Eurozone crisis spurs growth of Islamic finance

The continuing volatility in bond and equity markets combined with the uncertainty surrounding the Eurozone has opened up the Islamic finance industry to a new segment of potential investors looking to diversify away from their traditional investments.

High net worth investors and their wealth advisers are primarily concerned in the current environment with wealth preservation, and many are looking to reduce their exposures to the Eurozone and to conventional financial institutions. 

The Islamic finance industry currently stands at an estimated $1trn with Deutsche Bank  forecasting that the Islamic market will almost double in size over the next four years to $1.8trn in assets. There are several drivers contributing to this growth; the sukuk (Islamic bond) market and the Takaful (Insurance) industry. We also expect to see the Islamic finance market continue to mature and expand on the back of increased awareness among investors of the benefits of Islamic finance. This increased awareness is particularly evident in the high net worth individual and advisor community, so Islamic wealth management will be a particular area to watch.  

According to Zawya, the leading online business intelligence platform focusing on the Middle East & North Africa, there was a record number of sukuk issues in November 2011, totalling $8.86bn. 2011 was therefore a record year for the sukuk market with over $79.5bn issued in the first 11 months of the year.  

2012 has had an equally strong start and is set to be another bumper year for a number of reasons. The first reason is the need to refinance the $7bn of existing issuance due to mature in 2012. Not all of this debt will require refinancing of course, as some will be repaid from available resources, but much will need to be rolled-over. 

Over the course of the first half of 2012, sukuk have outperformed most conventional bonds and have become an increasingly attractive investment and fund raising tool for both conventional and Islamic institutions. According to market reports, the most recent sukuk issues by First Gulf Bank, Emirates Islamic Bank, Majid Al Futtaim, which totalled $1.4trn, were oversubscribed by at least four times, a strong indicator of the level of demand for sukuk currently. 

Finally, many corporations are looking to take advantage of the investor demand for US Dollar Sukuk. In May 2012, Saudi Electricity Company issued a $500m five year sukuk and $1,250m 10 year sukuk. This is the first Saudi corporation to issue a US dollar denominated sukuk with a term in excess of five years. These corporations are finding sukuk an attractive alternative to conventional funds as the credit markets continue to tighten, increasing the need for businesses to diversify and expand their funding streams. Sukuk has therefore proven to be an effective source of funding for both conventional and Islamic institutions in recent years in particular.

It is also important to recognise how the sukuk market has recovered after the Dubai debt crisis in 2009. At the time there were concerns that many Sukuk would not be repaid. However recent events suggest otherwise and have further buoyed the market. One such issuance was Dar Al-Arkan, which recently announced that having sold land to Saudi Basic Industries Corp (SABC) for 742 million riyals it had sufficient resources to repay its sukuk in full. In June we also expect to see other sukuk mature and repay in full that had previously been trading significantly below par due to fears surrounding its ability to repay. 

Due, in part to the performance of the Sukuk market, there has been increased interest in sukuk funds such as BLME’s High Yield Fund that contains approximately 90% Sukuk and US $ Income Fund, which is comprised of just over 50% sukuk. 

The sukuk market is only half of the story when it comes to growth of the Islamic finance industry. The Takaful, or Islamic insurance, industry has seen unmatched growth in recent years and has expanded significantly, continuing to grow in the GCC as well as in new markets such as Egypt, Jordan and Lebanon.  

Ernst and Young predicted that the takaful industry would reach $12bn by the end of 2011. This is in comparison to 2009 when Takaful contributions were $7bn. In this report they also forecast the global Takaful market to reach $25bn at the end of 2015. While arguably ambitious, the growth projections again serve to demonstrate the demand for Islamic products and moreover suggest that the Takaful industry will remain a powerful growth catalyst for the Islamic asset management over the next decade.

Nigel Denison is head of treasury and wealth management and Bank of London and the Middle East

http://www.international-adviser.com/profiles-and-analysis/analysis/eurozone-crisis-spurs-growth-of-islamic-finance

Shariah Included in Indonesian Bank Rule

The country’s central bank will soon issue a regulation requiring Shariah banks to toughen down payments on housing and automotive loans, a deputy governor said on Sunday. 

The requirement will be similar to the implementation of the loan-to-value level applied to conventional lenders for housing and vehicle loans issued on March 15 and took effect on June 15. 

Under the new regulation, down payments of 25 percent for two-wheeled vehicles are required and 30 percent for four-wheeled vehicles. There were no rules before, but sellers often asked for about 15 percent. Loans typically account for 70 percent of car purchases in Indonesia. 

Shariah lenders were excluded from the regulation as in Islamic finance, lending does not require down payments. 

But Halim Alamsyah, a deputy governor at Bank Indonesia, said on Sunday that the first installment of Islamic loans for the automotive sector would be regulated. 

“We have decided that the first installment of Shariah credit for goods without down payments will be regulated,” he said. 

He did not specify the down payment size, despite saying the upcoming regulation was a precaution against a potential increase in non-performing loans amid the ongoing threat of global financial crisis. 

Bank Indonesia has sent signals to the market that it is cautious that credit expansion could grow too quickly in the future and may exceed local lenders’ financing capacity. 

The bank was worried of a bubble forming in the sector. Shariah banks comply with Islamic requirements, such as banning interest payments, providing no financing for alcohol and sharing profit and risks with customers. 

As Bank Indonesia did not include Shariah lenders in the down-payment regulation, many banks are bolstering their Shariah financing arms to avoid it as much as possible, exploiting a loophole in the rules. 

