Latest from GIFC

Tuesday, 31 July 2007

Landmark US $1,000,000,000 Dar Al-Arkan Sukuk Lists On Labuan International Financial Exchange

Dar Al-Arkan International Sukuk Company today listed its landmark US$1 billion Sukuk Al-Ijara on the Labuan International Financial Exchange (LFX), marking the first Saudi corporate Sukuk to list on the LFX. The Sukuk was arranged by a consortium of international banks on behalf of Dar Al- Arkan Real Estate Development Company, a leading residential real estate developer in the Kingdom of Saudi Arabia. The Sukuk has also been listed on the Dubai International Financial Exchange (DIFX). Launched in June, the Sukuk issue received an overwhelming response from institutions across the Middle East, South East Asia and Europe. It was significantly oversubscribed, raising close to US$1.5 billion, with Dar Al-Arkan opting to close the issue at US$1 billion. The Joint Lead Managers and Joint Bookrunners of the transaction were ABC Islamic Bank (E.C.), Arab National Bank, Deutsche Bank, Dubai Islamic Bank PJSC, Gulf International Bank B.S.C., Kuwait Finance House (Malaysia) Berhad and Unicorn Investment Bank B.S.C.(c). Unicorn Investment Bank B.S.C.(c) was also the Shari’ah and Structuring Advisor. AmInternational (L) Limited is the LFX Listing Sponsor for the Sukuk.
The landmark 5-year issue, based on an Ijara structure, marks the second Sukuk to be issued by Dar Al-Arkan. In March this year, the company closed its inaugural Sukuk at US$600 million, marking the first Sukuk to be issued by a Saudi corporate in the international capital markets. The inaugural Dar Al-Arkan Sukuk is listed on the DIFX. Commenting on the Dar Al-Arkan Sukuk’s listing on the LFX, YBhg. Dato' Yusli Mohamed Yusoff, Board Member of LFX and Chief Executive Officer of Bursa Malaysia said, “This is truly a landmark event in the history of the LFX. Given the growing interest on the part of investors from South East Asia in Middle Eastern instruments, we hope the listing of this Sukuk on the LFX will provide the platform to enhance the liquidity and trading of Sukuks among international investors.” Dato’ Yusli added that the Dar Al-Arkan Sukuk is the largest Sukuk listed on LFX and this listing will further bring in new investors to the region. Abdullatif Al-Shalash, Managing Director and board member of Dar Al-Arkan said, “We are delighted to have the opportunity to list our latest Sukuk issue on the LFX. The truly international nature of this Sukuk and the overwhelming response from investors affirms the strength of Dar Al-Arkan’s business model, our strong growth prospects and the confidence of the international financial community in our strategy. Dar Al-Arkan is committed to playing a leading role in providing affordable housing solutions that meet international standards for middle income families across the Kingdom of Saudi Arabia.” Majid Al Sayed Bader Al-Refai, Managing Director and Chief Executive Officer of Unicorn Investment Bank B.S.C.(c) commented, "The listing of this second landmark transaction for Dar Al-Arkan on the LFX represents a further important milestone in the development of the Islamic capital markets. We look forward to continuing to partner with regional and international financial institutions to expand the boundaries of the Islamic finance industry."

Monday, 30 July 2007

Japan's JBIC to Sell Islamic Bonds Backed by LME Investments

July 30 (Bloomberg) -- Japan Bank for International Cooperation, the government's main overseas lender, plans to sell Islamic bonds backed by products traded on the London Metal Exchange, an official said. The Tokyo-based bank, known as JBIC, plans to sell Islamic debt for the first time as early as in October, said Tadashi Maeda, director general of the bank's energy and natural resources finance department. JBIC will sell $200 million to $300 million of such securities, to be denominated in Malaysian ringgit or dollars, in Malaysia, he said. JBIC is seeking to tap increasing demand for Islam-compliant investments and banking products as oil money floods the Persian Gulf. Sales of bonds that comply with Islamic law totaled $16.3 billion worldwide this year, accounting for 89 percent of the record $18.3 billion for the whole of 2006, according to data compiled by Bloomberg. ``We want to see more oil money flowing into the Asian market and Malaysia is the best place to sell the Islamic bonds,'' Maeda said in an interview on July 27. Malaysia, where 60 percent of its 27 million people are Muslim, is the world's biggest issuer of debt complying with Islamic principles. The securities are gaining popularity in the Southeast Asian nation as the government seeks to develop Malaysia into the global center for Islamic finance. Islamic law bans the payment of interest or receipt of interest and investment in the alcohol, tobacco and gaming industries. Islamic bonds are typically asset-backed securities that pay an agreed profit rate instead of a coupon. Assets invested from oil revenues increased to about $1.5 trillion, Maeda said. About $500 billion of this amount is invested outside the Middle East, and only one-tenth of it goes to Asia, he said. LME Investments: The bonds will be backed by JBIC's investments in products traded on the LME, the world's largest metals marketplace, Maeda said, without specifying the contracts. The bank will create a company that will manage the funds and hire a financial institution to oversee it, he said. The price of the bonds will be determined by the performance of the contracts, said Maeda.
The LME, which handles more than $4.5 trillion of trading in metals and plastics each year, including copper, aluminum, lead and nickel. The price of copper delivered in three months rose 23 percent since the beginning of this year. JBIC plans to swap proceeds from a ringgit-denominated bond sale into dollars because it lends more in the U.S. currency, he said. The bank's next sale of Islamic bonds, which will be in dollars, will be in the Middle East, Maeda said.

