Crisis opens up opportunities for Islamic finance

The growth opportunities for the Islamic financial industry are particularly strong as Islamic finance has its largest presence in rapidly growing economies that have been least affected by the global financial crisis, according to Bahrain’s central bank governor H.E. Rasheed M. Al-Maraj.

Speaking at the 18^th annual world Islamic banking conference in Bahrain, Al Maraj noted that the “obvious flaws” in conventional finance have created great interest in the Islamic financial model.

He said: “This should provide the basis for the industry to sustain a period of strong growth for the rest of this decade. “

In Al-Maraj’s view, if Islamic finance is to make the most of its opportunities, it still needs to learn from the mistakes of interest-based finance.

“As Islamic financial institutions expand, they need to make sure that their management and control functions keep pace with their growth.”

He added: “Building high quality human capital is an essential building block for the expansion of the Islamic financial industry.”

Al-Maraj said the Islamic financial industry is fortunate to have several well-established standard-setting bodies including the Islamic Financial Services Board and the Accounting and Auditing Organisation for Islamic financial institutions.

“These bodies now need to take the lead in adapting the new international standards, including Basel III to the specific circumstances of Islamic finance,” said Al-Maraj.

Within Asia, Malaysia is a good example of the opportunities for Islamic finance. For example, Ernst & Young showcased its World Islamic Banking Competitiveness Report at the conference in Bahrain, which revealed that the Malaysian Islamic banking sector registered a four-year compound annual growth rate of 19.3% to reach $87bn in 2010.

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Nigeria: Experts Restate Great Future of Islamic Banking in the Country

An Islamic finance expert Hadiza Garba Laka has said the non-interest banking (Islamic-banking) has great potential for the Nigerian economy.

Hadiza Garba Laka of Lotus Capital Limited, who was delivering a paper recently at a public lecture organized by the Jama'atul Ta'awunil Muslimeen in Abuja, pointed out that Islamic banking has witnessed real time growth in UK, USA and Malaysia.

Also speaking at the lecture, Malam Mohammad Lawal Shaibu, an expert on Islamic banking and investment, said the interest-free banking is not a preserve of Muslims, explaining that the banking system is operated by Christians abroad since it is all about business.

Dr. Tawfeeq AbdulAzeez of University of Abuja, who was represented by Abu Mazeedatul Khayr said Islam prohibits usury because the religion is a complete way of life.

Malam Mosur Olaide, representing the Director General of the National Space and Research Development Agency, (NASRDA) Dr Saidu.O. Mohammad maintained that if conducted honestly and given a chance, Islamic banking will bring high moral ethos into the Nigerian market.

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Islamic banking comes out of its niche

The global economic crisis has meant lower interest rates, higher risk, and an investor flight to safety. Can Islamic banking pick up the slack?

Modern Islamic banking follows Islamic law according to the boards of Shariah scholars which differ between the conservative Middle East and more accepting South East Asian regions but the fundamentals remain the same: interest is banned and banks operate on a system of profit loss sharing (PLS). Loans involve the bank purchasing a commodity at market value and then selling it to the customer at a higher price with the bank keeping the difference. Similarly, interest is not paid on deposit accounts but investors share in the profit of the bank at a level set to compete on the conventional market. The Koran prohibits the financing of companies involved with goods and services deemed unethical (such as weapons, pork and gambling) and forbids speculative investments, insisting all financial transactions must be backed by tangible assets.

Hussain Al Qemzi

This lack of exposure to derivatives, sub-prime debt obligations and other risky business ventures meant the Islamic finance industry withstood the first wave of the global financial crisis relatively intact. As the impact of the crisis extended to the real economy, Islamic banks, particularly those in the Middle East, which invested heavily in real estate, began to feel the pinch. But with central banks around the world lowering returns, Islamic banks are finding themselves better able to compete for business.

“Islamic financing can no longer be seen as just a low-risk, ethical or religious alternative, ” Hussain Al Qemzi , CEO of Noor Islamic Bank told INSEAD Knowledge on the sidelines of an International Summit on Islamic Corporate Finance in Abu Dhabi recently. “I believe the growth that’s happening today is about competition.”

A trillion dollar industry

Since the opening of the first modern commercial Islamic bank in Dubai in 1975, Islamic finance has developed from a niche service presenting Muslims with a Shariah-compliant means to invest and do business into a mature, fast-growing industry with an estimated one trillion dollars in assets. While the figure represents just over one percent of the world’s total assets, the strength of the Islamic finance industry lies in its growth prospects.

Noor, which launched to the UAE public in January 2008, a few months before the full force of the economic crisis hit the region, shelved its international growth when the extent of the downturn became apparent. After redirecting its efforts to the local market, Noor was in profit in the first half of 2011, six months ahead of schedule. AlQemsi says the bank will review its growth strategy in 2012 with a view to expanding into African nations such as Egypt and Tunisia, where market penetration remains below 10 percent as millions of Muslims begin to move from a cash economy and seek halal financial dealings.

A recent IMF study titled ‘Islamic Banks: More Resilient to Crisis,’ found Islamic financial institutions have experienced credit and asset growth at least twice as high as that of conventional banks since the crisis hit, with asset value increasing by 21 percent in 2011.