“The LTV and down-payment regulation [on Shariah lenders] needs to be made effective soon. More meetings, however, are still needed,” Halim said on Sunday. 

Automotive retailers have posted record car sales for July despite the introduction a month earlier of new rules requiring purchasers to make higher down payments, industry data show. 

Car sales in July hit 103,219 units, beating the previous monthly sales record of 101,743 units in June last year, data from the Association of Indonesian Automotive Manufacturers (Gaikindo) showed. 

The July figure was 16 percent higher than that for the same month in 2011 when 89,056 vehicles were sold. The latest figure brought total sales for this year to 638,264 units, up 26 percent from the same January-July period in 2011. 

Gaikindo chairman Sudirman Maman Rusdi said the increase in sales last month was due to customers anticipating Idul Fitri, which marks the end of the Muslim fasting month. 

Car sales in Indonesia are forecast to reach 875,000 units this year, similar to the figure last year but well below the original target of 1 million. 





http://www.thejakartaglobe.com/business/shariah-included-in-indonesian-bank-rule/537844

Nigeria Islamic Finance Shows Huge Potential

The Stock Exchange officially launches the NSE Lotus Islamic Index (NSE LII) which consists of companies whose business practices are in conformity with the principles of Shari'ah. Sunday Trust looks at the necessity of the index.

In a bid to attract Sharia/ethical investors to Nigeria's budding stock market, Islamic wealth manager Lotus Capital and the Nigerian Stock Exchange (NSE) on Monday launched a debut index of NSE-listed companies that comply with Islamic investment principles.

This is one of the many steps the exchange has taken to bring to fruition its vision of becoming the gateway to African markets.

The Islamic Equity Index known as the "NSE Lotus Islamic Index" (with the code NSE LII) consists of companies in conformity with the principles of Shari'ah. The NSE LII, which is the first index created to track the performance of Shari'ah compliant equities on the floor of the exchange will increase the breadth of the market and create an important benchmark for investments as the alternative non-interest investment space widens.

The Islamic Index can serve as a general benchmark for 'ethical' funds and can be seen as a basis for creating Mirror Funds, Index Funds, Exchange Traded Funds, Index options etc., which will broaden the range of financial instruments traded on the NSE.

The NSE Lotus Islamic index, covered 15 equities with combined market capitalisation of around N2.87 billion, excluding banks, companies with high debt or leverage and other stocks that conflict with Islamic principles.

The index is designed to encourage more investments from the Middle East and weighted towards fast moving consumer goods, cement, oil marketing and manufacturing sectors.

According to Lotus, no sector will be allowed to account for more than 40 percent of the index which will be reviewed bi-annually.

The asset manager also disclosed that it had a buffer of 30 firms to consider for the inclusion at any one point but that stock liquidity, keeping to the Islamic principle is key.

On debt, it said total debt as a percentage of the firm's total value should not be more than 33 percent for it to qualify.According to analysts, global Islamic banking assets exceed $1 trillion and can reach $4 trillion by 2020. There is also an estimated $50 billion in managed funds invested according to Islamic principles in equities.About half of Nigeria's population is Muslims. This underlies the potential market Islamic investment has in Africa's second largest economy, and according to an Islamic banking analyst, "Islamic products are new in Nigeria but the uptake is growing in double-digits."

The NSE LII comprises of 15 stocks listed on the floor of the exchange namely: Okomo Oil Plc, PZ Plc, Unilever Nigeria Plc, Nigerian Aviation Handling Company Plc, GlaxoSmithKline Plc, Japaul Oil Plc, Cadbury Nigeria Plc, Dangote Flour Plc, Honeywell Flour Nigeria Plc, National Salt Company of Nigeria Plc, Nestle Nigeria Plc, Ashaka Cement Plc, Cement Company of Northern Nigerian Plc, Dangote Cement Plc and Lafarge WAPCO Plc.

NSE LII is certified by an internationally recognized Shari'ah Advisory Board comprised of renowned Islamic scholars among them are Professor Dr. Monzer Kahf a professor of Islamic finance at the MSC programme in the Qatar Faculty of Islamic Studies and Professor Muhammed Bashar head of the department of economics, Usman Dan Fodio University, Sokoto.

Speaking about the launch, the NSE Project Manager for the NSE LII launch, Mr Osahon Aire explained that investment instruments like Exchange Traded Funds (ETFs) can be built on the Index which investors with a preference for ethical/Shari'ah compliant investments can invest in.

He added that the launch will tactically aid the development of the market.Osahon noted: "The NSE Lotus Islamic Index will further illuminate the massive investment opportunities available to ethically minded investors, both in Nigeria and overseas. All the companies that will appear on the Index have been thoroughly screened by Lotus Capital Halal Investment in accordance with a methodology approved by an internationally recognized Shari'ah Advisory Board comprising of renowned Islamic scholars."

He explained that the launch of the Index is an exciting development that is in line with the NSE's mandate of broadening and deepening the Nigerian capital market.The index will provide a reliable benchmark for Islamic and other ethical investments. It can serve as an important diversification tool for ethically minded investors and portfolio managers both locally and from around the world, who seek to profitably invest in emerging African equities market. It will also reduce the research cost and time required by an investor to independently create Shari'ah compliant equity portfolio.

Speaking during the unveiling of the index, the Managing Director of Lotus Capital, Mrs Hajarat Adeola said the index was created to track the performance of Shari'ah compliant equities trading on the floor of the NSE.

