Islamic finance: Fitting In & Standing Out

A Sharia-compliant equivalent of the popular UK and US reality show The Apprentice has recently been announced by a UK-based organisation.

This follows the news of an ‘Islamic Facebook’ and ‘Halal-Tube.’ The Muslim world also has superheroes, like The 99, Muslim dolls (Dara and Sara), Muslim Cola (Mecca Cola), Islamic car, and so on.

It seems the criticism labelled against Islamic fin-ance products, form over substance, also has application in the ‘info-tainment,’ and social media area. Yes, imitation is the best form of flattery, but we (the Muslim world) also need to be flattered.

So where are the authentic innovations and inventions? Surely there must be ideas that can be financed in a compliant manner from, say, 10 per cent of the 1.8 billion Muslims living in the 57 Muslim countries and outside the Muslim world.

Here is an opportunity for Islamic finance to fund something beyond the traditional areas such as real estate, and actually show the way to conventional finance in the Muslim countries. No, it is not for deposit-accepting Islamic banks to lead, they will not, but Islamic funds, like venture capital, small to medium enterprise (SME) funds, and private equity.

The two most common questions I was asked in my travels, especially by students, are: What is the difference between Islamic and conventional finance? And what has Islamic finance financed?

The implicit point in the second question is the role of the financial sector, typically the largest economic sector in the Muslim countries, as a ‘lubricant for greasing’ the country’s gross development product, econ-omic diversification, and development. It is well accepted that Islamic banks finance permissible activities linked to the real economy, like real estate. However, there are also nine other economic sectors.

An important element of prudent risk management is reducing concentration risk. The credit crisis impacted the financial economy, and, thereafter, impacted the real economy, hence, Islamic and conventional banks in the GCC region have seen a rise in non-performing loans and increased provisioning. Thus the industry as a whole needs to reduce the exposure risk to the vertical stakeholders in real estate.

Strategy

The issue for Islamic finance is, what is the diversification and development strategy for staying relevant? For example, the pursuit of establishing an Islamic mega-bank, capitalised at, say, $5 billion paid up capital, is not a strategy, it is just another bank, albeit much larger. However, challenges still remain on standardisation, managing liquidity, meaningful cross-border presence, qualified personnel and scholars, regulations, accounting, customer service, and so on.

A strategy for Islamic finance, much like creating industry organisations AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions or IFSB (Islamic Financial Services Board), would entail establishing the foundation for meaningful asset class build-out. The expansion of asset classes would include trade finance funds, leasing funds, Sharia-based (equity) funds, halal food fund, SME funds, venture capital funds, etc. The asset class build-out will not only answer the second question, ‘what has Islamic finance financed’, but, more importantly, contribute depth to the Islamic equity capital market.

Today, there is a bias towards debt capital market Islamic finance, and, as an institution or individual can be conventionally overleveraged with negative consequences, an Islamic financial institution can be Islamically over-leveraged, i.e., Arcapita, Gulf Finance House and Investment Dar among others. Thus, to reduce the present bias of more depositors, called investment account holders (IAH), over capital market investors, the industry needs to appeal to equity instruments to address the risk profile of the latter. Obviously, this will not happen overnight, as it is a process involving customer surveys, education, including that of Imams, regulations, products, accessibility, customer service and support.

Will there be resistance from the banks, as deposit amounts will be reduced resulting in possibly lesser loans and loan amounts? Most likely, but the present situation has resulted in the ‘man on street’ asking the two above-mentioned questions. For example, a public-listed Islamic financial institution, like Dubai Islamic Bank, has thousands of IAHs. Now, if a robust index is created of only publicly listed Sharia-based companies, it addresses the first question of the difference. A Sharia-based index would not need the screening as such companies have Sharia advisers, by-laws aligned to Sharia principles, and pay zakat.

Generating interest

The likelihood of a fund off a Sharia-based index, comprising only Islamic banks and leasing companies, Takaful operators, Islamic REITs, halal food companies, etc., may generate more interest from the same IAHs than a Sharia compliant fund comprising companies like Microsoft, IBM, Pfizer, ExxonMobil, etc. Thus a client of, say, Abu Dhabi Islamic Bank may be both an IAH and a fund investor.

For the Islamic equity capital market to develop, the Islamic asset management space has to not only develop, but also expand to other asset class offerings.

The development of asset classes means that compliant funds are available for venture capital, SME fin-ancing, private equity, etc. Then, a real possibility exists for compliant funding inventions and innovations from the Muslim world on par with YouTube, Facebook, etc.

To rise to the challenge of being conventionally efficient, Islamic finance has to first fit in, and then it will stand out. We can start in the Arab Spring countries.

Author: Rushdi Siddiqui

The writer is Global Head, Islamic Finance and OIC Countries, Thomson Reuters. Opinion expressed here is the writer’s own.

http://www.sohbetna.com/business/articles/islamicfinancifittinginandstandingout/

Sulaiman Al-Rajhi’s life a rags to riches story

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  Sulaiman Al-Rajhi with Muhammad Al-Harbi during the interview.

Saudi Arabia’s rags-to-riches billionaire Sulaiman Al-Rajhi is also a world-renowned philanthropist. He is the founder of Al-Rajhi Bank, the largest Islamic bank in the world, and one of the largest companies in Saudi Arabia. As of 2011, his wealth was estimated by Forbes to be $7.7 billion, making him the 120th richest person in the world. His flagship SAAR Foundation is a leading charity organization in the Kingdom. The Al-Rajhi family is considered as one of the Kingdom’s wealthiest non-royals, and among the world’s leading philanthropists.

