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The Islamic finance and banking industry continues to rise in growth and is most definately expected to exceed $2 trillion dollars by the end of the year.
On the surface, the Islamic finance industry in the Gulf has never been healthier. When Emirates Airline looked at the markets last year to secure financing for yet another tranche of new aircraft, it decided against its traditional option; the European banks.
"We were kind of planning for finance from European banks, but it’s just a bit difficult now," Emirates president Tim Clark told Reuters in November. "We still have the Islamic finance market to go with, and other funding options are always open for us."
That kind of approach is telling. As European finance houses wilt under the pressure of the continent’s sovereign debt crisis, fast-growing emerging markets firms are in dire need of liquidity that Islamic banking institutions apparently stand willing and ready to provide.
Another example of the industry’s popularity was investment banking behemoth Goldman Sachs, which announced last October that it was planning to issue as much as $2bn through sukuk. Recent reports indicate that the Goldman sukuk could well be received positively, particularly by Saudi investors.
And in November last year, the launch of the Islamic interbank benchmark rate (IIBR) was another sign of the growing maturity of the local industry. A result of the collaborative approach taken by Islamic finance institutions, industry associations and sharia scholars, the IIBR finally offers a proprietary benchmark that decouples the sector from more conventional pricing.
Global sukuk issuance exceeded $85bn last year, more than 90 percent higher than the previous year, according to Kuwait Finance House Research Limited (KFHR). Its monthly report on the Islamic bond market also said issuance during December fell below the average, hitting $5bn.
The report showed that sovereign issuance was the main catalyst for the sukuk market last year, making up $59bn, while companies' issuance reached $19bn. The 2011 total to $85.1bn represented a year-on-year increase of 90.2 percent compared to 2010, KFHR added. The global sukuk secondary market also reached an all-time high of $178.2bn by the year-end, a 24 percent increase on 2010, the report said.
On a monthly basis, December was a quiet month for issuances outside of Malaysia. However, the primary market still recorded a year-on-year increase of 0.7 percent.
The largest issuance for the month was the third issuance of the year for Pakistan Domestic Sukuk Company Limited which issues on behalf of the government. The $781.1m sukuk Ijarah was structured with a three-year tenure. The vast majority of primary market issuances were domiciled in Malaysia with only one sukuk each arising from Pakistan and Bahrain, the report added.
However, while the sharia-compliant industry is clearly popular, it still faces plenty of criticism. Is the industry simply seeing success by default due to the problems being faced by more traditional sources of finance, or is the trend on merit alone.
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The Rising Islamic Finance Industry
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Tuesday, March 27, 2012
Islamic banks with no interest coming to Croatia
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Islamic banks, banks which prohibit the payment or acceptance of interest or fees for loans of money, will soon arrive in Croatia. Dr. Sukrija Ramic, a member of the Sharia Board of the first Islamic bank on European soil, Bosna Bank International, has announced that legal regulations have been completed that will open the way for new Islamic banks to open in the region.
Ramic has said that Croatia, with its Catholic majority population, could accept an Islamic bank in the country before Bosnia and Herzegovina, since Pope Benedict XVI has previously recommended that commercial banks look to the principles of Islamic finance.
Islamic banks are not only intended for Muslims but for all citizens. There are no special requirements for non-Muslims. Apart from Islamic banks having no interest, there are no other differences between Islamic and conventional banking. Islamic banks do not finance alcohol, tobacco, pornography, prostitution, gambling or the weapons industries. In other words, investment projects must be halal, reported Croatian daily newspaper Vecernji list.
Morocco eyes first Islamic bank launch in 2013
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Foreign Islamic banks will be allowed to take up to 49 percent of Morocco's first fully-fledged Islamic bank in 2013, as the country aims to become a regional financial hub, a government minister said on Monday.
The government will submit to parliament a draft bill with a set of regulations for the introduction of Islamic finance products in the country within the next few weeks, General Affairs and Governance minister, Najib Boulif, told Reuters.
"We expect parliament to approve the bill before the end of this year. The current plan is to allow a gradual introduction of Islamic banks to preserve the competitiveness of existing(conventional) banks," said Boulif.
The draft bill will be added as a chapter to the country's Banking Law, providing a set of regulations on all Islamic finance products which specialised lenders will be able to offer from Morocco, Boulif said.
It is the first time that the Moroccan government, led since December by the moderate Islamist Justice and Development Party (PJD) has detailed how it intends to develop Islamic finance in the country of 34 million.
Morocco does not allow fully-fledged Islamic institutions but started in 2010 allowing conventional banks to offer a limited set of Islamic financial services products although customers complain they are subject to higher fees than conventional banking products.
So far only AttijariWafa, the country's biggest bank which is indirectly controlled by a holding company owned by Morocco's ruling monarchy, offers four such services based on Murabaha financing but only for personal finance.
Immediately after parliament approves the law, Moroccan authorities will allow local banks and foreign Islamic banks to set up the first Morocco-based Islamic lender, Boulif said.
"Local banks will be allowed to take at least 51 percent of its capital and as much as 49 percent will go to foreign Islamic lenders. There is a very strong demand from abroad for such a project," said Boulif, himself a member of the PJD.
Traders in Casablanca cite Qatar's International Islamic Bank as one of the likeliest foreign Islamic banks to want a foothold in Morocco.
"We thought it is best to start with one Islamic finance institution as we wish to assess closely the experience to ensure its success. If it proves to be a success within six months, then nothing should stop us from authorising more Islamic lenders," added Boulif.
In allowing fully-fledged Islamic finance institutions to operate in Morocco, Rabat aims to overcome what has become a chronic shortage of liquidity, speed up economic growth and help its ambitions to develop a regional finance hub in Casablanca.
"Our economy is in desperate need for a push to help it jump to an economic growth pattern above the (annual) 4 percent we have had in recent years," said Boulif.
When in opposition PJD legislators had said the development of a fully-fledged Islamic finance system in Morocco would add 2 percentage points to annual GDP growth.
"Morocco is struggling with liquidity shortage that forces the central bank to inject between 30 and 35 billion dirhams each week (into the banking system). This shortage hurts the financing of investment and impacts lending growth," Boulif said.
Morocco is also working on a developing a regional financial hub known as the Casablanca Finance City with a view to winning business with other countries in the north and west of Africa.
"We are keen to capitalise on the stability we enjoy here to turn Morocco into a regional Islamic finance platform," Boulif said, adding however that Tunisia and Libya may also harbour similar ambitions.
"Good investment opportunities don't wait. I think we will have to work pretty quickly to enact the new law in 2012 and not squander a very good and rare opportunity," he said.
