As Dubai crashes from wonder to blunder, who will go down with it?

The Gulf state's dream has turned into a desert mirage, casting doubt on the fledgling Islamic finance market

Dubai's story of hotels and hubris in the desert sands is well rehearsed, but where will the narrative end? A relatively happy conclusion would be for the damage to be localised and containable, for Abu Dhabi or the International Monetary Fund to step in as backer, and for world markets to regain a measure of calm. An unhappy denouement hardly bears thinking about.

The only surprise about the downfall is that it came as a surprise. Neighbouring Gulf states could see it coming and have been keen for some time to differentiate themselves from their wayward brother emirate. On a recent visit to Qatar, everyone bent my ear about the huge contrast between them and Dubai. To be fair, if Dubai is the Middle East's answer to Las Vegas, Qatar is the equivalent of Halifax, Nova Scotia.

With little oil to its name, Dubai set about transforming itself from a small pearl-fishing port to the "eighth wonder of the world", with the seven-star Burj al-Arab hotel, the shopping malls, the expat villas and vaunting ambitions to become a world-class financial centre. But the improvident Gulf state traded oil-dependency for property-dependency – or, more accurately, debt-dependency.

The Qataris and others in the Gulf fear that Dubai will bring the entire region into disrepute, confirming western prejudice and suspicion, and casting doubt on the fledgling, but fast-growing Islamic finance market.

Exactly how bad the financial situation is, nobody really knows; the distinction between the personal holdings of members of the ruling al-Maktoum family and that of the state is unclear.

Dubai World, which triggered the crisis by saying it wanted to suspend its debts for six months, is an investment vehicle of Sheikh Mohammed bin Rashid al-Maktoum, one of three government-controlled conglomerates. The accepted figure for Dubai's debt was $80bn, but Dubai World recently declared borrowings of $60bn to the Nasdaq stock market, and it is not known if the liabilities of Dubai Holdings, another government entity, are included in the figure. Some analysts suggest that a more realistic estimate could be in the order of $150bn. Neither is it clear, at the time of writing, what support will be forthcoming.

It wasn't supposed to be like this. Early in the credit crunch, Middle Eastern investors with deep pockets were looked upon as potential rescuers of western banks, such as the Qatari and Abu Dhabi investors who allowed Barclays an expensive escape route from the clutches of the UK government. However, the Dubai meltdown demonstrates the problems with the lack of transparency and accountability of some sovereign wealth funds and similar investment vehicles.

The contagion is difficult to assess at this stage. European banks may be in line for losses on an estimated £40bn of exposure to Dubai, and there are also question marks over the implications for western companies owned or part-owned by the emirate.

The London Stock Exchange found its own shares taking a hammering because of fears that the Dubai bourse might be forced to sell its stake of more than 20%, and although there are no immediate issues over the former P&O ports, the downfall of Dubai yet again brings into doubt the wisdom of selling strategic businesses to foreign owners, an issue that regular readers of this column will recognise as a long-standing concern of mine. City figures and politicians have repeatedly dismissed my misgivings on the takeovers of UK companies by overseas predators, such as Kraft's assault on Cadbury, as backward-looking and unrealistic. What would it take for them to admit they can be risky and damaging?

However the Dubai story ends, it is likely to be one of the pivotal moments of the crunch as the fear of bank defaults has turned into the fear of government defaults. Activity in the market for sovereign credit default swaps, a type of insurance for governments defaulting on their debts, indicates concerns about Greece, Italy and others, which in turn prompts questions about the stability of the eurozone.

I am not suggesting an imminent sovereign debt meltdown, but excessively leveraged countries are vulnerable, just like over-geared banks.

Dubai has brought home the fact that, despite the relative calm of recent months, the fundamental issues that caused the crunch – excessive borrowing and global imbalances – are still there. It also shows that any country which believes it can secure prosperity on a property boom and consumer bling (sound familiar?) is pinning its hopes on a mirage.

Link: http://www.guardian.co.uk/business/2009/nov/29/dubai-gulf-financial-crisis

Dubai Debts Test Islamic Finance

As the world is still recovering from an economic meltdown, an unfolding debt crisis in the flashy lifestyle-Gulf state of Dubai is sending shockwaves around the world, putting the booming Islamic finance to a test.

“A Default by Dubai will put the world of Islamic finance to the test at a time when hard questions are being asked by bankers and lawyers about the protection afforded by financial instruments based on Shari`ah law,” commented The Australian on Saturday, November 28.

Dubai announced Wednesday that its state flagship conglomerate, Dubai World, wanted a six-month standstill on 59 billion dollars in debt.

The move has sent shockwaves across the world economic markets over fears of a debt default.

“The bond that is at the heart of the threat of default and financial ignominy for Dubai is the sukuk,” said The Australian.

There are concerns that Sukuk creditors may not be protected.

It is not clear how creditors will rank in an insolvency, said Neale Downes, a Bahrain-resident partner at law firm Trowers & Hamlins.

He said investors sometimes have found themselves competing against other creditors rather than being able to enforce their claim on the underlying asset supporting the Sukuk.

Sukuks, which conform to Islam's prohibition of receiving or paying interest, typically work as profit-sharing vehicles.

Companies that issue Islamic bonds make payments to investors using profits from the underlying business, instead of paying interest.

But money can not be invested in alcohol, gambling, pornography, tobacco, weapons or pork.

The Sukuk market has reached $111.9 billion in the eight years to 2008 and a further $69 billion is expected to be issued in 2008/2009, according to the International Islamic Financial Market.

Islamic finance is one of the fastest growing sectors in the global financial industry.

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

Bailout

Dubai debt problems have triggered fears of a new world economic crisis.

“If you look to government balance sheets around the world you’ll find plenty of potential banana skins,” Jim Reid, strategist at Deutsche Bank, told The Times.

“Given the nature of this crisis the probability of further sovereign events remains elevated.”

A financial firestorm swept the US and the world in September 2008, after the demise of Lehman Brothers, one of the Wall Street giants.

It has knocked down many major companies worldwide, causing mounting job losses, falling household wealth and forcing consumers to hold back on spending.

"Dubai is very much a reminder that the lingering effects of the credit bubble are still with us," Barry Knapp, of US equity investments at Barclays Capital, told The Washington Post.

"While there no real direct linkages to U.S. markets and our direct exposure is small, we have plenty of our own bad debts in the US"

Dubai is estimated to have total debts of $88 billion.

Investors have downplayed the gravity of Dubai problems, saying if worst came to worst, the emirate could be bailed out by Abu Dhabi, its oil-rich neighbour.

Abu Dhabi, the capital of the United Arab Emirates, has already said that it will “pick and choose” how to assist its debt-laden neighbour.

"We will look at Dubai's commitments and approach them on a case-by-case basis,” a government official told Reuters by phone.

“It does not mean that Abu Dhabi will underwrite all of their debts."

Abu Dhabi, which pumps 90 percent of the oil that make the UAE the world's third-largest oil exporter, has already provided $15 billion in indirect support for Dubai through the UAE central bank and two private Abu Dhabi banks.

"Some of Dubai's entities are commercial, semi-government ones. Abu Dhabi will pick and choose when and where to assist."

Link: http://www.islamonline.net/servlet/Satellite?c=Article_C&cid=1258880594673&pagename=Zone-English-News/NWELayout

Imitating Traditional Banking Will Destroy Islamic Banking

When the global financial crisis first struck markets and international financial institutions, it caused massive Tsunami waves that flooded financial ports all over the world in bankruptcy, leaving no country untouched. The world began to look around it and was surprised to discover that only a few small islands in this financial ocean had managed to survive this devastating Tsunami. Those islands represented the financial institutions operating in accordance with Islamic Sharia law. Consequently, many of the world’s intellectuals began advocating the idea of adopting the fundamentals of these financial institutions; fundamentals that succeeded in seeing these institutions through the crisis.

