Latest from GIFC

Saturday, 30 June 2007

Profile 011 - Islamic Development Bank (IDB) - Saudi Arabia

The Islamic Development Bank is an international financial institution established in pursuance of the Declaration of Intent issued by the Conference of Finance Ministers of Muslim Countries held in Jeddah in Dhul Q'adah 1393H, corresponding to December 1973. The Inaugural Meeting of the Board of Governors took place in Rajab 1395H, corresponding to July 1975, and the Bank was formally opened on 15 Shawwal 1395H corresponding to 20 October 1975. The purpose of the Bank is to foster the economic development and social progress of member countries and Muslim communities individually as well as jointly in accordance with the principles of Shari'ah i.e., Islamic Law. The functions of the Bank are to participate in equity capital and grant loans for productive projects and enterprises besides providing financial assistance to member countries in other forms for economic and social development. The Bank is also required to establish and operate special funds for specific purposes including a fund for assistance to Muslim communities in non-member countries, in addition to setting up trust funds. The Bank is authorized to accept deposits and to mobilize financial resources through Shari'ah compatible modes. It is also charged with the responsibility of assisting in the promotion of foreign trade especially in capital goods, among member countries; providing technical assistance to member countries; and extending training facilities for personnel engaged in development activities in Muslim countries to conform to the Shari'ah. The present membership of the Bank consists of 56 countries. The basic condition for membership is that the prospective member country should be a member of the Organization of the Islamic Conference, pay its contribution to the capital of the Bank and be willing to accept such terms and conditions as may be decided upon by the IDB Board of Governors. Up to the end of 1412H (June 1992), the authorized capital of the Bank was two billion Islamic Dinars (ID) {A unit of account of IDB which is equivalent to one Special Drawing Right (SDR) of the International Monetary Fund (IMF)}. Since Muharram 1413H (July 1992), in accordance with a Resolution of the Board of Governors, it became six billion Islamic Dinars, divided into 600,000 shares having a par value of 10,000 Islamic Dinars (ID) each. Its subscribed capital also became four billion Islamic Dinars payable according to specific schedules and in freely convertible currency acceptable to the Bank. In 1422H, the board of governors at its annual meeting held in Algeria decided to increase the authorized capital of the Bank form ID 6 billion to ID 15 billion and the subscribed capital from ID 4.1 billion to ID 8.1 billion. According to the Directive of the Third Extra-Ordinary Session of the OIC Islamic Summit Conference held in Makkah Al-Mukarramah on 7- 8 December 2005, calling for a substantial increase in the capital stock of IDB in order to enable it to strengthen its role in providing financial support and technical assistance to its member countries, the Board of Governors of the IDB in its 31st Annual Meeting in Kuwait decided to increase the authorized capital stock of IDB by 15 billion Islamic Dinars to become 30 billion Islamic Dinars and the subscribed capital by 6.9 billion Islamic Dinars to become 15 billion Islamic Dinars. The Bank's principal office is in Jeddah in the Kingdom of Saudi Arabia. Two regional offices were opened in 1994; one in Rabat, Morocco, and the other in Kuala Lumpur, Malaysia. In July 1996, the board of Executive Directors also approved the establishment of an IDB Representative Office at Almaty, Kazakhstan, to serve as a link between IDB member countries and Central Asian Republics. The office became operational in July 1997 and is now a full-fledged Regional Office. The Bank also has field representatives in eleven member countries. These are: Indonesia, Iran, Kazakhstan, Libya, Pakistan, Senegal, Sudan, Gambia, Guinea Bissau, Mauritania and Algeria.

House to soon finalize bill on sharia banking in Indonesia

The House of Representatives is currently finalizing its sharia banking bill, which will provide a legal basis for the expansion of Islamic banking in Indonesia. Nursanita Nasution, a member of the special committee discussing the bill, said Thursday that even though sharia banking services had been available here for many years, they had never been provided with a firm legal basis. "Even though it might be considered a bit late in the day, legislation on sharia banking still needs to be enacted," the Commission XI member said. "We expect that the deliberation process will be completed and that the bill can be passed into law before the House goes on recess in the middle of July," she added. The bill was initiated by the House during a plenary session in September 2005. The House then asked the government to assess it before sending it to the commission stage. Among the important changes envisaged by the bill is the establishment of a sharia banking commission that will be responsible to handing down rulings (fatwas) on sharia products and services. This had been opposed by the National Sharia Council (DSN), which was established by the Indonesian Ulema Council (MUI) to oversee the activities of sharia banks. The MUI argued that the committee's work would overlap with that of the council. But the central bank as the regulator of the country's banking industry urged the establishment of a sharia banking commission as MUI fatwas had no basis in civil law. "It has finally been agreed that the commission be established, with members of the DSN sitting on the commission's supervisory board," Nursanita said. Another significant change envisaged by the bill is that sharia banks will be required to submit reports to the central bank on their transactions. The central bank will have the rights to evaluate all transactions conducted by sharia banks. Nursanita said that after the House completed its deliberation of the sharia banking bill, it would then start deliberating the sharia bond bill. - (The Jakarta Post, 30 June 07)

Profile 010 - Kuwait Finance House - Kuwait

Kuwait Finance House (KFH) was established in the State of Kuwait in 1977, as the first bank operating in accordance with the Islamic Shari'a. KFH is listed in Kuwait Stock Exchange (KSE), with a market capitalization of KD 3.133 billion as of 31 December 2006. Assets total KD 6.314 billion and deposits amount to KD 3.730 billion, representing 25% of the total deposits in the Kuwaiti market as per the balance sheet of 2006.KFH has been highly rated by prestigious international agencies. Standard & Poor's rated KFH A-/A2 for short and long term investments, respectively. Capital Intelligence rated KFH A/A1 for short and long term investments, respectively. Fitch International also rated KFH A, and Moody's rating was Aa3. KFH has been awarded by The Banker magazine as the world's Best Islamic Financial Institution, and for third successive year it has been awarded by EuroMoney magazine as the best bank.KFH provides a wide range of Islamic Shari'a compliant products and services, covering banking, real estate, trade finance, investment portfolios, and other products and services.Since the 1980's, KFH has witnessed multi-activity in international expansion. It has established independent banks in Turkey, Bahrain, and Malaysia. Moreover, it has stakes in other Islamic banks. Its investment activities in the US, Europe, South East Asia and the Middle East contributed tremendously to achieving the ever-growing profit of KFH, in collaboration with the world's leading companies and banks, such as Citibank, Deutsche Bank JP Morgan, Chase, BNP Parisbas, ABN Amro, HSBC, and Islamic Development Bank (IDB).KFH has always endeavored to expand its local branch network, covering 42 branches, in addition to special sections for ladies. It adopts the out-of-branch client concept. KFH has maintained its foothold as a pioneering entity in utilizing the latest technologies to meet the requirements of the various activities in which it operates, using online, SMS, as well as phone service (Allo Baitak), which has received the highest accreditation from the US Purdue University for outstanding customer service level.KFH is proud of its manpower skills. It employs a number of outstanding human resources, and is a pioneer in manpower Kuwaitization, where Kuwaiti manpower exceeded 52%.

Friday, 29 June 2007

S&P launches fully investable Pan Asia Shariah Index for Islamic investors

MUMBAI (Thomson Financial, 29 June 07) - Standard & Poor's said it launched a fully investable S&P Pan Asia Shariah Index, which draws stocks from nine Asian markets in the S&P Citigroup Global Equity Index. The new index will enable Islamic investors to benchmark their investment on a regional basis, and give product providers the opportunity to develop structured products tailored to the Islamic market, S&P said. The countries eligible for inclusion are China, Hong Kong, India, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand while Australia, Japan and New Zealand are excluded. Among the Indian companies that figure on the list are Infosys Technologies Ltd, Wipro Technologies, Oil & Natural Gas Corp Ltd and Reliance Industries Ltd. S&P Shariah Indices exclude businesses that offer products and services which are considered unacceptable or non-compliant according to Shariah law, such as advertising and media, alcohol, financials, gambling, pork, pornography, tobacco, and the trading of gold and silver as cash on a deferred basis.

Thursday, 28 June 2007

UAE Seeks To Overtake Malaysia In Sukuk Issuances This Year

DUBAI, June 27 (Bernama) -- The United Arab Emirates (UAE) has set its sights on overtaking Malaysia as the world's largest issuer of Islamic bonds (sukuk) this year by netting 55 per cent of the total by year end.Malaysia issued 60 per cent of the sukuk last year to be the Number One issuer last year.Dubai Islamic Bank (DIB) group chief executive officer Saad Abdul Razak says the UAE is banking on a more favourable foreign exchange scenario to leapfrog Malaysia in the market for syariah-compliant financial products.According to him, some experts expect higher returns from dividends for Islamic financial institutions in both the short and medium terms."They see a shift from conventional banks to Islamic banks and a growing interest among conventional banks to have an Islamic-based platform," he adds in an interview in a recent Dubai edition of the Islamic Business Weekly.In the interview, also published on the website of a local newspaper, Al-Bayan, Saad says that last year DIB handled more than US$10 billion of the US$25 billion global sukuk market."This year, the bank expects to issue sukuk worth US$16 billion in the UAE, Gulf Cooperation Council states and Pakistan," he adds.He notes that the global sukuk market began its rapid growth several years ago in line with the pace for Islamic-based financial products which recorded a growth of 10-15 percent a year in the late 1990s.The UAE, according to him, has begun to improve its competitiveness in the issuance of sukuk since early this year and this should see it overtaking Malaysia in leading the major international Islamic finance centres.UAE firms handled almost a quarter of the major sukuk issuances in the one-year period until last March. In the one-year period before that, Dubai was second to Malaysia at US$6 billion versus US$11 billion.Malaysia pioneered the sukuk market with initial issuances worth US$600 million in 2002 and expanded this to encompass real estate, air transportation, construction and petrochemical projects in several countries, including Pakistan, Britain, Singapore, the UAE and Bahrain.