(The Daily Star :: Lebanon News :: http://www.dailystar.com.lb)
Islamic banking : An alternative discipline
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Tuesday, March 20, 2012
Banking has evolved as an integral part of economics since long. Of late, correspondingly, Islamic banking has also occupied its position in Islamic economics. Now-a-days many academic curricula contain Islamic banking as an alternative to conventional or traditional banking. But when it comes to the genesis of banking and that of Islamic banking, one would admit that conventional banking has got much longer history and passed through many more phases of evolution than Islamic banking. As evident from history as well as different texts of economics, 'interest' had been a very important issue therein. Interest existed in economics, as return against capital, one of the factors of production. And banking is an industry basically based on interest.
On the other hand, interest is prohibited in Islam and hence Islam has always suggested an economy free from interest. In the economic theorem of Islam, there had been no space for interest and therefore no banking module was dreamed or visualised in Islamic economics. As the idea of banking was conceived on the very philosophy of interest, it (banking) can never be claimed to have belonged to Islam or the Islamic society. Banking is rather absolutely a creation of conventional economics.
As such the idea of prevelance of banking in the early days of Islam does not arise at all. But different business modules (of Islamic economics) were available at that time. Some of those modules were subsequently adopted in Islamic banking as well. That was done for the sake of avoiding interest of modern banking. Those modes were in the use of the ancient Islamic society, as different forms or modules of practical business, trade and mercantile or commercial ventures. Even Prophet Muhammed (SM) himself was also engaged in some of such businesses. This incident has subsequently been confused or mingled with various ideas. Thus the establishment of a just and balanced social order, exploitation- and poverty-free welfare society, attaining sustainable economic growth and other such virtues are integrated as objective or mission of Islamic banking. Practically, all these are nothing but the dreams of Islamic economics.
In fact, the right way to look for the origin or background of Islamic banking is to have a peep into the genesis of 'banking in general'. Primarily banking was merely a process of lending and borrowing of money. Perhaps the process originated in the hands of goldsmiths, merchants and Mahajans or any such affluent class of the society. Through evolution, it attained the institutional shape to bridge between the lender and borrower. Banking as of today is nothing but a corporatised, refined and extended shape of that intermediary function. However, at present, banking also encompasses many other ancillary services. Those services were adopted therein subsequently according to the demand of the day which was felt in phases.
In terms of corporate form of a banking institution, as we understand today, Islamic banking had never been a visible parallel organisation to conventional banking until, say the latter half of the last century. Then it became imperative to study the circumstances which led to the emergence of Islamic banking as a separate discipline. In doing this job, we reminisce those religious people who used to mark their erstwhile Bank Accounts with a noting of 'No-interest'. Many people were rather beyond the purview of banking channel for long to save themselves from falling into the religious curse. Banking and Islam were then treated mutually exclusive. Adopting one of them automatically rejected the other. At that time the two words Bank and Interest were synonymous.
In course of time, banking emerged as a very important activity of human civilization. At a point of time, it became simply absurd to remain associated with the economic wheel of the modern global village without taking part in banking. Such an emerged importance on banking activities made that pious group change their earlier view towards banking. They made up their mind not to stick to remain away or aloof from the purview of banking. They thought it better to get associated with the global finance industry; but obviously not at the cost of religion.
Consequently, in the realm of banking, 'interest' was diagnosed, and particularly targeted as the vital issue to address. Very rightly the scholars recognised that there remains no room for interest in (Islamic) economics, where banking prominently belongs to. Prohibition of interest in Islamic life then turned their concentration. 'Not to bank' was then revised as a move to 'Bank with religion' or 'Bank without interest'.
As the prime source of income of a bank is 'interest,' and interest arises from loan/lending and borrowing, loan transactions of conventional banking were identified first. Those transactions must be avoided as the way of earning in religious banking. It was perceived that loan or 'qard' might exist therein, only as an exceptional, non-business and non-earning benevolent transaction. But at large lending system was required to be replaced by any other permissible mechanism. Other subsequently extended ancillary functions and non-funded business activities of modern banks appeared in the second scene. These were regarded as non-prime issues, because interest as a direct element, was absent from most of those ancillary services.
Again, banking has emerged as a business. Now, to save a target group from interest-income, banking must not be transformed into a non-business charitable organisation. Interest-free banking must not mean cost-free, income-free banking. Banking is to remain a business or commercial organisation; but that business must be based on Islamic fundamentals. Every business must also have an expectation for a permissible return therefrom. Then the question comes, in Islamic banking business, what return we may expect, instead of interest. Very logically 'profit' has come as the first solution to replace interest. That idea opened the door of threadbare discussion and analysis which resulted in transparent differentiation between Interest (Riba) and Profit.
Interest in the Quranic language is 'Riba'. It is an Arabic word. Its literal meaning is excess, addition or increase etc. As a religious jargon Riba denotes an excess or addition related to loan. Riba, in English is called Interest. Interest is defined as a charge on borrowed money and its purview covers simple interest, compound interest and exorbitant interest or Usury as well. Interest implies a predetermined positiveness or mandatory increase from a deal in money.
On the other hand, 'Profit' is an English word. Profit means an advantage or benefit, financial gain or an excess of returns over outlay. Profit is the moneygained in business or from selling something for more than its original cost and/or 'an excess of income over expenses'. Prominent dictionaries like Oxford and Chambers also define 'profit' in the same terms.
A deal exclusively in money, known as a financial transaction, is not enough to result in a profit. There must be a real transaction or an underlying asset related to that deal to enable the deal as an earning tool which may generate profit. When the concept of profit enters into the realm of business it gets the shape of an equation. The equation is 'Profit = Revenue minus Cost'. Thus a profit may possess any sign. Negative profit, if any, is termed as loss. So, profit is the result or outcome of a venture, business or trade etc. Outcome of a business is usually expected in the positive form of profit; but both way i.e. positive or negative (loss) is practical.
So unlike interest, profit does not originate from the money itself. Profit originates from a venture where money is used as a factor of production. Here money gets the form of capital/investment and bears the expectation of reward (profit) and at the same time the risk of incurring loss as well. Profit results from equity sharing and/or trade and hence permitted by Shariah but interest is not. The Quranic verse is '…And Allah has permitted trade and forbidden interest …' (Sura Baqara: 275)
After portraying a concrete demarcation between interest and profit, it was made clear that it would be possible to simultaneously remain with banking and religion. This expectation initiated collective drive to replace interest by profit. The drive suggested turning the loan transactions of conventional banks into equity sharing ventures to earn profit therefrom instead of interest. Therefore, in banking, loan form of transaction got the shape of flow of money as capital/equity. It became a partnership between the religious bank and its client/s. Conceptually Islamic banking became a value-based and ethically guided financial operation.
