Bahrain opens microfinance bank

The global economic crisis is the result of “greed” and only a selfless approach will save the world, a renowned economist has said.

Nobel laureate Mohammed Yunus, who is also founder of the world’s first micro-finance bank, Grameen Bank, said on Thursday a greedy global financial system and wrong capitalism structure were actually to be blamed for triggering the collapse.

Yunus, who was in Bahrain to help open the country’s pioneering Family Bank, which offers micro-finance services, said a financial system based on reality could help alleviate the suffering of poor people across the world.

He said the micro-finance model put in place at Grameen Bank actually reflected the basic spirit of the Islamic banking.

“It is people’s money that belongs to them and once it is repaid by one beneficiary, it goes to another,” he said.

“We have to redesign the structure we are operating in, which is wrong and leading to an unsustainable lifestyle. Time is also running out when it comes to saving this planet from disasters as a result of global warming,” he added.

The bank, conceived by Bahrain’s Ministry of Social Development and supported by leading financial institutions including the Grameen Trust in Bahrain, has a paid-up capital of BD5 million and an authorized capital of BD15 million.

“The bank’s main goal is to serve the low-income families in Bahrain through the promotion of microfinance, which will aid social development,” the bank’s Chief Executive Atef El-Shabrawy said.

He said the bank’s aim to provide finances to developing parts of society would add a new dimension to Bahrain’s efforts in achieving social and economic sustainability.

Yunus won the Nobel Peace Prize in 2006 for pioneering the use of micro-credit to benefit poor entrepreneurs.

“My mission is with the intention of changing the world and not to gain anything personally from that. It is all dedicated to making a difference by addressing a social issue,” he said.

Grameen Bank, founded by Yunus, has been instrumental in offering loans to millions of poor Bangladeshis without any financial security, many of them women, and improving their standard of living by enabling them to start businesses.

http://www.arabnews.com/node/332769

The Next Phase in Islamic Finance

Full text of the inaugural address given by Ravi Menon, Managing Director, Monetary Authority of Singapore at the opening of the 3rd Annual World Islamic Banking Conference: Asia Summit, Grant Hyatt Singapore on 5 June 2012.

Dr Ahmad Mohamed Ali Al-Madani, President, Islamic Development Bank, Your Excellencies, distinguished guests, ladies and gentlemen, good morning. And to all our foreign guests, a warm welcome to Singapore.

An Increasingly Difficult Conjuncture 

We are meeting here for the 3rd Annual World Islamic Banking Conference Asia Summit, at a time of increasing stress in the global economy and financial system. 

The effects of monetary stimulus, which had helped to support the economy and prevent a full-blown financial crisis, are now levelling off in both the Eurozone and the US. 

The labour market remains a significant drag on growth in the advanced economies. Unemployment has hit new highs in the Eurozone while employment and production numbers in the US are showing signs of weakness. 

The story of a two-speed global economy is coming under strain, with demand weakening across emerging Asia. The moderation in China's economic growth appears to be somewhat sharper than expected. India is undergoing an even more pronounced and broad-based slowdown. 

But the key risk that has increased in recent months and poses the biggest threat to global economic prospects is the situation in Europe. 

Greece is preparing for a historic election that may well decide its future in the Eurozone. 

Spain is experiencing severe strains in its banking system against a backdrop of a sharp reduction in GDP, high unemployment, and a deteriorating real estate sector. 

Italy and Spain are facing higher sovereign borrowing costs that threaten fiscal sustainability. 

To be fair, Eurozone governments have been taking extraordinary measures to help stabilise the situation, reduce fiscal deficits, and restore growth. But they have reached a turning point where bolder, decisive actions will be needed to reverse the tide. The next few weeks and months will be critical. Islamic Finance: Challenges to Overcome 

Let me turn now to the subject of our conference. Islamic finance has shown remarkable resilience during the last five years – perhaps the most challenging economic environment in the post-war era. The industry has grown by an estimated 20% annually in the last five years to reach US$1.3 trillion in total assets in 2011. Islamic banks have grown both in number and in scope. 

But the sustained growth of Islamic finance is in no way guaranteed. For Islamic finance to continue thriving, the industry has to overcome a few key challenges. But in every challenge, there is also opportunity. Let me highlight three of them this morning. 

Islamic Finance in the Era of Deleveraging 

The clear and present danger to all financial activity, including Islamic finance, is the risk of contagion from an escalation of the Eurozone crisis. Islamic finance is closely intertwined with underlying economic activity and will be affected by the impact of slower global growth. Contagion from the Eurozone has already curtailed economic growth and capital inflows to many emerging economies where Islamic finance has taken root. Potential spillovers from an escalation of the Eurozone crisis could lower output in the Middle East and North Africa region by about 3¼ percent relative to baseline, the largest spillover effect for any region outside Europe. 

But Islamic finance has a window of opportunity in the current climate of deleveraging in the global financial system. With its strict prohibition on excessive leverage, Islamic finance has been spared the worst of the financi

http://www.poten.com/NewsDetails.aspx?id=12461570

S. Africa Non-Muslims Favor Islamic Finance

"Many non-Muslims choose Islamic banking products because they like knowing that their funds will never be invested in industries that are potentially negative for society, such as alcohol, tobacco, gambling and pornography,” Arrie Rautenbach, head of retail markets at Absa bank, told Business Live.

Trying to get a share of the booming Islamic banking industry, several South African banks are offering Shari`ah-compliant services, such as the First National Bank and ABSA bank.

The South African National Treasury has also announced plans to introduce Islamic bonds as part of efforts to get a share of the booming industry.

Over the past few months, the number of South Africans using Shari`ah-complaint banking products has remarkably increased to exceed 100,000 citizens.