Profile 009 - Bank Muamalat Malaysia Berhad - Malaysia

Bank Muamalat Malaysia Berhad started its operations on October 1, 1999 with a combined assets and liabilities brought over from the Islamic banking windows of the then Bank Bumiputra Malaysia Berhad, Bank of Commerce (M) Berhad and BBMB Kewangan. Bank Muamalat Malaysia Berhad, the second full-fledge Islamic bank to be established in Malaysia after Bank Islam Malaysia Berhad, is poised to play its role in providing Islamic banking products and services to Malaysians, irrespective of race or religious beliefs, thus contributing to the development of modern Malaysia. Bukhary Capital Sdn Bhd holds 70% shares in the Bank while Khazanah Nasional Berhad holds the remaining shares.

Alfalah Consulting - Kuala Lumpur:
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Wednesday, 27 June 2007

Islamic scholars call for ‘more attention to morals than law’

KUALA LUMPUR, 27 June 07 : Islamic scholars working with banks to shape Islamic financial products should pay more attention to the moral rather than the legal aspects of Islamic law, scholars told the Third International Islamic Finance Forum yesterday. Islamic and conventional banks are keen to develop and offer products in the fast-growing market for Islamic financing but some Islamic experts have criticised the banks and their advisors for not applying a stringent enough interpretation of Shariah, or Islamic law, when assessing the products. They have also said that some banks are “Shariah shopping”, that is, selecting scholars most likely to approve their product. Most banks seek approval for Islamic products from either national Shariah boards or from individual scholars attached to banks to reassure investors that their choices conform to their faith. For example, Islam bans investment in products that pay interest, considered usury, products where there is undue uncertainty, or where one party is deemed to be taking undue advantage of another. Although scholars interpret much of Qur’anic law in the same way, there is still some difference in views, paving the way for disagreement over the viability of certain products or practices. Mohamed Akram Laldin, chairman of the Shariah advisory committee of HSBC Amanah Malaysia, said scholars look at three basic areas when assessing the compliance of products: belief, legalilty and morality. He said products could fairly easily comply with Islamic law but it is more difficult to ascertain whether they comply with the morals of Islam. The price of a product may not be controversial from a legal perspective but if the product costs more than an equivalent conventional product, it may not fulfil Islam’s moral obligations of fairness and social equity, he said. “(We) need the realisation that they have the responsibility to fulfil the morals of Shariah,” said Engku Rabiah Adawiah Engku Ali, head of the private law department at the International Islamic University Malaysia. Although there is a plethora of Islamic scholars globally, the Islamic finance industry tends to rely on fewer than 50 individuals, who often sit on multiple advisory boards, to sign off on Islamic products and practices. This has slowed the introduction of new products and, some say, allowed a limited number of scholarly views to dominate in Islamic finance. “This is not a healthy situation for the (Islamic finance) industry or for the field of Islamic law,” said Malik Muhammad Mahmud al-Awan, chief academic officer of the International Center for Education in Islamic Finance, noting there were currently around 1.5bn Muslims worldwide with a wide range of views on Shariah. He called on financial institutions to engage younger Shariah scholars alongside more established ones to expand the pool of available advisers and to provide a broader array of viewpoints. “It is the social responsibility of banks to have people who are well known globally and new scholars who can learn to avoid problems (of insufficient manpower) in the future,” added HSBC Amanah’s Akram. Whether there should be greater effort to harmonise interpretation of Shariah is a more controversial subject. Azhar Kureshi, State Bank of Pakistan’s executive director for Islamic finance development, told delegates that standardising the “fatwas” - or approvals - given by scholars would lead to harmonisation of Islamic financial product documentation. Many have blamed the failure of the financial community to create a global market for Islamic financial products on the lack of common documentation. – Dow Jones Newswires
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Tuesday, 26 June 2007

A new Islamic investment bank has been established in Bahrain

(AMEinfo, 26 June 07) A new Islamic investment bank has been established in Bahrain. Global Banking Corporation has a paid up capital of $250m. It will focus on core business areas of private equity and venture capital; real estate and infrastructure development; asset management; advisory services in corporate finance and capital markets; and portfolio management services.

Tapping Indonesia's Islamic banking potential

(Asia Times, 26 June 07) JAKARTA - Indonesia is taking steps to ramp up its Islamic banking sector, which some financial analysts believe has the potential of creating the largest sharia finance area in the world. President Susilo Bambang Yudhoyono said at the recently completed World Islamic Economic Conference in Kuala Lumpur that his government intends to push through the regulatory change necessary to support the industry's development, which still only accounts for about 2% of total Indonesian banking activity. Sharia banking conducts modern business while adhering to Islamic laws regarding financial transactions. Nonetheless, the industry has grown rapidly in recent years, as banks tap deeper into one of the world's largest Muslim markets, where 87% of the country's 240 million people follow Islam. Worldwide, Islamic finance currently represents less than 10% of the total global Muslim market of 1.5 billion people. Some financial analysts believe, based on current market trends, that the global Islamic financial-services industry, including banking assets, could grow from US$1 trillion now to $2.8 trillion by 2010. US-based international credit-rating agency Standard & Poor's estimates that the global potential for Islamic financial services could be closer to $4 trillion. Much of that growth could come from Indonesia and its $300 billion dollar economy. In Southeast Asia, Indonesia still trails its smaller regional neighbor Malaysia, where the regulatory environment has already been modified to attract foreign Islamic investments. But financial analysts say there is huge potential in Indonesia to attract not only local money but also petrodollars and sharia-compliant funds from the Middle East, as has happened with Malaysia. Central to Islamic finance, which offers products and services akin to conventional financial products, is its "zero interest" concept and emphasis on profit-sharing. Based on sharia law, which forbids the collection of interest on loans and debts, including bonds, the system relies on asset-backed, contract-based, profit-sharing. For instance, so-called murabahah-based finance is concerned with lending for consumer goods such as motor vehicles and housing, but under the current regulatory regime is uncompetitive vis-a-vis conventional Indonesian banks. Sharia banks finance the purchases on behalf of a customer for an agreed fee, but these transactions incur a 10% value-added tax (VAT) because under current taxation laws such a fee is not categorized as interest, which would exempt it from VAT payments. Despite the regulatory hurdles, the industry is experiencing a mini-boom. Indonesia's first Islamic bank, Bank Muamalat, was founded in 1992 and has forecast that its profits will double year on year because of surging demand for its innovative, sharia-based Shar-E product. Last year nearly 664,000 customers applied for its Shar-E products, surging from the 132,669 customers it had in 2005. As of the end of 2006, Bank Muamalat had been joined by 23 other Islamic banks and 456 conventional bank branch offices that provided sharia banking services. According to Bank Indonesia, the central bank, the share of sharia banking assets of total national banking assets was a mere 1.6%, up slightly from the 1.4% recorded at the end of 2005. Yet Islamic banks reported a 79% year-on-year increase in business volume in 2006, to Rp8.76 trillion ($1.36 billion). The amount of leasing business, known as ijarah, grew by a whopping 164.7%, and sharia mutual funds grew in asset value by 17.6% last year, with a total net asset value of about Rp663.7 million. By the end of last year, there were about 20 sharia funds, representing about 5% of Indonesia's total number of mutual funds but only 1.3% of the industry's value. At least 17 companies listed on the Jakarta Stock Exchange have issued sharia-compliant bonds, representing 10.5% of the total number of listed companies that have issued debt instruments, with a total issuance value of Rp2.2 trillion. Increasingly, Indonesian banks are not only looking to add Islamic products to their loan portfolios, but are sounding out possible acquisitions to enhance their Islamic banking potential. For example, Bank Central Asia (BCA), Indonesia's second-largest lender by assets, plans to buy two small banks, and one of the acquired institutions would be transformed into a fully sharia-compliant lender. (BCA is 74% owned by a consortium of Singapore's state-run investment arm Temasek Holdings.) The only foreign bank currently licensed to conduct Islamic banking in Indonesia is HSBC, which offers Islamic banking services through its HSBC Amanah Syariah unit. Last month the unit arranged a $50 million international sharia financing syndication for state-owned Krakatau Steel, Indonesia's biggest steel producer. That followed on two previous deals it arranged for state-owned oil-and-gas company Pertamina to tap the global Islamic finance market, including a $322 million Islamic international syndicated loan in 2004 and a similar $200 million deal in 2006. Still, the lack of sharia-friendly regulations has, in places, held the industry back. According to Jakarta's governor, Sutiyoso, the lack of clear rules and regulations for sharia finance was behind the decision by a Dubai-based Islamic Bank consortium to shy away from funding Jakarta's multimillion-dollar monorail project. The consortium had agreed early this year to invest provided that the central government and the city administration would guarantee to cover half of any potential losses incurred by the project's operations. Sutiyoso managed to get the guarantees in place by April, but the sharia deal nonetheless proved to be incompatible with current Indonesian law. Government planners hope that regulatory change will pave the way for both government enterprises and private corporations to attract Islamic investors worldwide through the issuance of Islamic bonds. Toward that end, three draft laws related to sharia banking, tax and securities transactions are expected to be enacted this year. And they are looking to Malaysia's recent successful experience, particularly in relation to Malaysian corporations' issuances of foreign-currency-denominated Islamic bonds. Malaysia also gives tax breaks to foreign banks that set up Islamic finance operations, and several Persian Gulf-based Islamic banks have recently been awarded licenses to open branches there. Once Indonesia's new sharia-friendly laws come on line this year, Islamic banking could provide a valuable new source of foreign investment for Indonesia as well.