Achievement of the drive for Islamic banking primarily lies in washing out or gradually abolishing 'interest' in the realm of alternative banking. Interest-free banking is typically called Islamic banking. Yes, to be a true Islamic bank, it needs to possess other qualities, but the most essential criterion is to be free from interest.
Under the alternative banking system, as share of bank's income, the depositor is to get variable return instead of fixed interest. Similarly on the asset side, financial transactions of loans are also converted into capital or equity finance to share income between the bank and the client. However, on the asset side there were other permissible ways to finance. One such way is to make real transactions like trade, instead of loan or debt transactions. Each of these transactions has got specific modus operandi adopted from the respective discipline of Islamic Economics. There was customisation of the features while practising those in the banking arena because those were in fact hired or adopted from other fields. Concerned rules, therefore, followed their respective original discipline of business or trade of Islamic Economics. Renting leasable assets through Lease and/or hire-purchase was, in principle, found permissible in Shariah.
As already stated, initially Islamic banking was a project to make 'banking sans interest' possible; not to make it superior or competitive even. Alternative modes were adopted just to avoid interest. Out of such alternatives as stated above, the asset-based real transactions and profit/loss sharing features of Islamic banking transactions, have by this time been adjudged as better than those of the corresponding models in its conventional counterpart. Equity finance (partnering or profit sharing method) of Islamic banking transparently shows the difference and the inherent beauty of Islamic banking. Such a mode vividly distinguishes Islamic banking by way of its yielding variable return as opposed to the predetermined fixed rate of interest in conventional banking.
In the backdrop of global financial meltdown since 2007 we have already experienced the comparative resilience of conventional banking and Islamic style of banking worldwide, as commented even by the Vatican. Final fate of Islamic banking depends to a great extent on the quality of the people who are entrusted with the responsibility to implement the system. Islamic banking demands strict adherence to the rule of 'principle to override or prevail over practice'. It is the Islamic banking players who deserve credit for fair play as well as discredit for infringement.
If this equity sharing concept of Islamic Economics can be properly applied with legal support, it can turn around the greatest odd consequence of conventional banking. It can bring about a new paradigm of justice and equity in the society. It would change the irony of (banking) fate or the fallacy which is very surprising. The surprise of traditional banking is that it makes the deficit unit (borrowers) owner of the assets, businesses, mill-industries and what not; whereas the surplus unit or owner of fund (depositors) remains assetless. What a peculiar equation! Asset should belong to the owners of the fund which has made the concerned business or asset comes into existence and keeps it running. Here shareholding of joint stock companies can be cited as an example.
The writer is Vice President and Head of Islamic Banking of Bank Asia Limited. Opinion expressed in the article are of the writer and not necessarily of the organisation he is serving.
http://www.thefinancialexpress-bd.com
On the other hand, interest is prohibited in Islam and hence Islam has always suggested an economy free from interest. In the economic theorem of Islam, there had been no space for interest and therefore no banking module was dreamed or visualised in Islamic economics. As the idea of banking was conceived on the very philosophy of interest, it (banking) can never be claimed to have belonged to Islam or the Islamic society. Banking is rather absolutely a creation of conventional economics.
As such the idea of prevelance of banking in the early days of Islam does not arise at all. But different business modules (of Islamic economics) were available at that time. Some of those modules were subsequently adopted in Islamic banking as well. That was done for the sake of avoiding interest of modern banking. Those modes were in the use of the ancient Islamic society, as different forms or modules of practical business, trade and mercantile or commercial ventures. Even Prophet Muhammed (SM) himself was also engaged in some of such businesses. This incident has subsequently been confused or mingled with various ideas. Thus the establishment of a just and balanced social order, exploitation- and poverty-free welfare society, attaining sustainable economic growth and other such virtues are integrated as objective or mission of Islamic banking. Practically, all these are nothing but the dreams of Islamic economics.
In fact, the right way to look for the origin or background of Islamic banking is to have a peep into the genesis of 'banking in general'. Primarily banking was merely a process of lending and borrowing of money. Perhaps the process originated in the hands of goldsmiths, merchants and Mahajans or any such affluent class of the society. Through evolution, it attained the institutional shape to bridge between the lender and borrower. Banking as of today is nothing but a corporatised, refined and extended shape of that intermediary function. However, at present, banking also encompasses many other ancillary services. Those services were adopted therein subsequently according to the demand of the day which was felt in phases.
In terms of corporate form of a banking institution, as we understand today, Islamic banking had never been a visible parallel organisation to conventional banking until, say the latter half of the last century. Then it became imperative to study the circumstances which led to the emergence of Islamic banking as a separate discipline. In doing this job, we reminisce those religious people who used to mark their erstwhile Bank Accounts with a noting of 'No-interest'. Many people were rather beyond the purview of banking channel for long to save themselves from falling into the religious curse. Banking and Islam were then treated mutually exclusive. Adopting one of them automatically rejected the other. At that time the two words Bank and Interest were synonymous.
In course of time, banking emerged as a very important activity of human civilization. At a point of time, it became simply absurd to remain associated with the economic wheel of the modern global village without taking part in banking. Such an emerged importance on banking activities made that pious group change their earlier view towards banking. They made up their mind not to stick to remain away or aloof from the purview of banking. They thought it better to get associated with the global finance industry; but obviously not at the cost of religion.
Consequently, in the realm of banking, 'interest' was diagnosed, and particularly targeted as the vital issue to address. Very rightly the scholars recognised that there remains no room for interest in (Islamic) economics, where banking prominently belongs to. Prohibition of interest in Islamic life then turned their concentration. 'Not to bank' was then revised as a move to 'Bank with religion' or 'Bank without interest'.
As the prime source of income of a bank is 'interest,' and interest arises from loan/lending and borrowing, loan transactions of conventional banking were identified first. Those transactions must be avoided as the way of earning in religious banking. It was perceived that loan or 'qard' might exist therein, only as an exceptional, non-business and non-earning benevolent transaction. But at large lending system was required to be replaced by any other permissible mechanism. Other subsequently extended ancillary functions and non-funded business activities of modern banks appeared in the second scene. These were regarded as non-prime issues, because interest as a direct element, was absent from most of those ancillary services.
Again, banking has emerged as a business. Now, to save a target group from interest-income, banking must not be transformed into a non-business charitable organisation. Interest-free banking must not mean cost-free, income-free banking. Banking is to remain a business or commercial organisation; but that business must be based on Islamic fundamentals. Every business must also have an expectation for a permissible return therefrom. Then the question comes, in Islamic banking business, what return we may expect, instead of interest. Very logically 'profit' has come as the first solution to replace interest. That idea opened the door of threadbare discussion and analysis which resulted in transparent differentiation between Interest (Riba) and Profit.
