Latest from GIFC

Thursday, 24 July 2014

Islamic finance & management events in Kuala Lumpur Malaysia in 2014

Date: 26-27 August 2014
Event: KL Conference on Islamic Finance
Event site:

To register or reserve a seat online, please go to:

Organizer: Alfalah Consulting

Takaful Insurance Vs Conventional Insurance

From the onset Takaful insurance is like mutual insurance, the only difference is that there is investment condition and Shariah compliance in Takaful operation whereas there is none in mutual insurance. The whole idea of Takaful operation is borne out of the objective of Shariah (Maqasid al Shariah) which suggest that a Takaful participant is consciously fulfilling a moral obligation for the betterment of the society in order to achieve public good (Maslaha) regardless of the religious backgrounds of participants in the scheme. This idea also means that Takaful operation has some basic attributes that are at variance with conventional insurance practice. Therefore, the main differences between conventional insurance and Takaful practice are described as follows: (1) Contract difference: Takaful operation is based on mutual assistance agreement and a combination of donation (Tabarru), agency (Wakala) and or profit sharing (Mudaraba) contract between the operator and participants which is unlike the conventional insurance operation that is entirely based on sale and purchase contract between the insurer and the insured. However, a typical Takaful contract is determined by the chosen business model as described below. (2) Mutual Contribution and Donation (Tabarru): Takaful is also a contract based on mutual contribution by the participants rather than the conventional idea of sale or purchase contract between policyholders and insurers. The aspect of donation is treated in the Takaful contract agreement where each participant willfully relinquishes a certain proportion of his contribution to assist others in the scheme. (3) Ownership of Contribution by the Participants: Takaful operators make use of participants contribution only for the intended purpose of “joint guarantee” while in conventional insurance the operator use the premium paid by policyholders in investments in order to suit his shareholders needs. (4) Share in Profit and Surplus: Takaful participants have a share in the surplus and profits of the risk and investment funds respectively based on a pre agreed ratio between the operator and the participants while in conventional insurance policyholders have no share in the business of the company. (5) Moral obligation to the society: Takaful participants contribute to the scheme as part of fulfilling or adhering to the injunctions drawn from the Qur’an that says “Help one another in goodness and piety but help not in sin and transgression” (Holy Quran 5:2) while in conventional insurance the insurer is driven by the desire to make profit for his company without any moral restrictions. (6) Investment of Funds: Takaful operator is strictly guided to invest his funds in accordance with the provisions of Shariah and that of prudential requirements whereas the conventional insurance operator is guided by prudential requirements only. This further indicates the existence of multiple regulatory layers. Hence, a Takaful Operator is both regulated by the appropriate government authority in the country of its operation in terms of technical soundness and also the advisory council of experts (ACE) to ensure or guide its operation towards adhering to the business ethics of Islamic law (Shariah), while a conventional insurer is only regulated by the laws of the country of its operation without adhering to any divine laws. (7) Treatment of Risk: Risk is always shared by the participants of Takaful contract as opposed to the idea of risk transfer practiced by the conventional insurance. This makes it even difficult to differentiate between an insurer and the insured in Takaful scheme since the risk fund is owned by the participants whereas the operator is only a fund manager and not a risk bearer. (8) Classification of Business: The classification of Takaful business is on Family and General rather than Life and General Businesses as practiced in the conventional type. The idea of applying the concept of Family class of Takaful business as opposed to the Life business is to inculcate family solidarity investment strictly in line with the Shariah provisions on inheritance. Therefore, the beneficiaries of family Takaful scheme should only be the rightful inheritors of the participant in accordance with Islamic law. This rule is only applied to Muslim participants whereas non Muslim participants are free to appoint their chosen recipient(s).

