INCEIF-IFSB joint executive forum
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Thursday, May 2, 2013
The Forum stayed true to INCEIF’s mission to have a knowledge-exchange initiative among academics, policymakers and practitioners.
Two other Executive Forums are planned to be held the third and fourth quarters of 2013 which will focus on corporate and syariah governance and takaful respectively.
UK aims to boost role in Islamic finance
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Prime Minister David Cameron is looking to Southeast Asia to boost the UK’s role in Islamic finance. It’s the Bank of England he needs to convince first, say Shariah-compliant lenders based in Britain.
Central bank rules require lenders to hold easy-to-sell assets as protection against short-term funding shocks. Most are off-limits for Islamic banks because they pay interest.
Islamic lenders are "disadvantaged," Sultan Choudhury, managing director of Islamic Bank of Britain, said in a phone interview from Birmingham, England, on April 22. "We want the ability to operate without the restrictions that we are facing. The biggest example of that is in the liquidity rules."
Cameron visited Malaysia, the biggest center for the more than US$1 trillion-a-year market, last year to build on a pact to promote bilateral engagement in the industry and created an Islamic Finance Task Force in March. Britain’s six Shariah-compliant lenders will struggle to grow unless regulators adapt
bank liquidity rules or highly rated borrowers issue sukuk in pounds, according to Choudhury and Bank of London & the Middle East’s Nigel Denison.
"For an Islamic bank, there is a lack of liquid assets available," Denison, the London-based lender’s head of markets, said by phone. "If there were a liquid sukuk, particularly in sterling -- because we report in sterling -- that would make our lives a lot easier."
The UK announced plans five years ago to become the first western government to issue sukuk, only to disband the initiative in 2011 when the Debt Management Office said they don’t "provide value for money."
The average yield on Shariah-compliant debt has climbed 16 basis points this year to 2.8 per cent on April 24, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The yield on 10-year gilts fell 14 basis points to 1.69 per cent, data compiled by Bloomberg show.
"The cost of funding via conventional sovereign bonds -- gilts -- is still more advantageous than the cost of funding via sukuk," Haissam Saleh, Qatar Islamic Bank UK Plc’s London-based head of Middle East and North Africa treasury structuring and sales, said by e-mail April 17.
A Treasury spokesman said March 11 there are no immediate plans to issue sukuk. The press service didn’t respond last week to requests for comment.
"The UK’s liquidity regime applies to all firms equally," Liam Parker, a spokesman for the Bank of England, said in an e-mailed response April 24. "An allowance is made for Shariah-compliant firms with regard to the instruments they are required to hold to meet their liquidity requirements, but not to the quantity of liquidity."
The overhaul of bank rules known as Basel III may take account of Shariah lenders in the European Union, Parker said.
"The UK is actively engaged with international regulatory counterparts both in Basel and within the EU on this issue," Parker said. "We would expect that EU implementation will make suitable allowance for Shariah-compliant firms."
The only sukuk currently meeting Bank of England criteria are dollar notes from Islamic Development Bank, a Saudi-based multilateral lender, according to Choudhury and Denison. The bonds rank AAA at Fitch Ratings, one above the UK.
The lender may issue sukuk in pounds, Wayne Evans, an adviser to TheCityUK, a group representing financial services companies, said by phone April 2. IDB "is not yet in a position" to comment, Abdul Aziz Al Hinai, vice president for finance, said by e-mail April 22.
Global Islamic debt sales jumped to US$7.23 billion in March, the third-highest monthly total, data compiled by Bloomberg show. The debt avoids interest through contracts such as Murabahah, where lenders own an asset and sell it back at a mark-up.
Borrowers are put off selling sukuk in the UK in part because the holder would be liable for value added tax, Gary Campbell, a partner at Deloitte LLP in London, said by phone March 25. The underlying assets would need to be based outside of the UK for exemption, he said.
"We understand that the UK government is very sympathetic and is keen to eliminate any kind of discrepancies," Campbell said. "Whilst they are sympathetic, they haven’t issued anything formally in writing on the VAT treatment of sukuk."
Only one Shariah-compliant lender has set up in the UK in the past five years -- Abu Dhabi Islamic Bank PJSC, according to TheCityUK. HSBC Holdings Plc stopped offering Shariah-compliant services in the UK last year.
The Islamic Finance Task Force will look at ways to encourage sukuk, Richard Thomas, a member of the working group and chief executive officer at Gatehouse Bank Plc, said in a March 14 interview from Dubai.