Interest in the Quranic language is 'Riba'. It is an Arabic word. Its literal meaning is excess, addition or increase etc. As a religious jargon Riba denotes an excess or addition related to loan. Riba, in English is called Interest. Interest is defined as a charge on borrowed money and its purview covers simple interest, compound interest and exorbitant interest or Usury as well. Interest implies a predetermined positiveness or mandatory increase from a deal in money.
On the other hand, 'Profit' is an English word. Profit means an advantage or benefit, financial gain or an excess of returns over outlay. Profit is the moneygained in business or from selling something for more than its original cost and/or 'an excess of income over expenses'. Prominent dictionaries like Oxford and Chambers also define 'profit' in the same terms.
A deal exclusively in money, known as a financial transaction, is not enough to result in a profit. There must be a real transaction or an underlying asset related to that deal to enable the deal as an earning tool which may generate profit. When the concept of profit enters into the realm of business it gets the shape of an equation. The equation is 'Profit = Revenue minus Cost'. Thus a profit may possess any sign. Negative profit, if any, is termed as loss. So, profit is the result or outcome of a venture, business or trade etc. Outcome of a business is usually expected in the positive form of profit; but both way i.e. positive or negative (loss) is practical.
So unlike interest, profit does not originate from the money itself. Profit originates from a venture where money is used as a factor of production. Here money gets the form of capital/investment and bears the expectation of reward (profit) and at the same time the risk of incurring loss as well. Profit results from equity sharing and/or trade and hence permitted by Shariah but interest is not. The Quranic verse is '…And Allah has permitted trade and forbidden interest …' (Sura Baqara: 275)
After portraying a concrete demarcation between interest and profit, it was made clear that it would be possible to simultaneously remain with banking and religion. This expectation initiated collective drive to replace interest by profit. The drive suggested turning the loan transactions of conventional banks into equity sharing ventures to earn profit therefrom instead of interest. Therefore, in banking, loan form of transaction got the shape of flow of money as capital/equity. It became a partnership between the religious bank and its client/s. Conceptually Islamic banking became a value-based and ethically guided financial operation.
Achievement of the drive for Islamic banking primarily lies in washing out or gradually abolishing 'interest' in the realm of alternative banking. Interest-free banking is typically called Islamic banking. Yes, to be a true Islamic bank, it needs to possess other qualities, but the most essential criterion is to be free from interest.
Under the alternative banking system, as share of bank's income, the depositor is to get variable return instead of fixed interest. Similarly on the asset side, financial transactions of loans are also converted into capital or equity finance to share income between the bank and the client. However, on the asset side there were other permissible ways to finance. One such way is to make real transactions like trade, instead of loan or debt transactions. Each of these transactions has got specific modus operandi adopted from the respective discipline of Islamic Economics. There was customisation of the features while practising those in the banking arena because those were in fact hired or adopted from other fields. Concerned rules, therefore, followed their respective original discipline of business or trade of Islamic Economics. Renting leasable assets through Lease and/or hire-purchase was, in principle, found permissible in Shariah.
As already stated, initially Islamic banking was a project to make 'banking sans interest' possible; not to make it superior or competitive even. Alternative modes were adopted just to avoid interest. Out of such alternatives as stated above, the asset-based real transactions and profit/loss sharing features of Islamic banking transactions, have by this time been adjudged as better than those of the corresponding models in its conventional counterpart. Equity finance (partnering or profit sharing method) of Islamic banking transparently shows the difference and the inherent beauty of Islamic banking. Such a mode vividly distinguishes Islamic banking by way of its yielding variable return as opposed to the predetermined fixed rate of interest in conventional banking.
In the backdrop of global financial meltdown since 2007 we have already experienced the comparative resilience of conventional banking and Islamic style of banking worldwide, as commented even by the Vatican. Final fate of Islamic banking depends to a great extent on the quality of the people who are entrusted with the responsibility to implement the system. Islamic banking demands strict adherence to the rule of 'principle to override or prevail over practice'. It is the Islamic banking players who deserve credit for fair play as well as discredit for infringement.
If this equity sharing concept of Islamic Economics can be properly applied with legal support, it can turn around the greatest odd consequence of conventional banking. It can bring about a new paradigm of justice and equity in the society. It would change the irony of (banking) fate or the fallacy which is very surprising. The surprise of traditional banking is that it makes the deficit unit (borrowers) owner of the assets, businesses, mill-industries and what not; whereas the surplus unit or owner of fund (depositors) remains assetless. What a peculiar equation! Asset should belong to the owners of the fund which has made the concerned business or asset comes into existence and keeps it running. Here shareholding of joint stock companies can be cited as an example.
The writer is Vice President and Head of Islamic Banking of Bank Asia Limited. Opinion expressed in the article are of the writer and not necessarily of the organisation he is serving.
http://www.thefinancialexpress-bd.com
Cambodia considers attractions of Islamic finance
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“Most investors in the Middle East are certainly looking for Islamic-compliant business in countries that aren’t majority Muslim,” Ashraf Bin Md Hashim, head of consultancy at the International Sharia Research Academy for Islamic Finance, told the Phnom Penh Post.
Speaking on the sidelines of Cambodia’s first seminar on Islamic finance, hosted by Cambodian Intelligent Investor Organization on 10 March in Phnom Penh, Hashim said the Islamic finance is almost nonexistent among Cambodia’s Muslims.
Muslims make up around two per cent of Cambodia’s population of 13 million which is mainly Buddhist.
“There’s a demand from the Muslim community here,” Cambodian Intelligent Investor Organization CEO Sles Nazy told the newspaper. “I have seen some problems because right now Muslims can’t follow Islamic law when they borrow money, even if they want to.” According to Nazy, Islamic finance would most likely first appear in Cambodia in the form of Shari’ah-compliant microfinance while Hashim sees the potential for a bank to open an Islamic window.
Tunisia sets up Islamic finance working group
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The Tunisian government has set up a working group that will study how to develop Islamic finance in the country, a finance ministry official said.
The group, which includes representatives from the central bank, stock exchange and private sector institutions including Bahrain-based Al Baraka Banking Group, will look at the country's legal framework, said Karima Rezk, a director at the ministry.
Before last year's uprisings, authoritarian governments in Tunisia and other North African countries restricted or refused to promote Islamic finance for ideological reasons. A moderate Islamist party dominates the government which took power through last October's elections.
