking. He can be reached at e-mail:saidur08@gmail.com

Link: http://www.thefinancialexpress-bd.com/more.php?news_id=91124

Shari’ah scholars discuss Tawarruq practices

The Bahrain Financial Exchange (BFX) and Bursa Malaysia recently organised a forum to discuss matters related to Islamic liquidity management and financing and in particular contemporary issues relating to commodity Murabaha transactions and Tawarruq practices.

The forum was part of a two-day event marking the inauguration of a commercial relationship between the two exchanges.  The companies said in a press release that, “the underpinning for this relationship is to provide financial products to Islamic market participants and strengthen bilateral ties between both organisations.”

“The event, held at the BFX offices, attracted over 50 players from the Islamic financial markets and was graced with the attendance of three of the most eminent Shari’ah scholars within the industry. Dr. Mohd Ali Elgari, Sheikh Nizam Yaqubi and Dr. Aznan Hasan participated with the objective of providing insights and an opinion on the concept of Tawarruq and its application and practices to facilitate Islamic liquidity management and financing,” the media statement said.

Raja Teh Maimunah Raja Abdul Aziz, the Global Head of Islamic Markets, Bursa Malaysia, who was also the moderator for the panel discussion commented, "The use of Tawarruq and its role in money markets and risk management is important in further developing the industry and through discourses such as this, we hope to provide industry participants with greater understanding of the concept from a Shari’ah perspective as well as its commercial importance.”

The event also introduced a newly developed regulated Islamic commodity trading platform to industry participants specifically designed to facilitate Islamic financing and liquidity management aimed at tightening the application and enhancing integrity of Tawarruq practices.

Tawarruq is a sale of an asset to a purchaser on deferred payment with an onward sale by the purchaser to a third party on cash.

Link: http://www.cpifinancial.net/v2/News.aspx?v=1&aid=4201&sec=Islamic%20Finance

Shariah-compliant loans available for oil business

Houston is often described as the energy capital of the world, and for good reason. This city demonstrates all the skills and infrastructure needed as a global hub not just for the oil and natural gas sectors but also for renewable energy.

More than 5,000 energy-related firms now call Houston their home because policymakers and industry have worked together to meet the challenges of the day and exploit new opportunities.

In this post-credit-crunch world, however, energy companies both large and small face a difficult business environment.

The financial crisis has led to significant job cuts and hit margins across the sector due to concerns over global demand, with the price of crude oil slumping from record highs in mid-2008.

Meanwhile, tightening domestic and international liquidity in the face of burgeoning fiscal deficits has only exacerbated these difficulties at a time when extra business investment, especially in capital-intensive areas such as exploration and production, is precisely what is needed.

But new challenges also bring new opportunities.

The limited availability of capital through conventional sources makes it all the more important that the oil and gas industry, in particular, consider alternative financing products.

Shariah-compliant finance has the potential to unlock largely untapped liquidity in the Gulf and elsewhere that could add to and complement existing pools of capital required by the sector.

(According to the Times of London, Shariah-compliant government bonds, known as sukuk bonds, comply with Islamic law, which forbids the earning of interest on money lent. Instead, bondholders receive “rent” on leasing government assets such as buildings. At the end of the bond term, the Treasury buys back the asset, releasing payments to the investor. Most Islamic financial products work on the principle of investing in a fixed asset able to generate a rate of return, such as property that yields rent, or an asset that can repay a larger capital sum on redemption.)

This financing method is a growth market worldwide but currently supplies only a tiny fraction of the funds needed by industry players. However, U.S. companies in other sectors are beginning to exploit its potential. In fact, only two months ago General Electric became the first Western industrial company to issue a sukuk bond, worth around $500 million.

Clearly, there is a strong business case that Shariah-compliant finance — worth more than $1 trillion worldwide — could benefit the oil and gas industry by adding flexibility to the marketplace. Broadening the investor pool would allow companies to diversify their portfolio and lower the cost of capital. And as real property with clearly defined rights under Texas law, oil and gas are assets that perfectly fit the Shariah-compliant model.

