Australia to Get First Islamic Index

• By Geoffrey Rogow

Thomson Reuters is on the brink of giving Australia its first Islamic index.

Starting in early February, Thomson Reuters and Australia’s Crescent Wealth are jointly launching Islamic Australia Index — a research-based index that will offer local and international investors a tool to help invest in accordance with Islamic investment principles in the local market.

The initiative comes ahead of an expected government proposal to change tax guidelines to help open up the local market for Islamic investment products, though there remains some concern about the market’s growth potential. 

Called the Thomson Reuters Crescent Wealth Islamic Australia Index, the measure will cover 143 stocks with combined market capitalization of 160 billion Australian dollars (US$168 billion). The companies are screened to ensure they adhere to Sharia law. Islamic finance prohibits the earning of interest, choosing to focus instead on the buying and selling of tangible assets such as property under the principles outlined within Sharia law.

“Creation of the index is a key step toward positioning Australia as an attractive destination for global Islamic investment funds. It is estimated Islamic banking assets globally now exceed US$1 trillion, and that there is US$50 billion in managed funds investing in equities according to Islamic principles,” said the firms in a joint statement.

http://blogs.wsj.com

Challenges to growth of Islamic banking

Although Islamic banking has grown rapidly over the last three decades, the volume of transactions touched $1.086 trillion (Dh3.98 trillion) in 2011

• Image Credit: Gulf News Archive
• A branch of Dubai Islamic Bank. More than 310 Islamic financial institutions currently operate in more than 75 countries.

Although Islamic banking has grown rapidly over the last three decades, the volume of transactions touched $1.086 trillion (Dh3.98 trillion) in 2011, accounting for only one per cent of the world's total.

This point was made at a seminar organised last week by the Emirates Centre for Strategic Studies and Research in Abu Dhabi in cooperation with the Paris Institute of Geo-Political Studies.

The seminar also highlighted global interest in Islamic banking, motivated by the growing economic importance of Islamic countries and the increasing number of Muslims in places such as Europe. Even China is entering the market, recently approving a licence to set up the first Islamic bank in the country.

More than 310 Islamic financial institutions currently operate in more than 75 countries, and in the GCC the sector continues to flourish. The recent announcement that the world's largest Islamic bank, with a capital of $100 billion, would be headquartered in Bahrain, will boost this trend.

But despite the global interest and new trends, Islamic banking still faces many challenges. Many of these challenges have complicated Sharia and professional characteristics.

Wide variation

Regarding Sharia, there is a wide variation in fatwas in each Islamic bank. Some of these fatwas contradict each other, thus creating hurdles in the progress of the sector.

This disparity reflects conflicts of interest and competition among Islamic banks on the one hand, and among scholars on the other. Some financial instruments adopted by some Islamic banks are prohibited or treated as undesirable in other lenders, which may hinder their adoption and the mission of the banking business in general.

On the professional side, although one of the most basic fundamentals of Islamic banking is based on the profit-and-loss sharing principle, the interest rate in Islamic banks mirrors interest rates in traditional banks, in that it moves up and down in accordance with the interest rate of the London Interbank Offered Rate (Libor) on the London Stock Exchange. This is the average interest rate that leading banks in London charge when lending to other banks.

Even though fatwa departments in Islamic banks are currently considering a substitute for this interest rate mechanism, in reality, Islamic banking is part of the global banking system and will remain so due to the integration of the economies of Islamic countries with the global economy.

This is because economic globalisation does not allow for such a separation between Islamic banks and traditional banks.

The impact of the global financial crisis on Islamic banking stand as evidence of strong association between Islamic banking and global banking, despite the fact that the effects on Islamic banks were less serious than those suffered by traditional banks. Let us not forget that one reason for this is that Islamic finance prohibits overestimating assets without sound financial foundations, and financial derivatives — two major causes of the crisis.

The efforts of Islamic banking to go global are important, particularly if they want to achieve the stature of French banks, for example, but it also requires finding a solution to the currently existing Sharia and professionalism-related problems.

Dealing with global fin-ancial markets is different from dealing with local and regional markets, especially given that there are complicated financial instruments and derivatives that are difficult to deal with in terms of Sharia only.