Robust growth has been reported across almost all regions in which it operates from the world’s biggest Islamic finance market in Malaysia, to the oil-rich Middle East and the emerging markets of North Africa. Today Islamic bankers are keen to capitalise on conventional banks’ lack of liquidity offering credit at competitive rates and expanding the sectors’ presence into the conventional banking market. “With products like sukuk (Islamic bonds) and new syndication structures, we can do basically anything conventional banks can… and we can do it competitively,” claims AlQemzi.

AlQemzi says about 40 percent of the bank’s retail and corporate clients are non-Muslim. 

Not just for Muslims

In October, the Financial Times reported that Islamic banks were providing the best returns on cash deposited for two, three, four and five years, noting the Bank of London and the Middle East (BLME) has seen a four-fold increase in customer deposits mostly from non-Muslim investors. BLME, one of the main providers of Islamic finance in the UK sets a £50,000 minimum.

The real growth driver for the Islamic banking sector, however, is expected to come from international corporate finance as conventional banks tighten lending patterns and big business looks to include Islamic institutions in its funding mix.

Whether this is through Shariah-compliant syndications, trade finance or the use of other structured loan products, Islamic finance is leveraging off its deep pool of liquidity and experience with Gulf Cooperation Council (GCC) project finance to offer a competitive alternative to the international corporate finance market, David McLean managing director of MEGA, an umbrella company representing some of the world’s biggest Islamic finance conferences, told Knowledge. “The Islamic finance sector is starting to become part of the big loan syndications,” McLean says.

The market for sukuks

The most popular Islamic finance product used in corporate Islamic finance is the fore-mentioned Islamic bond, called a sukuk. Global sales of sukuks, which fell off dramatically after peaking at US$87 billion before the global financial crisis have rebounded.

In the first half of 2011, US$43.8 billion was raised globally, setting a new record. In May this year, HSBC Middle East became the first international bank to issue a benchmark sized - US$500 million - public sukuk. And in October, Goldman Sachs registered a US$2 billion Islamic bond programme.

Mohammed Dawood, managing director of Global Capital Financing, HSBC Amanah at HSBC Bank Middle East says the bank has noticed a change in the proportion of international buyers keen to access the sukuk market.

“There was a fairly even split between conventional and Islamic buyers and the spread of international buyers was broad, with Asian, European as well as Middle Eastern buyers picking it up,” Dawood told INSEAD Knowledge.

Investors were attracted by the price of the Islamic bond, which was issued flat to the conventional HSBC bond, meaning that the issuer did not have to pay a new issue premium, he says.

“The spread has tightened to 20 basis points inside the conventional equivalent - which suggests that, purely on current market levels, cheaper pricing can be achieved by issuing sukuk over conventional bonds,” Dawood says. “Liquidity is strong but, also more importantly, Islamic trades themselves have performed really well in the after market.”

Despite the sudden growth, Islamic finance is still in a very nascent stage with its own set of challenges. Whether it has enough liquidity to solely fund multi-billion projects is doubtful and there are still challenges relating to branding, product depth, perceived transparency and regulatory issues.

Islamic scholars are still arguing about certain aspects of Shariah law, making it difficult to standardise products across the Islamic world.

“Islamic banking is still a new industry,” Al Qemzi says. “It has three focussed areas where you will see it predominately strong: GCC, Turkey and South East Asia. “Each follow different approaches but this is changing and we are seeing the industry moving and getting more into synergy with each other.”

http://knowledge.insead.edu/

Zimbabwe: Islamic Banking - Growth Solution?

Since dollarisation, we have been fed various statistics that imply that things have improved since the hyper-inflationary days.

In particular, "growth" has been recorded in various sectors of the economy. To be fair, there, indeed, has been improvement in several areas. Supermarkets are full, companies are no longer compelled to resort to illegalities to remain operational, money is not littering the streets and some semblance of a normal economy is present.To the mind of the ordinary citizen, though, the most telling sign of improvement or growth is simple: an improvement in their standard of living.

If a survey were to be conducted right now, how many people would claim that their standard of living has improved? In general, it would seem that all that has happened is a reshuffling of the problems and the economic environment.

Under hyper-inflation, there was too much money chasing too few goods. Currently, there are plenty of goods, and no money to buy these with.

Previously, those in formal employment were singing the blues while the informal sector thrived. Now, the reverse is probably true, although even formal employment is now on shaky ground, as companies are inexorably succumbing to the liquidity crisis.

In essence, it would appear that while the hyperinflationary menace was uprooted, the underlying problem, that of a sick economy, was not addressed. The fact of the matter is that Zimbabwe's economy has been sick for a long time, probably from as far back as twenty or more years ago.

When one looks at our 1996 statistics (1996 is touted as having been the best year ever in Zimbabwe, from an economic point of view), even then the country was heavily dependent on external balance of payments support. In fact, the economic structural adjustment programme was embarked on in the early 1990s to try and address the problem of a non-performing economy.