Takaful Business Models
It is interesting to note that this year marks the 30th anniversary of the advent of the pioneering Malaysian Takaful Act which gave credence to the emergence of the first full pledged Takaful operator Syarikat Takaful Malaysia (STMB) in 1984. Since then Takaful is increasingly taking the center stage of the interdependency circle of global financial market players. It is on record that by the end of 2013, the global Takaful market players have rapidly grown to constitute more than 200 operators.
Takaful operations are widely centered on four business models as follows: (1) Mudharaba Model (Profit sharing business): According to Maulana Taqi Usmani “Mudaraba is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called Rabb-ul-mal (owner of fund or asset) while the management and work is an inclusive responsibility of the other, who is called Mudarib (fund or asset manager)” However, in Takaful business operation, the entire investment is provided by the participants as contribution from the owners of fund (Rabb-ul-mal), while the Takaful operator manages the investment as fund managers (Mudarib) in a Shariah complaint manner. In this model profit is shared among the two partners (both Takaful contributor and operator) while loss is only borne by the contributors alone. If there is deficit in the risk fund, the Takaful operator is expected to inject money through an interest free loan (Qard Hasan) arrangement to settle claims. (2) Wakala Model (fee based agency): This model is somewhat similar with Mudaraba only that in wakala the investor (Rab-ul-mal) pays a performance fee to the Takaful operator without sharing in profit nor loss in the Takaful business. This means that the operator is only acting as agent to the contributors for a fixed fee. Similarly, in Wakala model the operator also provides interest free (Qard Hasan) loan to the deficit in the participants fund but only receives administrative charges for the loan (3) Wakala-Mudharaba Model (Hybrid Takaful business): This is also referred to as the mixed model where the operator receives a moderately low agency fee from contributors for managing underwriting operations and also acts as the fund manager for investing participants Takaful Fund where he shares in the profit gained from the investment. (4) Waqf Model (Endowment trust business):
This is a type of model where both the operators and the contributors are totally not expecting any profit because the idea of Waqf is same with public foundation directed and targeted for a particular purpose or segment of the society. However, the participants in the endowment have to employ the expertise of the operator for a fee on the basis of agency (Wakala). The participants in this type of model are entitled to share in the surplus from the risk fund and the profits derived from the investment fund. However, this is depended upon the initial agreement reached between the operator and the participants. It is worthy to note that the hybrid (Mudaraba-Wakala) type of model is the most preferred because it encourages the operator to exert all his energy in executing his role for the betterment of all participants and the investments of the business.
It also encourages participants from contributing to the business, unlike in Wakala where the operator knows exactly what he earns whether the investment yields profit or not or in pure Mudaraba where the operators sees the other contributors as “sleeping partners” in the business. But in the hybrid model because of the double role of the operator and of course double share in terms of receiving agency fee and sharing in the profit gained from the investment fund. Naturally, this arrangement gives encouragement for the Takaful operator to put his best into action in order to protect and safeguard the business interest of all participants.
(Leadership / 21 July 2014)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

India: Hyderabad trust uses zakat to promote education

A Muslim trust here is showing the way how a collective system of 'zakat', an obligatory system of charity in Islam, can lift the community out of poverty and illiteracy. 

Though many organisations collect zakat and use it for the poor and needy, the Hyderabad Zakat and Charitable Trust is delivering tangible results in the area of education.

 More than 25,000 students are studying in educational institutions run by the trust in Telangana, Andhra Pradesh, Karnataka and Maharashtra. Started in 1990, the trust, headed by philanthropist Giasuddin Babu Khan, has so far helped over 400,000 students graduate. Many of them are now engineers, doctors, lawyers and chartered accountants. 

"The trust has done a lot of work in education. We have so far spent Rs.110 crore on our activities," Mohammed Ziauddin Nayyar, trustee, Foundation for Economic and Educational Development (FEED), a part of Zakat Trust, told IANS. 

Zakat, one of the five pillars of Islam, is a mandatory charity for every well-to-do Muslim as a measure to remove economic inequality.

According to Islamic scholars, every Muslim whose assets reached 'anisab' or minimum value (current market price of 60.65 tolas of silver) has to pay 2.5 percent Islamic annual tax on his wealth. Most Muslims pay this during the holy month of Ramadan. 

For want of a collective system of zakat, the money gets scattered among individuals and charity groups. The Hyderabad trust is trying to show how zakat, if properly channelled, can achieve its purpose of eradicating poverty and backwardness. 

The trust, which believes that education is the most powerful weapon to battle poverty, has adopted 105 government-run Urdu medium schools. Over 3,000 students also study in its five English-medium high schools in Telangana.

 Focussing on excellence in education, the trust last year set up the Hyderabad Institute of Excellence (HIE) to hone the skills of 10th standard toppers from poor and needy families. More than 250 students are studying in 11th and 12th standards at its sprawling 120-acre campus near Hyderabad. 

They are also receiving coaching for entrance exams for professional courses. HIE will also have a high school from next year. "HIE is in line with the vision of Giasuddin Babu Khan to provide world-class facilities to poor but bright students so that they can excel and become assets," said Nayyar. The trust also helps the poor and needy with financial assistance to make a living. This Ramadan it distributed ration and clothes to 3,000 widows to help them celebrate Eid. 

The young widows were given packets worth Rs.950 to Rs.2,000. The trust also motivates young widows to re-marry and provides an assistance of Rs.25,000 each. It has helped in re-marriage of 120 widows. Last year, the trust received over Rs.9 crore zakat. 