Undertake Joint Efforts In Halal Products

SYDNEY, July 30 (Bernama) -- Malaysian and Australian companies were today urged to undertake joint production and distribution of halal products for the international market.In making the call, International Trade and Industry Minister Datuk Seri Rafidah Aziz said the total value of the global halal market was estimated at A$2.7 trillion (RM7.9 trillion)."In the halal food sector alone, the market is estimated at A$610 billion (RM1.807 trillion)," she told a seminar on "Business Opportunities in Malaysia" here.Such a collaboration was ideal with Australia being a major producer of agro-based products and Malaysia striving to be a hub for the production and distribution of halal food, said Rafidah, who is leading a week-long trade and investment mission to Sydney, Brisbane and Perth in Australia starting Sunday.Members of her mission include Melaka Chief Minister Datuk Seri Mohd Ali Rustam, Malaysian Industrial Development Authority director-general Datuk R. Karunakaran, Malaysia External Trade Development Corporation chief executive officer Datuk Noharuddin Nordin, government officials and representative from the private sector.Malaysia-Australia collaboration could make use of each other's strengths to take advantage of Malaysia's experience and expertise in inspection, monitoring, standardisation and certification of halal products, Malaysia's standing among Islamic countries and Australia's strength in food technology, the minister said."Potential products and activities for collaborations include convenience and health food, seafood-based products, processed local tropical fruits, cocoa related products and palm oil-based products," she said.Pointing to Sydney's reputation as the world's third busiest financial centre after New York and London, Rafidah said: "I urge businessmen from New South Wales to leverage on Malaysia's comparative advantage in financial services to penetrate new markets in Asean and West Asia, especially in the areas of Islamic financial services."Citing Islamic banking as the fastest growing banking segment in Malaysia, she said that Islamic banking showed robust growth with high profitability last year.Syariah-compliant assets rose to US$34 billion or 13 percent in terms of market share from less than three percent a decade ago, she added.Rafidah told the 290 Australians participating at today's seminar that over the next 10 years, Islamic banking in Malaysia was expected to command 20 percent market share compared with conventional banking."Banks in Australia, and Sydney specifically, should take the opportunity to use Malaysian banks as a channel to access Islamic banking and financial markets in Asia and other parts of the world, especially in West Asia," she said.

Alfalah Consulting - KL: 
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Dechert highlights Islamic finance skill with innovative sukuk scheme

Dechert has acted on a key Islamic finance deal, advising on the establishment and London Stock Exchange listing of a $1bn (£485.87m) sukuk certificate issuance programme. A team led by London-based finance partner Abradat Kamalpour advised Dresdner Kleinwort and HSBC Bank as co-arrangers, dealers and bookrunners on the establishment of the programme for Bahrain's Gulf Finance House. According to Kamalpour, the deal is significant because the programme allows for numerous sukuks (the equivalent of bonds) to be issued from the same platform. "When sukuks started they were done as one-off issues," he said. "Now a corporate can set up a programme under which it issues these bonds. "This is one of just a handful of such programmes - only the fourth in the world. Gulf Finance House now has a platform so it can issue bonds very quickly." Another unusual feature of the sukuk programme, according to Kamalpour, is that it is backed by shares as opposed to real estate, which is normally the case. "We came up with the structure working alongside the banks," he said. Dechert, which pitched for the role, won the instruction on the back of its reputation in the Islamic finance world. The firm advised on the first sharia-compliant private equity vehicle earlier this year. Dechert also advised HSBC Trustee as the administrator on the deal. Due to Chinese wall considerations, however, this was handled by counsel Andrew Wilson. Walkers acted for the Cayman Islands-based special purpose vehicle used to issue the programme, while Lovells acted for Gulf Finance House. - (The Lawyer, 30 July 07)

Sunday, 29 July 2007

Sudan promotes Islamic banking in Sri Lanka

The Central Bank of Sudan has stepped in to provide technical assistance to ABC investments Ltd, to open out a new dimension in trade and finance under the Islamic concept for the benefit of all communities in the country. The financial transactions of the newly formed Investment and Finance Company will be carried out under profit sharing basis regulated by rules and guide lines of the Islamic faith. The Sudan Central Bank has signed a Memorandum of Understanding with ABC Investments and AL Zubair Charity Foundation to assist the company to develop various innovative financial instruments and Islamic financing, where Sudan has a long history.
The ABC group will be able to set up business in Sudan in the future under this strategic partnership. Addressing a media conference in Colombo last week, Managing Director of the ABC Investments M.I.M Razeek said that the MOU will provide several benefits to Sri Lanka including training of staff, manuals and banking documentation in addition to funding arrangements for projects both in Sri Lanka and Sudan. He added that ABC Investments plans to introduce good practices of savings and investments within the country. The company which provides Barakah Islamic financial services has devised strategies to increase the 300 million deposit mark before December while operating just in Colombo Razeek said, “They will set up branches in Kattankudy in the island's east and Kandy in the central hills by January”. ABC Investments maintains 1000 accounts in Colombo and hope to reach 10,000 within a year as it moves into the other regions. It will cater to the needs of clients in Matale and Katugastota areas from Kandy and by March open a unit in Puttalam. - (Sunday Times, 29 July 07)

International Islamic Union Bank wants Yemen’s banking law changed

The International Islamic Union Bank, which has a capital of $100 million, will not come to Yemen unless the Central Bank of Yemen amends an article in its Islamic banking law that allows foreign investors to own just 20 percent of the bank’s capital, said head of the foundation committee Shihab al-Azazi. Preparations for setting up a bureau of the International Islamic Union Bank in Yemen have been completed, al-Azazi said. But the bank refuses to begin setting up here until its demands are met. Al-Azazi called upon the Yemeni government to amend the current law that allows foreign investors to have only 20 percent of any project’s capital, demanding that foreign companies be allowed to own 50 percent. The Central Bank of Yemen is considering the amendment of the Islamic banking law, said Ahmed Dameem, the Deputy Governor of the Central Bank of Yemen. - (Yemen Observer, 28 July 07)