Several attempts have been made at re-inventing the wheel, insofar as getting Zimbabwe's economy to tick is concerned. "Thinking outside the box" was a popular phrase in the last decade, but all that resulted from this was weird situations such as a dollar in hand being worth more than two in the bank, and sitting at a corner and trading money becoming vastly more profitable that doing an honest day's hard work.Although copying was and is always discouraged from a scholarly perspective, sometimes it is exactly what is needed in order to get the right answer. It is no secret that the best-performing economies outside of oil-producing and other countries with similar natural endowments are those that have a broad-based economy.

The more self-sufficient an economy, the better off its citizens are. Such economies also typically do not run deficit positions on their national accounts.

Although it may not have caught the eye of the general public, American economists have for long been arguing against the running of continuous deficits.

But for as long as the party continued, no one was willing to think about the hangovers that would ensue.

Running a national deficit should only be undertaken for strategic reasons, or to facilitate capital expenditure. Unfortunately, that principle has been lost here, and deficits are run to facilitate recurrent expenditure with no expectation of fu-ture gain.

Apart from the macro-economic issues, however, the-re are micro-economic issues to do with the general business attitudes currently prevailing that also militate against the economy's recovery.

Short term thinking is perhaps one of the worst such attitude. Since dollarisation, all de-posits are said to be "short term", incl-uding investments by pension funds and other players whose activities are clearly long term in nature. This tendency is fuelled by the speculative mentality of yesteryear, where one had to have money on hand to "take advantage of opportunities".

No one wants to think long term, even when their mandate dictates that they should. In light of this, companies are now unable to raise funds through any other means than borrowing. With borrowing rates totally out of sync with rates of return as shown by economy-wide profitability and growth statistics, all this does is create an ever-deepening hole for our already-frail industrial and commercial sector.

Ironically, these companies being de-prived access to reasonable finance are the self-same employers of the members of the pension funds demanding unreasonable rates of return from the money markets.It is with such scenarios in mind that one is drawn towards models such as Islamic banking. Islamic banking, which is based on Shariah law, bans the charging of interest on monies lent.

Instead, the lender is obligated to participate in the profits or losses of the borrower. This banking model arose out of the need to protect borrowers from usury.

While Shariah law is sometimes criticised as being harsh, when one looks at issues such as ours, you begin to understand its social and even economic sense.

Several banks already do transactions on a profit-sharing basis, within the realm of structured financing, but perhaps it's time that this concept became more pervasive.

Without putting in place such measures, companies are going to be drained of resources through unviable financing arrangements, and in the end, even if the banks report profits initially, eventually even they will have no customers, and their overheads will consume them.

A lending model where the bank's participation is in profits and not just a fixed levy on the borrower also ensures the bank is more involved in the customer's activities. While this may seem invasive, it could actually improve recovery rates.

Currently, banks are mostly only interested in holding collateral, rather than truly understanding what a customer is up to.

Although the banking sector has a part to play in making their products more suitable to the prevailing economic circumstances of borrowers, and more cognisant of the medium to long term impact of their activities, the companies themselves are also to blame.

Reluctance to issue equity is one of the major reasons why several of them are in dire financial circumstances. Issues like upgrading of equipment can be addressed by bringing on board technical partners or obtaining vendor financing, but no investor is going to go into such a transaction if it will result in the company having a lopsided (over-borrowed) capital structure.

As Zimbabweans (and perhaps even as Africans, generally), we have a strong tendency of wanting to retain control, or wanting to be known as the owner of something.This is what has resulted in the stagnation or even downfall of several previously enviable institutions.

Working within group or communal structures often results in one member usurping the project and exploiting it for personal vantage. Without learning to think collectively and for the common good, it is going to be very difficult, if not impossible, to implement the sort of strategies needed to uplift us as a nation.

Concepts such as Islamic banking encourage the development of a communal and mutually beneficial mentality, unlike the rigid, impersonal and often conflicting nature of ordinary lending as we know it.

Perhaps as a nation we need to think deeply about such things.

Farai Mutambanengwe is the managing director of Adway Financial Services (Pvt) Ltd.

http://allafrica.com/

Give Islamic benchmark rate a chance: Bankers

The launching of the Islamic Interbank Benchmark Rate (IIBR) by Thomson Reuters in Bahrain last week is the latest manifestation of how the technical architecture of the global Islamic financial industry is maturing. To many the pace of maturity remains frustratingly slow, especially in the Middle East and North Africa, while Asia is galloping ahead, which has resulted in a lob-sided West Asia and East Asia fault line.

The search for a purely Shariah-compliant benchmark for pricing Islamic financial transactions and products is not new, whether it applies to Commodity Murabaha deals or Islamic mortgages. Malaysia has tried to set profit rates for its Islamic banking sector devoid from the benchmarks of LIBOR (London Interbank Offered Rate) or KLIBOR (Kuala Lumpur Offered Interbank Rate).

In reality, the debate even amongst Islamic bankers has been whether a purely Islamic benchmark is really necessary. After all they argue that the use of LIBOR and its ilk merely serve as a benchmark and are not involved in the actual transaction.

