Latest from GIFC

Friday, 22 May 2015

Islamic finance & management events in Kuala Lumpur Malaysia



Date: 17-18 March 2015
Event: KL Conference on Islamic Finance
Event site: www.islamic-finance-conference.net
Register

Date: 21-22 April 2015
Event: KL Conference on Islamic Wealth Management
Event site: www.islamic-wealth-management.net
Register

Date: 9-10 June 2015
Event: KL Conference on Shariah & Legal Aspects of Islamic Finance 2015
Event site: www.shariah-legal-islamic-finance.blogspot.com
Register
To register or reserve a seat online, please go to:

Organizer: Alfalah Consulting
www.alfalahconsulting.com

Malaysia remains largest sukuk market

SINGAPORE: Despite the rapid growth of other sukuk markets, Malaysia remains the largest and most liquid, with a deep institutional investor base.


This is according to Moody’s Investors Service in its just-released Moody’s analysis report titled “Islamic Finance: 2015 Malaysian Sukuk Volumes Will Be Stable, Driven by Refinancing.”

Moody’s Global Head of Islamic Finance, Khalid Howladar said: “We expect total sukuk bond issuance in Malaysia to be at or slightly lower in 2015, when compared with the US$20bil (RM72bil) seen in 2014.

“This is, given Malaysia’s adherence to its policy of fiscal deficit reduction, against the backdrop of weak commodity prices and foreign exchange volatility.

“Malaysia’s declining share of global issuance reflects the increasing  internationalisation and diversity of Islamic capital markets.”

Simon Chen, a Moody’s vice president and senior analyst for the financial institutions group, said for Islamic banks in Malaysia, overall loans growth, including for Islamic financing, will slow slightly to between 8% and 9% in 2015 from 10% in 2014.

“This will reduce the banks’ need for new funding, because asset growth will moderate, due to the country’s slower economic growth,” he added.

Chen pointed out that at the same time, Islamic banks will continue to  apply sukuk in addressing the significant maturity mismatches between their assets and liabilities, and to improve liquidity management in the  context of Basel III.

Moody’s analysis is co-authored by Howladar, Chen, vice president and senior analyst for the sovereign risk group Christian de Guzman, assistant vice president and analyst Nidhi Dhruv, as well as associate analysts Vincent Tordo and Maisam Hasnain. Dhruv, Tordo and Hasnain are Islamic finance specialists in the corporate finance group.

The report said that in 2015, corporate sukuk issuance would remain dominated by Malaysian government-related issuers, as such issuers continued to tap and further deepen the Malaysian sukuk market.
It also said US$44bil (RM158.6bil) of Malaysian sukuk would mature in 2015-2017, with corporate and sovereign issuers needing to refinance almost 90% of the total amount. Financial institutions account for the remaining US$4.6bil (TM16.6bil).

Of the US$44bil, only about 6% is denominated in US dollars, with the rest in ringgit, highlighting the depth of the domestic market.

As for the Malaysian sukuk market in relation to the overall global sukuk market, the former’s share of volumes is declining.  At March 31, 2015, some 58% of the about US$308bil (RM1.11bil) of total sukuk outstanding were issued in Malaysia versus a 40% issuance share in 2014.

The remaining issuance is increasingly fragmented, reflecting increased  volumes from other Islamic markets, particularly the Arabian Gulf countries.

Moody’s expects this trend of increased volumes from other Islamic markets to continue.
Moody’s report pointed out while other sovereigns have been keen to support the growth of Islamic finance in their jurisdictions, it is unlikely over at least the next five years that any other market except perhaps Saudi Arabia will match the depth and breadth of Malaysia’s domestic sukuk market.

This is considering the lead gathered from over a decade of sustained issuance, and the extensive and coordinated policy support from Malaysia’s central bank and all other stakeholders in the country.

The report further highlighted that future growth in issuance in Malaysia would be driven by strong demand from local investors, coordinated and supportive policies from the Government for Islamic finance.

Other factors include the large and growing base of syariah-compliant corporates in Malaysia and global investors’ increasing familiarity and comfort with sukuk instruments and increasing appetite for Malaysian credit.