The new Shari`ah-compliant services are available to all customers, regardless of their religion.

"Any company - small, medium or large - that chooses an alternative to conventional banking can make use of the Islamic business bank offering," said Rautenbach.

"During June the Islamic Forward Exchange Contract [FEC] from Absa Capital will be launched to support international trade by Islamic banking customers. Support for companies wishing to do international business is a current focus and products in the pipeline include a unique working capital solution and letters of credit, which will be Shari`ah-compliant."

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 and banks cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

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

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

http://abna.ir/data.asp?lang=3&Id=321745

Islam Analysis: The mobile route to a high-tech future

Muslim countries need forward-looking policies to take advantage of the opportunities offered by mobile technology, says Athar Osama.

The mobile phone is recognised across the world as one of the greatest enabling technologies of modern times. The exponential growth in its penetration and accessibility has defied all expectations — the UN agency International Telecommunications Union estimates that there were more than 5.98 billion mobile phones in use around the world in 2011, corresponding to about 86 per cent of the world's population. [1]

The almost universal access to mobile phones and other mobile devices, coupled with falling prices, has opened up new avenues for development. For the poorest of the poor in the Islamic world — many of whom live in Africa and South Asia — the mobile phone could be the only technology revolution to touch their lives on a sustained basis.

A world of possibilities

The mobile phone is so important because it acts as a platform technology to enable a number of other activities. This presents many opportunities, just as television, which was launched as an entertainment device, soon showed promise as an educational tool, and the Internet, which began as an educational tool, was soon used for entertainment and commerce.

But mobile phones succeed where the Internet and the television failed to go: in the farthest corners of the world, where electricity is scarce and Internet connectivity expensive.

The low cost and ease of use of mobile technologies significantly enhance their impact. As prices of devices and connections have fallen dramatically over the years, mobile phones have become a common sight in even the poorest places.

As a technology platform, mobile telephony can deliver social value in banking, public services, education and healthcare, for example. In some countries in the Islamic world, it also contributes directly to economic prosperity.

Route to prosperity

Mobile gaming and the development of applications ('apps'), an emerging multibillion-dollar industry, present the most exciting prospects for developing countries to establish a foothold in the global information technology (IT) value chain.

First, becoming a mobile entrepreneur does not require the kind of upfront investment needed to create a more elaborate IT business. Being a new industry, experience and a proven track record do not carry as much a premium as in other businesses.

Second, the timeframe for developing a mobile game or app is short enough to allow entrepreneurs to enter the market without putting too much at stake.

Third, and most important, the mobile industry provides a welcome escape from the domestic market — many app stores (of which Apple's App Store is the most visible) allow a game designer in a developing country to sell directly to the affluent West.

Several countries in the Islamic world have explicitly sought to capitalise on this opportunity by developing policy — for example through the SeedStartup incubator in Dubai and AppsArabia in Abu Dhabi, and similar initiatives in Jordan and elsewhere. In others, governments are catching up after clusters of mobile entrepreneurs emerged organically, such as the emerging mobile and gaming industry in Lahore, Pakistan.

Although these ventures are mostly focused on foreign markets, they will have an increasing impact on the domestic market. They are already affecting the entrepreneurial culture of these societies — mobile technology, because of its low barriers to entry and quick product development cycle, has become the primary means for providing a taste of entrepreneurship to the young.

A for-profit after-school programme in Pakistan promises to teach iPad and iPhone programming to school children. And mobile technology incubators are being planned around the Islamic world, including one (mLab South Asia) championed by the World Bank in Lahore, Islamabad.

Forward-looking policy

Beyond the potential economic benefits, mobile technology may bring an even larger indirect benefit to society through applications in electronic government (e-government), mobile money, e-health and e-learning. Here there is less certainty about the possible impact and routes to success — but rather than a drawback, this is an opportunity for enlightened and forward-looking government policy to make a difference.

Mobile money and banking, which enables financial inclusion in the developing world, is a particularly exciting development. A recent World Economic Forum report [2] identified several Islamic countries — notably Pakistan, Indonesia and Malaysia — as being in a high state of readiness to embrace the opportunity afforded by mobile money and banking. Pakistan's Easypaisa initiative is widely seen as one of the leaders in this area.

But realising the full potential of this application will require an understanding of the social dimensions of the technology — how people interact with it, what they use it for, and how best to incentivise them to use it.

For instance, as smart-phones and tablets become ubiquitous and wireless Internet becomes cheaper, mobiles will become fully loaded entertainment devices. Governments may need to step in to correct market failures, such as problems with educational, local language or culturally sensitive content.

Above all, in virtually all social applications of mobile telephony, the ability to rapidly experiment, evaluate and scale up is important for success. This requires a change in policy mind-set to put more of a premium on evaluation, learning and acknowledging failure.

A compelling set of market and technology forces will play an important role, but conscious and careful use of policy is critical to help steer developing Islamic countries towards a mobile-technology-enabled future.

Athar Osama is a London-based science and innovation policy consultant. He is the founder and CEO of Technomics International Ltd, a UK-based international technology policy consulting firm, and founder of Muslim-Science.com.

http://www.scidev.net/en/science-and-innovation-policy/science-in-the-islamic-world/opinions/islam-analysis-the-mobile-route-to-a-high-tech-future-1.html

Islamic growth body sets up agricultural partnership

An organisation set up to foster economic growth among Islamic countries has set up a partnership with a Dutch asset manager to address the “growing food security concerns” in some of its member states.

The Islamic Development Bank, a Jeddah-based organisation set up to aid economic growth among 56 member countries, has launched an agriculture-focused private equity fund in partnership with Dutch asset manager Robeco.

