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Thursday, 31 May 2007

Takaful may lure $7.4bn by 2015 according to credit rating agency Moody’s

Gulf Times, 31 May 2007
DOHA: Islamic insurance Takaful, which has grown annually at about 20% since 2000, is expected to attract $7.4bn in premiums by 2015, according to global credit rating agency Moody’s.However, its development hinged on Islamic banking and capital markets as well as in building ample Takaful reinsurance capacity, the agency said.It also noted that Takaful represented a relatively small proportion of Qatar’s market, notwithstanding the substantial growth opportunities in the energy-rich country. One of the key reasons for the “remarkable” growth in Takaful related to the difficulties traditional insurers faced in complying with Shariah as a result of their investment strategies, said Moody’s vice president Timour Boudkeev.
A typical conventional insurer would commit a substantial portion of its investments, usually in excess of 80%, to fixed-income securities to reduce risk on the asset side of its balance sheet and maximise the capital to support its liabilities, he added.“Under Shariah, riba (interest) is forbidden, disqualifying conventional bonds – which usually comprise a substantial portion of an insurer’s investment portfolio – as an acceptable asset class,” he said.The restrictions imposed limitations on insurers for certain sources of funding like senior or subordinated debt or hybrid capital, he added.Moreover, Moody’s said, equity investments could only be made in Shariah-compliant companies, ruling out investments in businesses involved with alcohol, gambling or conventional financial services.
Stressing the need for Islamic banking and capital markets, Moody’s said access to Islamic financial products was very important for a Takaful company as it offered the best way to build non-riba asset without exposing the company to excessive risks.Highlighting that co-operation or solidarity as the main concept that differentiated Takaful from conventional insurance, Moody’s said the former was similar to a conventional mutual insurer since the purpose was not to generate profits but to share risks among members. “When analysing the financial strength of a Takaful company, there are substantial similarities between most common types of Takaful and mutual insurance,” Boudkeev said.
There are three main operational models of Takaful with ‘Al-Wakala’, being common in the Middle East, which distinguished between the operating company and the Takaful fund.The operating company does not share in the underwriting result but is rather compensated by a fee deducted from the contributions made by participants and/or investment profits generated by the Takaful fund and the surplus of the Takaful fund belongs only to the members.The other model ‘Al-Mudharaba’, common in Malaysia, stipulates profit sharing between the operating company and the Takaful fund.
This may give the operating company an additional incentive to improve its underwriting performance. But the surplus of the fund belongs to the members, as it is in the case of Al-Wakala.‘Waqaf’, in contrast to ‘Al-Wakala’ and ‘Al-Mudharaba’, operates as a public foundation and the Takaful fund belongs to nobody.“Depending on the Takaful operational model used, the company’s capital management system and access to capital will be likely to vary by company,” the credit rating agency said.
Moody’s said the rapid development of Takaful institutions fuelled the demand for re-Takaful as an alternative source of enhancing the financial strength of the Takaful fund.Though the re-Takaful industry “is still in its early days”, the availability of ample re-Takaful insurance capacity would “seem to be very important for the further successful development of the primary Takaful industry as a whole,” it said.Reinsurance is the most appropriate tool for managing catastrophe exposure and accumulation of risk, particularly factoring that most Takaful companies tend to operate in a single geographical region and their diversification may be “less than adequate,” Moody’s said.

Dar Al Arkan Of Saudi Arabia Lists Landmark $600 Million Sukuk On DIFX

Mondo Visionone, 31 May 2007
Dar Al Arkan Real Estate Development Company (DAAR), a prominent Saudi Arabian property developer, has listed a $600 million Sukuk on the Dubai International Financial Exchange (DIFX). It is the first Sukuk from a Saudi issuer to list on the DIFX. It brings the number of Sukuk on the DIFX to six with a total value of $8.98 billion, underlining the exchanges’s stature as the biggest in the world for Sukuk by listed value.

The Sukuk is the first to be issued by a Saudi company in the international capital markets. It is listed solely on the DIFX and was sold to investors in Europe, southeast Asia and the Middle East after being significantly oversubscribed. Abdullatif Alshalash, Managing Director of DAAR said: “With its international status and its leading role in Islamic finance, the DIFX is the right venue to give our Sukuk high visibility globally and in the region. The Sukuk’s success with investors demonstrates the growing appetite for well structured securities in this asset class, notably in the real estate sector.

“The Sukuk enables international investors to diversify their investment portfolio in the Saudi real estate sector.” Per E. Larsson, Chief Executive of the DIFX, said: “As one of Saudi Arabia’s largest residential property developers, DAAR is a significant addition to our list of issuers. With more than 100 Sukuk issued globally last year, this asset class is growing fast and we look forward to many more listings.” DAAR’s Sukuk is a 3-year issue based on an Ijara structure.
The issuer is DAAR International Sukuk Company, which was specially created by DAAR for the purpose, and the financial advisers were ABC Islamic Bank, Standard Bank, Arab National Bank, Unicorn Investment Bank and WestLB. Hamed Ali, Executive Officer of the DIFX, said: “Issuers are increasingly seeing the value of listing their Sukuk in order to raise their profile and increase investor confidence. As the international exchange serving its region, the DIFX offers the right listing platform fro regional and international issuers.”
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HSBC to set up Asia-wide Islamic banking unit

Bloomberg News, 31 May 2007

BANGKOK: HSBC Holdings, the largest overseas bank offering Islamic services in Malaysia, plans to set up a stand-alone unit there to serve Asia's growing Muslim population. HSBC Amanah, the Kuala Lumpur-based Islamic-banking arm, has applied to the central bank for a license that would let it sell wealth management, mutual fund and retirement products to bigger Muslim countries like Indonesia, the managing director, Mohamed Ross Mohd Din, said. "If we can do it successfully here, then let's see what we can do in Indonesia, Bangladesh and Brunei," Mohamed Ross, 55, said in an interview Monday in Kuala Lumpur. "We are seeing an explosion of growth of Islamic finance globally. The Muslim population is growing faster than any other group."
HSBC Amanah is expanding its reach in Asia as rivals like Standard Chartered, ABN Amro and Allianz, Europe's biggest insurer, increase their offerings that comply with Shariah, or Islamic law. Global assets complying with Shariah are worth $500 billion and growing by more than 10 percent a year amid rising oil wealth in the Middle East, Standard & Poor's estimates. Opportunities to sell Islamic banking products abound in Asia, home to at least half of the world's Muslim population of 1.6 billion. Asia's emerging economies will expand 8.4 percent this year compared with U.S. growth of 2.2 percent, the International Monetary Fund said in April.