Giving details of the index, Adeola explained that each stock in the index had undergone a two-stage screening process, adding that those companies that passed the initial test are evaluated on the basis of Islamic financial screens to eliminate those with unacceptable levels of debt, cash and interest income.

According to her, "Only companies that pass the second stage will be considered for further analysis", pointing out that other criteria such as liquidity and market capitalisation of the equities are also taken into account. "Each sector weight is capped at 40 percent and each component stock is capped at 30 percent and the index is rescreened, rebalanced and reviewed bi-annually on the first business day in January and July of every year," she said.

http://www.globalislamicfinancemagazine.com/?com=articles_list&aid=1435

Islamic finance in Kenya(Video)

Islamic banking is a growing phenomenon and Kenya was the first country to introduce the trend in East and Central Africa. It already has two fully fledged shariah compliant banks

Click the following Link for the Video:
http://www.a24media.com/index.php/business-blog/3246-islamic-finance

What Morsy Means for Islamic Banking

Mohamed Morsy’s rise to the presidency could reintroduce Islamic banking reform and transform the industryFor months following parliamentary elections, the Muslim Brotherhood’s Freedom and Justice Party (FJP) has been working hard to draft and introduce new legislation that would dramatically transform Egypt’s Islamic banking industry, ending its decades-long role on the sidelines of the Egyptian economy.

A few months after the revolution, a small informal group of Islamic banking enthusiasts emerged to promote Islamic finance in Egypt and to pursue policies that would have been taboo under the Mubarak regime. “We decided to formalize this group and turn it into an NGO to promote a healthy Islamic finance industry, which would differentiate itself from its conventional counterpart and would offer something to society that conventional [banking] is not able to do,” says Walid Hegazy of Hegazy & Associates. “After the revolution, there was a lot more excitement in the air. Now we know the government is not going to be an obstacle — we could talk to the government,” Hegazy recalls.

An informal group turned into a formal organization known as the Islamic Banking Association, and began to participate in workshops and parliamentary sessions and advise new parliamentarians on the ramifications of different historical precedents. One group, the FJP, was particularly active. It encouraged Hegazy and other Islamic banking experts to participate in legal reform efforts. “When [the FJP] wanted to [achieve] legal reform, they realized they [could not] do it alone; they invited banking sector experts,” he says, noting the party is not aiming to transform the entire banking industry into an Islamic one. “Their view is, ‘Let everyone show us how they can contribute to the economy’.”

Nonetheless, the FJP remained bullish on its outlook for growth for the Islamic finance sector, now estimated at 5–9% of the total banking sector. Mohamed Gouda, a member of the FJP economic committee and an active proponent of Islamic finance, estimated Islamic banking could grow to 35% within the next five years. Gouda did not return a request for comment, stating only that his party was in a state of emergency at the time of presidential runoffs.

Poised for growth

In fact, all the necessary conditions are in place in Egypt for the Islamic banking sector to take off as it has in many markets in the MENA region and globally.

Currently Egypt has issued 14 Islamic banking licenses, but only has three full-fledged Islamic banks. Of these, Faisal Islamic Bank of Egypt is the most prominent, established in 1979 through a special decree.

Despite being the birthplace of Islamic banking, Egypt’s Islamic banking industry remains largely underdeveloped at LE 120 billion, compared to its commercial equivalent valued at LE 1.3 trillion according to central bank data. By comparison, Islamic banking comprises about 90% of the banking industry in Saudi Arabia.

Yet Egypt could become a potential powerhouse for dynamic Islamic banking growth, given a set of legal and political incentives because of a large Muslim population and built-in demand. Many retail banking customers and investors find refuge and security in Islamic financial instruments whether for religious reasons or to complement their portfolio rattled by the European debt crisis and the ongoing global recession.

“After the financial crisis, many banks suffered losses. We did not because the concept of Islamic banking is secure,” says Abdel Halim Ahmed, general manger of public relations at Faisal Islamic Bank. The bank follows Islamic principles whereby the bank is a trader that buys and sells. While the bank doesn’t give loans with interest, it makes a profit on the difference between the purchase and the sale price. Faisal Islamic Bank has been growing its branch network since it started operations in Egypt in 1979 and now has 29 branches nationwide.

In 2011, the Faisal Islamic Bank posted a 12.28% increase in total revenues, largely driven by an increase in its retail sector. “We concentrate on guaranteed investments,” says Ahmed. 

Faisal officials reached were not aware of and did not have any comment on the proposed legislation: the new chapter being added to the central bank law as well as the EFSA’s Capital Markets Law governing sukuk issue. The proposed banking law includes raising the minimum capital for banks to LE 2 billion from LE 500 million. It also revises Shariah board regulations and limits the governor to two four-year terms in office, according to media reports and experts familiar with negotiations.

For Faisal, it was business as usual with the same laws being applied to both commercial and Islamic banks.

Associated Press

Green light ahead

After the hotly contested presidential elections and an effective dissolution of parliament by a court order on June 14, the proposed legislation appeared to be hanging in the air, depending on whether the Muslim Brotherhood-backed Mohamed Morsy or Mubarak’s last Prime Minister Ahmed Shafik had secured the presidency.

“If [Mohamed Morsy] wins the election, then they will try to continue to increase the number of Islamic banks,” Hegazy said ahead of the presidential runoff. “If [Ahmed Shafik] wins the election, then he’ll still encourage Islamic banking but there will be a lot of other agendas.”

