Australia Sees Rescue in Islamic Finance

Grappling with a chocking financial meltdown, Australia is eyeing a share of the booming Islamic finance market to beat a growing recession and create more jobs.

Grappling with a chocking financial meltdown, Australia is eyeing a share of the booming Islamic finance market to beat a growing recession and create more jobs. "I think there's great opportunities such as Islamic finance," Chris Bowen, Minister for Financial Services, Superannuation and Corporate Law, told the Sydney Morning Herald on Monday, June 8. He said Sydney is seeking to take a portion of the booming Islamic finance market from Asia. "The majority of the world's Islamic population lives in Asia, and Singapore and Kuala Lumpur are trying to corner this market for themselves," he explained."I think Australia can play a role." Islamic finance is one of the fastest growing sectors in the global financial industry. The Islamic banking industry, which began almost three decades ago, has made substantial growth and attracted the attention of investors and bankers across the world. Currently, there are nearly 300 Islamic banks and financial institutions worldwide with assets predicted to grow to $1 trillion by 2013. Islam forbids Muslims from usury, receiving or paying interest on loans. Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork. Recession Beater Bowen, who was formerly the assistant treasurer, said luring Islamic finance would help rejuvenate the Australian economy and create more jobs. "Even if we only take a small percentage of the market it could generate a lot of wealth and a lot of jobs in Australia." A global financial crisis has swept the US and the world since September and knocked down Australian markets. Thanks to its transactions that don't deal in toxic assets or pay interests, Islamic finance institutions have managed to largely survive the crisis. Minister Bowen regretted that Australia has not yet passed a law allowing the operation of Islamic finance institutions. "This is just one example of the untapped opportunities out there for Australia." There are no Islamic banks incorporated in Australia. The country launched its first Shari`ah-compliant real estate fund in May in Bahrain with the aim of luring Muslim investors looking for opportunities in alternative investments and in new markets. "We are very good at managing money, and in superannuation we have the fourth-largest pool of funds under management in the world," Bowen said. "We've developed really good skills but we don't export those skills." Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3714&Cat=0

Launch of Islamic finance program

AN ISLAMIC finance training program based in Wales has been launched for finance professionals.

AN ISLAMIC finance training program based in Wales has been launched for finance professionals. Islamic finance has gone through a rise in popularity as an alternative banking system over recent years. The underlying principle that governs it is mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset. Established in partnership with Islamic Banking & Finance Institute in Malaysia (IBFIM) and Cardiff University’s Business School and Centre of Islam, the Islamic Banking Finance Centre UK (IBFC-UK) is recognized as one of the leading training centers in the UK, with an international reputation for delivering high quality training courses and research for the public and private organizations in Islamic banking and finance. Its clients include public and private banks, corporations, insurance companies and academic institutions. Akmal Hanuk, chief executive of IBFC-UK, pictured right, said: “The Islamic finance sector is expanding at an exponential rate and is now estimated to be worth $1.2 trillion globally and growing faster than any of the conventional banks, between 15-20%. “This is due to its strong financial principles and ethical values, which prohibits the charging or paying of interest and encourages mutual risk and profit sharing between parties. “We are very pleased to be the one of the first organizations in Europe to address the growing demand of trained professionals in the Islamic banking and finance sector, as we want to make sure that the UK is at the forefront as this sector develops and that it stays there. “We are also pleased that this initiative is coming out of Wales, which will enhance its reputation as one of the leading centers of training, skills and development.” Ieuan Wyn Jones, minister for the economy and transport, described the announcement as a particularly significant breakthrough for Wales in reaching out to new financial markets. He said: “Despite the current global financial crisis, Islamic finance continues its growth as an increasingly viable alternative banking system for both Muslims and non-Muslims. It will be a vital component of the new global financial infrastructure.” Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3746&Cat=0

Launch of Islamic finance program

AN ISLAMIC finance training program based in Wales has been launched for finance professionals.

AN ISLAMIC finance training program based in Wales has been launched for finance professionals. Islamic finance has gone through a rise in popularity as an alternative banking system over recent years. The underlying principle that governs it is mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset. Established in partnership with Islamic Banking & Finance Institute in Malaysia (IBFIM) and Cardiff University’s Business School and Centre of Islam, the Islamic Banking Finance Centre UK (IBFC-UK) is recognized as one of the leading training centers in the UK, with an international reputation for delivering high quality training courses and research for the public and private organizations in Islamic banking and finance. Its clients include public and private banks, corporations, insurance companies and academic institutions. Akmal Hanuk, chief executive of IBFC-UK, pictured right, said: “The Islamic finance sector is expanding at an exponential rate and is now estimated to be worth $1.2 trillion globally and growing faster than any of the conventional banks, between 15-20%. “This is due to its strong financial principles and ethical values, which prohibits the charging or paying of interest and encourages mutual risk and profit sharing between parties. “We are very pleased to be the one of the first organizations in Europe to address the growing demand of trained professionals in the Islamic banking and finance sector, as we want to make sure that the UK is at the forefront as this sector develops and that it stays there. “We are also pleased that this initiative is coming out of Wales, which will enhance its reputation as one of the leading centers of training, skills and development.” Ieuan Wyn Jones, minister for the economy and transport, described the announcement as a particularly significant breakthrough for Wales in reaching out to new financial markets. He said: “Despite the current global financial crisis, Islamic finance continues its growth as an increasingly viable alternative banking system for both Muslims and non-Muslims. It will be a vital component of the new global financial infrastructure.” Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3746&Cat=0