(The Star Online / 21 May 2015)
---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic Finance -- a Potent Tool to Address Most Pressing of Development Challenges

Even though it still remains a small share of the global financial system, Islamic finance industry has expanded rapidly, with annual growth rates of 10 to 15 percent over the past decade. And today, Shariah-compliant financial assets are estimated to be close to U.S. $2 trillion, compared to roughly U.S. $200 billion in the late 1990s. Many countries already have sizeable Islamic finance industries, including Bahrain, Brunei, Indonesia, Islamic Republic of Iran, Malaysia, Pakistan, Sudan, and the UAE. There is also a growing interest in Islamic finance from non-Muslim countries (for example, the United Kingdom, Hong Kong SAR, China, Luxembourg and South Africa), providing further evidence that this hitherto niche market has entered into the mainstream of global finance.


So, what is behind this success? Islamic finance principles adhere to best practices coming from common sense and that's what adds a special appeal to it. These distinct features characterize Islamic finance:
  • avoidance of debt and prohibition of "interest"
  • promotion of risk sharing, so that the relationship between the borrower and thelender is based on shared business risks and returns,
  • prohibition of contracts with high uncertainty and a requirement for full disclosure before, during and after the contract
  • a requirement that financial transactions be linked to real assets
  • promotion of socially responsible and ethical finance
Not only is Islamic finance gaining broader recognition in financial markets, it's also becoming a viable "alternative" source of funding to address pressing developmental challenges, eliminate extreme poverty and boost shared prosperity in developing and emerging economies. Why do I think Islamic finance has this potential?
First, Islamic finance can make significant contributions to economic development, given its direct link to physical assets and the real economy. The use of profit- and loss-sharing arrangements encourages the provision of financial support to productive enterprises that can increase output and generate jobs.

Second, by expanding the range and reach of financial products, Islamic finance could help improve financial access and foster the inclusion of those who are now deprived of financial services. Notably, Islamic finance emphasizes partnership-style financing, which could be useful in improving the access to finance for the poor and for small businesses.
Third, Islamic finance helps strengthen financial stability: there is some empirical evidence that Islamic financial institutions may be more resilient to unforeseen shocks, thereby contributing to overall financial stability.
In the World Bank, we recognize the cross-cutting relevance and importance of Islamic finance across a range of development solutions. The Finance and Markets Global Practice is expanding the use of Sharia-compliant modes of financing in World Bank Group operations, thereby delivering important benefits to our client countries. For example, recent operations in Egypt and Turkey have leveraged Sharia-compliant solutions to expand financing for small and medium scale enterprises through long-term Ijarah contracts (operating leases) to finance the acquisition of fixed assets as well as asset-backed Murabahah contracts (mark-up financing) for their working capital needs.
Despite its recent years of rapid growth and the obvious potential for development financing, we should recognize that Islamic finance is still in early stages of development. The industry will also need to address several challenges, such as establishing robust legal, accounting, regulatory and supervisory frameworks, improving risk management techniques, increasing the number of skilled Islamic finance professionals, and standardizing contract documentation and structures. As the World Bank Group continues to advance this agenda, we look forward to helping the industry at large and our client countries in particular to address these challenges. We are also expanding our efforts in promoting the systematic and sustained use of relevant knowledge of Islamic finance to raise awareness, build consensus and promote the worldwide use of Sharia-compliant financing instruments.

(Huff Post Impact / 21 May 2015)
---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Thursday, 21 May 2015

Khazanah to roll out first tranche of RM1b SRI sukuk

Khazanah Nasional Bhd will be rolling out the first tranche of RM100mil of its RM1bil sustainable and responsible investment sukuk (SRI sukuk) this year.