None of the Islamic financial institutions were trading in what caused the crisis or what was at the core of this crisis; namely financial derivatives, or what came to be known as the “poisoned bonds”. As a result of the international praise the Islamic banking industry and its principles received, numerous banking experts and theorists were overwhelmed by enthusiasm and wrote eloquent speeches and articles about the decline of capitalism and the rise of Islamic banking as an alternative. However, those people forgot that the Islamic banking system in operation today is nothing more than an imitation of the traditional banking system in terms of its instruments and practices. Islamic banking has already strayed from the theoretical foundation it was based upon, namely that of joint-risk ventures. Even though this foundation continued to be taught in theory, it became non-existent in reality as Islamic banking turned towards buying and selling loans. The bulk of transactions today are based on the Tawarruq and Murabaha financial structures.

Nevertheless, it does not look like Islamic banking will stop adopting tools used in traditional banking until it actually destroys itself. The media recently reported a story about the World Federation of Exchanges (WFE) stating that the final touches are about to be added to a key agreement specifying the international standards for Islamic financial derivatives in collaboration with the Islamic Stock Exchange in Bahrain. To tell the truth, this is very confusing. It was not long ago that Islamic banking was boasting about the fact that it had not been harmed by the international financial crisis and that the reason for this was that it refrained from dealing in financial derivatives due to their illegitimacy. This protected Islamic banking from such a crisis and invited the world to adopt its principles so as to avoid experiencing similar crises in the future.

However, today Islamic banking is seeking to strike a deal with the WFE to set international standards in place for Islamic financial derivatives in order to enter the derivatives market. How can we explain this contradiction in words and actions? The only logical explanation is that until the international financial crisis took place, Islamic banking did not possess any derivative instruments and this is what saved it from confronting the crisis. Therefore, it preferred to ride the wave by criticizing those instruments and ascribing its success of not having to face this crisis to its abstention from dealing in those instruments, which is true. But the real reason for that, as mentioned before, was not its reluctance to enter the derivatives market, but rather the unavailability of products and there is a big difference between the two.

Though I believe it is imperative for Islamic banking to try and find alternatives that are in accordance with Islamic Sharia law to enable it to handle the risks that it might encounter, which would probably arise from external factors such as the inconsistency of exchange and interest rates, I strongly suggest that those alternatives should be limited to this purpose and should not under any circumstances become products that are traded on the market. This falls under the responsibility of religious authorities that permit such alternatives. Those authorities could impose restrictions on such alternatives, thus, preventing them from becoming goods that could be traded. These alternatives should rather be instruments that we could resort to only when necessary. However, Islamic banking has accustomed us to the exact opposite – turning solutions to some problems over time into alternatives to be promoted. In fact those alternatives ended up outperforming other [financial tools]. For example, the Tawarruq mode of finance was originally a solution to provide monetary funding but it grew to become the predominant instrument in the Islamic financial market, consequently cancelling out all other instruments of Islamic finance. I fear that the instruments of risk management in Islamic finance would transform into a whole new independent industry just as the case is with traditional banking.

In this context, I would like to remind those in charge of the Islamic banking industry of the following Quranic verse: ‘Do you enjoin right conduct on the people, and forget to practice it yourselves, and yet you study the Scripture? Will you not understand?’ (Surat al Baqara, Verse 44).

Link: http://www.aawsat.com/english/news.asp?section=6&id=18957

SBP chief lauds Islamic banks performance

State Bank of Pakistan Governor Salim Raza has said that the performance of Islamic banks has been impressive compared to their conventional counterparts during the last two years.

Speaking at a opening ceremony of 10 more branches of Dubai Islamic Bank here on Wednesday, the SBP governor said due to active support of the central bank the total assets of Islamic banking industry had grown to Rs323 billion up to September 2009 while their deposits reached to Rs245 billion.

Mr Raza said that in terms of market share the total assets and deposits of Islamic banks account for 5.3 per cent and 5.5 per cent of the conventional banking industry, respectively.

He said cumulative growth rate of Islamic banking industry had remained above 55 per cent since inception despite a healthy growth in conventional banks.

The growth rate had slowed down during 2008 and 2009 due to global economic down turn, however, when compared with their conventional counterparts it was impressive by all counts, he remarked.

The SBP governor said that last year the central bank had unveiled its Strategic Plan for Islamic banking that broadly outlined the future direction of Islamic banking until 2012.

‘Our target is to increase the share of Islamic banking to 12 per cent of total assets of the banking sector,’ he added.

He pointed out that branch network of six full-fledged Islamic banks and 13 conventional banks with dedicated Islamic banking branches increased to 560 branches.

Raza said that the central bank was determined to ensure a level-playing field for the Islamic banking industry and it had put in place a robust regulatory framework with a strong focus on Shariah compliance and competitiveness.

He said State Bank played a key role in issuance of Ijara Sukuk, which has paved the way for effective liquidity management of Islamic banks.

‘We have also ensured a tax neutral regime for Islamic banking transactions through amendments in tax laws,’ he said.

He said that the SBP had introduced a comprehensive Shariah compliance framework which includes inspection of Islamic banks coupled with joint audit of profit distribution to depositors by the external auditors and Shariah Adviser of the bank.

Each bank is also required to publish report of their Shariah Adviser on Islamic banking operations in annual accounts, he added.

Link: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/news/business/09-sbp-chief-lauds-islamic-banks-performance--szh-04

IFSB to focus on issues related to Islamic finance stability

THE Islamic Financial Services Board (IFSB) Council has resolved to discuss pertinent issues related to financial stability in future meetings, particularly those concerning the Islamic financial services industry.

In a statement yesterday, the IFSB said that its inaugural forum on financial stability issues will be held in April next year in Khartoum, Sudan. The forum will follow the 16th Meeting of the IFSB Council there.

The IFSB also said the development of the agenda for the forum would give priority to capacity building and financial stability and be spearheaded by Bank Negara Malaysia Governor, Tan Sri Dr Zeti Akhtar Aziz.

"As Islamic finance continues to be an integral part of the global financial system, the forum aims to be a dialogue to explore the scope for the current framework of cooperation to be strengthened and broadened. "This is especially to address the new challenges that have emerged in the aftermath of the global financial crisis," it added.

The IFSB Council had at its 15th meeting in Kuala Lumpur on Monday, discussed a memo on Islamic Finance and Global Financial Stability.

The meeting, hosted by Bank Negara, was chaired by Dr Muhammad Sulaiman Al-Jasser, Governor of the Saudi Arabian Monetary Agency, and attended by the president of the Islamic Development Bank, central bank governors and governors' representatives of the IFSB's 21-member council.

The IFSB is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry.
Link: http://www.btimes.com.my/Current_News/BTIMES/articles/fisbo/Article/index_html

Western investors watch nervously as worth of Islamic bond is tested

A default by Dubai will put the world of Islamic finance to the test at a time when hard questions are being asked by bankers and lawyers about the protection afforded by financial instruments that are Shariah compliant.

The bond that lies at the heart of the threat of default and financial ignominy for Dubai is a sukuk, an instrument invented by bankers and Islamic scholars to comply with a Shariah (Islamic law) prohibition against the payment of interest on money.

Islamic finance has five pillars: a ban on interest, a ban on speculation, a ban on haram (forbidden) investments, such as pork or gambling, the requirement of partnership or sharing of profit and loss and the requirement of asset backing. Getting round the ban on interest is the problem and opportunity of Islamic finance.

A bond that doesn’t (in theory) pay interest sounds unattractive but in the Gulf and Malaysia, Islamic finance has flourished over the past decade.