Monday, 25 June 2007

Basic Rules For Proper Islamic Banking & Finance

(IBLS) E-commerce payments require knowledge of complex banking and financing information about the countries involved in an e-transaction. Even though most countries have a fairly similar banking and financing system, few Westerners know the basic rules that all good Muslims want to apply when they do business such as banking or other finance-related activities. This article looks into the general economic Muslim rules, their source and the thought behind them. This article answers these questions: What is the history of Islamic Banking?, What is the Difference Between Muslim & Western Banking?, Why Don’t Muslims Like Interest?, How Can you Run a Bank Without Interest?, What are Some Other Muslim Financial Rules?, Can You Give Some Tips for Doing Business With Muslims? As the cost of petroleum skyrockets, many Middle Eastern countries are becoming wealthier and the former reluctance on foreign investing has receded as countries like Bahrain, Qatar, Kuwait, the UAE, and many others seek to diversify their investment portfolios through aggressive capitalism but preserving their religious principles. Islam has long had a different approach to formulating rules for economic interaction with each other and reverence for the religious principle in all matters, and of course this applies to financial interactions, as well. But few Westerners know the basic rules that all good Muslims want to apply when they do business such as banking or other finance related activities. This article looks into the general economic Muslim rules, their source and the thought behind them. This article answers these questions: What is the history of Islamic Banking?, What is the Difference Between Muslim & Western Banking?, Why Don’t Muslims Like Interest?, How Can you Run a Bank Without Interest?, What are Some Other Muslim Financial Rules?, Can You Give Some Tips for Doing Business With Muslims? What is the History of Islamic Banking? Muslim scholar Abdur Ahman I. Doi claims the very first person to ever use a check (cheque, from root Arab word sukuk) was Caliph Umar bin al-Khattab in the early 7th Century. Be that as it may, until fairly recent history, the distrust of modern banking and doubt over its sanctity, let alone an utter lack of available institutions meant that until the 1970s, banking in the Islamic world was mostly done via the informal “hawala” system, where money was moved through brokers without much accounting or record-keeping. The first modern ‘Islamic bank’ was created in Egypt, without advertising its purpose, to avoid the stigma of being seen as embodying Islamic fundamentalism. It was headed, by Ahmad El Najjar, starting as a small savings bank in the Egyptian town of Mit Ghamr in l963, but was closed when the Government cracked down on private enterprise. Eight years later in l97l, The Nasir Social Bank was opened and declared an interest-free commercial bank, without reference to Islam. By the mid-1970’s, the Islamic Development Bank was organized to help offer basic Islamic financial services, the first customers were modest small businessmen. The first Islamic bank offering a range of services was in Dubai in 1975. Today, more than 100 banks operate in 40 countries with billions of dollars in deposits. Islamic banking is believed by analysts to be the fastest expanding sector in Middle Eastern financial services. While Islamic bank assets were $5 billion in 1985, they stood at $60 billion a decade later, and are estimated currently at $70 billion, managed according to Muslim law. Why Don’t Muslims Like Interest? People of the Islamic faith do not regard interest accrued on money, or Riba (Riba An-Nasia - Interest on lent money), as being spiritual because of admonitions in the Quran against the practice. Most Muslims define Riba as the same as usury, which is technically to loan money at excessive rates. The Quran states, in section 275: “Those who eat Ribâ will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitân (Satan) leading him to insanity…whoever returns [to Ribâ], such are the dwellers of the Fire - they will abide therein.” This passage leaves little to the imagination in terms of the condemnation of Riba, but at the same time highlights the debate that sprang up over the issue in times past. More conservative Muslims charged all interest as being riba, or usurious, whereas those tending towards a liberal reading argued Riba was only the charging of excessive interest. But the fact remains modern Muslim scholars have reached near consensus that the word Riba means the charging of any interest on loans. How is Riba Defined in Practice? Any repayment larger than the original loan of principal is prohibited. In Islam, there is only one acceptable type of loan – the “qard-el-hassan” (ie, good loan) whereby the lender charges no interest at all. Some traditionalist Muslim jurists have interpreted this principle so strictly that one writer stated, "this prohibition applies to any advantage or benefits that the lender might secure out of the qard (loan) such as riding the borrower's mule, eating at his table, or even taking advantage of the shade of his wall." The practice must be defined case by case, though. Can you Run a Bank Without Charching Interest? Of course, like any other business, a bank run by classical Islamic rules still has to make a profit, unless it is state supported. In Islamic money-lending there are two options. The first is an “interest-free” loan. The second is for lender to join with the borrower in taking risk, by way of either sharing in the profits produced by the venture or the losses. So, in theory, the lender could get more from the borrower than the market would have dictated the interest loan would be, but also he could end up with loss. This makes banks run on Muslim principle much closer to Western venture capital companies than traditional banks. This is because while the traditional bank is more interested in the credit-worthiness of the borrower than the proposed use of the funds, a venture capitalist is more oriented towards how profitable the venture might be. In the same way, the Muslim banker is seeking opportunities where he can make money, which cannot happen on straight lending, but instead as part of a team-oriented approach where if one wins, all win. Also, It should be reported that Professor Timur Kuran has studied the actual arrangements of Muslim banks and discovered there often Western-styled loans offered, and also the banks had many methods that gathered return that were interest-like, in some regard. What are Some Other Muslim Financial Rules? Here are some more basic principles, although space does not allow expanding on the subjects. These issues are mentioned in general, and how they would be detailed is another study. Generally, Muslims believe: Making money from money is never acceptable; Financial Risk or Speculation (Gharar) is not allowed; Making money from things prohibited, like alcohol or pork, is not accepted; and most importantly, money or business should never be allowed to take one’s devotion away from Allah. Can You Give Some Tips for Doing Business With Muslims? One of the most important things to remember is that Islam has a billion adherents and there are many different religious traditions and schools of thought on life, including business ethics and principles. Also, in different locales there will be unique ways of seeing the Quran and application. Add to this the fact that many Islamic countries don’t all have the same amount of Muslim, or Shariah law in place. Take for example the fact that if traveling on a business trip to Turkey, Indonesia, Iran, Kuwait, Qatar, or Saudi Arabia it will all be a different experience, with varying norms, levels of formality, expectations on dress and social intercourse for your hosts. For example, while women are expected to stay in the background in Saudi Arabia, in Bahrain they recently gave a seminar on women and entrepreneurship, and so on. A key will be to know about the host country where your business deal is set, or that is the background of your Muslim business partner. Study up on this by going to the CIA World Fact book site for different countries and do a search at the BBC site, as well as others. If need be, buy a Middle Eastern etiquette book and business guide. Islamic countries are more traditional, and more motivated by honor and manners than Western states. Showing respect for all of these things by knowing and observing the norms and you will greatly increase your chances of business success, in banking and every other sector.

Alfalah Consulting - Kuala Lumpur:
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Profile 008 - Seyad Shariat Finance Ltd - India

Seyad Shariat Finance Ltd. is a non-banking financial company, approved by the Reserve Bank of India as a Leasing company and registered under the Indian Companies Act, 1956. It strictly adheres to the sanctions of the Shariah and ventures to pioneer various schemes to promote industry, to establish business and on Islamic Principles. The Promoters are "Seyad Group of Companies", the owners of SEYADU BEEDI COMPANY and SEYAD COTTON MILLS LTD., headed by the Chairman and Managing Director, a well-known industrialist and businessman of Tirunelveli. Seyad Shariat Finance Ltd. is controlled by a dedicated team of Board of Directors. The moment one comes across the term : "Financial Institution" the first and foremost thing that strikes one's mind is “Interest”. One may wonder how a finance company can function without earning interest. The fact is, it is feasible, it has worked successfully in the Gulf and other countries and has proved to be viable beyond doubt. Such institutions have been established in India too, in cities like Bombay and Bangalore and have been functioning quite successfully and profitably. There is a subtle difference between Seyad Shariat Finance and other finance companies. Other financial institutions advertise for deposits and offer interest periodically. But “Shariat Finance” accepts investments, deposits, recurring deposits and pays “Bonus” out of the profit earned by the company subject to the maximum bonus stipulated by the Reserve Bank of India. As the profits fluctuate, so also the Bonus. Seyad Shariat Finance Ltd. offers comprehensive package schemes.