Saturday, 28 July 2007

Saudi Arabia's Sukuk Market Poised to Take Off

"Saudi Arabia's fledgling sukuk market is beginning to take off, with deals increasing in size and asset pools increasing in sophistication," explains Andrew Coats, partner at City-based international law firm Clifford Chance, to Arab News. Clifford Chance are acting for the lead arrangers in two current transactions - the stand-alone SR5 billion issuance announced yesterday by Saudi Electric Company (SEC) which matures in 2027; and the second issuance by Saudi Basic Industries Corporation (SABIC) which is in the process of finishing its book-building exercise, before announcing the final value of the issuance. The Capital Market Authority (CMA), however, a few days ago did raise the ceiling cap for domestic sukuk issuances from SR5 billion to SR8 billion. Both issuances are pioneering new asset pools that are being securitized. In the case of SEC, the primary supplier of electricity and the fourth largest company by asset value in Saudi Arabia, the specified pool of assets are "SEC's rights under the Council of Ministers Resolution 169 relating to electricity-related supply and licensing to maintain and read electricity meters and the distribution of bills, and the related entitlement to levy and receive charges for these services." The specified asset pools covers hundreds of thousands of numbered electricity meters throughout Saudi Arabia. "This is a ground-breaking transaction, not only in terms of size, but in terms of transaction structure, with the sukuk assets consisting of SEC's meter reading and maintenance tariffs relating to a specified pool of electricity meters," adds Coats. In the case of SABIC, the pool of assets comprises payment entitlements under marketing agreements, which SABIC has with petrochemical producers. SABIC has transferred a percentage of these rights and obligations into the sukuk through a similar custodian structure, SABIC, Sukuk LLC, a wholly owned subsidiary of the issuer. The SABIC Sukuk II matures in 2027, although sukuk-holders will be entitled to sell the sukuk to the issuer at the purchase price at the end of every five years. The margin of the sukuk has been fixed at 38 basis points over SIBOR. The sukuk, which has a minimum subscription of SR50,000, will be listed on the Tadawul with a further listing possible at a later stage on the DIFC. Both issuances, which are essentially public offerings under the new CMA regime, do not involve any special purpose vehicle (SPV) structure. According to Coats of White & Case, which together with its associated Saudi Arabian firm, Al-Jadaan Law Firm, acted for the sole lead manager HSBC Saudi Arabia Limited, the SEC sukuk issuance was publicly offered in Saudi Arabia and heavily oversubscribed, and is the largest sukuk or bond issuance by a Saudi Arabian entity to date. It follows the SR3 billion domestic sukuk issued by SABIC in September 2006, the first such issuance in the Kingdom, which was confined to Saudi investors, following the adoption of a stand-alone Sukuk Law in Saudi Arabia. The latest SABIC issuance is similarly based on a pool of assets comprising specified payment entitlements under marketing agreements, which SABIC has with petrochemical producers. - (MenaFn, 28 July 07)

British Islamic Insurance Holdings (BIIH) has a vision to become takaful partner of choice in the UK and Europe