KFH-Bahrain appoints ITS to provide integrated 'Ethical Banking' solution

Kuwait Finance House - Bahrain (KFH-Bahrain) announced on June 10, 2009 that it has appointed the computer group International Turnkey Systems (ITS) to provide an integrated 'Ethical Banking' solution to support the Bank's expansion plans.

Kuwait Finance House - Bahrain (KFH-Bahrain) announced on June 10, 2009 that it has appointed the computer group International Turnkey Systems (ITS) to provide an integrated 'Ethical Banking' solution to support the Bank's expansion plans. The one year contract includes upgrading the Bank's core banking system, integrating the branch automation system, trade finance, Islamic finance, internet banking, in addition to nical services related to human resources and treasury. The combined solutions will benefit the customer by providing greatly enhanced services from the Bank. Commenting on the appointment, Mr. Abdulhakeem Alkhayyat, Managing Director and CEO, KFH-Bahrain, said: 'We realize that our bank's requirements are unique and that our customer servicing facilities need to be multi-faceted. In a fast changing environment, it is essential to reach out to them and offer the best-in-class services.' 'Our diverse needs to provide our customers with a superior service meant that we were looking for a one-stop-shop solution. An integrated yet flexible IT solution that would provide us operational excellence and at the same time streamline our processes. Our rigorous selection process in identifying the right IT solutions provider, included a long evaluation of business solutions presented by various vendors and we are very pleased to appoint ITS as our technology partners. An influencing factor of the appointment was that we identified their close alignment with our strategies and that they were the best equipped to help us fulfill our business objectives,' he added. The Managing Director and General Manager of ITS Group, Mr. Khaled Faraj Al Saeed commented after the signing ceremony, 'KFH-Bahrain's selection of ITS solutions represents a continuation of a long business relationship that goes back since the inception of KFH-Bahrain. It underlines the bank's confidence of the level of technical services we continue to provide. We are proud that ITS solutions and our technical services are a key part of the growth strategy of one of the leading Islamic banks operating in the region.' Al Saeed said that the solutions offered by ITS to Islamic banks and financial institutions tend to be an integral part of their strategic plans to gain a higher market share and provide better services to its customers. ITS systems allow for more than 4 million transactions per day. Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3745&Cat=0

Pakistan Center of Excellence and landmark for Path Solutions

Pakistan, famed for hosting among its people the most talented resources in the Islamic Finance and Information Communication Technology sectors, is an ideal environment to develop Islamic banking.

Pakistan, famed for hosting among its people the most talented resources in the Islamic Finance and Information Communication Technology sectors, is an ideal environment to develop Islamic banking. “Pakistan has shown high commitment and dedication to Islamic finance; our market studies show that the annual growth of Islamic banks in Pakistan will double by 2013; thus Pakistan became the first choice in Path’s expansion plan”, commented Naji Moukadam, Path Solutions’ President, during the office inauguration reception that took place in Karachi on May 6th, 2009. “We are not only opening a support office in Karachi to serve our existing clients, but rather a new resource hub that will cater to all our clients in South Asia, the Middle East and Europe”. “We have great faith in the Pakistani level of expertise in both information technology and Islamic banking and finance”; he then added: “our aim is to boost the service level for the banks in Pakistan, assist our banks whether local or international in the product engineering through our business analysts and subject matter experts, innovate solutions and tools to match the new market trends, promote diversity and innovation in products and services”. Path Solutions has 16 years of market experience using unrivalled software implementation expertise at forward-thinking banks and financial institutions. Path Solutions’ strong market share is testament to its ability to maintain technology advantage. The company is now present in 17 countries around the world and plans to shortly add Central and Eastern Europe to its network. Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3725&Cat=0

Tawarruq declared impermissible by the OIC Fiqh Academy

Analysis on Islamic Banking, June 2009

As the key product in the Islamic banking industry is declared impermissible and attention turns to AAOIFI - the industry standards body - for direction, Islamic Banker investigates the ruling and its repercussions.

Tawarruq, also known as Reverse Murabaha or Monetization, is a widely used instrument to obtain cash immediately.

