Unveiling the importance of Islamic agro-banking in Sri Lanka by Muath Mubarak

The global financial system is progressively moving from conventional banking to pure Sharia compliant and ethical banking practices since modern Islamic banking was invented three decades ago. Currently, the Islamic banking and finance has grown tremendously leaving its legacy in each and every region.

The emergence of Islamic finance has not only brought in Islamic banking activities, but rather it contains various industry segments such as takaful (Islamic Insurance), investment banking, mutual funds, trusts,  project financing, Islamic indices, capital markets, insurance, wealth management, micro finance and many more.

Islamic finance is also keen on agriculture related financing and encourages growth in the provision of this source of financing for this purpose. There are some initiatives have been taken in Gulf Cooperation Council (GCC) countries including the Islamic Development Bank Group for agriculture sector financing but mainstream Islamic finance institutions have no direct involvement yet.

There is an increasing demand for agriculture financing globally and Islamic finance cannot escape from this market demand. Most of the big Islamic banks also consider agro-financing as one of the vital product for its portfolio.

This largely untapped market can be catered to by different Islamic finance techniques. These Islamic finance techniques will facilitate Sharia compliant transactions for the agriculture sector in any country irrespective of the race and religion. Agricultural financing could be performed under the following models (as in the diagram) of Islamic Finance principle.

• Trade based Islamic financing techniques provides financing through goods and commodities with some basic classical concepts such as Murabaha, Musawamma and Salam
• Rental-based Islamic finance products for the agriculture sector are products where the bank or financial institution will purchase assets or required equipment and offer those to customers / farmers on a rental basis via the Islamic finance concept called Ijara
• The ideal mode of financing for the agriculture sector is participatory mode of financing. This is where both the parties get involved based on participation in profit and loss. The main products are Musharaka, Mudaraba, Musaqaha, Muzara’a and Mugharasa

The ideal participatory mode of financing for the agriculture sectors can be described as follows:

Musaqaha (irrigation): This is a partnership that depends on one party presenting designated plants/trees that produce usable goods to another in order to work on their irrigation in exchange for an agreed share in fruits. This mode of financing is very effective for the agriculture (orchards / trees) sector where a specified share of output will go to the labor and the other portion will go to the institution / enterprise. The Accounting and Auditing Organisation for Islamic Financial Institutes (AAOIFI) has approved the Musaqaha related Sukuk (Islamic bond) for trading.

Muzara’a (share cropping): This partnership is in crops where primarily two or three parties are involved. One party presents land to another for cultivation and maintenance in exchange for an agreed share in the crop. In the case of three parties being involved in Muzara’a, one party will provide the land, second party will provide the input (seeds, chemicals, etc) and the third party may provide the labour for production. AAOIFI has permitted Sukuk for this and it is tradable. This can be used for a relatively short period time when financing agricultural products.

Mugharasa (Agricultural): This is a legally viable option for financing of tree cultivation. This is a partnership in which one party presents a plot of land without trees to another to plant trees on it on the condition that they share the trees and fruits in accordance to a defined percentage. Mugharasa Sukuk also can be traded and this is used for longer time period of financing where farmers need the highest duration for repayment based on the harvest.

The agriculture sector is a vast area with different sub-sectors.  This sector can be divided in to two namely, the agricultural farm sector (crops, horticulture, floriculture, etc) and agricultural-off farm sector (dairy development, livestock, poultry, water management, etc). This agriculture sector has got issues such as finance institutions being very reluctant to offer facilities due to various reasons.  One of the main issues is collateral where small farmers and business people will not have any acceptable collateral and they are not educated or illiterate in terms of financials and banking transactions.

There are many other reasons why a financial institution is not ready to deal with the agriculture sector and these are the main weakness of the agriculture sector:

• very limited access to farmers and non-availability of the right information about the financing facilities 
• collateral or security which is not acceptable
• formal financing is more expensive than the informal methods such as getting a loan from a wealthy person from villages
• lack of awareness and education about banking among village farmers
• farmers being unskilled, and the absence of usage of modern technology in production
• difficulty of obtaining basic requirements such as water, crops, proper soil, fertilizer, etc
• no market-focused approach, no communication and preference to over- produce 
• storing of the seeds, chemicals, fertilizers, harvested items  and transportation issues to areas where demand arises
• disorganised and non-documented sector. Needs / Requirements and production values not registered.
• lack of insurance policies for uncertainties and  hazards.