The IDB, through its affiliate Islamic Corporation for the Development of the PrivateSector, will use the fund to target a range of business opportunities in the sector alongside third parties including privatisations and growth capital investments.

The fund will have a traditional private equity structure with a 10-year lifespan and a five-year investment period with a target of $600m. The IDB expects to hold a first close of $350m by the end of the year having received strong interest from several investors, according to the spokesman.

Khalid Al-Aboodi, the chief executive of ICD, said: “The fund is the first public private partnership of this nature and size to address the inefficiencies and wastage facing the food and agricultural sector throughout our member countries.

“Boosting regional food production, supply and trade, the fund’s investments will also lead to creation of jobs, transfer of technology, promotion of sustainable practices and poverty alleviation. The fund will significantly benefit from ICD’s standing and resources in the Islamic countries”.

The IDB was founded in 1973 and now has 56 member countries throughout Africa and Asia with regional offices in Morocco, Malaysia, Kazakhstan and Senegal.

The ICD was launched by the IDB in 1999 with a mandate to support the economic development of its member countries through the provision of finance to private sector projects in accordance with the principles of the Shari’a law.

To date, ICD has, through its own balance sheet and managed funds, extended financing and investment commitments of over US$2bn to 205 projects according to its website.

--write to Kiel Porter at kiel.porter@dowjones.com

http://www.efinancialnews.com/story/2012-06-13/idb-launches-agriculture-fund?mod=sectionheadlines-TT-PE

Islamic finance can restore confidence during crisis

SPECIAL DRAWING RIGHTS: This instrument should be redeemable with a real commodity like gold, writes Zaleha Kamarudin

The Rabbani gold dinar was launched last year. The gold dinar and silver dirham were the monetary units of the Islamic caliphate until its collapse in 1924.

COMMERCIAL trade exchanges can facilitate both domestic and international trade. A trade exchange stimulates trade by brokering the members' merchandise, keeping account of members' transactions and trade balances and acting as a clearing house.

Similarly, central banks can use multilateral payment arrangements (MPA) to spur trade among member countries while significantly reducing the need for foreign exchange reserves. It would be even better if the MPA is gold-based, since central banks can leverage on their gold reserve holdings.

 The need for cash (or gold) for settlement can  be reduced by increasing the membership size and lengthening the settlement period.

 Malaysia has bilateral payment arrangements with about 20 countries. Now is an opportune time to implement the gold-based MPA as proposed by former prime minister Tun Dr Mahathir Mohamad as a response to the 1997 East Asian economic crisis.

 As for long-term solutions, one important thing that governments need to do is establish a global currency that is anchored to some "money" commodities like gold.

 This would effectively be a fixed-exchange-rate regime that would bring about monetary stability and hence encourage international trade.

 Such a currency can play the role of international reserve currency that is not under the control of any one nation. Recently, the governor of China's Central Bank, Zhou Xiaochuan, made a proposal for the adoption of such an international reserve currency, that is, global money to be managed by the International Monetary Fund.

 The 2009 G-20 Summit agreed to support a Special Drawing Rights (SDR) allocation which will inject some US$250 billion (RM800 billion) into the world economy. It's this SDR, an instrument created by the IMF to replace gold as an international reserve asset, that is the most likely candidate for a global currency.

 To make it truly political-free and stable, the SDR has to be made redeemable for some real commodities like gold.

 From an Islamic perspective, the gold dinar and silver dirham were the monetary units of the Islamic caliphate from the dawn of Islam until the collapse of the caliphate in 1924.

 The world has to be careful not to allow money or SDRs to be created out of thin air and thereafter, lent out on interest.  Money and SDRs should be made redeemable for gold or other commodities, even oil, in order to prevent abuse and the repeat of monetary crises in the proportions of recent times.

In order to stimulate economic activity, particularly in the current recessionary environment, governments should keep taxes as low as possible. Low rates encourage business activities and do not encourage tax evasion whereas high tax rates discourage business activities while increasing the probability of tax evasion.

 For sustainable economic development, governments should move towards imposing negative interest rates.  Experts have shown that sustainable economic development requires negative interest rates.

 Unlike in the current system, annual savings should be "taxed" rather than rewarded through interest. A negative interest rate is also consistent with the natural order of entropy and is also a characteristic embedded in the Islamic principle of zakat.

 And as learned from the current crisis, the banking sector, rating agencies and hedge funds must be monitored carefully with more regulations and transparency.

 Speculative gambling in the derivative markets must also be checked. The derivatives market has grown into a huge bubble, estimated to be in the vicinity of US$1 quadrillion (a thousand trillion).

 Derivatives markets are accelerating the current monetary meltdown, particularly the credit default swaps  that failed during the subprime mortgage crisis in 2008.

 There is a likelihood of huge sums of money leaving that market into the commodities markets, thereby sparking the rise of commodity prices to unprecedented levels.

 From an Islamic perspective, the measures outlined above contribute to the attainment of the maqasid al-shariah or the objectives of the syariah, by inculcating values like compassion, justice, avoidance of greed and protection of rights back into the socio-economic dimensions.

 The 1990s saw the collapse of socialism; now clearly, capitalism is on a downward trend. Perhaps the world could now give Islam a chance to show the good things it has to offer mankind.

 The Vatican remarked that banks should look at the rules of Islamic finance to restore confidence among their clients at a time of global economic crisis.