As shown by the below diagram, Tawarruq is essentially very similar to the standardMurabaha structure, with one additional leg. The standard part of the structure involves the Bank buying the commodity from the "Goods Supplier", paying £100. The bank then sells the commodity to "UK Purchasing Company" on a deferred basis, that is, the bank charges "UK Purchasing Company" £110 due in, say, five years time. The final step involves UK Purchasing company selling the commodity to the "Goods buyer" for an immediate cash payment of £100.

Source: Tax Adviser; Mohammed Amin Islamic Finance Blog,

What makes this contract popular with the bankers? Tawarruq is not only easy to use, but it is also flexible. In an industry that is very short on Sharia compliant products that provide cash "today", the Tawarruq contract was seen as an alternative. Secondly, it is also possible to roll over the contract, hence providing additional funding.

OIC Fiqh Academy Ruling

According to the Fiqh Academy there is a real distinction between "classical" and "contemporary" practice ofTawarruq. The cash obtained in the classical Tawarruq is determined by market forces, whereas, in the contemporary version the contract is "arranged"... that is "simultaneously, the mustawriq ("UK Purchasing Company") and the financier executes the transactions, usually at a lower spot price".

With this in mind, the Fiqh Academy has thrown its weight behind the classical version of the Tawarruq contract, whilst declaring the widely used contemporary version impermissible.

Are there any other alternatives? The Fiqh Academy suggests that the market should embrace Qard Hasan(benevolent or interest free loans) and "institutions are encouraged to set up special Qard Hasan Fund."

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

This point can be cemented further - AAOIFI standards 2/1/3, for Murabaha, state: "... it is permissible to prepare a single set of documentation to include both the customer's stated wish that the institution should buy the item from the supplier and a promise to buy the item from the institution, which the customer signs..."

Indeed, speaking at the Utrujj foundation in the UK, Shaykh Nizam Yaqubi, a leading scholar and a member of the AAOIFI Sharia' board, expressed disappointment that a compromise was not reached.

In particular, Shaykh Nizam rejected the idea of Qard Hasan as a solution arguing that Islamic banks were socially responsible banks that had to deliver returns to their shareholders.

The need for cash...

Ultimately, this boils down to one question: what do you say to an individual/institution that wants cash immediately? Should they be referred to the conventional system (where there is universal agreement on theimpermissibility) or should Islamic banks come up with solutions?

We can deal with the question head on, by asking: why does the individual need cash immediately? Certainly, Islam encourages people to live within their means and simply placing emphasis on credit will cause long term damage. However, in reality, the vast majority of people choose to live beyond their means, with the banking industry facilitating this process.

As attention turns to AAOIFI, there is no doubt that the OIC Fiqh Academy's ruling will be a wake-up call to many market participants. To the idealists in the industry, it is hoped that the focus will shift from debt to equity. However, the realists continue to argue that as long as the industry remains in the "nascent" stage, it has no choice, but to replicate conventional products.

Notes:

1. Mohammed Amin, et al., (Sept. 2008), Islamic finance: the tax adviser's role, Tax Adviser

2. Mohammad Nejatullah Siddiqi (Feb. 2007), Economics of Tawarruq

3. AAOIFI (2008), Sharia Standards for Islamic Financial Institutions,

4. Mohammed Amin, (Feb. 2007), Foreign investors applying Shariah compliant finance when investing into the United Kingdom, Islamic Finance Blog

5. ISRA (Apr. 2009), OIC Fiqh Academy Ruled Organised Tawarruq Impermissible

Link: http://www.islamicbanker.com/tawarruq-fiqh-academy-aaoifif.html

Islamic finance escapes worst of crisis

The Islamic finance industry has been relatively, although not completely, immune to the effects of US subprime problems, the ensuing credit crisis and global economic downturn.

“I have not found any Islamic bank that has lost money by exposure to toxic assets – because they were forbidden,” says Humayon Dar, chief executive of BMB Islamic, one of the biggest managers of alternative investments for Muslims.

Indonesia easily raised $650m (£397m, €459m) recently with the first global dollar-denominated sukuk Islamic sovereign bond of the year. The issue was oversubscribed, and set an encouraging example for Bahrain’s expected $1.5bn-$2bn of sukuk this month.

Nevertheless, issuance of sukuk – or Islamic bonds – fell by more than half last year, to $20bn. But difficulty raising money was inevitable as the financial crisis led investors to shun debt, whatever their religion.

There is evidence that what happens in the world of conventional finance affects the Islamic financial world with a time lag. The first signs that US problems were worse than expected, and could have international repercussions, emerged in the middle of 2007.

“All of a sudden there was a lack of liquidity,” Mr Dar says.

“Mainstream markets started to fall at that point, but that struck Islamic banks only in September 2008, [although] they were affected indirectly.

“Because they did not lose money, they are in a relatively better position than their [conventional] counterparts.”

As a result, Islamic banks have more funds as compared to conventional lenders. They have not had to rebuild their balance sheets in a panic, or seek emergency help from governments.