After its recent announcement to increase its paid up capital, the Board of British Islamic Insurance Holdings (BIIH) announced its decision to appoint Bahrain-based Gulf International Bank B.S.C. as the Company’s GCC Financial Advisor, and Investec Bank (UK) Limited, as its UK Financial Advisor. BIIH recently announced that it intends raising £80 million paid up capital by the time of launch of business in the first quarter of 2008 to meet the capital adequacy requirements associated with the business plan submitted by the Company to the FSA. BIIH raised £19 million paid up capital in 2006 and has decided to raise the additional capital in two tranches: (i) through a Private Placement in the UK and Gulf region during the summer of 2007; and (ii) through additional fundraising closer to the launch of the Company’s business in the first quarter of 2008. GIB is one of the largest regional banks in the GCC, with more than US$27 billion of its own assets and US$22 billion of clients’ assets under management. With a proven track record spanning more than 30 years, GIB provides client-led, innovative financial products and services to a wide customer base in the region, including investment banking, treasury services, asset management, project and structured finance, and Islamic banking. Backed by a highly qualified, dedicated team of professionals in Manama, Riyadh and Abu Dhabi, and supplemented by offices in London and New York, GIB provides specialized financial advisory services to a wide range of public- and private-sector clients in the Middle East. New York-based Global Finance magazine has recently named GIB as the “Best Equity Bank in the Middle East/Africa” after conducting a survey of the world’s best investment banks. GIB was selected for the award because, among other things, it has been the exclusive financial advisor for most major IPOs in the Kingdom of Saudi Arabia in recent years and because of its leading role in corporate advisory. Investec is an international, specialist banking group that provides a diverse range of financial products and services to a niche client base in three principal markets, the United Kingdom, South Africa and Australia, as well as certain other geographies. The group employs approximately 5400 people world-wide. Investec is focused on providing its investment banking service offering to the UK small and mid-cap market. Investec is focused on growing companies from £50m to >£1bn and has long-standing relationships with a wide range of clients including listed companies, private businesses and private equity funds. UK Small Cap Fund Managers rate Investec as No.1 AIM broker. Investec has a dual listing on the London Stock Exchange and Johannesburg Stock Exchange and has a market cap of approximately $8 billion. Commenting on the appointment of the investment banks, Sh. Abdulaziz Hamad Aljomaih, the Chairman of BIIH said: “We are delighted to appoint two premier investment banks as the GCC and the UK financial advisors to the Company’s private placement of its New “A” Shares. The selection of GIB and Investec is consistent with the Company’s established approach of working with blue chip advisory teams to help its board establish a world-class Takaful firm in the UK.” BIIH, in an innovative move, will be the first company to offer Shari’a compliant insurance products to the British Muslim population from an FSA-authorised and regulated, stand alone Islamic insurance company. Following the formation of the company in 2006, £19 million (approximately $38 million) was raised from institutional and private investors in the Gulf Region who subscribed for shares in BIIH following a Private Placement which took place during the summer of 2006. An additional £1 million committed for subscription by the Core Founder at the time of FSA Permission takes the total committed capital to £20 million. BIIH has a vision to become the Islamic insurance partner of choice for Muslims in the UK and Europe, following strong research which shows a substantial market potential for a Shari’a compliant insurance offer from a focused and trusted Islamic insurance provider. The business has also identified opportunities to use a Takaful based insurance solution for the fast growing ethical market. The UK insurance industry is the largest in Europe and the third largest in the world after the USA and Japan. The UK’s annual per capita insurance spend is approximately £2,500 (US$5,000), which is the second highest in the world after Switzerland (as of 2005). Most people in the UK purchase some form of insurance and over 60% of households in the UK subscribe to home-related insurance, while more than 70% are covered for motor insurance. A comparison of the insurance penetration in the UK with that of the GCC region suggests that the UK’s per capita insurance premium in 2005 was 35 times more than that of the GCC region. In 2005, total general insurance premiums in the UK were £32.2 billion (US$64 billion) and long-term insurance premiums were £100 billion (US$200 billion). A UK survey conducted by BIIH indicated a strong preference for Shari’a compliant insurance solutions amongst UK Muslims with 50% responding that they are ‘extremely likely’ or ‘very likely’ to buy Motor Takaful as long as all aspects of the policy, including cost and level of cover, are comparable with their existing conventional insurance policy. A further 26% said that they would be ‘fairly likely’ to buy Motor Takaful. The corresponding figures for Household Takaful were 46% and 28% respectively. British Islamic Insurance Holdings has its offices in Central London. Its creation was led by Gulf Ventures Corporation (GVC), Bahrain. GVC worked with a number of leading international consulting firms and project managed the FSA regulatory application preparation process from conception to completion. GVC worked with Ernst & Young and KPMG in the UK, and Mercer Management Consultants provided takaful advisory services. Norton Rose provided legal advise and GVC worked with one of Europe’s premier actuarial consultants, EMB Consultancy. GfK NOP, a leading market research company, helped GVC in conducting primary research in the UK to assess the interest of British Muslim population in a takaful proposition in the UK. - (Albawaba, 27 July 07)

Friday, 27 July 2007

Lack of standards hit Islamic banks’ assets: McKinsey Report

DOHA: Islamic banks’ assets, growing at 15-20% per annum, touched $400bn in 2006, which was less than 1% of global banking assets, according to a report by managing consulting firm McKinsey. McKinsey said this was because the sector’s growth was “hampered” by regulations. Rational licensing policies that do not insulate Islamic banking sector from competition and a central Shariah board for establishing national standards to create the platform for them to expand beyond national borders were imperative for the sector’s vibrant growth, it suggested. Lack of standards inhibited the development of international Islamic banking markets and resulted in an industry that was little more than a collection of national strongholds, also said the report, authored by Nasr-Eddine Benaissa, Xavier Jopart and Ozgur Tanrikulu, highlighting that as of now there are about 270 Islamic banks.“Despite recent growth, assets held by Islamic banks remain at less than 1% of global banking assets. In Islamic countries, penetration varies considerably,” it said.In Qatar, Islamic banking assets were 14.4% of the total banking assets in the country in 2005, up from 12.1% in 2001, whereas in Bahrain, it was 14.4% (against 17% in 2001), Kuwait 21.6% (15.8%) and the UAE 11.8% (7.2%).Finding that some national regulators shielded Islamic banks from real competition, thus relieving them of external pressure to improve their performance, the report said regulators “would have to tackle these issues to propel the sector further out of its niche and into the mainstream”.Asserting that the regulatory frameworks governing Islamic banks were a vital influence on the banks’ overall performance in each national market, the report said the wide variation in regulations from country to country was “probably the main explanation for the similarly wide variations in growth and performance across markets.”“It will continue to be a strong influence on them as they evolve,” the global consultant’s report said.Stressing that the countries starting to develop Islamic banking regulations should consider how their efforts contribute to the global harmonisation of Islamic banking practices, it said “no such standards have been developed, so it is difficult for players to exchange best practices across markets and to expand abroad.”Ideally, the evolving regulatory model should put all institutions – Islamic and conventional – on the same competitive footing and create a transparent market, it said.“Banks should not be able to hide lax customer service or operations behind Sharia credentials. In addition, policies should promote the use of separate Islamic banking balance sheets and income statements that would provide complete information on the Islamic banking market and reduce the asymmetry of present information,” McKinsey said.On the licensing policy, the report said experiences showed that the Saudi and Malaysian models had fostered the competition. In Saudi Arabia, a single licence and compliance framework covered all banks – a system that avoided any differentiation between Islamic and conventional institutions and allowed every bank to offer both the products, whereas it was the same case with Malaysia, although it offered three kinds of licences.Though requiring banks to be either Islamic or conventional might seem necessary to create a clear distinction between the two and to raise the credibility of the Islamic banking sector, the report said “it creates a walled garden around Islamic banks, insulating them from competition.”Protected Islamic banks, convinced that religious credentials alone will sustain them, “are often complacent” and that their innovation, quality of service, convenience and operations improvements suffered, thus landing them behind their conventional counterparts, it said.“The most suitable framework is one that allows banks to choose what they offer and doesn’t constrain them through a tight licensing policy,” it said, adding “if Islamic banks are to compete with the conventional ones, then innovation and speed are crucial.”“A central Shariah board benefits from precedents and experience and over time it should make faster and more uniform decisions, which lightens the burden for the (Islamic) scholars on the committees of individual banks,” McKinsey said.It would mean that these committees (of individual banks) needed fewer scholars since they can draw upon the central board’s opinion rather than having to explore each fresh topic from scratch, it also said. - (GT, 27 July 07)