There are also major stock exchanges for commodities, gold and oil that deal with billions of dollars daily, thus putting big burdens on financial institutions because of the size and speed of transactions.

But if these issues can be resolved, it would be possible for Islamic banking to constitute an important part of the world banking system.

Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.

http://gulfnews.com/

Azerbaijan develops Islamic financing

Azerbaijan, Baku, Jan. 25 / Trend /

Leyla Abdullayeva, Trend Analytic Center Expert

Azerbaijan may soon become a regional Islamic financing center and play a significant role in boosting cooperation in Islamic banking with Persian Gulf and Central Asian countries.

Islamic financing is one of the fastest growing segments of the global financial services industry worldwide. At the same time, interest in Islamic finance as a source of investment is high in our country. Many countries' interest in Islamic finance is associated with different factors, the foremost of which is the desire to attract liquid resources from the Middle East and Southeast Asia and a certain demand for financial products in accordance with Sharia law by local Muslims.

Today, Azerbaijan actively introduces Islamic financing. The independent authority of the International Bank of Azerbaijan (IBA) on Islamic banking will start its work in March, which plans to present six Islamic banking products to the market during the first phase.

The Islamic Corporation for the Development of the Private Sector (ICD) is also in talks to create the first Islamic insurance company in Azerbaijan, Takaful, which is popular in Europe, particularly in the UK. European and Central Asian countries are considered experts in Islamic financing. Most of Takaful's customers are non-Muslims in countries where the Islamic insurance market is the most developed in the world.

Ansar Leasing, organized on Islamic principles and established by the ICD, has successfully operated in Azerbaijan for three years. During this period, the company has formed a portfolio worth $15 million and the company plans to draw about $6-$7 million from its founder to expand operations. Some Azerbaijani private banks are also starting to expand the range of Islamic financing tools, introducing Ijarah (leasing) and Murabaha. One such bank is TuranBank, which plans to introduce these tools with the financial support of the Islamic Corporation.

Another bank, Nikoil, is actively introducing deposit products, which include Wadia yad Daman.

Evidently, Azerbaijani banks' interest in Islamic products is growing gradually. The amount of money that enters the market through this channel is very small in Azerbaijan, since many issues related to Islamic financing have not been yet addressed. Therefore, the successful development of Islamic finance on the domestic market will depend on the further improvement of legislation, regulatory prudential norms, and supply and demand. In the near future, it may become a subject of debate.

By developing Islamic financial infrastructure, Azerbaijan may indeed attract investments and financing from the Islamic capital market, not only from Arab countries. Alternative financial tools can be provided for Azerbaijani investors in this way. Also, the number of practicing Muslims who cannot and do not want to use traditional financial services is growing in Azerbaijan. Islamic financial tools can become the channel through which their assets can be involved in the economy.

Do you have any feedback? Contact our journalist at agency@trend.az

http://en.trend.az

IDB ready to fund Oman's Islamic banking sector, public-private business ventures

Islamic Development Bank (IDB), an international financial institution based in Jeddah, Saudi Arabia, is ready to provide equity capital to Oman's upcoming Islamic banking industry, development projects in the sultanate and private-sector businesses.

IDB provides equity capital and loans for projects and enterprises in accordance with Sharia law, besides providing financial assistance to member countries for economic and social development.

Speaking to Muscat Daily on the sidelines of the Islamic Finance and Banking Conference, Dr Ahmed Mohammad Ali, IDB president and chairman of the board of executive directors, said the bank is willing to provide capital assistance in Oman.

He said, "We are at the disposal of both authorities and institutions to provide assistance in Oman. IDB has, from the start, been supporting the establishment of Islamic banks and financial institutions through equity participation.

"The option is open and depends on the needs of the industry, authorities and founders of Islamic banks in Oman. We are ready to provide equity capital to banks which are making a foray into Islamic banking."

IDB, Dr Ali added, wishes to increasingly support development projects under Oman's Eighth Five-Year Plan. "We will be happy to participate in development projects in different sectors, but all depends on the desire of the Oman government and institutions."

Dr Ali said the Islamic Corporation for the Development of the Private Sector (ICD), the private-sector arm of IDB, is also looking to support Oman's private-sector enterprises.