“Once the opportunities are there in the market, they will be able to capture them in a better way than their traditional counterparts,” says Mr Dar.

Western banks have been active in Islamic finance – both institutional and personal – for a while now. They often have superior marketing skills to regional competitors.

But that has not guaranteed success. “They haven’t done as well as fully fledged Islamic banks have done,” Mr Dar says.

“There’s a perception in the Islamic world that they are in Islamic finance because they are making money. Once they are not, they will wind up their operations.”

Muslims, he says, are more likely to trust in fully fledged Islamic banks that will stay in the sector through thick and thin.

But at the same time, some Middle East banks have relied on what he calls a “sharia premium” – expecting Muslims to bank with them simply because they are Islamic, and failing to provide competitive services. That is changing.

“Even in Gulf Co-operation Council countries, there is an indication the sharia premium is going down,” he says. “Islamic consumers are becoming more demanding.”

Islamic banks should also learn from western counterparts such as UBS and HSBC on issues of corporate social responsibility. “This is something that western banks have excelled at,” he says.

“You pick any Islamic bank. They don’t have a well defined corporate social regime that they must follow. They have been charitable.

“But corporate social responsibility isn’t just about charitable giving. It’s about all the stakeholders. You have to be seen to be serving the community.”

Mr Dar is particularly critical of Islamic institutions that have seen a big rise in profits in recent years and kept the money to themselves.

“It’s wonderful to be profitable, it’s even more wonderful to be equitable in your distribution of profits,” he says. “Islamic banks should be distributing benefits among stakeholders.”

Depositors should receive more money as a result of banks’ bigger profits, he says, and he is particularly critical of overpaid executives. “If the benefits are going to bankers in the form of bonuses, then you are not really benefiting all the stakeholders.”

Link: http://www.ft.com/cms/s/0/28e16ac6-5341-11de-be08-00144feabdc0.html?nclick_check=1

Islamic finance limited without new laws

ISTANBUL - Turkey is ready to jump onto the Islamic finance bandwagon that has flourished in the past few years, according to a participant of the Turkey Infrastructure and Green Investment and Finance Summit 2009.

First there are necessary regulatory changes that have to be made and meanwhile the Treasury has a lot of work to do, said Selim Kervancı, head of investment banking at HSBC Turkey and the official representative of the International Capital Market Association of Britain. "There are special financial products created exclusively for the Gulf region, but these can be used everywhere right now. In Turkey, we need new regulations to establish a presence for Islamic finance," Kervancı said. Recalling that HSBC is active in using Islamic financial products such as murabaha and ijara, Kervancı said these products are in line with the rising demand for infrastructure funding.

Sanjeev Kathpalia, country head of TAIB Bank, which has a presence in Istanbul and Bahrain, the so-called "participation" banks in Turkey are "the beginning of Islamic finance in Turkey."

"They introduced [Islamic finance] to banking laws and regulations," Kathpalia told the Hürriyet Daily News & Economic Review on Friday. "Since then, one can observe the expansion of these products. There has been a consolidation within participation banks. The growth rates of these banks are more than other commercial banks."

"There is a long way to go in terms of regulation and Turkey is moving in that direction," Kathpalia said. "But lots of technical work that would support Islamic finance is done in the West. In fact, the West is leading the growth [of Islamic finance]."

Kerim Alain Bertrand, general manager of ISI Emerging Markets, said the company has a special database just for Islamic finance. "Our clients are mainly from Asia, the Gulf region and Britain. I think this sector is growing slowly in Turkey, whereas it is developing rapidly globally. In Turkey, retail banking system is really limited and institutional banking is only for trade finance possibilities."

Bertrand said Islamic finance, with its rapid growth, can be an alternative source of financing for Turkey, but first legislation should be changed.

Link; http://www.hurriyet.com.tr/english/finance/11806456.asp?scr=1

IIRA asses liquidity position of Islamic banks

The Islamic International Rating Agency has published a research report on the liquidity characteristics of Islamic Banks.

The research was conducted by selecting key Islamic Commercial Banks based in a few countries.The liquidity indicators for these banks were extracted from the published financial statements and the measurements as at December 2007 and December 2008 was analysed.

The study concluded that Islamic Banks face challenges in managing their liquidity in adverse markets. The liquidity indicators have deteriorated compared to 2007, but for some banks it simply means holding less liquid assets and reserves compared to the prior year.

The liquidity indicators, albeit down from the previous year, still indicate adequate liquidity for some of the banks while a few face challenges. Since the origin of the credit crisis rests in the diminution of asset values, especially interest bearing asset backed securities; the nature of Islamic banking with its prohibition on interest has served to protect Islamic banks to some extent. That is not to suggest they are entirely immune from the impact of declining real estate values and restricted real estate lending.