When the presidential elections results were finally announced on June 24, Morsy’s historic win did not only represent the first civilian president-elect or the first elected president after the revolution, it also gave a second chance for Islamic banking reform as well as the banking industry as whole — if the Morsy administration chooses to advocate the same agenda and policies the FJP pioneered in parliament prior to its dissolution.

It represents a chance to shape the development of the banking sector and potential reform of the banking sector as a whole , which they have been mulling for months. Leaders of the group, including Hassan Malek and Khairat El Shater offer experience in managing corporations and following Shariah principles.

As president, Morsy could offer a more daring and sweeping approach to the banking reform than a Shafik presidency could, according to analysts. 

It would also mean that once the parliament is elected again, the party in power would have to reach out to those segments of the population who do not embrace a growing role for Islamic banking in Egypt. One of the main criticisms of Islamic banking are its variations from country to country as well as at times conflicting definitions of what constitutes as a Shariah-compliant product or company.

Rushdi Siddiqui, who is a Global Head of Islamic Finance at Thomson Reuters, has said that the global sector does not excel at educating people and explaining how it differs from conventional finance.

“Certain prejudices and bigotry exist in many countries that still do not understand Islamic finance,” he said on Al Arabiya.com. “It’s a process that requires a lot of education. Christian Evangelists have said that Islamic finance is related to terrorism finance, while in parts of the US [some] think the same.” 

Nonetheless he estimates the $1 trillion (LE 6.04 trillion) global sector will reach $2 trillion (LE 12.08 trillion) within five years.

In Egypt, the potential for growth remains extensive for the Islamic banking sector despite the drawbacks, but the exact outcome and direction of its development in Egypt is elusive. On many counts, the future of Islamic finance in Egypt would depend on how daring the Morsy administration will choose to be on banking reform, the makeup of the new parliament when the new parliamentary elections are held, as well as the emerging balance of power between the two.

http://businesstodayegypt.com/news/display/article/artId:442/What-Morsy-Means-for-Islamic-Banking/secId:5

Emerging discipline of Islamic banking

Afzaul Haq in the first of a two-part article on 'Basel Accords and Capital Adequacy of Islamic banks'

Practical experience under different changing paradigms has led the Basel Committee on Banking Supervision to draft the second revision of the Basel Accord i.e. Basel III. This latest version of the Basel Accord has been evolved as a more stringent regulation to come into force phasing over the years from 2013 to 2019. This stringency has disqualified many a hybrid or derivative instrument for treatment as regulatory capital. As a result, although they were eligible under Basel I and Basel II, those derivative elements are now scheduled to be excluded from the purview of capital according to Basel III. At the same time, non-joint-stock company shares with comparable features are included in the same status of ordinary shares of a joint-stock company. Both these exclusion and inclusion are prescribed on the basis of the extent of capital-likeness of the concerned instrument.

But we observe that regarding capital and its adequacy, a significant component yet remains ignored or overlooked in the sight of the Basel Committee. Incidentally this component also relates to Islamic banking. In principle, Islamic banking possesses some exceptional traits which are quite different from those of its conventional peers. Those features logically deserve significance in respect of capital, its composition and adequacy as well.

As of today, be it considered nationally or globally, the banking industry cannot ignore the emerging discipline of Islamic banking. Therefore, calculation of capital, as long as its purpose to justify strength of a bank is concerned, must not ignore the reality of Islamic banking. At home, around 15 per cent to 20 per cent of both assets and liabilities sides of the consolidated affairs or Balance Sheet of the banking industry are covered under the umbrella of Islamic banking. Growth of Islamic banking and finance all over the world is tremendous, particularly for the last decade.

But the Basel Accord is yet to recognise the distinct characteristics of different aspects of Islamic banking. We feel that the reality must not be ignored. So is the specialty of Islamic banking. Mudaraba deposit, the substantial (±80 per cent) component of total deposit of any Islamic bank is, by nature, quite different from the deposit of a conventional bank.

Mudaraba principle of deposit implies that the bank receives deposits as Mudarib or manager of fund. The bank is authorised to invest such fund 'at the risk of the depositor'. Income/profit resulting from deployment of such deposits is shared between the bank and the depositor at a pre-agreed ratio. Loss, if any, not resulting from the negligence of the bank or any of its representatives, is exclusively borne by the Mudaraba depositors themselves.

Mudaraba deposits are neither like usual deposit liability of a conventional bank, nor are they shareholders' fund. But yet they possess many important features of capital. This is why Mudaraba deposit is rather called quasi-capital. Such a quasi-capital may easily be eligible for a secondary component of capital as a parameter of the strength of a bank. In terms of quality (of capital), Mudaraba deposit is far better than many items, which are still recognised as the components of capital in its different tiers even under most stringent Basel III. 

Traditional scholars may not go deep into the matter above; but the concerned professionals including the banking regulators, auditors and rating agencies cannot but do so. In fact Mudaraba fund is by nature an equity. It has got loss-absorbing capacity, a vital characteristic of capital. This very character differentiates capital from debt. A Mudaraba deposit is neither secured nor guaranteed by the (Islamic) bank. These two features are very strong criteria of a capital instrument.

As a rationale to the proposition for recognising Mudaraba deposit, in the calculation of banks capital, reference may again be invited to some of the new provisions of Basel III as already stated above. This revision indicates that focal point in assessing the quality of an instrument (to be treated as capital) is nothing but the features or terms and conditions of deployment of money there against it. The inherent provisions of Mudaraba deposit naturally qualify the same as one of the components of equity or capital.