Al-Rajhi is a billionaire who chose last year to become a poor man at his own will without having any cash or real estates or stocks that he owned earlier. He became penniless after transferring all his assets among his children and set aside the rest for endowments. In recognition of his outstanding work to serve Islam, including his role in establishing the world’s largest Islamic bank and his regular contribution toward humanitarian efforts to fight poverty, Al-Rajhi was chosen for this year’s prestigious King Faisal International Prize for Service to Islam.

In an interview with Muhammad Al-Harbi of Al-Eqtisadiah business daily, Al-Rajhi speaks about how he was able to succeed in convincing chiefs of the leading central banks in the world, including that of the Bank of England, nearly 30 years ago that interest is forbidden in both Islam and Christianity, and that the Islamic banking is the most effective solution to activate Islamic financing in the world and make it a real boost to the global economy.

The story of Al-Rajhi is that of a man who made his fortunes from scratch, relying on grit and determination. Al-Rajhi threw away his huge wealth through two windows — distributed a major part of his inheritance among his children and transferred another portion to endowments, which are regarded as the largest endowment in the history of the Islamic world. He had to fight poverty and suffering during his childhood before becoming a billionaire through hard work and relentless efforts, and then leaving all his fortunes to become penniless again.

Al-Rajhi is still very active and hardworking even in his 80s with youthful spirits. He begins his work daily after morning prayers and is active until Isha prayers before going to bed early. He is now fully concentrated on running the endowment project under his SAAR Foundation, and traveling various regions of the Kingdom managing activities related with it. He always carries a pocket diary containing his daily programs and activities and he is accustomed to stick on to the schedule he had prepared well in advance.

Al-Rajhi scored excellent performance results in almost all businesses in which he carved out a niche for himself. In addition to establishing the world’s largest Islamic bank, he founded the largest poultry farm in the Middle East. The credit of activating the organic farming experiment in the Kingdom mainly goes to him through launching a number of farming projects, including Al-Laith shrimp farming. He also established real estate and other investment projects.

Excerpts:

Sheikh Suleiman, have you become a poor man again?

Yes. Now I own only my dresses. I distributed my wealth among my children and set aside a portion for endowment to run charity projects. As far as I am concerned, this situation was not a strange one. My financial condition reached zero point two times in my life, and therefore I have had the feeling and understanding (about poverty) well. But now the feeling is accompanied by happiness, relaxation and the peace of mind. The zero phase in life this time is purely because of my own decision and choice.

Why did you choose this path?

All wealth belongs to Allah, and we are only those who are entrusted (by God) to take care of them. There were several reasons that prompted me to distribute the wealth and that resulted in performing this virtue. Most important among them is to foster brotherhood and love among my children and safeguard their harmonious relationship. This is more significant than any wealth in this life. I was also keen not to be instrumental in wasting the precious time of courts in case of any differences of opinion among them with regard to partition of inheritance. There are several examples that everybody could see when children entered in dispute over wealth and that led to the collapse of companies. Nation has lost many large companies and their wealth that we could have been saved if we tackled the matter in a right manner. Apart from this, every Muslim should work on some endowments that could benefit him in the life after death. Likewise, I prefer my children to work on developing wealth, which they inherit after my death, during my lifetime itself rather than I continue working to increase them.

Are you getting enough free time after the distribution of wealth?

As earlier I am still working on developing endowments. I will donate and give alms from it until Allah takes over this trusted deposit. I have worked out a meticulous scheme for this endowment and developed it with the support of specialist consultants and agencies. This idea struck me long before. Usually people in the Islamic world set aside one-third or one-fourth of their wealth for endowment and that will be effective only after their death. But in my case, I decided to implement this decision in my lifetime itself. So I invited my children to Makkah during the end of Ramadan and presented the idea in front of them. They readily agreed it and then I distributed my wealth among my children in addition to setting aside a part of it for endowment. I sought the help of consultants to facilitate the procedures for the distribution of all my assets including properties, real estates and stocks, and that was completed in a cordial atmosphere. All my children are now fully satisfied with my initiative and they are now working on these properties in my lifetime.

How much wealth you distributed among children and set aside for endowment?

He laughed without giving an answer.

How do you feel now about your projects?

I would like to point out that there were some factors that prompted me to make investments in certain specific areas. My experiment in money exchange was the temptation to set up a bank. The absence of any Islamic banking was also another factor in establishing Al-Rajhi Bank, which is now the world's biggest Islamic lender by market value. I began the experiment with opening an office in Britain where we introduced Islamic banking system at a greater level. The experiment was a success and it had received total backing of the Saudi Islamic scholars at that time. I still recall the application made for getting license for the bank was turned down in the beginning. This was because the concerned British officials did not have any idea about Islamic banking. Therefore, I went to London and met with the manager of the Bank of England and two of his deputies. I told them that Muslims and Christians see interest as forbidden (haram), and the Muslim and Christian religious people are unwilling to make transactions with banks based on interest and instead prefer to keep their cash and other valuables in boxes at their homes. I tried to convince them that (if we establish Islamic banks) this money would be helpful to strengthen the world economy. These talks were helpful in convincing them and they agreed to open Islamic banks. Then I traveled widely throughout the world in the West and East, and met with the chiefs of central banks in various countries and explained to them about the salient features of the Islamic economy. We started working and achieved success through launching it in the Kingdom and implementing it in London. When I returned to the Kingdom from London, I met the late Grand Mufti Sheikh Abdul Aziz bin Baz and Sheikh Abdullah bin Humaid, and informed them about the plan saying: 'We would reach, by the grace of Allah, the Islamic banking within a stipulated period of time.' They praised me for the initiative. We started aggressively implementing the project and that is in the form of Al-Rajhi Bank as you see now. Regarding Al-Watania Poultry, the idea of establishing such a venture struck me after my visit to a poultry project abroad. I saw that the way of slaughtering chicken was not proper. Then I decided to make investments in the field of poultry after considering it as a duty to my religion and nation. I started the project even though making investments in poultry involved high risks in those days. Now Al-Watania has become a mega Saudi project that is instrumental in achieving food security in many respects. The company enjoys a 40 percent market share in the Kingdom, and Al-Watania chickens are naturally fed and halal slaughtered in accordance with the Shariah principles.