The end of three decades of civil conflict has resulted in new hope and incredible opportunities dawning for Sri Lanka to realize its development potential and to build a strong foundation for long term peace and prosperity.

Sri Lanka is a tiny beautiful island of 65,610 square km’s located in the Indian ocean with a population of approximately 20 million in 2010. Over 70% of the rural population in Sri Lanka is dependent on cultivation, livestock raring or fishing for food and their livelihood. Sri Lanka’s economy is dominated by agriculture (approximately 13% of GDP in 2010) where it produces plantation crops like tea, rubber, coconut, cocoa and spices for the export market.

The Sri Lankan budget for 2012 has highlighted many incentives and tax benefits for the agriculture sector (KPMG, 2011). These include the following:

• having a vision towards becoming a self sufficient economy by improving agriculture productivity in terms of rice, coconut, tea, rubber and spices
• depreciation of the currency by 3% in order to increase the price competitiveness in the global market
• tax removed for rice mills using modern technology and for production of coconut, palmyrah and Kithul
• developing four rice exporting centres (South, East, Rajarata and North).

It is clear there is an untapped demand for agricultural financing and the government is also very optimistic in this regard, so it is highly advisable that Islamic Finance Institutions (IFIs) in Sri Lanka concentrate in this area rather than depending only on basic transactions and products.

The policy makers and finance service providers must create an opportunity for farmers throughout the country by active participation of IFIs for agricultural financing. This will definitely create some success stories and bring changes in the farmer’s lives whilst enhancing cultivation.

http://www.cimaglobal.com/Thought-leadership/Newsletters/Regional/The-CIMA-Edge-South-Asia-and-Middle-East/January--February-2012/Unveiling-the-importance-of-Islamic-Agro-banking-in-/

A closer look at Islamic finance in Sri Lanka by MM (Published by CIMA-UK)

The buzzphrase in today’s business world is ‘Islamic banking and finance (IB&F)'.

Background

Islamic finance takes its principles and rules mainly from primary and secondary sources. The primary sources include the Quran (text of god) and Sunnah (Words or Acts of the Prophet [SAW]).

Secondary sources include Ijma - consensus, Qiyas - Analogy and Ijthihad – interpretation of learned jurists and scholars. Other authorities of interpretation such as Sharia supervisory boards (SSB) and ‘The Islamic Fiqh Academy’ – KSA are also important elements in Sharia.

Sharia has been translated as ‘Islamic Law’ but comprises not only Islamic law, but also moralities, ethics and guidelines for a complete way of human life. In the field of Islamic Banking and Finance Sharia plays a vital role.

Islamic finance in Sri Lanka

Sri Lanka is not well known for this niche market, but Sri Lanka's recent resolution of its civil armed conflict has given new hope and positive views about the future of Sri Lankans.

Sri Lankan Sharia conscious investors and other interested groups were pleased to see the country's first fully fledged Islamic commercial bank inaugurated by the central bank governor in August 2011.

This was a remarkable event in the history of Islamic banking and finance in Sri Lanka. It took more than a decade to achieve, due to issues like double taxation, separate banking rules and regulations, corporate governance and other issues that needed to be addressed to cater to this new market.

The Sri Lankan financial market consists of a number of Islamic financial service providers in the form of investment companies, leasing companies and subsidiaries of finance companies.

Additionally, the government owned Bank of Ceylon has started its own Islamic windows model operating under the brand name of Al-Noor a year ago.

These market needs were witnessed by the current retail banking market leader in conventional banking - Commercial Bank, which kickstarted its operation as a specialised branch and a delivery channel for Islamic banking customers under the name of Al-Fadhla two months ago.

As per the estimates and research studies, there is an Islamic banking asset base within the country of more than approximately USD 1,000 million in 2010.