The very terminology of 'Mudaraba' itself denotes capital. In fact Mudaraba depositors make deployment of their fund in the business of the bank. No doubt, they invest in expectation of share of profit to be earned by the bank. But at the same time they agree to bear the entire of the genuine loss, if any. This provision of taking the risk of loss by the depositor is a sine qua non of any Mudaraba agreement. Such a provision is rather a divine mandatory stipulation of any Mudaraba deal. 

Under Mudaraba principle, provider of fund and the manager of fund are mutually exclusive. One is absolute provider of fund and the other is absolutely the manager of fund. In Islamic banking, the status of Mudaraba depositors is the provider of fund; whereas bank is the exclusive manager of fund. As far as the Mudaraba principle is concerned, incurring a loss of money means loss of the money provider (depositors); but sharing of profit between the depositor and the fund manager (bank), is to be based on a pre-agreed income sharing ratio (ISR). This is why in some countries a Mudaraba deposit account is called profit-sharing investment account or PSIA. It is remarkable that they call Mudaraba deposit as investment account to differentiate the same from all other non-Mudaraba deposit accounts. 

By definition the Mudaraba depositors bear their own commercial risk. In that case, for commercial risk, no separate room therefore is required in the capital structure of an Islamic bank. But such rooms are required rather for the following two other banking risks, beyond routine commercial risk of Mudaraba deposits:

Fiduciary or management delinquency risk: it is the risk to incur non-genuine loss i.e. loss resulting from the events like negligence, misconduct or breach of contract on the part of the bank. Mudaraba depositors by themselves are to bear commercial risk; but not the fiduciary risk. Therefore, in case of a loss, arising from fiduciary risk, the bank is to compensate the depositors. A bank is to do so because, after all, every bank is the symbol of the custodian or trustee of its depositors' fund. This symbol at least socially as well as ethically entails operational risk on the part of the banks. As such, Mudaraba deposit creates a silent fiduciary risk, which is virtually to be borne by the bank i.e. its shareholders.

Displaced commercial risk: it refers to an extra risk of a bank beyond the usual commercial risk. Business or commercial risk is borne by Mudaraba depositors but displaced commercial risk is not. Any loss arising from the displaced commercial risk, may virtually need to be shifted to the bank's own capital. Mudaraba depositors are entitled to the pre-agreed ratio of income (not any fixed amount or rate pre-fixed on the deposit itself) of the bank, be it more or less. Under Mudaraba contract, profit on deposit is dependent on the bank's income with a positive correlation between the two. 

As such, usually higher income of the bank would fetch the depositors a higher profit and vice versa. It is true that by definition they are also to bear genuine loss (i.e. the commercial risk), if any. But practically, for reasons whatsoever, if actual rate of profit on the Mudaraba deposits becomes abnormally low (even on genuine ground), not to talk of loss, it may trigger chain withdrawals of Mudaraba funds. 

Such a chain withdrawal may give rise to reputational risk for that specific bank and even systemic risk for the banking sector as a whole. To prevent any such untoward event, it might again be a silent compulsion, on the part of the bank, to pay the depositors higher than the actual (low) rate earned. Thus an endeavour may be inevitable to keep the profit rate on Mudaraba deposit around at par to the market. Such an implicit or implied obligation to balance or adjust the said shortfall is originated from displaced commercial risk. This shortfall amount necessary to make good or compensate, virtually tags this risk to banks capital. This hidden or silent compulsion virtually shifts the incidence of commercial risk of the Mudaraba depositors to the bank itself, in the guise of displaced commercial risk. 

Besides these two specialised risks as stated above, there remain some other reasons for which routine capital requirement beyond Mudaraba deposit itself cannot be fully avoided. Those factors constrain Mudaraba deposit from its being best quality capital like ordinary shares. When it is compared to share capital, Mudaraba deposit lacks in some features, like perpetuity and subordination. This is why one cannot claim that Mudaraba deposit itself is as good as common stock or ordinary shares in all respect. So, for obvious reason, Mudaraba deposit must not be proposed to be included in the predominant core share capital. Rather such a deposit qualifies for supplementary or additional capital.

The writer is steering Islamic banking of Bank Asia Ltd. Opinions are his own and not of the or ganisation he is serving. afzal@bankasia.com.bd

http://www.thefinancialexpress-bd.com/more.php?news_id=139339&date=2012-08-07

Challenges to growth of Islamic banking

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

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

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

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

More than 310 Islamic financial institutions currently operate in more than 75 countries, and in the GCC the sector continues to flourish. The recent announcement that the world's largest Islamic bank, with a capital of $100 billion, would be headquartered in Bahrain, will boost this trend.But despite the global interest and new trends, Islamic banking still faces many challenges. Many of these challenges have complicated Sharia and professional characteristics.

Wide variation

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

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

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

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

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

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

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

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

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

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

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

http://gulfnews.com/business/opinion/challenges-to-growth-of-islamic-banking-1.971299?flv=1

Why is Islamic finance important for MBAs?

There are a number of business schools now introducing Islamic Finance in their curriculums. For some, the reasoning is to open MBA students up to different cultural realities, but for many schools, it just makes business sense.

We can identify three main reasons why it is important to include Islamic Finance in the curricula of an MBA student.

Islamic finance has a niche hold on the market, and it is growing at a tremendous rate

Islamic finance has developed into a solid industry that complements conventional banking, only a fraction of the available liquidity is actually invested in the sector, (2 per cent of global banking assets) though it does offer great potential and further growth prospects (is growing more than 20 per cent annually.) Some of the most active countries in Islamic finance (Saudi Arabia and the UAE for example) represent the highest level of liquidity in today’s global market, a market hungry for liquidity.