The Islamic financial services industry worldwide, including banking assets, may grow to $2.8 trillion by 2010 from as much as $1 trillion now, the Malaysia-based Islamic Financial Services Board and Saudi Arabia's Islamic Development Bank estimate. "Western banking and financial institutions have found it practical and profitable, and are adopting it with great speed and enthusiasm, not to mention at a handsome profit," President Susilo Bambang Yudhoyono of Indonesia told delegates at the World Islamic Economic Conference in Kuala Lumpur on Sunday.
Islamic law bans the payment and receipt of interest, prohibits investment in businesses like gambling and alcohol and stresses profit-sharing. "In Malaysia we are trying to develop the concept of wealth management" to appeal to individuals, Mohamed Ross said. HSBC Amanah and HSBC Amanah Takaful Malaysia, a joint venture offering Islamic insurance formed by HSBC Insurance Asia-Pacific Holdings, are developing retirement planning, wealth protection and investment-linked Islamic life insurance policies, he said.
The world's top five banks by assets - the Zurich-based UBS, HSBC, Barclays in London, the Paris-based BNP Paribas and Citigroup in New York - offer Islamic services. Personal wealth in the Middle East is expected to increase to $1.8 trillion by 2010 from $1.2 trillion in 2005, according to a June report by Merrill Lynch & and Capgemini Group. The region's high-net-worth individuals increased to 300,000 - or 9.8 percent - between 2004 and 2005, the report said. Kuwait Finance House and Al Rajhi Bank of Saudi Arabia hold Islamic banking licenses in Malaysia. Qatar National Bank, the Gulf emirate's largest lender, opened a Singapore office in April to compete for new banking business in the Asia-Pacific region, said the chief executive, Ali al-Emadi.
HSBC, which is based in London, offers Islamic banking services through HSBC Amanah. The unit has about 200 employees and representative offices in countries including Bangladesh, Brunei, Saudi Arabia, Indonesia, Britain and the United States. HSBC Amanah in Malaysia, with assets of 5.37 billion ringgit, or $1.6 billion, has 30 employees. In its effort to become a hub for Islamic finance, Malaysia is giving tax breaks for such products. Prime Minister Abdullah Ahmad Badawi said in March that the government would allow overseas investors to own 100 percent of Islamic financial institutions conducting foreign currency business. Last August, the central bank said it would allow local and overseas banks and insurers to conduct Islamic business transactions in foreign currencies at the Malaysian International Islamic Financial Center.

First Islamic bank in Kenya gets ministry approval

The Standard, 31 May 2007

The first commercial bank operating entirely under Islamic Sharia principles has been licensed.Finance minister, Mr Amos Kimunya, has granted approval to First Community Bank Limited to conduct banking business according to Sharia, which prohibits the lending of money at interest.According to its lawyers, the bank is a joint venture between Kenyan and Kuwaiti nationals and has a paid-up share capital of Sh1 billion."Our client thanks the Central Bank of Kenya and the Ministry of Finance in facilitating the licensing process," Ahmednazir, Abdikadir & Company Advocates said in a statement. They said the board of directors of the Bank would soon issue a more comprehensive briefing on the bank’s plans.

Barclays Bank of Kenya and Kenya Commercial Bank have both introduced Sharia-compliant banking products in the last year but with large numbers of Muslims still unbanked, the market niche is still considered untapped.Islamic banking as an industry has seen dramatic growth in acceptability globally. Its main distinction is that it offers fixed-profit lending, which shields borrowers in times of rising interest rates.In addition, in adverse circumstances, where conventional banks levy penalties and penal interest on default by borrowers, Islamic banks work in partnership with borrowers to realise payment for loans.

Also, they add, depositors in Islamic banks have a potential upside to returns on their deposits in case the underlying assets perform well because the banks share profits with depositors."Islamic banks have, in most countries, maintained a better asset quality than conventional banks while the process of risk assessment is the same as that in conventional banks," they conclude.Meanwhile, Fina Bank will spend Sh20 million in a modernisation programme. Group Chief Executive Officer Mr Frank Griffiths the money will be used to upgrade existing branches."We are giving some of our branches a new design so that customers can get the same kind of service wherever they go," he explained. Griffiths added the bank will open a new branch in Nakuru in June.He said plans are also underway to open new branches in Tanzania and Uganda. Griffiths was speaking on Tuesday night during a function to open a new branch at Apic Centre in Westlands. The bank has closed its Ukay branch.

Ernst And Young Launches Islamic Finance Report

Investors Offshore, 31 May 2007

Big four accounting firm Ernst & Young has launched a new report dealing with the rapid growth of the Islamic finance industry, with a particular focus in the development of the hedge fund sector in the context of Islamic finance.
The 1st Annual Ernst & Young Islamic Funds & Investments Report (IFIR) was launched in Manama, Bahrain, last week and will focus on the spectrum of asset classes and drivers that will have the most significant impact on the industry.
The report will provide new insights into the market, pinpoint critical success factors and identify key trends that will shape the immediate future of the industry, rather than analyse investment performance of Islamic funds.
“The Islamic funds industry has grown tremendously in size and product depth in the last five years," observed Sameer Abdi, Group Head of the Islamic Financial Services Group for Ernst & Young. "With ever increasing investor demand to satisfy, there remains immense potential for the future growth of this sector."
Total assets for all the Islamic banks globally (estimated to be 300 banks) amounts to about US$170 billion. However, this represents a nominal portion of the total assets of the world's commercial banks, highlighting the growth potential of the industry. In addition, the deposits of Islamic banks stand at around US$140 million compared to the US$13 trillion held by commercial banks.
The Key Insights that will emerge from the report are:
Macro-economic growth in the region has been robust on the back of strong oil prices and diversification
Regional equity capital markets are slowly on the path to recovery after corrections in 2006
Average fund size has increased to USD 284 million from USD 230 million in 2005
Approximately 50% of the total number of funds have less than USD 50 million of assets under management each
The Islamic wealth management industry needs to develop holistic business models that leverage intricate client relationships and implement efficient operational frameworks
The critical success factors for a new entrant include product development expertise to fill the perceived supply gaps, client relationship management, operational efficiency, competitiveness with established and multinational players, effective marketing and distribution networks, acquisition of high quality human resources
What deal flow can we expect to see emerging in the Islamic Private Equity space?
How sustainable is the current appetite for Islamic Real Estate investments?
Where will the next Sukuk Mega Deals come from?
What are the key institutional shifts in asset allocation, and implications for Funds players?
How can Islamic funds more pro-actively target the “value-seekers”?
How can structural challenges be overcome that will enable Shari’ah-compliant Hedge Funds to grow from current market levels of less than $1 billion to more than $50 billion by 2010?
The report was launched by Ernst & Young at the Pre-Conference Executive Briefing at The World Islamic Funds and Capital Markets Conference on the 26th of May at the Gulf Hotel in the Kingdom of Bahrain. The executive briefing was led by Sameer Abdi, Group Head Islamic Financial Services and Ali Arsalan Tariq, Senior Consultant, Ernst & Young Bahrain.

Wednesday, 30 May 2007

The Islamic Development Bank launched a $10 billion fund to combat poverty in developing Muslim nations

Javno, 30 May 2007
The Islamic Development Bank launched a $10 billion fund on Wednesday to combat poverty in developing Muslim nations. The fund, which has an initial endowment of $1.4 billion, will be dedicated to alleviating poverty, promoting health and universal education, and empowering women in the bank's 56 member countries.

"This launching ceremony of the IDB's Poverty Alleviation Fund symbolises a revitalisation of the Islamic community in a world where unmatched wealth is next to absolute poverty," the host of the bank's annual meeting, Senegalese President Abdoulaye Wade, told delegates. Saudi Arabia has already pledged to contribute $1 billion, Kuwait $300 million, Iran $100 million and Senegal $10 million, bank officials said.

The aim of the fund is to help meet the U.N. Millennium Development Goals (MDGs), proposed by then-Secretary-General Kofi Annan and approved by world leaders in 2000. They include cutting extreme poverty by half, ensuring universal primary education, and stemming the AIDS pandemic, all by 2015, among others.