Both independent companies and conglomerates stand to benefit from this underutilized funding stream. This is particularly true for those looking to launch new capital-intensive projects such as oil refineries, liquefied natural gas terminals and petrochemical plants in the Middle East and Central Asia at a time when credit conditions are unfavorable.

So where does London come into this? The U.K. today is the leading Western country offering Shariah-compliant products — with $19 billion in assets — and the leading market outside the Muslim world. London is the location of choice as far as Middle East capital markets are concerned, and 20 sukuk offerings on the London Stock Exchange raised $11 billion to the end of 2009.

Supportive government policies have also helped London become the most advanced Western market for retail services, with a range of Shariah-compliant banking products from mortgages to car loans already on offer.

As global ambassador for all U.K.-based financial services, I continue to emphasise that Shariah-compliant finance in the London market is not something strange, exotic and arcane.

Rather it is a natural and welcome addition to the range of products and services that the city can offer to international investors operating in the 21st century.

So we hope Houston's oil and gas industry will view us as natural partners when it comes to exploiting the advantages of this alternative financing method.

The balance of the global economy has radically altered and is evolving rapidly. These shifts have been accompanied by changes in financial techniques and products. The emergence of Shariah-compliant finance will play a major part in these developments.

And Houston and London are well-positioned to lead the way — together — in this energy-finance new world.

Anstee, lord mayor of the city of London, was the keynote speaker at an Islamic Finance Forum at the Houstonian Hotel this week.

Link: http://www.chron.com/disp/story.mpl/editorial/outlook/6840982.html

UK gears up to issue first corporate sukuk

The UK government may be stalling on the issuance of a sovereign sukuk in the wholesale sterling market, but the country took a step nearer to facilitating the issuance of the first UK corporate sukuk. Come end of February 2010, the necessary final legislation should be adopted by the House of Commons following the introduction of The Financial Services and Markets Act 2000 Order 2010 by Treasury to support Islamic finance and the issuance of corporate sukuk within the UK.

According to the Treasury, Order 2010 will help to provide a level playing field for corporate sukuk within the UK and provides clarity on the regulatory treatment of corporate sukuk, reducing the legal costs for these types of investments and removing unnecessary obstacles to their issuance.

“The Financial Services and Markets Act 2000 Order 2010 explicitly exempts alternative finance investment bonds (AFIBs), a class of debt-like security which includes sukuk, from collective investment scheme (CIS) regulations. It introduces a unique regulatory definition of an AFIB, removing uncertainty about the regulatory treatment of corporate sukuk,” explained a Treasury statement.

In a note to the order, the Treasury states: “This order inserts a new article 77A into the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544) to make alternative finance investment bonds a specified investment for the purposes of the Financial Services and Markets Act 2000. New article 77A(2) provides that arrangements fall within article 77A if they meet a number of conditions, as set out in sub-paragraphs (a) to (f).”

The measures come only a week or so after the Luxembourg tax authorities published a new tax circular on the treatment of a whole range of Islamic finance products including Murabaha, Musharaka, Mudarabah, Istisna, Ijarah, Ijraha wa Ikitina and sukuk.

Perhaps a coincidence is the development in Korea where The Strategy and Finance Committee of the country’s National Assembly (Parliament) is set to approve a bill aimed at facilitating tax neutrality for the issuance of sukuk in Korea during its next sitting at the end of February 2010. The vote for the adoption of the bill was postponed in December 2009 because of a lack of parliamentary time due to an unscheduled debate dominated by the two main parties — the Grand National Party and the Democratic Party — on further fiscal measures introduced by the Government aimed at mitigating the ongoing effects of the global financial crisis on the Korean economy.

The move has been welcomed by Islamic finance market players and potential issuers in the UK. Sukuk, according to the Treasury, are a broad class of financial instruments designed to replicate the economic function of bonds, but with a structure which complies with Islamic financial principles. Although there is an obvious appeal to the Muslim business community, sukuk, added the Treasury, can be issued and bought by everyone irrespective of creed and ethnicity.

“The government’s objectives on Islamic finance,” reiterated Exchequer Secretary to the Treasury Sarah McCarthy-Fry, MP, “are to enhance the UK’s competitiveness in financial services by maintaining the UK’s position as a Western leader for international Islamic finance; and to ensure that everybody, irrespective of their religious beliefs, has access to competitively priced financial products. This measure is another important step in the development of the Islamic finance sector in the UK and will help to provide a level playing field for Islamic financial products in this country. It is good news for the UK economy and for our Islamic finance industry.”