The detailed research report containing analysis, ratios and statistics can be downloaded from the IIRA website, www.iirating.com, under the research reports section.

Link: http://www.cpifinancial.net/v2/News.aspx?v=1&aid=2531&sec=Islamic%20Finance

Islamic financial instruments to be used soon by Islamic banks in Yemen

Islamic banking improves dramatically

The Central Bank of Yemen (CBY) is working on preparations to implement Islamic financial instruments which will help Islamic banks in opening a window to use their liquidity surplus as well as provide funds to finance social and economic projects in Yemen, the Governor of the Central Bank of Yemen, Ahmed al-Smawi said.

He delivered a speech at the Fourth Conference of Islamic banks and financial institutions, which was hosted in the Syrian capital, Damascus, during 1st and 2nd of June.

Al-Smawi, confirmed that Islamic banking in Yemen has expanded dramatically, especially after the amendment of the law of Islamic banks.

Al-Smawi pointed to the amendment, which removed the limits on the participation of Arab and foreign to Islamic banks in Yemen as well as allowed for conventional banks to open branches in accordance with the Islamic banking system.

Islamic banks in Yemen achieved growth rates exceeding that of the world growth rate, which is estimated at 10-15 percent in terms of the volume of assets and deposits, al-Smawi said.

Al-Smawi clarified that, "Despite the recent establishment of Islamic banks in Yemen, their branches in governorates throughout Yemen exceeded 44. These banks also account for more than 30 percent of the total assets in the banking sector, and 27 percent of the total deposits.”

He said, "The financial facilities and loans provided by Islamic banks accounted for 40 percent of the total facilities and funding for the whole banking sector. These loans were mostly allocated for small and microfinance projects.”

He said that property rights in Islamic banks formed 35 percent of the total property rights of the banking sector until the end of 2008.

Al-Smawi pointed to the effects of the global financial crisis, resulting in catastrophic repercussions and consequences of financial panic such as the following: the withdrawal of deposits, and the bankruptcy of many banks and financial institutions that were classified at the top of the financial pyramid. He said that those negative effects led to a lack of liquidity and the elimination of thousands of workers, which has proved that Islamic banking is successful in such times, as it has been largely unaffected.

Link: http://www.yobserver.com/business-and-economy/10016562.html

Scholars stop in Istanbul to analyze Islamic finance

Islamic Finance News, a global provider of information and news regarding the field of Shariah-compliant financing, will be holding a “roadshow” on June 4, 2009 in İstanbul.

Islamic Finance News, a global provider of information and news regarding the field of Shariah-compliant financing, will be holding a “roadshow” on June 4, 2009 in İstanbul. With Islamic finance practices sprouting in various parts of the world, particularly after the onset of the ongoing global financial crisis, the level of competition is rising and participation banks in Turkey have to step up their pace to meet customers' needs, a formidable task as Islamic financial institutions are becoming adept at innovating market-creating products and providing quality delivery services. To top it off, players from other countries are moving into Turkey, either opening their own firms or buying into existing Turkish entities. As such, the Islamic Finance news Roadshow 2009 is being held at a perfect time for Turkey. Its objective is to help Islamic financiers get new perspectives and ideas on how to expand their business, strengthen their platforms and seek new or different ways of undertaking their activities. Turkey, being touted as a vital link between East and West not only in the geographical sense but also economically and politically, is also of special interest to those who observe the principles of Islamic finance. It is only to be expected, therefore, to find financial institutions that bank according to Islamic principles doing well in Turkey. In particular, these participation banks are becoming a significant conduit for funds from the Middle East seeking better returns in Europe through Shariah-compliant financial arrangements. Islamic finance is no longer only a form of mutual assistance among Muslims; rather, it is being readily embraced by much of the rest of the world. In the midst of so many opportunities, time is of the essence, be it to venture into Islamic finance for the first time or to consolidate and increase one's market share in this sector. The roadshow is designed to be of assistance to those in either of these circumstances. A particularly useful feature of this roadshow is opportunity for interaction and discussion. Not only is the audience invited to ask questions of the panelists on their discussions at each session, there are also networking sessions where business contacts can be established. The roadshow will begin with an overview of what's happening in Turkey from the perspective of Islamic financial practice, especially in the context of the region and beyond. The discussions will then move on to developments in particular aspects of Islamic finance, delving into issues such as regulations and ratings. The session on making the business environment in Turkey and the region conducive to the development of Islamic financial products is another highlight of the roadshow. Islamic Finance News' objective is to facilitate the continued nurturing of the industry. It provides a strong and steady stream of news and views, in addition to inviting participants to interact and share experiences and knowledge. Over 150 key market participants have already registered to attend the event. Organized by the REDmoney Group, the forums will span Asia, the Middle East, Europe and Africa. Upcoming roadshows will be held in the UK (Sept. 16), Japan (Oct. 6), Brunei (Oct. 20), India (Nov. 3) and Pakistan (Nov. 5). Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3664&Cat=0

IDB called to sponsor students in oil, gas fields

THE Islamic Development Bank (IDB) can play a major role in developing national oil and gas companies among its member countries by extending assistance in education, says Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah.