On the other hand, out of the 1.6 billion Muslims in the world, only 14 per cent use traditional banks, compared to 92 per cent of US households and 95 per cent UK, and a large number might find Islamic finance as an attractive option for their savings and/or financial needs.

The Islamic market demands a specific expertise that combines solid financial knowledge with that of Islamic finance market. MBAs can fill that role

The origins of the Islamic modern banking movement first developed in the 1950s and 60s, but its full development occurred in mid 70s after the oil crises of 1973, coinciding with the emergence of Islamic movements.

During the 90s, Islamic financial institutions became increasingly innovative and developed more complex instruments and structures to meet the demands of modern day business. Today they cover a wide product range, from corporate finance to asset management; and future development is likely to be in the area of derivatives liquidity management.

In recent years, driven by the oil financial liquidity and an increase demand, the industry witnessed a large expansion, both in terms of its side, as well as in the financial innovation of the new developed products. Today, most conventional players are active, like Deutsche Bank, HSBC, BNP, Citi, UBS, or Barclays in the offer side but also companies like general electric in the demand side. Therefore, it is becoming a global industry that needs global expertise.

Because the industry is so new, there is still much room for people willing and capable of providing the needed innovations to move the industry further. Thus, MBAs not only need to learn about the Islamic finance world because it can shed light on other finance markets, but because it invites innovation and offers job growth.

MBA students have a solid training in finance and finance innovation, that can be easily transfer to the Islamic finance sector, provided that they understand enough the Islamic finance market. Therefore, for MBA students looking into new career possibilities, Islamic Finance Industry can definitely be something for them to explore.

A deeper understanding of Islamic finance will help MBAs shape the debate on the new financial order

There is a popular saying: There is nothing like a good crisis to reassess your options and look for new alternatives.

Islamic finance can offer some food for thought in the financial crisis. For example, the industry was less effected by the crisis because its intrinsic features help the stabilization of credit growth, promote an asset-based investment, foster economic productive transactions and thus a reduction of systemic risk, and for the most part help to have a balanced leverage.

In general, the principles of avoiding speculation and fostering instead the real economy provide interesting insight on how to avoid some of the causes of financial crisis.

In short, the market for Islamic finance has developed itself as a serious alternative for conventional banking and covers a wide product range, experiencing state of the art education- and research regarding the Islamic Finance Industry is interesting for international students.

A deeper knowledge of Islamic finance can improve the competitiveness of MBA students on the international financial market stage – for their personal career possibilities and also in shaping a new financial order that is in the coming.

Celia de Anca is the professor of Islamic Finance and director of Scief at IE Business School.

http://www.independent.co.uk/student/postgraduate/mbas-guide/why-is-islamic-finance-important-for-mbas-8009567.html

US Islamic assets manager set to delist

Shariah Capital, an Islamic asset management firm based in the United States, is to delist from London's Alternative Investment Market (Aim) after a seven-year string of losses.

The hedge fund manager, which operates in the Middle East and has reported annual losses every year since 2005, said in a market message it would seek a cancellation of the shares.

"In the directors' opinion, the Aim quotation has not provided the company's shareholders with a liquid, or even semi-liquid, market for its common shares."

The US$300,000 per year cost of maintaining the listing is better spent elsewhere, the company said. The company's chairman and chief executive, Eric Meyer, alongside his family trusts, own 76.95 per cent of the voting rights - meaning the 75 per cent threshold needed to complete the delisting will be easily met. The bank's shares fell 30 per cent to 35 US cents yesterday. Shariah Capital suffered three board resignations last year, including Sheikh Yusuf Talal DeLorenzo, an Islamic finance specialist.

Last month, the company announced another year without profit, widening losses to $463,984 for last year compared with $353,954 during the previous year, which it attributed to the impact of the euro-zone debt crisis and Arabian Gulf investors' reticence to invest in hedge funds.

In its annual earnings statement in June, the company said it "does not believe ultra cautious Gulf investors will change their mood until the current crisis of sovereign credibility is demonstrably behind us."

The company added it would seek business outside the Middle East for the first time.

Dubai Multi Commodities Centre, the free zone authority for Jumeirah Lakes Towers, is one firm exposed to the delisting as a result of its 4.99 per cent stake in Shariah Capital, which it purchased in March 2008 for $5.5m.

 http://www.thenational.ae/business/markets/us-islamic-assets-manager-set-to-delist

ghunter@thenational.ae

Sri Lankan firm launches a “Shari’ah Compliant Stock Market Investment Plan”

Sri Lanka’s Innovest Investments has launched an “Islamic Shari’ah Compliant Investment Plan” which comprises of only Shari’ah compliant stocks traded on the Colombo Stock Exchange.

The company says, with this scheme in operation, investors who prefer to avoid interest or Riba can now limit their investments to shares from a basket of Shari’ah compliant companies.

“The basic precept in this investment plan is that one can buy and sell shares subject to the condition that the company is undertaking a Halal business” added the firm in a media release issued annoucing its latest investment plan.

Innovest, is a firm engaged in providing advice to both institutional and individual clients looking to invest in the stock market as well as fixed income securities.