"We need to have appropriate liquidity instruments," Mansur Mannan, executive director of DAR Capital, a London-based financial adviser, said in a phone interview March 21. "If regulations can be changed somewhat, that would be a step in the right direction."-- Bloomberg
Read more: UK aims to boost role in Islamic finance
Islamic finance presents opportunities in Australia
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Australian website Financial Standard Online reports that the Muslim Community Co-operative Australia (MCCA) is in advanced discussions with an unnamed Middle Eastern company with a view to setting up a $180 million mortgage fund, a $150 million property fund, a $180 million Sukuk fund and a $5 million asset-leasing fund.
MCCA manages a Shari’ah compliant property income fund out of its headquarters in Melbourne and has just surpassed $30 million in assets under management and MCCA chairman Dr. Akhtar Kalam said this growth shows strong support for Islamic finance products within Australia. "It's not just family office and ultra high net worth investors who want to be part of the fund. Our client base is much more diverse than that," he told Financial Standard. "We're not really interested in the Muslim population specifically, we're interested in all Australian mums and dads."
Sukuk: heading for the mainstream
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With more and more sovereigns and corporates looking to raise money through sukuk - in response to strong investor demand - Islamic finance is becoming increasingly mainstream. Are regional asset managers well positioned to take advantage? The growth of the market for sukuk - Islamic bonds - over the last few years has been staggering and experts predict that 2013 will continue that trend, particularly in the Gulf Co-Operation Council (GCC) countries and wider MENA region.
Investors within the emerging markets space as well as internationally have had a taster and are hungry for more sovereign as well as corporate issues. Worldwide issuance was $138 billion in 2012, its fourth consecutive year of growth, and up 64% on 2011. Regionally, the GCC accounted for $24 billion of the total: in Mena, Oman and Egypt are among the governments issuing sukuk for the first time. Little wonder then that a recent report from Standard & Poors said that sukuk was fast becoming a "mainstream" debt instrument.
Many of the region's asset managers have been among the trailblazers in this investment space, but others have steered clear. Will the rapid current expansion persuade more conventional fund managers to make the switch to this specialised market?
According to Mark Watts, Head of Fixed Income at National Bank of Abu Dhabi ( NBAD ), the industry will see a number of managers moving into the Islamic finance space.
"On the conventional side there's a wealth of market, portfolio and bond-analysis experience and in my mind, it's easier to train someone in Islamic finance and the specifics of how the MENA bond market trades, than it is to take someone who's very well versed in Islamic finance and turn them into a portfolio manager or analyst," said Watts.
Watts says that this is already happening, but warns that investors should be wary of inexperienced managers jumping on the bandwagon - especially those coming from the ranks of ex-traders. "There are new managers coming to the party. Some of these managers will end up being credible competition and we welcome that, but some of them will be people who are a bit more opportunistic."
Watts argues that experience trading a certain asset isn't the same as managing that asset in a portfolio. "A trained trader is not the same as a trained fund manager. They actually approach the market in completely different ways, and that comes out in the risk profile. Our message to investors is always to have a look at the underlying experience, pedigree and resources of the fund manager."
NBAD has approximately 40% of its $800 million AUM invested in sukuk, making it one of the biggest players in the region, according to Watts.
Growing investor understanding
Investors do seem to have an understanding of products such as sukuk and this is one of the key factors behind increased issuance, according to Dilawer Fawazi, portolio manager of the Invest AD Middle East and Africa Bond Fund.
"Many international investors now have a better understanding of what a sukuk is, they understand the structures and appreciate that the structures in effect replicate the cash flows of a conventional bond," says Fawazi.
"There is a broader group of investors now willing to participate in sukuk issuance because of evidence that sukuk tend to have lower volatility characteristics than conventional bonds," he adds.
Fawazi believes this is down to a "dedicated Islamic investor base" that holds approximately 70% of sukuk issuance and tends to adopt a "buy and hold" approach, creating relatively low selling pressure in periods of volatility.
He also adds that a "demand-supply mismatch" ensures that new supplies tend to be mopped up easily and issuers, in most cases, obtain more favourable pricing than would be the case for conventional bonds.
Historically low yields
Yields for sukuk issuance are at historically lows, driven by realistic pricing and investors' acceptance of longer tenors. The S&P Ratings Direct report (entitled 'Investor Appetite is Pushing Sukuk Into the Mainstream') identified the recent $1 billion five-year sukuk of the Dubai Electricity and Water Authority (DEWA) as especially significant, noting that its dollar-denomination and low yield (3% compared to 6% on a previous bond) could "set the benchmark" for other strong credit quality government-related entity (GRE) credits in the region. Banks in Qatar and Saudi Arabia are predicted to lead more quality issuance in 2013, as they respond to increasingly rigid regulatory capital requirements, while the UAE could tap the sukuk market to boost its long-term funding profile.
