New Sharia standards adopted

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has adopted three new Sharia standards.

This includes a ruling on standards for the disposal of rights, bankruptcy and the management of liquidity, collection and use.

"The adoption of these three standards, together with those adopted in previous years, are an important addition to our standards, both in terms of kind and number," said AAOIFI secretary general Mohamad Nedal Alchaar.

"The number of new standards adopted since the beginning of last year is 14 so far, bringing the total number of existing standards to more than 84. This is a significant achievement for AAOIFI," he said.

"There is a need for formulating such standards because of the increased complexity seen by the Islamic financial services industry in its different products and transactions, as well as the steadily increasing growth of the Islamic finance industry.

"The aftermath of the global financial crisis affirmed the need for AAOIFI to keep pace with the changes arising from such crisis."

-TradeArabia News Service

Islamic banking will bring minor change

Syda Bbumba

In her Financial Year 2010/11 budget, Finance Minister Syda Bbumba announced that due to demand from the private sector she would introduce new products, including Islamic banking.

“I will therefore be submitting amendments to the Financial Institutions Act 2004 to Parliament which will allow commercial banks to offer financial products under Islamic banking.”

Bbumba said this will allow banks to move into previously untapped markets.

Her announcement caps a decision by Bank of Uganda to allow Islamic banking.

Licensing of Islamic banking will follow the amendment of the bank of Uganda Act 2000, the Financial Institutions Act2004, and the Micro Finance Deposit Taking Institutions Act 2003.

These acts are the basis under which the Central Bank licenses commercial banks and micro finance institutions to take deposits.  The amendments have already gone through the BoU board and are on Bbumba’s desk.

She is expected to take them to Cabinet from where they will be tabled before parliament.  The BoU is said to have met the parliamentary committees on the economy and the statutory budget committee.

The amendments are being pushed to be formulated into law by the end of the year so that the central bank can license Islamic banking. A source in the financial sector told The Independent that Syda Bbumba is pushing for expeditious introduction of Islamic banking in the country.

 According to the central bank, when Islamic banking is eventually introduced into the country it will operate under two categories; under the existing commercial banks which have indicated interest in opening what they have called the Islamic banking window which will provide Islamic products alongside the conventional banking and investors who wish to establish Islamic banking as a separate arrangement.

Juma Walusimbi

“We (BoU) have already received applications from the Middle East, from the Import and export bank of Iran, and from Bangladesh which is to partner with locals to establishing Islamic banking but we have deferred them until the law is in place,” said Juma Walusimbi, the Director for Communications at the Central Bank.

Walusimbi added, however, that there is not much Islamic banking is bringing apart from practicing ethical banking.

“Being based on the Quran there is no interest on money to money transactions but interest is acceptable on trade. Its principles are hinged around ethical banking where funding of businesses that promote sin is not allowed,” he said.

He explained that Islamic banking will offer credit to development projects like any commercial bank in the country basing on general banking guidelines. “Commercial banks that will offer windows on Islamic banking and even when a full-fledged Islamic bank opens shop, will still rely on applications based on sound economic financial and environmental considerations that require for any borrower to make a proposal which is acceptable and reflect that it will give good returns,” he said. Walusimbi said customers will still be required to provide security to access a loan.

“The bank will offer packages for Muslim and non Muslim borrowers once established in Uganda,” he said.

In East Africa, Islamic banking is already practiced in Kenya and Tanzania. The coming of  the east African common market could have driven the central bank to open up to the system.

The International Monetary Fund Country Representative, Thomas J Richardson said they are watching the introduction of Islamic banking in Uganda.

“The IMF had helped some countries including Britain start Islamic banking,” he said. 

According to the IMF’s latest regional economic outlook for the Middle East, which compares the performance of Islamic banks in the countries of the Gulf Cooperation Council (GCC) with conventional commercial banks during the global financial crisis, it was discovered that Islamic banks were less affected during the initial phase of the global financial crisis.

This reflects a stronger first-round impact on conventional banks through market-to-market valuations on securities in 2008. But in 2009, data for the first half of the year indicated somewhat larger declines in profitability for Islamic banks, revealing the second-round effect of the crisis on the real economy, especially real estate. Going forward, Islamic banks overall are better poised to withstand additional stress, according to the IMF analysis.

independent.co.ug

Islamic finance gains popularity

Singapore The perception that Islamic banking is profitable and has great unexplored potential is encouraging many countries, including secular and non-Muslim ones, to grab a slice of the pie.

However, this rush without full knowledge of the system will create its own weaknesses that will need to be overcome in coming years, an Islamic finance expert said.