Islamic finance, which operates according to religious principles such as a ban on paying interest, is seen as "an important initiative that is accepted by all major political parties", Rezk told Reuters in a telephone interview this week.
She added that the government did not intend to inhibit conventional banking in the country, but merely wanted to "make the market more dynamic and add choice to consumers".
The working group aims to meet weekly and come up with proposals for action within a few months, Rezk said. It is under the purview of the finance ministry's director-general Chaker Soltani, whose responsibilities include debt management and financial cooperation.
"We need more details," Rezk said, on both the structures of Islamic financial products and how to regulate them.
Soltani told Reuters earlier that the Tunisian government hoped eventually to issue sukuk (Islamic bonds), but did not expect to make an issue this year since the legal framework to support it was not yet in place.
"Before issuing Islamic bonds, or sukuk, we must put a law in place," he said.
interest in 'halal' finance growing in Italy
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Islamic finance has existed in Europe for more than forty years, with the United Kingdom one of the world's leading countries in the field, and others, such as Malta and Luxembourg, also at the forefront. In Italy, where the sector is more or less non-existent, results of the first experiments are now beginning to be seen.
In 2009, for instance, Deloitte set up a sector dedicated to Islamic finance. ''At the moment, we are developing products compatible with Italian regulations,'' says Alberto Liotta, a director at the consultancy firm, a guest at a conference organised by Islamic Relief Italia. ''Attention is mainly focused on conventional financing instruments, such as leasing, the concept of which can be brought closer to those of Islamic finance''.
''In the West, there is strong financing demand based on religious principles as a result of the growth of the Muslim middle-class, due to interest in ''halal'' products by ethical finance and because there is a serious amount of money to be made,'' says Alberto Brugnoni, a director at Assaif, another consultancy firm. ''Major investment funds are also focusing on this not so much for interests as to diversify their portfolio''.
Yet although the issue has been discussed for a few years now, the time appears not yet right for the birth of a retail Islamic bank in Italy following the model of the Islamic Bank of Britain. ''In truth, it would be possible to create it in Italy because the regulations here are harmonized with the rest of Europe,'' says Valentino Cattelan, a sector expert and professor at Rome's Tor Vergata University. ''From an investor's point of view, the problem is that it would not yet be very profitable business because of tax problems and because there is not yet a market considered to be useful''.
Singapore to use Waqf to promote Islamic Education
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Wednesday, March 14, 2012
The Singaporean government is planning an endowment fund to promote Islamic education in the south-eastern Asian country, The Straits Times newspaper reported.
“I am confident that MUIS’s move to create new waqf will pave the way to revive the philanthropic spirit in the community,” Yaacob Ibrahim, Minister-in-charge of Muslim Affairs, told parliament on Thursday, March 8.
“It is a progressive move to keep pace with evolving giving trends and the growing complexity of our financial environment", he added.
The three-million-dollar fund will be created by the Islamic Religious Council of Singapore (MUIS). It will be used to promote Islamic education in the south-eastern Asian country.
Waqf is a permanent dedication of movable or immovable properties by a Muslim for purposes recognized by Islamic Sharia. MUIS handles and develops 200 waqfs properties in Singapore, with a total asset value of S$250 million. These properties, held in trust, yield an annual rental income of millions of dollars, makes Singapore the region’s most advanced country in the development of waqfs.
MUIS is the largest body that caters for the needs of Muslims, who are estimated at between 450,000 to 500,000, making around 15 percent of Singapore’s population.
Yaacob said that he hopes the new waqf fund will revive the philanthropic spirit among Singaporean Muslims.
Over the past years, Muslim philanthropists have created waqfs, whose annual funds are used in funding religious and charitable programs.
He expressed pleasure that more Muslims nowadays are doing financial planning and drawing up wills in accordance with Islamic inheritance law.
As a form of “planned giving”, he suggested that Muslims could pledge up to one third of their estates for the new waqf fund.
The minister gave tribute to the role played by waqfs in Singapore.
He cited the example of a mosque which created a new waqf through the purchase of two properties to sustain the mosque operations.
The minister also called on MUIS to find an appropriate way to promote and adapt waqfs to the modern context.
He said he expects many well-to-do Muslims would like to contribute to the community.
Financing Cambodia’s Muslims
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Islamic finance could help to boost trade between Cambodia and the Middle East, as well as attract investment from Muslim-majority countries, experts said on Saturday.
Knowledge of Islamic finance and banking, which bars interest lending and discourages unfair trade advantages, is almost nonexistent among Cambodia’s Muslims, which comprise about 2 per cent of the country’s population.
But demand for halal business practices is increasing in Malaysia and Middle Eastern countries, according to insiders.
With more education on Islamic law, domestic Muslims could dominate trade with those countries and attract investment from Islamic banks in the region, experts and Muslim business owners said.
“Most investors in the Middle East are certainly looking for Islamic-compliant business in countries that aren’t majority Muslim,” Ashraf Bin Md Hashim, head of consultancy at the International Shari’ah Research Academy for Islamic Finance, said on Saturday on the sidelines of Cambodia’s first conference on halal finance.
“This could open an Islamic banking window here.”
Progress on Islamic finance in Malaysia has been slow, Ashraf Bin Md Hashim said.
Banking without interest earnings has made for a difficult pitch to investors and much more time and fine tuning are needed to generate profits that adhere to the Quran, Islam’s holy text.
Still, 23 per cent of Malaysia’s banking sector and 80 per cent of its bond market comply with Islamic law, according to Ashraf Bin Md Hashim.
The Islamic Bank of Thailand is preparing to launch it first Islamic, or Sukuk, bond in Thailand.
An edge in trade with predominantly Muslim countries would be a boon for the Cham, a predominantly Muslim ethnic group in Cambodia, who generally have a lower standard of living than their Khmer countrymen, said Ahmad Yahya, a secretary of state at the Ministry of Social Affairs and a member of the Cham community.
“If we look at the Muslim population in Cambodia, we don’t have anything … In business, we have to start from the bottom. We need more resources,” he said on Saturday.
About 400,000 Cham live in Cambodia, the Post reported in August.
Islamic finance would most likely first appear in Cambodia in the form of microfinance, and there are plans to open a microfinance institution that would not collect interest on loans, Cambodian Intelligent Investor Organisation CEO Sles Nazy said.
The CIIO hosted Saturday’s conference.
Compliant MFIs would invest in small businesses and properties as opposed to lending money to investors.
Instead of earning interest from loans, the institutions would take a predetermined share of profit or loss.
Halal MFIs would also allow the Kingdom’s Muslims to live closer to Islamic Law, a resource that Sles Nazy said the community wants.