The outlook for investing in sukuk looks favourable, according to Mohieddine Kronfol, chief investment officer of Global Sukuk and MENA fixed income at Franklin Templeton Investments.
"On the supply side it looks good, and on the fundamentals of the different companies it's looking good," says Kronfol. "It's also looking good with respect to the supply and demand imbalance; the market will continue to be underpinned by solid demand and that's going to help performance from a risk or volatility perspective."
The global firm has been making waves in Dubai since 2007 and as of 31 December 2012 manages over $1 billion in Shariah-compliant assets. They recently launched the UCITS-compliant Franklin Templeton Global Sukuk Fund, which Kronfol says could allocate between 40 - 50% of its assets to the GCC.
Kronfol stresses that although their latest product launch is a new departure in some ways, Franklin Templeton are not new to the space. "We've been doing it for a while and we have a leadership position. We have all the attributes to be competitive over the long run and that's why we're doing this."
So, while the trajectory of increased sukuk issuance is set to continue, fund managers who are new to this space will face stiff competition from the heavyweights as they try to get a slice of the pie.
Global Islamic financial assets to hit $1.8 trillion Bright prospects for Oman
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The size of Islamic financial assets is forecast to reach $1.8 trillion in 2016, while the financing and investment activities are expected to accelerate, especially in the Islamic capital markets as emerging economies embark on infrastructure spending. This was stated by an expert at the two-day Oman Islamic Economic Forum 2013, which began yesterday. The forum in its second edition is organised by Amjad Development at Al Bustan Palace Hotel under the auspices of Dr Yahya bin Mahfoudh al Mantheri, Chairman of the State Council.
The forum shed light on various aspects of Islamic finance, Islamic banking, Takaful insurance, Zakat, Awqaf, alimonies, perfection of work, development of Islamic banking to finance the public sector and infrastructure projects, development of small and medium enterprises (SMEs) and the human resources. Speaking to the reporters, Al Mantheri said that Islamic banking has started taking shape in the Sultanate with the establishment of Bank Nizwa and the opening of Islamic windows by traditional banks.
He said that Islamic banking is witnessing remarkable growth in different parts of the world and that the industry is worth over $1.5 trillion. The figure reflects the fact that there is a global trend towards Islamic banking. The co-operation of Islamic countries in developing the mechanisms of Islamic banking will have a positive effect on the growth of the industry in the world including the Sultanate. Speaking on the occasion, Hamood bin Sanjour al Zadjali, Executive President of the Central Bank of Oman, said the holding of the conference coincides with the launch of Islamic banking in Oman.
He added that in response to the Royal directives of His Majesty Sultan Qaboos regarding the development of SMEs, it is expected that the Islamic banks would provide suitable financial support for SMEs and entrepreneurs. Banks will provide them with innovative Sharia compatible solutions that meet their needs. Khalid bin Hilal al Yahmadi, Chairman of Amjad Development Company, said that the Islamic banking industry posted more than 30 per cent growth in the last two years. He added that this high growth ushers well for the industry in the coming years.
He also emphasised the need to keep pace with this growth by developing existing human resources and ensuring sound utilisation of the available resources. Al Yahmadi added that the conference will include a panel discussion on education, technology, morals and their role in economy, especially in the light of employment challenges. Raja Nazarin Shah, Crown Prince of Perak in Malaysia and Financial Ambassador of the Malaysia International Islamic Financial Centre (MIFC), in his address said that over the last 30 years, the relations between Oman and Malaysia have grown in key areas including education, culture, business and trade.
He said that the Sultanate seeks to achieve the aims of its Vision 2020, as it is the case with Malaysia which has its vision 2020. He said that bilateral trade between the Sultanate and Malaysia stood at $740 million in 2011, a substantial increase from $265 million in 2010. Raja added that the Islamic finance industry has registered an impressive annualised growth of almost 15 per cent over the past 10-15 years to reach $1.3 trillion globally. While this growth has been achieved primarily in Muslim-majority countries, an increasing number of non-Muslim countries have also been developing their Islamic finance industry, including the United Kingdom, Luxembourg and Hong Kong.