According to Rushdi Siddiqui, global head of Islamic finance, Thomson Reuters, the delinking from conventional performance benchmarks started more than a dozen years ago in the Islamic finance industry, but this launch of "the world's first Islamic finance benchmark rate" is designed to provide an objective and dedicated indicator for the average expected return on Shariah-compliant short-term interbank funding.

IIBR uses the contributed rates of 16 Islamic banks and the Islamic sections of conventional banks "to provide a reliable and much-needed alternative for pricing Islamic instruments to the conventional interest-based benchmarks used for mainstream banking sector."

Only two Saudi banks are on the contributors list, namely Alinma Bank (an Islamic bank) and National Commercial Bank (a conventional bank). The list does not include Al-Rajhi Bank, the world's largest Islamic bank in terms of assets and balance sheet.

The criteria of IIBR require that participating banks must supply to all points on the curve; they must quote every day from Sunday to Thursday, and as Sunday is not a working day (say) in Malaysia, Friday's rate will be used; and contributors will be permitted to maintain the same rates for one additional day.

The calculation method is based on contributions being ranked highest to lowest; the upper and lower quartiles are disregarded; the fixing is calculated from the mean average of the two mid-quartiles; the output rate is calculated to five (5) decimal places; and the rounding convention is the same as standard Thomson Reuters.

The benchmark's ongoing implementation and integrity will be overseen by an Islamic Benchmark Committee of over 20 Islamic finance institutions, chaired by Nasser Saidi, chief economist of the Dubai International Financial Center (DIFC), and a Shariah Committee consisting of four Shariah scholars, namely, Sheikh Yusuf Talal Delorenzo (chairman); Abdul Rahim Sultan Al-Olama; Mohammad Daud Bakar; and Sheikh Muddassir Siddiqui.

While Nasser Saidi maintains that "the establishment of the IIBR marks an important milestone in the maturation of Islamic money markets by providing an international reference rate for interbank transactions," some Islamic bankers are more cautious about the feasibility of IIBR in practice. 

"Conventional money markets have relied on LIBOR, which by definition does not comply with Shariah conventions. Islamic markets will be able to rely on the IIBR and it will become an international reference rate for both conventional and Shariah-compliant transactions. Our aim is to provide an IIBR that is reliable, timely, representative of market conditions, transparent in its construction and accepted as the market reference. Islamic money and financial markets are coming of age and becoming part of the mainstream," added Saidi.

But, Badlisyah Abdul Ghani, CEO of CIMB Islamic Bank, one of the participating banks in setting the IIBR, confirms that he is personally "not entirely convinced with the feasibility of having an IIBR which is separate from the conventional market. The percentile (e.g. 1 percent, 10 percent, etc) are just numbers. There is no such thing as Islamic mathematics! There is only mathematics. Islamic financial institutions use the benchmark rates such as LIBOR, KLIBOR, etc, as reference rates in the calculation on returns under various Islamic financial transactions. There is no Shariah reasoning for not using LIBOR because it is just a number referenced to determine a return rate under trade contracts."

This is where Thomson Reuters' collaborative approach comes in. Industry challenges, stressed Siddiqui, are best solved by industry players working towards a common objective. The simplicity and robustness of the new benchmark's methodology, governance, and transparency, combined with the endorsement of many respected Islamic financial institutions and scholars, will result in a reliable and realistic benchmark that better measures cost of funding for Islamic financial institutions, he maintained.

CIMB Islamic Bank, for instance is committed to see through this initiative to make it a success and feasible exercise unless proven otherwise, because it is a member of the Association of Islamic Banks in Malaysia (AIBM), which has agreed to support the IIBR initiative, whose other multilateral sponsors include the Jeddah-based Islamic Development Bank (IDB); the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI); the Bahrain Association of Banks (BAB); and the Dubai-based Hawkamah Institute for Corporate Governance.

Abdul Ghani has other concerns about IIBR - in that it may be heavily Middle East-centric and reflect largely Middle East pricing. "In general, it would be fine if the rate can reflect only one common rate globally. For a start it will probably reflect just Middle East pricing as most contributors predominantly come from there. When more contributors from the rest of Asia (particularly Malaysia and Indonesia), Europe and America come on board later, this rate will converge to neutral. This, I believe was somewhat similar to how LIBOR started in those early days," he explained.

According to the promoters, the IIBR harnesses Thomson Reuters global benchmark fixings infrastructure which is used to compile over 100 fixings around the world. Rates for Shariah-compliant US dollar (USD) funding will be contributed by the 16-member panel in the morning of each business day to Thomson Reuters systems and will be published daily on Thomson Reuters terminals. The efficacy of how the benchmark works, according to Abdul Ghani, depends on how close the IIBR is to the particular market. "If the IIBR yield curve is 3 percent and the particular market is trading around 1 percent, then creditability is questionable," he added.

The new benchmark, says Thomson Reuters, can be used to price a number of Islamic instruments including common overnight to short-term treasury investment and financing instruments such as Murabaha, Wakala and Mudaraba, retail financing instruments such as property and car finance, and sukuk and other Shariah-compliant fixed income instruments. It can also be used for the pricing and benchmarking of corporate finance and investment assets.