“There’s a demand from the Muslim community here. I have seen some problems because right now Muslims can’t follow Islamic law when they borrow money, even if they want to,” he said.
While some Cham attendees at Saturday’s conference expressed confusion over how they could take loans without paying interest, others said Islamic finance in Cambodia would benefit their businesses.
Mat Fasy, whose company imports halal food from Middle Eastern countries, said business between Cambodia and the Middle East is small at present but had potential to grow, especially in commodities trade such as rice and rubber.
An understanding of Islamic business practices is essential to furthering trade in the Middle East, according to Mat Fasy.
Muslim-run businesses in Cambodia could attract financing from Islamic banks in Southeast Asia if a better understanding of the practices was developed, said Sulaiman Muhammad, who imports halal food from Malaysia.
“Muslim companies in Cambodia are short on capital. If there was more Islamic finance here, Islamic banks in Malaysia might invest in our companies,” he said.
Islamic banking crucial to trade
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ISLAMIC banking may play a vital role in Asean trading, especially for the Philippines, which has good business relationship with Indonesia and Malaysia, according to British Ambassador Stephen Lillie
Islamic banking is a system that is based on the principles of Islamic law, also known as Shariah, and guided by Islamic economics.
Two basic principles behind Islamic banking are the sharing of profit and loss and, significantly, the prohibition of the collection and payment of interest.
Since this system of banking is grounded on Islamic principles, all the undertakings of the banks follow Islamic morals. Therefore, investments involving alcohol, gambling, pork, etc. are prohibited.
Lillie said if the country wants to attract more investments, Islamic finance should be developed.
"The Philippines has a web of trade and investment and people to people links with the Middle East," Lillie said.
He added that as the country seeks for areas to capitalize on and expand these links, Islamic financial instruments may have a valuable role to play.
"Indeed as you seek to attract much needed foreign investment from a wide range of sources, (the Islamic links) would be crucial," Lillie said.
Lillie added diversifying and innovating investment products are also key to good trading systems.
In particular, he pointed out that Islamic finance is relative to the country because of the Muslim community which comprises about 8 percent of the population, bigger than other European countries.
The Muslim community in United Kingdom accounts for only 3 percent of its population.
Globally, Islamic finance has been growing at a rate of 20-25 percent in the past five years, according to Noel Bonoan, COO and vice-chair of Manabat Sanagustin & Co., CPAs, a Philippine partnership and a member of the KPMG network of independent member firms affiliated with KPMG International Cooperative.
"Islamic finance is increasingly emerging as a viable alternative to conventional finance and has significantly grown in popularity," Bonoan said.
He likewise pointed out that the lack of legislative and regulatory infrastructure in the Islamic finance market significantly adds to the cost and complexity of Shariah-compliant operations.
Idiosa Ursolino, senior vice president of the Al Amanah Islamic Bank of the Philippines, pointed out the challenges that stymie the development and expansion of Islamic finance institutions in the country.
One of these is the lack of Shariah advisers in the field of economics, banking and finance.
In the Philippines, the role of an Islamic finance institution is to provide developmental projects in the country, said Samira Gutoc, Al-Amanah director.
"One of our developmental projects is the improvement of the tuna industry in General Santos City," Gutoc said.
To date, there exists only one bank engaged in Islamic finance, the Al-Amanah Islamic Investment Bank, a subsidiary of the Development Bank of the Philippines.
It has been in existence for about 40 years and had to be taken over by the DBP, which infused P1 billion of fresh capital.
Amanah Bank started with a small capital of P50 million.
"In recent years Islamic finance has become one of the fastest-growing areas in financial markets. It is estimated that there are approximately $1 trillion worth of Shariah-compliant assets globally. Islamic finance as a global industry has seen a compounded annual growth rate of over 25 percent from 2006 to 2009 and market observers expect continued growth at an annual rate of 15-20 percent as the number of Islamic finance providers and investors increase," said Leah De Leon, undersecretary of the Department of Finance.
She also pointed out that in 2011, the Sukuk, Islamic financial certificates or bonds, became one of the drivers of growth for the Islamic financial system.
Sukuk issuance continues to grow at a rapid rate.
Data shows that the amount of outstanding Sukuks rose to $177 billion as of November 2011 from $143 billion as at end 2010.
Saudi banking sector set for continued growth
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NCB Capital expects that loan growth for Saudi banks to continue strong in 2012 as they focus on retail lending. In its new report issued today, NCB Capital believes that government spending and bonus salaries in 2011 will have a “recurring effect” on banks' balance sheet growth in 2012.
NCB Capital expects the bottom line this year to be driven by volume growth and non-interest income.
"Banks focus on the underpenetrated retail segment is a key recurring theme," said Farouk Miah, head of Equity Research at NCB Capital. "Improved provision coverage, asset quality and capital base make Saudi banks well-equipped to continue the strong lending growth recorded in 2011. Overall, we expect loan growth of 12.4 percent in 2012 led by a retail loan growth of 16 percent."
The economics team at the National Commercial Bank estimate 2012 government expenditures 13 percent higher than budgeted on revenues of SR930 billion, leading to a budget surplus of SR150 billion, or 7.1 percent of GDP. The continuing expansionary fiscal policy, coupled with low-interest rates should maintain healthy economic growth and boost domestic liquidity. NCB Capital believes the corporate sector will benefit from continuing government support and estimate a corporate loan growth of 11 percent.
Lending by the banking sector was also boosted by the government abandoning the "advance mobilization scheme" which provided companies with government contracts up to 30 percent financing. This aided the building and construction sector of corporate loans which grew 25.4 percent in 2011 and similar growth levels is expected going forward.
According to the report, most of the Saudi banks believed that it was unlikely for the mortgage law to be passed in the near-term. As a way of getting round the problem, banks have focused on mortgage lending to state-sector employees on the high end of the income curve. NCB Capital continues to believe that even if the mortgage law is passed, it will not have an immediate and full effect on mortgage lending until the supply of housing becomes more affordable.
A key trigger for mortgage lending, even in the absence of enforced formal institutions, is the introduction of tax on underdeveloped lands easing pressure on property prices. This will be a key trigger for mortgage lending going forward; while a mortgage law will facilitate bank lending, a land tax will ensure greater supply to meet the demand of home buyers.
The NCB Capital report highlighted that banks' share of demand deposit has increased significantly over the past few years. It currently stands at its highest level of 58 percent up from a low of 40 percent at the end of Q4, 2008. "It is no surprise that the switch came after interest rates started to decline; indeed we attribute this to the low interest rate environment which significantly limited the opportunity cost associated with non-interest bearing deposits," explained Miah. "In addition, the reduced rates had a noticeable substitution effect as depositors' preferred short-term liquidity over longer term deposits at limited returns while abundant liquidity reduced banks' demand for longer maturity funds."