Typically, interest is expressed as a share in a profit, such as the rent paid for use of a property or asset. According to estimates by HSBC Amanah, the Islamic arm of the British bank, outstanding Islamic finance debt is worth $822 billion (£498 billion).

Even Western investors have been persuaded to dip their toes in the exotic financial tool, tempted by the deep pool of petrodollars available in the Gulf. Only days before Dubai revealed its bombshell — a threat of possible default on Nakheel’s $4 billion sukuk — GE Capital, the American financial services group, issued the first sukuk by a Western company, raising $500 million. The underpinning of a sukuk with assets makes it attractive for use in property lending or asset leasing. The sukuk issued by GE this week was a loan for aircraft leasing.

GE’s decision to use the Islamic finance market for funds reflected renewed confidence in a market that had almost collapsed after expansion in 2007 when the Gulf was awash with money fuelled by high oil prices.

Demand shrivelled after the collapse of Lehman Brothers with only $16 billion issued last year. More importantly, fears surfaced that sukuk failed to provide the same legal protection as conventional bonds. To date, the legal structure of sukuk has never been tested in a court.

There have been high-profile defaults, including the Saudi Arabian Saad Group and Investment Dar, a Kuwaiti Islamic Investment Fund. Investment Dar owns half of Aston Martin, the luxury British car company, and the fund failed to make a payment in April on a $100 million sukuk issue. In June, Golden Belt, a $650 million issue by Saad Group, the investment house controlled by Maan al-Sanea, was downgraded to default status.

The concern is that sukuk creditors may not be protected. According to Neale Downes, a Bahrein-resident partner at Trowers & Hamlins, the law firm, it is not clear how creditors will rank in an insolvency.

In some cases, he said that investors have found themselves competing against other creditors, rather than being able to enforce their claim on the underlying asset supporting the sukuk.

But the repeated declarations of support by Dubai’s ruler gave the market confidence that the sovereign would stand behind its debts. Only a month before the Nakheel shock, Dubai raised $2 billion in sukuk issues.

Link: http://business.timesonline.co.uk/tol/business/markets/the_gulf/article6934074.ece

Key economic role for Islamic finance

Islam-ic finance has a potential role in contributing not only to global financial stability but also towards more balanced global growth.

While Islamic finance by its very nature and its direct link to economic activity contributes to this process, the recognition of the new financial challenges ahead require further steps to be taken to strengthen its resilience and robustness, Central Bank of Malaysia governor Dr Zeiti Akhtar Aziz told a high-level conference on financial stability in Kuala Lumpur.

The development of Islamic finance in Malaysia that has operated in parallel with conventional finance for almost three decades now has demonstrated its sustainability as a form of financial intermediation," she said.

"Today, the Islamic banking system has emerged as a vibrant financial system with Islamic banking assets currently accounting for 18.8 per cent of the total banking assets of the Malaysian financial system.

"The product range has now expanded into an extensive range of innovative instruments while in the Islamic capital market, the sukuk market has surpassed the conventional market in terms of market share.

"An important aspect that has contributed to financial stability in the overall financial system is the conscious policy to develop a more diversified financial system that allows for the diversification of risks.

"This current global financial crisis has prompted a search for an enduring solution to ensure the stability of financial systems," she said.

"The challenge before us is to build a new financial architecture that would allow for the more efficient functioning of not only financial intermediation within national economies but also across borders.

"Islamic finance, with its emphasis on a strong linkage to productive economic activity, its in-built check and balances and its high level of disclosure and transparency offers this.

"Indeed, inherent in Islamic finance is the explicit elements that address several of the issues that have surfaced in the conventional financial system during the current crisis.

"At the centre of this recent global financial crisis was the breakdown in governance that led to indiscriminate lending, excessive risk-taking and overzealous financial innovation," she said.

"This is avoided in Islamic finance with the requirement that Islamic financial transactions must have an underlying economic activity and that the process of innovation and formulation of Islamic financial products and services must be done carefully and in accordance with Sharia.

"The crisis has provided an important lesson that the development of new financial instruments embraces this process while being able to effectively compete in the global arena.

"In this challenging international financial environment, Islamic finance has continued to demonstrate its evolution and strong growth," she added.

"Islamic finance in its advancing journey today is presented with an opportunity to increase the financial linkages with the broader financial system thereby facilitating a more efficient allocation of capital across borders.

"Indeed, Islamic finance as an integral part of the international financial system has the potential to contribute to global financial stability and to enhance the prospects for global growth."

Link: http://www.gulf-daily-news.com/NewsDetails.aspx?storyid=265422

Post - Economic Meltdown –The Impact on Technology Supporting Islamic Finance

The rapid growth of the Islamic financial market in the Gulf Cooperation Council (GCC) region and South East Asia over the last five years has created a thriving market for the suppliers of support technology to develop and enhance their offerings to meet the increasing demands of their customers who operate within this specialized segment.

However, the current economic meltdown in the US and European markets (which is likely to spread to other regions) will force Islamic finance players to review and redefine their focus on how to survive in a highly turbulent market place. Many proponents of Islamic finance claim that it will not be greatly affected by this meltdown due to the underlying principles of Shariah, nevertheless, regulators will require Islamic financial institutions to enhance key processes, including risk management, to withstand the shock should another meltdown occur.

Therefore, opportunities are in the offing for suppliers of supporting technology in Islamic finance to re-architect their offerings in anticipation of the changes required by Islamic finance regulators and players as they cope with the changing landscape post the economic meltdown.

Read Whitepaper: Post - Economic Meltdown -The Impact on Technology Supporting Islamic Finance

http://www.ithound.com/risk/view_abstract/3346/BusinessManagement/AccountingandFinance/EnterpriseAccountingSoftware/PostEconomicMeltdownTheImpactonTechnologySupportingIslamicFinance?activity_type=16

Islamic Finance to lead in financial services industry

The global financial meltdown has presented an unprecedented opportunity for Islamic Finance to establish itself as a truly global leader in the financial services industry, thereby realising its full, unique potential. The speakers at Islamic Finance seminar arranged by ACCA Pakistan expressed these views. They said in marketing terms, a large gap exists between the perception and the reality of its current brand attributes. The workshop facilitators Dr Afra Sajjad, Head of Education and Policy Development, ACCA Pakistan and Mr Aziz who represents ACCA at the Federation of European Accountants (FEE) Task Force on XBRL and UKTI Accounting Sub-group on Islamic Finance led the discussion deliberating upon the success of Islamic Finance in current economic scenario and ways to bridge this gap. staff report

Link: http://www.dailytimes.com.pk/default.asp?page=2009\11\25\story_25-11-2009_pg5_11

Zakat fund collection drops

The global financial crisis has also adversely impacted Zakat collection this year. There has been a drop of QR5m in Zakat collection during the seven-month period from April to October this year, the state-run Zakat Fund has reported.

Although, Zakat Fund officials did not specify reasons for the drop, it is understood it could be an outcome of the world economic turmoil. Zakat is mostly paid by eligible Muslims during the holy month of Ramadan. The collection this Ramadan fell by nine percent.

The Zakat Fund collected QR111.4m between April and October as Zakat, which was QR5m less as compared to QR116m which was collected in the corresponding period last year. This was disclosed by Khalifa Al Kubaisi, head of finance and investment of Zakat Fund at the Ministry of Awqaf and Islamic Affairs, at a press conference on Sunday.

Of the QR111.4m, he said about QR94m was collected as Zakat while the remaining QR17.4m was through other kinds of donations. He said Zakat collection during Ramadan last year was to the tune of QR85m, while this Ramadan the figure was QR78m.

Zakat Fund has a database of beneficiaries and supports a large number of needy families as well as individuals.