He said, "We are also ready to provide financing to private-sector enterprises. ICD would be willing to participate to support private sector enterprises in terms of equity capital.

"The CEO of ICD was in Oman recently and had discussions with local businessmen and we hope something will materialise in this direction in the near future. Oman is a founding member of IDB and has always been supportive to its activities."

The present membership of the bank consists of 56 countries. The basic condition for membership of IDB is that the prospective member country should be a member of Organisation of the Islamic Cooperation.

© Muscat Daily 2012

Islamic banking: Kyrgyzstan, seize the hour!

Economic processes slow down across the world for recent half year. Debt crisis deepens embracing new European countries. Fitch, S&P and Moody's warn that not only banks of Spain, Greece, and Portugal are at risk but biggest backbone banks of Germany, Austria, Great Britain and France. Their bankruptcy is fraught with collapse of Eurozone.

China also concerns in a new wave of the crisis. Bloomberg Poll questioned 1,097 investors whereof 61 percent are waiting for collapse of the banking system. And only every tenth believes China will manage to escape problems.

A new world recession is looming. Some experts think that forthcoming crisis will be more amplitudinous than those which world survived in 2008. Best financial experts of Europe and America break their heads over how to elude the worst scenario.

Orients’ treasure

While they are reflection on the Islamic financing gathers pace. Islamic banks survived the crisis with minimal losses showing sufficient high growth at 15-20 percent per year. Experts believe that Islamic model of economy may become a decision of problems emerged from the global financial crisis. Today over 400 world financial institutions practice Islamic banking and their annual turnovers make up around $1 trillion. Deutsche Bank reports the volume of Islamic finances will almost double up to $1.8 trillion by 2016. Standard & Poor's expects increments of assets at the level of $2.8 trillion.

In a short, the system proves its value. Many countries of Old and New World realized this and the U.S. Switzerland, Great Britain and Germany have begun launching Islamic financing model.

Islamic financing is operating in Kyrgyzstan for 5 years and it demonstrates its value in practice. Share of Islamic financing in June 2011 reached 5 percent of all banks credit resources of the republic. And it will increase up to 10-12 percents by 2015 according to experts.

A lawyer never goes to law himself

“Islamic banks across the world successfully got over crisis as they rest upon other principles distinct from traditional credit activities,” an adviser on business development to the Board of Directors of EcoIslamicBank OJSC, Shamil Murtazaliev, tells.

He says that Islamic economic system bans profiteering, bank interest rates and any enrichment without creation of a real commodity or an actual cost service.

He notes money in Islamic economy is not a commodity but just means of exchange. A profit can be fairly earned only through trade or through partly risk-taking. “Islamic economic system pays special attention to human relations and moral principles of economic relationships that must contribute into prosperity of the society in whole, not separate individuals. A principle of social fairness is cornerstone of Islamic principles,” the banker says. He believes the world will realize the supremacy of Islamic economic system over economic model of speculative capital.

The difference of Islamic banking from traditional one is absence of loan interest. There are other financial and profit earning instruments.

“Murabahah, mudarabah, sharika”

These are major financial operations in Islamic banking. Murabahah means a particular kind of sale, where the seller expressly mentions the cost he has incurred on the commodities for sale and sells it to another person by adding some profit or mark-up thereon which is known to the buyer. Mudarabah is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. Profits generated are shared between the parties according to a pre-agreed ratio. Sharika means partnership between a bank and a client and the profits are shared among the parties on the basis of their participation or on a pre-agreed ratio and the losses are shared on the basis of equity participation.

Besides, Islamic economy bans activity which is in conflict with Sharia: alcohol, drugs, gambling business as well as bonds, bank lending and investments into companies whose loan indebtedness is a major source of financing.

Golden rain

Kyrgyzstan has done a lot to launch Islamic banking but it is ahead to do more. Financiers plan to implement Islamic assurance, Islamic paper securities and other financial instruments. Improvement of legislation and political will of the Government are needed to do that.

“This will help to attract investments of richest countries of Arabia, Malaysia and other Muslim countries into economy of the republic,” Shamil Murtazaliev believes. “Representatives of 57 countries work in Islamic Development Bank (IDB) and there is a country competition among them where everybody lobbies interests of his state. Kyrgyzstan joined Islamic Development Bank recently and it is important to push forward interests of the republic for further development of Islamic banking”.