It has a network of 60 employees to identify the deserving. The families of Babu Khan and Abdul Aleem Khan, who heads FEED, contribute the maximum for the trust. Hyderabadi Muslims settled in the US and the Gulf also make a sizable contribution. "After seeing our activities and the transparency, more NRIs are coming forward to contribute," Nayyar said. The trustees, however, feel that what the trust receives is not even one percent of the zakat Muslims can pay in Hyderabad and other parts of Telangana.

 According to Babu Khan, the potential of zakat collection in Telangana is Rs.1,000 crore but the actual collection and distribution is only Rs.100 crore. Community elders say only 10 percent Muslims pay zakat to institutions, mainly madarsas, while 90 percent pay to individuals who approach them. "They don't even check whether those seeking zakat are really poor and needy. Thus the really deserving who don't beg are deprived," said a member of Jamaat-e-Islami, which is active in distributing zakat. Activists also rue the fact that many wealthy Muslims don't pay total zakat. "If all Muslims pay zakat in full and it is channelled properly, the community can overcome the problem of poverty," said Nayyar.

(One India News / 23 July 2014)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Wednesday, 23 July 2014

Saudi Market Surprise Sparks Speculation of Sukuk Access

Saudi Arabia’s plan to open its $531 billion stock market to foreigners is prompting speculation that Islamic bonds will be next.

The government’s approval of overseas financial institutions to trade equities may herald a similar relaxation of rules in the local-currency primary debt market, according to Mashreq Capital DIFC Ltd. and Rasmala Investment Bank Ltd. The nation’s Capital Market Authority said yesterday that the stock-market change would take place in the first half of next year.
“Capital markets are a package, you can’t have one part without the other,” John Sfakianakis, chief investment strategist at Riyadh-based investment company MASIC, said by phone yesterday. “The fact is that Saudi sukuk eventually should also be open to everyone.”
Opening the local-currency sukuk market would give foreign investors access to companies that sold 42 billion riyals ($11.2 billion) through a dozen sales in the past year. That’s more than three times the amount of dollar Islamic bond sales, which are open to overseas buyers.
In the 12 months through yesterday, only four dollar-denominated sukuk have been sold in Saudi Arabia. Those came from two issuers, Dar Al Arkan Real Estate Development Co. and Saudi Electricity Co., according to data compiled by Bloomberg. Twelve different borrowers, including National Commercial Bank and Almarai Co. (ALMARAI), each issued a riyal-denominated Islamic security in the period.


“It’s a step in the opening up of Saudi capital markets overall, and that benefits sukuk investors because there will be more potential product if we can get access,” Abdul Kadir Hussain, who oversees about $700 million as chief executive officer at Mashreq Capital in Dubai, said in a phone interview yesterday. It will also make it easier for domestic borrowers to issue Islamic bonds, he said.
Access to the kingdom’s debt market may appeal more to investors wanting to broaden their exposure than to those seeking yield, according to Doug Bitcon, a Dubai-based fund manager at Rasmala.
“Lots of Saudi debt prices very tightly,” Bitcon said by phone yesterday. “I’m not sure how attractive that will be to international investors beyond portfolio diversification.”
The average profit rate, equal to a bond’s interest rate, of 41 outstanding sukuk from Saudi Arabia is 3.11 percent, according to data compiled by Bloomberg. That compares with 5.06 percent for 44 Islamic bonds outstanding from the neighboring United Arab Emirates, the data show.


Gross domestic product in Saudi Arabia will probably expand by 4.15 percent in 2014, versus 3.8 percent last year, economist estimates compiled by Bloomberg show.
The world’s biggest exporter of oil and de facto leader of OPEC is removing barriers to one of the most restricted major stock exchanges as the government pursues a $130 billion spending plan to boost non-energy industries. The move may lead to the country’s inclusion in MSCI Inc.’s indexes, which are used to measure performance by money managers with an estimated $9 trillion of assets.
“Opening the debt market would be part of the openness and all inclusiveness that the policy makers want to demonstrate,” Sfakianakis said.
(Bloomberg / 23 July 2014)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

H Abdur Raqeeb on The Need for Islamic Banking in India

India's central bank is reviewing regulations on Islamic banking in Asia's third-largest economy.