Former Chairman of the Colombo Stock Exchange (CSE) and Finance Commission Ajit de S. Jayaratne and top corporate executive Dian Gomes are the key figures behind the company.

http://www.news360.lk/business-finance/news-sri-lankan-07-08-2012-firm-launches-a-%E2%80%9Cshari%E2%80%99ah-compliant-stock-market-investment-plan%E2%80%9D-446573

Role of professional real estate firms in Islamic banking

In the region there have been challenges to Islamic banking due to the slump in real estate, however, advocates say the system has built- in protection when compared with the conventional financial institutions as excessive risk taking is banned

The decision to licence the operation of Islamic banking in the Sultanate has opened up windows of opportunities for the banking sector in Oman. The successful launch of “Bank Nizwa”, an exclusive Islamic bank and the opening of Islamic banking operations windows within conventional banks is evidence that the banks plan to capitalize on the opportunities presented by the new industry and meeting the increasing demand for Sharia-compliant finance.

Over the past two decades, Islamic finance has burgeoned into a $1 trillion global industry that, among other things, has served as a vital source of funding for real estate projects and developments around the world.  Several modes of Islamic financing have been developed based on the primary tenet of Islamic financial intermediation that mandates the sharing of risk between the lender and the borrower.

Islamic banks have focused on real estate because it fits with Islamic principles, which require an underlying physical asset in all transactions. Many other investment classes are also off-bounds due to prohibition on gambling and interest.

Some institutions have relied heavily on real estate as the primary business model, investing in real estate, developing real estate and lending to activity around real estate. The real estate investment and finance products could involve the purchase of land, buying and selling, build and sell, build and lease and re-development.

In Oman, Islamic finance has the potential to, among other things, help the revival of the domestic real estate sector. This impending resurgence will help investor confidence in the local market and accelerate national economic growth as well.

In the region there have been challenges to Islamic banking due to the slump in real estate. However, advocates say the system has built- in protection when compared to the conventional financial institutions as excessive risk taking is banned. In addition to the market risks there are areas such as competencies and expertise to supervise risks effectively.

Islamic commercial banks have been conservative in lending and collateral valuations. Investors are being very cautious and asset prices are going down, so it is more challenging. The challenges are in identifying the quality of asset, asset price risk, rate of return risk, displaced commercial risk and equity investment risk.

The bank’s exposure for Islamic banks typically takes the form of a profit sharing contract; whereby the Islamic bank puts its own money at risk in the form, effectively, of an equity stake. The bank’s exposure depends on both the skill and honesty of its partner.

This potent mix of high risk and moral hazard is an area which needs greater scrutiny. In fact, as the real estate assets which banks are financing continue to be owned by their clients, much Islamic bank exposure to real estate risk may not appear on the sector’s balance sheets.

An experienced property management firm such as Cluttons has in-depth knowledge and experience to assist with critical risk management activities on individual opportunities such as condition surveys, purchase reports, valuations, and appraisals as well as strategic guidance on market opportunities and determinants of value of real estate income for investment decisions.

by Philip Paul, Head of Agency, Cluttons Oman

http://www.kippreport.com/2012/08/role-of-professional-real-estate-firms-in-islamic-banking/

Lack of awareness on Takaful, conventional insurance differences

Many Malaysians do not understand the importance and difference between takaful and the conventional insurance, says Zuraidah Hanim Ibrahim, the first lady agent from Takaful Ikhlas Sdn Bhd to break into the Million Dollar Round Table (MDRT) ranks.

She said Malaysians were not aware of takaful coverage, as they often had the misconceptions on the differences between the Islamic and the conventional insurance.

"Only 10 per cent of Malaysians have takaful coverage compared to 42 per cent who have insurance coverage.

"The untapped market is actually is in the high-income market.

This is because they have no time to explore what is takaful and usually, they are insurance policy holders, yet looking for more and better coverage," she told Bernama in an interview.

Zuraidah said takaful, an Islamic insurance concept grounded in Islamic muamalat (Islamic banking), observed the rules and regulations of Islamic law.

"In reality, it is better to have both kinds of coverage for a person, as both insurance structures give benefits in different ways," said Zuraidah, who manages over 1,500 Takaful Ikhlas policyholders.

On MDRT, Zuraidah said, with a personal production of family takaful for the first year contribution of RM461,000, she was able to make it to MDRT 2011, along with 7,000 other insurance and takaful agents from around the world.

The minimum premium qualifying mark will increase every year, and for the MDRT 2011, the mark was RM420,000.

With the induction, Zuraidah, who runs her own financial consultancy via Subang Jaya-based Darul Asiah Consultant Sdn Bhd, joined the ranks of some 36,000 life insurers and financial services professionals from over 430 companies in 78 countries.

The MDRT annual meeting is also designed to expose participants to innovative sales ideas in the life insurance-based and financial services business.

It will have about 100 speakers during its sales ideas breakfast sessions, motivational main platform presentations, educational afternoon sessions, and what it badges as insightful evening sessions.

MDRT members demonstrate exceptional professional knowledge, strict ethical conduct and outstanding client service. - Bernama

http://www.dailyexpress.com.my/news.cfm?NewsID=82297

Islamic banking carries huge opportunities for Oman

The decision to licence the operation of the Islamic banking in the Sultanate has opened up windows of opportunities for the banking sector in Oman, according to Philip Paul, Head of Agency, Cluttons Oman.

The successful launch of Bank Nizwa, an exclusive Islamic bank and the opening ofIslamic banking operations windows within conventional banks is evidence that the banks plan to capitalize on the opportunities presented by the new industry and meeting the increasing demand for Sharia-compliant finance.

Over the past two decades Islamic finance has burgeoned into a $1 trillion global industry that, among other things, has served as a vital source of funding for real estate projects and developments around the world. Several modes of Islamic financing have been developed based on the primary tenet of Islamic financial intermediation that mandates the sharing of risk between the lender and the borrower.