THE Islamic Development Bank (IDB) can play a major role in developing national oil and gas companies among its member countries by extending assistance in education, says Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah. Most Islamic countries are blessed with huge reserves of oil and gas, which should enable IDB to sponsor students keen to pursue this discipline, he said. "The move could lead to the emergence of national oil and gas companies from among the IDB countries," he said at the 34th Board of Governors meeting of IDB in Ashgabat, Turkmenistan on June 3rd, 2009. The text of his speech was released in Kuala Lumpur. Since IDB is headquartered in Saudi Arabia, qualified students can be sent to the King Fahd University of Petroleum and Minerals, which would enable them to find jobs at international oil and gas companies. "This is possible, as reflected by Malaysia's success story in creating Petroliam Nasional Bhd (Petronas)." With an initial injection of US$300 million (RM1.04 billion), Petronas today has accumulated investment of US$160 billion (RM556.8 billion), and owns the tallest twin tower building in the world and an international university campus. Petronas has sponsored more than 100 Turkmenistan students who are now pursuing their first degree at Petronas University in Malaysia and employed more than 200 Turkmens who are now working hand-in-hand with Malaysian expatriates in this country. Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3668&Cat=0

Could Islamic Finance Model Have Prevented Banking Collapse?

In a world now in financial crisis, thought to be brought about by banking problems, a Russian writer states the world may have been better off if it had followed an Islamic model. But is that true and what might Islam teach the West about money?

The report maintains one of the reasons why Islamic countries have not been impacted in quite the same way as the West in terms of its banking industry has to do with the fact that it bans the interest rate. In the West, like the United Kingdom, Canada, France and the United States as examples, the interest rate is the foundation for the development of wealth. The writer goes on to say it is also the source of trouble in the world of money. 

A financial system with an interest collection ban and complicated financial tools is said to have helped Islamic countries avoid the huge losses in default on loans. They are not, however, immune from the financial collapses in other countries due to the interactions in the international business world and the oil and gas markets. 

One of the unique features of the Islamic system is an economy that isn't based on getting as much profit as possible. Furthermore, it excludes certain forms of financial speculations. Equality is an aspect of the religion that emphasizes a sharing of resources under a banner that underlines needs of the poor as an obligation. 

I spoke with Dr. Khurshid Khan, one of the leaders in the Islamic community in Shreveport, Louisiana, about these matters. He and I talked about the financial systems in Islam. He prefaced his remarks by stating “there are those who do not practice Islam as they should, both in the social and in the financial areas. I am opposed to extreme thinking, and anyone who knows me, knows that is true.” Dr. Khan is originally from Pakistan, but has lived most of his life in the United States where he served more than 20 years as an officer in the military. He declares that he is therefore not biased against Western ways. 

Dr. Khan explained the monetary system under Islam as having some key features that are helpful in preventing financial problems. He declared “Islam says that an individual should be prepared for the future. In other words there is an emphasis on saving. Islam says also that an individual should make personal policies and take responsibility so he or she is not poor. Banks are established in a way so that there are enough resources to cover financial responsibilities. One of the most important ideas of Islam is the idea that if you can't afford something you shouldn't get it. That would prevent someone with a limited income from purchasing a house outside that person’s income.” 

Khan says that as for interest rates, there are various way so looking at these issue in Islam as opposed to saying the religion simply bans it. Instead, he explains, they have what is called profit sharing, which allows people to have a certain portion of the money deposits invested. This allows depositors then to share in the profits made by banks. 

But will the West follow an Islamic model or will middle eastern countries follow the West? A narrative of Egypt's banking system explains how Egypt has undergone major reforms since the 1990s and now is developing a more liberalized and modernized system, supervised and regulated according to internationally accepted standards. These are some of the changes that have taken place or are in process:- 

1. Introduction of laws giving more independence to the CBE, and an electronic signature law 

2. Regulation of connected and related party lending 

3. Management reforms of the four public sector banks, making clear the responsibilities of managers and boards of directors 

4. Development of an automated credit risk information system (CRIS), from which participants would be able to gain online access to clients' credit profiles.

Dealing with mortgages remains a struggle, however, in Egypt, although a new mortgage law is being examined to open up markets. Perhaps, however, Egypt has learned a lesson from the West and will continue the practice of conservative savings and credit when these markets open.

Birmingham hosts conference on tapping into Islamic finance market

Birmingham will today play host to a conference looking at how the West Midlands can tap into the potential offered by the emerging multi-billion-pound Islamic finance market.

The half-day event, entitled Islamic Business: The Way Forward, brings together a range of speakers from the sector and will look at the potential for positioning Birmingham as an Islamic finance hub.