Investment Dar Bank: a new Islamic investment bank established in Bahrain

The establishment of Investment Dar Bank was today announced in the Kingdom of Bahrain - a new Islamic investment bank with an authorized capital of USD1 billion, with subscribed and paid-up capital of USD200 million. Shareholders consist of a group from the private sector including Islamic financial institutions and individual with vast experience in the Islamic financial industry. The establishment assembly meeting of Investment Dar Bank was held on Thursday July 26th, 2007, (12 Rajab 1428 Hijri). The meeting was attended by the bank shareholders, along with representatives of the Central Bank of Bahrain and the Ministry of Trade and Industry from the Kingdom of Bahrain. The goals of establishing an Islamic bank. On this occasion, Mr. Abdullatif A. Janahi, Chairman of Investment Dar Bank, said that the founders of the bank are Islamic institutions and skilled individuals with extensive experience in Islamic financial Industry. They realized the importance of Islamic banks and its mission in helping humanity. Janahi stressed that the Islamic banking system is developing and can make contributions to achieve sustainable growth anywhere in the world. Central banks worldwide sensed the importance of Islamic banking and the vital role they play, so they facilitated and encouraged the establishment of such banks. Consequently, Islamic banks now are present on the five continents of our world. Recently global financial centers gave special attention to Islamic financial industry by granting licenses for these financial institutions to operate. In Britain, for instance, there is an increase in the number of Islamic banks and conventional banks offering Islamic financial services, including senior British banks with a global reputation such as HSBC, as well as Lloyds TSB and others. "Research has shown that three quarters of Muslims would prefer to deal with Islamic banks. For example, there are a large number of companies now owned by Muslims in Britain, as many as up to 100,000. Many of these companies want to convert to Islamic banking transactions, as indicated in the research. Islamic financial services attract non-Muslims in Islamic countries and non-Muslim countries," Janahi added. From this perspective we see that the number of Islamic banks is not enough to deliver financial services to the potential Islamic market in the GCC, as the number of Islamic banks form 10% of the number of conventional banks. It is essential for us to make Islamic banking services available to the public and to develop these services to be active and comprehensive and support real economic activity in the country, at the same time working closely and harmoniously with the global financial system in order to provide better growth rates and monetary stability worldwide. Over the past ten years, the assets of Islamic banks have grown at a rate of between 10 to 15 per cent and are expected to continue at a similar growth rate, which makes us expect that Islamic bank assets will reach USD 4.8 trillion by 2015, guaranteeing that we would feel the need for the required growth in the number of Islamic banks, and readiness with banking expertise which would provide the latest in the world of Islamic finance, so as to coexist and compete efficiently with the global banking industry. Thanks and appreciation to the government of the Kingdom of Bahrain: Adnan Abdul Qader Al Musallam, Chairman and Managing Director of Investment Dar Company, said, "The foundation of Investment Dar bank in the Kingdom of Bahrain comes as a result of our expansion strategy to grow geographically worldwide and particularly in the Arab world. Establishing the Investment Dar bank is another initiative to expand our business in the banking sector, especially since Investment Dar company owns more than 40% of Bahrain Islamic Bank, and 12.5% of Sham Bank in Syria. Mr. Al Musallam added, “Investment Dar Bank in Bahrain is an investment bank which will focus on offering world class investment bank services and transaction advice, in contrast to Bahrain Islamic Bank, which is a commercially based bank offering individuals financial services in the Kingdom of Bahrain. Mr. Al Musallam expressed deep appreciation and thanks to each of those who contributed to the founding of the Investment Dar Bank, the government of Bahrain, and His Majesty King Hamad Bin Isa Al Khalifa, King of Bahrain Kingdom, for his contribution in support of the Islamic Finance industry in the region, and thanked the Central Bank of Bahrain and the Ministry of Trade Industry for their support. Bahrain venue is the most appropriate location for Investment Dar Bank: Regarding the selection of Bahrain Kingdom as headquarters for Investment Dar Bank, Mr. Abdullatif A. Janahi, Chairman of Investment Dar Bank, said, “The founders of Investment Dar Bank studied the requirements of the Islamic banking sector in a number of Arab and Islamic states. They were very pleased to select Bahrain as the headquarter for Investment Dar Bank for many reasons mentioned earlier by many specialists and I do not want to repeat it. But I would like to focus on the Central Bank of Bahrain’s initiatives to improve, progress and develop the Islamic banking sector by forming a legal and supervisory environment which builds confidence in the investors. The Central Bank is also employing professionals who understand fully the technicalities of Islamic banking. For these and other reasons, Bahrain outweighs others as center for this Islamic banking”. Founders of Investment Dar Bank - Bahrain: Mr. Abdullatif A. Janahi emphasized that Founders of Investment Dar Bank wanted the bank to be born strong, with most of the founders being senior Islamic financial institutions with strong records of successes. For example, Investment Dar Company, based in Kuwait owns 31% of the capital of the bank and manages an estimated USD 15 billion in associated projects and assets. It is worth noting the quality of the Founders’ backgrounds, as they come from diverse sectors of investment and are specialized in several areas, such as investment, finance retail, real estate and hotel development, project management, consulting and finance management, amongst others. In addition to these financial institution relationships, it owns shares in commercial banks, insurance companies and other miscellaneous investments, beside that, the board of this bank include figures who are pioneers in the Islamic banking work and the experience of each of them extends to three decades, which is the age of Islamic banks in our world, and they have come to supervisory and executive positions in several financial institutions, and they have successful records of innovation in this industry. Part of the investment map of Investment Dar Bank: Mr. Abdullatif A. Janahi said, “It is not a secret to share with you the investment bank strategy, as there is no doubt that there are investments in the region to impose themselves on the banking market, such as investing in real estate, the stock market and other common investments, but the board of Investment Dar – Bahrain believe that any investment must achieve deeper economic goals and not just follow the speculation and competition of the market. When investing, the bank must also consider how its investment will make a contribution to solving social issues such as unemployment and generating greater national incomes. This will only be possible with evolutionary thinking, and this what the bank will pursue. Mr. Janahi confirmed that the Investment Dar Bank board of directors stressed the need to strive to encourage capital investment in various sectors such as industry, agriculture, privatization, with particular attention to the service industry and co-operation with the public sector to diversify national income sources and enhance the role of the private sector in promoting development. Mr. Janahi concluded that he was confident that the Investment Dar Bank will play an effective role in the Gulf, Arab, Islamic and international community, as a locally established bank with regional orientation and global range. - (Al Bawaba, 26 July 07)