“I am very confident that the concerted efforts and initiatives of the Sultanate to develop its Islamic finance industry will gain substantial momentum and yield desired results,” he said. Suleiman bin Hamad al Harthy, GM of Islamic Banking at BankMuscat Meethaq, said that the forum is very important for Islamic banking industry, which is still in its early stages. This requires us to keep pace with the developments in this sector in the world.
Financial Crisis - An Islamic Analysis
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Friday, April 26, 2013
M.M.Akbar at Dubai International Peace Convention 2010, giving insight on the latest Financial Crisis.
Part 1
Part 2
Islamic Economics - The Solution for World Crisis
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Father of Islamic Banking, Dr. Hussain Hamed Hassan at Dubai International Peace Convention 2010.
Part 1:
Part 2:
Is the Islamic finance industry ready for social media?
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Social marketing eliminates the middlemen, providing brands the unique opportunity to have a direct relationship with their customers. — Bryan Weiner.
Today, it seems Islamic finance is still stuck at a hard-copy of stage communication (faxes) when the financial world has moved on to Facebook, Twitter, blogging, etc.
Many Islamic financial institutions have Web sites, but how often is it updated beyond awards won? How many Islamic banks, takaful operators, Shariah consulting firms, industry bodies, etc, are on Facebook? Yet, the youth — its future clients — in many Muslim countries with Islamic finance are on Facebook.
What about the cross-sell of Islamic finance to non-Muslims as an ethical alternative? These potential customers are an important cluster of social media and they are continuously looking for offerings aligned with their values.
Several Islamic financial institutions have Twitter accounts, unsure how many of their (retail) clients are on Twitter. Do these institutions believe SMS, Internet and mobile banking is the “social media” connection to their clients?
Maybe the culture of social media is lacking in, say, the GCC. But we saw how effectively social media was utilised during the Arab Spring.
Fear
Is there a fear of technology among Islamic financial institutions? The fear of hackers stealing from customer accounts and identity theft? They have heard about horror stories on hacking from US- and EU-based banks with allegedly better (read, more expensive) firewalls.
Is there fear that social media connectivity will raise the level of transparency to conventional benchmarks standards and with accountability to follow? Put differently, will social media result in enhanced governance? It is not a bad thing in this post-credit crisis environment where companies are rewarded via a stable stock price and rave reviews for transparency and governance.
Is there fear that “bad news” concerning Islamic financial institutions will spread like wildfire if (deeply) connected to social media? It will spread anyway as news organisation coverage is supplemented by bloggers and tweeters in real time.
Resources
Is it a lack of resource issue in having, say, a “chief social media officer”? It would appear that Islamic financial institutions have not looked at public relations and outreach as an investment in their brand, but, rather, a cost of doing business.
Brand-building goes towards commitment to not only clients and staff, but long-term growth of the institution, including eventual cross-border expansion and future clients. Furthermore, during challenging market cycles, the message to the community, whose attention has become shorter, is the confidence inspiring “business as usual”.
Guidance
The Thomson Reuters Islamic Finance Gateway, or IFG, may just provide a guidance for Islamic financial institutions on understanding about the benefits of social media connectivity. It comes down to market intelligence, and the market place is the best source of “knowledge that powers” market movements. The community connectivity function of the IFG comes down to insights by industry experts making sense of the information overload, communicating about important sign posts on the road ahead and allowing community to interface with experts on a secure platform.
LinkedIn, Twitter
At the behest of colleagues, I joined LinkedIn about a year ago to connect with like-minded colleagues globally to share ideas and articles. Outside of unsolicited endorsement of people I have connected with, but, not worked with, it has been a pleasant experience, especially reading leadership articles.
Furthermore, I started tweeting a few months ago, initially on Islamic finance and the halal industry, but have expanded to issues related to Muslims, Islam, Muslim countries, etc. It has been a fulfilling experience and I should have joined much earlier. Why?
1. Tweeting forces one to convey their message in 140 characters, becomes very important in today’s world of short-attention span and information overload. Islamic financial institutions should be able to convey thought leadership within these constraints.
2. Twitter brings news in real time from multiple eyes, hence, it’s a multiple “op-ed” of the market place on the subject matter. The raw news provides more colour than polished sound-bites.
3. Twitter has allowed me to follow the likes of global leaders like His Highness Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and his comments in real time. He first tweeted about Dubai being a hub for an Islamic economy a few months ago.
Conclusion
Shaikh Mohammed’s tweets, at the time of writing this, on the performance of UAE government standards should encourage Islamic financial institutions to engage and embrace the social media to not only connect, but also to report developments.
