Islamic Finance Rules Edge Forward Amid 5-Year Impasse

After at least five years of delays, Islamic finance experts in Saudi Arabia and Malaysia are renewing efforts to create common regulations for scholars.

Malaysia’s International Shariah Research Academy for Islamic Finance is working with its Middle Eastern counterpart on guidelines that will address the number of boards on which scholars can sit to reduce conflicts of interest, according to Executive Director Mohamad Akram Laldin in Kuala Lumpur. An institution will also be established to provide global accreditation, said Akram, who helped set up a body last year to oversee advisers’ activities in the Southeast Asian nation.

The industry needs such measures to boost confidence and improve transparency, Abas A. Jalil, Kuala Lumpur-based chief executive officer of Amanah Capital Group Ltd., said in an interview yesterday. Discussions have faltered in the past because of Persian Gulf experts’ more stringent interpretations of Shariah law, which could still hinder progress, he said.

“The main challenge is to get everyone on the same page,” Abas, who has helped form Islamic funds in Bahrain and Kazakhstan, said. “Scholars in Malaysia are more liberal. In the Middle East, their products focus mainly on local investors so they don’t mind not being flexible.”

Share Ownership

In most countries there’s no limit to the number of entities to which a scholar can advise on Shariah compliance, Akram at Malaysia’s academy, said in an Oct. 10 interview. To avoid conflict of interest in the Southeast Asian nation, the central bank doesn’t allow Islamic experts to sit on more than one board involved in the same business.

The new rules being worked on in conjunction with the Islamic Research & Training Institute in Jeddah, Saudi Arabia, will also determine if religious scholars can own shares in companies they advise and govern the disclosure of information relating to products they help structure, Akram said.

“A universal Shariah governance framework will enhance competitiveness and growth of Islamic financial institutions,” Abdul Rahim Abdul Rahman, a scholar who advises HSBC Amanah Malaysia Bhd. in Kuala Lumpur, said in an Oct. 14 e-mail. “Shariah governance will ensure the achievement of accountability toward stakeholders.”

The $1.3 trillion global Islamic finance industry is seeing annual average growth rates of 15 percent, Malaysia’s Securities Commission said in a June 27 statement. The proposed regulations from the two academies come as sales of Shariah-compliant debt, which pays returns on assets to comply with Islam’s ban on interest, climbed to a record in the six-member Gulf Cooperation Council, which includes Saudi Arabia.

Record Sukuk

Issuance in the GCC rose four-fold to $19.2 billion in 2012 from a year earlier to account for 49 percent of the $39.1 billion worldwide, which is also an all-time high, according to data compiled by Bloomberg.

Global Islamic bonds returned 8.1 percent this year, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows, while debt in emerging economies gained 16 percent, according to JPMorgan Chase & Co.’s EMBI Global Composite Index.

Average yields on sukuk fell five basis points last week to a record low of 2.92 percent, after dropping 42 basis points in the July-to-September quarter, according to the HSBC/Nasdaq index. The difference between the average and the London interbank offered rate, or Libor, narrowed one basis point, or 0.01 percentage point, to 195 basis points.

Public Trust

The Bloomberg-AIBIM Bursa Malaysia Corporate Index, which tracks 57 local-currency sukuk in the world’s biggest Islamic debt market, gained 0.5 percent last week to 101.085. It reached an all-time high of 101.1963 on Sept. 26.

The proposed guidelines would strengthen an industry which now has varying degrees of supervision for religious experts, Megat Hizaini Hassan, partner and head of the Islamic finance practice at Kuala Lumpur-based law firm Lee Hishammuddin Allen & Gledhill, said in an e-mail yesterday.

Engku Rabiah Adawiah Engku Ali, a scholar who sits on Bank Negara Malaysia’s Shariah Advisory Council in Kuala Lumpur, said in an Oct. 12 interview that a more robust framework would reinforce the public’s trust.