Wednesday, 25 July 2007

Rise of the sukuk

The Islamic bond market is taking off, not only in the Middle East but across the globe. Are there specific technology challenges related to these and more complex Shariah-compliant instruments? A niche product until recently, issuance of the global sukuk, an asset-backed, Shariah-compliant trust certificate or Islamic bond, will top $100 billion by the end of the decade, up from some $70 billion at the end of 2006. According to estimates from Standard & Poor’s, the growth of the sukuk is part of the overall explosion of the Islamic market, as Shariah-compliant assets worldwide total close to $500 billion reflecting growth of more than 10% a year over the past decade. S&P predicts that Islamic finance will continue to expand, both geographically and in terms of products offered, and newly created Shariah-compliant instruments are set to rival product offerings at conventional banks. In response to the growing market, last year Dow Jones and Citi launched the Dow Jones Citigroup Sukuk Index, the first Islamic bond index. To be included, a sukuk must comply with Shariah law and the Accounting and Auditing Organisation for Islamic Financial Institutions, the main standard setting organisation based in Bahrain. Western banks, including HSBC, Deutsche Bank, Barclays Capital and Citi, are getting in on the action. BNP Paribas has recently completed the second largest bond issue in Saudi Arabia for the Saad Trading Contracting and Financial Services Company. BNP Paribas acted as sole managing underwriter for the $650 million, 5-year bond issue, in sukuk format, which was also the first sukuk issued in Saudi Arabia for a private business. And more are following their wake: “In Europe and America, there is a large myth about these millions of unbanked people who keep their money under the mattress – if only there was an Islamic bank in the neighbourhood. So there have been one or two Islamic institutions formed and certainly regulation has changed in a few different Western countries,” says Nicholas Brewer, Temenos strategy manager. This includes the UK. London has recently joined the list of major financial hubs to handle Islamic transactions, becoming the sole non-Muslim competitor of natural Islamic markets in Dubai, Kuala Lumpur and Bahrain, according to S&P. The UK government demonstrated its commitment in the 2007 budget by introducing new measures for sukuk, enabling them to be issued, held and traded in the same way as corporate bonds. Mohammed Amin, tax partner at PricewaterhouseCoopers, says that previously it was impractical for UK companies to issue sukuks because they wouldn’t get tax relief on the payments that would be made to the investors. “The tax law is being changed so that in future, from the date of the Finance Bill becoming law, UK companies will be able to issue sukuks with obvious, very concisely controlled definitions and they will be able to get tax relief on the payments they make to investors. Similarly it is quite clear how UK investors will be taxed if they buy and sell sukuks.” The UK government itself is carrying out a study as to whether it should issue a sukuk, which will have “a big effect in terms of making everyone sit up and take notice,” believes Amin. According to Celent’s 2007 report Socially Responsible Investments: Shariah-governed investing, sukuk is the first foray into security instruments to broadly take hold in the marketplace. Because of the Islamic ban on riba, or interest, sukuks follow a structure similar to revenue bonds –they are structured in tandem with a physical asset. The underlying revenue streams from toll roads, airports, seaports, utilities, new buildings, power plants or oil facilities are used to pay a profit on the sukuk. Currently most sukuks are bought and held – there is not an active secondary market. Although it sounds relatively simple, the actual issuance of the bond is more difficult than conventional bonds due to the fact that Shariah is an interpretive law that has variance among countries and people – and this has an impact on the technology. Jamil bin Hassan, principal consultant on Islamic banking practice, i-flex solutions, says: “Buying and trading sukuk is not a problem. The problem is the issue and creation of sukuks. No one had come up with good system to originate sukuk because the market is still small and there has not been the volume to justify the spend on technology.” Vittorio D’Orazio, principle research analyst at Gartner, explains that there is a problem with standardisation: “It is a problem for the IT provider to configure [technology] around the current regulation in each country and around a specific request of the Islamic board, which is a separate entity from the bank board and supervises the delivery of Islamic banking project. The IT providers develop some products, they show the Islamic board how the product works and the board must approve it or they must make changes. Very often, the board is not unanimous because mostly they are just three people and discuss endlessly around specific theological points.” Shariah-compliant products must be approved by a Shariah scholar certified for issuing a fatwa (Islamic decree). There are fewer than 20 scholars with such skills worldwide, increasing approval times and leading ultimately to a “manpower crunch”, he says. In Gartner’s Market Trends: Islamic banking worldwide 2006, D’Orazio examines 15 IT service providers and 27 core banking systems providers of Islamic banking applications. The research found that the back office is the most affected area, with 80% of it being actively involved in changes by the Islamic banking implementation. This is largely a result of the need to replace not only the software but also the