Rushdi Siddiqui is co-founder and managing director of Azka Capital, a private equity advisory firm focused on halal industry initiatives, and an advisor to Thomson Reuters on Islamic finance and the halal industry. Views expressed are his own and do not reflect the newspaper’s policy
Challenges to the growth of the Islamic finance market
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While Islamic financial institutions have passed the robustness test by exhibiting greater resilience during the recent global financial crisis, the crisis has also brought under the spotlight some important challenges the industry is currently facing. Going forward, the stakeholders of Islamic finance will need to address a broad spectrum of issues surrounding the industry.
Highlighting the inherent strengths of Islamic finance, the recent global financial crisis coincided with the growing concerns over the possibility that excessive financial innovation might lead the Islamic finance products to bend certain key precepts of Muslim jurisprudence to breaking point. Perhaps the most prominent example is the Sukuk – sometimes even called the “Islamic bond” – as many Islamic Sukuks have gone too far in mimicking conventional, interest-bearing bonds, which are prohibited in Islam.
Diversifying assets
Since there is little room for diversification of assets, the risk management capabilities of the Islamic financial institutions are limited. A direct consequence of this was observed in the last financial crisis when large exposure to real estate of Islamic financial institutions resulted in falling asset values in many of these institutions operating in the OIC member countries, particularly in the MENA region. A study by Ernst & Young (2011) reveals that the real estate concentration still remains a concern for Islamic finance industry and may affect its future growth.
The low penetration levels of Takaful (Islamic insurance) in OIC countries are posing another challenge for the Islamic finance industry. OIC member countries as key Takaful markets are characterised by low insurance penetration rates versus huge potential for rapid economic growth. Global Takaful premiums are estimated by Ernst & Young (2011b) to have reached $16.5 billion in 2011. Moreover, Takaful premiums remain highly concentrated in Iran which generated almost 30% of the global Takaful premiums in 2011. Similar to the relative size of Islamic finance to the global financial industry, the Takaful market represents only 1% of the global insurance market at present (Ernst & Young 2011c).
Regulation and standardisation
Another major impediment to the growth of Islamic finance industry is the weak Islamic finance enabling infrastructure in many OIC countries. Enabling infrastructure would include, among others, legislative, regulatory, legal, accounting, tax, human capital, and Shariah business frameworks. Although member countries such as Bahrain, Malaysia and UAE are among the major Islamic finance centres with developed infrastructures, in many others, an enabling environment is not in place. This, in turn, increases operational risks, including the risk of Shariah compliance.
Development of Islamic money and capital markets, provision of standardised liquidity management tools, improvement of the operational efficiencies of Islamic financial institutions, standardisation in products, synchronisation of regulatory frameworks, and human capital accumulation are other areas where the Islamic finance industry needs to take structural steps.
Broadening the skill base
The broadening of the global skills base in Islamic finance is desirable since the number of qualified practitioners, as well as Shariah scholars available for Shariah boards, is currently very low.
Representation of Shariah scholars on Shariah boards is highly concentrated. A survey by Funds@Work (2011) reveals that only the top 20 Shariah scholars hold 619 board positions which represent more than half of the 1,141 positions available.
All in all, with the challenges ahead, the growth of Islamic finance, free from interest and subject to high moral codes, will be slow in the long-run. And the slow growth of the industry would also slow down economic growth and wealth creation. However, the wealth created would be real, more equitably and profitably distributed, and would encourage spin-offs into real economy, creating jobs, increasing trade both domestically and internationally.
Islamic finance as a viable alternative financial system
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That’s a very difficult question to answer, but one that has been asked many times. The thing is this question can only be answered by financial professionals within the Islamic finance world, or people who practice conventional banking. The first obviously say that it is. After all, it’s their baby, why would they say it isn’t. The second group consists of people who don’t understand the concept enough to give an answer, or they brush it off by saying that there is very little different, it’s just interest under a different name.
Whether it is different or not, really Shariah compliant or not, Islamic finance is gaining clout and influence every passing day. It is the fastest mode of finance in Pakistan and the world with assets and deposits growing faster than its conventional counterpart. It has now become a trillion-dollar industry worldwide and is expected to continue this growth as more and more Muslim countries climb the development ladder with rising incomes.
So this gives rise to another question. Is Islamic finance – considering its increasing clout – really a viable alternative financial system and solution? The answer would seem to be that yes it is.