Global Islamic fund assets under management grew by 7.6% to $58 billion in 2010, up from $53.9 billion in 2009, according to Ernst & Young Islamic funds and investments report (2011). 

According to the figures released by research firm - Cerulli Associates (2011), global Islamic finance assets will reach USD 5 trillion by 2015.

Creating an infrastructure

To create the infrastructure for the Islamic banking and finance market, other components play a major part - the insurance industry.

The Islamic insurance (Takaful) industry was started in Sri Lanka with a very few players catering to Sharia conscious insurance holders. The current players are winning the trust of the whole Sri Lankan community in terms of Islamic insurance by highlighting its unique features of rewarding the policy holders, where Takaful scheme payments will be pooled and invested in acceptable Islamic investment opportunities and the return shared with customers.

The Sharia conscious investors have more options in terms of Islamic Finance in Sri Lanka. They have a golden opportunity to invest in Colombo Stock Exchange (CSE), by way of participating in the Islamic funds (Eg: Amana-Namal Equity Funds) and unit trust (‘Crescent I-fund’  is an open ended Shariah compliant fund).

The myth that Islamic finance caters only to the high end market and does not consider the needs of lower income earners is not entirely accurate. In fact, there are institutions in Sri Lanka striving to alleviate Sri Lankans by providing Islamic Micro Finance facilities throughout the island in order to make difference in their lives.

Change and local implications

Although Islamic Finance has proved groundbreaking, with far reaching impacts worldwide while flourishing as a young market, there are issues and critical challenges to be addressed locally.

The Islamic banking and finance industry is facing challenges around the globe - a lack of Sharia scholars with in depth knowledge of finance products (in a recent press release for The Star news media, Dr Zambry said statistics by the International Islamic University of Malaysia (IIUM) showed that two million Islamic finance professionals were required to fill positions in IFIs worldwide by the year 2020), modern technology (the current software systems and other technologies have been developed based on interest bearing tools and products which Islamic banks cannot use without customisation).

This has been addressed by some Islamic finance education institutes in Sri Lanka through classroom education, public awareness and events enhancing knowledge in the field. This has helped Sri Lanka shine globally with well educated, qualified and experienced industry professionals who work outside Sri Lanka as top executives in Islamic banks.

Islamic finance as a solution

It can be argued that Islamic finance is a solution provider for many current local and global economic ills, since Islamic finance functions without interest/usury (Riba), uncertainty (Gharar), gambling (Qimar) and speculation (Mysir).

To safeguard global financial markets, Islamic finance industry experts should have a global view and take actions to develop Sharia, accounting, auditing, ethics and corporate governance standards for banking, insurance, leasing, capital market and money market sectors.

As a value addition, the Bahrain based Accounting and Auditing Organisation for Islamic Financial Institute (AAOFI) and Malaysian based Islamic Financial Services Board (IFSB) is working closely with other international standard setting bodies to integrate global norms, standards and best practices of Islamic and conventional banking and finance.

Islamic finance and information technology

Islamic finance's growth has been fuelled by many factors, including rapidly changing information communication technology.

Even though Sharia compliance is the key for Islamic banking, competitive technological advancement facilitates fully automated branches - a touch screen for banking transactions with no human resources, advanced mobile applications for smart phones, hightech security ATM machines, SMS and GPRS banking services and so on.

These drive the industry forward with rapid changes in the modern business environment. Modern world customers are smarter and more knowledgeable and can easily switch to other banks just by a click of mouse. And information systems strategy is the heart of the banking sector and will determine the success of the business.

Customising software for Islamic finance

We need to customise conventional core banking software to be used as ready made products since there is no standalone core banking software system for Islamic banks.

The customisation should be done to Islamic banking principles, accounting, cash management, credit facilities and other operational requirements as per Islamic finance regulations.

Standalone software

Because of the customisation of conventional banking software for Islamic banks, the urgency or need for the stand alone Islamic banking software has been shadowed.

One of the important issues is the change in legal and tax systems for Islamic finance. The banking act of 2005 brought in some changes to accommodate a profit and loss sharing banking system and is a proactive action of the government.