Islamic bankers are not duly worried about the constraints of the IIBR in that it will only set the daily rates for Shariah-compliant US dollar (USD) funding and not other major currencies as well. The consensus is that a benchmark will have to start somewhere and starting with a US dollar one is fine, as long as other yield curves for other currencies are also developed as and when the need arises.

"My only concern at this juncture is whether having this initiative done in a new market that has yet to achieve efficiency would bring about a meaningful result and impact on the young modern era Islamic financial market," explained CIMB Islamic's Abdul Ghani.

In London, LIBOR is set daily in the morning by the top six banks, whereas the IIBR process comprises a whole range of banks (from very small to fairly large ones) and a number of professional bodies. Abdul Ghani warns that IIBR contributors must give out a rate that is reflective of the real market not entirely based on their market position because if based on their position, the result can be somewhat skewed.

"Later," he explained, "the pioneering contributors will be expanded to include more contributors from center such as Europe, US and Asia. The idea behind the initiative is to just start something instead of simply discussing the theory. As much as I am not fully convinced, I am game for anything that may be able to help contribute to a more robust Islamic financial market. If it does not work, then at least we would have explored it. If it works, then the industry would be for the better."

The challenge of IIBR is whether it can facilitate cross-border transactions and funding given the diverse nature of the level of development of the Islamic finance markets in the Middle East, GCC, Malaysia and the rest of Asia. Unless the rate is reflective of all the centers that partake in the initiative, Islamic banks maintain that it is going to be very difficult to say whether IIBR can facilitate cross border transactions and funding.

Abdul Ghani is bullish about IIBR and urges the market to give it a chance. After all, he stressed, the aim of IIBR is to help enhance the robustness and integrity of the Islamic financial market.

http://arabnews.com

Islamic Banking Is the Need of the Hour: Experts

Even as RBI and government aren't keen on allowing Islamic banking, experts from the world of Islamic finances today said it is a question of "how soon and not whether it will be allowed", as this mode of banking can greatly help a fund-starved country get long-term finances.

"It is not when, but how soon, the Reserve Bank and the government will take a positive view on this highly effective financing option," T Balakrishnan, the brain behind the country's first proper Shariah-compliant financial services firm Al Barakah Financial Services, promoted by the Kerala government, told PTI on the sidelines of a meet on Islamic banking organised by the Indo-Arab chamber of Commerce and Industries here today.

Balakrishnan, who just retired as the additional chief secretary of Kerala in-charge of industries and commerce, said the Kerala State Industrial Development Corporation-promoted Al Barakah Financial Services, which was refused permission by the RBI early this year to start NBFC operations, is still hopeful of getting the regulatory nod.

Islamic banking prohibits charging interest from idle deposits, but allows investment in productive projects/ business and the resultant profit-sharing.

Pointing out that 75 per cent of the bank deposits in Kerala is held by the state's Muslim population, which constitute 25 per cent of population, he said, if Al Barakah Financial Services, in which, the state holds 11 per cent equity, or any other organized player is allowed to operate, they can easily channel billions of rupees to build infrastructure in the state. But he added none of these depositors draw interest from their banks, as it is prohibited under their faith.

Currently, Islamic banks across the globe manage an asset base of over USD 1 trillion (as of 2010), which is projected to reach USD 2.8 trillion by the turn of 2015.

Addressing the summit, Rajya Sabha deputy chairman R Rahman Khan blamed the bureaucracy for their myopic approach to developmental issues. 

"The problem is that our bureaucracy is not open to change and look for newer ideas. So is the case with the officials at the central bank. If they open their eyes and look at the Arab world and their finances, they will find that their banking model is many times better and more stable than interest-driven banking system that we have," Khan said.

Shariq Nisar, a director at TASIS that advices Shariah-complaint companies in their investment areas, said, "It is not that there is no Islamic banking being practiced in the country now. There are aplenty, but all in an unorganised manner. What we need is a formal approval from regulators, so that large players can enter and tap this huge untapped money for productive purposes."

Pointing out that already Islamic fund houses like Gulf Finance House, have invested over USD1 billion in the country's infra sector like roads, ports, railways, airports, which are all Shariah-compliant, a partner at law firm Clasis Law Ishtar Ali said the Naiad Toll Bridge was partly funded by Islamic finances.

"But companies cannot come and invest in more such projects because our banking rules don't allow them to do so," he said.

Balakrishnan said, Al Barakah Financial Services will again move the RBI for approval and expressed the hope that it will come by going by the 30 per cent (or USD 300 billion) funding gap envisaged by the Centre for its USD 1 trillion infra push in the next Plan period.

He also drew his optimism from the recent statement by the Prime Minister that it is high time the country looked at the Malaysian model of infra funding.

The Southeast Asian tiger economy heavily depended on Islamic funds for its infra expansion. So are China, the US, Britain, Germany, France and many other non-Arab, non-Muslim nations, Balakrishnan said, adding Islamic banking is thriving in as many as 75 countries today.

http://news.outlookindia.com

Kenya Booming Islamic Finance

The recently offered Islamic banking in Nairobi is attracting new customers from Muslims and non-Muslims alike who praise the growing industry for offering low-risk Islamic shari`ah financial solutions, UPI news agency reported on Friday, November 25.