What about your insistence on introducing organic farming through Al-Watania agricultural projects?

As you see, now I am 85 and still enjoy good health. If we pursue organic farming as our healthy food style, we can bring down cost of treatment to a great extent. We made several experiments in the field of organic farming. Our numerous experiments met with setbacks in the beginning. This prompted many engineers and workers to reach a conclusion that it is impossible to have organic farming and profit together. In the beginning, they were firm in their view that this would not at all be successful. But I insisted that it would work and continued compelling them to proceed with the venture. At one time, I took a firm position and told them either to do organic farming or quit. Now we are reaping the fruits of this lucrative business in line with my vision to provide only the healthiest, safest and most trustworthy food to consumers. Al-Watania Agricultural Company stopped using chemicals and artificial fertilizers and focused exclusively on organic methods such as the use of pest insect repellants and animal manure.

Your austerity and thriftiness on spending are well known. Please comment?

I am not a miser. But I am always vigilant against extravagance. I always try to impart this lesson to all those working with me whether it is in banking or poultry or other projects, and I am more concerned about it when it is coming to the case of my children. In the past, I never gave money to my children when they were young in return for nothing. When any one of them approached me to give them cash, I asked them to do some work in exchange for it. In our life, we practice some extravagance without being aware of it. But it affects our whole life, exhausting us and putting a burden on our country. For example, there is no logic in putting heavy curtain on our windows and then lighting lamps in daytime when we get sunlight free of cost while electric lamps are costly.

Despite all your wealth, why don't you still have a private aircraft?

Let me tell you that I have many planes but they belong to various airlines. I have ownership in all of them to the tune of the ticket fare that I pay for each travel. I always travel in economy class with the conviction that Allah bestowed us wealth not for showing arrogance or spend extravagantly but to deal with wealth as a trusted property.

What about the recreation and hobbies of Sheikh Al-Rajhi? How do you spend free time?

I have not any special recreations. However, I find happiness and enjoyment while making a trip to the desert. I never went out of the Kingdom on a tourism trip.

What about your will? What are its salient features?

Regarding my will related with wealth, I have already implemented it in my lifetime. As for the remaining aspect of my will, it is a public matter and also involves certain private matters, besides encouraging my children to maintain their kinship and always reminding them about the life after death.

How do you see your children's private investments? Are there any directives to them?

A number of them are doing an excellent work in accordance with their knowledge and experience. Most often, I try to guide them when I noticed anything undesirable even if it is in their private investments. Regarding my younger children, I always guide them, especially in the case of their investments. This is purely out of my keenness that they should be honest in their work as well as in spending wealth given by God as a trusted property. I am also eager to hear about my children that they are interacting with the society in the best possible manner, and that they are serving their religion and nation.

In what way you like to spend your time? What are the places that you like most?

I used to travel between Riyadh, Qassim, Al-Jouf, and Al-Laith to oversee my projects there. I always prefer to visit the farms in Qassim and Al-Jouf.

How could you preserve many old and precious things and antiques at Suleiman Al-Rajhi Museum?

A long time ago when I was in Jeddah, I was keen on preserving heritage pieces and gathered them together, especially those related with money exchange. There would be a history with every human being. The museum tells the story of money exchange. I particularly kept registers and cash boxes that were used when I started the money exchange business. The first cash box was made of wood, and there was a huge treasure box in which we kept our gold and silver. The artifacts kept at the museum tells the evolution of currency in the Kingdom through issuance of bank notes, as well as some currencies and coins that were in circulation among the Haj pilgrims. A major factor that prompted me to set up the museum was the visits made by a large number of officials from various countries to know more about these old coins and currencies. We have had to exhibit these rare collections in front of them to explain about our history and heritage, especially those related with money. I was keen to furnish the museum with historic and heritage pieces, especially with the same materials used for construction in the past. Hence, the roof of the museum was made of palm branches, and that was the case with the seating arrangements at the museum.

Al-Rajhi's punctuality

The interview also sheds light on many qualities of Al-Rajhi, including his punctuality. "In the beginning of my business career, I had appointments with several top European company executives and officials. I still remember that I reached late for such an appointment due to an unavoidable reason. My delay was only a few minutes but the official excused himself for the interview. Later, after expansion of the projects, the same official came late for an interview with me so I excused myself for the interview. I always carry a paper to note down the schedule of meetings and stick to the schedule at any cost."

Al-Rajhi continued: I am always keen to strictly adhere to the Islamic principles throughout my life. Once I received an invitation from an Arab government to attend an investment conference there. On the sidelines of the conference, I was invited to take part in a dinner reception. When I reached there, I found a recreational program, which is contrary to our religious customs and traditions, taking place. So I quit the place immediately and, Abdul Aziz Al-Ghorair from the UAE also joined me. Soon minister plenipotentiary rushed to us, and we explained to him that the function is against our Islamic tradition. So he informed us that the recreational party would be cancelled. When they canceled that party, we participated in the dinner.