CIMB eyes more global sukuk deals

Business Times, 30 May 2007

CIMB Group, Malaysia's second biggest bank, is eyeing more Islamic bond (sukuk) deals this year in the international market, its group chief executive Datuk Nazir Razak says. He said the firm hopes to conduct more deals in the international market rather than focus only in the domestic market for the Islamic instrument."Our target this year is to do more sukuk deals which have nothing to do with Malaysia. In fact, we have already started bond deals such as the one we did for the Islamic Development Bank," he told reporters on the sidelines of the Third World Islamic Economic Forum in Kuala Lumpur yesterday.
He said of the total bond market in the country, Islamic bonds currently makes up about 60 per cent."(However) it is hard to estimate a number as it keeps on changing. Over the past several weeks we saw the launch of the Maxis Communications Bhd's privatisation deal and their intention to seek Islamic financing for the deal," he said.On its banking business, Nazir said CIMB is looking to expand further in Thailand and Vietnam, as part of its ambition in becoming a regional player in the sector.CIMB, through CIMB-GK Securities (Thailand) Ltd, has the licence to trade stocks as well as carry out corporate advisory work such as initial public offerings."We have already established our stockbroking operations in Thailand, and thus, it would be logical for us to evolve into a banking franchise there in the future," he said.
However, CIMB has yet to enter into any discussions with any parties over its possible venture in Thailand. CIMB already has a strong investment banking and stockbroking franchise in Kuala Lumpur, Singapore and Jakarta. It also has its South-East Asian equity sales teams based in Hong Kong, London and New York.

Tuesday, 29 May 2007

More demand for syariah products

The Star 29 May 2007

KUALA LUMPUR: Increased trade and investment flows between Asia and the Gulf States have led to greater demand for syariah-compliant banking services such as trade and project finance as well as investment services.
Standard Chartered Bank (StanChart) regional chief executive officer (Middle East and North Africa) Shayne Nelson said more Muslims were tempted to take part in and profit from the Asian growth story and to diversify their investments out of the US and Europe.
As such, Asian countries that were best prepared (from legislation, banking regulations and market structure perspectives) to service wealthy Muslim investors and corporates would be best positioned to enjoy an influx of oil money, he added.
“A new partnership between China, India and the Muslim world is forming a 'New Silk Road'. The inter-regional complementary trade relationship forms its backbone, from which spurs rapid growth in cross-border direct investment and portfolio investments flows.
“It has an uplifting effect on the services sector and Islamic banking has been gaining the most attention,” he said in his presentation on China & India: Partnership with the Muslim World, held in conjunction with the Third World Islamic Economic Forum yesterday.
Nelson said the oil boom had resulted in massive capital and liquidity around the Middle East but a lot of money had been wasted. “They have learnt their lesson and diversified from resources to service. There is a shift in the way they invest,” he said.
In reducing economic dependency on the oil-related sector, countries such as United Arab Emirates (UAE) had made significant efforts to develop industries such as cement, building materials and fertilisers. Investors from the region had also begun to acquire larger stakes in multinational corporations and undertake long-term investment in various industries across the world.
On StanChart's Islamic banking segment, Nelson said growth had been very good as reflected in its recent first quarter result. “Our Islamic banking is growing at double the rate of conventional banking in the markets that have embraced the former. “We are expanding and we offer a wide range of derivatives. Commodity derivatives is something we want to build up as we go forward,” he told StarBiz.
Currently, the bank has Islamic banking operations in UAE, Pakistan, Bangladesh, Indonesia and Malaysia. Nelson said StanChart was always looking at expanding Islamic banking to more countries. In Malaysia, StanChart was considering all options to transform its Islamic banking window into a full-fledged subsidiary, he said. “When we get the scale, it makes sense. If we form a subsidiary it should have a full governance structure,” he said.

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Sharia rating for takaful firm

Gulf Daily 29 May 2007

MANAMA: The Bahrain-based Islamic International Rating Agency (IIRA) has assigned a Sharia Quality Rating of AA to Syarikat Takaful Malaysia Berhad (Takaful Malaysia).The rating reflects IIRA's opinion that Takaful Malaysia conforms to a very high level of standards of Sharia requirements in all aspects of Sharia quality analysis.The rating is premised on Takaful Malaysia's compliance to Sharia requirements in its operations and business, despite being subjected to changes in its operating environment due to the opening up of the local takaful industry.Takaful Malaysia has highly intellectual and qualified Sharia scholars as members of its Sharia Advisory Board (SAB).In performing its duties, SAB has established a good and respectable working relationship with all management levels.Takaful Malaysia allocates a provision from its annual Zakat payment to be distributed to deserving parties and it is supervised by a Zakat Payment Committee.This is in line with corporate social responsibility initiatives undertaken by the company.To further strengthen Takaful Malaysia's position in the industry, it has appointed actuary Mohammed Kamil as its group managing director."We believe that by being the first takaful operator in the world to receive this rating, it would not only further enhance Takaful Malaysia's credentials as the leading takaful operator, but also ensure that Takaful Malaysia fully complies with the local and global Sharia standards," said Mr Kamil."Consequently we also hope that the rating will boost the confidence and give more assurance to our existing customers as well as prospective clients, by being fully Sharia compliant in all aspects of our business operations and transactions."This is the first Sharia Quality Rating issued by the IIRA."We are very pleased to give our first Sharia Quality Rating to Takaful Malaysia, a leading takaful operator in the world," said IIRA chief executive officer Jamal Zaidi. "We believe that the very high level Sharia Quality Rating earned by Takaful Malaysia will provide it with a high level of credibility and a competitive advantage in the takaful market."

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Monday, 28 May 2007

Islamic finance makes further inroads

The Star - 28.5.07

CONTINUED economic strength and sound macro management are prerequisites in ensuring the success of the Malaysian Islamic finance industry, said Kuwait Finance House (KFH) Malaysia chief economist & head (research) Baljeet Kaur Grewal. Baljeet Kaur GrewalShe said Malaysia had already established itself as a key player in the global Islamic sphere, thanks to an environment of strengthening economic growth, underpinned by strong fundamentals. However, there remained tremendous prospects for growth in the industry, which she said, would be of a vertical nature. “The Malaysian emphasis now is on capacity building, investment in human capital development, enhancing financial soundness and compliance of Islamic financial institutions and enhancing syariah compliance and governance, among others,” she told StarBiz.
Baljeet said the local Islamic finance market and the Gulf Cooperative Council (GCC) Islamic market would have different yet complementary growth patterns. Unlike Malaysia, Baljeet said, the GCC states would see more of a lateral expansion such as the establishment of new banks and companies and the introduction of new products. “This is partly because of the vast liquidity in the market (GCC) which impacts directly on demand dynamics for financial products,” she said.
In five years, she expects to see increasing embedded capital within clusters of economies, which will jointly build a framework for an integrated Islamic finance industry. Baljeet also noted that the next phase of global industrialisation could not be financed solely out of equity or government budgets. Instead, there would be an increased reliance on debt markets for Sukuk and other capital market instruments. “In this regard, Islamic finance is set to leverage its position because of its competitive pricing and now increasingly acceptable structures,” she said. “Regulations will need to remain supportive of the development of Islamic markets.” Locally, she believes that sound regulation in the Islamic markets has been key to the industry's growth.
She said that the challenge, moving forward, would be to maintain this advantage while advocating risk management policies, corporate governance, transparency and market conduct within the syariah framework. To maintain the growth of the Islamic finance industry in Malaysia, continuous research on markets, products and investments was needed, she said. On the level of capitalisation of most Islamic banks, she describes it as “still diminutive” compared with global players. “We need to address this as well,” she said.
Meanwhile, in line with the rapid growth of the Islamic finance industry, the KFH group recently launched its research arm, KFH Research, in Dubai. ”The value of an independent point of view to give investors a competitive advantage is crucial, more so in Islamic markets,” Baljeet said. “Based on this premise, KFH has established the world's first Islamic economics and investment research arm,” she added. The outfit's research activities, according to Baljeet, span global markets and economies, and aim to provide in-depth macro and trend analysis and enable knowledge sharing. “Based in Malaysia, against a thriving Islamic capital market, our research group acts as a conduit linking the Middle East and Asia, two key economic regions which will drive growth into the next decade,” she said.
Baljeet also said plans were afoot to set up research bases more aggressively across the Middle East, Asia and the greater Middle East and North African regions. Meanwhile, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz, in a speech delivered by Bank Negara deputy governor Datuk Mohd Razif Abd Kadir during the launch of the research outfit, said that in the recent five years, there had been a rapid evolution and expansion of the global Islamic financial services industry.
“Islamic finance has now been accepted as a viable and competitive mode of financial intermediation, not only in Muslim countries but also beyond the Muslim world,” she said. Zeti said the overall Islamic financial system's growing role in mobilising and channelling funds to productive investment activities across borders brought important benefits to the global economy. “Building stronger financial markets and greater intermediation through knowledge sharing, especially forms an important part of this process to facilitate greater international and investment flows,” she said. KFH, listed on the Kuwait Stock Exchange, enjoys a strong presence and reputation within the Middle East as one of the pioneers in Islamic banking and finance.