Let’s get one thing straight, the simplistic description that any zero-interest-rate system is Islamic is superficial. After all, this is the exact term used by mainstream central bankers when they talk about policies pursuing what they call ‘quantitative easing’, so it is not something exclusive to Islamic finance. Islamic finance is a lot more than just the absolute prohibition of interest. There is also the effort to maintain high moral and ethical standards on the part of lenders and borrowers. In fact, if practiced and implemented in letter and spirit, this is perhaps the key thing that sets Islamic finance apart from conventional finance.
And there can be no denying that there is definitely a lot of room for ethics in today’s financial world.
In fact there can be no greater argument or rationale for a zero-interest-rate system than the John Maynard Keynes’s The General Theory, and I quote:
“Provisions against usury are amongst the most ancient economic practices of which we have record … In a world, therefore, which no one reckoned to be safe, it was almost inevitable that the rate of interest, unless it was curbed by every instrument at the disposal of society, would rise too high to permit of an adequate inducement to invest.”
Keynes’s endorsement does not necessarily make this system right, but his analysis does suggest that it should be regarded as a serious proposition.
And the single greatest reason why I feel that Islamic finance, for what it’s worth, can work and can be a successful alternative to conventional systems is the fact that although interest is prohibited under Islamic finance, profit is not; the latter is derived from various arrangements that combine finance and enterprise. In essence, this is a profit-sharing and risk-sharing system that is based entirely on equity finance.
This is the only area where I am not yet entirely convinced that there actually is equitable risk sharing. In theory, at least, Islamic finance contrasts with the current dominant system based on interest-bearing debt, in which risks are theoretically transferred to debt holders. I am not entirely sure if this is entirely the case in practice as well.
But this is where it gets tricky. One may agree that that if people adhere strictly to its ethical requirements, there would be fewer moral-hazard problems in Islamic banking. But we also know that whether any particular system is efficient in avoiding moral hazard is a matter of practice, rather than of theory. And if in the world of Islamic finance, this adherence to ethics cannot be guaranteed, there really is no need of it as a separate or alternative system.
Published in The Express Tribune, April 22nd, 2013.
Is Islamic banking as exploitative as conventional banking?
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It is not only in Pakistan where they find scepticism. The vast majority of Muslims across the globe remain dubious about the operations of formalised Islamic banks. The main criticism such people lodge against Islamic banking is that it is as exploitative as conventional banking and finance.
Conventional banking is all about borrowing cheap and lending dear, yet Islamic banks also follow the same pattern: offering a return to their investment account holders – not much different from the market rate of interest – and charging very high (albeit market-driven) profits to households and businesses.
In Pakistan, a number of businesses have emerged, which are collecting investments informally from an increasing number of people, and offering them very lucrative and frequent returns. Such businesses are increasing in number and size, and it is interesting to look into this newly-emerging phenomenon. If the underlying business model of such so-called investment companies is strong and robust enough, it should be studied and assessed in order to ascertain the implications for policy development on a national level. If, on the other hand, malpractices are detected, it will be helpful to take some early steps to safeguard the interests of hundreds of people who have already invested in such companies.
Apparently many groups of businessmen, represented and aided mostly by graduates of traditional Islamic schools or madrassas, have quietly been raising a lot of investment from people around the country, especially from the Islamabad and Rawalpindi region, and the areas in the north as far as Gilgit-Baltistan.
They claim to do business in strict conformity with Shariah and offer unbelievably high returns to their investors, which to date has been over 50% per annum or around 5% per month. There are a lot of small groups, mostly led by religious scholars from one prominent school of thought. The most notable of these is the Elixir Group.
The Group’s website offers general information on its business activities and investments, which are reported to be in Pakistan, Malaysia, Thailand, the United Arab Emirates, Sri Lanka, Ethiopia and even in China. While the website does not offer information on the directors and shareholders of the Group, some officials at their Rawalpindi office, who happen to be behind some marble factories in the Westridge area, disclose that a Lalika family is behind the Group. They claim to own big names like Rocco Ice Cream and Prime Dairies, and are planning to start a housing scheme in the name of Sukoon Housing.
Since the Group is neither a regulated entity nor is well-known outside some very specific circles, many people who have come across it are at best confused. On one hand, they are tempted by the very high returns offered to investors; on the other hand, they are nervous and confused, owing to the mystery surrounding the different businesses in which the Group claims to have invested.
Apart from some general information on its website, the Group does not provide any financial information on its activities, as most of the investments received by the Group from the general public are in cash. As the Group claims to have invested in a number of overseas projects, questions arise on the channels it has used for transfer of money from Pakistan. There are many questions related to conducting due diligence, a regulatory requirement for banks and other investment companies when accepting investments from the general public.