“We are looking at RM100mil to start with, but with an upside of RM150mil,” said Khazanah board of director and Yayasan AMIR chairman Raja Tan Sri Arshad Raja Tun Uda after the launch of the SRI sukuk yesterday.
The sukuk programme is the first of its kind and has been issued a preliminary AAArating by RAM Ratings Sdn Bhd.
The proceeds of the issuance will be channeled to Yayasan AMIR, a non-profit organisation initiated by Khazanah in 2010, to manage its cashflow for the deployment of the Trust Schools Programme for schools identified in 2015.
The first issuance will be used to roll out 20 schools under the Trust Schools Programme, in Kuala Lumpur, Johor and Sarawak.
Khazanah executive director and chief financial officer Mohd Izani Ghani targets to price the sukuk by mid-next week.
“Indicatively now, we are thinking of MGS (Malaysian Government Securities) seven-year plus 50 basis points, so indicatively 4.3%.
“Because of the uniqueness of the structure we are allowing some time for investors out there to go and seek approval,” said Izani.
Khazanah has already met a group of investors, including some financial institutions and foundations, as well as asset management companies.
“Generally they are all interested in giving back to society. It is a matter of time when they have to present to the committee for the investment,” he said.
He added that the SRI sukuk was dedicated for education only.
“At the beginning of every year, there’ll be an issuance for the schools roll out in that particular year.
“The structure is unique that can be applicable for any other initiatives, like affordable housing, healthcare, environment. It’s out there for people to adopt and use the structure that we have created,” he said.
The SRI sukuk has several key performance indicators, which will affect the returns from the sukuk investment.
“If the KPIs (key performance indicators) are not met, investors will get normal returns as per the launch date.
“If the KPIs are met, there is a mandatory step down in the yield, ie when the KPIs are met you are happy with gifting away the returns,” he said.
The “step-down” could range from 80 to 100 basis points, he added.
“We will sum up the final yield when we price the sukuk hopefully by mid next week,” said Izani.
Another feature of the SRI sukuk is that investors can decide to waive their principal anytime from the first day of the investment up to the seven years of the sukuk.
“If you feel that the KPIs are met and you feel like you want to give, just give notice to Khazanah, and we will manage the redemption at nominal value of RM1 and that’s effectively giving to the trust schools,” he said.
The investor will be granted a tax exemption by the Finance Ministry if the principal is waived.
Some of the KPIs include expansion of the trust schools, upskilling and training teachers as well as senior leaders of the schools, among others.

(The Star Online / 19 May 2015)
---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Getting Islamic Finance to Fulfill its Promise

What do the Olympic Village in London and the Burj Khalifa in Dubai have in common? The answer is Islamic financing, or financing under Islamic principles.