Link: http://www.thepeninsulaqatar.com/Display_news.asp?section=Local_News&subsection=Qatar+News&month=November2009&file=Local_News2009112435516.xml

Islamic finance 'important in accountancy'

Islamic finance is a growing issue in the world of accountancy, it has been suggested.

Daud Vicary Abdullah has just been appointed as global leader of Deloitte Touche Tohmatsu's Islamic Finance industry group.

He believes that the field should present new areas of growth for financial services firms for some time to come.

Commenting on the sector, he said: "The Islamic Finance industry is rapidly expanding, which presents opportunities for companies in various businesses around the world."

Deloitte's member firms already provide Islamic institutions with advice on matters relating to sharia compliance, as well as audit and tax issues.

Link: http://www.gaapweb.com/news/2062-Islamic-finance-important-in-accountancy-.html

In his new role, Mr Vicary Abdullah will support the member firms to ensure they are offering the best possible service.

Recently, Dr Mohd Daud Bakar, an international sharia expert, warned that the Islamic Finance sector could face a talent shortage in the future.

He urged institutions to ensure they are committed to the training of staff so they develop the skills needed to thrive in the field.

Islamic banks should target female market - report

Islamic banks in the Middle East are "extremely well positioned" to take capture a share of women's rapidly growing demand for top-notch banking services, says a new publication from the Boston Consulting Group (BCG).


With an estimated $5 trillion in incremental earnings to spend, educated, ambitious, working women represent a commercial opportunity for goods and services providers that eclipses the rise of the consumer economies of both China and India, the research house said.

It said Islamic banks were in pole position to play a role in the women's banking arena, because they offer unique elements in the sector including a pre-disposed distribution network with some Islamic banks already off women's sections/branches due to Islamic traditions surrounding privacy. It also said halal products were important for women, especially as they think about setting money aside for their children. It is important for money that is passed down to the next generation to be 'clean'.

BCG said the growing demand by women for financial services should prompt Islamic banks to systematically target this emerging market, work to understand women's dissatisfaction and change their offerings to profit from, and help boost this most important commercial opportunity.

The Middle East in particular was a rapidly growing market for banks to explore as more Arab women are entering the workforce and making important financial decisions, it added.

Companies should view Arab women as a fast-growing consumer segment and be prepared to adapt their offerings accordingly.

BCG estimated that women in UAE control approximately AED250 billion in household assets, with 70 percent of them owned by Emirati women or Arab women expats. Some of this is family owned wealth, but with female earning power growing stronger, women will continue to earn more money from their jobs. Currently, women in the UAE have an annual income of AED2 billion.

Michael J Silverstein and Kate Sayre, authors of BCG's Women Want More: How to Capture Your Share of the World's Largest, Fastest-Growing Market, said: "This 'female economy' will be replete with opportunities for companies to capture new consumers, increase market share, and open new markets.

"This is because surveys show that women are dissatisfied with the products and services available to them in many catagories, largely because companies misunderstand women's issues and fail to answer their needs. The areas with the most expressed dissatisfaction are three of today's most important consumer-goods categories: financial services, health care and consumer durables."

Dr Mohammed Badi, principal in BCG's Dubai and New York offices added: "Women want someone to walk them through the facts and help them understand their financial options, with clear information, educational materials and more engagement with advisors. Additionally, there is a strong business case for improving the quality of financial services for women in the Middle East, given the growth of female incomes and purchasing power."
Link: http://www.arabianbusiness.com/574469-women-are-islamic-bankings-biggest-opportunity

Islamic industry board sets new financial standards

The Islamic Financial Services Board, which sets standards for the sharia finance industry, has adopted new guidelines to enhance the sector's stability.

The guidelines relate to the Islamic insurance industry, the conduct of Islamic financial institutions and the sharia governance system, the board said in a statement.

The full guidelines are available on the board's website at www.ifsb.org.

Compliance with the Kuala Lumpur-based board's standards is voluntary. Islamic banks are governed by the regulatory authorities in their respective jurisdictions.

Link: http://in.reuters.com/article/fundsNews/idINKLR47993620091124

Could Islamic finance provide an accountancy jobs boost?

Islamic finance is an increasingly important aspect of some accountancy jobs, according to one expert.

Daud Vicary Abdullah, who has just been appointed as the global leader of Deloitte Touche Tohmatsu's Islamic finance industry group, explained that the sector is rapidly expanding.

He said: "The Islamic finance industry is rapidly expanding, which presents opportunities for companies in various businesses around the world."

Demand for such skills has seen Deloitte's member firms providing services including audit, tax and consulting to Islamic financial institutions, as well as advice on sharia compliance issues, Mr Vicary Abdullah added.

Recently, Dr Mohd Daud Bakar, an international sharia expert, called on the accountancy profession to ensure that people have the skills needed to help Islamic finance operations run smoothly.

He warned that the sector could face a talent shortage in the future if action is not taken to address the issue of staff development now.
Link: http://www.ashdowngroup.com/news/could-islamic-finance-provide-an-accountancy-jobs-boost--news-19475245

Expert says Islamic banking is not practicable in India

Special Correspondent

But finds scope in other areas of finance

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Says banks are not permitted to indulge in trading

‘Islamic banking still a developing concept’

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KOCHI: Given the current banking sector regulations in the country, Islamic banking is not practicable in India, said Mufti Abdul Kadir Barkatullah, a British expert on Islamic banking and finance.

Since giving or taking interest is against the Sharia laws, Islamic banks need to look to other areas, such as trading, to generate profits to meet their costs. In India, banks are not allowed to get involved in trading and hence Islamic banks cannot survive, the India-born Mr. Barkatullah pointed out. The Raghuram Rajan recommendations on banking reforms, if implemented, would accommodate Islamic banking institutions.

However, several other areas of finance, such as real estate funding and venture capital, were Sharia-compliant and hence Islamic finance had a lot of growth potential in India. (Islamic banking, according to Wikipedia, `refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics.’) Mr. Barkatullah, who is a senior Imam of Finchley Mosque in London and prominent Sharia scholar with an educational background in Economics and Finance, pointed out that profit was not anathema to Islamic finance, only, but it should be principle-guided. It was driven by two major principles: the economic activity should not cause harm to society as well as to individuals; and, that risks and rewards should be shared — not rewards alone. The economic activity should be fair, equitable, transparent and based on clearly laid down terms.

Mr. Barkatullah, who is also adviser to several banks, pointed out that Islamic banking, which was just three decades old, was still a developing concept and would take time to stand on its own. It thrived in several Western countries, especially Britain, though at a micro level. Nearly one-fifth of the Islamic bank customers in Britain were non-Muslim.

Link: http://www.thehindu.com/2009/11/24/stories/2009112452600300.htm

Islamic finance body enhances industry''s stability, adds new members

The Islamic Financial Services Board (IFSB) on Monday approved three documents aimed at further facilitating efforts towards enhancing the soundness and stability of the Islamic financial services industry. The decision was made at its council meeting in Kuala Lumpur, chaired by Dr. Muhammad Sulaiman Al-Jasser, Governor of the Saudi Arabian Monetary Agency, the IFSB said in a press release. The three documents included Guiding Principles on Governance for Islamic Insurance (Takaful) operations, Conduct of Business for Institutions offering Islamic Financial Services and Guiding Principles on Shari'ah (Islamic law) Governance System, according to the IFSB, a Malaysia-based organization set up by Muslim countries, of which Kuwait's central bank is a founding member.

The guidelines on governance for all Takaful operations are designed such as to reinforce relevant good governance practices based on those prescribed by other internationally recognized governance standards. Guiding Principles on Shari'ah Governance System aims to highlight to supervisory authorities in particular, and the industry's other stakeholders in general, the components of a sound Shari'ah governance system.