Tackling crises

Al-Rajhi said: There was a huge fire that gutted down one of my factories managed by my son. When he came to inform me about it, I told him: Say praise be to God. I asked him not to submit any report about the losses to the authorities seeking compensation. In fact, the compensation is from Allah and it is essential for us to be satisfied with What Allah destined for us. Assam Al-Hodaithy, financial director of Al-Watania Poultry, said: "When the fire broke out at the factory, we decided not to hurt Sheikh Al-Rajhi by informing about it at that moment. Later, when we met him next morning, he told us to shift the factory to another place and remove the debris until completion of reconstruction." There was a similar fire at Al-Watania Poultry project in Egypt. The company incurred losses worth SR 10 million Egyptian pounds. When the concerned factory official contacted Al-Rajhi to inform about the fire, he was surprised to hear an instant reply from him: "AlHamdulillah."

http://www.arabnews.com/?q=sulaiman-al-rajhi%E2%80%99s-life-rags-riches-story

More graduates needed in local Islamic finance sector: expert

Brunei needs to encourage more Syariah graduates to enter the finance sector if it wants to become a legitimate player in the Islamic finance industry, said an expert here yesterday.

Executive Director of Malaysia-based International Syariah Research Academy for Islamic Finance Dr Mohamad Akram Laldin said building human capacity is the key to developing Brunei's niche in the market.

"The challenges are integrating the Syariah knowledge and market knowledge. We need to have more Syariah graduates to go into the area and understand the market."

"We need people who are able to run the business, who are capable, and can plan. I believe with the establishment of Centre for Islamic Banking, Finance and Management (CIBFM), Brunei has taken a very good step," Dr Akram said on the sidelines of yesterday's International Conference on Islamic Finance held in the capital.

CIBFM was officially launched earlier this year and offers a range of short courses for banking and finance staff to acquaint them the tenets of Islamic finance.

"We have started seeing more and more people who are trained in Islamic finance coming up. This is a very good sign... The majority (of the) population of Brunei are Muslims, so that is another encouraging factor to improve manpower," he said.

However, working in the English language medium has proven difficult for Syariah graduates and remains a barrier to them entering the finance sector, said Dr Akram.

Accustomed to using Malay and Arabic in their professional lives, graduates will need to become proficient in English as it remains the language medium of finance globally.

"Syariah graduates sometimes feel very uncomfortable using English. I believe we can slowly overcome this."

The need for staff well-versed in Islamic finance becomes more pressing with non-Islamic banks entering the fray.

Dr Akram, who also acts as a consultant for HSBC Brunei, said the bank is also entering the "Islamic window" by drawing up Syariah-compliant financial products.

"In most jurisdictions this is allowed, only in some places such as Qatar they do not allow (conventional banks to offer Islamic finance products). They will have what they call an Islamic window."

Southeast Asia can capitalise on the growing Islamic finance sector, projected to be valued at US$2 trillion by 2017, he added.

"In Southeast Asia, each and every country has their own strength... From what I can see, in Brunei, maybe wealth management, in Malaysia, we have sukuk, in Singapore corporate and investment banking, Indonesia, because of the huge population base retail banking."

http://business.asiaone.com/Business/News/Story/A1Story20120516-346245.html

What the West Can Learn From Islamic Banking

Across the Middle East and South-East Asia, Islamic financial institutions hold aggregated assets estimated to be worth $50 billion. To some, this cash-rich sector represents a huge opportunity for growth and investment. But perhaps, what Islamic banks can really offer is a set of guiding principles that can enhance financial stability, four years after the crisis.

Will centre of gravity of global finance shift from London and New York to the Gulf and Kuala Lumpur?
Photo Credit: creativei images

Given they are barred from charging interest and must abide by a strict religious code, Islamic financial institutions are often dismissed by sophisticated western bankers as living in the dark ages. However, according to a couple of recent major reports, shariah-compliant financial institutions are not only coming of age, but also have much to teach their western counterparts.

In a report, Empowering Risk Intelligence in Islamic Finance: Managing Risk in Uncertain times, Deloitte’s Islamic Finance Knowledge Center said that the approach to risk management used in Islamic finance has more in common with the western approach than is often assumed.

The report – based on a survey of 20 Islamic financial institutions located across the Middle East and South-East Asia, which have aggregate assets of $50 billion – suggested that Islamic finance, a cash-rich sector, has much to teach the west's financial system, which has yet to fully recover from the near-death experiences of 2007-09.

The Empowering Risk Intelligence report found that Islamic financial institutions came late to adopting formal approaches to risk management. 79% of respondents had established their risk-management departments in the past five years, with only 5% having a risk management department prior to 2002. But things are changing, and fast. The report found that 83% of Islamic finance firms today have both a formal risk-management function and a risk committee responsible for overseeing all risks.

Related: Islamic Finance

Related: Islamic Banking and Islamic Banks

Yet Deloitte acknowledged there is room for improvement in the risk management area. Key risk-management and regulatory challenges facing the Islamic sector include that two-thirds of Islamic financial institutions don't have any external credit rating, and that only 25% have considered or received an external rating from a specialist Islamic rating agency such the Bahrain-based Islamic International Rating Agency. The report said:

This constitutes a real challenge posed to industry participants and standard-setters such as the [Kuala Lumpur-based] Islamic Financial Services Board, [Bahrain-based] Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI), [Bahrain-based] International Islamic Financial Market (IIFM) and the Islamic International Rating Agency (IIRA), to enforce best practices.