Though still accounting for a small share of the global financial industry, Islamic finance is one of its fastest-growing segments, and its potential is far from exhausted. Islamic banking institutions now operate in over 50 countries and account for more than 15 percent of market share in nearly a dozen of them. Iran and Sudan have a full-fledged Islamic financial sector, in addition to Bangladesh, Brunei, Kuwait, Malaysia, Qatar, Saudi Arabia, the United Arab Emirates, and Yemen. In addition, sukuk, the Islamic equivalent of bonds, are now being used in a number of countries, including by the governments of Hong Kong, Luxembourg, the UK, and South Africa. The total assets of the global Islamic finance industry stood at an estimated 1.8 trillion US dollars at the end of 2013, and this figure is growing.
What can it achieve?
The expanding reach of Islamic finance promises to carry a number of potential benefits. For example, Islamic financial institutions are less exposed to crisis because of their risk-sharing features. Islamic finance by design provides better risk management on the part of both financial institutions and their customers, as they share risks, speculation is prohibited, and financing is asset-based and thus fully collateralized. A depositor has the choice to be an investor in the bank and share profits and risks with it, or they can choose to simply place the money in the bank for safeguarding but without receiving any financial return.
Another advantage is that by offering a form of banking that is in compliance with Shari’a rules, Islamic finance can attract a large number of people into the banking system who have previously refrained for religious reasons. Moreover, in Islamic finance there is greater incentive for lending to small- and medium-sized enterprises (SMEs) because of the risk-sharing nature of the industry. And sukuk can be an interesting alternative to large-scale investments in infrastructure, through public–private partnerships (PPP), again boosting the environment for private sector activity and job creation in general.
But while growing in scope, there are challenges for the industry to develop in a safe and sound manner. The IMF examined some of these issues in a recently published Staff Discussion Note, trying to understand under what circumstances the potential of Islamic Finance can be realized.
I would focus here on the following three areas:
First, when it comes to financial stability, it is important to build on progress in setting standards to harmonize the regulation and supervision of Islamic finance and to protect its consumers. Basically, regulators need to approach this topic by first recognizing the unique features of Islamic banking. For example, regulators should clarify that customers who opt to be investors are treated as such, and enjoy more say in governance as well as greater transparency in the determination of their payouts.
Secondly, more countries need to follow the example of Bahrain, Malaysia and Qatar and issue government sukuk, which would provide a benchmark for sukuk to be issued by the corporate sector. This would help Islamic banks and central banks better manage liquidity. And, as this instrument is well-suited to financing infrastructure, increased sukuk issuance could help narrow the large gap for infrastructure financing. Countries such as Malaysia, Saudi Arabia and the United Arab Emirates are already tapping into this market to expand electric power, telecommunications and transportation infrastructure.
Finally, Islamic banking has yet to develop its equity-like financing to spur greater access for SMEs to finance. Equity financing is a key component, for instance, in making investments in start-up companies viable. To promote the development of an equity market under Islamic finance, it is important that the industry ensures the regulatory framework and tax policies in different countries do not discriminate against risk-sharing. Also, this type of financing requires that banks develop the capacity to assess economic projects and their stewards, and therefore it is of paramount importance to strengthen the overall financial infrastructure.
And what is the role for international financial institutions?
While some of these issues will need to be resolved over time for the industry to develop and fulfill its social mandate, our role in responding to this increased demand was to initially bring different players to the same table to openly discuss some of these issues, then to identify the hurdles and come up with a shared understanding of where the future of Islamic finance lies.
The IMF has long been involved in Islamic finance, and will continue to be, through policy advice, capacity building, and outreach. In addition to our Staff Discussion Note, we held a seminar on this topic during the IMF’s Spring Meetings. While there are still unanswered questions, one thing is certain: international financial institutions and standard setting bodies have an important role in advancing the industry in a sound and sustainable manner.What do the Olympic Village in London and the Burj Khalifa in Dubai have in common? The answer is Islamic financing, or financing under Islamic principles.
Though still accounting for a small share of the global financial industry, Islamic finance is one of its fastest-growing segments, and its potential is far from exhausted. Islamic banking institutions now operate in over 50 countries and account for more than 15 percent of market share in nearly a dozen of them. Iran and Sudan have a full-fledged Islamic financial sector, in addition to Bangladesh, Brunei, Kuwait, Malaysia, Qatar, Saudi Arabia, the United Arab Emirates, and Yemen. In addition, sukuk, the Islamic equivalent of bonds, are now being used in a number of countries, including by the governments of Hong Kong, Luxembourg, the UK, and South Africa. The total assets of the global Islamic finance industry stood at an estimated 1.8 trillion US dollars at the end of 2013, and this figure is growing.
What can it achieve?
The expanding reach of Islamic finance promises to carry a number of potential benefits. For example, Islamic financial institutions are less exposed to crisis because of their risk-sharing features. Islamic finance by design provides better risk management on the part of both financial institutions and their customers, as they share risks, speculation is prohibited, and financing is asset-based and thus fully collateralized. A depositor has the choice to be an investor in the bank and share profits and risks with it, or they can choose to simply place the money in the bank for safeguarding but without receiving any financial return.
Another advantage is that by offering a form of banking that is in compliance with Shari’a rules, Islamic finance can attract a large number of people into the banking system who have previously refrained for religious reasons. Moreover, in Islamic finance there is greater incentive for lending to small- and medium-sized enterprises (SMEs) because of the risk-sharing nature of the industry. And sukuk can be an interesting alternative to large-scale investments in infrastructure, through public–private partnerships (PPP), again boosting the environment for private sector activity and job creation in general.
But while growing in scope, there are challenges for the industry to develop in a safe and sound manner. The IMF examined some of these issues in a recently published Staff Discussion Note, trying to understand under what circumstances the potential of Islamic Finance can be realized.
I would focus here on the following three areas:
First, when it comes to financial stability, it is important to build on progress in setting standards to harmonize the regulation and supervision of Islamic finance and to protect its consumers. Basically, regulators need to approach this topic by first recognizing the unique features of Islamic banking. For example, regulators should clarify that customers who opt to be investors are treated as such, and enjoy more say in governance as well as greater transparency in the determination of their payouts.
Secondly, more countries need to follow the example of Bahrain, Malaysia and Qatar and issue government sukuk, which would provide a benchmark for sukuk to be issued by the corporate sector. This would help Islamic banks and central banks better manage liquidity. And, as this instrument is well-suited to financing infrastructure, increased sukuk issuance could help narrow the large gap for infrastructure financing. Countries such as Malaysia, Saudi Arabia and the United Arab Emirates are already tapping into this market to expand electric power, telecommunications and transportation infrastructure.
Finally, Islamic banking has yet to develop its equity-like financing to spur greater access for SMEs to finance. Equity financing is a key component, for instance, in making investments in start-up companies viable. To promote the development of an equity market under Islamic finance, it is important that the industry ensures the regulatory framework and tax policies in different countries do not discriminate against risk-sharing. Also, this type of financing requires that banks develop the capacity to assess economic projects and their stewards, and therefore it is of paramount importance to strengthen the overall financial infrastructure.
And what is the role for international financial institutions?
While some of these issues will need to be resolved over time for the industry to develop and fulfill its social mandate, our role in responding to this increased demand was to initially bring different players to the same table to openly discuss some of these issues, then to identify the hurdles and come up with a shared understanding of where the future of Islamic finance lies.
The IMF has long been involved in Islamic finance, and will continue to be, through policy advice, capacity building, and outreach. In addition to our Staff Discussion Note, we held a seminar on this topic during the IMF’s Spring Meetings. While there are still unanswered questions, one thing is certain: international financial institutions and standard setting bodies have an important role in advancing the industry in a sound and sustainable manner.
(Al-Asharq Al-Awsat / 20 May 2015)
---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Wednesday, 20 May 2015