The introduction of the latest measures to support corporate sukuk issuance follows a series of legislative changes introduced by the last three Labour governments toward creating a “level playing field” for Islamic financial products.

However, classifying Islamic financial instruments, including sukuk, under existing regulatory frameworks did pose challenges for the UK authorities like for those in other jurisdictions, especially non-Muslim ones.

In December 2008, Treasury jointly with the Financial Services Authority (FSA), launched a “Consultation on the Legislative Framework for the Regulation of Alternative Finance Investment Bonds (sukuk)” which set out the proposed legislative framework for the regulatory treatment of “Alternative Finance Investment Bonds”. The order in fact takes into account responses received by Treasury to its consultation which focused on definition of an AFIB as similar in characteristics to a conventional bond, its regulation as such, mandatory listing of AFIB’s, and tax provisions for AFIBs. Respondents to the consultation include top City law firms, Islamic banks in the UK, other major financial institutions, community organizations and professional bodies.

Sukuk are one of the most prominent instruments used in Islamic finance. Since 2003, there have been several initiatives by the authorities to create a “level playing field” for Islamic finance. For example, the government has introduced, and has proposals to further introduce, various tax changes with respect to AFIBs.

“In line with our efforts toward a level playing field on tax overall,” added McCarthy-Fry, “Treasury and the FSA have been working to remove barriers and uncertainty in the regulation of alternative finance investment bonds. Following constructive consultation with industry, the statutory instrument has now been laid before Parliament, and we are confident that the new regulations will come into effect by the end of February. These measures will reduce compliance and legal costs for these instruments, and facilitate the issuance of corporate sukuk in the UK”.

Link: http://www.arabnews.com/?page=6&section=0&article=132210&d=1&m=2&y=2010

Islamic finance gaining major support in Britain

“Islamic finance is, and will continue to be, an important part of the government’s overall commitment to ensuring a competitive financial services sector in the UK,” reiterated Sarah McCarthy-Fry MP, exchequer secretary to Treasury, in London at a seminar entitled “New Year — New Opportunities in Islamic Finance,” hosted by the international law firm, Norton Rose, in London recently.

This statement of intent coincides with two notable developments relevant to the European Islamic finance sector in the last two weeks or so. Firstly, the UK Treasury and the Financial Services Authority (FSA) have been working to remove barriers and uncertainty in the regulation of alternative finance investment bonds (sukuk).

Following consultation with the industry, the statutory instrument, the Financial Services and Markets Act 2000 Order 2010, was sent to the House of Commons in mid-January, and the Brown government is confident that the new regulations will come into effect by the end of February. These measures, stressed McCarthy-Fry, will reduce compliance and legal costs for these instruments, and facilitate the issuance of corporate sukuk in the UK.

The other development is that the Luxembourg Tax Authorities, also in mid-January, published the tax treatment for sukuk and a range of Islamic financial products with the aim of facilitating tax neutrality for such products compared to equivalent conventional ones. The wider aim is to develop Luxembourg as another European hub for Islamic finance especially sukuk origination and listings and registration domicile for Islamic funds and trusts.

Luxembourg in fact is emerging as the fastest growing Islamic finance hub in Europe with key developments in the process of being implemented with counterparties in Saudi Arabia and Malaysia over the next few months. In this respect Luxembourg is emerging as a serious alternative hub for Islamic finance to London and Paris, although officials and market players on all sides stress that there is room for all given the nascent state of the industry in the European Union.

The Norton Rose seminar also saw the first public statement made on behalf of the opposition Conservative Party regarding Islamic finance. Mark Hoban MP, shadow (Conservative) financial secretary to the Treasury, confirmed that the Conservative Party has supported the steps taken by the government to create a level playing field for Islamic finance and that it would continue the same approach. He recognized the concerns raised by the audience in respect of a need for clearer criteria to enable the industry to address any government concerns in relation to a UK government sukuk.