Islamic finance poised to seize projects market

DUBAI (25 June 07) : Islamic finance could soon wrest control of the $50bn Gulf project finance market, aided by government inducements and investors looking for alternatives to conventional funding, industry officials said. Conventional financing now dominates the Gulf market which accounted for almost $1 in every $3 raised for project financing last year, according to HSBC Holding. But banks such as HSBC and Deutsche Bank re expanding their Islamic finance operations and Gulf Arab investors are setting up new Islamic banks to cope with the expected surge in demand for Islamic project finance.“There is some political pressure from governments and companies want to demonstrate they are acting in an Islamically acceptable way,” Dominic Harvey, head of Middle East banking and projects at law firm Norton Rose said at a conference sponsored by the Middle East Economic Digest.“Because it’s a relatively new concept there is still a huge mismatch between demand and supply.” The size of the regional project finance market, already the largest in the world, could top $1tn in the next 10 years, driven by spending on infrastructure largely in Saudi Arabia and Abu Dhabi, Harvey said.“Spending will be on oil and gas related projects, construction and general transport infrastructure,” he said. “Some experts predict the market will grow 10-fold in the next 10 years and this could be conservative.”Funding that complies with Islamic principles, which can come from conventional banks such as HSBC, accounts for about 10% of the project finance market. Islam bans interest, which it equates with usury.Funding from Islamic institutions likely accounts for less than 5% of the market, Harvey said. Local Islamic lenders had previously been focused on retail banking and were reluctant to lend long-term funds, leaving the project finance market to conventional finance.“Some local Islamic banks don’t see (project financing) as attractive given the long tenors and low returns but they will need to meet the demands of their clients and do as governments require,” said Hissam Kamal Hassan, director of Islamic finance at HSBC in Saudi Arabia.Over the next 10 years, the majority of financing for projects could comply with Islamic law, he said. Saudi Arabia is setting up an Islamic bank, called Inmaa, in part to cope with demands for infrastructure spending along Islamic principles.“Most people behind projects are not saying we won’t do non-Islamic, but they are saying that where possible, we should do Islamic,” Hassan said. – Reuters

Profile 007 - UM Financial Inc - Canada

UM Financial Inc specializes in Islamic financing, halal investment, halal RRSP & Shariah-compliant interest-free loan in Canada. UM Financial offers ethical and Shariah-compliant products to estimated 850,000 Canadian Muslims & others interested in ethical investment. UM Financial unlike a conventional financing becomes your partner to own an asset. There is no lending at all; therefore interest is removed from the equation. Islamically, this process is referred as a musharakah mutanaqisah (declining partnership) and is used for Islamic financing around the globe. UM Financial understands that Islamic Finance is a very important field, and as such has an independent Shariah Advisory Board that ensures all their products are free of interest.

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Malaysia's Khazanah opens the books for exchangeable sukuk

(FinanceAsia, 25 June 07) Malaysia's Khazanah Nasional Bhd yesterday opened the bookbuilding for its and Asia’s second exchangeable Islamic bond and immediately met with massive demand that left the $600 million issue multiple times covered within hours, sources say.This early demand is primarily coming from conventional investors, though, as Islamic investors typically need more time to make investment decisions. However, Khazanah, together with joint bookrunners CIMB, Deutsche Bank and JPMorgan, have spent the past four days travelling around the Middle East on a targeted roadshow to educate Middle Eastern investors about this particular issue and Islamic exchangeables in general with the aim of lifting their participation in the deal compared to Khazanah’s first such issue in September last year.That issue, which was exchangeable into Telekom Malaysia, attracted about 20 institutions from the Middle East, compared with around 80 conventional investors. In terms of allocations, about 30% went to the former group. According to industry specialists, a higher participation should be possible this time as investors focusing on Sharia-compliant bonds (also known as sukuks) are more familiar with the instrument this time around, having seen not only the Khazanah trade, but a few offerings by Middle Eastern issuers as well.“Khazanah’s objective is definitely to get more participation and more demand from Middle Eastern investors, which is obvious by the fact that it is offering a higher coupon,” says one observer. “The company has a national agenda to establish Malaysia as a centre for Islamic finance.”While Asian investors are happy to buy zero-coupon convertibles or exchangeables, Middle Eastern investors are more used to investing in fixed-income instrument and like the regular coupon payments.From a structuring point of view this second offering is almost identical to the first one, which was to be expected after that deal proved acceptable for Islamic investors, while at the same time attracting conventional investors to the table. The first deal, which was arranged by CIMB, HSBC and UBS, also took a full 18 months to complete as everything had to be approved by the regulators for the first time. By using the first deal as a benchmark, the current bookrunners have been able to launch this current offering within a month of being mandated.There are some differences though. The most obvious is that this time the underlying shares are in PLUS Expressway, a toll road company about 66% controlled by state-owned Khazanah. And when calculating the gearing ratio for the purpose of making the underlying company Sharia compliant, the bookrunners are this time using a debt to market capitalisation ratio rather than the debt to total assets ratio that was implemented on the first deal.The reason for this change, according to one source, is simply that PLUS Expressway is part of the Dow Jones Islamic index, which uses the debt to market cap definition. However, it may make it more tricky for the bookrunners as they may have to adjust the gearing if the market cap moves up or down a lot.This time around the bonds will also be listed in Dubai (as well as in Hong Kong and in Labuan, Malaysia), which may help attract more Middle Eastern investors.Like last time, the coupon payments are based on the dividend of the underlying company – i.e. PLUS Expressway – and are called “annual periodic payments” to get around the fact that Islamic bonds aren’t allowed to pay interest. These payments will range from 2% to 2.5%, according to the term sheet, compared with 1.25% on the first Khazanah sukuk.The bonds have a five-year maturity with no put, although investors will be able to sell the bonds back to the issuer if the underlying company fails to stay compliant with the Sharia requirements. There is also an issuer call after three years, subject to a 130% hurdle.The total yield to maturity, or yield to dissolution as it is referred to, is being offered at a discount to the five-year US dollar swaps rate of 30bp to 90bp. Based on the swaps rate on June 18, this would translate into a yield of about 4.7% to 5.3%. The exchange premium will range from 19% to 23%.The periodic payments aren’t guaranteed and to protect investors in case PLUS Expressway were for some reason to reduce its dividend payments substantially, there is a sizeable buffer between the annual periodic payments at a maximum 2.25% and the current dividend yield of approximately 4%. Any divident payments above that 2.25% will also be put inot a so called “sinking fund” for use towards future annual payments to the bond holders.However, PLUS Expressway has a stated policy to pay 40% to 60% of its net income as dividend, which means this shouldn’t be a problem unless its profits were to rapidly deteriorate. Together with the government’s aim to make these Malaysia-issued sukuks a success and the fact that Khazanah is the controlling shareholder of PLUS Expressways, bond investors do have reason to feel pretty comfortable about their annual payments not being disrupted, however.Being a toll road company, PLUS Expressways do have a steady income stream at the bottom of its earnings that is rising in line with the increased use of its roads. However, the compay is not a stranger to growth, having recently taken stakes in two toll roads in Indonesia and India. It is also involved in two new links to the North to South highway that will connect this main artery to the new Kuala Lumpur airport as well as to Singapore. The deal may include a greenshoe that could lift the total proceeds towards the $750 million that Khazanah raised from its first sukuk exchangeable, but the size of that hasn’t been determined yet.The bookbuilding will close on Wednesday (June 27) with the final price expected to be determined on the same day.

Profile 006 - First Habib Modaraba - Pakistan

The Habib Group (HG) is one of the oldest business group in Pakistan. Habibs, being the product of sound and grueling training imparted by their elders, rising gradually up the ladder, ultimately acquiring management and multi national business skills of high order, were to be pleasantly surprised by the rich fund of good will which entrepreneurs had for the name of Habib. Habib Modaraba Management Limited (HMML) is a heir to such rich tradition of commerce and banking which goes back to more than one and a half century. In the year 1985 First Habib Modaraba (FHM) was uniquely placed to offer its clients the unmatched benefits of the Management's vast experience and know-how in the domains of industry, finance, commerce and entrepreneurship. Starting with a paid-up capital of Rs.25.0 million, the Modaraba registered, a rise in equity base to almost Rs.400.00 million. A growth rate which by all standards is simply phenomenal and points to the incomparable expertise and financial acumen of the management. First Habib Modaraba is engaged in four major types of activities: i) Leasing ii) Musharaka / Morabaha iii) Equity Investment iv) Certificate of Musharika.