Read more: Islamic finance can restore confidence during crisis - Columnist - New Straits Times http://www.nst.com.my/opinion/columnist/islamic-finance-can-restore-confidence-during-crisis-1.94335#ixzz1xpfzuXKI

Saudi Arabia remains largest takaful market

The global takaful industry has witnessed tremendous growth in the last decade, rapidly becoming an integral part of the mainstream financial system, with Saudi Arabia at the forefront, Ernst & Young executive said Wednesday at the opening of "The World takaful Conference: Asia Leaders Summit (WTC: ALS 2012)" at Hotel Istana, Kuala Lumpur.

South East Asia, particularly Malaysia, has been the nerve center of this dynamic and vibrant industry, added David McLean, Chief Executive of the World takaful Conference. Citing a recent report by Bank Negara Malaysia, he said the takaful industry "experienced a compounded average growth rate of 27 percent in terms of net contributions between 2005 and 2010."

Given the large untapped market that still exists, the takaful industry in Malaysia is poised to benefit in the years ahead on the back of steady demand. 

Similarly other key markets in South East Asia such as Indonesia and Brunei are also rapidly emerging as important takaful markets, he added.

Brandon Bruce Sta Maria, Partner, Assurance – Insurance Leader, Ernst & Young Malaysia, noted that "global takaful contributions grew by 19 percent to $8.3 billion in 2010. Of these, the GCC contributed $5.68 billion and South East Asia contributions were $2 billion. In 2010, growth in the GCC slowed to 16 percent, from a compounded annual growth rate (CAGR) of 41 percent in 2005-2009, as the implementation of compulsory medical takaful in Abu Dhabi and Saudi Arabia was completed earlier. Saudi Arabia remains by far the largest takaful market, contributing $4.3 billion or 51.8 percent of the industry at an average contribution per operator of $141 million."

He also said "Malaysia grew 24 percent to reach contributions of $1.4 billion at an average contribution per operator of $141 million. With current growth trends, and the addition of new frontier markets such as Indonesia and Bangladesh, it is expected that gross contributions will reach $12 billion by 2012. 

By contrast, the GCC takaful market predominantly comprises of general takaful business with family takaful accounting for as little as 5 percent in certain markets."

"Strong competition, evolving regulations and shortage of takaful expertise are identified as key risks in both the GCC and South East Asia. Young takaful operators are relying upon aggressive pricing strategies to compete against the established, older, conventional players. Such pricing is not sustainable and causing significant pressure on the industry’s profitability. There are increasingly stringent regulatory requirements on capital and solvency, indicating the regulators’ desired future direction", he added.

Zainurin Julaihi, Senior Vice President and Chief Financial Officer of takaful Ikhlas Sdn Bhd, said "with a track record of sustained double-digit growth rates, the potential for the takaful industry in Asia is unquestionable. The low insurance penetration, demographic factors and the rise in Shariah compliance awareness have made the region an attractive destination for both domestic providers as well as global conventional insurers entering the takaful market space."

He added that "though the focus has shifted toward identifying strategies to translate the market potential to real growth, industry leaders must also keep a constant check on the increasing competitive pressures and the challenges that come along with it." – SG/QJM

http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentid=20120614126894

Technology in Islamic banking

Western banks operating in the Islamic banking market need to understand the cultural differences to implement technology sucessfully, says .

The question about whether differences arise when implementing technology in an Islamic bank in comparison to one that operates under a Western ‘conventional' model attracts a mixed and sometimes contradictory response. There are clearly some similarities: the goal of achieving high levels of customer satisfaction and the need to deliver increases in sales and profitability are among the shared drivers, and technology can play its role in helping them to achieve goals like these. However, modern Islamic banking is only about 40 years old and it has developed the most within the last 10 years. This means that it is comparatively immature, and so it has some catching up to do.

Jeff Wolfers has recently returned from a two year contract as a chief information officer and board director of the National Commercial Bank in Jeddah, Saudi Arabia. NCB is the largest bank in the region and it's very advanced in how it applies information technology to Islamic banking. So he's well placed to comment on the differences.

He says that the challenges fall into two distinct categories: the first is about how to deliver banking technology in the Middle East, and the second challenge is the need to create financial and banking products that comply with Sharia law - the application and interpretation of which varies from country to country.

The use of banking technology is quite nascent too. He says that telecommunications networks can be quite fragile and prone to failure in the Middle East. This means that "branches can be off air for a week while the local telecoms companies fix the problems, and technology vendors often operate through agents that have few skills", he explains. These problems aren't that easy to solve, and that's because he says it can be hard to bring the necessary IT talent to the Middle East as it's not the most attractive employment destination for some Westerners.

Adding fire to this issue is the fact the region's governments have visa regimes that restrict the number of foreigners that can live and work in their respective countries. This doesn't mean that local world class talent doesn't exist. It does and Wolfers says that it is growing, but it is scarce. With all of these challenges in mind he comments: "I would say that few in the Islamic banking world deploy advanced technology as the banks are so young, and so they are generally deploying first or second generation systems across their estates."

As a CIO he thinks it's important to support and deliver solutions that are solid, dependable as well as supportable, but they don't have to be leading edge ones. "My philosophy is to stick with established names like Microsoft, Cisco, HP and so on whenever I source solutions," he says. Yet life isn't so simple even with these big IT names in play, and that's because the regulators are finding it hard to keep up with the growing demand for Islamic banking products (the Financial Times reported on 27 March 2012 that Saadiq, the Islamic banking arm of Standard Chartered Bank, saw revenue grow by 65% in 2011 compared with 2010).