Aston Business School lecturer Dr Omneya Abdelsalam, who has organised and will chair the event, said one of the key themes was to look at ways to rebrand Birmingham as a centre for international Islamic businesses.

She said: “The West Midlands has real experience in managing investment funds, so there is great potential for areas like the West Midlands to attract Sharia-compliant funds to invest here or provide project finance for projects.”

About 70 delegates are attending, at least half from the legal and financial sector in the West Midlands, to hear speakers including Keith Leach, head of alburaq (Arab Banking Corporation); Omar Shaikh, private equity and Islamic finance, Ernst & Young; and Professor Habib Ahmed, Sharjah Chair in Islamic Law & Finance at Durham University.

Dr Abdelsalam said there was a shortage of skills in Islamic finance, particularly in the development of innovative new Sharia-compliant products, a gap which Aston University hopes to fill with the planned launch of a new Masters degree in Islamic Finance next year.

“There are opportunities not only for Birmingham but for Aston University. We are developing a Masters degree in Islamic finance where we will be able to produce the next generation of qualified professionals who will not only be qualified in Sharia finance but also in conventional accounting and finance.”

The university is also gearing up to offer a series of short courses in Islamic finance in July ahead of the launch of the Masters next October.

Dr Abdelsalam said the panel discussion would reflect not only on the opportunities offered by Islamic finance but the challenges emerging in the sector.

“For example, we need high quality financial reporting and enhanced disclosure of financial information. We also need an improved supervisory and corporate governance framework.

“There is also a need for a centralised Sharia supervisory board which is independent and consistent.”

Dr Abdelsalam said the conference would look at how Islamic finance could help in a recession and pointed to the factors that meant Islamic banks had not been caught up in the subprime financial crisis.

“Islamic finance is more conservative,” she said. “In Sharia-compliant finance the sale of debts is not allowed. Also, to be able to sell a product, you must hold this product. Usury (riba in Islam) is not allowed. Instead sharing risks and rewards is encouraged. Interest is not allowed, instead the bank and the depositors all share the risks and rewards so there is more scrutiny in the banks.

“Ignorance (gharar) must be avoided. Contracts should be completely clear to the contracting parties. With the subprime problems, they were packaged as securities and repackaged again and again. The banks shared in this subprime crisis but it took some time to realise this because there was some ignorance of the product. This is not allowed in Islamic finance.”

Dr Abdelsalam said the difficulties experienced by conventional banks spelled opportunities for Sharia-compliant finance.

“There is a continued liquidity restraint in conventional banks. Everyone is paying more attention to risk assessment, which is something Islamic finance encourages.”

She believes Islamic financial products could be targeted to the wider market, not just the Muslim community.

Link: http://www.birminghampost.net/birmingham-business/birmingham-business-news/financial-business-news/2009/06/02/birmingham-hosts-conference-on-tapping-into-islamic-finance-market-65233-23764785/

Korea looks for Islamic finance avenues

Korea is a relatively latecomer to Islamic finance in East Asia. But following the stated ambitions of neighboring countries such as Hong Kong and Singapore that are trying to establish themselves as international Islamic capital market hubs, Seoul is similarly trying to promote Korea as the same. 

Kim Jong Chang, governor of the Financial Supervisory Service of Korea, the financial services regulator, believes that Islamic finance is a good innovation in the global financial market and stresses that the Korean government is committed to facilitating it in Korea. 

Korea believes that the global financial crisis has shown that financial services cannot be divorced from the real economy and sees an ideal fit between its vast industrial base and Islamic finance. Here Lee Do Heon, managing director, Global Business Department, Korea Investment & Securities Co. Ltd., discusses the rationale for Korea's new-found interest in Islamic finance and the prospects and challenges that lie ahead. 

What is your assessment of Korea's current involvement in Islamic finance?

One of the most important challenges is awareness and trying to help Korean customers understand the principles of Islamic finance. For example, in the case of Sukuk of which most of the standard structures are an Ijara, the initial paper should be a solid one backed by underlying core assets. From a Korean issuer's point of view it looks as if it is an accumulation because they are selling core assets. We are trying to convince them that it is not. Also for Shariah equity funds, we try to explain to them that they are more like a socially responsible investment with lower leveraging. So what we are trying to do is to explain the Shariah financial principles but in terms of a Korean conventional financial nomenclature. We are also promoting real transactions which are acceptable to both Islamic investors and Korean customers. There are still some regulatory hurdles in Korea, so it will take a little bit more time to close Shariah-compliant transactions. 

What is the rationale behind Korea's new-found interest in Islamic finance? 