The cross-party support (including by the opposition Liberal Democrat Party) for UK government’s Islamic finance initiative has been welcomed by the industry. Farmida Bi, London banking partner, Norton Rose, emphasized “It is extremely good news for the City of London that there is cross party support for the promotion of Islamic finance and that the helpful legislative changes that have been made will be continued irrespective of which party is in power”.

In December 2008, the UK government announced that it was postponing any decision regarding the issuance of a sovereign sukuk for the time being. Minister McCarthy-Fry reiterated at the Norton Rose seminar that the Treasury currently has no intention to launch a UK government sukuk. The minister highlighted the current market conditions and the government’s concern that a UK government sukuk would not offer value for money for both the Treasury and investors.

The financial crisis and global downturn at the end of the last decade precipitated exceptional change in financial services, both in the UK and around the world. McCarthy-Fry warned that the world must continue to learn and implement the lessons that will help strengthen the financial services industry so that it is better able to serve the global and individual economies in future.

“We will continue to pursue a regulatory framework that is an international benchmark. And we will continue to pursue a consistent, politically neutral legal system that is widely used and understood globally. Together, these will help reinforce confidence in doing business with the UK and in investing in the UK.

And these goals will help the UK to continue as a leading financial center, one able to take advantage of growth areas in financial services, including the area I am here to talk about today — Islamic finance,” she added.

The Treasury acknowledges that capitalizing on growth areas such as Islamic finance and supporting their expansion will be hugely beneficial for the health of the sector in the future. Indeed, this support for growth areas relates to one of the lessons from the crisis — the need for a more diverse financial services sector.

Islamic finance, says the UK Treasury, “is an area that has been helped by the openness to new influences and ideas that we have here in the UK, especially in London. With our depth of skill, experience and connections all around the world, we have ensured that the UK has long been the leading Western center for Islamic finance”.

There are at present 22 banks offering Islamic financial products in the UK, including five that are fully Shariah-compliant, which means that there are more banks in the UK offering Islamic finance than in the whole of the rest of Western Europe. The UK also has a Takaful provider, an Islamic hedge fund and nine Islamic fund managers.

Despite the impact of the global financial crisis, Islamic finance remains a growth sector around the world. It is under conditions like the ones faced by international financial markets during the crisis and in its aftermath, explained McCarthy-Fry, that new opportunities for growth and development become increasingly important.

“The issue of corporate sukuk by GE Capital in November, showed the continued appetite around the world for Shariah-compliant finance. This was first listed on the London Stock Exchange, and brought the total number of sukuk listed in London to 20, with total funds raised of over $11 billion. Worldwide, only the Dubai NASDAQ exceeds these figures. The Islamic finance market presents huge long-term opportunities for London and the UK. And it is a market that this government would like to continue to nourish.”

The UK government’s dual objectives for Islamic finance are: a) for business, to maintain London’s position as a European leader for international Islamic finance; and b) for individuals, to ensure that everybody, irrespective of the religious or ethical beliefs, has access to competitively priced financial products.

To facilitate the above, the UK government over the past five years has made a series of reforms to establish a level playing field — in tax and regulation — between conventional and Islamic finance. These include products such as Shariah-compliant mortgages, individual savings accounts and child trust funds.

In the 2009 pre-budget report, Chancellor of the Exchequer Alistair Darling, announced further measures, especially the government’s intention to provide relief from tax on capital gains for alternative property refinance, subject to satisfactory safeguards. The proposed change would allow those who own property that has appreciated in value to obtain additional bank finance in a Shariah-compliant way, using the property as collateral. Such refinancing currently faces prohibitive tax barriers where principal private residence relief does not apply.

The government is also committed to creating, as far as possible, a level playing field on VAT for retail consumers of Islamic finance products. This includes VAT guidance on corporate sukuk.

On the UK government’s position on issuing a sovereign sukuk, McCarthy-Fry dismissed recent speculation that the Treasury may be going down this route. “Contrary to recent speculation, our position on this matter has not changed, and remains that a UK government wholesale sterling sukuk would not at present offer value for money. But I would like to reiterate that this decision was taken after a lengthy consultation and after extensive consideration of a wide range of factors. We will keep this judgment under review and revisit should factors change in such a way that sovereign sukuk issuance becomes more viable,” she advised.