way the products are managed across the back office systems. Middle office is also heavily affected (63%), especially regarding the reporting issues that must be related to the Shariah calendar and practices. “Technology providers see that the banking world has long been convinced that it should go for a packaged approach where it can – buy a commodity when it can and bespoke if you need to,” says Brewer. “Where there is not this commonality or commoditisation of the instruments and processes, then it becomes harder to adopt a truly packaged approach because you can’t say that everyone does this 80% this way and I will make my package fit and add the extra 20% if, in fact, the 80% commonality isn’t there. It is quite hard to adopt a packaged approach.” He says that Temenos has packaged as much as it can and the rest it has constructed a modern technology framework around it which means that “you can carry out more customisation both during implementation and afterwards then perhaps you would normally want to do with a package for other types of banking.” Peter Sherriff, technical architect at Charles River Development, Asia Pacific, agrees that the different interpretations create a problem, but that the solution lies in being flexible. “From the systems perspective, we already equip the system with a lot of the guidelines around Shariah compliance, and around other ethical type investment strategies, which gives people a head start in terms of being able to very quickly deliver Shariah compliant products. Those products can differ between the different Islamic scholars, so you need to be able to slightly modify and tweak those rather than go back to the first principles or do it completely from scratch. So the key is to have a framework which is flexible, automatable and which can handle the complexity of the requirements.” Gartner’s D’Orazio found difficulty in drawing a definitive map of the technology providers providing Islamic banking products worldwide for a number of reasons: they are embedded into a generic core banking system deal/replacement; they are developed internally and not publicised with a public offer; and they happened mainly in emerging countries where information is not that easily tracked. Also they do not use system integrators. “If you are Temenos, Misys or any other and you want to implement the Islamic banking solution for your customer, you typically do not go to Accenture to do the implementation because the main work to do is on the parameters – so they hire some local provider and experts.” Samir Safa, business development manager, Misys, argues that these limitations force Islamic banks to be more innovative. Misys has recently signed an agreement with Bahrain’s Albaraka Banking Group to implement Misys Equation (Islamic) so the bank could improve the retail and Islamic services it provides its customers, plus enable it to expand into new territories. Such as moving into derivatives, perhaps? In this area there is a debate that has yet to be resolved. Celent believes that a nascent Shariah-compliant derivatives market is developing. In the hedge fund industry short selling is a common strategy that cannot be used under Shariah because you cannot sell something you don’t own. Derivatives are difficult to structure because Shariah committees generally state that money should be lent only on physical assets and bar speculation – a central characteristic of derivatives. Yet last September the International Swaps and Derivatives Association and the International Islamic Financial Market signed a memorandum of understanding as a basis for developing a master agreement for documenting privately negotiated Shariah-compliant derivatives transactions. But that doesn’t mean that it is clear sailing ahead. PwC’s Amin says: “There is a lot of debate about derivatives. I have seen lawyers who are experts in terms of standards stand up in conferences saying there is no such thing as Islamic derivatives, while others are setting up funds to transact derivatives. It is a grey area. The challenge is that to the extent that people have these structures, they regard these structures as proprietary and therefore they don’t publish or write about them, so it is very hard for other people to unpick them and evaluate whether they really are Shariah-compliant or not.” The notion of Islamic derivative may currently be a grey area, but the same was said of Islamic bonds until relatively recently, and in the form of the sukuk, they have plainly arrived. It seems only reasonable to assume that some form of Shariah-compliant derivative product will soon emerge, and bring with it a whole new set of challenges. Shariah law overview: In its 2007 report Socially Responsible Investments: Shariah-governed investing, Celent outlines the high level guide to the principles of Shariah:
□ no interest (riba) may be charged or paid; one may not benefit from another’s uncertainty (gharar) – in investment terms this includes the trading of risk or sale of something not yet obtained;
□ where income is involuntarily received, the investment or portfolio must be purified – the income may be given as a donation (zakat) to charity;
□ certain investments are not religiously permissible (halal) – including investments in alcohol, hotels/restaurants that serve alcohol, tobacco, pork, gambling, weapons, and entertainment such as films; and
□ no investments in companies that do not meet specific financial parameters in relation to debt to equity ratios (no more that 33% of enterprise value), interest income (no more than 5% of income attributable to interest). - (Banking Tech, July 2007)
Alfalah Consulting - Kuala Lumpur:
Consultant/Speaker/Motivator : 
Islamic Investment Malaysia:

Profile 024 - Kuveyt Turk (Kuwait Turk)