Islamic finance growing in Canada

Law Times 28 May 2007

Islamic finance experts from around the world converged at a two-day conference in Toronto last week to share their expertise and form alliances with players in North America’s burgeoning Islamic finance sector.And although Islamic finance is still in its infancy in Canada, many key players believe its time has come.The Islamic finance sector has exploded in the Middle East, Southeast Asia, Europe, and the United Kingdom over the past 30 years and has grown by 15 per cent each year for the past five years alone.
There are now roughly 300 Islamic financial institutions in 75 countries holding assets of more than US$300 billion and US$400 billion in financial investments.Islamic banks have started opening in some Western cities, including London, England, which plans to compete with Dubai and Malaysia to become the world centre of Islamic finance.Many of the globe’s largest conventional financial institutions are also moving aggressively to provide Islamic-law-compliant financial products to cater to the large and increasingly affluent Muslim population. Muslims account for almost one quarter of the world’s population and Islam is widely considered to be the world’s fastest growing religion.
According to Islamic law, business activity must be grounded in moral and ethical principles. Trading in tangible assets or services is permitted, but simply making money from money is considered usury and is forbidden. Therefore, Shariah-compliant financial products and services of all types cannot involve interest or explicit interest.Investments also can’t be in prohibited areas such as gambling, alcohol, pornography or arms dealing, and transactions cannot be considered high-risk, because gambling or mere speculation is not allowed.Despite the growth of the Islamic finance sector around the world, it is still taking baby steps in North America. But experts say the largely untapped market in Canada includes close to a million Canadian Muslims, as well as non-Muslims interested in ethical investments, and oil-rich foreign investors from the Middle East.Although a small number of grassroots Islamic financial institutions and organizations now offer retail products or services in Canada, no large Canadian financial institution currently distributes Shariah-compliant financial services or products.But that is about to change, says Omar Kalair, the founder and president of UM Financial Inc. His organization — which started off offering a Shariah-based mortgage product and later diversified into other areas — has now teamed up with one of the big five banks. In the coming months, this bank will begin distributing a full suite of UM Financial’s usury free products, including mortgages, investments, credit cards, deposits, and international financing.And there will be more to come, predicts Walied Soliman, a lawyer at Ogilvy Renault LLP in Toronto who has been working in this area for two-and-a-half years.“I definitely think that products that are Islamic-finance compliant will be offered by more than one [large] financial institution in this country,” he says. “I also believe that after the success of one or more of those banks, major international players will be interested in pursuing opportunities in Canada. I’m quite convinced of that.“Most financial service providers that target the retail market in Canada are, at the very least, taking a very close and hard look at this area,” he says. “The market is too big not to have someone tap it.”Stuart Carruthers, a partner at Stikeman Elliott LLP in Toronto, says he and others at the firm are also taking this trend very seriously. The factors leading to the explosion of Islamic finance in London are also present in Canada to a lesser degree, he notes.Canada has a large, growing, and demographically young Muslim population concentrated in large Canadian cities with close ties to family members and to institutions in predominantly Islamic countries, he notes. And large Canadian financial institutions make an effort to reach out to multicultural communities in Toronto and other big cities. “We always look to see what’s coming down the pipeline. And we’re expecting to see more of this activity in Canada,” says Carruthers.However, the Royal Bank of Canada ventured into this market by testing a Shariah-compliant financing product several years ago, but decided there was insufficient demand for the product.It wasn’t a lack of demand that sunk that product, says Faisal Kutty, a partner at Kutty Syed & Mohamed in Toronto, legal counsel to UM Financial who also advises other Islamic financial companies in Canada. The bank likely didn’t establish trust and buy-in from the Muslim community by teaming up with a reputable community-based organization, he says. To succeed in this market, both the mainstream institutions and the community-based institutions need each other.“The community organizations need the larger institutions because they need access to the bigger pool of finance so they can make the [products] more competitive,” he says. “And the mainstream organizations need access to the networking and the credibility, which comes from working with an Islamic financial institution.”Once banks start offering competitive products that are backed by community organizations, and evaluated and approved by Islamic scholar advisory boards, they’ll get buy-in from the Muslim community, he says. And oil-rich investors from the Middle East will also start paying attention.“A big chunk of the money that goes into Islamic finance comes from the Middle East. And a lot of them are afraid to invest in the United States because of all the post-[Sept. 11] paranoia. . . . Canada is considered pretty safe. “Some of the big players in the Middle East might come here and purchase large commercial ventures and [do] real estate transactions and they would like to structure them through Islamic financial institutions.”There’s another reason why banks and smaller Islamic financial institutions need each other, at least when it comes to offering Shariah-compliant mortgages.Islamic mortgages are often structured as rent-to-own agreements, explains Kalair. In order to circumvent interest, when someone purchases a home, UM Financial becomes an equity owner in the home. So, technically, the client is living in a home that is partially owned by UM Financial.Instead of paying interest, the client pays rent and a principal payment each month. In the end, total monthly payments amount to roughly the same as under a conventional mortgage. However, stating they have equity ownership in a home is too risky for banks, so there are two separate agreements: one between UM Financial and the purchaser, and the other between UM Financial and the mainstream financial organization.However, Kutty says banks should also understand that Muslims who enter into Islamic finance models are extremely cautious about taking on loans or debt, and are unlikely to default on payments.His office has dealt withhundreds, perhaps thousands, of transactions over the past 11 years, and only one client has ever defaulted on a mortgage. In that situation, the client was going through a divorce and the couple couldn’t decide who should continue making payments.“These things are taken very seriously,” he says. “They won’t generally buy a house and do a ‘screw you’ type of thing.”Lawyers who practise in this area don’t have to be experts in Islamic law, says Soliman.
The lawyers who succeed in this area will be excellent corporate or banking lawyers with proven track records for thinking outside the box — so they can take the faith-based criteria given to them and create products that work within the Canadian regulatory landscape.For instance, real estate transactions typically require structuring a loan as a business transaction where the lender doesn’t charge explicit interest but still receives some sort of return.“You might say this sounds like total hokey baloney. You might say this sounds like a good way for lawyers to make a couple bucks. And for corporate and business lawyers trained in the Western world, that’s a natural reaction,” he says.“We are taught in law school that the substance of a transaction is always more important than the form of a transaction in determining what the transaction actually is,” he says. “In Islamic law, the form of a transaction is at least as important as the substance of a transaction. And that’s a very difficult concept for Western trained lawyers to get their heads around, but it’s one that I understand as a given now.”