However, the UK government will continue to support the sector where appropriate, in particular via engagement on tax and regulatory issues through meetings such as the Islamic Finance Tax Technical Working Group, which took place at the end of January.

Minister McCarthy-Fry urged the Islamic finance industry to seize the opportunities that the new financial landscape offers. With the whole of the financial services industry taking stock of its actions and looking to rebuild trust, there are some key principles underpinning Islamic finance that could help shape this new landscape.

The rejection of certain speculative activities and the encouragement of an ethical approach to finance, to name a couple, could contribute significantly to the wider debate on the future of the financial markets, she added. In this respect, she would also like to see the sector grow in size and in influence since a more diverse financial sector will be better placed to provide businesses with the services they need for sustainable growth.

Link: http://www.arabnews.com/?page=6&section=0&article=132209&d=1&m=2&y=2010

Delhi to overhaul financial services sector to usher in Islamic banking

 India is planning to overhaul the regulation of its financial system to attract investments from the Gulf and to encourage its largely unbanked Muslim population to save money in a way compliant with their religion, a senior government adviser said on Thursday.

K. Rahman Khan, deputy chairman of India’s upper house of parliament, told the Financial Times that the ruling Congress party had proposed the introduction of Islamic financial products.

The party was seeking regulatory approval from the finance ministry, the Reserve Bank of India and Securities and Exchange Board of India for a move to capture one of the fastest growing sectors in the financial services industry, he said.

“Islamic finance has been growing at a steady pace and it is the most attractive form of alternative [banking] system in the financial sector, it makes no sense for India to exclude itself from this success story,” Khan said.

With more than 150 million Muslims, India has the world’s largest Muslim minority.

Many Muslims are discouraged from banking with commercial banks as Islam has restrictions on interest payments and investing in sectors such as gambling and drinks groups, according to the Institute of Objective Studies, a research group focusing on the Muslim community.

Some Western and emerging economies are taking steps to facilitate Islamic investment.

China, with 80 million Muslims, recently awarded its first licence for Islamic banking to Bank of Ningxia.

The Congress party’s report, which Khan said had been endorsed by Manmohan Singh, India’s prime minister, falls short of backing the creation of a fully-fledged Islamic banking sector at a time when regulators are shy of liberalisation.

Khan said that the “main goal at the moment is to help set up non-banking institutions that will allow Indian citizens to save and invest in a Sharia-compliant manner and to attract foreign direct investment from the Gulf. At a later stage we will be looking into setting up Islamic banking.”

Enthusiasm

India is keen to attract a greater share of Gulf investment. The UAE is already one of India’s largest trading partners. Political and business leaders in the region have expressed their enthusiasm for larger investments in the Indian economy.

Shaikh Nahyan Bin Mubarak Al Nahyan, the UAE’s minister of education and a leading Arab investor, predicts India will become a “world economic power”.

“While countries around the world continue to feel the pinch of the economic downturn, India’s economy is buoyant and in relatively good condition. Investment opportunities abound in this vast, innovation-driven country,” he said.

Link: http://www.ethiopianreview.com/news/19150

Zambia Taps into Islamic Finance

"The guidelines are intended to provide a broader framework for conducting Islamic banking services in the country," Fundanga told IOL.

Zambia is tapping into the thriving Islamic finance industry by formulating guidelines for Shari`ah-compliant banking services for the first time, with bankers expecting the move to accommodate Muslim clients and help the economy of the Southern African country.

"The guidelines are intended to provide a broader framework for conducting Islamic banking services in the country," Bank of Zambia Governor Dr. Caleb Fundanga told IslamOnline.net.

BoZ has finalized regulatory and banking framework for banks that will be offering Islamic financial services in the country.

Dr. Fundanga says the new regulations will enable people to have access to credits for capital investment from the financial institutions according to Islamic principles and without paying interest.

"In Zambia, Muslims are excluded from the banking system on account that Shari`ah prohibits interest."

Islam forbids Muslims from usury, receiving or paying interest on loans.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.

Fundanga says one challenge that would face the industry in Zambia is the lack of adequate guidance from Islamic scholars.