The Reserve Bank of India has set up an internal committee to examine the matter, unnamed sources told

The RBI has reportedly set up a three-member panel comprising senior RBI officials Rajesh Verma, a deputy general manager with the Department of Banking Operations, Archana Mangalagiri, general manager, Non-banking Supervision and Bindu Vasu, joint legal adviser.
Islamic banking is practiced in several countries, including in the UK, which in June issued an Islamic bond that attracted orders in excess of £2bn ($3.4bn, €2.5bn) from global investors.
What is Islamic Banking?
Islamic banking follows the Shariah law. The model differs from conventional banking in that it does not accept deposits, only investments, which essentially make banking a venture capital activity. The model also encourages interest free loans in a bid to boost financial inclusion.
Islamic banking is also based on profit and loss-sharing; the model forbids the payment and receipt of interest and prohibits investment in businesses that are considered sinful – such as adult entertainment or the production of alcohol.
Speaking to IBTimes UK, H Abdur Raqeeb, General Secretary, Indian Centre for Islamic Finance (ICIF) told us how India stands to benefit from the roll out of Islamic banking.
Q: Do you think that India is a key place for growing the Islamic banking market and why?
AR: The misconception among many Indians is that Islamic banking caters to only the Muslim population. The model promotes financial inclusion. India's small farmers and petty traders for instance are still not part of the banking system despite over 40 years of nationalisation of the country's major banks. They cannot go to the capital markets to raise money. Islamic banking can cater to [the millions] outside the commercial banking system.
In addition, Muslims' savings are not being ploughed back into the Indian economy as a large section of the Muslim population here does not bank with commercial lenders.
Q: What needs to be done in terms of rolling out Islamic finance in India?
AR: Political will is necessary. The government has to take a decision on Islamic banking and the RBI has to regulate it. The central bank has to look into it.
We have been pleading with the government and have met Finance Ministry officials in the previous [Congress Party-led] regime.
Moreover, we don't have to use the term 'Islamic banking' in India. We can refer to it as alternate banking, which is what the UK calls it. Or, we could call it participatory banking, which is what they call it in Turkey.
Q: But, if India adopts Islamic finance on a broader scale, will this mean that a lot of the legal framework will have to change?
AR: Not much actually. We in India can borrow and benefit from examples of Islamic banking in the UK or in Singapore.
India Reforms
The question about whether India should allow Islamic banking has been debated for long.
In 2008, India's Planning Commission roped in Raghuram Rajan, the present RBI governor and a former Professor at the University of Chicago, to head its High Level Committee on Financial Sector Reforms (CFSR).
The CFSR, tasked to identify 'real sector reforms', recommended that New Delhi 'permit the delivery of interest free finance on a larger scale, including through the banking system.
(International Business Times / 22 July 2014)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Tuesday, 22 July 2014

Saudi Arabia tightens control on zakat

The Saudi Ministry of Social Affairs is warning Saudis seeking to fulfil their zakat duty during the holy month of Ramadan against donating funds to those who solicit money via social networking tools.

There is an inherent risk in using social networking tools such as Twitter and WhatsApp to make donations, the ministry said, as true identities can be concealed and well-intentioned donations can fall into the hands of terrorist organisations which sometimes use charitable organisations as a cover.
Those who wish to donate money are encouraged to give to the more than 700 licensed charitable organisations in the kingdom, to social security offices or to organisations involved in the Al-Khair al-Shamel (Global Goodness) project, the ministry said.
These groups document donations in a transparent fashion under the state's auspices, it added.
Before Ramadan began, the Ministry of Interior warned it would impose the penalty of precautionary sequestration on bank accounts found to be involved in the unregulated collection of donations.
Al-Qassim University lecturer Yasser al-Muhanna said the issue of zakat funds and charitable donations is of paramount importance in Saudi Arabia as some "proponents of deviant ideology" exploited people's religious sentiments to obtain money through duplicitous methods.
One of these methods involves shaming stock brokers and traders into donating money to dubious organisations by telling them large portions of their profits are "usury".
"This is aside from the phantom organisations that used to roam the towns and villages to collect donations, alms and zakat funds under the pretext of supporting the mujahideen," he said.
Saudi authorities have since taken measures to cut off this flow of funds, al-Muhanna said.
The task of monitoring the collection of zakat funds and donations has been brought under the auspices of the counter-terrorism strategy which has been in place since the 1990s, he said.
In 1995, the Ministry of Interior, the Saudi Arabian Monetary Agency and commercial banks formed special units to monitor and combat money laundering.
"In 2011, [authorities] began strict monitoring of the work of charitable organisations and legal amendments were made concerning the operation of banking and financial [institutions] to close any loopholes that may be exploited to raise funds for these groups," he said. "Additionally, banks insist on knowing the identity of their customers, their financial and commercial activities and nature of the transactions they conduct."
The government also made legal amendments to the zakat collection system in order to monitor investment activities that were not previously covered, particularly transactions involving goods, commodities, buildings, land and real estate, he said.