"First of all, the interest is dollar-driven. It is driven by the fact that Islamic banking can be very profitable," said Andrew White, director of the International Islamic Law and Finance Centre in Singapore.

Interest in Islamic banking, a sector that survived the financial crisis in better shape than conventional banks, has grown in the past few years, not only in Muslim countries, but also in secular countries, he said.

"We are seeing a growing interest in Europe, the United Kingdom, the United States... and the reason for that is it can be very profitable," White told Gulf News on the sidelines of the World Islamic Banking Conference-Asia.

"It is a new market that has not been fully explored by some of the traditional players."

Apart from the "massive" Muslim populations in Asian countries, including Malaysia, Indonesia, Bangladesh and pakistan, the emergence of Asia itself as a financial centre is another factor driving interest in Sharia banking.

While Malaysia is considered the main Asian centre for Islamic banking, White strongly believes there is a place for other players in the industry, and their role could be complementary, rather than competitive.

"Each of the [Asian] countries will have to decide what part of the industry it wants to play a role in," White said.

Singapore's leverage

According to White, Singapore, one of the main financial hubs in Asia, "finds its strength from leveraging what it already does very well, which is wealth management and private equity, capital markets. It already does that in the conventional side; it will certainly leverage on that on the Islamic side."

Despite the fact that Hong Kong is the only Asian country that looks similar to Singapore in many ways, Singapore still has the niche industry.

"One of the weaknesses of the industry is that there is such a rush to come into it. Conventional bankers are suddenly saying ‘Hey! I can be an Islamic banker now'," White said.

The conception that Islamic banking doesn't charge interest, and some bankers simply "change some terms here and there", will not last.

"Do they understand Islamic banking? No. Do they understand Islamic economics? Not necessarily. Do they understand Islam? Not necessarily," White added.

He said education, training and a better understanding of the Islamic banking system were required.

By Jumana Al Tamimi

© Gulf News 2010.&All rights reserved.

Azerbaijan to introduce Islamic banking

The chairman of the Central Bank of Azerbaijan has addressed the Islamic Development Bank's (IDB) board of governors, meeting in Baku.

Elman Rustamov

Elman Rustamov told the board meeting that Azerbaijan had withstood the global economic crisis well.

"We achieved great success both in the financial and economic spheres. It is not surprising that international organizations and financial structures highly appreciate our economic achievements. FITCH has recently raised our rating to investment level. This was a success for Azerbaijan's economic and financial system," Rustamov said.

He said that the meeting of the IDB board of governors would promote Azerbaijan's collaboration  with Islamic financial structures.

"We also intend to use the services of the Islamic financial system in Azerbaijan in the future," the head of the Central Bank said.

"This issue will be considered in the future. Azerbaijan is different for its tolerance, so why not demonstrate this tolerance in the banking system? But I would like to repeat once again that the country has no legislative base to move to this system."  

The economic systems of the Islamic states have shown a good level of resistance to the world financial crisis, IDB President Dr Ahmad Mohamed Ali Al Madani told the board meeting.

"This was possible because of the good financial system which is gaining influence in the world. The assets of the Islamic banks have grown to 30% in the world banking structure and we expect the total capital of these banks to increase to $1 trillion by the end of 2010," the bank chief said.

The president of the bank hoped that the governors' meeting would decide on further steps to develop the Islamic banking system as part of the world banking structure.

1news.az

Delinking Islamic finance, Libor

Analysts say it's possible to use City indexes as reference rate benchmarks for mortgages

slamic finance migration towards 2.0 can be best described by a quote from Oliver Wendell Holmes, a famous jurist, ‘… great thing in this world is not so much where we stand as in what direction we are moving ...'

Enlightened Islamic bankers and scholars have been commenting for nearly a generation on the need to delink from the interest based economies and its reference rates.

The first step toward delinking is to acknowledge it. The second step, to prevent destabilisation and confusion, is the phased-in process that spells out the sign posts on the road of Sharia-based investments.

The final step is ensuring the vigilance to the methodology and continued refinement.

In 1999, the first Islamic equity index by a globally recognised index provider, Dow Jones Indexes (DJI), was launched, and the industry had an Islamic equity benchmark to measure relative performance of Sharia-compliant companies instead of relying on established broad market conventional indexes like S&P 500 or MSCI World.

In 2006, DJI along with a global bank, Citigroup, launched the world's first Sukuk Index, again, for measuring relative performance instead of relying on emerging market bond indexes.