Dozen of largest IDB countries controls 70 percents of world energy resources and has accumulated substantial funds there. And now they are needed to make use of them including outside their countries within diversification of the economics.

In this context Islamic banking for Kyrgyzstan, having great potential for attraction of investments, must be considered as one of priorities in development of the banking sector of the country.

http://eng.24.kg/

Significance of Islamic economy highlighted - Oman

Shaikh Saleh Kamil (pictured), Head of the United Chambers of Commerce, Gulf Region, delivered a speech at the Oman Chamber of Commerce and Industry (OCCI) yesterday on Islamic Economy and its significance in the present crises-ridden world.

The audience appreciated his thought-provoking comments on the various aspects of Islamic economy that prevent many ills that plague many economies today.

On the issue of Zakat he says it is one of “my concerns for many years. Zakat can be the key tool for the economic and social growth. But alas! The Islamic nation (ie 57 Muslims nations) is yet to do a lot to realise the potential role of the developmental Zakat. Allah the Exalted says in his Holy Book “Success is really attained by the believers who are performers of Zakah, Shaikh Kamil reminded.

He added that Zakat has been made obligatory on Muslims for an honourable wisdom, since if the individual saves money, he will pay 2.5 per cent as Zakat. But if he invests it in business he will pay less, and if he invests it in agricultural project, he will pay less, and if he invests it in industrial project he will pay less and less. The more people benefit from your business, the less Zakat you pay and the more reward you gain, since it will lead to opening the doors of livelihood for a lot and moving the wheel of the production of the Islamic economy. This is the true meaning of (performers of Zakah).

Zakah is just one aspect of Islamic economy that helps prevent poverty, and takes care of widows, orphans and other needy people by way of training and employment. He also stressed the importance of a permanent co-ordination between the chambers of commerce among 57 Islamic states especially in light of the global financial crisis.

Shaikh Kamel was born in Taif, Saudi Arabia in 1941. He grew up in the Holy City of Mecca where he had his elementary education. After graduation from the Faculty of Commerce, Riyadh University, he worked at the Saudi Ministry of Finance and later established his own business “Dallah Establishment” in the early sixties, and by early eighties he established the huge conglomerate company “Al Baraka Investment & Development” a holding company for many Islamic Banks and financial institutions operating according to Islamic teachings in various diversified business activities all over the world.

Shaikh Kamel is well recognised as one of the pioneer personalities in the field of Islamic Banking and Finance, while his companies are known as pioneers in many business adventures throughout the region.

http://main.omanobserver.om

UAE leads Islamic banking world

 Mohamed Hamed Rashid is confident on his investment structure. Already, he has thrown over $100,000 into funding a new alternative energy project, but instead of looking for interest on his savings and start-up capital, he prefers the Islamic banking structure, which he argues delivers more freedom and more security than traditional Western banking.

“When I looked at the possibilities and where to put our money, the Islamic bank was the best option for us,” Rashid told Bikyamasr.com.

He’s not alone. More and more investors and average citizens are turning to Islamic banking as an alternative to Western interest-focused structures.

Abu Dhabi Islamic Bank (ADIB) reported on Sunday that the UAE controls some 30 percent of the global Islamic banking system.

ADIB, in a statement, commended the great role the Islamic banking sector was playing “in boosting and pushing forward development, economic and financial growth of the UAE.”

ADIB’s statement came in Abu Dhabi Report 2011, co-launched with Oxford Business Group.

Islamic banks are largely contributing to funding infrastructure projects in the UAE, in addition to financing real estate ventures and training national workforce, it added.

ADIB’s CEO Tarad Mahmoud said UAE’s Islamic banks played an important role to developing international Islamic banking whose value exceeded USD trillion.

Islamic banking has been attracting a growing number of clients because this industry is based on “moral principles, commitment with transparency and applying the dual benefit method in all of its operations and transactions,” he added.

Mahmoud highlighted the important role of the independent Islamic sharia committees in monitoring and organizing transactions.