There is a definite need to look into the matter with respect to money laundering, even if the investments are genuine, and the returns offered by the Group actually come from the investments made by it in different projects. There are also questions related to corporate governance, as there is no information at all on the so-called founding shareholders and directors of the company.
Although it may sound incredible to see these businesses offering extremely high returns to their investors, it is not impossible for high performing businesses to offer such returns. Despite all the doom and gloom in the country, the Karachi Stock Exchange has performed exceptionally well, with the index going up 48% from January to December 2012. The textile sector provided an unbelievable return of 99% last year. The story for cement is even more impressive, generating a return of 152% in the same period.
One thing that these informal groups claim is perhaps true: putting your money in banks does not generate appropriate returns to investors who are looking for regular income. Their money, however, is safe, given the tight regulations around banking and finance. If a proper corporate governance and regulatory framework, similar to what we have for Mudaraba companies in the country, is devised for these informal Shariah-compliant investment and business groups, one may observe a new way of doing business in compliance with Shariah.
Major contributor
$16.5b was the value of global Takaful premiums estimated in 2011, of which 30% was the contribution of Iran.
Unbelievably high
50% is the return on investment per annum offered by some Shariah-compliant finance corporations.
Rapid expansion
59.6% was the average annual growth rate of deposits at Islamic banks, compared to 16.1% per annum for the conventional banking sector between 2002 and 2011, data from SBP shows.
The writer is an economist and a PhD from Cambridge University.
Published in The Express Tribune, April 22nd, 2013.
Banking practices: Banks meet to improve Islamic financing SOPs
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Senior Shariah scholars and advisers of Islamic banks and conventional banks with Islamic windows have agreed to standardise Forex and interbank Musharakah agreements between Islamic banks and Islamic banking windows.
This move will facilitate the availability of Shariah-compliant venues for deployment of excess liquidity of Islamic banks. This agreement was reached during a meeting called by Meezan Bank Ltd, in which Shariah scholars discussed the challenges in Islamic Treasury Operations.
The participants held a detailed discussion over recent issues in Forex Trading and interbank products and agreed to standardise Forex and interbank Musharakah agreements to facilitate customers.
Meezan Bank’s Head of Product Development & Shariah Compliance Ahmed Ali Siddiqui said “This forum brings together extensive knowledge and experience of industry experts on a single platform and has the potential to play a crucial role in addressing the challenges faced by the industry.” The Islamic Banking sector is one of the fastest growing markets in the country, increasingly attracting new customers from the conventional banking market. This has subsequently raised the need for improving the services provided by Islamic Banks to cater to the influx of new customers.
The forum was attended by several prominent Shariah scholars including Dr Muhammad Imran Ashraf Usmani (Meezan Bank), Mufti Irshad Ahmed Ijaz (Bank Islami), Mufti Khalil Aazmi (Bank Alfalah), Mufti Zahid Siraj (Burj Bank), Mufti Najeeb Khan, Mufti Hasaan Kaleem, Mufti Ebrahim Essaa and Mufti Bilal Qazi (Meezan Bank) along with Product Development and Treasury professionals of all major Islamic banks and Islamic banking windows of conventional banks.
Meezan Bank is Pakistan’s eighth largest bank in terms of branch network.
Published in The Express Tribune, April 23rd, 2013.
Islamic finance is key to economic growth in Oman, says expert
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The CEO of Bank Nizwa, Oman’s first Islamic bank, was a keynote speaker at a recent economic forum dedicated to Islamic finance.
Dr Jamil el Jaroudi (pictured), a leading expert in Islamic finance, delivered a powerful presentation under the theme ‘Islamic banking, great hopes for Investments’, which gave participants the opportunity to gain first-hand information on the importance of the industry to the financial landscape of Oman.
It included in-depth insights into the Islamic banking tools available to realize growth in the economy.
The forum, which was facilitated by Al Roya newspaper, drew delegates from many important industries across the Sultanate.
Dr El Jaroudi’s address was dedicated to pressing issues of the current stage of Islamic finance development in the Sultanate and delved into new approaches to understanding the future for the industry.
In his opening remarks, Dr El Jaroudi outlined his hopes for Islamic banking on spurring the development of Oman’s economy.
He said: “There is huge potential for significant growth in Islamic finance here in Oman, and we are confident that we can expand our horizons and our activities to create a very successful environment.