Scholars have been insisting on moving away from London Interbank Offered Rate (Libor), commonly used as a reference point in contracts for credit pricing.

Where there is a will, there is a way. For example, Islamic mortgages are available in the US, but the reference rate is the US Treasury, which is the only available benchmark.

S&P has the S&P/Case Schiller Home Price Indicies for US Cities for New York, Atlanta, Chicago, which give market-based valuations, based on a transparent methodology.

In theory, it is now possible to use such City indexes as reference rate benchmarks for Islamic mortgages in those cities, as a ‘real economy' link between property prices and mortgages.

A number of well meaning initiatives have been undertaken over the years in an attempt to delink Islamic finance contracts from Libor, to capture the connection to the real economy.

Is it time to repeal the ‘law of necessity' for Libor reference, and apply the same ‘law' to applying contribution rates for Islamic instruments as the beginning of a new paradigm for reference rate points?

Attempts to delink from Libor include local Islamic equity benchmark indexes (volatility issue?), Sukuk Index (trading and transparency?), CPI (frequency of data?), commodity index (volatility), real estate indexes/prices (bubbles, transparency, illiquidity?), in a variety of processes and formulas.

Challenges

While there is a link to the real economy with a sample of the afore-mentioned indicators — these are performance and not pricing measures, for placing and accepting inter-bank Islamic deposits — it presents an obvious challenge. Assuming Islamic fixing is possible, which is not an unreasonable assumption, the next set of issues include panel member banks (which contribute to prices), governance of the Islamic fixing (independent third party), and methodology for calculation and dissemination.

The global capital markets have accepted the transparent process for fixings, from overnight to one year and beyond.

In general terms, a number of panel member banks (16) contribute to pricing before a certain time (GMT) every business day, and the British Bankers Association (BBA) oversee the governance of the pricing to ensure fictitious prices are spotted and those contributing are removed.

The contributed rates are then applied to a formula by Thomson Reuters: removing the outlier top and bottom prices and taking the mean of the median. The rates are then released before noon GMT.

For Islamic finance to showcase its connection to the real economy, authentic and indigenous rates are the answer to the question, ‘what's the difference?' The ensuing financial instruments off of these rates capture the price, pulse, health and direction of Islamic finance.

Islamic finance needs to find its own path, and, a SCIRR, at Holmes' direction, could then be used by the conventional industry as a reference rate as connected to the real economy.

The writer is Global Head of Islamic Finance at Thomson Reuters. Views expressed here are his own and do not reflect that of his organisation or of Gulf News.

gulfnews.com

Sharia-compliant banking products a 'huge flop' in Britain

ISLAMIC bank accounts and other financial products have failed to take off in Britain, according to industry insiders.

This is despite hopes that the UK would become a pioneer in a new growth market.

New banks that were set up to appeal to the UK's nearly two million Muslims and Sharia-compliant products created by the existing high street lenders have failed to make much of an impact, critics say.

Junaid Bhatti, part of the team that set up Islamic Bank of Britain, the first Sharia-compliant bank approved by the Financial Services Authority, says that the sector has been a big disappointment.

"As we now approach the sixth anniversary of IBB's launch, I'm sad to finally have to admit that Islamic finance in the UK has been a huge flop," he said. "IBB may still be limping on as probably the last bastion of the cause, but it's difficult to imagine it holding out for much longer."

Competitors have fared even worse and many had closed or scaled back their operations significantly, Mr Bhatti said.

Established banks that launched Islamic banking products are also believed to have fared poorly. HSBC and Lloyds were seen as having made the biggest efforts to make inroads, but without much success, Mr Bhatti said.

"Lloyds, which made a half-hearted stab at Sharia-compliant products in 2004, doesn't seem to have promoted its offering for years," he said in an article for Muslim Politics.

"Even HSBC Amanah, probably the most credible and efficient provider of halal banking in the UK, has dramatically reduced its dedicated Islamic banking staff in Britain, and its marketing volume has been turned way down."

Neither Lloyds nor HSBC would give customer figures, but HSBC said that its accounts were growing at 10 per cent to 15 per cent a year. Lloyds did market its Islamic products but is no longer doing so.

An official said that they were detailed on its website.

Anyone visiting a branch could ask about its Islamic personal and business current accounts but would not see an adviser with specialist knowledge.

HSBC has launched several Islamic products since it got into the market in the UK in 2003 and has a dedicated salesforce in branches in areas with large Muslim communities.

The main aims of Islamic finance include the avoidance of riba, or usury, and making sure that money is not used to support industries considered to be unethical, such as alcoholic beverages, pornography and gambling.