Islamic experts versed in Shariah law are generally required to have recognized university degrees before they can act as advisers to banks and companies. A shortage of trained personnel means they tend to sit on a number of advisory boards simultaneously.

“Some Islamic Scholars with the highest qualifications from top religious schools do not have a good knowledge of economics and financial products, yet they sit on various boards because of their influence in the Islamic world,” Amanah Capital’s Abas said.

‘Self-Regulated’

Mohammad Daud Bakar, a scholar who heads Bank Negara’s Shariah committee also sits on boards of Malaysia’s Securities Commission, Islamic Bank of Asia Ltd., BNP Paribas SA and Noor Islamic Bank among others, according to the institutions’ websites.

Mohamed Ali Elgari, an expert in Kuala Lumpur, holds positions on boards including those of HSBC Amanah Malaysia Bhd., Islamic Bank of Asia, National Commercial Bank, and Abu Dhabi Islamic Bank PJSC, the lenders’ websites show.

Islamic markets would benefit from rules overseeing scholars although it could be a challenge to create a set of guidelines that are applicable worldwide, according to Hong Kong-based law firm Norton Rose.

“Scholars operate on a global basis and it is very difficult to create regulations and systems which apply across borders,” Davide Barzilai, a partner with Norton Rose, said in an e-mail yesterday. “Scholars are self-regulated by the market and of course by their own conscience and Shariah.”

To contact the reporters on this story: Liau Y-Sing in Kuala Lumpur at yliau@bloomberg.net Yudith Ho in Jakarta at yho35@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

http://www.businessweek.com/news/2012-10-15/scholar-rules-edge-forward-amid-5-year-impasse-islamic-finance

Islamic finance to be demand-driven: KPMG

KPMG, a leading International firm providing Audit, Tax and Advisory services yesterday organised at the Grand Hyatt, a seminar on Islamic Finance-Lessons Learnt from abroad & Challenges faced in Oman.

This was the latest in a series of Breakfast Seminars that KPMG held earlier and is planning to hold over the coming months. This Seminar brought together people involved with Islamic Finance industry, the regulators and the support organisations.

Khalid Ansari, Partner in Charge of Advisory Services of KPMG in Oman, highlighted that the seminar had received an enthusiastic response, with representatives attending from a wide variety of Islamic Finance industry groups and regulatory organiSations. The seminar was delivered by Khalid Yousaf, Director Islamic Finance Advisory Services of KPMG in Oman.

The seminar provided a comparative analysis of Islamic Finance models adopted by various countries around the world, their experiences and the pros and cons of their approaches.

Khalid highlighted the aspects of lessons learnt from other countries and how a methodical approach for the development of Islamic Finance industry infrastructure could be taken for best results in Oman. The challenges and issues relating to Islamic Finance in Oman will require government and regulatory authorities’ attention and support for the industry to achieve a successful launch and rapid growth. He emphasised that since the introduction of Islamic Finance in Oman is demand-driven from markets and customers, its future is secure. The growth after a steady start is likely to overtake the conventional banking assets by 2020.

The audience actively participated in the discussions with questions, practical problems and suggestions throughout the presentation which made the seminar highly interactive and interesting.

Khalid Ansari mentioned that KPMG is running similar Breakfast Seminars in the coming months covering topical issues in Islamic Finance. He also invited the participants to suggest topics which could be addressed in future seminars.

http://main.omanobserver.om/node/115476

EASE LAWS TO ALLOW ISLAMIC FINANCE TO FLOURISH

The federal government is under pressure to tweak tax incentives that make it easier for the Islamic finance sector to flourish in Australia and allow greater cross-border transactions with Asia.

The Dubai-based global head of Islamic finance for law firm Allen & Overy, Anzal Mohammed, says there’s a push to encourage policy makers to ease regulations on such things as stamp duty and withholding tax so people who want to invest in Islamic-compliant funds don’t get hit with tax penalties.