The meeting was attended by the President of the Islamic Development Bank, Central Bank's Governors and governors' representatives of the IFSB 21-member Council. The IFSB council also admitted eight new organizations into its membership, including the Insurance Authority of the United Arab Emirates, Banque Centrale du Luxembourg and the Arab Chamber of Commerce and Industry of Hong Kong.

The members of the IFSB comprise regulators and supervisors of the banking, capital markets and Takaful sectors, as well as international inter-governmental organizations and market players -- financial institutions, professional firms and industry associations.

Established in 2003, IFSB's membership has grown to total 193 as of August, including 15 financial institutions from Kuwait, such as KFH, Boubyan Bank, Gulf Investment House and Kuwait International Bank. Islamic financing is based on Shari'ah, or Islamic law, which prohibits charging or paying interest. Instead, there are schemes for partnerships in trade in goods and services, direct investment and renting as well as profit sharing. Shari'ah also bans financing businesses related to alcohol, pork, gambling and weapons.

Link: http://www.kuna.net.kw/NewsAgenciesPublicSite/ArticleDetails.aspx?id=2042314&Language=en

Islamic Inheritance: Hiba — Capacity for Making a Gift

A s in all religions, Islam too attaches great value to the performance of charity and to the act of giving. In the Holy Quran, it is laid down that the act of spending out of love for God, your kin, for orphans, for the poor, for the wayfarers, for those who ask, and to be steadfast in prayer and to practice regular charity, are all held to be acts of righteousness.

Gift is a generic term that includes all transfers of property without consideration. In India, Gift is considered equivalent to Hiba but technically, Gift has a much wider scope than Hiba. The word Hiba literally means, the donation of a thing from which the donee may derive a benefit. It must be immediate and complete. The most essential element of Hiba is the declaration, “I have given”.

As per Hedaya, Hiba is defined technically as, “unconditional transfer of property, made immediately and without any exchange or consideration, by one person to another and accepted by or on behalf of the latter”.

Under Muslim Law, where one Muslim signifies his willingness to make to another an immediate and unconditional transfer without consideration of the ownership of an existing and definite piece of property, and if the other accepts that transfer of ownership and if possession of the property is transferred thereupon, then a valid gift (or “Hiba” as it is called) takes place in respect of such property.

Since Muslim law views the law of Gift as a part of law of contract, there must be an offer (izab), an acceptance (qabul), and transfer (qabza). The transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee must be made during the lifetime of the donor and while he is still capable of giving. If the donee dies before acceptance, the gift is void

The donor (the person who gives). Any person who is sui juris can make a gift of his property. Like any other contract, the requisite conditions are [the age of] majority, understanding, freedom and ownership of the subject matter of the disposition. A person must be major, able to understand the nature of the act, be subject to no undue influence, coercion or duress and must be the owner of the property to be gifted. A declaration by the donor therefore must be clear and unambiguous intention of the donor to make a gift. Further Conditions for donor would be that he must be free of any fraudulent or coercive advice as well as undue influence & of course he must have ownership over the property to be transferred by way of gift.

A gift by a married woman is valid and is subjected to same legal rules and consequences. A gift by a pardanashin woman is also valid but in case of a dispute the burden of proof that the transaction was not conducted by coercion or undue influence is on the donee. A person in insolvent circumstances is also valid provided that it is bona fide and not merely intended to defraud the creditors.

Acceptance – The one who can receive is known as the donee. Acceptance may be made expressly or implied by conduct. Any person can receive a gift if he or she is in existence at the time of the gift. An absolute gift to an unborn child is invalid, but if the child is born within six months of the date of gift, it will be valid on the presumption that the child was actually existing in the womb of the mother. A muslim may also make a lawful gift to a non-muslim. The Donee must be in existence at the time of giving the gift, & In case of a minor or lunatic, the possession must be given to the legal guardian otherwise the gift is void.

A Gift to an unborn person is void. However, gift of future usufructs to an unborn person is valid provided that the donee is in being when the interest opens out for heirs.

A gift is void is the donee has not given his acceptance. The real test of the delivery of possession is to see who (the donor or the donee) reaps the benefits of the property. If the donor is reaping the benefit then the delivery is not done and the gift is invalid.

Muslim law recognises the difference between the corpus and the usufructs of a property. Corpus, or Ayn, means the absolute right of ownership of the property which is heritable and is unlimited in point of time, while, usufructs, or Manafi, means the right to use and enjoy the property. It is limited and is not heritable. The gift of the corpus of a thing is called Hiba and the gift of only the usufructs of a property is called Ariya.

A Hiba, once validly created cannot be revoked. No receiver of a gift under a Hiba can also be compelled to give anything in exchange. Of course, it is quite common that the donor and receiver agree that something will be done or given in exchange for the gift, and such gifts fall under a different category altogether, known as Hiba bil Iwaz or gifts for return.

A Hiba which does not take effect immediately is of no effect whatsoever. Finally, a Hiba which is purported to be made by a person who is on his death-bed, cannot operate on a greater piece of property than his will (or Wasiyat) would, if he had left behind a will. Such gifts in contemplation of death are known as donatio mortis causa and can operate to the extent of one-third of the donor’s estate only. As distinguished from a Will, a gift may be made of the whole property of the donor, even to an heir. It can be made in favour of a stranger to the exclusion of his heir. The only restriction is the rule which invalidates death-bed gifts.

Having regard to all of the above, it is clear that a Muslim gentleman who wants to provide for his son or daughter like his Hindu or Christian brethren, would, instead of executing a Settlement Deed, make a Hiba of his property in such manner and form as he thought fit, and thereby, ensure that the son or daughter in question had a piece of property which they could then utilise for their maintenance and upkeep.

Link: http://www.khaleejtimes.com/biz/inside.asp?xfile=/data/business/2009/November/business_November538.xml&section=business

Islamic finance steps up

Natsuko Waki looks at why governments in the Middle East and Asia are taking on a greater role to deepen Islamic finance markets.

Governments in Muslim nations in the Middle East and Asia are increasingly turning to Islamic finance to raise funds, giving a necessary but perhaps not sufficient shot in the arm for the $1 trillion industry.

Deeper liquidity is essential to winning investors back to the market after the credit crisis sapped demand and issuance and triggered the first ever major defaults of Islamic bonds, or sukuk, this year.
While government backing would allow international investors to gain exposure in the fast-growing region via safer debt, it would highlight the risk of owning non-sovereign sukuk from firms with weaker balance sheets in an industry where regulation is less advanced than in the conventional bond marketplace.

Sukuk are structured as profit-sharing or rental agreements and returns are derived from underlying assets because Islamic laws prohibits paying or earning interest.

Government involvement is just what the Islamic finance industry needs to avoid cutting off inflows from international investors after some defaults and a series of debt restructurings.

Dubai's state-owned developer Nakheel is currently undergoing a restructuring of its $3.5bn sukuk, due to mature in December.

Prices had taken a hit last month on speculation its owner and government conglomerate Dubai World might offer equity to its Nakheel bondholders.

"I think without greater government help it's doomed anyway. Risk is just too high. But there is a lot more risk appetite from investors and definitely the government implication is a huge help," said Nathalia Barazal, fund manager at Lombard Odier Darier Hentsch & Cie in Geneva.

"I wouldn't buy it unless it's a big company, good balance sheet," she said, adding that more government issuance might drive people away from debt from firms with weak fundamentals.

Barazal, who sold Nakheel's December sukuk less than a fortnight ago, said she would consider an exposure if it were from a safer issuer and the type of sukuk which was attractive, for example, exchangeable convertible bonds.