Mohammad Qayyum, the director-general of the Institute of Islamic Banking and Insurance in the UK, said that there had not been "a concerted campaign by banks to make people aware" of available products. Another hurdle is that banks often price their Islamic products more expensively than alternatives, he said.

However, there could be some improvement with legislative changes designed to make it easier for banks to offer Islamic products, which should reduce their price.

The Treasury has made changes in the tax law to accommodate Sharia products, Mr Qayyum said, and the FSA is consulting on a new framework for the issuance and regulation of sukuk, or Islamic bonds.

http://www.theaustralian.com.au 

Irish firms urged to improve knowledge of Islamic finance

Irish accountancy and law firms will need to divert expertise to Islamic finance if the country is to attract business from this lucrative sector, according to a leading business academic.

Eamonn Walsh, professor of accounting at University College Dublin, said recent changes to legislation and tax rules that paved the way for Islamic finance investors in Ireland had been long overdue. However, he said that professional services firms needed to create a local knowledge base in this area for Ireland to win investments.

IDA Ireland is to promote the International Financial Services Centre as a hub for Islamic funds and banks, which are governed by Sharia law.

These rules do not allow interest to be charged; instead, banks share in the profit and loss of ventures.

Walsh, who has acted as a financial consultant to several large firms in the Gulf region, said there were opportunities in the sector, although Ireland was late coming to the table.

‘‘It is an area that has grown quite rapidly in the last three years," said Walsh. ‘‘It is estimated at the moment that Islamic finance is worth around $260 billion so, in the global economy, it is a small part of the market. But this is expected to quadruple in the next five or six years.

‘‘It would have been better had changes to legislation been [made] a year ago or two years ago, but the fact is that we have them now and that obviously is a good thing," he added.

Walsh said that the changes to Irish legislation paved the way for Islamic banks and funds and sent out a positive message.

‘‘It’s a way of Ireland saying it is serious about the Gulf states and [about] trying to encourage trade and investment," he said.



ThePost.ie

CFA Institute today announces the appointment of Usman Hayat, CFA, FRM, as director of Islamic finance and Environmental, Social, & Governance (ESG) Investing, to its Europe, Middle East and Africa (EMEA) office. Usman moves to London from the Asia Pacific Office in Hong Kong, bringing with him invaluable expertise in Islamic finance to the organisation's EMEA headquarters. 

As director of Islamic finance and ESG Investing, Hayat's main focus is to assist in developing educational content for investment professionals and members of CFA Institute in these two areas. In response to the growing interest and activity in Islamic finance and ESG issues, CFA Institute has created this directorship to support its Life Long Learning initiative - a scheme that helps members to stay updated in their profession through access to conferences, online multimedia and resources, publications, and executive education. 

Hayat holds the CFA designation, as well an MBA from Lahore University of Management Sciences. Previous to his role at CFA Institute, Hayat worked as an independent consultant in the capital markets of Pakistan. He has extensive knowledge and experience in the areas of market development and risk management having also worked as Joint Director at Pakistan's Securities and Exchange Commission. Since 2002, Usman has had over 60 articles published in English language media.

Commenting on the appointment, Nitin Mehta, managing director for EMEA at CFA Institute, said, "Usman's appointment is timely: Islamic finance and ESG factors are becoming important features of the investment landscape, and, therefore, investment professionals are seeking more educational opportunities related to these areas. Among the major financial centres, London is a leader in both topics, so Usman is ideally positioned to build a network of support and influence in developing educational content and programmes for the global investment community." 

Source: Zawya

Islamic finance to grow, needs to work on basics

 Islamic finance consistent with Sharia law is poised to grow and take advantage of the conventional banks' lost reputation after the global financial crisis, banking experts said Monday, but the sector still needs to work on its basics to succeed.

Although Islamic banks were the least affected by the worldwide crisis and posted strong growth, "there is no room for complacency," the Governor of Bahrain's Central Bank, Rasheed al-Maraj, said in Singapore.

"If we can ensure that the foundations are sufficiently robust, the Islamic financial industry has a great and profitable future ahead," he told a conference on Islamic banking. "There is a great deal of work to be done."

Assets of the top 500 Islamic banks jumped 28.6 per cent year-on-year to 822 billion dollars in 2009, according to the Singapore-based Islamic Bank of Asia.

Industry experts predict assets of Islamic banks to top 1 trillion dollars this year, representing about 1 per cent of all global bankassets.

"The figures of Islamic banks are impressive, but there are some challenges," said Sultan bin Nasser al-Suwaidi, governor of the Central Bank of the United Arab Emirates.