The report suggested that the main causes of shariah-compliance risks include non-standardized practices, diverse interpretations of shariah law, and the fact shariah laws are unenforced in many jurisdictions. Dr Hatim El Tahir, director of Deloitte’s Middle East Islamic Finance Knowledge Center, said:

One thing is certain – the traditional operations and management of Islamic finance will need to change. Institutions offering Islamic financial services around the globe will not only need to deal with risk management but will also need operational effectiveness and a skilled workforce to empower risk intelligence in Islamic finance.

The Deloitte findings came as an op-ed published by Project Syndicate, The Challenge of Islamic Finance, sang the praises of Islamic finance and suggested it has an important role in counter-balancing the bonus-fuelled procyclicality and morally hazardous nature of western finance.

Authors Andrew Sheng, ex-chairman of the Hong Kong Securities & Futures Commission (and one of the voices of sanity in the movie Inside Job) and Ajit Singh, emeritus professor of economics at Cambridge University, said there is growing convergence between Islamic and western finance.

Despite skepticism regarding accommodation between Islamic and global finance, leading banks are buying Islamic bonds (also known as sukuk) and forming subsidiaries specifically to conduct Islamic finance. Special laws have been enacted in non-Muslim financial centers – London, Singapore, and Hong Kong – to facilitate the operation of Islamic banks and associated financial institutions.

Read the full story by Andrew Sheng and Ajit Singh here on EconomyWatch.  

Sheng and Singh argued that Islamic finance, already a $3 trillion sector, has an important role to play in improving the ethical framework of western-style finance (which, as everyone other than bankers and financiers recognizes, seriously lost its way during the credit bubble of 1999-2007).

They suggested that if the ethical values in Islamic finance, rooted as they are in shariah religious law, could:

"further deter moral hazard and the abuse of fiduciary duties by financial institutions, Islamic finance could prove to be a serious alternative to current models of derivative finance."

The test of any alternative financial system depends ultimately on whether it is – or can be – more efficient, ethical, stable, and adaptable than the prevailing system. For now, there is no Islamic global reserve currency and no lender of last resort. But the Islamic world is the custodian of huge natural resources that back its trading and financial activities.

If the scenario outlined by Sheng and Singh is correct, prepare for the centre of gravity of global finance to shift from London and New York to the Gulf and Kuala Lumpur.

Related Story: Can Consumers & Taxpayers Be Saved From The Bonus-Crazed Financial Sector?

Related News: EU Agrees To Stricter Bank Rules

By Ian Fraser

Ian Fraser, a journalist since 1988, is working on programmes about the banking and financial crisis for the BBC. He writes about business and finance for the Financial Times, the Sunday Times, the Independent on Sunday, the Daily Mail, and the Mail on Sunday.

http://www.economywatch.com/economy-business-and-finance-news/what-the-west-can-learn-from-islamic-banking.16-05.html?

Islamic finance in spotlight

The World Islamic Funds and Financial Markets Conference (WIFFMC) has over the last eight years established itself as the world's most influential annual gathering of leaders in the global Islamic funds and investments industry.

The two-day WIFFMC 2012 opens at the Gulf Hotel on Sunday under the theme "New Growth Horizons: Expanding The Global Footprint of Islamic Funds and Investments".

It will again set the stage for industry leaders to gather to showcase cutting edge innovations and also address the key enablers that will boost growth in the international Islamic funds and investments industry.

It will bring together leading players, industry thought leaders and key regulators in the international Islamic funds and investments industry for discussions that will seek to capitalise on the new opportunities and chart the future direction of the global Sharia-compliant funds and investments industry.

The testimonials from key industry leaders further confirm the overall significance of WIFFMC 2012 as the meeting place of choice for the key decision makers in the global Sharia-compliant investments industry,

"The increasing interest in Islamic finance in major markets across the globe presents a unique opportunity of expanding the global footprint of the Islamic investments industry," said Central Bank of Bahrain (CBB) executive director of financial institutions supervision Abdul Rahman Al Baker, who will be a keynote speaker at the event.

"It is therefore important to ensure that the Islamic funds and investment industry has solid and strong foundations for future development and growth," he added.

"In addition to enhancing the innovations of new Islamic instruments and encouraging more spending in research and development, it is also essential that the Islamic financial institutions develop strategic alliances with other financial institutions globally, especially in the area of products structuring and offering.

"Formation of such alliances will help to achieve economies of scale and improve the services across the Islamic funds and investment industry," he said.

and improve the services across the Islamic funds and investment industry," he said. CBB is once again delighted to be hosting this prestigious event," he added.

"Whilst investors are now aware of the wide choice of Sharia investment products available in the market, they should now learn to appreciate the benefits that come along with Sharia investing," said CIMB-Principal Islamic Asset Management executive director Datuk Noripah Kamso.

"There has also been articulation by investors that the asset classes made available to the investors are not as broad and deep as what is made available to them in the conventional investment space.

"This concern could be the result of lack of visibility of the track record of these investment products by virtue that the various asset classes are structured using home-based currencies for their domestic sandbox.

"I hope that the above concerns will be answered at this year's conference and I am delighted to be part of this important gathering of international investment leaders."

http://www.gulf-daily-news.com/NewsDetails.aspx?storyid=330236

Can Islamic banking close the gap on its conventional peers?

Fifteen years ago, Muslims wishing to take out a home finance, use a credit card or deposit money into a current account would have been hard pushed to do so and stay compliant with Sharia law. With few Islamic banks around - and a limited range of Sharia  products - banking as a Muslim invariably involved compromising either your faith or your financial needs.