"Now, I don't have to worry about accumulating riba," Ahmed Bayusuf said, using the word that, for Muslims, defines interest.

Developing in his work over the past decade, Bayusuf used to work as a cab driver in Nairobi for nine years.

After saving enough money, he invested in a coffee shop. Now, he's the store manager at Books First.

In 2007, Gulf African Bank and First Community Bank offered Nairobi's first interest-free banking options, in accordance with Shari`ah.

Now, there are nine banks offering interest-free options.

Other services that attract customers include free accounts with minimal opening fees, no ATM fees, no maintenance charges and flexible loan payments.

Offering low-risk investments, Islamic banking is appealing to Muslims and people of other faiths as well, Bayusuf said.

He added that he thrilled for having an opportunity to invest his money in Muslim-approved accounts.

"I also know that my money is being invested in compliance with the Islamic way," he said.

There are nearly ten million Muslims in Kenya, which has a population of 36 million.

Muslims make up nearly 98 percent of the communities of the North Eastern Province.

Booming Business

Showing a growing preference for Islamic banking, analysts expect a bright future of Islamic banking.

“The industry has transformed the banking sector," Abubakr Athman, a business analyst with TalentRecruit Kenya Limited, said.

"Many conventional banking customers have flocked into Islamic banking, clearly seeing the benefits on offer."

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

Transactions by Islamic banks must be backed by real assets, not shady repackaged subprime mortgages.

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

The Islamic banking is one of the fastest growing financial sectors in the world.

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

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.

http://www.onislam.net

Sri Lanka, Malaysia partners to promote Islamic banking, bonds

Sri Lanka's Wealth Lanka Management (Pvt) Ltd, an investment house, and Al Tayseer Advisory Services Sdn. Bhd a Malaysia based consultancy has linked up to provide Islamic banking and bond market instruments, officials said.The firm advices on Islamic banking and corporate finance and advisory services for specialist industries like steel, cement and cotton.

"We find Sri Lanka as an emerging market for Islamic finance with immense future growth potential," Al Tayseer Advisors Services, chief executive and partner Fahd Hashim, told reporters in Colombo.

"Sri Lanka is the second fastest growing economy in Asia right now and growth is linked to public sector investment with imports of cement steel."

Al Tayseer can help with setting up plants or acquiring them to supply commodities to Sri Lanka, Hashim said.

The firm was also working in Pakistan. Hashim said it was already advising a Pakistan based cement maker that is exporting to Sri Lanka. In addition to corporate finance the consultancy also advised in materials and energy efficiency and use of carbon credits.

Mangala Boyagoda, head of Wealth Lanka Management, a senior fixed income specialist in Sri Lanka said the new partnership could provide Shariah based bond market products to help create an interbank market in Islamic finance.

"You cannot develop Shariah banking without an interbank market," Boyagoda said. "We are looking at the possibility of raising a Shariah government bond."Though several banks have Islamic finance units in the country, they have constraints in Treasury management due to lack of compliant products.

The partnership will also advice on setting up Islamic banking units or outsource such units for banks, finance companies and leasing firms, Hashim said.

http://www.lankabusinessonline.com

Plans to develop Shariah interbank market

The Shariah interbank market will be developed in Sri Lanka to position the country to become a regional player. The possibilities are being looked at to raise a Shariah bond and negotiations are taking place at present.

The Sri Lankan banking industry landscape needs to be changed to incorporate better practices. Hence, Shariah is a concept that could be adopted by any customer not only Muslims, we need to promote this banking model, Wealth Lanka Management Chairman Mangala Boyagoda said.

“We will combine our exclusive strengths to introduce specialized Shariah linked financial instruments, incorporating true Shariah principles to the local market for the benefit of not only for Muslim brethren, but also for the country at large,” he said.

Islamic finance specialist Al Tayseer Advisory Services (Al Tayseer), a part of International Al Tayseer Group, signed a Memorandum of Understanding with Wealth Lanka Management (Pvt) Ltd, a local consultancy firm to jointly develop Shariah linked financial instruments for the local market by pooling their individual expertise. Many banks and financial institutions are experiencing increased demand for Shariah linked products and this demand is expected to grow further. As such, our focus will be to develop short and medium-term Shariah based financial instruments for banks, finance companies, leasing companies, corporate entities as well as the government,” he said.

“We are confident that entering into this new venture is both timely and appropriate. The launch of the venture would help support the government endeavours as well as offer alternative and innovative financial products in line with Shariah principles. In the backdrop of the dawn of peace and the government’s commitment to develop capital markets will have positive impact on the venture, Boyagoda said. The Shariah concept is different from commercial banking and there is a need to educate and train the public to gain benefit. The country’s Shariah banking will be developed according to the Malaysian model and discussions are underway with two banks to develop a road map, Al Tayseer Director Edwin Das said.