Total of assets of Islamic banks in the Middle East and North Africa rose to $416 billion in 2010.

For investors like Rashid it is a step in the right direction and delivers more options to the customer and investor alike.

“I am not a conservative Muslim, but I see the opportunities in Islamic banking and with these banks we won’t be affected by the rising and dropping of international markets,” he added.

http://bikyamasr.com/54626/uae-leads-islamic-banking-world/

Islamic Finance: A 'come together' consolidation?

Will 2012 be the year of “come together” consolidation for Islamic banks?

Size is often the justification for achieving economies of scale, used to access deals for league table prominence, used as a buffer in a challenging environment, used as defensive measure to ward off unwanted suitors, and so on.

Islamic banks are very much like Islamic (equity) funds. There are hundreds of Islamic banks and funds, but the paid-up capital and assets under management, respectively, is too small to be meaningful. Yet, both, more so Islamic banks, present a unique situation (of an industry risk) of “too small to fail”.

Islamic finance is not only a niche industry today, but also an embryonic industry, where an Islamic bank failure may actually result in the “run on deposits” scenario due to contagion perception as no “Islamic lender of last resort”.

For example, when the industry had sukuk default, circa 2009, or comment by a leading scholar concerning syariah violation of a particular type of sukuk, the perception, fanned by certain media, was that “it’s the beginning of the end of Islamic finance”.

Obviously, the industry has not only survived but is said, by the likes of S&P, to be thriving on the march towards US$2 trillion (RM6.4 trillion).

Sub-Eco System

Islamic finance is a sub-eco system of the global economy, finance, and capital markets, hence, the hot winds of new world order, post- US sub-prime mortgage crisis and sovereign debt obligations of selected European countries, have made their way towards the base countries of Islamic banks.

The stakeholders of the Islamic finance industry, be it regulators, industry bodies or the banks themselves, have realised the new world order may just compress (or shorten) the industry development curve.

There is an implicit realisation that one does not need to have the “toxic assets” on the balance sheet to be collaterally damaged, as the financial economy (stage one) eventually impacts the real economy (stage two). Islamic banks finance the real economy.

Recent news and developments in Islamic finance include:

• ISLAMIC Financial Services Board introducing Exposure Draft 13, Guiding Principles on Stress Testing Islamic Banks. This is one of the important developments in 2011, an attempt to better understand the soundness and stability of Islamic banks.

• EMIRATES NBD, a conventional bank, acquired the struggling Dubai Bank (DB), an Islamic bank, at the behest of Sheikh Mohammed bin Rashid Al Maktoum, ruler of Dubai and prime minister of the United Arab Emirates. Emirates NBD also owns Emirates Islamic Bank (EIB), and we can expect to see integration between EIB and DB.

• STANDARD & Poor’s a major rating agency, is reviewing the credit ratings on 50 banks in the Mena (Middle East North Africa) region under new criteria. It also classified Bahrain’s banks as the riskiest in the six-country GCC (Gulf Cooperation Council) region.

• BAHRAIN’S central bank has “urged five of the Islamic banks to merge in early 2012 as it seeks to strengthen the banks’ capital bases …,” and it now pending shareholder approval.

• QATAR’S central bank, which issued a directive early this year stating Islamic windows and subsidiaries of conventional banks need to be spun off, sold, closed, etc, by the end of the year, has hinted at giving the banks more time for implementation. The execution risk in these uncertain times may cause the law of unintended consequences to kick and cause more damage.

Central bank urging

The central bank of Bahrain, much like Bank Negara Malaysia, has brought much credibility (via regulations) and certainty to Islamic finance over last two decades. It can be said these two central banks have put Islamic finance on the global map, and, among the many benefits, have encouraged enlightened non-Muslim countries to establish themselves as Islamic finance hubs.

Thus, when the CBB encourages consolidation of Islamic banks in its home country, it may be just the necessary wake-up call for the industry to direct the conversation towards size, as it matters. Some may also say that it may be the by-product of the Arab Spring, more specifically, the situation in Bahrain.

The same “spring” that has brought real interest in Islamic finance in Oman, Egypt, Libya, and Tunisia.

What are the lessons from the present situation for Islamic banks in Malaysia?