There are some tax modifications such as double taxation, stamp taxes (for Islamic banking transactions) that have been proposed by Islamic Finance Focus Group (IFFG) which includes experts of the industry from Sri Lanka. These are positive signs which accommodate this niche market by making amendments to the current legal and tax system which has been developed over period of time to suit conventional banking products.

Other countries - especially the UK - are aspiring to become Islamic finance hubs by making changes in legal framewors through their budgets.

The UK has five Islamic banks regulated under FSA.

The following list of the countries shows the global appetite for the fast growing Islamic banking industry: 

Thailand	Thailand already has the Islamic Bank of Thailand, backed by the government to attract Foreign Direct Investments through Islamic finance, which is to be used for economic development
Singapore	The first regional bank launched, which is the Asian Islamic Bank with a $100Mn investment
India	An emerging market for Islamic finance, deliberations going on with the Reserve Bank of India (RBI) with Islamic finance propositions
Canada	Canada is seriously looking into regulatory issues in accommodating Islamic banking and finance institutions
Germany	Appetite portrayed through their debut in the industry: Saxony Sukuk worth USD 100 million
Oman	Already given approval for the second full-fledged Islamic Bank
Malawi	Very recently created an Islamic Pension Fund
Mauritius	They have launched the first Islamic bank in the country in the middle of this year
Kazakhstan	Banking and financial institutions are looking at different options for investments because the world sees this country as the hub for Commonwealth (CIS) countries
Australia	Pushing through legislation to remove tax barriers on Sharia-compliant products that would pave the way for issuing of Islamic bonds
Nigeria	Stanbic IBTC Bank, a unit of South Africa's Standard Bank Group, has been issued with a preliminary licence to offer Islamic banking services in Nigeria
Gabon	Changing its financial laws to accommodate Islamic Finance and attract FDI as a part or their economic reform
Hungary	Magyar Iszam bank will be the first Islamic bank to be launched very soon
Afghanistan	Expects to enact an Islamic Banking law before end of 2011

A new future

Sri Lanka is a conflict affected middle income country with high national achievements in social indicators like literacy rates, doctors per patient, medical expenditure per patient and more.

The country’s economic performance improved vastly in 2010, reflecting the post war era optimism and reduced negative impact of the global financial crisis.

GDP growth is estimated at around 8% for this year based on the positive expectations of healthy growth in investments and business opportunities.

Islamic finance can contribute to the development of infrastructure of the Sri Lankan economy, especially by attracting foreign direct investments from oil rich nations for upcoming development projects in the country.

The global banking and finance system market is shifting from conventional systems to Islamic finance systems by understanding benefits from it.

Well articulated and effective government policies, an appropriate Sharia compliance framework, efficient, effective and market based regulations and tax and legal frameworks accelerate institutional infrastructure. Comprehensive Islamic finance market products and service offerings will drive this local niche and young market segment the next level.

http://www.cimaglobal.com/en-gb/Thought-leadership/Newsletters/Regional/The-CIMA-Edge-South-Asia-and-Middle-East/September--October-2011/A-closer-look-at-Islamic-finance-in-Sri-Lanka-/

Amazing statistics of my blog, Alhamdulillah

Alhamdulillah, with the grace of almighty Allah, this blog (islamicfinance2009.blogpost.com) has been viewed by  approximately more than 15,000 users (mostly from USA) as of 29-Sep-2011.

Pageviews by Countries

United States 13,616 Malaysia 1,914 United Kingdom 1,499 Sri Lanka 850 India 713 Netherlands 666 Pakistan 621 Germany 608 Russia 459 United Arab Emirates 456

Thank you very much and stay tune for more updates everyday.