Under development

As a result products are still being developed. The key aim is to make a profit without exploiting the less well off in society. Islamic banks and financial institutions, for example, are not permitted to sell loans that charge interest and nor are they permitted to buy the kind of toxic debts that saw the downfall of many conventional banks. The permissible methods of transaction are described in Infotech's Modern Islamic Banking whitepaper. They are ‘cost-plus-sales' (murabaha) where the buyer knows the mark-up cost of the product and the seller's profit is fixed; credit sales where an added percentage of profits can be charged for a deferred payment period; leasing (Ijarah), where the customer is not required to pay any interest although they have to pay a fixed fee that takes into account an array of factors including the customer's creditworthiness; and partnerships (musharaka or mudaraba) are permitted in which ownership is shared by the bank and its customer.

Due to the complexity of all of this, domestic property mortgages are among the Islamic products that are yet to be approved by the regulators. The key difference with conventional mortgages is that no interest can be charged by the banks, but a fixed price is agreed and the lender become effectively a tenant of the bank until the loan for the house he's bought has been paid off. Islamic banking aims to be fair to both parties, but without a clear definition of the Islamic financial products Wolfers says there is no way that "purchased software products can support them".

Technology customisation

For this reason product features often developed in-house. Yousif Alkhan, assistant general manager of information technology at Ithmaar Bank, says that conventional products tend therefore to be more standardised than Islamic ones. "As a result technology customisation amounts to most of our implementation effort," he says, explaining that from his point of view there are otherwise no fundamental differences between conventional and Islamic banking. That's even though the implementation of technology can take longer than within a conventional bank, but he's right to point out that both types of banks need to adhere to regulatory compliance.

Wolfers nevertheless adds that the traditional retail banking delivery channels are 10 years behind those deployed in the West. The respective first and second most popular customer channels remain the branches and ATMs. The third most favoured channel is the call centre. The internet and mobile banking channels are the least preferred ones. "Cash remains king and credit card lending is almost non-existent, and this is why branches and ATMs are the most important channels," he says.

He also argues that service levels fall well below Western standards in Islamic banks, and this is often caused by a lack of investment in core banking technologies - including a lack of back-ups. "To bring systems up to par with 99.5% availability levels can require significant investment in data centres, networks, servers and storage," he explains. All of this is vital because technology is critical today to all retail, commercial and investment banking alike. Islamic banks know that they have to invest in order to become more competitive against conventional banks and their rivals within their own sector.

Driving competitiveness

"We are like any other banks as we use technology for all of the areas of our lives - including risk management, back-office operations, for the delivery of financial products and services to our customers and so on," says Alkhan. For this reason he puts much of his bank's effort into the implementation of technologies for channels like ATMs, mobile and internet banking. "We intend to remain ahead of our competitors in terms of the implementation of technology; we think that all of Ithmaar Bank's stakeholders benefit and we want to continually improve our services," he says.

Bryan Foss, visiting professor at Bristol Business School and a non-executive director at Source Global, says that niche banks demonstrate best practice in the Islamic banking market. "They have proved to be effective as they may be able to better focus on driving change, but customers need a broad range of Sharia-compliant and other financial service solutions," he says, adding that "this provides a role for those firms that can operate across multiple product ranges and offer services across geographies that have varied Sharia-compliance regulatory regimes".

The ‘broad range' that he refers to also means that banks like HSBC and Standard Chartered Bank are developing conventional and Islamic products that sit along aside each other in the same geographic markets, and to succeed they need to clearly understand their risks and objectives in order to create and implement an effective development strategy.

Clarity is also about knowing where there are conflicts of interest between compliance with Sharia and international regulations. Alkhan says that technology helps to ensure compliance by recording transactional and customer data, but the integration of both systems is often quite demanding. In the past a lot of the reporting was completed manually, taking a lot of time and effort to finish. Reliable IT systems and solutions are nevertheless available to help Islamic banks to manage it today in a more efficient and timely way.

"I have experienced the differences between AAOIF, the accounting standards for Islamic banking, and IFRS, which is used by the conventional banks, and there is a mapping process to help us to bridge the differences and we have to support these standards during the development phase, which requires us to consider the different entities we have operating in different regions and their different reporting requirements," he says. These arise due to cultural and regulatory differences within each market, whether it be Malaysia or the UAE. Each has its own regulatory regime.

Learning from Islamic banks

Alkhan concludes that conventional banks can learn from their Islamic counterparts by behaving ethically, being aggressive and moving quickly as the focus needs to be, in his opinion, on being innovative rather than just on what's currently happening within the market. In contrast Wolfers says that it's a touchy subject as he doesn't believe that conventional banks can learn from Islamic banks. However, Western banks or CIOs operating in this market (which the FT says will be worth $990 billion by 2015) do need to comprehend the cultural differences in order to be able to successfully manage the implementation of
new technologies which will bring about change in its many guises.

Technology is often disruptive and Mohammad Harb, head of Islamic banking business development for retail and corporate banking at IT vendor Misys, concludes: "The cultural difference between Islamic and conventional banks is a very important aspect of which the technology implementer needs to be aware, and even though some differences may be trivial." Change and how Islamic banks are going to adapt to their growing market by implementing advanced IT is therefore going to be perhaps one of their key challenges, and Western banks should use IT increasingly to enforce their own markets' rules and regulations to prevent the excessive risk-taking that led to the recession.

http://www.bankingtech.com/bankingtech/technology-in-islamic-banking/20000225421.htm;.49f4d07bb55175180e5453a50ae76331b9143bfd

Another False Start?

Islamic banks dreamed big in early 2009 as they emerged from the global crisis. Shari’ah-compliant institutions in the Gulf were mostly insulated from global conventional banks’ toxic debt.

It followed that Islamic finance was thrust forward as a viable alternative model. Some even suggested that under Islamic principles the disaster would never have happened in the first place.