Going forward, however, NCB Capital expects demand for time deposits to increase as the opportunity cost, in absolute terms, for demand deposits rises. "We believe conventional banks, particularly those who target high-income depositors, to be at most risk. Shariah-complaint banks, on the other hand, face a lesser risk as more conservative depositors forgo interest on religious principles," commented Miah. "More importantly, however, Shariah-compliant banks target customers on the low-end of the income curve; 90 percent of Al-Rajhi's retail depositors, for example, are low to mid income earners and hence the opportunity cost, in absolute terms, is limited even in the case of a spike in interest rates."
On a YTD basis, the daily average value traded in the local equity market is up 98 percent YoY to SR8.7 billion and is 130 percent higher from the corresponding period in 2011. NCB Capital expects the TASI to sustain increased level of activity for 2012 supporting a 21% sector growth in fee income.
According to the report, NCB Capital prefers stocks of established players such as Al-Rajhi, Samba and Riyadh Bank due to their attractive valuations and their ability to take advantage of the opportunity in the retail segment. "These names also stand to benefit most from the strong equity market activity. We downgrade Saudi Investment Bank and Arab National Bank to Neutral from Overweight," Miah concluded.
Islamic Finance industry to continue developing in France, says Salion
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Thursday, March 8, 2012
In 2007, oil prices pushed the French government to consider Islamic finance. The Minister of Economy, Christine Lagarde, asked Paris EuroPlus and treasury to assess and develop France's potential to attract Islamic Finance.
In his preview of the Islamic Finance Industry for 2012, Antoine Salion, Islamic Finance Advisor, Paris EuroPlus said in his piece titled, 'France: seeking diversity' that In the coming weeks, Chaabi Bank, the long-established French subsidiary of Moroccan Groupe Banque Populaire will open its Sharia compliant deposit account to small and medium enterprises (SMEs), thus addressing a latent need of small businesses for Islamic banking products. SMEs have voiced an important demand for Islamic products, as French Muslims are known for their entrepreneurship and represent an interesting customer base for Islamic banking.
According to Salion, hopes are now high again that France will develop a sound Islamic finance market, but much remains to be done. First, the French Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards have yet to be distributed and spread.
Second, Chaabi Bank is not yet offering the most complex products, corporate funding and mortgages. Chaabi says it is aiming at a full set of products by the end of 2012, which seems realistic in light of the recent 10-year Murabaha home financing product.
Third, wholesale banking and capital markets are yet to be developed. Chaabi's first French Islamic window should pave the way for international Islamic investment banks willing to penetrate the French market. In addition, the Sukuk market may also benefit from the current funding difficulties experienced by French international corporations, which could take advantage of the comprehensive French framework for Sukuk issuance and listing.
Regarding Takaful Insurance, he described it as an immmature topic in France, even though synergies will appear evident with the rise of distribution networks for Islamic banking products.
In his conclusion he emphasized that, among the key 2012 drivers such as the coming presidential and legislative elections in May and June, the industry will keep developing in France thanks to sound foundations and strong potential. Salion believes that the election result only effect will be to influence the pace of the industry's growth.
It is worthy to mention that EuroPlus doesn't only assemble expert bankers, but also industrial enterprises listed in the stock market and key players in the market.
Plenty of room for growth and product innovation
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Education in the segment is sorely needed
The expanding shariah-compliant investment fund universe has been attracting more and more fans from outside the Islamic world, as their overall volume of capital under management grows and attention shifts to alternative products and asset types not implicated in the post-2008 crisis. According to the Ernst & Young Islamic Funds and Investments Report 2011, “the Islamic funds industry grew to US$58 billion in 2010, achieving a 7.6% growth. The Islamic fund universe comprises of some 100 fund managers”. With change and development sweeping through the Islamic world, shariah-compliant investing seems only destined to grow further.
The shariah panacea?
Shariah-compliant investing actually developed something of a reputation as a haven as the global financial crisis hit, with more conventional investment areas increasingly facing both performance and perception problems. “From an investor’s perspective, Islamic funds present an alternative to the crowded conventional space, and serve as another avenue for diversification,” asserts Akmal Hassan, CEO and executive director of Asian Islamic Investment Management Sdn. Bhd. (AIIMAN). “The growing awareness of this asset class is fast dispelling the common belief that shariah-compliant investments tend to be plain-vanilla type and returns are generally ‘moderate’ due to restrictions in the permitted investment universe.” And, as Sandeep Singh, country head of Franklin Templeton Asset Management (Malaysia), adds: “This particular segment is still in a very early stage, and the market is still evolving, with more players coming in and more product innovation.”
Indeed, although the amount of capital managed in shariah-compliant vehicles may be quite limited to date compared to other asset classes the potential investable universe is quite large. The top ten constituent stocks alone of the FTSE Shariah Global Equity Index, for instance, have an aggregate net market cap of slightly under $2 trillion, and include such blue-chip names as Chevron, Microsoft and Oracle, all verified by Yasaar Research Inc scholars, who, FTSE claims, “represent all of the major shariah schools of thought.”
However, this honeymoon period post-2008 may fast be drawing to a close, according to some views. “I believe the cheerleading days, where Islamic finance and Islamic funds management were seen as saviours to the global economic crisis, are coming to an end,” says Rejina Rahim, managing director of Nomura Asset Management Malaysia. “Islamic fund managers and investors alike are coming to a realisation that they are not operating in a separate realm and are in fact very much part and parcel of the global economic system.”
“It is a myth to say Islamic funds have no downside risk,” confirms Abdul Jalil Rasheed, CEO of Aberdeen Islamic Asset Management. “Any investments related to stock markets are impacted during a crisis.” And, Mr. Singh admits, “It’s difficult to compare it with the conventional space since it’s still very small.”
Shariah and performance
In particular, some of the shine appears to be coming off certain facets of the shariah-compliant story as other sectors recover, which compels reconsideration of the intrinsic merits and performance of the shariah-compliant platforms themselves. “Post-crisis, such products present an attractive proposition and tremendous growth opportunity both locally and globally,” Mr. Hassan remarks. However, “we should look at performance on a fund-by-fund basis rather than generically as an asset class,” adds Mr. Rasheed.
“In terms of performance, while the banking sector in most markets was underperforming the markets, Islamic funds were faring well, but of late, with more positive news emerging, it is the conventional banking sector that has been performing, causing some of the funds to lag their conventional peers,” notes Ms. Rahim. “It is difficult to fully discount an exposure to banking, as in most markets, the banking sector would make up about an approximate one third of the market, while shariah-compliant stocks would generally only be 60-70% of the total market value.”