Kind regards,
Muath Mubarak
muath2015@gmail.com
+94777626967

HERE COMES ISLAMIC BANKING

A pivotal part of the banking reform by the CBN is the planned introduction of Islamic Banking. Speaking to Senators about this during his screening exercise the CBN Governor Lamido Sanusi said, “the services (Islamic banking services), would be available to Muslims and non-Muslims. It is not a religion; it is a product available to the public. By definition, the CBN described the Islamic bank as “a non-interest bank which transacts banking business, engages in trading, investments and commercial activities, as well as the provision of financial products and services, in accordance with the principles and rules of Islamic commercial jurisprudence”. The CBN further highlighted that the system allows for a feasibility study or investigation to be carried out by the lending banks on the proposed business before granting of any loan in other to assess the feasibility and viability of such a venture or project . The survey will help the bank to envisage the prospects of the borrower to repay the loan within the maturity period of the loan and to ensure that all transactions are carried out within the tenets of the sharia laws.

 Ever since, this reform agenda has come under heat. In reaction to speculations that the Islamic banking is Sanusi's own ill-intentioned project, the CBN governor has stated clearly that the idea and approval of the Islamic Banking system was a heritage from his predecessor, Prof. Soludo. Speaking through Mohammed Abdullahi, Head, CBN Corporate Affairs, the governor said: "this policy has been on for about three years and has been approved in principle for some time now. I can recall that Jaiz International Bank Plc has been given approval in principle to operate as an Islamic Bank. All that the Central Bank is waiting for them to do is to mobilise their capital base of 25 billion required for operations in the Nigerian banking system. Approval-in-Principle has already been given during Soludo's time". BankPHB was also given approval in principle to operate Islamic banking started operation in this direction. Introducing this product, Bank PHB explained that "this product is designed for Muslim faithful desiring banking services without compromising their religious beliefs”

The name, 'Islamic Banking' sends shivers across the country especially among non-Muslims who fear that it is a hoax to get Nigeria fully Islamized. A source said, “they should find a more generic name for it as the mere mention of that word 'Islamic' brings a sudden fear and psychological trauma on our minds. I still think this is, and has always been a carefully thought out agenda by Sanusi and those who put him there”. ” How are we sure that this so-called islamic bank will not be used to fund jihad and terrorism in Nigeria?,  another asked. This is coming at the heels of the Central Bank Governor's avowed resolve to grow and nurture full scale Islamic Banking in the Nigerian banking sector as a hedge against future global economic crisis and as an alternative to supplement the regular or conventional banking system in Nigeria.

In other to dispel the fears of those who are scared of the nomenclature, 'Islamic bank' the Central Bank issued a directive and a guideline recently to prospective applicants for the Islamic bank license. It was signed by D.A.N. Eke, the Acting  Director of Banking Supervision. On the name, the guideline reads thus, “in line with the provisions of Section 39 (1) of BOFIA 1991 (as amended), banks offering non-interest banking products and services shall not include the words “Islamic” as part of their registered or licensed name. They shall however, be recognized by a uniform logo to be designed and approved by the CBN. The CBN shall require all the banks' signages and promotional materials to carry the logo to facilitate recognition by consumers. It also directed that non-interest banks should not perform transactions that involve interest, uncertainty or ambiguity relating to the subject matter, terms or conditions, gambling, speculation, unjust enrichment or exploitation/unfair trade practices. In other words, the banks will be known and operate as a non-interest bank. Furthermore, the directive stipulated that “in view of the ethical character of their business, all non-interest banks are required to screen their promoters, shareholders, customers, counterparties, transactions, products and activities against the proceeds of crime, corruption, terrorist financing and other illicit activities using legal and moral filters”. This guideline guarantees anti-money laundering and combating of the financing of terrorism.

Some of the basic principles that make Islamic banking attractive as explained by Muath Mubarak who is presently working for Brawa Bank (a newest full-fledged Islamic Bank in Qatar) include: The principle involves a contract under which the investor brings financing to the table and the entrepreneur brings expertise, effort, and in the case of Islamic venture capital, a business plan. Collectively, the parties share the proportionate profit from the results of the enterprise as per their pre-arranged agreement. The entrepreneur cannot be placed at risk of losing money since he has contributed only expertise. If the business venture fails, then the most the entrepreneur could lose is the investment he has already made in the business and the time and effort he had put into the venture. In other words no one can come after the entrepreneur for cash compensation.

http://nigerianorientnews.com/Business.html