Today, in many markets, such compromise is no longer necessary. Islamic banking is becoming a part of the mainstream, widely available across financial products and geographies. In 2012, Islamic banking assets are expected to reach US$1.1tn globally, up 33 percent on 2010, according to Ernst & Young. Within just a few years, Islamic banking has transformed into a global industry.

There are three major drivers behind this extraordinary journey - three reasons why I believe Islamic banking will keep on growing far into the next decade.

First, increased competition has resulted in a widening of the Islamic product offering, bringing it within scope for larger numbers of Muslims. In the early 2000s, a move by Islamic banks to make Sharia-compliant products more commercially compelling was a real game changer in the industry.

For the first time, Islamic banks were reaching customers for whom the commercial aspects of banking were just as important Islamic opportunity, have subsequently joined the fray, helping to grow the total market around the world.

Second, as the Islamic banking proposition has become more attractive, Muslims have converted from conventional banking at a rapid pace, spurring the industry to make the product offering even more sophisticated. Muslims who have been accustomed to using credit cards, for example, will not want to lose this benefit when switching to Islamic banking.

Whether in terms of access, technology, products or services, they expect nothing less than they have been getting from conventional banks, and Islamic banks are responding. Muslims now have a choice: to bank in a Sharia-compliant way, they no longer need to sacrifice the convenience, products and services they have been used to in the past.   

Third, the industry is receiving increasing regulatory support with governments in many markets actively encouraging the development of a healthy Islamic banking ecosystem. In the UAE, all new local banking licences granted in the last 15 years have been for Islamic banks. Countries such as Oman, Uganda and Nigeria are opening up their markets. Issuance of sukuk, or Islamic bonds, has become widespread, and Islamic finance is used increasingly for government support programmes.

In Bahrain for example, Standard Chartered Saadiq now works with independent employment authority Tamkeen to provide Sharia-compliant financing for small- and medium-sized enterprises (SMEs).  Malaysia - probably the world’s most successful Islamic banking market - shows what can be achieved. Here, concerted government action has pushed Islamic banking past the tipping point to represent around a quarter of total banking assets.

The next big step for the global Islamic banking industry will be to close the remaining gap with conventional banking when it comes to the range of products and services on offer. Islamic wealth management, for example, is clearly lagging behind, with Sharia-compliant funds comprising less than 0.25 percent of total assets under management.

It is a classic chicken and egg story. To attract wealthy Muslim clients, you need a competitive range of products and services, but to get this, you need scale. However, with the strong growth in Islamic assets and Islamic banking providers putting increased pressure on fund managers to respond, there is a good chance Islamic wealth management will catch within the next few years.

For all the industry’s recent growth, Islamic banking still represents a fraction of total banking assets globally, and the far majority (it is estimated that roughly only one in every eight Muslim with a bank account, banks Islamic) of Muslims still bank conventionally. Penetration remains low in some of the world’s largest Muslim countries, such as Pakistan and Indonesia at nine and four percent, respectively. There are several reasons for this, the most obvious being a simple lack of awareness of what Sharia banking has to offer. 

Regulatory barriers also persist in some countries. While different markets will develop at different speeds, support from governments and regulators will help keep up the pace of change.

Opening markets to international Islamic banks will help, too. International providers tend to accelerate development in individual markets with their ability to migrate best practice, product sophistication and banking expertise between geographies. At Standard Chartered, for example, we work with regulators in a number of countries to help develop their framework for Islamic banking, using our experience from other markets. 

Clearly, by tapping into their global networks, international Islamic banks also play a role in facilitating cross-border banking for Islamic customers.

This is essential if the industry is to attract more fast-growing SME customers as well as high net-worth individuals who wish to stay Sharia-compliant without missing out on growth opportunities in foreign markets.

The purpose of all banking, Islamic or conventional, is to help people to reach their aspirations. It is about connecting with customers and meeting their financial needs in a way that fits with how they live their lives. In the last few years, Islamic banking has caught up fast to meet this core requirement. 

It is still very early days for Sharia banking, but one thing is clear: with around 1.6bn Muslims in the world, the upside for Islamic banking is huge, and the best is yet to come.

http://www.albawaba.com/business/can-islamic-banking-close-gap-its-conventional-peers-426204?

Islamic finance standardisation making headway

Ijlal Ahmed Alvi says standardisation will help Islamic financial market reach its full potential. (SUPPLIED)

Efforts to standardise global investment practices that conform to Shariah have made significant progress over the past years and more developments are expected soon as industry players recognise the need to move in a common direction, a watchdog official said. 

Ijlal Ahmed Alvi, Chief Executive Officer of the International Islamic Financial Market (IIFM), admitted that the process of creating and finalising regulations had been rather slow to take off because of the in-depth consultation that standard-setting bodies need to have with various units including banks, regulators, Islamic scholars and legal experts. 

But over the past four years the Bahrain-based IIFM, which is the worldwide agency responsible for standardising Islamic products and documentation, has managed to set three global frameworks that help regulate the industry’s capital and money market segment, Alvi said. 

In 2008, IIFM launched the Murabaha inter-document standards or the Master Agreement for Treasury Placement that is used for over-the-counter commodity transactions. Murabaha is considered both interest-free and transparent as sellers openly declare to the buyers the cost and profit on the commodity being traded. 

Coordinating closely with the International Swaps and Derivatives Association (Isda), the IIFM launched in 2010 the Tahawwut (Hedging) Master Agreement – a landmark framework that highlights the importance of hedging instruments in mitigating risks, especially considering the current economic climate.