"Zakat collection in Saudi Arabia is undertaken by the Department of Zakat, and the funds are distributed by the General Organisation for Social Security," Shamel Humaidan of the Department of Zakat and Income in Riyadh told Al-Shorfa.
The Ministry of Labour and Social Affairs also monitors charitable organisations through its Department of Organisations -- a group of chartered accountants who audit their accounts -- and via 400 social development committees across the nation which report on the organisations' work.
Last year, the ministry distributed 25 billion Saudi riyals ($6.7 billion), the total amount of collected zakat funds, in addition to 1.5 billion riyals ($400 million) paid out monthly by the General Organisation for Social Security to about 700,000 families, Humaidan said.
Saudi Arabia monitors the financial activity of charitable organisations by limiting them to one bank account administered by two members of their board of directors and by requiring they first obtain approval from the security authorities and the Saudi Arabian Monetary Agency to open the account.
These accounts are used for deposit only, not disbursement, Humaidan said, and no cash withdrawals or transfers abroad are allowed.
Meanwhile, the Ministry of Islamic Affairs continuously monitors the performance of imams, preachers and workers at mosques and intervenes immediately if any of them comes under suspicion, Adel al-Usaimi, imam of al-Khair mosque in Riyadh told Al-Shorfa.
"Several fatwas were issued by the supreme religious authorities prohibiting the payment of zakat and donations to misguided groups, most recently by the Grand Mufti of Saudi Arabia, Sheikh Abdul Aziz Al al-Sheikh, who warned against paying zakat or making donations to non-deserving recipients, especially terrorist groups that were included on the official list," he said.
In Saudi Arabia, cash donation boxes are not allowed in mosques, markets and malls, as cash donations are accepted only at banks, al-Usaimi said.
(Al-Shorfa.Com / 21 July 2014)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Turkiye Finans raises $252 mln from first sukuk issuance in Malaysia

Turkish lender Turkiye Finans Katilim Bankasi has raised 800 million ringgit ($252.21 million) from an Islamic bond in Malaysia, its first issuance from a 3 billion ringgit programme announced last month.

The issuance by Turkiye Finans, in which Saudi Arabia's National Commercial Bank is the largest shareholder, is the first ringgit-sukuk done in Malaysia by a Turkish issuer.
Proceeds from the five-year sukuk will fund general corporate purposes and working capital requirements, according to HSBC Amanah Malaysia Bhd. HSBC Amanah and Standard Chartered Saadiq Bhd are jointly advising the Turkish bank.
"Following this debut issuance, we hope to see more cross-border sukuk issuances by Turkish issuers in Malaysia, giving the Malaysian investor community an opportunity to diversify their investments," said Wasim Saifi, chief executive of Standard Chartered Saadiq, in the statement.

Turkey Finance is one of four Islamic banks in the country, with a sole focus on loans to corporate clients. The bank in June established a 3 billion ringgit programme, with sukuk of one to 20 years. 
(Reuters / 21 July 2014)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Monday, 21 July 2014

Islamic banking: growing fast but can it be more than a niche market?

For years, Islamic banks have been growing at a double digit pace.