IDB Group's total finances till January amount to $46 billion

(Khaleej Times, 24 June 07) JEDDAH — Total finances extended by the Islamic Development Bank (IDB) Group till January this year amounted to $46 billion, according to official figures released by the bank on the occasion of the 32nd annual conference of IDB board of governors, which was held in Dakar, Senegal. The IDB said in a statement made available to Khaleej Times here that Senegalese President Abdoulaye Wade inaugurated the conference in the presence of IDB President Dr Ahmed Mohammed Ali and finance and economy ministers of 56 member countries. The conference witnessed the launch of a $10 billion Islamic Solidarity Fund (ISF), which aims at combating poverty in the Organisation of the Islamic Conference (OIC) countries. Saudi Arabia has given $1 billion while Kuwait $300 million to the Fund, which was established on the recommendations of the extraordinary OIC summit that was held in the Holy City of Makkah in December 2005. "The IDB in its capacity as an international Islamic financial institution is committed to exerting every conceivable effort and mustering all its energies and capacities to combat poverty," said Ali. "The bank will allocate $350 million annually for poverty reduction projects," he said. The Poverty Alleviation Fund (PAF) has so far received $1.35 billion from 21 member countries. According to the IDB statement, the bank has given 38.9 per cent of its total finances worth $46 billion to finance development projects and as technical assistance in member countries, 59.7 per cent to finance trade and 1.4 per cent as aid and grants to Muslim communities in non-member countries. Last year alone, the IDB group gave $5.2 billion in loans to finance 361 operations. Of that amount $2.17 billion were given to finance development projects and $2.95 billion to finance trade. The bank has so far financed 746 educational and health projects of 67 Muslim communities. The bank's executive directors met in Senegal and approved new finances worth $763.2 million. About 600 people representing international and regional finance organisations, in addition to representatives of Islamic banks, National Development Finance Institutions (NDFIs) in member countries, the Association of Contractors and Consultants in the OIC member countries, participated in the annual meeting. The 14th meeting of the board of governors of the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), the 7th meeting of the General Assembly of the Islamic Corporation for Development of the Private Sector (ICD), and the second meeting of the General Assembly of the International Islamic Trade Finance Corporation (ITFC) also took place on the sidelines of the IDB board meeting. A seminar on 'Capacity Building for Promotion of Trade and Investment in Africa' was also held in Senegal with the participation of well-known economists. It explored the best ways and means of promoting the capacities of member countries in the African continent to develop trade and investments to boost economic cooperation and push forward the countries of the continent towards development.

Profile 005 - The Islamic Bank of Asia - Singapore

DBS Bank launched The Islamic Bank of Asia (IB Asia) on May 07, 2007 after receiving official approval from the Monetary Authority of Singapore for a full bank licence. IB Asia's founding shareholders include majority stakeholder DBS and 22 Middle Eastern investors from prominent families and industrial groups from Gulf Cooperation Council (GCC) countries. IB Asia is incorporated with an initial paid-up capital of USD418 million with DBS contributing USD250 million and holding an initial stake of 60 percent. IB Asia's second closing with other GCC investors in the coming weeks is expected to increase IB Asia's capital to USD500 million. With the proposed capital injection, DBS will continue to hold a majority stake with no less than 50 percent plus one share. IB Asia will be a subsidiary of DBS based in Singapore, and will commence operations on separate ground floor offices in DBS' headquarter facilities and will focus on commercial banking, corporate finance, capital market and private banking services. IB Asia will have a nine-member board of directors with His Excellency, Abdulla Hasan Saif, Advisor for Economic Affairs to the Prime Minister, Bahrain, as Chairman. The launch of IB Asia follows DBS' stepped-up participation in the Middle East markets. In the last two years, DBS has placed a significant portion of large, landmark equity IPOs and securitisations in the Middle East. Last April, DBS was among the first few Asia-based banks to receive a banking licence from the Dubai International Financial Centre.

Sunday, 24 June 2007

New Model for Future of Islamic Banking Planned - fatwas would be issued by a single entity

(MENAFN - Arab News) JEDDAH, 20 June 2007 — Saleh Kamel, president of Dallah Albaraka Group and chairman of the General Council of Islamic Banks and Financial Institutions (GCIBFI), has called for a streamlining of the Shariah Council system to help deal with the different interpretations of Shariah compliance across the Islamic world. In an exclusive interview with Oliver Cornock, country editor for Oxford Business Group (OBG), which was released yesterday — the authoritative UK-based publishing, research and consultancy services company — Saleh expressed his concern that some institutions tended to simply rebrand conventional financial tools without understanding the meaning of true Shariah compliance."The challenge is whether the owners, directors and employees truly understand what Islamic banking means. At GCIBFI we are working with key partners to implement a new model whereby fatwas would be issued by a single entity," Saleh said. "I hope that this would assist in helping to define the concepts and problems of the differing interpretation of Shariah compliance," he said. The plan is that the GCIBFI, Islamic Development Bank and ISFB want to have a central Shariah council for issuing fatwas, in addition to a Shariah council for each bank, for further control. Saleh outlined his vision for addressing such factors with intentions for an Islamic mega bank involved with all aspects of the sector on a global scale. "GCIBFI represents 130 banks in 40 countries and we are developing a new model to enable us to work with all of them in every Islamic country," its chairman said. "The Dallah Albaraka Group will be looking to invest between $100 million and $200 million in the management portion of this new model."The president of Dallah Albaraka Group explained the broader concepts of Islamic economy and the emphasis it places on developing society. "As yet we have not adequately emphasized the development of our countries and the earth — this is one of the most important tenets of the Islamic economy. At the Dallah Albaraka Group, we aim to work in any sector that doesn't harm humans or the earth and we also look to how many jobs can be created through our projects."
Alfalah Consulting - Kuala Lumpur:
Consultant/Speaker/Motivator : 
Islamic Investment Malaysia:

Profile 004 - Dubai Islamic Bank - UAE

Dubai Islamic Bank has the unique distinction of being the world’s first fully-fledged Islamic bank, a pioneering institution that has combined the best of traditional Islamic values with the technology and innovation that characterise the best of modern banking. Since its formation in 1975, Dubai Islamic Bank has established itself as the undisputed leader in its field, setting the standards for others to follow as the trend towards Islamic banking gathers momentum in the Arab world and internationally. 

Islamic banking is now one of the world’s fastest-growing economic sectors, comprising close on 200 institutions responsible for assets estimated at more than $200 billion. In this context, the role of Dubai Islamic Bank is even more impressive. Yet, the bank remains true to its roots as a customer-centred organisation where close personal service and understanding form the basis of all its relationships. 

Tradition and heritage join with a commitment to flexibility, innovation and modernity, so that customers of every nature are provided with comprehensive solutions to all their financial needs.

Alfalah Consulting:
Islamic Investment:

7th issuance of short term Sukuk Al-Ijarah securities in Brunei

With the consent of His Majesty the Sultan and Yang Di-Pertuan of Brunei Darussalam, the Ministry of Finance announced yesterday the successful pricing of its 7th issuance of short term Sukuk Al-Ijarah securities. The statement added that the BND 70 million issue carrying a maturity of 91 days, begins June 21, 2007 and matures on September 20, 2007, at a rental rate of 2.275 per cent. With this issuance, the Brunei government has thus far issued BND$800 million worth of short term Sukuk Al-Ijarah securities since the maiden offering on April 6, 2006. In the deliberation of the country's development last year during the recent Legislative Council meeting, it was highlighted that the government of His Majesty issued Sukuk Al-Ijarah in March 2006 which is an initial effort to develop capital market in this country. The issuance received overwhelming response from the financial institution in this country. Several main companies in the country succeeded in issuing Sukuk Al-Ijarah where such issuance also involved the participation of the public. The development is indeed encouraging in adding the Islamic financial products offered to the institutions and the public in an effort to nurture a savings culture

Islamic financial services industry in ME is seeking more short-term funding sources and liquidity management tools

(Gulfnews, 24 June 07) Dubai: As Islamic finance becomes a major part of the local and regional financial system, the Islamic financial services industry in the region is increasingly seeking more short-term funding sources and liquidity management tools. Last week Islamic mortgage lender Amlak signed an $800 million 360-day Wakala facility with Emirates Islamic Bank. Wakala is an Islamic financial contract in which an investor places cash with a lender who then uses it to buy qualifying financial assets. The investor gets a commission and a share of the profits generated by the funds. "The efficiency of the structure that we have agreed with Emirates Islamic Bank will increase Amlak's liquidity in the short term," said Arif Alharmi, CEO of Amlak Finance. A big obstacle to the growth of Islamic finance is the long-term nature of many Islamic products and the absence of short-term liquidity management tools. For example, Murabaha, a contract for purchase and resale allows the customer to make purchases without having to take out a loan and pay interest. The bank purchases the goods for the customer, and re-sells them to the customer on a deferred basis, adding an agreed profit margin. Here, the debt as an asset remains illiquid and non-tradable. Sukuks (Islamic bonds) are also long term in nature. Liquidity in sukuk continues to remain elusive even on the Dubai International Financial Exchange, the largest sukuk exchange in the world. "Despite the rapid evolution of Islamic bond markets, we have yet to see the emergence of short-term management products. It calls for the cooperation of all stakeholders in the industry," said Abdullah Haron, assistant secretary general of Malaysia's Islamic Financial Service Board. In the absence of a money market, Islamic institutions are forced to keep huge sums in unproductive cash to meet their short-term liquidity needs. "We recognise the need to create a money market for Islamic institutions, but they need to come up with appropriate Sharia-compliant short-term asset-backed instruments. We will support their efforts," Sultan Nasser Al Suwaidi, UAE Central Bank governor told Gulf News recently. An Islamic equivalent of repos, sales and repurchase agreements is under consideration. Creating a repos market is hard in the region as many countries do not have active government debt markets. The absence of interest poses a challenge when it comes to pricing these short-term instruments and identifying Sharia-compliant underlying assets for Islamic repos.
Alfalah Consulting - KL: 
Islamic finance consultant: 
Islamic Investment Malaysia:

Profile 003 - Islamic Bank of Britain - UK

The Islamic Bank of Britain plc is a commercial bank in the United Kingdom, established in August 2004 to offer Sharia compliant financial service products to British Muslims. The bank has 8 branches in London, Birmingham, Manchester and Leicester. It is the first British bank to offer services aimed specifically at Muslims, although non-Muslims are also allowed to hold accounts.