US1.5b global sukuk boost Malaysia's position

PUTRAJAYA: Malaysia's successful pricing of the US$1.5 billion global sukuk has strengthened the country's position as an international centre for Islamic finance, says Prime Minister Datuk Seri Najib Tun Razak.


Najib, who is also Finance Minister, said the 30-year tranche was the government's inaugural sukuk issuance, which is the longest tenured sukuk ever by a sovereign.

"This sukuk also fulfills Malaysia's objective of making the issuance a new benchmark," he said at the Finance Ministry's monthly gathering here on Tuesday.

The issuance comprises US$1 billion of 10-year and US$500 million of 30-year benchmark Trust Certificates (Sukuk) for a total size of US$1.5 billion.

Najib said the deal was oversubscribed, attracting an aggregate interest of US$9.0 billion from a combined investor base of over 450 accounts.

The 10-year tranche was oversubscribed nearly seven times while the  30-year tranche was oversubscribed about six times.

"The success of the transaction shows that international investor sentiment for Malaysia's credit profile is very high and positive," he said.

The premier also said the nation's economy grew robustly in the first quarter of the year despite facing uncertain external challenges like the slump in global commodity prices and depreciation of the ringgit.

He said the Gross Domestic Product grew an encouraging 5.6%, supported by a vibrant domestic economy despite weak external demand.

"In the same period, private investment at current prices rose  13.6% to RM51.5 billion while total foreign direct investment (FDI) net inflows hit RM9.9 billion.

"This economic performance shows improved investor confidence in the country and reflects the effectiveness of the government's management of the nation's economy and finances," he said.

(The Star Online / 19 May 2015)
---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Malaysia: US$1.5 billion sukuk a sign of our Islamic finance strength

Malaysia's successful pricing of the US$1.5 billion (RM5.4 billion) global sukuk has strengthened the country's position as an international centre for Islamic finance, says Prime Minister Datuk Seri Najib Razak.


Najib, who is also finance minister, said the 30-year tranche was the government's inaugural sukuk issuance, which is also the longest tenured sukuk.
"This sukuk also fulfils Malaysia's objective of making the issuance a new benchmark," he said at the Finance Ministry's monthly gathering in Putrajaya today.
The issuance comprises US$1 billion of 10-year and US$500 million of 30-year benchmark Trust Certificates (Sukuk) for a total size of US$1.5 billion.
Najib said the deal was oversubscribed, attracting an aggregate interest of US$9 billion from a combined investor base of more than 450 accounts. – Bernama, May 19, 2015.
(The Malaysian Insider / 19 May 2015)
---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Tuesday, 19 May 2015

Qatar Islamic Bank to boost capital via bond sales

Qatar’s biggest Islamic bank plans to sell bonds to help boost core capital to comply with Basel III banking standards.