And most recently, Isda and IIFM released a standard contract template for Islamic profit rate swaps (PRS), which works in the same way as interest rate swaps in conventional financial markets, except that it does not use interest rates as per Shariah laws. 

“There has [undoubtedly] been progress over the years and from our side, there are also a few more standards coming up as we move forward. We are working on standards [for] Wakala, cross-currency swaps, sukuk and collaterised [debt obligations],” he said. 

A sector that has been buoyant even despite the onslaught of recent market challenges, Islamic finance is expected to have global assets amounting to between $1.1 trillion and $1.3trn (Dh4trn and Dh4.8trn) by end-2012. 

Industry observers, however, believe that stronger regulatory framework and clearer guidelines could see the industry’s wealth increasing further as banks and investment firms will be able to expand beyond their home markets. 

Collaboration key to industry growth

In Islamic finance, no man is an island, according to Alvi as he acknowledged the fact that addressing standardisation issues involves the collaborative efforts among all standard-setting bodies. 

“We coordinate with [global bodies] to ensure that we develop standards in a cohesive manner. For instance with regard to hedging, we coordinate with the IFSB [Islamic Financial Services Board] in terms of looking at the regulatory capital fee for banks and its impact [on the industry] because that is their area [of expertise]. Similarly, we work with AAOIFI [Accounting and Auditing Organization for Islamic Financial Institutions] on the accounting aspect of documentation products for the capital market,” he explained. 

Working together also makes more sense as Islamic finance has dramatically grown and diversified its product offerings and services to become a significant sector in the global financial landscape, the IIFM CEO added. 

Alvi believes that there is a massive room for innovation in Islamic finance because unlike its conventional counterpart, it has yet to develop its full potential. 

“The development of innovation in conventional [finance], in my view is [now] limited because they have already gone through that phase, which the Islamic industry [has just started treading]. So over a period of time, [Islamic finance] will see more innovative solutions especially for risk mitigation and liquidity management. The industry will eventually be more interlinked with the global system [while at the same time staying] independent in many ways,” he said. 

Implementation remains an issue

While it has made significant strides in less than a decade, Islamic finance is technically still in the early stages of addressing all the relevant regulatory aspects of the industry. However for standards that are already in existence, the sector faces a new challenge in as far as implementation is concerned, IIFM’s chief executive said. 

“[We do not yet have] the standards for everything because we’ve just started [working on them]. But for the standards that we do have, implementation is an issue. It’s a challenge that banks, regulators and everyone in the industry have to play a role in order to [create] a clear direction [for Islamic finance],” he said.

The IIFM, Alvi noted, can only recommend to institutions and regulators to adopt standards. In practice, it does not impose any penalties for non-compliance to industry standards.

“[These standards] are voluntary. We cannot enforce them [because] we understand that the market wants flexibility. What we are doing [however] is for the betterment of the industry and we [hope] that the regulators, banks and users in general will adopt these standards because the benefits [of moving in a common direction] are far much greater than working in isolation,” he said. 

http://english.alrroya.com/content/islamic-finance-standardisation-making-headway

KPMG Survey Highlights Barriers To Islamic Finance Growth

A number of barriers remain to the expansion of the Islamic finance industry, including a lack of qualified Islamic bankers, weaknesses in financial reporting and transparency, and the issue of regulatory capital, according to a KPMG survey conducted by the Economic Intelligence Unit (EIU).

The EIU conducted interviews with a number of leading figures on behalf of KPMG, and the report entitled “Growth and Diversification in Islamic Finance” sought their views on the current and future development of Islamic finance. Included in the survey are case studies on HSBC Amanah and Unicorn Investment Bank which detail their experiences in this area.

Respondents highlighted the following issues that the Islamic finance industry faces: Lack of young qualified Islamic bankers across all regions; while training is available and specific countries such as Malaysia are making huge investments in this area, respondents observed that high turnover remains a problem. Lack of development in Islamic finance regulations was also cited - many Muslim countries have not put the legislation in place covering the authorisation of Islamic banks, or the issuance of Islamic finance products. Nor have they considered putting it on the agenda. The quality and transparency of financial reporting on Islamic finance also differs from one jurisdiction to another.

The survey additionally found that measuring the performance of Islamic financial products can be difficult. However, with the introduction of Basel II and the requirement that banks allocate risk by rating, there is greater likelihood of the ratings of Islamic financial products and instruments growing in importance over the next few years, it said. Respondents felt that a tailor-made rating agency would be the solution, as the major western ones have been slow to develop rating methods and specific criteria for Islamic financial products.

On a positive note, the report also highlighted the areas where product and market diversification are beginning to take hold in what, undoubtedly, remains a relatively young industry which has experienced a period of rapid expansion, to the point where it has an estimated US$500 billion under management. One respondent felt that takaful (insurance) is potentially the most lucrative area for development, because it remains under-developed, especially in conservative Gulf Co-Operation Council countries.

Paul Furneaux, Financial Services Partner with KPMG in the UK explained:

“Respondents were aware that they would have to be more creative in product innovation in areas such as derivatives, swaps and options, but recognised that the market is currently at the bottom of a steep learning curve. The role of Islamic scholars will be crucial in helping to determine the level of sophistication of the products themselves.”

A number of key areas for potential development were highlighted including:

• The issuance and trading of asset-backed securities or ‘sukuk’ where there is significant potential for the growth in Europe and the US. However, several respondents felt that there had not yet been enough issuances in the market to stimulate the growth in secondary market trading as a growth area.
• 
  
• Project infrastructure financing, which will include the development of markets in the West
• Structured finance derivatives
• 
  
• Private equity and retail banking which goes beyond Islamic mortgages.
• 
  

However, respondents also reported that there was a need for the market to consolidate and refine itself, as well as consider innovation and new product development.