Just as Singapore and Hong Kong are doing in their markets, Korea has a long-term vision to promote the country as an international financial center. It is only natural for Korea to pay more attention to one of the more important and growing financial segments which is Islamic finance. It is growing very rapidly even though its market share globally is still relatively small. If any country aspires to be a financial center, it must facilitate the growth of Islamic finance. Islamic investors are also relatively long-term investors and do not like speculative hedge funds. This fits in with the Korean view of doing banking business which is linked to the real economy. One of the causes of the Asian financial crisis in 1998 was short-term buying-and-selling by financial institutions and corporates. It is very natural that the Korean market welcomes more stable and long-term investment such as Islamic finance. The Korean economy has a very strong industrial base. This has a very good fit with the ethos of Islamic finance so that it impacts on the real economy into productive investments. 

What are the current regulatory hurdles which prevent the facilitation of Islamic financial products in Korea?

These hurdles are typical of those that you find in conventional financial markets. The main hurdles are taxation issues relating to double stamp duty, value added tax (VAT) and capital gains and the definition of what constitutes a security. From a conventional point of view, Sukuk for instance, may look like asset-backed securities or like investment certificates. There must be a standard guideline that Sukuk is considered as securities. There are also other challenges on the commercial banking side. In a conventional mortgage, for instance, it is like lending with collateral. But in the Islamic mortgage of Diminishing Musharaka the bank must purchase the property and co-owns the asset or property with the mortgagee. The bank then rents out its share of the equity to the mortgagee. Under Korean legislation, commercial banks are not allowed to buy properties for purposes other than headquarters and branches etc. Fortunately, these issues have been recognized by the Financial Supervisory Service of Korea, the central bank. 

So is the Financial Supervisory Service reviewing current legislation with a view to introducing tax neutrality measures for Islamic financial products in Asia such as those in Japan, Hong Kong and Singapore? 

I am not in a position to say whether the regulator is undertaking such a review. All I can say is that the regulator is aware of the situation and Gov. Kim Jong Chang of the Financial Supervisory Service of Korea is showing interest in this matter and Islamic finance is being investigated and considered very positively. Have any Islamic financial transactions been concluded in the Korean market to date? 

Not yet in the domestic market. We at Korea Investment & Securities Company Ltd. (KISC) are trying very hard to carry out the first Islamic financial transaction in the country. We are looking at the possibility of arranging corporate Sukuk for Korean companies and also at launching a number of Islamic equity funds based on Korean and Asian Shariah-compliant stocks. In the case of Sukuk, we are first thinking of an international placement of a prominent Korean issuer and later when the regulations are introduced we may have a Sukuk placement in Korea for other issuers, say from the Middle East and Southeast Asia. I am confident that a private Korean corporate or government-linked corporate will issue a Sukuk in the near future. 

Source: Arab News

What about issuing a Sukuk by a Korean entity outside Korea, say in the Malaysian ringgit or Indonesian rupiah markets? 

We will try to place outside Korea first because of the lack of regulatory framework in Korea. Malaysia is one consideration and the offering can be in US dollars. We do not have any preference as to the location outside Korea where the Sukuk placement might take place. We are actively considering this and are already engaged in some discussions with counterparties and partners. Due to the global financial turmoil, the financial markets are in flux. We cannot say exactly when this issuance will take place but we are actively monitoring the market to ascertain when is the most ideal time to launch the Sukuk.

Link: http://nation.ittefaq.com/issues/2009/06/02/news0994.htm

4th Islamic Banks and Financial Foundations Conference Recommendations

The 4th Islamic Banks and Financial Foundations Conference on June 2nd, 2009 recommended to enroll Islamic banking course in university curricula and establishing a joint course between the Economy and Sharia faculties in order to make graduates qualified in banking and Sharia.

The 4th Islamic Banks and Financial Foundations Conference on June 2nd, 2009 recommended to enroll Islamic banking course in university curricula and establishing a joint course between the Economy and Sharia faculties in order to make graduates qualified in banking and Sharia. The Conference, in a final session, called for finding a legal environment compatible with the nature of Islamic banking and adopting a banking arbitration system to solve disputes related to Islamic banking and developing new formulas of Islamic finance to increase revenues. For his part, Grand Mufti of the Republic, Ahmad Badreddein Hassoun talked about the importance of knowing Islamic banking work characteristics through studying and scientific specialization and intensifying training courses, pointing out that Syria made good steps in the field of Islamic banking. Governor of Central Bank of Syria, Dr. Adeeb Mayaleh pointed out that work is in progress to realize an Islamic banking sector based on the laws of Islamic Sharia to cope up with the requirements of life in Syria. Mayaleh said that Islamic banks in Syria have witnessed a distinguished growth during its short work time which is about 1 and a half year, however, they have 70 000 clients and their revenue volume amounts to 42 SYP billions and 11% of the total revenue volume, indicating that Islamic banks are developmental banks and that the percentage of its investment finance amounts to 60% of its finance. 800 Sharia scholars and Islamic banking specialists from Arab and foreign countries participated in the 2-day Conference. Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3638&Cat=0