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Islamic finance is the ideal catalyst for taking trade relations between East and West to a new level

Ameinfo - 28 May 07

Islamic finance is the ideal catalyst for taking trade relations between East and West to a new level, Bahrain-based Ithmaar Bank CEO Michael Lee told the recent World Economic Forum on the Middle East at the Dead Sea, Jordan.
More than 1,200 political and business leaders, including 16 heads of state, took part in the conference, which was opened by H.M. King Abdullah Ibn Al Hussein. In his keynote address, Lee said that Western countries and companies are increasingly looking towards Islamic finance as an option for raising money for major projects. 'The worldwide Islamic finance market is currently worth more than $500 billion, with Islamic banks growing at around 20 per cent a year, twice as fast as their traditional counterparts. The combined turnover of the Islamic banking industry could top 2 trillion US dollars in the next three years or so,' he said.
'The Sukuks (Islamic bonds) market is still in its infancy stages but has huge potential for growth. The sizes of some Sukuks already issued are staggering, running into the billions of US dollars, and they are being used to fund major developments and expansions in the West,'said Lee. Lee also explained that Sukuks are no longer solely being issued by Middle East-based Islamic banks. 'In 2004 a Sukuk was issued by the German State of Saxony specifically targeting Middle Eastern markets and last year saw the first US Sukuk, which raised money for gas field projects. Sukuks are also expected to become a popular mode of financing in the UK and Japan,' he said. 'Even the banking giants of the Western world are getting into Islamic finance, with Standard Chartered, Citigroup and HSBC being just some of the major institutions launching Islamic services.' Lee added, however, that Islamic Banking will need time to mature as an industry before it can operate on the same level as conventional banks. 'A broad and transparent regulatory framework needs to be in place in order to win the complete trust of multinationals and countries outside the Muslim world. We at Ithmaar Bank are pleased to be operating from the Kingdom of Bahrain, which is helping to pioneer these new standards,' he continued. 'The industry also needs to find new ways to differentiate itself from traditional banking by offering unique products and services that emphasize the strengths of Islamic finance.' Mr. Lee is a seasoned investment banker with over 34 years of experience serving multilateral, governmental, corporate, financial institutional and high net-worth clients, at Merrill Lynch in London, Hong Kong and New York, and at Dean Witter, where he was Chief Executive of Dean Witter Capital Markets-International in London. In 1992, he became a senior adviser at the Kingdom of Bahrain's then Ministry of Finance & National Economy, providing inter alia strategic advice on the development and regulation of the Bahrain International Financial Centre. Immediately prior to joining Ithmaar Bank, he was with Emerging Markets Partnership, which he joined as Managing Director in 1998, and where he was Deputy Chairman and Managing Director of Emerging Markets Partnership Bahrain, 40% owned by Shamil Bank of Bahrain, a subsidiary of Ithmaar Bank; EMP Bahrain is the general partner and manager of the US$ 930.5 million Islamic Development Bank (IDB) Infrastructure Fund.
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Friday, 25 May 2007

Several strategies and initiatives are being lined up to bring Malaysia's Islamic venture capital industry to the international level

Business Times, 25 May 2007
Several strategies and initiatives are being lined up to bring Malaysia's Islamic venture capital (VC) industry to the international level, Securities Commission (SC) chairman Datuk Zarinah Anwar says. She said the Malaysian Venture Capital Development Council which is chaired by the SC hopes to do this by riding on on the country's strength in Islamic finance and capital market."We want to create a competitive advantage through the development of an Islamic VC industry," she said at the International Centre for Education in Islamic Finance Inaugural Intellectual Discourse Series II in Kuala Lumpur yesterday.
Zarinah said Malaysia's strength lies in its established Islamic finance regulatory framework which can accomodate a variety of Islamic structures as well as offer favourable tax treatment.She said Malaysia is committed to developing its Islamic finance and positioning itself as an International Islamic Finance Centre. Zarinah noted that over the next five years, private equity and VC funds are expected to increase their commitment to emerging markets."Asia (excluding Japan, Australia and New Zealand) is expected to be the prime beneficiary since it attracts 70 per cent of private equity and VC investments in emerging markets," she said. She said ultimately, Islamic VC will serve as a valuable asset class for the Islamic finance industry.
Zarinah said currently most Islamic funds are tied to short-term instruments such as Murabahah transactions, or are invested in the public markets and real estate."The introduction of long term investments like Islamic bonds and VC will provide greater opportunities for portfolio diversification and matching of investor needs," she said.

Islamic Finance Special Report

Financial Times, 25 May 2007
Do you know your ’sukuk’ from your ‘murabaha’? Find out more in the FT’s Islamic Finance Special Report:Backwater sector moves into global mainstream. Not long ago, Islamic finance was widely regarded as a specialised, if not obscure, backwater of global banking, write Roula Khalaf and Gillian Tett. Although the concept of tailoring financial services to devout Muslims has existed for more than three decades, this activity was largely limited to commercial banking - and focused on specific regions, such as Malaysia or the Middle East.

But in the last few years, Islamic finance - based on a strict interpretation of the Koran that bans the use of interest in transactions - has undergone huge expansion, partly driven by the oil-driven financial liquidity in the Gulf, and the fast growing number of Muslims seeking more religiously sanctioned products.

The phenomenal growth in what is still an opaque industry, however, has raised concerns over the need for more regulation and better supervision. The UK, now home to two Islamic banks, is vying to become a centre for Islamic finance. Sukuks, or asset-based Islamic bonds, are being marketed to international investors. Alexander Lis, managing director at Oliver Wyman, the consultancy, calculates that there are $300bn of assets managed according to Islamic principles, and more than 280 institutions - ranging from commercial to investment banks and investment funds - providing Islamic products.

Others put the scale of the industry even higher: the Financial Services Authority in the UK, for example, recently suggested it was as big as $500bn. Standard & Poor’s estimates that the sukuk market has reached $70bn, and will top the $160bn mark by the end of the decade.

Though Islamic banking still represents only 1 per cent of global banking assets, most observers expect this heady pace of growth to continue for many years. The development has been driven by economic and political factors. The so-called “war on terror” in the aftermath of the September 11 2001 attacks helped to consolidate a sense of Islamic identity across the Muslim world, prompting many more to seek ways of expressing their religious convictions. And the rise in the oil price has fuelled an unprecedented economic boom in the Middle East. The new demands for the recycling of capital flows have been met with innovation in the provision of Islamic financial products, offering ingredients, for the first time, for a larger scale industry.And while no major scandals involving the Islamic finance sector have come to light so far, the boom in the industry has occurred amid a much wider credit bubble in global financial markets. “Right now we have a credit bubble - you can sell almost anything to anybody, including in the Islamic finance world,” says one investment banker. “People should certainly be asking hard questions about financial practices in the Islamic finance sector.”

Analysts hope that regions where the industry is expanding rapidly, such as in the Gulf, will eventually adopt the Malaysian model of a single national Sharia board overseen by the government, rather than individual banks. Specific supervision and regulation for Islamic banks also has yet to take hold, with only Kuwait and Bahrain issuing separate regulatory regimes for the sector.