Mohammed met Treasury officials in a bid to encourage such a move. It comes as the chairman of the Australian Financial Services Task Force, Mark Johnson, also recommended that impediments to Islamic finance be removed as part of the Board of Taxation review.

Islamic finance is based on the principles of Sharia law and bans the payment and receipt of interest. Investors instead need to make returns that are linked to profits and cannot invest in what Mohammed terms as “Sharia-repugnant” companies such as those associated with gambling, pornography or alcohol.

In early 2010, the federal government asked the Board of Taxation to review federal and state tax laws to ensure they did not unfairly disadvantage Islamic finance products.

While few bankers expect there to be a surge in Islamic finance even if the government changes any tax guidelines, Mohammed says it opens up the local market to more of these products by providing a “more level
playing field”.

“The key change we need is to the taxation regime to allow Islamic finance to develop,” Mohammed says.

“This discussion has been going on for a number of years and now everyone’s waiting to see what they [the government] do next.”

He also says Islamic finance is popular in countries such as Malaysia, so there may be more opportunities for cross-border transactions, as well as providing “more diversified funding sources” in an environment where there’s generally less liquidity.

He says government tweaks to legislation, whether federal or state, may change the state of play for wholesale investors but it’s not clear whether such changes will result in a bigger uptake in the retail market.

The major financial institutions are slowly moving into the Islamic finance space but a recent report by Austrade found Islamic finance is still a “nascent” industry.

The major banks are yet to offer retail investors comprehensive products and Australia’s first Sharia-compliant equity fund, Crescent Wealth, was only set up in October last year. The fund will begin offering products, including superannuation, tapping into the $1.4 trillion global Islamic investment market .

The Austrade report did note, however, that Islamic finance has potential for development, with Australia’s Muslim population hitting almost half a million and more than 60 per cent of the world’s Muslims located in the Asia-Pacific.

http://www.brw.com.au/p/sections/fyi/ease_laws_to_allow_islamic_finance_hIzXlz2To4Mas1iygJtKAI?

The blossoming appeal of Islamic finance

The Islamic finance sector has seen robust growth over the years, blossoming to become the fastest growing segment in the global financial industry. In tandem, the Malaysian Islamic finance realm has scaled new heights as it represented 18 per cent of the Malaysian banking sector’s total assets as at December 2011. BizHive Weekly takes a look at the the current state of the industry, challenges faced by players and measures taken to grow and move forward.

Tracking the growth path of Islamic finance

Islamic finance has seen tremendous growth and acceptance over the recent years in Malaysia and on a global scale in over 70 countries from financial centres in Malaysia to the Middle East.

It is considered as the fastest growing segment in the global financial industry.

Global Islamic financial assets have increased significantly over the past three decades, crossing US$1 trillion in 2010 and estimated to have exceeded US$1.2 trillion in 2011 from about US$5 billion in the late 1980s, according to the World Bank.

Dr Mahmoud Mohieldin, World Bank managing director

World Bank managing director Dr Mahmoud Mohieldin stated recently that the size of Islamic finance assets was expected to grow between 10 per cent and 15 per cent annually over the next three years, supported by strong demand and supply factors in addition to effective regulation and quality of services that would sustain growth.

“The (Islamic finance) asset size is currently around US$1.2 trillion to US$1.3 trillion but if you compare it with the global financial assets, it is just about or less than 0.5 per cent,” he pointed out, adding that it was expected to touch US$1.6 trillion by year-end.

In the local context, the Islamic banking segment represented 18 per cent of the Malaysian banking sector’s total assets as at December 2011, where the total assets stood at RM1.78 trillion at that time.

“Based on records, this segment has shown an impressive growth from RM185 billion in 2008 to RM326 billion in 2011 which constituted an average growth of around 21 per cent over the past three years,” RHB Islamic Bank Bhd (RHB Islamic) managing director Abdul Rani Lebai Jaafar said to BizHive Weekly.

“Malaysia has a comprehensive legal, tax, accounting, regulatory and supervisory framework which are well articulated.