“Al Tayseer has identified Sri Lanka as an emerging market for Islamic finance. We have much to offer for the country’s business community in terms of Islamic banking advisory, consultancy, training, legal and compliance, regulatory framework and policies,” he said.

http://www.dailynews.lk/

Islamic banking forum a success

In spite of the economic turmoil in Europe, the economic problems in the US and the unrest in Bahrain, this year's World Islamic Banking Conference (WIBC) proved to be the biggest to date.

"In the current economic climate, the attendance at this year's event was just magnificent," said event organiser David McLean.

"We broke through the 1,300 delegate numbers and had more sponsors than ever before which is remarkable and is a testament to Bahrain's role as the capital of the Islamic banking industry,” he said.

"To get speakers and delegates from more than 50 countries was quite an achievement, given the state of the global financial industry, but it is a testament to the fact that Islamic finance is continuing to grow in this climate and shows that people across the globe see Bahrain as remaining the focus for the industry,” McLean added.

Professor Kishore Mahbubsani from the Lee Kuan Yew School of Public Policy at the National University of Singapore spoke on Preparing for the Asian Century.

Addressing the conference, which concluded at the Gulf Hotel yesterday, Prof Mahbubsani said by 2036 China would be the world's largest economy by far, would have the largest number of scientists and have the world's biggest space programme.

"We are entering a new era of world history where economic power is shifting to the east," he said. "By 2036, China will be the number one economy, India will be second, the US will be third and Japan fourth. There will be no European countries at the top.

"What we are seeing is the end of a 200-year era which has seen Europe and then the US dominate the global economy. It is the end of the West-dominating history," he said.

"But to some extent those 200 years have been an aberration in the last 2,000 years," he added.

He said the West had got to a point where you can't tell from day to day whether the euro would survive, while in the US its super committee has failed miserably to deal with their budget crisis.

"The core of the problem both Europe and the US are facing is that they are failing to understand that the world is rapidly changing. They fail to understand that they can no longer continue to live beyond their means," he added.

He said Asia was now succeeding because it had taken on the values of the West at a time when the West had forgotten them.

Asia, he said, was committed to free market economics, the mastery of science and believed in meritocracy at a time when the West was moving backward.

And he said the Middle East should now look more to Asia and less to the West and re-open the old Silk Route which previously bound the two regions together.

Meanwhile, Bahrain's economic growth is expected to be positive in the third quarter as the economy has already overcome a major part of the impact stemming from the unrest, Al Maraj said of the sidelines of the conference. –TradeArabia News Service

Debt, corruption and Islamic banking

SHARI'A MATTERS - In last week’s column, I suggested that a political party like Pakistan Tehrik-e-Insaf should adopt the promotion and implementation of Islamic banking as part of its election manifesto. While Imran Khan may not seem like someone interested in Islamic banking and finance, it (Islamic banking and finance) at times attracts interest from the least expected individuals and institutions. Until recently, I used to deliver a one-day training course in Islamic banking and finance at the London-based Chartered Institute of Securities and Investment. On one such training, I met two individuals from the London Metropolitan Police. On my inquiring, they informed me that they belonged to the financial crime branch and were interested to learn about Islamic banking and finance to see if it was linked to financing of terrorism or any other financial crime such as money laundering. Prior to this I didn't expect police to be interested in Islamic banking and finance. Today, Islamic banking practitioners come from all ethnic backgrounds (from Americans to the Chinese), nationalities (from Ethiopian to South Korean), and from all faith groups (from Jews to Hindus). 

I would not be surprised if tomorrow Imran Khan decided to embrace Islamic banking and finance, perhaps not for his love for Islam or Islamists but certainly because of the potential contribution that Islamic banking and finance can make to the cause of national debt strategy and elimination of corruption from the Pakistani economy. Islamic banking and finance, being asset-based, should in principle be less prone to financial crime, but it would be fair to assert that it is no more or less vulnerable to abuse by those who look for weaknesses in a financial system to exploit in their favour. However, because Islamic financing is always provided for doing business or trading, it is relatively difficult for the recipients of Islamic funds to "run away" with the money. In international transactions, if equity-based tools of Islamic finance are used to bring foreign capital into Pakistan, technically the new injection of foreign capital into the country will not lead to an increase in national debt. Even in the case of the government using sukuk for raising debt-based shari'a compliant capital, the financing will always be tightly linked to an already exiting asset or will be used for creating new assets.

This close proximity with the assets being financed makes Islamic banking and finance less prone to corruption. For large transactions, almost always there exists a double due diligence phenomenon (as part of regular banking practices but also an oversight function by the Shari'a supervisory board). 