Ernst and Young (E&Y), in their latest World Islamic Banking Competitiveness report, shows the assets of Islamic banks grew at an average rate of 17% per year between 2008 and 2012.
This is two to three times faster than the rate at which conventional banks grew over the same period, due in part to the global financial crisis.
Islamic banks differ because they have to run their operations in a way that is consistent with the principles of Islamic law or sharia.
This prohibits banks from dealing with businesses that are considered sinful or haraam such as pork, alcohol and gambling. Admittedly, this is not much of a constraint.
However, usury or riba is also prohibited under sharia law so in principle banks cannot charge fees or interest for money lending.
How it works
Given this is how banks generally make their money, you may ask how Islamic banks prosper?
The answer is they still make money by lending out their capital but do so in ways where interest and fees are not explicit.
For instance, Mudharabah is a profit sharing arrangement like a venture capital deal where the bank provides the finance and the borrower the labour and entrepreneurship.
If the business were to fail, the lender loses their money and the borrower the time and effort committed to the enterprise.
Similarly, Musharakah describes a joint venture between a bank and business where the profits are divided according to their relative capital inputs.
In this way, bank returns are tied to company profits and the partnership ends when the loan is repaid.
This approach could be used to provide mortgage financing to buy a property. The property earns rent from the occupier which is paid to the buyer and the bank in relation to their share of the equity.
At the same time, the buyer agrees to buy the bank's share in instalment payments, so over time their equity increases and the bank's falls, until the mortgage principal is paid off.
Another way of profiting from providing credit is a simple form of sale and buy-back agreement known as Murubahah.
Here, the bank buys the house, car or other commodity and sells it to the buyer at a profit but allows them to pay in instalments.
In this case, the profit margin should be clear, agreed upfront and be reflect the bank's costs in providing the service.
Fast growth explained
It is partly because economic growth has been strong in several emerging market countries with a large Muslim population.
E&Y identify 25 "rapid growth market" countries which they predict will account for half of global GDP by 2020. Of these, 10 have a high Muslim population.
Iran accounts for nearly half of the banking assets in Islamic banks worldwide.
Three-quarters of the rest is in the QISMUT nations [Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey] where growth has averaged 6.5% per year for the last five years.
The rapid expansion of Islamic banking has been mainly through Islamic windows in conventional banks rather than in pure Islamic banks.
This has allowed existing banks to easily enter the Islamic banking market and is likely to continue being a mechanism for growth for the foreseeable future.
'Huge untapped Muslim populations'
There is certainly space for E&Y's estimate of 20% growth for each of the next five years.
Even in countries where Islamic banking has a strong foothold, such as the Gulf states and in South East Asia, its share rarely accounts for more than one third of the market.
In Indonesia, the world's most populous Muslim country, Islamic banking currently has less than 5% market share.
There are also huge untapped Muslim populations around the world including India, Pakistan and Bangladesh in South Asia; Egypt, Nigeria, Morocco and Nigeria in Africa; and a number of the former Soviet Republics.
It is also expected that growth will not just be limited to regions with a high Muslim population.
Last month, the UK issued a £200 million sovereign sukuk or Islamic bond.
Although the amount is small, a fraction of the value issued by Malaysia each year, it was a clear signal of intent.
It comes on the back of the Islamic Finance Task Force launched last year by the British government with the aim of making London a western hub for Islamic finance.
Challenges ahead
Many of the rapid growth market countries face ongoing economic and political instability.
As the era of cheap money ends and the huge monetary stimuli from central banks is withdrawn, growth in these regions may slow down, especially in the banking sectors.
Islamic finance is also less profitable than conventional banking.
The E&Y report finds that shareholder returns are 20% lower as a result of higher costs and operational inefficiencies.
Islamic banks tend to be much smaller than their conventional counterparts, making it hard to achieve economies of scale.
There is also far less standardisation in the products available because of different interpretations between banks and jurisdictions of what is acceptable under sharia law.
Islamic banking products are also more complex which adds to their cost.
The importance of face-to-face relationships means the branch network is important, but has resulted in an under-development of phone and internet banking.
And, Islamic banks are relatively poor at cross-selling with an average of 2.1 products per customer compared to 4.9 products per customer in conventional banks.
When regulators in Qatar acted to prevent banks from offering both Islamic and conventional banking products forcing a choice between the two, many decided to close their Islamic banking operations in the country.
Islamic banks have tremendous scope to keep growing within the niches, compatible with sharia law and in certain parts of the world. But, unless they face up to these challenges, they might struggle to take the conventional banks head on.
(BBC News Business/18 July 2014)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Prudential sees big potential for takaful business in Sarawak

KUCHING: Prudential Assurance Malaysia Bhd (Prudential) foresees huge opportunities for takaful business to widen its reach throughout Sarawak.

A Prudential senior agency mananger said the local market is widely untapped and believed that the increasing level of awareness on standard of living and quality healthcare will attract people to obtain more protection services.

Firdaus Lau Abdullah, a senior agency manager with Prudential said, “For the whole Malaysia, there are still a significant percentage amount of people who do not have insurance.

“A statistic which was conducted not so long ago revealed that there are just 11 per cent insurance penetration rate throughout Malaysia.

“Therefore, the remaining 89 per cent are still in need of insurance and the market is huge.

“In Sarawak, there are a lot of Bumiputera and they will require insurance services for instance takaful as the standard of living keeps going up and people require better healthcare services,” he told The Borneo Post when interviewed recently on the sidelines after Prudential’s carreer talk held here on Saturday.

He added that Sarawak is a land of rich resources which enables its economy to grow strongly.

He explained that as the economy grows, people will need more insurance as a solution for retirement purposes or financial benefits against illness.

Firdaus who hails from Kelantan and comes here from Kuala Lumpur, also observed that there are more private hospitals being built compared to the last time he visited Kuching several years ago.

He noted that the rising number of private hospitals showed that people wants better and quality healthcare for their families and loved ones. He added, insurance is one of the services which can reduce the financial burden of the people in the event that they are struck with certain illness.

Meanwhile, Firdaus pointed out that Prudential BSN Takaful Bhd’s (PruBSN) business has a leading market share in the takaful industry.

His view was in line with PruBSN which had recently reported that its new business increased 15 per cent to RM265.7 million on an annual contribution equivalent (ACE) basis for the financial year ended December 2012.