At one level, Malaysian banks, Islamic or conventional, have not been directly impacted with crisis I or II, but anecdotal evidence suggests exporters (to the US and Europe) are been impacted. These same exporting companies are banking clients with working capital needs.

For Islamic banks in Malaysia, the options may include:

• The often heard cry of consolidation to achieve the benefits of size. It may possibly be a better route to achieve size than establishing a newly licensed mega bank that will acquiring customers (is the retail pie expanding?), building/buying branch outlets, and so on.

Destructive competition in an overbanked market?

• Spinning off and publicly listing the Islamic subsidiaries of conventional banks as the incubation testing market cycle period has been successfully completed. Islamic investors from, say, the GCC, are more interested in acquiring portfolio investment stakes in market share leading banks than their Islamic funds.

The restraint showed in Malaysia on not publicly commenting on the directive form the Qatar central bank shows the world-class leadership and stature of Bank Negara Malaysia.

• Friendly/strategic or even bailout stakes in Islamic banks in the overbanked GCC generally, Bahrain and UAE, specifically. The GCC-based banks have been raising money in Malaysia, via sukuk and bonds. It shows the Malaysian money is not only welcomed, but also needed in the heart-land of the “petro-liquidity”.

Lessons?

Are there lessons from Qatar’s sovereign wealth fund (SWF), Qatar Investment Authority (QIA), for Malaysia’s SWF, Khazanah Nasional, concerning QIA’s investments in cash-strapped banks Britain’s Barclays, Brazilian unit of Spain’s Banco Santander, and Credit Suisse Group? In these cases, QIA was rewarded handsomely, where Credit Suisse and Barclays netted a US$2 billion profit.

The five Bahrain-based Islamic banks urged to merge by CBB include Bahrain Islamic Bank and Salaam Bank, and three-way combination Capivest, Elaf Bank and Capital Management House. The amounts involved here is not in the same league as Credit Suisse or Barclays, and the valuations are much lower than pre-crisis period.

Would a Malaysian Islamic bank or Khazanah be the welcomed figurative “white knight” that would provide not only a cash injection, but also the long sought after bridge between GCC and Malaysia?

The year 2012 could be the year for Malaysian Islamic banks to achieve size and spread their “welcomed wings” to new lands.

The writer is the global head, Islamic finance & OIC countries, Thomson Reuters

http://sohbetna.com/business/analysis/islamicfinanceacometogetherconsolidation/

Qatar Islamic banking directive to set example for other markets

The deadline of Dec. 31, 2011, as per the directive issued by the Central Bank of Qatar (CBQ) in January 2011 requiring the country's conventional banks which have opened Islamic banking windows to close them down, has passed almost unnoticed.

Despite the initial outcry at the time of the announcement of the directive stressing that it was too arbitrary and the grace period was too tight, there has been no upheaval of the Islamic finance industry in the emirate. Some Islamic bankers are now arguing that the move was required to stem the alleged rampant co-mingling of conventional and Islamic funds at some of the Islamic banking windows, and that the Qatari Islamic banking sector has been successfully re-aligned and consolidated.

The successful implementation of the directive in Qatar could well have implications for other markets in the region and beyond where Islamic banking windows are prevalent. The clear message of the directive is that dedicated standalone Islamic banks are preferable to half-way houses where co-mingling and all sorts of compromises are possible if not the norm. They also give greater legal, regulatory and Shariah compliance clarity and comfort to those depositors and investors interested in Islamic finance.

The affected banks included the Al-Islami window of Qatar National Bank (QNB), the largest bank in the emirate; Commercial Bank of Qatar; Doha Bank; HSBC Amanah; Ahli Bank; Al-Khaliji Bank and International Bank of Qatar (IBQ), which between them had 16 Islamic banking branches in Qatar.

On Jan. 1, 2012 it became clear that only one such window, Al-Yusr of International Bank of Qatar, was acquired by two local Islamic banks — the retail banking assets and business was acquired by Barwa Bank, the newest of the Qatari Islamic banks, while the corporate banking assets and portfolio was acquired by Qatar Islamic Bank (QIB), the largest Islamic bank in the emirate.