Innovation: Frenzied race to develop new ideas

When international bankers discuss Islamic finance, one word that repeatedly crops up is “innovation”, writes Gillian Tett. In the past five years, Islamic finance has not only swelled in size, but expanded in complexity, as bankers around the world have competed furiously to produce new, Sharia-compliant ideas – and proclaim how “innovative” they are being in marrying the Koran with modern finance.Middle Eastern issuers are now increasingly embracing the concept of using the capital markets, alongside bank loans. Islamic banks in the region – and elsewhere in the Muslim world – are also becoming more aware of the benefits of diversifying the risk on their own balance sheet.And the investor base of the Islamic finance world has become slightly more adventurous, too: instead of simply relying on quasi-deposit accounts, or items such as real estate, to park their funds, investors are turning to hedge funds and more complex capital markets products.

This has prompted Islamic finance to move increasingly into the capital markets arena, and embrace a host of new liquidity management tools as well as more structured products. It has also fostered the creation of new institutions, such as Islamic hedge funds, with a clutch of these springing up in London and the US recently.Moreover, as this trend has got under way, it has been greatly boosted by the arrival of Western investment banking groups into the field. For what Western bankers have discovered in the last couple of years is that many of the concepts which they have developed in other fields – such as tax planning or securitisation – can be applied to Sharia-compliant products too.

Thus, behind the scenes, a bitter competitive struggle has broken out between the banks, as they each rush to transfer these innovative ideas to Islamic finance – often in conditions of great secrecy.The most visible sign of this innovation is seen in the world of “sukuk”: although these instruments, akin to bonds, were invented less than a decade ago, their issuance has risen sharply in the last couple of years and are now producing numerous permutations.

Less obviously, experimental ideas are now also emerging in product and infrastructure finance, aside from sukuk. Private equity is attracting intense interest too, as is the so-called diminishing musharaka structure, which produces an effect akin to the amortisation of a loan.

However, the field which is arguably attracting most brainpower of all is derivatives and structured finance. Until now, the use of such instruments has been extremely low in the Islamic world, meaning that most banks, investors and corporate issuers had little way of protecting themselves from items such as inflation risk.Moreover, a few devout Muslims argue that these innovations increasingly contravene the spirit of Islamic finance – even if they might match its letter. Concepts such as derivatives and hedge funds, for example, are considered particularly controversial, given the Koran’s ban on gharar (speculation). Nevertheless, these criticisms are certainly not hampering the development of new ideas at present; on the contrary most observers think that product proliferation will only intensify this year.

Products: No interest – but big deposits of ingenuity

As with other Islamic products, Sharia-compliant financial transactions, known as commodity murabaha, first emerged in the 1970s, when a group of wealthy Muslims began to look at ways to invest that did not flout strict religious laws laid out in the Koran, writes David Oakley. The Koran bans the payment of interest, or riba, as the creation of money from money itself is considered sinful.
“The essential difference between Islamic finance and conventional finance is not paying interest, whether it is commodity murabaha, Islamic bonds or in the retail space Islamic mortgages. Islamic finance tries to replicate the conventional market, but in a structure that uses profits rather than interest,” says Neil Miller, a partner at law firm Norton Rose, which specialises in Islamic finance.

Commodity murabaha replicate short-term money market deposits, usually taken out for fixed terms between one week and one year, and medium-term syndicated loans. A commodity murabaha is a contract between a bank and its client for the sale of goods at a price plus an agreed profit margin for the bank. As the bank is making profits rather than earning interest, this is considered Sharia-compliant. Profits are allowed under Islamic law. The instrument is called a commodity murabaha because the profits are made on the buying and selling of a commodity, usually metal, such as copper, aluminium or lead.

One bank will buy the metal at the spot price, or the current price. This bank will then sell the metal to another bank on a deferred payment basis, say for three months, at the spot price plus a mark-up or profit for doing so. The second bank will then immediately sell the metal to a broker or another institution for the spot price. The first bank has made a profit from the the mark-up, while the second bank has raised funds for its investments.

In the wholesale markets, Islamic finance can be broadly divided into commodity murabaha; equities; property investment; takaful, or Islamic-compliant insurance; foreign exchange, including Sharia-compliant currency swaps; Islamic bonds, or sukuk; and structured products. In the retail markets, individuals can use current and savings accounts, which are based on a profit-sharing principle, while personal loans, which are based on the trading of a commodity similar to commodity murabaha, and Islamic mortgages, which are in essence leasing arrangements, have also been created.

Equity investors are allowed to buy only shares from certain industries. For example, insurance stocks are excluded because insurance involves a degree of uncertainty, risk or speculation, known as gharar, which is prohibited. Investors are also banned from buying stocks that derive income from alcohol, pork, defence, gambling and entertainment. Stocks have to fit a certain financial profile, too. A debt-to-equity ratio of more than 33 per cent is unacceptable.

In the past year, the financial product that has been attracting the most publicity is the sukuk, a relatively new instrument that has only sprung up in the past five years. Today the size of the sukuk market is about $70bn, with growth helped by the rising oil price and the sharp fall in equities in the Gulf, encouraging investors to switch out of stocks. These instruments are designed in a similar way to conventional bonds, but pay coupon profits instead of interest.
Other instruments and asset classes starting to emerge are structured products, linked to commodity or equity prices, and hedge funds, although many bankers remain unconvinced that these funds are successfully trading. There is also debate over how far Islamic finance can replicate the conventional markets. For example, can derivatives such as credit default swaps, which offer protection against a company defaulting, be developed when any kind of speculation is banned under Islamic law?

Supervision and regulation: Experts see need for a common approach

Created 17 years ago but now expanding its operations, AAOIFI – the Accounting and Auditing Organisation for Islamic Financial Institutions – works on two levels, writes Roula Khalaf. First, it has an accounting board that issues rulings on how transactions should be booked in banks’ financial statements. It has also started giving crash courses and issuing professional certifications for accountants working in the sector.Second, AAOIFI runs a Sharia board of 17 religious scholars whose role is to try to unify the various opinions issued by religious scholars on behalf of individual institutions. AAOIFI’s Sharia board rules on the Islamic credentials of financial products. Scholars on the board then abide by the AAIOFI rulings in their daily bank jobs.

The organisation, however, faces serious constraints. Set up by the industry itself, AAOIFI has no power of enforcement. With a permanent staff of only 15 – and an additional 40 outside consultants – the organisation’s resources are also limited. Only eight countries have adopted AAIOFI accounting standards as mandatory, though many other Islamic financial institutions tend to use them.Mohamed Nedal Alchaar, head of AAIOFI, argues that organisations such as AAIOFI – another is the Malaysia-based Islamic Financial Services Board – are becoming the checks and balances on the industry. But he acknowledges that a lot more needs to be done. “The industry has to be standardised – otherwise it will be local. For it to be a real viable alternative system it needs harmony. You cannot have a product be one thing in Bahrain and another in Malaysia,” he says.

Some analysts argue that the sector requires clear and specific regulations while others say this would shield Islamic institutions from competition and promote complacency. A recent report by KMPG notes that there is little consensus in the industry on how to create reporting and governance standards.Anwar Khalifa Alsada, deputy governor of the Bahrain central bank, says Islamic banks should be separately regulated. The industry, he says, needs more transparency, particularly for depositors. Unlike conventional banks, deposits in Islamic banks are not guaranteed. That is why, he says, Bahrain now requires Islamic banks to disclose more details about profit allocation between shareholders and depositors.

Mr Alsada and others, however, say regulators have an additional job – that of educating the public about the risks and benefits of Islamic banking. Indeed, analysts say some depositors appear unaware that (at least in some cases) their bank deposits are not guaranteed.