The Islamic Bank of Britain was formed by a group of investors from the Middle East to take advantage of the growing market for Sharia compliant financial services in the UK. Islamic law does not allow the charging of interest, making it difficult for Muslims to hold bank accounts or mortgages with conventional UK banks. In recent years this has begun to change, with many UK banks seeing the potential to offer specifically tailored services for Muslim customers. The Islamic Bank of Britain is however the first UK bank to be established offering such services, and as single corporate entity is an entirely Sharia'a compliant bank, unlike the larger banking conglomerates.

The bank states that it runs on four values: faith, value, convenience, trust. Faith is an important factor for the bank, and accordingly branches close on Friday afternoons to allow the staff to attend Jummah (Friday) prayers. The bank also has a Sharia Supervisory Committee to ensure that its products are compliant with Islamic teachings.

Alfalah Consulting: 

Saturday, 23 June 2007

Emirates Islamic Bank launches Shari'a compliant Alternative Strategies Fund

(AME Info, 23 June 07) Emirates Islamic Bank launch new Islamic fund to its already expanding Shari'a compliant fund offering - the Islamic Alternative Strategies Fund ('Fund').The Fund is open to institutional and retail investors and will seek to generate absolute positive returns through all market cycles by investing in Shari'a compliant investment vehicles that in the opinion of the manager, will offer the prospect of high risk-adjusted returns The last few years have seen an explosion in Islamic investment products being offered and have seen the nascent concept migrate into a mainstream proposition, in particular within the Middle-East. With a potential market of 1.5 billion people worldwide the current estimates of the size of the Islamic finance industry (which range anywhere from $350 billion to $500 billion) are drawing the best and most talented asset managers into this space. Mr. Faisal Aqil, General Manager, Retail Banking at EIB said, 'At Emirates Islamic Bank, we offer risk diversification to our clients by providing innovative solutions to accessing alternative asset classes. The latest offering is the Islamic Alternative Strategies Fund, a hedge fund with the ability to invest across a range of strategies, aiming to deliver equity-like returns with bond-like risk over a complete market cycle.' This product is now available for investment to the Ethmar clients at minimum ticket sizes of USD 25,000. The Fund is a Jersey registered fund with monthly liquidity and no initial lock-in period. Fund assets are Shari'a compliant as advised by the Emirates Islamic Bank's Shari'a Board. Investments into the Fund should be viewed as medium to long term investment.

Profile 002 - American Finance House-LARIBA-USA

American Finance House - LARIBA was established in 1987 in the City of Pasadena, California, USA. The company founders are a group of business men and women who believe in the LARIBA system of banking as the true expression of "halal" Banking and Financing. LARIBA is the acronym for " Los Angeles Reliable Investment Bankers Associates." American Finance House is licensed in the state of California as a Finance lender. 

The company is headquartered in Pasadena, California ( 18 miles or 32 kilometers north east of Los Angeles). The company is registered to conduct business in all the states except New York. THE BANK OF WHITTIER, NA can also serve you using the LARIBA model in ALL states.

The company's main goal is to provide "LARIBA" financing to all people regardless of their national origin, religious beliefs, gender or color. American Finance House LARIBA, since its inception, has distributed competitive profits and dividends which are believed to be proper and halal from a LARIBA point of view. 

The company made halal investments available to many community members. The company specializes in single family home financing and in small and medium size business financing using the leasing model (Ajarah) and / or joint venture (Musharakah).

The company acts as a prudent money/asset manager responsible for stringent due diligence in evaluating investment opportunities, which match the investment style and temperament of the shareholders and owners of assets.

Editor's note: The acronym, LARIBA also means no riba or no interest in Arabic.

Alfalah Consulting: 

Friday, 22 June 2007

'Barriers remain' in expansion of Islamic finance

(GAAP, 21 June 07) There are still some barriers to the expansion of the Islamic finance industry, a new survey from the Big 4 firm KPMG has found.

A lack of qualified Islamic bankers, weaknesses in transparency and financial reporting and the ongoing matter of regulatory capital are all obstacles to the growth of the sector, the KPMG report, titled Growth and Diversification in Islamic Finance, stated.

The survey contains case studies of HSBC Amanah and Unicorn Investment Bank.

Paul Furneaux, financial services partner with KPMG in the UK, explains: "Respondents were aware that they would have to be more creative in product innovation in areas such as derivatives, swaps and options, but recognised that the market is currently at the bottom of a steep learning curve."

It will be important to involve Islamic scholars to help determine the level of "sophistication" of the products, added Mr Furneaux.

Respondents to KPMG's survey said that the market must solidify and define itself.

Islamic law prohibits the collection and payment of interest.

Malaysia urged to expand Islamic Banking to Bosnia

SARAJEVO, 22 June 07: Malaysia has been urged to expand its Islamic banking to Bosnia and Herzegovina due to the rising interest in such products and services, according to the countrys first Islamic bank CEO.

Amer Bukvic of Bosna Bank International made an impassioned plea to Datuk Seri Abdullah Ahmad Badawi to encourage Malaysian banks to capitalise on their expertise in Islamic financial banking and invest here.

He said Europes big financial groups were slowly moving towards that direction but they did not have the expertise and experience compared with Malaysia.

"And this is where Malaysia has the edge. You should move fast to benefit from the increasing interest in Islamic banking," he said when elaborating on his question to the Prime Minister during the Malaysia-Bosnia and Herzegovina Business Forum on Thursday.

Apart from Islamic banking, issues ranging from as diverse as terrorism and barter trade to halal and mineral water and health spa products were raised during Abdullahs dialogue with more than 700 Malaysian and Bosnian businessmen and captains of industry.

Bukvic said Malaysia was, in fact, indirectly represented in the country as his bank was established by the Islamic Development Bank of which the Malaysian government was among the owners.

However, he said, Malaysian banks should expand directly to the Bosnian market since it had a well established Islamic financial system covering banking, insurance, Takaful and other products.
He noted that there were 34 European banks in Bosnia and Herzegovina, all of which were making huge profits as the financial sector was well regulated..
Their investments are in excess of one billion euros as the top few banks alone are worth around 100 million euros each, said Bukvic, who is an alumni of the International Islamic University in Petaling Jaya.
He added the state faculty was establishing an MBA in Islamic finance due to the rising interest in such products.
In his response earlier, Abdullah urged the Malaysian delegation to take note of Bukvics remarks about the prospects of expanding Islamic banking services to the country.
The prime minister stressed that Islamic banking was not exclusively for Muslims but for non-Muslims too.

He added that Malaysias commercial and foreign banks had Islamic windows while some Islamic banks specifically set up by businessmen or banks from the Middle East were doing very well. Their support, he added, came not only from Muslims but non-Muslims as well as they wanted to take advantage of the Islamic banking and financial services.

Alfalah Consulting - KL: 
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Islamic Investment Malaysia:

Brunei's Islamic Banking Plans are Robust

Bandar Seri Begawan, 22 June 07 - What hit Mr Jaspal Singh Bindra, Regional CEO, South East and South Asia of Standard Chartered Bank, when he was recently in Brunei for a day was the diversity in terms of gender compared to the rest of SCB institutions..
"Around 75 or 80 per cent of our staff in Brunei is female, which is pleasantly different from the rest of our banks," he said. "Secondly, when you talk to the people, especially in the government, they are so aware of what's right and wrong rather than being in a state of denial or state of exaggerated performance."
The Bulletin spoke to him at length about Islamic banking and what SCB’s plans are in providing services.
What are your views on the overall banking practices in Brunei?
In just a few words, I would say it's still small. It's also lacking depth in terms of the participants where there are just a few local banks and foreign banks. I believe there is still room for both breadth and depth to be expanded. Overall, the pool is small because Brunei has a small population and has a small economy. However, it is huge for the size of its territory but small by global standards.
What are your views on Islamic banking?
Our institution is predominantly present in Asia, Middle East and Africa and we in our footprint cover almost the entire Islamic world, we have the whole of the Middle East, Pakistan and Bangladesh, which are the two big Muslim nations. We also have Indonesia, Malaysia, Brunei, parts of China and other areas in this region. Clearly, it is very relevant from our footprint and our customer franchise.
Secondly, it is at a stage of growth where the only way you can go is up, compared to conventional banking. It is in huge multiples compared to where conventional banking can go because conventional banking base is so big. For conventional banking to grow in high percentages is quite difficult other than the few economies like China, India, Vietnam which are having an unnatural kind of growth. Most of the markets are only going to grow in a very mature way.
Whereas in the Islamic banking we think there is going to be a boom. The thing that will fuel the boom, we believe, is the supply side, which is so robust. The amount of liquidity and liability that are coming into Islamic Banking are huge and is largely to do with the wealth creation. It is really finding the assets that conform to the Syariah law.
Compared to other countries, how are-we doing in the Islamic banking arena in that sense?
I think there are two ways to looking at it. There is an absolute progress kind of chart or report you can have and then there is comparative.
And I can say in absolute terms Brunei is doing very well. I think the government has got us thinking together on it. They have a plan and they've made it out quite well. They have been at it for some time now and they are planning to extend their laws of the bonds that they raise under the sukuk from few months to a year. Obviously, they are developing at the right stages.
But when you look at what other countries are doing like Dubai, Pakistan or Malaysia, they have just taken a huge leap forward through a combination of things but they are doing a much larger part of their business through incentives, creating other benefits and so on.
A point in case would be Malaysia. You can do Islamic banking under the conventional banking licence as long as you do it at an arm's length. In Brunei on the other hand, you can't. You have to have a separate licence for it, so that straightaway makes it a little bit of a barrier for people coming from overseas to do it here.
Having said that, full marks to them (Brunei) for progressing the way they have and what I have heard is that their plans are even more robust. I was fortunate to meet with the minister in Kyoto last month during a conference and he was absolutely determined to take Islamic banking to another league. So clearly there is huge amount of determination, planning and thinking behind it and we think (Brunei's) time will come though some others have moved ahead already.
Is it affecting SCB in any way?
Not really, because it is still small but if we don't sort of move with it because now we are getting a very clear signal that it's going to be a bigger thing in the future, that we would have the same conversation in a couple of years and if we are still where we are today then I can tell you that we will be thinking we are losing out. But hopefully we won't let that happen.
Islamic banking has a great potential in attracting foreign direct investment. Won't it put pressure on your bank's interest margins?
Well, it is difficult to say because Islamic by definition is going to be a fixed rate kind of instrument and fixed rate is only relevant at a point in time of contracting the transaction. It can't be the only reason for affecting interest rate because it is a periodic setting, unlike a daily fluctuation, which you have on floating rates.
Conventional banks in Malaysia and Singapore are feeling the heat more from Islamic banks because I think as interest rates are rising, people are preferring to go for a fixed rate rather than being exposed to floating. This is because conventional banks don't want to lend fixed anymore, as they don't want to take the pricing risk themselves. If they tie up fixed for you, the rising rate environment will end up maybe over the life of that transaction paying higher or at least reducing their margins.
Smart businessmen are finding a structure where they can conform to Syariah, like in Malaysia. Let me give you an example. More than 50 per cent of our (SCB's) assets in Malaysia are by Chinese businessmen and not by the Muslim population because they just have figured this out, if you can get it fixed and these people are desperate for land because they don't have any assets, so if we can conform our asset use to Syariah and get it approved, we can get this money at a reasonable rate and fixed as well.
So I think that is what's putting the pressure on conventional banks. They are saying, "Hey, this was typically our business and now it's going away. On the other hand we can't compete, we can't put fixed:"
Does SCB Brunei have any plans of providing Islamic banking services in the near future?
Right now we can offer it from across the border, there is no restriction on that as we are being told by the authorities here. But eventually, I think we will want to do it here.
The whole challenge on this is a trade off between the scale and timing because you can start very early and stay ready for it but then what you do is you invest capital and it takes a long time for capital to start generating any return. On the other hand if you don't do it for too long, then you've lost the initial set of prime clients and then you enter late when there is enough to generate returns to your capital but not customers to go to. They have their loyalty with some other people.
So I think, that's the trade of. But having said that, Tiew Siew Chuen, the CEO of SCB Brunei, is actively engaged with the government to see how we can get into this earlier than later. -- Courtesy of Borneo Bulletin

Profile 001 - Bank Islam Malaysia Berhad - Malaysia

Bank Islam Malaysia Berhad, a name synonymous with Islamic banking in Malaysia, continues to lead the way and to assume the role of trendsetter for Islamic banking. Commencing operations as Malaysia’s first Islamic bank on 1 July 1983, its establishment was primarily to cater for the financial needs of Muslims in the country and to further extend its services to the whole population at large. 

Set up with an initial authorized capital of RM600 million and a paid-up capital of RM79.9 million, the bank has gradually increased its authorized and paid-up capital to RM2 billion and RM563 million respectively, to accommodate the growth of its assets and to better position itself in meeting future expansion and growth. Listed on the main board of the Kuala Lumpur Stock Exchange (KLSE) (now known as Bursa Malaysia Securities Berhad) on 17 January 1992, Bank Islam has developed itself as one of the most respectable financial institutions in the country. 

With a network of over 90 branches nationwide, the bank parades a comprehensive list of about 50 innovative and sophisticated Islamic banking products and services, comparable to those of their conventional counterparts. Bank Islam was directly involved in developing the Islamic financial sectors dealing in banking, takaful, stock broking, leasing, research and training and other related Islamic banking services. The synergistic collaboration between Bank Islam and its subsidiaries dealing with these services have complemented the overall growth of the Islamic financial system in Malaysia. 

The role of Bank Islam is to realize Malaysia’s dream of setting up and developing an Islamic financial system that is modern and competitive, as well as being a viable alternative to the more established conventional system. The introduction to the Islamic banking, one of the very important components in the Islamic financial system, is a step to realize the country’s aspiration. 

Bank Islam’s success story is by and large a significant victory for Islamic financial system as a whole. This has put Bank Islam in the center of attention in the banking sector and is well on its way to turn Malaysia into the international capital of Islamic banking.

Alfalah Consulting: 
Islamic Investment:

Thursday, 21 June 2007

BNM Governor's Keynote Address at the Sukuk Summit '07, London. "The Challenge for a Global Islamic Capital Market:Strategic Developments in Malaysia"

Ladies and gentlemen, distinguished guests.

It gives me great pleasure to be here in London to speak at this landmark sukuk summit. The Islamic bond market - the sukuk market - represents a key component of the Islamic financial system. This recent decade has seen the accelerated development of this market and its significant role in strengthening the evolution of Islamic finance. The global development of this market is particularly important in this more challenging financial and economic environment. It has contributed to enhancing the effectiveness and efficiency of the mobilisation and allocation of funds within national financial systems and in the international financial system. This development is also evidenced by the level of innovation and sophistication of the products and services being offered by the Islamic financial institutions. The encouraging development of the Islamic bonds market has also had an important role in enhancing the linkages between financial markets as it facilitates cross-border flows in the international financial system.

The sukuk market as an important source of financing for large scale investment projects, has a key role in facilitating the economic development process. For investors, it provides greater potential for diversification into new asset classes. My remarks today will focus on the vast potential of the Islamic bond market in the economic development process, in its role in ensuring financial stability and its role in promoting greater financial integration in the global financial system. I would also like to take this opportunity to share with you Malaysia 's experience in the development of this market. The Malaysian sukuk market has now evolved into one of the world's largest Islamic bond market.

Immense role of sukuk market in the economic development

The financing requirements for economic development are immense. The bond market is key to meeting these funding needs for both the public and private sectors. This is particularly important for emerging market economies. In the Middle East and in Asia , two of the fastest growing regions in the global economy are taking place following privatisation and implementation of infrastructure projects. Asia alone will be spending an estimated USD1 trillion on infrastructure over the next five years, while infrastructure requirements in the Middle East are estimated to be USD500 billion over the same period. The challenge is to put in place an intermediation system that will channel the surplus savings in both these regions into productive investments. It is in this context that the Islamic capital market, in particular the sukuk market will serve as an important avenue to efficiently mobilise longer term funds to meet these funding requirements.

The global experience has shown that the lack of well developed bond markets brings with it vulnerabilities arising from over-reliance on financing from the banking sector. This has often resulted in funding mismatches with adverse implications on financial stability. The development of the bond market allows for access to funding with the appropriate maturities, thus avoiding the funding mismatches. It also allows for the diversification of risks by issuers and investors.

The central merit of the sukuk structure is that it is based on real underlying assets. The ijarah sukuk for example - an Islamic bond which applies a sales and leaseback arrangement - is an asset-backed instrument providing continuous security to the investor. This approach discourages over-exposure of the financing facility beyond the value of the underlying asset, given that the issuer cannot leverage in excess of the asset value.

In addition, Islamic finance requires that the financing must be channelled for productive purposes, such as for project financing, rather than for speculative activities. The risk exposure is therefore to the project and not to the uncertainties or activities that have no real economic benefits. Islamic financial intermediation therefore has the potential role of contributing towards financial stability.

In the current environment, the demand for sukuks significantly exceeds the supply. Today, the global sukuk market, denominated in international currencies, is estimated to be USD18 billion. If domestic sukuk issuance is included, it has now exceeded USD50 billion. Although the size of the market may seem modest by global standards, the sukuk market has been registering an impressive average growth of 40 per cent per annum. The phenomenal demand has been spurred by the high levels of surplus savings and reserves in Asia and Gulf regions. Asia has a savings rate which is higher than any other region in the world and is expected to remain between 30 and 40 per cent of GDP for many years to come.