The other banks had wound down their Islamic banking window operations complete with removing all signage and of course not opening any new accounts or businesses. Existing Islamic banking customers were in some cases given the option of switching to the banks' conventional banking business or in other cases to continue payments until affected Islamic financing facilities matured.

An unrepentant CBQ Gov. Sheikh Abdullah bin Saud Al-Thani as late as mid December 2011 warned the affected banks that the directive was "irreversible" and that they must comply with its provisions. In his keynote speech to the 8th International Conference on Islamic Economics and Finance (ICIEF) which was held in Doha in December 2011, Al-Thani articulated the reasons behind the central bank's directive, which he confirmed is irreversible.

The Islamic Banking Windows, according to Gov. Al-Thani, made it difficult for the banking regulator to effectively implement its monitoring and supervision of these windows.

This issue could not have been highlighted more aptly during the acquisition of Al-Yusr's Islamic Retail Banking business. As the first such transaction to be closed in the region, albeit under Qatari law, there were some legal and other regulatory challenges which UK law firm, Eversheds, which acted for Barwa Bank, successfully navigated through within the provisions of existing Qatari legislation.

"The IBQ window was not a separate legal entity. As such, its assets and liabilities were a part of the conventional bank. We therefore had to consider how best to separate and then package and transfer these assets and liabilities. There were also challenges concerning transition services that were required post completion to serve the transferring customers," explained Amjad Hussain, partner and head of Islamic Finance at Eversheds, in a recent interview.

The central bank also found that the coupling of conventional and Islamic banking activities at the same institution, undermined competition and transparency in the affected banks. At the same time, there is much confusion over the balance sheet treatment of the assets and liabilities of the Islamic banking windows in the financial reports of the conventional banks, which are not separated. As such this has implications for the risk management process of the institution.

Al-Thani gave the thumbs up to the Qatari Islamic banking industry which boasts four Islamic banks — Qatar Islamic Bank, Qatar International Islamic Bank, Masraf Al-Rayan and Barwa Bank. These banks, he added, have a crucial role in the country's banking sector and economy, in compliance with the objectives of the Qatar Vision 2030 and its first application through the First Strategic National Development Project 2011-2016.

He reminded Qatari Islamic banks of their partnership role in financing economic development and projects in the country, and stressed that he was confident that the Qatari Islamic banks will rise to and are capable of taking up this challenge together with their conventional counterparts. The Islamic banking sector has a 20 percent market share of the total banking industry in Qatar, which has four dedicated standalone Islamic banks.

It was way back in 2005 that the CBQ allowed conventional banks to launch Islamic Banking Units (IBUs), which have contributed to the growth of the sector and to the profitability of the banks, and which have attracted an estimated customer base of just under 100,000.

Eversheds' Hussain rejects any notion of arbitrariness in the action of the CBQ in issuing the directive. The action, he contended, is "part of a wider process of supporting and shoring up the banking industry in Qatar. You have to look at it in the context of the proactive approach of the central bank during the recession when it helped a number of local banks to remove some of the toxic debts that they had exposure to. The CBQ is also making sure that there are enough opportunities for all the market players."

Previously, the Islamic banking windows were barely competing because of co-mingling issues and because they were able to offset overheads through the conventional banks. There was a feeling that the market was not as transparent as it could be. In addition to regulatory issues, the central bank had to deal with two separate businesses dealing with different banking activities - Islamic and conventional.

"I believe competition was an issue, because the pure Islamic banks were seen to be at a disadvantage. The Islamic banking windows at the conventional banks were able to use backroom services in their banks. There were also regulatory and corporate governance concerning how manage different banking platforms under one roof which is what the conventional banks were trying to do. This resulted in a culmination of issues which the CBQ is trying to address in its efforts to improve out the banking sector," explained Hussain.

http://arabnews.com

Ireland may be first EU state to sell Islamic bond

IRELAND plans to become the first European nation to sell sovereign sukuk — Islam-approved financial certificates — as its equal tax treatment for Islamic-finance products attracts investors.

The Government has agreements with more than 60 countries to avoid double taxation on Islamic transactions, Micheál Smith, the south-east Asia director of IDA Ireland, said. 