Still, despite a vibrant last few years, growth has been messier than many had hoped. For one, in late 2009 Dubai’s debt crisis hit developer Nakheel and Jebel Ali Free Zone. Both had raised funds through Islamic bonds (Sukuk). It shattered creditors’ belief that Sukuk were safer than traditional bonds. Saudi Arabia’s Saad Group and Kuwait’s The Investment Dar also defaulted on Sharia-compliant bonds.

Some spent 2010 and 2011 on the fence about ploughing huge sums into Islamic finance. As a result, news from the industry has been fairly mixed. One dark spot in particular was the revelation that Dubai Bank, an Islamic institution, had run into serious debt problems. By October 2011 the Dubai government caved and arranged for an Emirates NBD takeover.

There’s now a prevailing sense that the Gulf has failed to fulfill its potential. Yet, others say ballooning growth rates speak for themselves. For instance, the top 20 Gulf Islamic banks have grown by 20 per cent since the end of 2010, compared with nine per cent for conventional banks, according to Ernst & Young’s Bahrain-based Shari’ah-compliant advisory group.

IMPRESSIVE GROWTH

Indeed, in recent months the growth of Sukuk issuance has been impressive.

Sensing trouble in the Eurozone, many Gulf corporates are seeking Middle Eastern Islamic money. Banks, including Saudi lender Banque Saudi Fransi, which priced a $750 million five-year Islamic bond in May this year, are also getting in on the act. And sovereign entrants so far this year include the governments of Qatar and Dubai. It’s perhaps the most accelerated period of bond activity in recent memory, and contrasts dramatically with the debt maelstrom in Europe.

But Sukuk sales, which jumped 68 per cent to $26 billion in 2011, are still below the record $31 billion in 2007 and are dwarfed by the $764 billion in conventional bonds sold globally this year.

Beneath these numbers there remain some fundamental concerns about the industry. At the heart is the interpretation of Islamic principles: what is considered Shari’ah compliant still varies to this day.

Tensions have escalated around Goldman Sachs’ recent $2 billion Islamic bond programme, which some have claimed is un-Islamic.

In fighting between scholars is nothing new. It has marred much of the progress of Gulf Islamic finance in the last decade.

Some bankers, especially in Saudi Arabia, have complained that overly strict religious rules stifled much-needed product innovation.

Globally, there has been a struggle between Islamic finance’s standard-setting bodies to formulate rules. Companies and governments aren’t bound by the regulations set by organisations including Manama-based Accounting & Auditing Organisation for Islamic Financial Institutions and Kuala Lumpur-based Islamic Financial Services Board.

Then there is the fierce criticism that Shari’ah lenders have failed to find a better way forward other than simply to mimic conventional commercial and retail products.

All of which leads many, like Neil Miller, the global head of Islamic finance at KPMG, to believe that sustainable future growth will hinge on radical change, not positive quarterly figures.

"The thing that's holding back the industry is that nobody is really working out how to transform it from its current model,” says Miller. “There are those that say transformation is difficult, so they are targeting growth and scale to be able to apply pressure to change things from a position of strength but this will take time. Then there are those people who want to change the industry to highlight the proper way of doing business but they face myriad embedded challenges.”

Miller believes that the relative size of the Islamic finance market – roughly one per cent of global finance – means it's not going to step in and fill the gaps that open up when conventional finance has a wobble. “It simply shows an alternative model for financing. This perspective needs to be kept in mind.”

Meanwhile, lack of standardisation across Islamic markets means products aren’t being traded in high enough volumes. Therefore, liquidity between Islamic banks in the region is low.

There have been efforts to tackle this.

In May, the Islamic Development Bank, a Jeddah-based multilateral institution, signed a memorandum of understanding with the Qatari government and Saudi Arabia's Dallah Albaraka Group to launch an Islamic bank. The aim is to facilitate Islamic interbank trade, develop liquidity-management solutions and launch an Islamic securities market.

Islamic banks in the region are themselves flush with cash, but have few outlets for it. Hence, any Sukuk that comes to market is always wildly oversubscribed. Some suggest trading in Shari’ah compliant derivatives would present new platforms for trading. But John Sandwick, a global Islamic finance adviser based in Switzerland, said banks must resist the urge.

“The danger is that these derivatives people see this liquidity in Gulf banks and come up with some wacky instruments – then slap a fatwa on them so Islamic banks can trade them.”

He said regional banks are prone to the same trading collapse that saw JP Morgan lose $2 billion on complex investments recently.

Generally, there is no shortage of positive forecasts for Gulf Islamic banking. The latest from Ernst & Young predicts assets under management at Shari’ah compliant institutions in the region will double to $990 billion by 2015 from $416 billion in 2010. Yet, similar projections have been made each year since the global financial crisis.

There’s no question that the recent spurt in Sukuk activity underlines the industry’s appetite and growth ambitions over the long term. How it intends to achieve this is a different story. Most of those that monitor the health of Islamic finance say the industry must use this current buoyancy as an opportunity to get to grips with the underlying issues that could sustain future expansion.

It will be a long slog from here.

http://www.gulfbusiness.com/another-false-start?page=2

The rise of Islamic financial planning

The world’s eyes have been watching with interest events unfold in the Middle East over the past 12 months, wondering what the next chapter holds.

At the very heart of the Arab Spring lies individual and societal freedoms, but what strikes me as particularly interesting is that this widespread uprising is likely to result in more democratically-elected Islamic governments. This, in turn, will prompt a rise in demand for Islamic finance and wealth management solutions.

The Islamic finance industry is estimated to be worth over $1 trillion (£646 billion) globally – a figure only expected to grow as the financial markets develop and expand and a rising number of stocks become Shariah-compliant.