"The availability of these Shari`ah scholars in Zambia may pose a challenge given the small proportion of Muslims in Zambia."

According to the Islamic Council of Zambia (ICZ), Muslims constitute over 12 percent of the country's 12.5 million people.

Benefits

Experts believe that Islamic finance concept would be very beneficial to the national economy.

Chama Mwanya, a member of Zambian think-tank the Economic Association of Zambia (EAZ), says Islamic finance would help on the issue of borrowing, one factor that the Zambian financial sector has been grappling with for a long-time now.

"Lending rate is still high in Zambia making borrowing for capital investments prohibitive."

Dr. Fundanga, the Bank of Zambia Governor, hopes by introducing Islamic finance to the market and encouraging Muslims to use the system, Zambia will get a crucial push for its development.

"Islamic banking should be viewed in light of its potential to inject liquidity in the financial markets and its ultimate impact on the cost of funds as well as its ability to capture those who would otherwise be excluded from the banking system on religious grounds."

This is the first time Zambia looks into developing its Islamic finance industry.

It is taking the cue from several African and would countries which begun developing Islamic finance services to attract wealth and create jobs.

The Islamic banking system is being practiced in 50 countries worldwide, making it one of the fastest growing sectors in the global financial industry.

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

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First sukuk bonds planned for Q1

Islamic finance plays growing global role

Securities regulators are hopeful that the first Islamic bonds will make their debut in the Thai market in the first quarter of this year.

The Securities and Exchange Commission expects to finalise rules for sukuk instruments some time over the next several months.

Authorities hope that Islamic bonds will help draw capital from the cash-rich Middle East and other markets.

Dheerasak Suwannayos, president of the Islamic Bank of Thailand, notes that Islamic finance has posted massive growth in recent years, and now plays a key role within the global financial system.

Growth in the market has averaged around 80% per year over the past several years, with more than $80 billion in sukuk instruments outstanding.

According to the SEC, Malaysia is the largest market in the world, with some 59% of outstanding sukuk instruments as of September denominated in ringgits, followed by US dollars at 25% and Saudi riyals, UAE dirhams and Indonesian rupiah the rest.

Islamic finance comprises a wide range of instruments and financial structures aimed at bypassing Islamic prohibitions against the payment of interest. In many cases, financing is done through trustees, where a special purpose vehicle is set up to serve as an intermediary between investors and the entity seeking capital. Investors receive benefits through leases or profit-sharing arrangements rather than interest returns.

Mr Dheerasak said Islamic bonds are open to both Muslims and non-Muslims for investment, and that they typically offer greater transparency than conventional bonds.

Recent sukuk deals have even been able to secure funding at 25 to 50 basis points (hundredths of a percentage point) cheaper than conventional bonds, thanks in part to higher investor demand, said Mr Dheerasak.

"No one knows really how big the petrodollar market really is. We think it may be larger than the US dollar market," he said.

Mr Dheerasak said a sukuk bond is similar to a conventional bond in terms of yields and issuing procedures, with a key difference being that Islamic finance is generally structured as an asset-backed security and has restrictions in terms of the type of businesses permitted under Islamic law.

Sukuk bonds boast a major advantage for investors in terms of transparency, given that conventional bonds generally do not stipulate explicit claims on assets.

"Sukuk holders are owners. They share in the revenues generated from an asset. If a default occurs, the assets are liquidated and split among the sukuk bondholders," he said.

"But for a traditional bond, the investor is a creditor. In a default, they will have to queue up with other creditors in splitting any assets."

Islamic bonds may be structured in a variety of ways, but typically fall into one of four categories: Ijarah, or leasing arrangements; Murabaha, a transaction where the seller explicitly declares his cost-plus-profit margin; Mudharabah, a structure similar to a joint venture where profits are shared between a fund raiser and investor; and Musharakah, a joint venture where profits and losses are shared.

Ijarah represents the most common type of structure, accounting for an estimated 60% of the Islamic bonds outstanding in the global market.

Issuing a bond is similar to any other asset securitisation. A company seeking to raise funds may sell assets to a special purpose vehicle (SPV), which pays for the assets using funds raised from the sale of sukuk securities to investors.