Investment banks: Wide array of new names join the party

Earlier this year WestLB underwrote a £225m package of Islamic finance to support a leveraged buyout of Aston Martin, the racing car group, by a group of Middle Eastern investors, writes Gillian Tett. The deal marks the first time that Islamic finance has been used for a private equity, leveraged buyout in the UK. But it also highlights another key trend: as Islamic finance expands in scale and complexity, the array of western financial institutions joining the party is widening by the day.

For while a few western banks, such as HSBC, BNP Paribas, Standard Chartered and Citigroup, have been running Islamic operations for almost a decade, they are now facing competition from a host of new names. These include Morgan Stanley, Barclays Capital and Deutsche Bank – as well as smaller players, such as WestLB, which last year alone arranged around a dozen Islamic deals, worth around $4bn.There are several reasons for the trend. One is the rich business opportunities that can now be found in the Middle East, as the result of the oil boom. HSBC calculates, for example, that Middle Eastern investors have now invested some $1,200bn in international assets alone in recent years, some of which is now being repatriated as the political climate has changed.

Other analysts suggest the region could enjoy some $20,000bn of oil income in the coming years – of which as much as a third could be used in the Islamic finance sphere, Darshan Bijur of the consultancy KPMG suggests.

And even before this extraordinary forecast comes into play, the business bonanza is also creating vast corporate financing and infrastructure needs. Not all of this is using Islamic finance. Indeed, until quite recently, markets such as Malaysia were more developed than the Middle East in their use of instruments such as sukuk. However, the Gulf region is embracing Islamic finance with a speed that has taken practitioners by surprise.

But western banks have also spotted other reasons to embrace the sector. One is the fact that Islamic products can often prove to be distinctly lucrative. For, like any nascent, fast-emerging area of finance, the sector is so fragmented and opaque that it can often produce high margins – particularly where products are not commoditised.

Moreover, contrary to what a casual onlooker might suspect, western investment banks do not appear to face any significant impediment as a result of their national affiliations – or lack of Islamic roots. That is partly because they tend to distribute their products through local Islamic banks, or act with a local partner.

However, the pattern also reflects a distinctive point about the way that Islamic finance operates: namely, that the religious “brand” of any product typically rests not in the reputation of the institution that has produced it – but with the religious scholars who have approved it. Thus, western banks have entered this field by engaging the service of esteemed religious scholars who can rule on the Islamic merits of products.

Some, such as HSBC, have done this by creating a dedicated Sharia advisory board, attached to a specific Islamic banking unit. Others, such as Deutsche Bank, have created so-called Islamic “windows” (or dedicated pools of capital that are used only for Sharia-compliant finance) – but have used Islamic finance consultancies for religious advice.

Still others, such as Barclays Capital, have turned to Islamic scholars on an ad hoc basis, as product opportunities arise. Either way, by engaging renowned Islamic scholars, the banks have been able to create the necessary Islamic “branding” – whatever their origins.

However, the pattern also reflects a distinctive point about the way that Islamic finance operates: namely, that the religious “brand” of any product typically rests not in the reputation of the institution that has produced it – but with the religious scholars who have approved it. Thus, western banks have entered this field by engaging the service of esteemed religious scholars who can rule on the Islamic merits of products.

Some, such as HSBC, have done this by creating a dedicated Sharia advisory board, attached to a specific Islamic banking unit. Others, such as Deutsche Bank, have created so-called Islamic “windows” (or dedicated pools of capital that are used only for Sharia-compliant finance) – but have used Islamic finance consultancies for religious advice.

Still others, such as Barclays Capital, have turned to Islamic scholars on an ad hoc basis, as product opportunities arise. Either way, by engaging renowned Islamic scholars, the banks have been able to create the necessary Islamic “branding” – whatever their origins.

It remains an open question just how sustainable this approach will be in the long term. After all, the expansion of the Islamic financial industry this decade has occurred in a very benign credit climate. However, if markets were to crash, investors and issuers might become more discriminating about the source of Islamic products – particularly if the Sharia-compliant qualification of a product sold by a western bank ever came into dispute.
London: Capital takes a leading role

Next month London will record an-other first in the fast-growing Islamic financial services market when it holds a sukuk summit, writes David Oakley. London is the leading western market place for Islamic finance, even challenging the three main Muslim centres – Bahrain, Dubai and Malaysia – for business in some products as it takes advantage of its position as the world’s main financial hub alongside New York.

The sukuk summit, organised by the British government and the first to be held in a western country, will see central bankers, investment bankers and policymakers converge on London’s Whitehall from Europe, the Middle East, Malaysia and Japan to discuss the future of this relatively new form of finance. So far, London has unequivocally positioned itself in the vanguard. More money flows through the British capital via the most-widely used Islamic financial instrument, commodity murabaha, than in any other centre.

Last month the UK became the first western country to announce plans to issue a sukuk. It has established the first secondary market in these Islamic bonds, albeit with small volumes, and seen the first attempts at creating shariah-compliant hedge funds.Last month the UK became the first western country to announce plans to issue a sukuk. It has established the first secondary market in these Islamic bonds, albeit with small volumes, and seen the first attempts at creating shariah-compliant hedge funds.

It has also used the technical expertise at its disposal at the investment banks based in the City to develop structured instruments, such as commodity and equity linked products that follow the prices of these assets. In the retail market, it is the only country in Europe that offers Islamic banking products.

The organising of the sukuk summit is the latest in a long line of government initiatives, supported by the UK regulator the Financial Services Authority, aimed at developing the Islamic financial market.In March, the government announced draft legislation that will give companies issuing Sharia-compliant bonds the same tax relief as those issuing conventional bonds, by allowing them to offset the coupon payments on the securities against the company’s profits for corporation tax purposes.

The government has also lifted double stamp duty on Islamic residential mortgages and commercial property loans. In the past, these loans were subject to two charges as an Islamic loan involves a bank buying a property, then selling it on to an individual or business for a higher price or fee. This avoided paying interest, but was in British law considered two transactions requiring stamp duty to be paid twice.

In the west, London is in a league of its own. In the US, Islamic bonds are not permitted to exist under most state laws, while many Americans still remain hostile to Islamic finance after the September 11 attacks. In France, despite having a Muslim population of 6m – three times the size of the UK’s – the authorities and regulators have been slow to realise the potential of this sector.

Wednesday, 2 May 2007

Islamic finance: From niche to mainstream

BBC News, 23 March 07
Changes to the tax system unveiled in the Budget will potentially make the UK a key world centre in the development of Islamic finance - a market currently estimated to be worth $400bn globally.

Islamic finance is based on Islamic principles and jurisprudence (Shariah). The basic Shariah prohibitions are on the earning (or payment) of interest, speculation, contractual uncertainly and transactions which are overly advantageous to one party at the expense of another. The Shariah also prohibits any participation in weapons, pork, gambling, pornography and alcohol businesses.

Overcoming most of these prohibitions is very difficult in the conventional finance system. The Islamic finance industry has thus developed various Shariah-compliant structures in order to provide investment opportunities and to meet the financing needs of businesses and investors who want to comply with the Shariah. These structures deliver results which are similar to those possible through conventional financing transactions.


Some of the key Islamic financing techniques include Ijara (based on the leasing of an asset), Musharaka (equity investment/profit and loss sharing), Istisna (production/construction financing) and Salam (forward financing). All of these techniques can be used to achieve the commercial objectives of "traditional" financing methods - but in a Shariah-compliant way.