Broadly speaking, Shariah-compliant investing can be categorised by three over-riding principles – procedural, substantive and charitable principles.

The first forbids the use of interest payments based on the belief that one should not benefit from lending money. It also forbids the use of gambling and uncertainty, meaning that financial products are structured in such a way that risk and profit are shared between the investor and the organisation arranging the investment.

The second calls for investments to work in sync with Shariah law and thus prohibits the inclusion of alcohol, gambling, pork, pornography and tobacco investments.

And finally, the third stipulates that investors set aside a certain amount for the purpose of charitable giving, in order to purify one’s wealth as well as help others.

While the Middle East is undoubtedly the home of Islamic financial planning, the UK has become the indisputable jewel in the Western crown and we believe it will play a pivotal role in advancing growth going forward.

The UK is already home to over two million Muslims and currently boasts Islamic assets worth in excess of $19 billion (£12 billion).

Its 22 banks offering Islamic finance products far exceeds that of any other Western country and what might once have been a niche area is now becoming much more mainstream, as flocks of financial groups recognise the need to service Muslims’ financial requirements, as well as those of many non-Muslims whose investment principles are aligned with the ethics promoted by Islamic law.

This growing desire to assert a specific Islamic identity to crucial social activities has caused a boom in Islamic financial investments. To date, the London Stock Exchange has seen over $19.5 billion (£12.6 billion) raised through 31 issues of sukuk alternative financial investment bonds, with 10 new sukuk listings in 2011 and two in early 2012.

Globally, sukuk issuance is expected to climb a further 50 per cent this year, with companies increasingly turning to capital markets amid a constraint in the banks’ lending ability.

However, while there are significant opportunities within the UK to invest in high quality global companies with strong balance sheets, we believe this could be the wrong way to tackle financial planning.

Many seeking Islamic finance are already familiar with the products and different terms, but the merits of financial planning are an altogether lesser known world. At its heart, financial planning is more than just the use of Shariah-compliant products. Clearly, while any investment product must adhere to the Shariah rule, it is important for the entire client experience to be in accord with the principles of Islamic investment.

With this in mind, Islamic financial planning promotes the idea of aiding individuals in identifying and achieving their short and long-term life goals.

In my opinion, the whole art of product solutions is somewhat redundant if one doesn’t fully understand an individual’s lifestyle and has a clear picture of their goals, hopes and dreams. After all, what is right for one person is unlikely to be right for the next person. Only through this, do we believe that clients can truly enjoy a Shariah-compliant investing experience.

By Niraj Vyas, financial planning director at Guardian Wealth Management

http://www.moneyobserver.com/news/12-06-14/rise-islamic-financial-planning

Global shortage of Islamic finance professionals identified

The world needs 50,000 Islamic finance experts right away to promote Islamic banking and finance. Some 38 universities around the world are producing approximately 5000 graduates in Islamic banking and finance a year but estimated that demand is potentially 10 times that number.

According to Muhammad Zubair Mughal, Chief Executive Officer of Lahore-based Al-Huda Centre of Islamic Banking and Finance, warned that If this demand / supply imbalance was not addressed in the short term it would leave Islamic banking and finance facing many obstacles in its growth and promotion. 

http://www.opalesque.com/IslamicFinance_Briefing/?p=16926

Shariah banking growing rapidly

Many non-Muslims like knowing they are not investing in alcohol, tobacco or porn

More than 100000 South Africans make use of the shariah-compliant banking products of local banks.

Eric Enslin, head of client engagement at FNB Wealth, said the shariah customer base is not exclusively Muslim.

Enslin said shariah banking is consistent with the principles of Islamic rulings and their practical application through the development of Islamic economics. Shariah prohibits the payment or acceptance of interest charges (riba) for the lending and accepting of money, as well as trade and other activities that provide goods or services considered contrary to its principles.

With shariah products, profit comes exclusively from the nature of the agreement. "There are a number of ways trade contracts can be set up, such as rental with a view to ownership, cost plus mark-up, and more," Enslin said. "An example of a rental agreement could be the financing partner [the bank] purchasing the asset on the client's behalf and renting the goods to the customer at a fixed rental repayment price over an agreed period. The rental amount would include the bank's profit mark-up that is agreed at the inception of the sale. The agreed repayments are not subject to any fluctuations, irrespective of market conditions."

Without any fluctuations, Enslin said, the customer can rely on a constant repayment amount throughout the period of the contract.

This provides the certainty required by shariah, and the stability is a win-win for bank and customer, said Enslin. "The structure of Islamic finance products is gaining rapid acceptance as a viable alternative to traditional Western banking. This is because the sale and buy-back agreement between the financier and the customer is agreed when the partnership is entered into. The terms of the sale and the profit margin are fixed."

FNB's Islamic product client base has been growing at 25% a year, showing rising demand.

Absa's head of retail markets, Arrie Rautenbach, said the Islamic banking product choice is available to anyone - and for reasons beyond the usual. "Many non-Muslims choose Islamic banking products because they like knowing that their funds will never be invested in industries that are potentially negative for society, such as alcohol, tobacco, gambling and pornography. Absa also offers an Islamic will, Islamic risk cover (Takaful), Islamic business banking and Islamic private and wealth banking. Even shariah-compliant exchange traded funds (ETFs) such as NewGold and the Shariah Top 40 ETF are available through Absa Capital.

"Any company - small, medium or large - that chooses an alternative to conventional banking can make use of the Islamic business bank offering," said Rautenbach. "During June the Islamic Forward Exchange Contract [FEC] from Absa Capital will be launched to support international trade by Islamic banking customers. Support for companies wishing to do international business is a current focus and products in the pipeline include a unique working capital solution and letters of credit, which will be shariah-compliant."