“We have established Bank Nizwa as a centre of excellence for Islamic banking where we provide a just and equitable model for economic growth through a range of banking tools. This is particularly true of our Islamic principles which leverage the economy to new heights through the financing of public sector projects.”
Dr Ashraf al Nabhani, General Manager — Corporate Support, Bank Nizwa, also participated in the panel discussion about ‘Capital Market-Expected performance.’
Bank Nizwa’s participation in an event like this is a testimony towards its readiness to support all channels that lead to understand Islamic Banking and its role in development of the economy.
Bank Nizwa is clear on its commitment to Islamic finance and to its customers through its suite of Shari' acompliant products and services which are integral to growing the market share of Islamic banking in Oman.
It has the talent, the products and the technology readily available to ensure that there is a conducive environment for the growth of Islamic finance and it will continue to work with the industry to facilitate the development of Oman’s economy.
Government ‘committed’ to expanding Islamic products
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Australia is a growth market for Islamic financial services including insurance, Parliamentary Secretary to the Treasurer Bernie Ripoll says.
“Islamic finance is a rapidly expanding market, with annual global growth estimated at about 15% to 20%,” he told the Amanie Australia Islamic Finance Forum in Melbourne.
“Some projections suggest the Islamic finance market will be worth $US2 trillion ($1.9 trillion) within the next three to four years.”
Islamic finance has developed to become an option for Muslim and non-Muslim consumers alike, Mr Ripoll says.
“We are proud our nation protects freedom of religion under our highest law. Because of this, banks and other financial institutions are free to implement measures designed to appeal to specific market segments [such as the Islamic community].
“The Government wants the introduction of Islamic financial services products to grow the sector… [it] regards the introduction of Islamic finance products to the domestic market as a way to open our financial services sector to new opportunities for growth.
“Because Australia’s regulatory arrangements already allow Shariah-compliant funds to be established here, the potential for new opportunities exists at the institutional level.”
There are more than 470,000 Muslims in Australia who may use Islamic financial services if they are more accessible, according to the Government.
“The introduction of Islamic finance products to the Australian market is not a replacement for other forms of finance, but rather a door to new opportunities for our financial services sector,” Mr Ripoll said.
“While Islamic finance is still in its early stages here in Australia, it offers much potential and this is why the Australian Government is committed to further developing Islamic finance.”
Breaking new ground: Setting misunderstandings aside, Islamic banking grows rapidly
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Despite misunderstandings about Islamic banking in different sections of the society, it is growing at a rapid pace in Pakistan and the growth will accelerate further if the central bank continues to chalk out policies.
These were the views of Executive Vice President Head of Product Development & Shariah Compliance, Meezan Bank, Ahmed Ali Siddiqui, who was speaking to a select group of journalists at a workshop on ‘Islamic Banking’ at Meezan Bank’s head office on Tuesday.
Siddiqui believes that Islamic banking will be a strong Rs1 trillion industry by 2015 and its size will be 20% of the country’s banking industry.
“Islamic banking is different from conventional banking and it is completely incorrect to say that both are same things with different names. Here your bank becomes business partner that provides you raw material for a joint business in which both profit and loss are shared among both partners,” he claimed.
Since Islam permitted trade and prohibited interest, Islamic banking focuses on trading by becoming a partner of its clients and does joint trading, he added.
“The size of Islamic banks in Pakistan is growing considerably, I believe that the time is not too far when people will start realising that this system is different and it can boost trade and economy of the country,” he stressed.
Islam encourages circulation of wealth and discourages its concentration in a few hands to narrow down the distinction between rich and poor. “The circulation of wealth is as important as blood in our body. As a blood clot paralyses the body, the concentration of wealth in a few hands paralyses the economy, which is why monopoly is prohibited in Islam,” he said.
Siddiqui said the concept of banking based on pooling of excess funds of depositors and channeling them towards those who require it for investment is not only approved but encouraged by Islam. However, he clarified that the concept of lending and borrowing on the basis of interest in not allowed in Islam.
A fixed rate of return is not permitted under Islamic Shariah. However, the fixed return does not make a transaction halal or haram such as profit on trading and rent on property, he explained.
The total size of the world’s Islamic banking industry is around $1.2 trillion whereas many leading conventional banks have Islamic windows such as Citibank, ANZ, RBS, Goldman Sachs, HSBC, Saudi American Bank, Saudi British Bank and USB AG.
Today, Pakistan has five full-fledged Islamic banks and at least 12 conventional banks are also operating Islamic banking branches.
Published in The Express Tribune, April 25th, 2013.
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