Revenues from the assets are passed along to the investors, while the issuer retains use of the assets themselves. On maturity, the transaction is reversed, where the SPV sells the assets back to the original issuer, with the proceeds passed back to the sukuk investors.

The asset trustee is responsible for the issue of the sukuk instruments and its underlying assets. A sukuk trustee, meanwhile, is a professional trustee responsible for overseeing the interests of bondholders as well as monitoring the asset trustee to ensure that terms of the trust deed are being followed.

In Islamic finance a Shariah committee acts similar to credit rating agencies in conventional finance to ensure that the base assets, business and bond structures are in compliance with Islamic law, said Mr Dheerasak.

Malaysia dominates the Islamic finance market in Asia, while London is the main centre for European issues. But a number of global financial centres, including Tokyo, Hong Kong and Singapore have taken steps to support the development of Islamic finance as well.

"We have 9 million Muslims in Thailand out of a population of 67 million. Of this, 1.4 million live in the three southern border provinces," he said.

"Compare this with Malaysia, a country with 12 million Muslims out of a population of 22 million."

"We have a number of top international banks, banks with experience in Islamic finance such as Citibank, HSBC and Standard Chartered with offices in Thailand. I believe that we have strong potential to become an Islamic financing hub as well. It all depends on government policy."

Development of Islamic finance in Thailand has long been hindered due to the tax code, where returns from sukuk instruments are classified as rental revenues and subject to a 12% property tax. Transfers of land or property assets to a SPV is taxed as a land transaction. But a new trust law for capital market transactions will eliminate such obstacles, and clear the way for the issue of sukuk bonds.

link: http://www.bangkokpost.com/business/economics/30488/first-sukuk-bonds-planned-for-q1

Regulatory hurdles for facilitation of Islamic financial products in S. Korea

DESPITE the postponement by South Korea’s National Assembly’s Strategy and Finance Committee of pushing through a vote to approve a bill aimed at facilitating tax neutrality for the issuance of sukuk at end December 2009, local supporters of the introduction of Islamic finance products are confident that the delay is a minor setback.

They stress that the postponement was more due to the timing of the vote which comes amid increasing political squabbling between the Grand National Party and Democratic Party, especially over controversial policy issues relating to the introduction of tough new income and corporation taxes which have been opposed by trade union leaders. Bankers in Korea stress that the vote stands a better chance of taking place in February 2010 when Parliament reconvenes.

The bill is a prerequisite to the launch of Islamic finance products such as sukuk, Ijara (leasing) and other products in Korea. According to Lee Do Heon, managing director, Global Business Department, Korea Investment & Securities Co. Ltd., the current regulatory hurdles which prevent the facilitation of Islamic financial products in Korea are typical of those in conventional financial markets. “The main hurdles,” he explained, “are taxation issues relating to double stamp duty, value added tax (VAT) and capital gains; and the definition of what constitutes a security. From a conventional point of view, sukuk for instance, may look like asset-backed securities or like investment certificates. There must be a standard guideline that sukuk is considered as securities. There are also other challenges on the commercial banking side. In a conventional mortgage, for instance, it is like lending with collateral. But in the Islamic mortgage of Diminishing Musharaka the bank must purchase the property and co-owns the asset or property with the mortgagee. The bank then rents out its share of the equity to the mortgagee. Under Korean legislation, commercial banks are not allowed to buy properties for purposes other than headquarters and branches etc. Fortunately, these issues have been recognized by the Financial Supervisory Service of Korea and the central bank.”

Korea is a relatively latecomer to Islamic finance in East Asia. But following the stated ambitions of neighboring countries such as Hong Kong, Singapore that are trying to establish themselves as international Islamic capital markets hubs, Seoul is similarly trying to promote Korea as a future Islamic finance hub. Kim Jong Chang, governor of the Financial Supervisory Service of Korea, the financial services regulator, believes that Islamic finance is a good innovation in the global financial market and has stressed that the Korean government is committed to facilitating it in Korea. Korea believes that the global financial crisis has shown that financial services cannot be divorced from the real economy and sees an ideal fit between its vast industrial base and Islamic finance.