“Further, the establishment of well-defined syariah parameters as well as the bold move by the regulatory authorities to centralise syariah rulings have been instrumental in pushing further the growth of Islamic banking and finance in Malaysia.

“Coupled with the strong support from the government as well as Bank Negara Malaysia (BNM) along with the introduction of the Financial Sector Master Plan (FSMP) with its various initiatives, the Islamic banking sector had managed to meet its target of contributing 20 per cent share of Malaysia’s total banking assets in 2010,” he noted.

BNM governor Tan Sri Dr Zeti Akhtar Aziz

The resilience of growth in the Islamic finance sector against the backdrop of the ongoing global financial crisis had proven to be a ‘defining period’ for the industry, according to BNM governor Tan Sri Dr Zeti Akhtar Aziz.

Nonetheless, the industry must now work towards ‘bridging economies’ to foster growth moving forward, the central bank governor said while adding that better understanding and clarity on syariah matters would also help to attain convergence.

“Islamic fi nance needs to be dynamic and innovative, with an emphasis on the development of diversifi ed and comprehensive syariah-compliant fi nancial solutions that meet the differentiated needs of different businesses, including the requirement of international businesses and thus facilitate cross-border investment,” she said.

Expanding on the ever-growing acceptance of Islamic finance practices, chief executive officer and executive director of Asian Islamic Investment Management Sdn Bhd Akmal Hassan believed the key principles in Islamic finance, such as ethical, transparent, prohibition of excessive risk, leverage and speculation appealed to many investors especially after the devastating global financial crisis four years ago.

“The global financial crisis in 2008 highlighted one of the main basics of investing: ‘buy what you understand’,” he pointed out to BizHive Weekly.

EXPECTING ROBUST GROWTH: The size of Islamic finance assets is expected to grow between 10 per cent and 15 per cent annually over the next three years, supported by strong demand and supply factors in addition to effective regulation and quality of services that will sustain growth. — Reuters photo

“The bundling of subprime loans in a convoluted structure and sold to investors as a high grade bond highlights the pitfall of investing when one does not truly understand what one is buying into.

“That also calls for the need of more transparent and less risky products, which Islamic finance could help to address.

“Besides, Islamic law prohibits making money from money, in other word interest or ‘riba’, as wealth can only be generated through legitimate trade and investments in assets reminded many investors that it is time to go back to basics,” he emphasised.

Read more: http://www.theborneopost.com/2012/10/21/the-blossoming-appeal-of-islamic-finance/#ixzz2A7Qw0nxi

Introduction of the world’s first Islamic arbitration rules will grow Islamic finance assets

The introduction of the world's first Islamic arbitration rules last month by the Kuala Lumpur Regional Centre for Arbitration (KLRCA) will pave the way for further expansion of Islamic finance with total global assets now estimated to be worth around US$1.2 trillion (RM3.72 trillion) to US$1.3 trillion (RM4.03 trillion).

Not only are the arbitration rules the first of its kind worldwide, it caters to both conventional and syariah-compliant commercial transactions and contracts as well.

KLRCA director Datuk Sundra Rajoo told StarBiz that with these new Islamic arbitration rules, the relevant parties to a dispute could have a complete syariah-compliant process, from the formation of the Islamic products right to the dispute resolution process.

Most disputes relating to Islamic finance ended up in civil courts where usually common law principles on conventional banking were applied, he said, adding that due to lack of expertise and precedents, the courts were less equipped to apply and interpret the relevant syariah principles where required.

Stressing the importance of such rules, Sundra said with the global Islamic finance sector already worth US$1 trillion and set to triple its value over the next decade, he foresee there would be more domestic and cross-border agreements and transactions, hence more disputes arising out of it.