"I would definitely get involved in the region, I don't want to start with real estate... probably with exchangeable convertible bonds," she said.

Link:http://www.arabianbusiness.com/573609-islamic-finance-steps-up

‘ME banks moving away from organised tawarruq’

Some Middle Eastern banks are avoiding organised tawarruq after a ruling against the practice, an industry official said, a trend that could signal a shake-up for the $1 trillion Islamic financing sector.

Shrugging off criticism of the OIC Fiqh Academy’s controversial decree, the organisation’s secretary-general said some institutions have heeded the call to abandon the popular financing arrangement.

“I have been hearing that some banks have agreed that what they were doing is wrong and they have begun changing the method of their tawarruq transaction,” Abdul Salam Al-Abadi said in an interview on the sidelines of a sharia scholars meeting in Malaysia.
“They are trying to do it the way it should be done.”
He did not identify the banks.

The International Council of Fiqh Academy, a powerful group of scholars led by the OIC, rocked the industry in April this year with an order forbidding the use of organised tawarruq, a cornerstone of the sharia banking sector.

With the global tawarruq market estimated at more than $100 billion, practitioners had warned of catastrophic results if the rule were to be implemented strictly.

“If tawarruq were suddenly withdrawn, this would have a dramatic effect because many Islamic financiers routinely use this instrument as a means of liquidity management and to provide their customers with working capital facilities,” law firm Denton Wilde Sapte had said in a note.
Tawarruq is widely used as a source of financing. It involves the sale of an asset to a purchaser with deferred payment terms. The purchaser then sells the asset to a third party to get funds. Organised tawarruq is similar, although the transactions are executed through banks. Some scholars say it is wrong to pre-arrange the parties’ contractual obligations although bankers want this for legal protection and commercial certainty.

Al-Abadi said the Muslim World League’s fiqh academy had similarly prohibited the use of organised tawarruq.

“After all these discussions, the majority of the scholars say it is forbidden,” said Al-Abadi, a Syria and Egypt-trained sharia expert and former Jordanian government minister.

“Our council consists of more than 70 scholars and at the meeting, there were more than 20 experts besides these 70 scholars and the majority said it’s forbidden.”
Several influential sharia scholars have defended the use of tawarruq, although some say the structure needs further refinement.

“It’s the right of any scholar to say ‘That’s my view, it’s not forbidden’,” Al-Abadi said.
“We say to the people ‘The way in which you deal is not correct’ and let the people decide in future.”
Some scholars have said organised tawarruq is a mere paper shuffle, without assets actually changing hands, violating the sharia’s rule that financial transactions must involve specific assets.
Islamic banks and their clients rarely, if ever, take delivery of commodities used in tawarruq transactions, as their purpose is to use the assets as fund-raising tools.
What makes this contract popular with the bankers? Tawarruq is not only easy to use, but it is also flexible.

In an industry that is very short on Sharia compliant products that provide cash “today”, the Tawarruq contract was seen as an alternative.

Secondly, it is also possible to roll over the contract, hence providing additional funding.
According to the Fiqh Academy there is a real distinction between “classical” and “contemporary” practice of Tawarruq. The cash obtained in the classical Tawarruq is determined by market forces, whereas, in the contemporary version the contract is “arranged”... that is “simultaneously, the mustawriq and the financier executes the transactions, usually at a lower spot price”.

With this in mind, the Fiqh Academy has thrown its weight behind the classical version of the tawarruq contract, whilst declaring the widely used contemporary version impermissible.
Are there any other alternatives? The Fiqh Academy suggests that the market should embrace Qard Hasan (benevolent or interest free loans) and “institutions are encouraged to set up special Qard Hasan Fund.”

One thing is for certain — the ruling by the Fiqh Academy is certainly brave and the implications of this announcement might be huge. In an industry, where the vast majority of transactions are “arranged” rather than left to market forces, many practitioners will be worried about other products coming under the Fiqh Academy’s radar, including the ubiquitous Murabaha contract.

Link: http://www.arabtimesonline.com/kuwaitnews/pagesdetails.asp?nid=39537&ccid=12

Sukuk Comes to America

Eying a share of the booming Islamic banking, General Electric, a multinational technology and services conglomerate, became the first major American corporation to issue Islamic bonds (sukuk), reported the Business-Intelligence Middle East website Saturday, November 21.

“We have been focused on diversifying our alternative funding sources to include global deposits and covered bonds,” said Kathy Cassidy, GE’s Senior Vice President and Treasurer.

“Transactions such as the sukuk allow us to make progress in meeting our objectives.”

GE Capital Corporation, the company’s finance arm, sold last Thursday a five-year, $500m sukuk.

“This transaction is strategically important for GE as it establishes yet another way of raising funds from an important investor base,” Cassidy said.

Sukuks, which conform to Islam's prohibition of receiving or paying interest, typically work as profit-sharing vehicles.

Companies that issue Islamic bonds make payments to investors using profits from the underlying business, instead of paying interest.

But money can not be invested in alcohol, gambling, pornography, tobacco, weapons or pork.

The Sukuk market has reached $111.9 billion in the eight years to 2008 and a further $69 billion is expected to be issued in 2008/2009, according to the International Islamic Financial Market.

New Horizon

The GE views the sukuk issuance a step to bolster the company’s transactions in the Muslim countries.

“GE Capital’s inaugural entry into the sukuk market aims to further complement and solidify GE’s fast growing presence across the Middle East and Asian regions,” said Aris Kekedjian, Vice President and Managing Director.

“This issuance establishes our presence with a new and important investor base and demonstrates our commitment to these regions.”

Islamic finance is one of the fastest growing sectors in the global financial industry.

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

GE, ranked by Forbes as the world’s largest company in 2009, is planning to issue more sukuk.

“We intend to be regular issuers in the sukuk market and are heartened by the support we have seen in this first transaction,” Cassidy said.

Link: http://www.islamonline.net/servlet/Satellite?c=Article_C&cid=1258711854472&pagename=Zone-English-News/NWELayout

Russia: A Promising Market for Islamic Finance

By Lahem al Nasser

Riyadh, Asharq Al-Awsat- There are around 47 million Muslims in Russia, which means that Muslims make up around one third of Russia's overall population. This figure is expected to rise to 50 percent by 2050 due to the high birth rate among the Muslim community, the decrease in the non-Muslim Russian population which is decreasing at a rate of 1 million people per year, as well as the immigrations of Muslims from central Asia into the Russian Federation. The Islamic presence in Russia is centered in the Caucasus, Siberia, and Moscow. Russian Muslims heaved a sigh of relief at the collapse of the Soviet Union; they reaffirmed their identity and began to practice their religion openly once more without fear or shame. In 1990 there were as few as 98 mosques in Russia, however today there are more than 7200 mosques throughout Russia. This is something that characterizes the Muslim zeal for their religion, and the [Russian] Muslims desire to follow the tenets and teachings of their religion, something which they were prevented from doing under the former Soviet regime.

This is something that makes the Muslims in Russia eager to apply Islam to all aspects of their life, including Islamic Shariaa Law. Therefore the [Russian] Muslims are in dire need of all types of Islamic financial institutes, such as Islamic banking, investment, and insurance institutions that meet with their [religious] requirements. Only one bank offering Islamic financial services is operating in Russia, and this is the "Badr Forte Bank." This bank was instituted in 1997 by the Forte Bank to offer Shariaa-compliant financial services to Muslims [in Russia]. As for Shariaa-compliant insurance services, a Russian – Tatarstani insurance company sought to establish an Islamic Takaful Insurance company, and in 2004 an agreement was concluded with the Dubai Islamic Insurance and Reinsurance Company [AMAN] to study the possibility of establishing a Takaful Insurance company in Russia. However this agreement was terminated in 2005 and no Takaful insurance company has yet to come into existence in Russia.