Respondents acknowledge that while Islamic finance continues to be a male-dominated industry, several women have excelled in the sector, and have had a huge financial impact in Islamic countries. They suggested that the role of women in the sector will undoubtedly become stronger, as they can help tackle the human resources bottleneck that currently exists. For this to happen, however, many Muslim countries would have to introduce legislation guaranteeing gender equality and equal opportunities in the workplace.

For the future, convergence is the theme that unites many respondents and the point at which the ‘tipping point’ may be reached between Islamic finance and the global financial system to allow it to move from being a niche player into the mainstream. But there is also an issue around Muslim countries addressing their Islamic financial architecture by deciding which model they would prefer to follow – either a ‘dual’ banking system or the ‘Islamization’ of the banking system. Many bankers interviewed for the survey felt that adherence to the former model would be preferable.

Paul Furneaux concluded:

“Overall the future is bright for the Islamic finance market. As respondents commented, even if the oil price goes down, their collective view was that this would not have a material effect on its continued development.”

http://www.tax-news.com/news/KPMG_Survey_Highlights_Barriers_To_Islamic_Finance_Growth____27673.html

Share and Shariah Alike: Islamic Finance's Untapped Potential

ISLAMIC BANKING ONLY makes up one per cent of mainstream finance, but it takes up more than its fair share of newspaper column inches. Perhaps this shouldn’t be surprising since the industry has considerable growth potential: high oil prices and a post-Arab Spring resurgence of political Islam in North Africa will help swell balance sheets, and Islamic banks in the UK report increasing interest from non-Muslims in their services too.

But more importantly, at a time when the weaknesses of mainstream finance have never been more exposed, Islamic finance offers a thoughtful alternative. Islamic prohibitions on the charging of interest are not coincidental — both Christian and Jewish scriptures contain similar provisions — and the emphasis instead on profit-sharing structures is intended to offer a fairer system.

Although many industry players have focused their efforts on winning over customers already using mainstream banking services, if the Islamic finance industry shifts its focus to the millions of Muslims who through choice or circumstance have never used a bank, it could be truly transformative. Islamic microfinance has the potential to lift the young, disaffected poor out of poverty and promote entrepreneurship in stagnant rentier states.

While Islamic prohibitions on complex derivatives or excessive risk-taking may have seemed unadventurous and fusty in Wall Street’s heyday, there must be plenty of chastened bankers wishing they had considered that shariah lesson. Of course Islamic defaults do still happen, and they can be very messy, but then no investment is risk-free.

That said, as Sophie McBain reports, the Islamic banking industry is beset by serious structural and regulatory problems. With financial heavyweights like Goldman Sachs trying (but not yet succeeding) to get in on the game, the Islamic finance industry has reached a critical juncture. Either it confronts its irregularities and expands, or it will be forced to retreat.

Spear’s hopes the Islamic finance industry resolves to reform, because of its potential to bring millions of Muslims into banking for the first time, because of its back-to-basics and human-centred approach to finance, and because, almost four years on from the start of the financial crisis, we would all benefit from a broadening of the global debate.

http://www.spearswms.com/leaders-and-columnists/32922/share-and-shariah-alike-islamic-finances-untapped-potential.thtml

Islamic finance sector facing key challenges

Islamic finance industry is facing key growth constraints that need to be addressed, Central Bank of Bahrain (CBB) executive director of financial institutions supervision Abdul Rahman Al Baker claimed yesterday.

"We are seeing continuing fragmentation in Islamic financial products," he told delegates at an Indonesia-Bahrain seminar on the industry at the Ritz-Carlton Bahrain Hotel and Spa.

"Unless products can be standardised, there will be less liquidity and documentation costs will remain higher than for conventional banks," he said.

"Furthermore, Islamic banking needs to gain a larger share of the retail market by providing investment accounts that are as flexible as conventional deposit accounts and to continue its provision of retail credit products such as credit cards and other products which are flexible enough to be competitive with conventional products.

"This is where teaming up scholars and bankers from different countries can facilitate developments. There needs to be a greater exchange of personnel between countries to facilitate exchange of ideas. Perhaps this seminar is one of the ways to push this process forward," he said.

"The CBB intends to remain at the forefront of the Islamic banking and finance and we look forward to work closely with our Indonesian brothers and market players to develop this key industry."

Mr Al Baker said Bahrain is the home of modern Islamic banking and finance within the GCC.

"From the setting up of Bahrain Islamic Bank in 1978, through to the publication of the first set of Islamic finance regulations in 2001, Bahrain has been at the forefront of developments in Islamic finance," he said.

"In order for the Islamic finance to develop further, both here in Bahrain and in Indonesia, a robust training and educational support is essential. It is only by developing expertise Islamic finance can build up the critical mass of qualified individuals necessary for the industry to reach its full potential in the global marketplace.

"We have also witnessed important developments in the standardisation of wholesale Sharia-compliant financial instruments by the International Islamic Financial Market here in Bahrain," he said.

"I am proud to say that the CBB has played a key role in its programmes of sukuk issuance since the first sukuk issues in 2001.

"These sukuk give banks and financial institutions an eligible liquid asset and a liquid form of collateral for secondary market trading and liquidity generation," he added.

http://www.gulf-daily-news.com/NewsDetails.aspx?storyid=330081