Indeed, in late November 2009 the Korea Exchange (KRX) and Bursa Malaysia hosted the inaugural KRX-Bursa Malaysia Islamic Capital Market Conference in Seoul which was widely attended by local investment bankers, advisers, issuers and institutional investors and by visiting delegates of the MIFC initiative, which comprised senior management of Bank Negara Malaysia, the central bank; Securities Commission Malaysia and Bursa Malaysia.

The conference indeed was co-organized in support of the Malaysia International Islamic Financial Centre (MIFC) initiative, which aims to share Malaysia’s Islamic finance experience and to promote the opportunities in the Malaysian Islamic capital market landscape.

Malaysia acknowledges Korea as a potential Islamic financial market and welcomes Korea’s participation in shaping the Islamic finance landscape together, via leveraging on Malaysia’s more than 30 years of experience in developing the world’s most comprehensive Islamic financial system.

Dato’ Yusli Mohamed Yusoff, chief executive officer of Bursa Malaysia Berhad, is confident that “the conference will stimulate interest in the Shariah-compliant products which are currently in demand from investors who are seeking returns from alternative and ethical investments. In addition, this visit by the delegates from the MIFC will pave the way for more opportunities to exchange ideas in Islamic finance and forge greater working relations between Korea and Malaysia for the interest of growing this important industry. We are confident that the Malaysian and Korean authorities as well as KRX and Bursa Malaysia would be able to leverage on our respective strengths in the establishment of an Islamic capital market in Korea.”

Discussion centered around the liberalization of Islamic financial markets, investment and business opportunities in Islamic capital market, the Islamic finance landscape and framework as well as the growth of Islamic finance products in Asia and globally.

“The Korean sovereign wants to issue a sukuk and the country’s corporates are already preparing. What we offer is a platform for Korean issuers to issue non-ringgit sukuk in Malaysia. But we want those issuers to be able to issue in Malaysia and Korea,” said Raja Teh Maimunah, global head of Islamic markets at Bursa Malaysia.

One of the most important challenges, according to Lee Do Heon, is awareness and trying to help Korean customers understand what the principles of Islamic finance are. For example, in the case of sukuk of which most of the standard structures is an Ijara, the initial paper should be a solid one backed by underlying core assets. From a Korean issuers’ point of view it looks as if it is an accumulation because they are selling core assets. “We are trying to convince them that it is not. Also for Shariah equity funds we try to explain to them that it is more like a socially responsible investment with lower leveraging. So what we are trying to do is to explain the Shariah financial principles but in terms of a Korean and conventional financial nomenclature. We are also promoting real transactions which are acceptable to both Islamic investors and Korean customers. There are still some regulatory hurdles in Korea, so it will take a little bit more time to close Shariah-compliant transactions,” he added.

While the complexity of the issues may have been cited as a potential cause of a drag in passing the legislation, local bankers stress that they are far less complex than the conventional derivatives and bubbles that have bedeviled the global financial system over the last two years.

On the other hand, potential Korean issuers like some others in East Asia may be waiting for the sukuk market to recover in terms of pricing and yields before they decide to take the plunge. There is evidence that this is already happening both in the Asian sukuk and GCC sukuk markets. The recent $850 million IDB sukuk and the $1.5 billion Petronas EMAS sukuk were both competitively priced and were much in demand by Asian investors, and were not surprisingly well oversubscribed.

It will be interesting to see what the tax implications are in the proposed Korean sukuk bill. It is likely that the government will opt for sukuk to be sold through SPVs (special purpose vehicles) but it will have to plug a potential tax loophole or abuse of the proposed law in the case of companies with no intention of selling sukuk setting up SPVs to take advantage of the low or non-existent capital gains tax. It is likely that the bill will only allow sukuk Al-Ijarah and Mudarabah structures.

Several Korean companies including GS Caltex, Korean Air, Hyundai, Samsung and others are reportedly exploring the possibility of raising funds from the sukuk market. South Korean Chaebols including Lucky Goldstar, Samsung, Korea Shipping and several others have in the past accessed Islamic commodity Murabaha facilities structured through London. — M.P.

Link:http://www.arabnews.com/?page=6&section=0&article=130672&d=4&m=1&y=2010&pix=business.jpg&category=Business