There can be no doubt that Russia represents one of the major markets for Islamic finance due to the existence of a large Muslim population that – as I mentioned above – is eager to follow the tenets of Islam. In addition to this, the Russian Muslim community enjoys an annual growth rate of more than 6 percent, and Russia has enormous oil and natural gas resources.

Following the outbreak of the global financial crisis, the Russian market – in the same manner as other international markets – opened up to Islamic finance, and Vice-Speaker of the upper chamber of the [Russian] Federal Assembly called for effective ties to be established with the Islamic Banking system in order to allow Russia long-term access to Islamic financial resources. Torshen also did not rule out the Central Bank of Russia amending its rules to allow Islamic banks to open in Russia, despite admitting the disparity between the operational mechanism of Islamic finance and the Russian banking system. Russia's largest financial companies are seeking to take advantage of the [financial] liquidity of Islamic banking at a time when there is a lack of financial liquidity in the global financial system.

This is why FDP Capital, one of the leading financial companies in Russia, is seeking to introduce Islamic financial services in its operations in collaboration with the Liquidity Management House which is affiliated to the Kuwait Finance House, with memorandums of understanding being signed by the two parties to this effect. I therefore call on the Islamic Development Bank, the Islamic Chamber of Commerce and Industry, and the General Council for Islamic Banks and Financial Institutes to take advantage of this opportunity [in Russia] by inviting the heads of major Islamic financial institutes to meet and draw up a unified strategy to seize this opportunity, as it is one that will not recur.

The Islamic financial industry has a great opportunity to serve itself [in a unified manner], rather than waiting for individual institutes to take the initiative separately. The financial crisis proved that many major Islamic financial institutes lack the human and financial potential to develop long-term strategies, alternate plans, and ambitious visions, from in-depth study of market research. Initiating this [unified] strategy will allow the Islamic financial industry to seize opportunities as they arise, rather than wasting time considering opportunities and drawing up plans, as ultimately this may result in the opportunity going to waste.

Link: http://aawsat.com/english/news.asp?section=6&id=18878

1st Islamic banking firms to be born by Christmas, may walk by Easter

Even as the Reserve Bank of India (RBI) is yet to give a formal nod, the country’s first heavy-duty Islamic banking financial institution may hum a tune on global business before the next Easter. The Non-Banking Financial Companies (NBFC) is proposed to be set up in Kochi before Christmas.

The Kerala government and the NBFC’s NRI promoters are waiting for Union finance minister Pranab Mukherjee nod as he is expected to make the crucial decision on the NBFC’s operational dimensions this week.

Ernst & Young, signed up by the Kerala government as consultant for the project, had come out with a project report on the Islamic banking NBFC, proposing Rs 1,000 crore authorised capital. A meeting of the core group of promoters held in Sharjah last week has okayed a pattern of 11% stakes for KSIDC (State government’s investment promotion arm) within the 51% equity earmarked for promoters. About 49% is to be culled from public through private placement. Besides KSIDC, this unique venture has 19 NRIs in its club of promoters.

Sources told FE the Sharjah meet of the board of promoters was in consensus to incorporate the Kochi-headquartered company before the Christmas this year. It may also go live with its Islamic banking operations by Easter, provided there is policy hand-holding from the central government.

By April 2010, the NBFC counts on emerging India’s first firm to deal solely in Sharjah-compliant products. For starters, the company will take shape with an initial paid-up capital of Rs 100 crore.

For Kerala, with its warchest of 1.8 million NRIs logging over Rs 30,000-crore in deposits in Kerala banks, raising capital for the venture is no tough odyssey. On the sunny side, NRI businessmen with deep pockets like MA Yusuf Ali (retail giant Emke Group), P Mohammed Ali (Oman-based Gulfar Group), Azad Moopen (Hospital industry major Moopan Group) and CK Menon (Doha-based Behzad Group) have already hopped on the Islamic banking bandwagon.

However, if the company— proposed under the name of Al Barakah Financial Services— is to be developed as global Islamic banking firm, it may need amendment of RBI banking regulations. Initially RBI was not too keen on the concept, but there is fresh perspective this season after Raghuram Rajan Committee recommendations on financial sector reforms. The panel clearly advocates permitting “delivery of interest-free finance on a larger scale, including through the banking system”.

Link: http://www.financialexpress.com/news/1st-Islamic-banking--firms-to-be-born-by-Christmas--may-walk-by-Easter/545260/

Qatar scholar defends Murabaha

Murabaha differs from interest-based lending as it is based on economic activity, an influential sharia scholar said on Thursday, countering criticism that sharia banking is a copy of conventional finance.

Murabaha, or cost-plus financing, is widely used to finance the purchase of assets from real estate to machinery but has been compared to conventional loans due to the profit earned by banks.

Under a murabaha deal, an Islamic bank buys an asset from a third party and sells it to its customer at cost plus profit.
This allows the bank to extend financing without charging interest, which is forbidden by the sharia.

Qatari sharia scholar Ali Muhyiddin Al-Qura Daghi drew a distinction between the two financing arrangements.

"The issue is the structure of these instruments and contracts and who bears responsibility," Daghi said in an interview on the sidelines of a sharia advisers meeting in the Malaysian capital.

"The interest in interest-bearing loans is something that is guaranteed to the lender and he undertakes absolutely no risk at all. In murabaha, the bank undertakes responsibility if the commodity should be damaged or destroyed during the period."

Since the oil price boom and recent financial crisis, more countries are exploring Islamic banking. But there is also scepticism about the system, with critics dismissing it as conventional banking cloaked in religious language.

They point to the use of the conventional London Interbank Offered Rate for pricing Islamic products and sharia banks' preference for a predetermined return instead of sharing profits and losses.

The quest to grow market share and the industry's struggle to keep up with a boom in demand are cited as some reasons why Islamic finance has replicated traditional banking practices.

"There is a genuine fear among Islamic circles that if interest is largely substituted by 'mark-up' under the profit and loss sharing operations, it would represent a change just in name rather than in substance," the Council of Islamic Ideology has said.

"Profit and loss sharing under the mark-up system was in fact the perpetuation of the old system of interest under a new name."

But Daghi said cost-plus financing cannot be equated with conventional lending. "From an economic aspect, murabaha is linked to the real economy whereas the interest-based lending system is a step removed from that," said Daghi, who advises leading industry body Accounting and Auditing Organisation for Islamic Financial Institutions.

"It's money begetting money. Money doesn't beget money by itself, there has to be that intermediate step." - Reuters

Maybank Islamic wins Most Outstanding Islamic Bank award

Mohamed (left) handing over the award to Abdul Wahid.

MAYBANK Islamic Bank Berhad (Maybank Islamic) recently clinched the Most Outstanding Islamic Bank award at this year’s Kuala Lumpur Islamic Finance Forum (KLIFF) Islamic Finance Award.

This is the second year Maybank Islamic has received an award from KLIFF. Last year, it won the Most Outstanding Islamic Retail Bank award.

The awards were given to honour and acknowledge the efforts and contributions by individuals and institutions in developing Malaysia’s Islamic finance industry.

Both foreign and local Islamic financing institutions were polled for various categories of award up for grabs on the day.

Maybank president and CEO Datuk Seri Abdul Wahid Omar received the award from Minister in the Prime Minister’s Department Tan Sri Nor Mohamed Yakcop at an award presentation ceremony held in conjunction with the 6th KLIFF Conference.

"Each year the benchmark of excellence for KLIFF’s Awards continues to be raised in selecting the winners. We are honoured with being given this award which will spur us to work even harder to ensure our continued leadership in Islamic banking in Malaysia and the region," said Abdul Wahid.