PruBSN added that the results has confirmed the company as the leading takaful provider in Malaysia with a market share of 28.4 per cent.

PruBSN noted that its strong financial performance in 2012 was achieved due to the strength of Prudential’s franchise in Malaysia, its robust multi-distribution channel strategy and new product launches.

On a side note, Firdaus’s wife, Norlia Hassan is one of the top agents for Prudential Malaysia and was awarded the top Bumiputera agent for 2010 and 2011; attributable to her strong determination and willingness to live a better life with her family.

She observed that having been in the insurance industry for more than 14 years and gaining numerous awards with Prudential, she followed a good system which include several attributes such as discipline, determination, sincere, sacrifice, structure, persistent, goals setting and willingness to learn.

Norlia revealed that during her earlier days in the industry, she approached approximately 50 to 100 people a day to educate people about the need of having an insurance. Norlia said her inspiration is her children and her aspiration is to have a better standard of living with her family members.

As for Firdaus who has more than 19 years of experience in the insurance industry, he said he considers success as living financially independent and having a balanced life in work, spiritually and in social life.

(Borneo Post Online / 21 July 2014)
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Ramadan Question: How much Zakat Al Fitr?

At the end of the Month of Ramadan every Muslim individual bears the responsibility to donate Zakat al Fitr, an amount of money specified by the local religious authorities to be donated for the cause of charity.

The amount of this donation in the UAE has been assessed to be Dh20 for the year 2014, confirmed a mufti speaking on the Fatwa toll free number of the General Authority for Islamic Affairs and Endowments (GAIAE).

This amount should be referred to whenever the individual has performed his fast in the UAE, he added.

If a person has performed his fast in a foreign country, the amount determined in that country should be taken in to account. If the person carried out some of the fast in the UAE, and then traveled to complete the fast in another country the second country should be referred to for the determination of the amount.

This being said, the destination of the donation can be anywhere, as long as it serves a poor Muslim person. If people prefer to send Zakat al Fitr to their home country they are permitted to do so, explained the mufti.

It is important to send the money on time so it will reach the destination before Eid al Fitr, he added.

If the fast was performed in the UAE and the donation will be sent to another country, the amount should be Dh20.

In order to donate Zakat al Fitr in the UAE there are many channels, such as the various charity organisations in the country.

But if the zakat is paid to a poor individual Muslim this is also accepted, the mufti concluded concluded.

(Emirates News / 18 July 2014)
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Saturday, 19 July 2014

Takaful: Towards Deepening Insurance Penetration

The universal objective of financial inclusion is to facilitate the establishment and delivery of suitable and affordable financial services for the underserved or disadvantaged segments of all human population regardless of race or religion.