The rules were also a great tool in support of the internationalisation of the Islamic finance, which complemented the Bank Negara Financial Sector Blueprint, he noted.

http://biz.thestar.com.my/news/story.asp?file=/2012/10/22/business/12181506&sec=business

Does Islamic finance have a responsibility to reduce unemployment

There is a buzz about the prospects for Islamic finance in parts of the Middle East and North Africa region (MENA). News reports are suggesting that as a consequence of change in public policy, the market share of Islamic banking in Egypt will grow to “35 per cent in five years from 5 per cent now”. Much attention in Islamic finance circles is also falling on the relatively smaller markets, such as Oman and Morocco. Observers, such as researchers from Credit Suisse, are also pointing to Islamic finance as a potential source of spurring economic growth in the Arab Spring countries.

A question arising out of all this buzz is this: Will the rise of Islamic finance address the problem of high unemployment among the Arab youth?

The economic literature on MENA tends to see unemployment as the region’s greatest challenge. It is difficult to exaggerate its scale and socio-economic implications. According to Global Employment Trends 2011 by the International Labour Organisational youth unemployment in the MENA region is estimated to be 24.8 per cent compared to world average of 12.6 per cent.

It is frequently argued that job growth in MENA is best expected from high-growth small and medium sized enterprises (SMEs). According to research by the World Bank, these SMEs consider limited access to finance to be a significant constraint. The buzz about Islamic finance in building expectations that it could help tackle unemployment in MENA by doing things like financing the under-financed SMEs that will create jobs.

But is helping create more jobs a social responsibility of for-profit shareholder owned institutions offering Islamic financial services? Or does this responsibility only belong to others, such as the government and development financial institutions?

The issue is not ‘can Islamic finance solve MENA’s unemployment problem?’ It cannot. Even governments are finding the challenge overwhelming and Islamic finance is but a niche within the financial sector. The question is whether the Islamic finance sector should consciously attempt to contribute to tackling unemployment as part of its business strategy rather than a byproduct of its activities.

If you are a follower of the economist and Nobel laureate Milton Friedman, you will probably think that tackling unemployment is not the business of for-profit finance. According to Friedman, the social responsibility of business is to increase its profits, as he argued in his article published in the New York Times Magazine in 1970. Friedman’s core argument is simple and powerful: Management of for-profit shareholder-owned companies should do what these companies are meant to do — maximise profits for shareholders.

Friedman’s argument is often invoked in Islamic finance. In a recent blog, a London-based Islamic finance practitioner writes:

Islamic financial services providers, whether they are banks, Takaful operators, asset managers or real estate fund providers, are normally companies with shareholders. Accordingly their prime responsibility is to maximize shareholder value while conducting their operations in accordance with the requirements of their Shariah supervisory board. Consequently any expenditure by the Islamic financial services firms must be directed towards building their businesses either directly or indirectly.

A somewhat different view of corporate social responsibility (CSR) is taken by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the Bahrain-based standard setter in Islamic finance. AAOIFI’s standard on CSR is not confined to simply acting responsibly while going about business as usual — a common notion of CSR — but goes far and deep into actively doing good. For instance, its “mandatory conduct” includes possible impact assessment of financing on economy, society, and environment while its recommended “voluntary conduct” includes assisting small and micro businesses.

Some of the messages coming out of Islamic financial institutions also suggest that they do not exist solely to maximize shareholder’s wealth. For instance, Kuwait Finance House (KFH), a prominent institution in Islamic financial sector, reports that in 2010, among other philanthropic activities, it donated USD 2 million for flood victims in Pakistan. Giving away such a sum to the poor in a country where KFH does not even operate is unlikely to increase the wealth of KFH’s shareholders, directly or indirectly.

AAOIFI CSR standard and philanthropy are materially different from some of the modern notions about CSR. For instance, in its 2011 Environmental, Social, and Governance (ESG) report, Goldman Sachs says “we define our social value by what we contribute to making markets robust and economies strong.” Such modern notions of the role of corporations in society are most likely to be seen as consistent with Friedman’s position of maximizing profits.

Should Islamic finance follow Friedman’s position or should it align itself with the social cause of tackling unemployment?