Islamic banks have focused on real estate because it fits with Islamic principles, which require an underlying physical asset in all transactions. Many other investment classes are also off-bounds due to prohibition on gambling and interest.

Some institutions have relied heavily on real estate as the primary business model, investing in real estate, developing real estate and lending to activity around real estate. The real estate investment and finance products could involve purchase of land, buying and selling, build and sell, build and lease, and redevelopment.

In Oman, Islamic finance has the potential to, among other things, help the revival of the domestic real estate sector. This impending resurgence will help investor confidence in the local market, but also accelerate national economic growth as well.

In the region there have been challenges to Islamic banking due to the slump in real estate, however, advocates say the system has built- in protection when compared with the conventional financial institutions as excessive risk taking is banned. In addition to the market risks there are areas such as competencies and expertise to supervise risks effectively.

Islamic commercial banks have been conservative in lending and collateral valuations. Investors are being very cautious and asset prices are going down, so it is more challenging. The challenges are in identifying the quality of asset, asset price risk, rate of return risk, displaced commercial risk and equity investment risk.

The bank’s exposure for Islamic banks typically takes the form of a profit sharing contract; whereby the Islamic bank puts its own money at risk in the form, effectively, of an equity stake. The bank’s exposure depends on both the skill and honesty of its partner.

This potent mix of high risk and moral hazard is an area which needs greater scrutiny, in fact. As the real estate assets which banks are financing continue to be owned by their clients, much Islamic bank exposure to real estate risk may not appear on the sectors balance sheets.

http://www.twentyfoursevennews.com/banking-finance/islamic-banking/islamic-banking-carries-huge-opportunities-for-oman/

Islamic Finance - An alternative banking model?

Whether you're bored of bank bashing or not, there's no denying that people are searching for more trustworthy, transparent places to place their cash. And with the Islamic Bank of Britain (IBB) launching a table-topping 4% expected profit rate for its two-year fixed account, will faith-based bank accounts prove a popular alternative?

Contrary to what you may think, the account is open for anyone to apply. And as an Islamic bank, IBB does not pay interest. The rate is offered as an 'expected profit rate', because the Bank invests the funds into Sharia compliant and ethical trading activities. These activities deliver a profit over the 24 month term.

But you can trust in this, as IBB said it has never failed to deliver the expected rate.

How do Islamic bank accounts work?

Islamic banking products forbid the payment or receipt of interest and refuse to invest in "unethical" industries such as the gambling, pornography or the tobacco trades. They have become increasingly popular across a wide range of religious groups and general consumers.

Islamic finance turns traditional financial institutions on their head. It has to be Sharia, or Islamic law, compliant. Sharia is taken from the Koran, one of whose central tenets - that money has no intrinsic value - might sound alien to the denizens of the City.

The principles of Islamic banking are more than 1,400 years old, but the practice is relatively new. It was launched in Egypt in 1963.

"As the credit crunch has mutated inexorably into a recession, with bankers having eclipsed politicians, lawyers and even journalists as public enemy number one, the growing number of Islamic finance institutions in Britain might just be sitting pretty," reportsthe Times.

The UK now has a handful of fully Sharia compliant banks and dozens of other financial institutions have set up special branches or firms. They include the Qatar Islamic Bank(QIB), and the Islamic Bank of Britain, which has headquarters in Birmingham.

So are the basic principles what banking needs?

Could Sharia principles set us on the path to building real and sustainable economies?

Central to Islamic finance is the fact that money itself has no intrinsic value, it is simply a medium of exchange. Each unit is 100% equal in value to another unit of the same denomination and you are not allowed to make a profit by exchanging cash with another person.

But it does not abolish inherent business risk, and it can finance an asset bubble as well as any Western bank. Reflecting in part the world it comes from, it can be conservative and far from enthusiastic about innovation in either technology or finance.  And - this may be positive or negative - Islamic banking would have been unable or unwilling to finance growth through debt.

However, authors Andrew Sheng, ex-chairman of the Hong Kong Securities & Futures Commission and Ajit Singh, emeritus professor of economics at Cambridge University, said there is growing convergence between Islamic and western finance. It has an important role to play in reframing western finance in an ethical framework.

 "...Islamic finance could prove to be a serious alternative to current models of derivative finance."

"The test of any alternative financial system depends ultimately on whether it is - or can be -
more efficient, ethical, stable, and adaptable than the prevailing system.

"For now, there is no Islamic global reserve currency and no lender of last resort. But the Islamic world is the custodian of huge natural resources that back its trading and financial activities."

There should be a return to "back to basics" banking across the board, rather than merely among Islamic banks.

Some mainstream banks such as Lloyds and HSBC offer Islamic products. HSBC, for example, has Islamic mortgages that are in demand even from non-Muslims.

Some of the tenets of Islamic banking will appeal to anyone who agrees with the underlying principles of equitable distribution for everyone. And they are deemed efficient and productive by many.  

The International Herald Tribune adds: "Islamic banking and financial institutions provide a good example of Sharia sensitive business. There are a number of studies comparing efficiency and productivity of Islamic banks with their conventional interest-based counterparts, on the global, regional and national levels. The results of such studies are at best inconclusive, suggesting that Islamic banks are on average at least as productive, profitable and efficient as conventional banks in the jurisdictions wherein they co-exist with conventional banks."

http://www.mindfulmoney.co.uk/13161/investing-strategy/islamic-finance--an-alternative-banking-model.html