The sukuk market brings with it many benefits to both issuers and investors. Issuers can benefit from the huge increase in liquidity in the Islamic world, and can tap on these new sources of funds. Raising funding from the Islamic bond market in the current environment has been 10 to 20 basis points lower than mainstream bonds. An increased number of multilateral agencies are issuing sukuks to finance development projects. In addition, both government agencies and the corporate sector have considered the sukuk market as an attractive source of financing.

From the investor perspective, there are the benefits of diversification. In a sukuk issue in 2005, 48 per cent of the issuance were subscribed by conventional-based investors. This increased appetite for sukuk reinforced by excess liquidity in the global financial system is part of the reasons sukuks are attractively priced for issuers.

Extending the linkages to other parts of the world

The emergence of Islamic financial products, in particular, in the capital market has also promoted greater global financial integration. The bringing together of financial institutions and market players across continents to participate in this expansion of inter-regional investment flows has fostered financial linkages among the major regions. This will not only provide great synergies and opportunities but will contribute towards facilitating international financial stability.

Just as the old Silk Road in the 14 th century offered a route that facilitated the spice trade from the East to the West, we can now envisage the new Silk Road which financial flows across borders between the East and West, thereby promoting international financial integration. In this context, the Islamic capital market, in particular, the sukuk market has a major role in strengthening this interlinkage. The essence of the New Silk Road is to provide a route for such flows and promote greater financial integration for the benefit of a wider community. The New Silk Road should not be envisaged as just a link between Asia and the Middle East but that which extend to Europe and the rest of the world. Indeed, we are already seeing the participation of global investors and the international financial community. The participation of a financial centre like London will foster the global growth and international integration of this market. The involvement of regulators and government agencies is also contributing to accelerating this process.

Malaysia is one of the key intermediary destinations along this New Silk Road that offers a platform for the origination, distribution and trading of Islamic capital market and treasury instruments, including sukuks. Malaysia is positioning itself as an Islamic investment gateway to Asia , with a niche in Islamic fund and wealth management. Malaysia has developed a comprehensive Islamic financial system that operates in parallel with the conventional financial system. Of significance, is the inter-connectivity within the system that includes the banking and takaful industries, and the Islamic money and capital markets - a matrix which mutually reinforces the integrity and stability of the Islamic financial system. This is supported by the financial infrastructure, the legal and regulatory framework and the expertise to contribute to the growth of Islamic finance.

Malaysia 's achievements in developing the sukuk market

Allow me to share the Malaysian experience in developing the sukuk market. The Malaysian Islamic bond market has made significant progress since the first sukuk issue in 1990 by a multinational corporation operating in Malaysia . The development of the market involved initiatives to facilitate an efficient issuance process, the price discovery process, the broadening of the investor base, the establishment of a benchmark yield, the liquidity in the secondary market and the strengthening of the regulatory framework. These initiatives have been reinforced by the legal and Shariah framework and the supporting financial infrastructure including the settlement and bond information system.

Following the development of a robust and vibrant domestic market, initiatives have now been taken to raise the significance of the international dimension of our Islamic financial system. This has included wide ranging liberalization measures including bringing in new Islamic finance foreign players into our system through the issue of new licences and allowing for greater levels of foreign interest in our domestic financial institutions. The liberalisation has also involved the potential for greater foreign participation in our domestic financial markets.

In 2002, Malaysia achieved a further significant milestone when the Malaysian government issued the first global sovereign sukuk, raising USD600 million. With this issuance, it became an international benchmark for the issuance of global sukuk. The sukuk issue was listed on the Luxembourg Stock Exchange, Labuan International Financial Stock Exchange and Bahrain Stock Exchange. There has since been further sovereign issues in the global capital market.

In 2006, the Malaysian market saw the launch of a sukuk using concepts such as Mudha-rabah, Mu-sya-rakah and Ijarah. The issuers included Malaysia 's government-linked companies. A landmark example was the USD750 million exchangeable sukuk Musyarakah by Khazanah, the government's investment corporation for the purpose of selling a stake in Telekom Malaysia . It marked the world's first issue of its kind, incorporating full convertibility features common to conventional equity-linked transactions.

Following these developments, the Malaysian sukuk market has attracted a wide range of lead arrangers. In addition, the rising demand and the growing number of issuers and the broadening investor base has led to the growing sophistication of the market. By January 2007, Malaysia accounted for 67 per cent, about two-thirds of the global sukuk outstanding, amounting to about USD47 billion.

The growth in the sukuk market also reflects the commitment and combined efforts of the Malaysian government and regulators. There is a clear articulation of the vision and policies to drive the local Islamic capital market. This is reinforced by the implementation of a strong legal, regulatory and tax framework.

Bank Negara Malaysia and the Securities Commission have worked closely on a sequence of vital blueprints: the 10-year Financial Sector Master Plan, the 10-year Capital Market Master Plan and the Islamic securities guidelines. The government has reaffirmed all these plans and initiatives with the announcement of a range of tax measures in the 2006 budget.

Another important aspect of the development of the sukuk market is the development of the other key components of the Islamic financial system, the money market, banking, and takaful sectors. The various components are able to meet the different requirements of the economy including the differentiated tenor for which the funds are required. This includes providing stable long-term funds for large investments and development projects. These would allow for a balanced allocation of financial and economic resources within the economy, diversifying the risks through the Islamic financial system, and enhancing its flexibilities to adjust, thus strengthening its resilience.

As Malaysia moves to a more liberalised and globalised Islamic capital market, the role of the industry in advancing the Islamic financial system becomes increasingly important. The role of the industry has been important in spearheading product innovation, branding, profiling, promotion and marketing of the Islamic capital market products and services. This has contributed to the development of a deeper and more liquid, efficient, transparent and effective sukuk market.

Challenges in the development of the Global Islamic capital market

While much has been achieved, much remain to be done. Let me turn to some of the challenges and initiatives taken to address them. A vital ingredient for the development of capital markets, including the Islamic capital market, is the creation of a secondary trading platform for the capital market instruments. This will provide investors with the flexibility in managing their liquidity requirements. In this respect, more needs to be done in terms of the creation of a continuous supply of Islamic papers and instruments that would promote the secondary trading of instruments and add greater depth to the market.

There also needs to be greater diversity in the type and maturity of the sukuks in the market for Islamic financial institutions and portfolio managers to manage their funds effectively. As part of the efforts to address these issues, the Malaysian government regularly issues sukuk with different maturities in order to create a benchmark yield curve. Since the year 2000, the government has developed an auction calendar for both the conventional and sukuk government issues. In 2005, the government commenced issuing shorter term Islamic treasury bills and longer-dated sukuk, with a maturity of 10 years, to further diversify the instruments available to investors. In the Malaysian sukuk market, Islamic private debt securities now account for 50 per cent of the total private debt securities market.

Another challenge to the growth of the market concerns pricing issues. For the Islamic security to be efficiently priced and credible, further initiatives need to be undertaken to develop its own indicator. For example, if a sukuk is issued based on the Ijarah principle, and uses the property as its underlying asset, the actual rate of rental may be explored to be used to determine the rate of return on the instrument. It would then fluctuate depending on the demand and supply for that property. It will then give a true reflection of the price of the underlying asset.

Shariah experts, who have a full understanding of the mechanics of sukuk, are key to ensuring its proper governance. And shariah decisions, when made, should be transparent and disclosed. This will allow others to appreciate the juristic reasoning, which in turn should lead to wider acceptance of shariah decisions, particularly if they have implications on cross-border transactions. In relation to this, a guide for issuers and investors to refer with regards to shariah decisions would facilitate the development of the market.

Of further importance is the attainment of the convergence of Shariah principles and interpretation to ensure market confidence among investors from different parts of the world. To achieve this, there needs to be continuous investments in intellectual capital and greater engagement among Shariah scholars. The regular engagement that is now taking place among the scholars is already producing this convergence.

Similarly for the global acceptance of Islamic finance, the harmonisation of standards and practices is important. Full support has to be accorded to the international standard setting organizations such as Islamic Financial Services Board (IFSB) and to the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) to formulate appropriate standards that would strengthen the Islamic financial system. The IFSB has already formulated the prudential treatment for sukuk investment by the Islamic financial institutions as stipulated in the Capital Adequacy Standards. The IFSB has also undertaken initiatives to strengthen the framework and practices in the Islamic money market. Further work is being undertaken to formulate strategies for strengthening the liquidity management framework and to identify measures to develop benchmark Islamic securities that can help to determine benchmark rate for system-wide application.

Global co-operation to develop the Islamic financial markets

Indeed, while there remains many challenges that need to be overcome, the overall direction and potential of the global Islamic financial markets are certainly well recognised. Greater engagement and interface between the industry, the scholars, and the authorities will create greater awareness, understanding and appreciation of the issues and the direction for its resolution. This will provide an environment in which the full potential of Islamic finance can be realised. This is indeed a global challenge and it will be the cumulative efforts of the scholars, industry and authorities that will produce the best outcome.

In conclusion, I would like to congratulate the organisers in successfully providing a platform at this conference for all the sukuk stakeholders ranging from the issuers to investors. I wish all of you a highly productive and successful conference. Thank you.
Source: BNM web site
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