The answer to this question probably lies in how the term ‘Islamic’ in financial services is interpreted by the financial institutions, their stakeholders, and society. The term Islamic, just like other terms such as sustainable, responsible, or ethical used regularly in finance, do not mean the same thing to everyone.

To some, it may only mean avoiding financing to businesses built around ‘sins’ — like drinking alcohol and gambling — and giving lending the form of sales or leases while retaining its economic substance. This minimalist and form-oriented approach, while not uncommon, also explains much of the criticism that is frequently levelled at the industry. It is safe to assume that to others, particularly the enthusiasts of Islamic finance in MENA, the term Islamic means more. While what exactly is the “more” remains relatively fluid, AAOIFI’s standard on CSR, despite lacking regulatory power, helps us understand some of the expectations associated with it.

The institutions eager to capitalise on the renewed prospects of Islamic finance in parts of MENA will do well to clarify their position. Will they consciously channel financing to business and sectors, tacking unemployment, even if involves comprising some financial return? Or will these institutions invoke Friedman’s argument and only maximise profits because this is what they believe to be their reason for existence?

Both paths will have their challenges. Those wishing to address unemployment on a sustainable basis will probably need a clear mandate from their shareholders and account holders to do so. Those wishing to only maximise profits will probably find it hard to maintain support from policy makers and society.

It will be interesting to observe if and how far Islamic is willing to go beyond maximising shareholder’s wealth to tackle MENA’s unemployment challenges.

Usman Hayat, CFA, Director of Islamic Finance and ESG at CFA Institute.

http://gulfnews.com/business/banking/does-islamic-finance-have-a-responsibility-to-reduce-unemployment-1.1092049

Dubai Bank to be rebranded by November-end It will be branded as Emirates Islamic Bank

It’s official: By end of November, Dubai Bank will be rebranded as Emirates Islamic Bank (EIB).

Following the transition, EIB will become the third largest Islamic bank in the country after Dubai Islamic Bank and Abu Dhabi Islamic Bank.

In a letter sent to its customers, Jamal bin Ghalaita, CEO, Dubai Bank, said: “Emirates NBD Group is bringing together its two Islamic banking holdings to create a stronger, more resilient proposition for its customers under the Emirates Islamic Bank brand. By the end of November, you will begin to see your branches, ATMs, cash deposit machines (CDMs) and other related materials reflecting the Emirates Islamic Bank brand.”

Once the alignment process is completed, customers will have an expanded network of 50 branches, 100 ATMs and CDMs across the UAE in addition to free access to over 700 ATMs and CDMs that are part of the Emirates NBD Group.

Emirates NBD, UAE’s biggest lender, took over Dubai Bank last October, after it was acquired in May by the government from its previous owners, Dubai Holding and Emaar Properties.

Ghalaita, in the letter, further said: “We are also working to minimize any disruptions to your banking experience. As such, your present account numbers, cheques, debit and covered cards and other services including online banking and telephone banking will remain valid.”

EIB has said previously that customers of the larger entity will benefit from economies of scale, have a more substantial list of payment partners and access to a more comprehensive range of Shariah-compliant products.

http://www.emirates247.com/business/economy-finance/dubai-bank-to-be-rebranded-by-november-end-2012-10-22-1.479927

Islamic finance in bloom

Last week, the Islamic finance industry received another boost when Bloomberg launched its Malaysian Ringgit corporate sukuk index, a move that further cements Malaysia as a major player in the niche sector.

Investor demand for Shariah-compliant products, both corporate and sovereign, has grown significantly in recent months. In particular, sukuks (financial certificates seen as the equivalent of Islamic bonds) have been issued at record amounts on the back of cheap borrowing costs.

Bloomberg’s new index, developed with the Association of Islamic Banking Institutions Malaysia (AIBIM) and the stock exchange Bursa Malaysia, aims to offer a benchmark for investors in Ringgit-denominated sukuks in Malaysia, a country that has styled itself as a global hub for Islamic finance. Malaysia accounted for nearly 60% of global sukuk issuances in 2011, dwarfing its nearest rival Qatar by over a factor of six (see chart below).