Qatar Islamic Bank (QIB) expects to issue a Tier 1 capital-boosting bond between this quarter and the third quarter, the bank’s chief financial officer said yesterday. The Doha-listed lender in February received shareholder approval to issue up to 5 billion Qatari riyals (Dh5.04bn) to increase its Tier 1 or core capital in line with Basel III banking standards.
The bond will have a perpetual tenor.
“We have taken approval for 5bn Qatari riyals worth of issuance but at this point when we look at our organic growth requirements and we need up to 2bn riyals only and for the other 3bn riyals we have taken approval from our shareholders in case there are growth opportunities we could tap into and not have to go through the entire approval process,” Gourang Hemani said on the sidelines of a conference in Dubai.
“It is going to be a private placement, most likely within Qatar. We are looking somewhere between the second quarter and third quarter.”
Banks in the Arabian Gulf are issuing capital-boosting bonds as part of raising new funds through capital tools to foster growth and comply with the new Basel III banking rules, which will be phased out by 2019.
The IMF expects Qatar’s economy to grow 7.1 per cent this year and 6.5 per cent next year.
“We see the [credit] market growing on average of 10-12 per cent [a year] over the next two to three years,” said Mr Hemani. “I don’t see why we shouldn’t participate in the growth story.”
QIB’s net profit rose 19 per cent to 400 million riyals in the first quarter of this year, compared to a year earlier. Total income grew 13 per cent in the first quarter to 950m riyals, compared with the year-earlier period.
(The National Business / 18 May 2015)
---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Sunday, 17 May 2015

Islamic banking picking up, but at a slow pace

Pakistan has announced new governance framework to strengthen Shariah-compliance environment of Islamic banks and Islamic financial institutions.


Islamic banking in Pakistan is growing consistently and quite well. State Bank of Pakistan (SBP), the central bank, reports a 23.3 per cent growth in Islamic banking deposits to Rs1.07 trillion in calendar year 2014, up from Rs868 billion in calendar year 2013.

“Islamic banks are significantly improving the process of financial inclusion,” according to Hasan Aziz Bilgrami, chief executive officer of Dubai-based BankIslami Pakistan.

The central bank is earnestly trying to expand and promote Islamic banking. It has revised down the paid-up capital requirement of Islamic banks to Rs6 billion from Rs10 billion to spur growth in the banking segment. SBP is fast tracking development of overall Islamic banking system under its five-year expansion plan that started in 2015. Its near term target is to raise the operations, volumes and transactions of Islamic banking from the current 10 per cent to 15 per cent of the conventional banking.

The deposit base of Islamic banking institutions (IBIs) are projected to rise by Rs300 billion in 2015. This is, partly, due to the fact that the conventional banks are also promoting Sharia-compliant products on the back of customer preference. “A certain amount of conversion of conventional banks into Islamic, too, is leading to a higher growth in deposits as seen in 2014,” SBP says.

Two large conventional banks are planning to expand into Islamic banking windows as a result  of the growing customer demand. “The present trend of deposit growth in the banking industry will get still more spur this growth in the next few years,” says Bilgrami.

As of now, 22 IBIs are operating in Pakistan. These include five full-fledged Islamic banks, while 17 conventional banks are operating 1,574 Islamic banking branches. The conventional banks are also operating 929 Islamic windows nationwide, in addition. SBP reported recently that the market share of Islamic banking of assets was 10.4 per cent, and of deposits 11.6 per cent, as on December 31, 2014. Four banks — Habib Bank, Meezan Bank, Faysal Bank, and Summit Bank — are leading the Islamic banking growth, besides efforts by others.

Ahmed Ali Siddiqui, head of the Product Development and Shariah-Compliance Department in Meezan Bank, said the Shariah-compliant model offers considerable growth opportunities as it attracts savers.

“The deposits are the major source of funding for banks which are making efforts to mobilise Islamic deposits. Returns of Islamic financial products (deposits) are derived by profits on assets. These are not influenced by the fluctuation in the discount rate,” he said.
“But, the conventional banks  have an edge over IBIs because they pay a minimum of six per cent profit on savings accounts, while returns on Islamic banks deposits are still below six per cent,” he added.