There are some industry observers who argue that Islamic financial transactions are more prone to abuse, given that they are more complex. For example, sukuk (a Shari'a compliant equivalent of a bond) structures normally rely on a number of offshore companies (called special purpose vehicles or SPVs), which can potentially be used for tax evasion and similar kinds of financial crime. After all, the famous Enron debacle resulted from a complex nexus of SPVs that the company used before it eventually collapsed. While it is true that sukuk-type structures tend to be more complex than conventional bonds, it is primarily because of the lack of legal infrastructure in a number of countries where sukuk have in the past been issued. Malaysia provides a good example of a country that has developed a comprehensive framework for the issuance of sukuk. Therefore, there sukuk structures tend to be less complicated and consequently less prone to dispute, corruption and fraud. There is a need to study that model for the further development of an Islamic capital market in Pakistan. Once a transparent Islamic capital market is developed, fears of misuse and abuse of Islamic financial structures will diminish. It is important that the government develops a comprehensive plan to privatise the existing banks and financial institutions only through their conversion to Islamic financial institutions. The likes of Abu Dhabi Islamic Bank and many Qatari banks and financial institutions are looking for shopping opportunities out of their respective jurisdictions. Creating an upbeat environment in favour of Islamic banking in Pakistan will certainly attract their attention. Bringing an international class of new investors into Islamic banking in Pakistan will also ease out corrupt practices in the banking sector, by making such institutions less exposed.

The writer is a Shari’a advisor to banks and financial institutions and can be contacted at humayon@humayondar.com

UK 'to remain leading centre'

The UK and London will remain the world's leading international and Islamic financial centre.

That was the message from British Ambassador Iain Lindsay at a UK roundtable discussion at the WIBC yesterday.

"Islamic finance, like every other type of financial activity, benefits from the UK's combination of experience, variety of skills, geographic location, infrastructure, transparency and openness," he said.

"The UK recognises the tremendous opportunities that Islamic financial services have to offer.

"The latest figures for Sharia-compliant assets in the UK are $19 billion and $1 trillion globally with a potential global growth to $4trn.

"As a leading centre for financial innovation where Islamic structures are constantly being developed, our goal is to position the UK as the global partner of choice for the provision of Islamic financial services.

"This includes the development of strong partnerships with other centres of Islamic finance, including Bahrain," he said.

"In the UK we have a proven record of developing and delivering retail domestic and wholesale international investment Islamic financial services and products and the necessary legal and financial skills and expertise to take full advantage of this key market," he added.

"The UK is in ninth place globally and is the leading Western country and is seeking to consolidate its position as the gateway to Islamic finance in Western Europe.

"We have 22 UK banks which offer Islamic banking of which five are fully Sharia-compliant, more than any other Western country.

"We have 31 sukuk issues raising $19bn on the London Stock Exchange and there is a growing focus on the development of Islamic funds.

"There are 34 managed from the UK but asset managers are keen to innovate this market and there are more than 20 law firms supplying specialist services in Islamic finance," he said.

"The UK is moving Islamic finance from the niche to the mainstream market with world-leading expertise, skills and financial infrastructure to support this dynamic sector," he added.

He said many UK universities already offered Islamic finance degrees and UK institutions provided Islamic finance for small- to medium-sized businesses across the country.

"All the above demonstrates the strength of the UK and how ideal we are as partners of choice in the development of Islamic finance," he added.

"The success of WIBC demonstrates that Bahrain is an ideal location for businesses looking to establish themselves in this region."

http://www.gulf-daily-news.com

IDB to help build sustainable Islamic finance

The Islamic Development Bank (IDB)Group will continue assisting in building a sustainable Islamic financial system and sound regulatory framework both in Bahrain and Malaysia.

"A system of proper corporate governance processes in line with Islamic principles must be in place in our financial institutions," said Khalid Mohammad, chief executive officer of Islamic Corporation for Development of the Private Sector (ICD), IDB.

Speaking at the 18th World Islamic Banking Conference here today, he said there is a lack of regulatory framework in some aspects of the operations, adding that effective prudential supervision of banks is also vital.

The introduction of liquid, equity-based risk sharing and capital adequacy frameworks will shield Islamic institutions from the effects of future economic trouble and will help build a more sustainable financial system, he said.

IDB is actively involved in the establishment of the General Council of Islamic Banks and Financial Institutions in Bahrain, the International Islamic Rating Agency, development of prudential regulatory standards and a shariah compatible avenue for investing in a short-term inter-bank market with the Islamic Financial Services Board.

Mohammad said ICD, the private sector arm of IDB, also played a part in creating the recently established International Islamic Liquidity Management Corporation in Malaysia.

"We have also been contributing significantly to the Islamic banking industry all around the world, in response to the global financial crisis which has had a negative impact on most of its member countries," he said.

The global economic growth prospects are continuing to deteriorate in the majority of the advanced economies, while recent indicators point to a general convergence toward low growth in all economies around the world, he said.

Mohammad said the eurozone authorities are struggling to restore debt sustainability, recapitalising their banks, strengthening measures against financial contagion and laying the foundations for robust economic governance in the region.

However, in the recent financial crisis, the Islamic banking industry has remained relatively intact from the negative consequences of this phenomenon, and has demonstrated an alternative architecture that could help minimise the severity of the crisis, he said.

Global shariah-compliant assets have grown by 30 per cent since 2008, while asset growth in the world's top 1,000 conventional banks have slumped 6.8 per cent.

Islamic banks have raked in US$4.8 billion in net profits, while the Islamic finance Industry has sustained over 20 per cent annual growth since 2000 and achieved US$1 trillion in total Islamic assets last year.

"Islamic banking acts as a new architecture to redesign the conventional financial markets by eliminating the major weaknesses of the conventional system," Mohammad said.

http://biz.thestar.com.my