Islamic finance assets around the world may rise about 16% to €1,240 billion this year, Raj Mohamad, managing director at Five Pillars, a consulting firm based in Singapore, told Bloomberg Television yesterday. 

While plans to sell sukuk by Britain, France and Luxembourg have stalled, Mr Smith said Ireland will push ahead with a sale. 

"Ireland will be going back to the bond market and a sukuk is an option when conditions are right. We also hope to form more working groups with Muslim countries such as Malaysia to build up a critical mass of expertise as the objective is for Dublin to become a centre of excellence for Islamic finance." 

Ireland introduced tax legislation for products that comply with Islam’s ban on interest in 2010, Mr Smith, who is based in Singapore, said. 

The Central Bank has a Shariah team overseeing its Islamic funds, which total about €390m under management. 

The Irish Stock Exchange listed its first sukuk in 2005 and Ireland is a popular choice for sales because the nation offers a "relatively inexpensive" and timely listing process, he said. 

The Government last sold bonds in September 2010, the year it had a deficit that was the highest as a percentage of gross domestic product in the developed world. The Department of Finance estimates the ratio dropped to 10.1% of GDP in 2011 from 31% the previous year. 

CIMB Group Holdings, the world’s biggest sukuk arranger, said this week that it got approval to set up the first Shariah-compliant equity funds from Malaysia in Ireland. 

Ireland’s bid to become an Islamic finance hub received a boost in October when Goldman Sachs Group got approval from the nation’s central bank to list its $2bn (€1.55bn) sukuk programme. The planned sale has attracted criticism among Islamic scholars, with some saying the proceeds may not be used according to Shariah law. 

CIMB-Principal Islamic Asset Management, based in Kuala Lumpur, chose Ireland for its Islamic equity funds because there’s no double taxation and no withholding tax on interest payments, Jim McCaughan, chief executive of US-based venture partner Principal Global Investors, said on Monday. 

An initial investment of $20m (€15.5m) will be put into three funds that will open for subscription next month, he said. 

"We expect interest from Europe, Malaysia and more importantly the Persian Gulf and other Muslim countries," Mr McCaughan said. "People are getting wealthier and want to diversify their funds." 

Global sales of sukuk, which pay asset returns instead of interest, total €4.7bn this year, compared with €500m in the same period in 2011, according to data compiled by Bloomberg. Offerings reached a record $36.3bn last year, surpassing the $31bn raised in 2007. 

The difference between the average yield for sukuk and the London interbank offered rate, or Libor, narrowed two basis points to 299 basis points yesterday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. 

The average yield has climbed nine basis points, or 0.09% point, this year to 4.08%. 

Shariah-compliant bonds have dropped 0.1% in 2012, according to the HSBC/Nasdaq index, while debt in developing markets declined 0.2%, JPMorgan Chase & Co’s EMBI Global Composite Index shows. 

The Bloomberg Malaysian Sukuk Ex-MYR Index of foreign currency Islamic debt sold by companies in Malaysia rose 0.5% this year to 104.919 yesterday. The gauge increased 5.9% in 2011. 

Britain cancelled what would have been the first sukuk sale by a Western government last February, saying the debt didn’t offer value for money. Luxembourg ruled out a plan to sell Islamic bonds in 2011 because the government saw no need to raise additional funding. France has legislation in place to facilitate a sale and has yet to proceed with an issue. 

Ireland has a Muslim population of 30,000, according to a Department of Finance document covering the nation’s Islamic industry issued in March 2010. Roman Catholics make up 87% of Ireland’s population. 

The Islamic Cultural Centre for Ireland and the Immigrant Council of Ireland have all called for more Shariah-compliant initiatives, the report said. 

"There’s been no objection to Islamic products being sold in Ireland," said Mr Smith, who is also a director in charge of the 10-member Association of Southeast Asian Nations at the IDA. 

The European debt crisis provides an opportunity for Islamic finance to grow given it is rooted in ethics and religion, according to Nik Norzrul Thani, the chairman of Malaysian law firm Zaid Ibrahim & Co. 

"What Ireland is doing is a step in the right direction," Nik Norzrul said in an interview in Kuala Lumpur. 

"Ireland’s ambition to be a Shariah-compliant hub is a recognition that Islamic finance isn’t only for Muslims."

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