Islamic finance promotes an economic order that conforms to Islamic scripture, namely the Koran. It prohibits interest on debt, which is deemed a form of exploitation under Shariah law, and promotes a close link to the real economy. Islamic financial contracts need be backed by (or at least tied to) real assets or transactions. Purely speculative investments are banned.

“Malaysia has become a centre for Islamic finance, in part because it has spent the last 30 years building (and providing incentives for) Islamic finance,” says Blake Goud, Principal of Sharing Risk, a website that provides analysis of current issues in Islamic finance.  “It has addressed some of the questions regarding the different Shariah standards with the Gulf Cooperation Council (GCC), which has encouraged issuers from that region to enter sukuk markets.  The launch of this index is probably just confirmation of this growth.”

“Sukuk issuance is still growing from a small base – compared to conventional bonds – and the growth will probably continue,” notes Goud.  “That is the main factor, but a withdrawal of European banks from lending in the GCC has probably contributed to growth in sukuk issuance and Malaysia's markets have become more attractive to issuers because it provides a more liquid secondary market than markets in the GCC (which have been improving).”

In a press statement, Bloomberg was keen to stress that it “will track and measure the performance of the most liquid and credit-worthy Islamic corporate bonds in Malaysia” – a comment perhaps placed to alleviate some investors’ uncertainty of Shariah-compliant products.

But the demand for sukuks, or Islamic bonds, is getting ever stronger.  Sukuk issuance in the first half of 2012 alone was over $67 billion, a record number for half-year issuances, according to the business information company Zawya.  Four decades ago, Islamic finance was usually the preserve of Muslim businesses wishing to tap the capital markets in accordance to religious principles.  Now sukuks are a practical funding alternative.  A Deutsche Bank report back in November 2011 estimated that Islamic finance industry could be worth $1.8 trillion in assets by 2016 as corporates continue to think outside the box and seek unconventional methods of funding.

Bloomberg’s initiative is one of several recent developments favouring the growth and acceptance of Shariah-compliant financial products.  Thomson Reuters has launched its own index to monitor the performance of the sukuk market in line with the Bloomberg release.  The Islamic financial sector also benefits from a growing Muslim population; more market players introducing degrees of competition and liquidity; and a recent commodity boom, which has generated large revenue surpluses in several Middle East economies.


http://treasurytoday.com/2012/09/islamic-finance-in-bloom

GROWTH CHALLENGES: Lack of a strong legal platform may hinder growth of the industry Read more: COVER STORY: “Strong legal framework needed for Islamic financing”

Despite the recent global economic crisis, the Islamic finance industry has continued pushing forward strongly. Entering 2012, the industry increased its total assets by 23.8 per cent by the end of 2011— comprising a hefty 22.4 per cent of the total assets of the banking system.

Global recognition has not been in short supply either as evidenced by The Banker Magazine’s 2011 rankings of top Islamic financial institutions which saw 21 Malaysian institutions listed.

 

By all appearances, Malaysia’s Islamic finance industry is well on its way to fulfilling its aspirations to becoming an international Islamic financial centre.

Is it all hunky dory?

 

Missing element: “The government should look into establishing a special court for Islamic banking,” says Datuk Ahmad Zaini Othman, Chief Executive Officer of the Malaysian Building Society Berhad (MBSB). “This is something I think is still missing in this country.”

“If they want Islamic financing in Malaysia to be recognised internationally, they need to do this,” the CEO stresses.

 

Zaini points out that at present the legal aspects such as legal settlements still go through conventional courts. While the conventional judiciary may be familiar with Islamic financing law, Zaini stresses that we need judges who not only know the Islamic financing law but who also possess deep understanding of the religious aspects that go beyond laymen comprehension.

 

“It is all there in the Quran and Sunnah, but we need people who can correctly interpret them,” says Zaini, emphasising that “interpretation is important.”