Innovation and new products
With shariah-compliant investing still relatively immature, despite its fast growth and evident popularity, new product lines are an important consideration. The 2011 Ernst & Young Report notes that, “favoured asset classes continue to be equities, commodities, sukuk and alternatives”. All the same, the same report points out that Islamic funds make up only 5.6% of an Islamic financial services sector amounting to some $1 trillion worldwide, with most investors still sticking primarily to banks. So there is obviously tremendous room – and need – for growth and product innovation.
“Shariah-compliant funds are still nascent, having really come onboard about five years ago,” points out Mr. Rasheed. “It’ll take time for the industry to develop & mature. Till then, I expect that it’ll be the plain vanilla shariah-compliant equities/sukuk funds that’ll continue doing well in terms of interest.”
Sure enough, the E&Y Report notes that “equity dominates the overall AUM, which remains concentrated in traditional asset classes”, citing a total of 39% of assets in equities, with a further 15% in commodities, 12% in fixed income and 10% in real estate. “There is tremendous potential,” affirms Mr. Singh. But, he adds: “There’s still a lot of education required in this segment.”
Structural limitations in the various international markets also crimp potential product diversification. “One of the main challenges faced by fund managers is the unavailability of Islamic instruments in most countries,” points out Mr. Hassan. “Malaysia is indeed blessed to have the wide array of enabling infrastructures [put] in place by the relevant government agencies and regulators, coupled with the existence of a highly liquid market with growing product offerings. However, the same scenario does not exist in most of other countries. This poses setbacks in Islamic investing in some countries and will invariably, limit the multitude of products.”
“We have learnt that from the institutional space, the average mandate size is comparatively smaller. Thus we are planning for more pooled fund structures to cater to a wider group of clients,” says Ms. Rahim. And she adds: “What we have noticed is that investors in the Middle East are moving their interest away from the developed markets and actively looking at Asian markets.”
Mr. Rasheed at present sees relatively limited room for product innovation. “An Islamic hedge fund is a difficult concept to grasp whilst shariah-compliant properties too lack a globally acceptable shariah guideline to be successful.” As a result, he notes, his firm focuses almost entirely on “plain vanilla shariah-compliant equities and sukuk mandates”.
Ms. Rahim warns, though, that the asset class needs both innovation and performance to continue to grow. “There will be a minimal number of investors looking for shariah-compliant products if the range of product offerings is limited and not performing,” she cautions. “Losing money is a big no-no from all investors, Islamic or otherwise.”
Distribution and the investor base
Once shariah-compliant products are developed, of course, they still have to be distributed to a potential investor audience. And there too arises the question of the nature of the current investor base, in a sector where even an Islamic audience may be facing a new proposition that needs some explanation and investor education. Fortunately, fund professionals are seeing positive developments in their investor audience. But an increasingly sophisticated and insightful investor base also brings challenges as well as opportunities.
“The level of sophistication among investors locally and abroad has increased tremendously,” admits Mr. Hassan. “The challenge for investment managers like ourselves is not only to build and maintain an impressive track record, but to up the awareness of our value proposition.”
Shariah-compliant product purveyors are also well advised not to limit their outreach too narrowly, many feel. “A common misconception is that a Muslim majority country is where shariah fund interest lies,” affirms Mr. Rasheed. “In Malaysia, the bulk of shariah products are subscribed by non-Muslim customers.”
In Southeast Asia, Mr. Hassan concurs: “Both Muslims and non-Muslims are looking to diversify their investment through shariah-compliant products that are lower in risk, and offer greater transparency coupled with decent returns. However, there is also an increasing demand and room for product innovation for shariah-compliant investment products in the Middle East countries.”
In Southeast Asia, Mr. Hassan concurs: “Both Muslims and non-Muslims are looking to diversify their investment through shariah-compliant products that are lower in risk, and offer greater transparency coupled with decent returns. However, there is also an increasing demand and room for product innovation for shariah-compliant investment products in the Middle East countries.”
“It’s still a very nascent market,” says Mr. Singh. “We’re excited because of the long-term potential. We are not looking at an AUM six months or a year down the line; that would be very irrelevant compared to the long-term potential. You have about 20% of the world population Muslim; and one should not go with the mindset that these products should be targeted only at the Muslim market.”
“In setting up of the Islamic funds business, we have been leveraging on the group’s presence in Bahrain, Dubai, Riyadh and others,” recounts Ms. Rahim. “This year, we will be aggressively marketing our Islamic capabilities [in areas] outside of Malaysia, such as the Middle East and the Southeast Asian region.”
There are clear signs, though, that the investor base still needs to be grown further. According to the 2011 Ernst & Young Report, with the exception of Malaysia: “Over-dependence on a few institutional investors… is a key structural weakness in Islamic markets”.
Expectations and outcomes
With these and other challenges to growth still clearly in place despite the ebullient demand and output in the shariah-compliant fund universe, practitioners do inevitably have some concerns about the sector’s development. These don’t appear likely to upset shariah investing’s evolution, but could dictate it.
“In any business, profitability is a major concern. The funds management business margins are small compared to some other industries thus we need volume. Growing the business to a viable volume is challenging in any situation, but magnified even more when most competitors are all focusing on the same number of investors. By virtue of its religious connections, many expect the major institutional funds operating in Muslim countries to automatically have an asset allocation to shariah-compliant products. The truth is far from it,” says Ms. Rahim.
Education is a key challenge, Mr. Rasheed feels, but not simply in the product sales sense. “We need to educate clients on what shariah compliant funds are, how different they are from conventional funds, and that it’s not a rebadged conventional product. There are important elements like shariah-compliant cash management, custody, trusteeship, all of which have to be shariah-compliant but are often not seen/highlighted because they are back-end in nature. This needs to be articulated properly to clients.”
Mr. Hassan cites the sukuk market as another area of concern, even though, the E&Y Report notes: “2010 proved to be a record year for global sukuk issues with over $50 billion raised”, and issuance already at almost $30 billion in 1Q2011 alone. However, he believes: “There is currently too much variation in terms of what is considered compliant where sukuk structures are concerned. As such, some investors avoid structures which they are not comfortable with. This calls for the need to develop a ‘universal’ set of shariah standards that can be applied across different geographies and schools of thought by the investors.”
Ms. Rahim also insists that shariah-compliant providers must avoid a certain complacency that can come with their approach. “Investors are investors, no matter where they operate from,” she affirms. “Islamic investors are no different from conventional investors; they look for performance within their risk range. Shariah compliance in itself is not a major selling point. Islamic finance practitioners and promoters must realise this.”
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