One challenge is to set standards in accordance with Sharia law, he said, urging more coordination in rulings by Sharia boards.

Because there is no single version of Sharia, which for example prohibits the payment or acceptance of interest fees for lending, a contract regarded as Sharia-compliant by some scholars might be rejected by others, said Bahrain's al-Maraj.

"There exists a lack of legal certainty," he said.

For Ibrahim Hassan, chief executive officer of Malaysia's Maybank Islamic, the issue of standards should be addressed "from a global perspective" to attract worldwide investors.

One other key driver for the sector's growth is innovation, "to offer more products to a wider range of customers," he said.

So far Islamic banks have a relatively high concentration of risk on real estate, al-Maraj warned, noting that it was critical for Islamic finance to "find ways of diversifying its risks."

Jacques Tripon, chief executive officer of BNP Paribas' Islamic Banking said the sector needed more "money market products" quickly.

Islamic banks should not just aim to make profit, but "also go back to the essence of Islam," offering microfinance for low-income clients, he said.

Innovation and research are one of Islamic finance's weaknesses, Tripon said. Others are "very scarce" human resources and expertise.

For Tan Jeh Wuan, managing director corporate banking and capital markets at the Islamic Bank of Asia, there "is little doubt that the Islamic finance and Islamic banking institutions are in an enviable position."

During the global crisis investors saw the risks of complicated financial products, he said.

Now there is a trend to basic products, Tan said, calling Islamic finance "an example of such no-frills financial solutions."

"The financial turmoil has ... presented windows of opportunity for promoting Islamic finance," he said, noting that besides the Middle East, Islamic finance is becoming more widespread in Asia.

The growing economies of Indonesia, China and India - as well asEurope - are potential markets, Maybank's Hassan said.

Looking ahead, Islamic finance would see some consolidation, BNP Pariba's Tripon said, because "we have too many banks."

Contrary to other analysts who painted a rosy picture of the sector's future, Tripon gave a more moderate outlook.

"The challenges ahead of us are huge," he said, warning that "we have to be very, very careful to stick to our principles."

"We are progressing maybe at a slower peace, but still much faster than the conventional market."

Source: Earth Times

Islamic banking faces liquidity challenge

Central bank governor notes distinction between profits of shareholders, investors, depositors

• Al Suwaidi believes the UAE is well placed to take advantage of growth in the region.
• Image Credit: Supplied

Singapore: The management of short-term liquidity by financial institutions in the UAE is one of the challenges facing the growing Islamic banking system here, the UAE Central Bank governor said yesterday.

Addressing the opening session of the first annual World Islamic Banking Conference-Asia, Sultan Bin Nasser Al Suwaidi also pointed out the need to distinguish between the profits of shareholders and those of investors and depositors.

"The figures of Islamic banks are impressive, but there are some challenges that would need the focused attention of scholars," Al Suwaidi said.

"The first such challenge is the question of disparate rulings by the various Sharia boards of Islamic banks, which should be better coordinated and harmonised," he said.

This "will satisfy an important requirement of setting credible standards [for Islamic banks]."

Short-term liquidity management at Islamic banks and other financial institutions constitutes another challenge, he said.

"This is not a straightforward issue and has been under discussion between Islamic banks and the Central Bank of the UAE. There is now a proposal to advance a solution for this issue," Al Suwaidi said.

Challenge

"The third challenge is the distinction between profit to shareholders and profit to investors [or] depositors, which is not a clear-cut issue at the moment. We need a standard formula to calculate profit in an equitable and fair way at all Islamic banks," he said.

The Islamic banking system in the UAE goes back to 1975 with the formation of Dubai Islamic Bank. In 1998, the second bank, Abu Dhabi Islamic Bank, was formed.

Today there are eight Islamic banks operating in the UAE with 219 branches and assets of Dh242 billion at the end of 2009. These represent 16 per cent of the total assets of the banking system. Deposits at the end of 2009 stood at Dh183 billion, or 18.7 per cent of the banking system.

Deposits grew 9.5 per cent, and loans and advances 5.5 per cent in "a difficult year" as a result of the international financial crisis, Al Suwaidi said. Assets of Islamic banks grew 6.5 per cent in 2009.

The UAE "is well placed to take advantage of any growth in the economies of the countries in the region," he said, due to its infrastructure to "service stronger trade and investment flows".

The UAE's infrastructure projects — such as the railway, marine transport networks and nuclear power generation plant — are expected to "add value and help expand other economic sectors", he said, leading to further diversification of the economy.

Source: Gulf News