Addressing the constraints for building inclusive financial sectors is, therefore, paramount in helping to improve the lives of people through the creation of sustainable financial services in the society.
Therefore, considering the significant number of the financially excluded segment of the population in the world today, which constitutes more than 2.5 billion working age adults, it is remarkable to indicate that non interest finance can be a very important tool for the promotion of financial inclusion, not only in Nigeria, but the whole world.
One of the major obstacles identified in the universal fight against the prevalence of financial exclusion is the lack of financial literacy among the populace. The observed gap in financial literacy is especially wide among women and of course the less educated segment of the society. Therefore, it is evident that people often lack the ability to save and manage their little earnings for effective personal financial decisions.
For instance, lack of financial education leads many people to erroneously understand insurance as something that can only be done when there is disposable income. This idea forms the basic understanding on risk and the need for mitigating against it among many people.
Perhaps, in order to improve on the issue of financial literacy, the Organisation for Economic Co-operation and Development (OECD) initiated a project in 2003 to develop common financial literacy principles that will serve the needs for global financial education.
Many other countries have also identified their various financial educations needs and have developed strategies towards closing these gaps. The key important areas that require proficiency in personal finance include saving, investment, tax, insurance and retirement among others.
Additionally, the drive towards non interest finance can never be comprehensive without establishing the necessary regulatory framework for non interest mechanism of risk mitigation like the Takaful insurance.
This was the main reason at the completion of its assignment in 1983, the Malaysian Committee on Islamic banking framework, recommended that a special task force be established to study the practicability of islamic insurance (the Takaful).
This was suggested in order to draw up an appropriate legal framework which is feasible for complementing risk management in all non interest banking operations.
It was this process that later heralded the evolution of the pioneering 1984 Malaysian Takaful Act. Prior to that, Takaful as an alternative to conventional insurance was first practiced in Sudan in 1979.
The application of risk management mechanism in Islamic history can be traced to the practice of paying blood money (Diyyah) for manslaughter by members of the Arab clan and that of mutual indemnification among co-workers (Dawaniyya) during the reign (634-644 CE) of Caliph Umar al-Khattab (ra).
These early Arabian risk mitigation practices are today recognised as insurance products. Indisputably, these traditions inculcate and connotes that a Muslim is expected to have an appetite for risk management. Risk and uncertainty are part and parcel of every human endeavour; therefore, it is innate for people to prepare themselves against unforeseen financial or physical loss.
For that reason, one can declare without fear of contradiction that Islam not merely recognises insurance but encourages the practice of insurance as a lawful method for risk management. However, the question that always springs to mind is that if insurance is not prohibited in Islam why then do a majority of Muslims exhibit their overt repugnance over insurance issues?
Many Muslims miscomprehend the role of insurance in Islam and argue that it is forbidden and goes against the belief in the will of Allah whereas the World Fiqhi bodies have collectively issued a favourable ruling for practicing “Takaful” as the Islamic substitute for conventional insurance.
Therefore, allegations on the position of insurance in Islam are all based on sheer misconceptions caused by unawareness or lack of interest on the subject matter because Islam as a way of life sets standards for the conduct of all aspects of human existence.
There are some fundamental elements which made it necessary for Islamic law (Shari’ah) to negate the practice of conventional insurance business. Islamic law explicitly forbids the involvement in any form of any action that is associated with excessive uncertainty (Gharar), gambling (Maisir), and interest (Riba).
Moreover, we can safely infer that the Takaful is not a new phenomenon for some countries in Asia, Middle East, Europe and America because long before the dawn of the 21st century, many countries have realised the need for the development and implementation of inclusive financial products.
In the same vein, the United Kingdom Department for International Development and many international NGOs have since taken the lead in aiding the research and promotional development on financial inclusion in many parts of Asia and Africa.
This has given much impetus for the development of suitable financial products, to those with ethical and faith related reservations towards the practice of conventional finance.
Against this backdrop, the National Insurance Commission NAICOM initiated and and and crafted market development strategies for the industry under the MDRI project. The development of the Takaful Insurance operational framework happens be one of those strategies targeted for accomplishment by the commission as the Nigerian insurance regulatory authority.
Remarkably, the implementation of the Takaful Insurance framework was launched by the NAICOM in November 2013, after the unveiling of the Takaful Insurance Guideline ceremony performed by the then minister of state for finance, Mr Yerima Lawal Ngama, in Lagos.
This landmark achievement clearly indicates that the Nigerian insurance regulator has tremendously given the Takaful Insurance all the attention and supports it required without any prejudice.
The Nigerian insurance industry and all interested stakeholders are expected to take the full advantage of this remarkable initiative towards the expansion of a new business frontier for the betterment of the economy.
Interestingly, the target market for the Takaful in Nigeria is large and recent reports from the few existing window operations indicate the attainment of 70 per cent penetration.
Based on the Financial Services Access survey 2012 conducted by a non-governmental organisation (NGO), Enhancing Financial Innovation and Access (EFInA), there are strong indications that with suitable operational framework like that of the Takaful, proper public education and awareness on the benefits of insurance and how it works, 35.9 million adults who constitute 41.4 per cent of those without insurance in Nigeria could be included in the insurance market.
The experience in other jurisdictions like Asia and Middle-East also depicts the prospects of healthy and viable business conditions.
According to the 2012 World Takaful Report prepared by Ernst & Young, United Kingdom (UK), global Takaful contributions rose from 19 per cent in 2010 which amounts to $8.3 billion to $12 billion in 2013. With this exponential growth trend, the Takaful contribution is, therefore, expected to reach $25 billion by the end of 2015. No doubt, the implementation of the Takaful Insurance will open up another exciting opportunity for the development and growth of the Non-interest Financial Institutions (NIFIs) in Nigeria.
Therefore, one may infer without fear of contradiction that the success of the Takaful operations is certainly going to secure the needed business environment for the operations and the stability of all other non interest financial institutions in the country.
The prospective Takaful insurance operators may have to look beyond these perspectives by coming up with innovative Takaful insurance products that shall suit the specific needs of its potential market in Nigeria.
However, the predictable emerging challenge for the Takaful Insurance business can be observed in the following important areas: consumer awareness, investment restrictions, liquidity management, re-takaful arrangement, market development, capacity building, availability of Advisory Council of Experts (ACE) and the continuous professional development for the ACE.
These challenges must be seen as very imminent and requires urgent strategic plans for the smooth take off by the new Takaful operators.
(Leadership Newspapaer / 18 July 2014)
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