He said Maybank Islamic will continue to leverage on the group’s domestic and international network to expand the range of Islamic financial products and services to markets where the group has presence.

"In the coming year, Indonesia will be our key market for us to establish our Islamic banking services particularly in the consumer as well as investment banking segment," he said.

Maybank began offering Islamic banking services through the Islamic window concept in 1993, and in 2008, Maybank Islamic became a full-fledged Islamic banking subsidiary of Maybank.

Today, Maybank Islamic is the largest Islamic financial services provider in the country with total Shariah-compliant assets of over RM35 billion.

It commands the largest market share in Islamic financing and deposits of more than 23% each and also leads in a number of key portfolios.

Link: http://www.thesundaily.com/article.cfm?id=40408

Korea looks to Islamic investments

Firms need to be compatible with Shariah law

Korean companies such as GS Caltex Corp. and Hyundai Motor Co. will be able to sell Islamic bonds as economic growth picks up and ties with the Middle East improve, according to Citigroup Inc.

“With early signs of an economic revival in Asia and the Middle East, Korea’s move to position itself as an investment opportunity for Islamic investors is timely,” Mudassir Amray, the U.S. bank’s head of Islamic banking, said at a conference in Seoul yesterday. “Islamic funds are looking for diversification in their portfolios.”

Korea plans to provide Islamic bonds with the same tax benefits as conventional debt, the Ministry of Strategy and Finance said on Sept. 29. Korea Exchange Inc., the nation’s bourse operator, will consider introducing an Islamic equity index to aid companies tapping finance compliant with Shariah law, Acting Chairman Lee Chang-ho said at the conference yesterday.

Muslim Shariah law forbids interest payments and speculation. Sukuk are asset-based securities paying a profit distribution to investors, rather than interest.

Industries including infrastructure, utilities, telecommunications, retail and transportation would be acceptable, Amray said. Those involving alcohol, entertainment, pork producing and conventional finance would be prohibited, according to Amray. “Sukuk can be issued by any entity whose business is Shariah compliant,” he said. Bloomberg

Link: http://joongangdaily.joins.com/article/view.asp?aid=2912812

Islamic Finance 2.0 – A Moral Compass for Banking

The global financial crisis has raised questions about banking practices including lending and borrowing practices, risk management and corporate governance. An urgent call for systemic change underlies the need for a new, less selfish, version of capitalism that should be practiced by the global finance industry. This call for change is not new - early this year the British Prime Minister, Gordon Brown, said at the G20 meet that: ”it is time for a values based market which is premised on a shared global ethics. A market with morals is possible based on demanding responsibility from all and fairness to all”.

An integrated approach to banking which considers the economic, environmental and social footprint of its policies and practice is increasingly becoming a necessary component in the process of change and the attempt to transform how businesses and banks relate to each other. Sustainable finance deals with institutional policies, or systems of analysis, where all financial decisions aim at an integrated approach to optimise a company’s economic, environmental and social footprint. Sustainable finance can therefore be seen as a strategic financial decision regarding a company’s risk and value rating inboth the short and long term.

The notion of sustainable finance is further fueled by the need to reinstate banks as centres of trust and to ensure that decision making is driven by a moral compass. At the same time, the banks extend their role as institutions of trust and integrity by committing to such standards.

Is finance value neutral?

The biggest hurdle in developing a framework for sustainable finance lies in the understanding that conventional finance is seen as a mere transaction tool. It is referred to as a value neutral system that is merely an intermediary in the exchange of demand and supply in the money markets.

This understanding of finance as a transaction tool has resulted in criticism of one of the few existing frameworks to promote sustainable finance - the Equator Principles. The Equator Principles are a voluntary set of guidelines for determining, assessing and managing social and environmental risk in project financing. Banks chose to model the Equator Principles on the environmental standards of the World Bank and the social policies of the International Finance Corporation. As of October 2009, 67 financial institutions have adopted the Equator Principles, which have become the de facto standard for banks and investors on how to assess major development projects around the world. The Principles apply to all new project financings globally with total project capital costs of US$10 million or more across all industry.

Apart from the fact that the Equator Principles are confined to project financing only, the real problem lies in the structure of conventional finance which provides no incentive to actually to evaluate the criteria in an integrated way. Critics have increasingly dismissed the Equator Principles as toothless and mere greenwash as they have no monitoring procedures nor are there any punishments for those signatories who contravene the principles.

Islamic finance is fundamentally sustainable finance

The truth is, to see banking as a value neutral industry is a misplaced notion, one that stems from its neo-liberal provenance. This has perpetuated the disjuncture between community, environment and business. More than ever, the world is standing back to watch how the finance sector scales this current crisis and charts its way forward.

Arguably sustainability sits within the syntax of Islamic finance. This is because Islamic finance is premised on social welfare aspirations. Islamic finance is a banking system that is characterised by the principles of Shari’ah or Islamic law. By the nature of its very system it is inherently ethical. For example the fundamental tenet of wealth purification through giving of income to the poor through ’zakat’. Further, economic satisfaction is broadened to encompass the spiritual and material.

Currently the centres of Islamic finance are concentrated in the Middle East and South-East Asia (predominately Indonesia and Malaysia) but is spreading into North Africa and Europe. It is regulated by the Islamic Financial Services Board (IFSB), an international standard-setting body which ‘promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry’.

Although I exercise caution in saying that Islamic finance can offer a blueprint for a new financial system, arguably the underlying principles provide a convergence towards a ‘real economy’ and herald a more prudently managed and governed financial system. The transformative values that underline Islamic finance could prove to be the tipping point in developing a comprehensive regime for sustainable finance.

Understanding responsibility

To reiterate, at heart, sustainable finance must emphasize a shared ethics of fairness and responsibility.

The problem nevertheless is that in Islamic finance, responsibility has been drawn in the negative. For example, Islamic banks cannot invest in ‘haram’ activities, cannot indulge in ‘riba’ and cannot be involved in excessive leverage and speculative activities. This is deemed necessary in order to shield market players from disproportionate risk exposures.

This negative iteration of responsibility does not however convey to the stakeholder the positive value proposition that underpins Islamic finance which relates to morals, principles and integrity. For example, property rights can be enjoyed in trust as long as man follows God and remains worthy of trust. Other examples include moderation (iqtisad), adl (justice), ihsan (kindness par excellence), amanah (honesty), spending to meet social obligations (infaq), sabr (patience) and istislah (public interest).

Negative responsibility are responsibilities not to harm and have a stronger call of obligation in law. Positive responsibility invoke some positive act to benefit another (Pogge, 2002). Negative responsibility promotes a reactive, compliance mindset. Positive responsibility, which is a positive act to benefit another invokes a proactive approach that is growth oriented. This is because it promotes a framework for action beyond compliance and provides ownership of decision making.

An integrated approach to Islamic finance

When the negative and positive responsibilities that underpin the principles of Islamic finance are recognized, a more integrated implementation of sustainability standards can be tabled.

Much needs to be done in the area in terms of guidelines, toolkits and comprehensive sustainability criteria development. When properly implemented, sustainable finance will be a crucial key in linking how businesses are funded.

What could potentially be useful is a ‘sustainability competency framework’ in developing financial criteria. Among the factors that need to be considered include:

• How to implement clear, consistent, ethical standards and procedures that will prevent controversy and reputational risk
• Best practice in accountability mechanisms for compliance and resolving disputes
• Positive obligations: what are they and how to apply
• Impact in the area of risk management

What is clear is that Islamic finance provides a wide canvas to explore sustainability in an integrated way. Islamic financial institutions can potentially provide the stewardship in the area in which conventional financial institutions are perceived to have failed.

Link: http://csr-asia.com/weekly_detail.php?id=11871