 

“For example, riba is not right and forbidden; however excessive profit, such as selling a property for 150 per cent profit, is wrong too.”

 

Mismatched avenue: Zaini believes that continuing to rely on conventional courts for Islamic financing’s legal matters would be detrimental in the long run.

 

“Conventional court in itself is a mismatch,” says Zaini, clarifying that the word ‘conventional’ does not match with ‘Islamic’.

 

“Because it is religion-based, at the end of the day we need to return to that essence and adhere to it,” says Zaini. “That means having the necessary infrastructure to uphold it in a dedicated manner.”

 

What might happen if conventional courts continue to be used to deal with legal matters pertaining to Islamic financing?

 

“For one, you will continue looking at it through a secular way of thinking,” replies Zaini, adding that it may lead to oversight of some aspects based on Islamic principles. According to Zaini, another effect would be the stagnation of Islamic financing expertise in the country.

 

“One example is the musharakah mutanaqisah product — this product is not feasible for properties under construction as some aspects of the law do not recognise certain parts of the transaction,” highlights Zaini. “So if a developer goes ahead with the product, there is no protection for the developer under any law.”

 

The CEO further points out how the lack of protection in certain scenarios is limiting the industry. “If you want to attract foreign Islamic investment in a big way, you need to have a strong Islamic legislative framework in place.”

 

“Foreigners would not come here and invest hundreds of millions if they are not protected,” Zaini emphasises. “With a proper legal framework, we can do much bigger business.”

 

In addition, Zaini also points out that such a framework would also mean that the country would be more attractive to top talents in the industry.

 

“If you do not have a very strong framework, you may not have a strong image of the Islamic platform,” says Zaini, asking rhetorically, “why would an Islamic financing talent from the GCC (Gulf Co-operation Council) come to work in Malaysia if we don’t even have a court for Islamic banking?”

 

“He would probably much rather go to GCC countries where the legislation is more developed in this respect.”

 

Challenging: However, Zaini admits that putting in place a legal framework for Islamic financing would be challenging. Differing opinions and interpretations worldwide pose a daunting obstacle — Zaini cites the introduction of Profit Equalisation Reserve (PER) by Bank Negara as an example.

 

“The Islamic deposit programme is based on profit and loss whereby banks pay dividends based on the allocated profits,” says Zaini, explaining that this means the dividends are higher if the Islamic banks make good profit and vice versa. “In comparison, conventional banks pay based on a fixed amount of interest.”

 

“So when Islamic banks report good profits and subsequently pay more dividends than conventional banks, there would be a flow of customers from the conventional banking market to the Islamic financing market.”

 

Zaini explains further that PER was introduced to avoid the mass movement between markets by fixing the percentage of profit shared as dividends by the Islamic banks.

 

“Say they make profit and are able to pay 9 per cent, PER means they can only pay for example 4 per cent while 5 per cent would be kept in reserve.”

 

“There might come a time when the profit margin is smaller, in such an event, the reserve would be used to top up the dividends to be paid out,” says Zaini. “The GCC is against this and do not recognise the practice because it is not in line with shariah.”

 

However, Zaini feels the way forward would be to ignore the differences and focus on what can actually be done.

 

“Malaysia is heading towards a two-system financial system and for the Islamic part of it, we need a strong legal platform,” says Zaini. “I think we have a sufficient pool of shariah legal expertise, and our universities are also producing enough experts in the area of Islamic financing.”

 

“But I think we also need to bring in scholars from abroad with a different perspective of the international market so that when we formulate the legal framework, it will be more comprehensive,” adds Zaini, explaining that doing so would enable Islamic financing in the country to reach greater heights.

 

“Like the English law, this will not happen overnight but instead through years of practice and experience.”

Read more: COVER STORY: “Strong legal framework needed for Islamic financing” - RED - New Straits Times http://www.nst.com.my/red/cover-story-strong-legal-framework-needed-for-islamic-financing-1.149172#ixzz281b5brlA