Shariah framework

BankIslami’s Bilgrami is upbeat about the expansion of Islamic system. “The Islamic banking industry is improving the process of financial inclusion.” 

The Islamic modes have gained a good deal of popularity following “the derivatives” and the speculation-based financial crisis in the US, which had hit most of the EU and other countries, too, working with the capitalist system. Its after effects are still partly visible.

But Islamic banking, and several countries, including Pakistan, had remained unaffected by the derivatives crisis. In fact, it had flourished which is one of the reasons for its fact track growth in recent years.

SBP has formulated the new Shariah framework after consulting all the major stakeholders, as well as research and study by its own ‘Shariah Board’, its spokesman told this scribe.

“The framework has been expanded, refined and enlarged before its announcement and setting its implementation date — July 1, 2015, when Pakistan’s new financial year 2015-16 starts,” he said.  
At the same time, the central bank has also advised all the IBIs to make necessary arrangements to comply with the requirements of the new framework before the timeline of July 01,2015.

The central bank has also warned “any non-compliance with the provisions of the new Shariah governance framework will render the defaulting bank liable to penal action under the rules of the Banking Companies Ordinance 1962.

SBP is trying to ensure that the working of IBIs stays in conformity with the rules and principles of Shariah. In line with this, the central bank has been issuing regulations, instructions and guidelines on Shariah-compliance from the day Islamic banking was re-launched in 2001.

Expansion, popularity

Islamic banking had been originally launched in the late 1980s, under orders of the then president of Pakistan General Ziaul Haq. One of its key features was introduction of “Profit and Loss Account.” The profit among the depositors was distributed out of the income or profit accruing from investment of these deposits or funds in trade and businesses by the borrowers.

The central bank had issued a comprehensive set of instructions, rules and guidelines for Shariah-compliance in 2008.  But, in line with major developments which the Islamic banking environment has witnessed since then, “some of the instructions and guidelines have been revisited and a comprehensive Shariah governance framework has been developed. The framework will be applicable to all IBIs which include full-fledged Islamic banks, Islamic banking subsidiaries and Islamic banking divisions of the conventional banks”, the SBP spokesman said.

The popularity and effectiveness of the Islamic banking has been acknowledged by the International Monetary Fund (IMF) in its recent report. But the fund also proposes some improvements and calls for better and more comprehensive regulatory system to govern Islamic banking.

“The ethical-based fast-growing sector of Islamic finance, which bans speculation, still lacks regulatory and supervisory frameworks catering to its unique risks. Islamic finance, which ensures the provision of financial services in accordance with Shariah laws, has so for been governed mostly by frameworks developed for conventional finance,” according to the IMF report.
IMF report further said that Islamic financing has doubled in size over the past four yeas. It is now worth more than $2 trillion as demand for its products rises.

“Around 40 million of the world’s 1.6 billion Muslims are clients of the Islamic finance industry, which has surged in popularity since its niche market days of the early 1970s. But it continues to represent less than two per cent of the global conventional banking assets of $ 140 trillion. Islamic finance has the potential to contribute to the global economy, promising to foster greater financial inclusion, especially of large under-served Muslim population,” the IMF report said.

As SBP has been very active in he field of guiding and promoting Islamic finance, the Security & Exchange Commission of Pakistan (SECP), the equity market regulator, is also getting down to promote Islamic Capital Market (ICM).

SECP’s Islamic finance division, which was established in February 2015, has just unveiled its plans to promote Shariah-compliance in the capital market.

In a statement recently, SECP launched its proposal to introduce an ‘All Shares Shariah-Compliant Companies’ Index (ASSCC) at the country’s biggest bourse — Karachi Stock Exchange (KSE).

As of now, KSE’s KMI-30 index is seen by investors as the Islamic equities benchmark to know about the performance of Shariah-compliance equities. But it is limited to only 30 socks, out of 560 listed on the KSE. KMI-30, however, shows that its member companies are performing quite well.

“About Rs100 portfolio invested in a KMI-30 company on January 01, 2011 rose to  Rs266 as on December 2014. If the same amount had been invested in KSE-100 it would have been Rs267 — the first being just Rs1 less than the later,” according to an analyst.

(Khaleej Times / 17 May 2015)
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