Will you never earn or be charged interest if you opt for a shariah-compliant bank account? "Conventional banking pays interest, which is a guaranteed amount," said Rautenbach. "Islamic banking pays a profit share, which is not guaranteed as it is the sharing between the customer and the bank of profit earned by the bank on the customer's behalf. Shariah compliance also requires complete transparency of contract, so the customer knows in advance what his or her expected share of the profit earned will be.

"Islamic finance products require that there is an underlying asset. This is one of the reasons why Islamic banks fared better in the recent economic meltdown than many conventional banks. For example, in a vehicle finance transaction, after being mandated by the customer, the bank buys the car and agrees with the customer what profit mark-up will be added to the purchase price. The cost of the car plus the profit mark-up is then divided by the number of months the customer chooses for repayment to arrive at a monthly repayment amount for the duration of the contract - this could be anything up to 72 months. What the Reserve Bank does with interest rates will not affect the payments as interest is not part of the transaction," Rautenbach explained.

http://www.timeslive.co.za/sundaytimes/2012/06/10/shariah-banking-growing-rapidly

MAS underlines key challenges for Islamic finance to continue thriving

Monetary Authority of Singapore (MAS) managing director Ravi Menon has underlined key challenges for Islamic Finance to continue thriving.

“Islamic finance has come a long way.

“As it embarks on its next phase of growth, the industry must overcome the challenges posed by slower growth and global deleveraging, and build scale and reach critical mass.

“This requires financial institutions, regulators, and international standard setting agencies to work closely together,” he said in his address at the opening of 3rd Annual World Islamic Banking Conference: Asia Summit, here yesterday.

Ravi said Islamic finance has shown remarkable resilience during the last five years – perhaps the most challenging economic environment in the post-war era.

He said the industry has grown by an estimated 20 per cent annually in the last five years to reach US$1.3 trillion in total assets in 2011.

“Islamic banks have grown both in number and in scope. But the sustained growth of Islamic finance is in no way guaranteed. For Islamic finance to continue thriving, the industry has to overcome a few key challenges.

But in every challenge, there is also opportunity,” he stressed.

Ravi pointed out the clear and present danger to all financial activity, including Islamic finance, is the risk of contagion from an escalation of the eurozone crisis.

He said Islamic finance is closely intertwined with underlying economic activity and will be affected by the impact of slower global growth.

Contagion from the eurozone has already curtailed economic growth and capital inflows to many emerging economies where Islamic finance has taken root.

“Potential spillovers from an escalation of the Eurozone crisis could lower output in the Middle East and North Africa region by about 3.25 per cent relative to baseline, the largest spillover effect for any region outside Europe.

“But Islamic finance has a window of opportunity in the current climate of deleveraging in the global financial system.

With its strict prohibition on excessive leverage, Islamic finance has been spared the worst of the financial crisis,” he said.

Ravi pointed out that Islamic banks are well positioned to reach out to new customers who are in need of financing as many global institutions pull back on their lending due to the need to repair their balance sheets.

He said Islamic finance should diversify into growth areas such as trade and infrastructure financing, where demand is still strong, especially in emerging economies.

With a focus on supporting real productive activities, Ravi said Islamic finance is naturally compatible with trade and infrastructure development.

He said tapping these sectors also brings about greater diversification benefits, especially for Islamic institutions which have been hurt by their significant lending exposure to the real estate sector.

A second factor that Islamic finance will have to contend with, the central bank chief said, is the ongoing global regulatory reforms.

He noted the scale and scope of these reforms are probably unmatched in recent history.

“Islamic financial institutions will have to devote considerable resources to meet the new international standards.

But there are certain inherent characteristics of Islamic finance that will stand it in good stead in the emerging regulatory environment.

Ravi said Islamic finance is also well placed to meet the increased “return-to-basics” investor demand.

Following the global financial crisis, investors have become more averse to the unknown risks embedded in complex financial instruments.

Islamic finance, he said with its stronger emphasis on transparency, price certainty and risk-sharing, can benefit from this renewed demand for more basic investments, from Muslim and non-Muslim investors alike.

“The third, and perhaps most important, challenge that Islamic finance must overcome is its present fragmented state.

Islamic finance currently suffers from low economies of scale.

The overall size of Islamic assets is still less than one per cent of the global financial system.

“Being smaller and relatively young, Islamic finance currently offers fewer product choices for consumers and less comprehensive risk management options for institutions.

Cross-border investment flows are also constrained by differing interpretations of permissible transactions under Shariah principles,” he said.

He said the isolated pools of Islamic liquidity in each market restrict opportunities for more efficient allocation of capital across consumers, industries, and jurisdictions.

Ravi suggested that Islamic finance must become more integrated with the global financial system.

He pointed out the industry must expand beyond its traditional markets to include a wider range of financial institutions, investors and consumers.

This means Islamic finance must strike roots in key international financial centres of the world.

He said these centres can contribute to Islamic finance in several ways, including market liquidity, capabilities in global financial markets and opportunities for interaction and collaboration.

As Islamic finance gains prominence, he said conventional financial institutions increasingly want to be involved to tap these opportunities.

He said financial centres like Singapore serve as intersecting nodes where Islamic financial institutions collaborate with their conventional partners to jointly grow the industry.

“By applying the same regulatory framework to both conventional and Islamic financial institutions, Singapore aims to encourage financial institutions here to grow their suite of products and services for the Islamic finance industry,” he added. — Bernama

Read more: http://www.theborneopost.com/2012/06/06/mas-underlines-key-challenges-for-islamic-finance-to-continue-thriving/#ixzz1xAFS6IU8