However, the one Islamic financing vehicle which has been generating all the attention recently is the Sukuk. Sukuks are asset-backed, Shariah-compliant trust certificates. The closest instrument comparable to them in the conventional financial system would be a bond (notably those issued in relation to a securitisation). However, a traditional bond generates interest and is therefore prohibited under Shariah law.
Sukuks are asset-based and tend to be used in conjunction with an Ijara structure - where the lease rental income provides a profit for the Sukuk holders - or a Musharaka structure, where the profit share provides a return. Holding a Sukuk confers a beneficial interest to the holder - in terms of holding a proportional ownership of the underlying asset - as well as the income that it generates.

The Sukuk holder also assumes all rights and obligations for the maintenance of the asset. In a conventional bond, the investor has no such beneficial interest (other than perhaps a security interest), nor rights and obligations and is only entitled to receiving interest.

Tax charges

The UK tax system is clear and well developed with regard to the treatment of cash and transaction flows for a conventional bond. Up until now, however, the tax law was unable to ensure that the cash and transaction flows for a Sukuk were also treated in the same way. For example: let us say that a UK business wants to buy a factory and so issues a conventional bond to finance its purchase. The business would pay interest to the bondholders, and eventually redeem the bond.

The treatment of tax - income tax, corporation tax, withholding tax, stamp duty and so on - for the cash flows in these transactions are well-established in the current UK tax system, so all parties can be reasonably aware of their risks, obligations and post tax benefits.

Alternatively, a UK business which wants to buy the same factory but act in accordance with Shariah principles, would issue an Ijara Sukuk to purchase the factory. The business will pay an Ijara rental for the use of the factory which will form the profit to pay the Sukuk investors.
Up until now, the UK tax system would tax the rent and profit exactly as it would the rental income and profits arising from any other business arrangement. This is what causes the difficulty, as the tax charge on these flows as "rent" and "profit" is much higher than it would have been if the same amount of return had been classed simply as interest.

Clearly, this meant that UK businesses or investors who wanted to adhere to the Shariah were severely disadvantaged and would, in effect, be unfairly taxed simply for adhering to the requirements of their faith.


The chancellor has introduced legislation which will now treat these Sukuk transactions as being similar to conventional bond transactions, thereby removing the tax disadvantage for its use. This change should lead to a sharp increase in the usage of these kinds of Islamic financing instruments - not only by businesses which want to be Shariah-compliant, but also by other businesses which want to diversify their investor base and tap into the immense pool of Islamic finance in the oil rich Middle East.

The chancellor has not only created the framework for London to emerge as the leader in the global Islamic finance industry but his changes are likely to be replicated in many other countries. Islamic finance will move from being niche to the mainstream as a viable and valid financing option for all.

Tuesday, 1 May 2007

Ahmad Sanusi Husain

Ahmad Sanusi Husain has has over 16 years of experience in Islamic finance, professional training, consulting, education and management fields. He served at a public university, a government department, a leading Islamic bank, a national training institute and a premier private training & consulting firm and currently as Executive Director of Association of Islamic Banking Institutions Malaysia (AIBIM).
He was the Manager of Training at Bank Islam Institute of Research and Training (BIRT), which was established in 1995 and later as the Director of Training and Professional Development at Islamic Banking and Finance Institute Malaysia (IBFIM). During his service at both BIRT and IBFIM, he was entrusted with the planning, development and management of training and professional development programs in the fields of Islamic banking, finance, capital market, value-based management and other related subjects for institutions in Malaysia and other countries.
Prior to joining BIRT, he served at Bank Islam Malaysia Berhad, the first Islamic bank in Malaysia, from 1991 until 1995 as an officer in the Organisation and Methods Department. While serving at Bank Islam, he was responsible for research & development, manual writing and introduction of bank’s numerous Islamic financial products and services particularly Islamic consumer and retail banking facilities as well as advising and training other local and international financial institutions and organisations in developing their Islamic financial products and services.Ahmad Sanusi is also a consultant and trainer in the field of Islamic banking and finance, management and personal development. Since 1992, he has been actively involved and personally delivered more than one thousand lectures in seminars, training and academic programs and also consultancy services to:
a) Financial institutions:
- commercial banks
- investment (merchant) banks
- finance companies
- cooperatives banks and societies (Bank Rakyat etc)
- unit trust (mutual fund) management companies (Public Mutual etc)

b) Professional bodies and institutes:
- Institute of Bankers Malaysia
- IBFIM etc

c) Institutes of higher learning:
- Universiti Tenaga Nasional (UNITEN)
- Universiti Teknologi Mara (UiTM)
- Universiti Telekom
- Universitas TriSakti Jakarta
- Institut Teknologi Brunei etc
- Al-Azhar University, Egypt(a special 10-day program for final-year Malaysian students organised by a Malaysiangovernmental body)

d) Other public and private institutions:
- Employee Provident Fund (EPF)
- Majlis amanah Rakyat (MARA)
- Deloitte etc
- Edaran
- Consolsys
- Silverlake System

He has delivered public lectures throughout Malaysia (in all 14 states and federal territories in Malaysia) and foreign countries:
- Indonesia
- Singapore
- Brunei
- Thailand
- Egypt
- Bahrain

For the record, thousands of participants from more than 50 countries across 5 continents i.e. Asia, Africa, Europe, North America and Australia/Oceania have attended public training programs organised by him and his team over the years i.e. since 1992. He has managed professional training ranging from 1 day talk to 17 days international integrated course on Islamic banking and finance. He was one of pioneer trainers and consultants for Interest-free Banking Scheme introduced by the Central Bank of Malaysia in 1993 (currently known as Islamic Banking Scheme).
Beside Islamic finance, he is a trainer and consultant on management topics and personal development.In December 2005, he was appointed as a writer for learning module for the Certified Islamic Finance Professional Programme offered by the International Centre for Education in Islamic Finance (INCEIF). (INCEIF is an international centre of educational excellence in Islamic finance, established to develop talents including professionals and specialists in Islamic finance who are much needed to sustain market competitiveness and meet future challenges in the Islamic financial industry. INCEIF has been granted a university status by the Malaysian government). Prior to joining Bank Islam, he had also served at Universiti Utara Malaysia (Northern Malaysia University) and Inland Revenue Department.

He was also entrusted as the Head of Secretariat for the Association of Islamic Banking Institutions Malaysia (AIBIM). He has appeared on live television interview programmes on Radio Television Malaysia (RTM) and Radio Television Brunei (RTB). Invited to be chairperson in programs organised by international event organisers. Ahmad Sanusi is an economics graduate from Northern Illinois University, USA. He also obtained qualifications in investment, insurance and translation and keep on advancing his study in strategic management, Islamic finance, Arabic language and others related areas. He has been admitted as a member of Malaysian Institute of Management, the national management organisation and professional accreditation body in the field of management. He hailed from the northern Malaysian state of Kedah Darul Aman (the State of Peace).Ahmad Sanusi's areas of expertise:

i) Islamic finance
- Global development of Islamic finance
- Overview on Islamic banking
- Overview on Islamic insurance (takaful)
- Islamic investment- Islamic financial planning
- Islamic unit trust / mutual fund- Islamic retail banking
- Islamic consumer financing
- Islamic product research, development and innovation
- Marketing strategies for Islamic financial services
- System and solution development
- Islamic finance syllabus & module development

ii) Management
- Performance management
- Training management
- Corporate planning
- Business and management ethics

iii) Personal Development
- Communication skills
- Public speaking & Presentation Skills
- Career development

Latest papers presented or sessions chaired at conferences:

"Islamic Banking in Asia: Improving Delivery Channels through Latest Technology", presented at BankTech Asia 2007 organised by Knowledge Group at Kuala Lumpur Convention Centre on 22-23 May 2007.
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Islamic Financial Planning & Wealth Management by Ahmad Sanusi Husain