Kuveyt Turk is a Participation Bank established in 1989 to operate in accordance with terms set forth by the Council of Ministers' Decree dated Dec. 16, 1983 and no. 831/7506. Until they become subject to the Banking Law in 1999, activities of Special Finance Houses were conducted by Council of Ministers Decrees on the one hand and by Directives of the Central Bank and the Undersecretariat of Treasury on the other hand. Starting from December 1999, Kuveyt Türk has become subject to the Banking Law no. 4389 just as other Special Finance Houses. Shareholders of Kuveyt Türk are Kuwait Finance House (62%), Kuwait Social Security Institution (9%), Islamic Development Bank (9%), General Directorate of Associations Turkey (18%), and other shareholders (2%). The Kuwait Finance House, which is the largest shareholder of Kuveyt Türk with its 62 % share, is a giant finance institution of Kuwait with its outstanding asset volume and contemporary and pioneering banking services. Kuveyt Türk’s objective is to bring diligence to the interest-free banking system, research fields of investment and introduce contemporary, reliable, rapid and high quality services to its customers with very qualified staff members. It is proud to take fast service of high quality through its branch offices, alternative delivery channels and correspondent banks within and outside the country employing all state-of-the art technological facilities to the depositors and investors. Kuveyt Türk has reached to the level of leading banks in Turkey in respect of capital adequacy. Kuveyt Türk, which converts the savings of its customers who are profit and loss sharers into sound and profitable investments on the most profitable sectors and creates new employment facilities by providing resources to the real sector and thus, making significant contributions to the economy of the country, has been awarded gold, silver and bronze medals on various dates by public institutions and trade associations such as the Undersecretariat of Treasury and Foreign Trade, Istanbul Chamber of Commerce and Istanbul Ready Made Garment Exporters' Association for the success it has shown in the field of exports. Kuveyt Türk, which started its operations with two branches, its head office and the Sirkeci Branch, now has 78 branches. Kuveyt Türk, in parallel to its vision of becoming an international finance house, is preparing to open branch and representative offices abroad as well. The 2000s, which is an age of Information Technology, compel the finance houses to operate in a more technology intensive manner. Kuveyt Türk has established the information and technology infrastructure required at the highest level. It offers all banking services through Electronic Banking and Alternative Delivery channels in the best way. Together with VISA credit card and the Palmiye Installment Shopping Card services, POS and member merchant services, Internet banking, call center, interactive voice response system and SMS banking services are presented continuously. The permanent change project aiming at carrying the modern management techniques and management and service concept of the 2000s to the body of the company with the young and dynamic service staff, almost all of whom are university graduates and experts in their fields and expert consulting staff, its sound capital structure and economic power, make Kuveyt Türk the leader of the Participation Banks in Turkey

Tuesday, 24 July 2007

Dar Al Arkan of Saudi Arabia Lists a $1 billion dollar Sukuk On Dubai International Financial Exchange (DIFX)

Dar Al Arkan Real Estate Development Company (Dar Al Arkan), a prominent Saudi Arabian property developer, today listed a $1 billion dollar Sukuk (Islamic bond) on the Dubai International Financial Exchange (DIFX).It is the second Sukuk to be issued by the company, following a $600 million Sukuk which also listed on the DIFX in May 2007. The value of the DIFX’s Sukuk listings is now $13.78 billion, or 48% by value of all Sukuk listed on exchanges worldwide.Abdullatif Al-Shalash, Managing Director of Dar Al Arkan, said: “Sukuk are a highly attractive asset class that appeal to investors worldwide who seek exposure to Saudi Arabian real estate through Dar Al Arkan’s activities. As the region’s international exchange with world class regulatory standards, the DIFX gives our Sukuk high visibility globally and in the region.” Like its first Sukuk, Dar Al Arkan’s second offering was sold to investors in Europe, southeast Asia and the Middle East. Per E. Larsson, Chief Executive of the DIFX, said: “More than 60 Sukuk have been issued globally this year, up from 50 in the same period of 2006, and we expect further listings as we expand our involvement with the sector. Dar Al Arkan is our first Saudi Arabian issuer and the first overseas company to list two Sukuk on the DIFX.”Dar Al Arkan’s latest Sukuk is based on an Ijara structure maturing in 2012. The issuer is Dar Al Arkan International Sukuk Company, which was specially created by Dar Al Arkan for the purpose. Its financial advisers were ABC Islamic Bank, Arab National Bank, Deutsche Bank, Dubai Islamic Bank, Kuwait Finance House (Malaysia) Berhad and Unicorn Investment Bank. Hamed Ali, Executive Officer of the DIFX, said: “Issuers are increasingly seeing the value of listing their Sukuk in order to underpin investor confidence in their securities. As the international exchange serving its region, the DIFX offers the ideal listing platform for regional and international issuers.”

Takaful Malaysia Gets Boost From "AA" Syariah Quality Rating by IIRA

KUALA LUMPUR, July 24 (Bernama) -- Syarikat Takaful Malaysia Bhd, which has been conferred an "AA" Syariah quality rating by Bahrain-based Islamic International Rating Agency (IIRA), believes the rating will boost customer confidence."We believe that being the first takaful operator in the world to receive this rating, would not only further enhance Takaful Malaysia's credentials as a leading takaful operator, but also ensure that Takaful Malaysia fully complies with local and global Syariah standards," its group managing director Hassan Kamil said in a statement here today."Consequently, we hope that the rating will boost confidence and give more assurance to our existing customers as well as prospective clients, by being fully Syariah-compliant in all aspects of our business operational and transactions," he said.IIRA chief executive officer Jamal Zaidi said the rating reflected its view that Takaful Malaysia conformed to very high standards of Syariah requirements and quality analysis in its operations and business.

Sri Lanka Islamic investment group to go rural

July 22, 2007 (LBO) - ABC Investments, a new Sri Lankan Islamic investment group, plans to expand their business with branches outside the capital Colombo, especially in areas with large concentrations of Muslim people. The firm which provides Barakah Islamic financial services, looks to cross the 300 million deposit mark before December while operating only in Colombo.
They plan to move into Kattankudy in the island's east and Kandy in the central hills by January. At the moment they manage 1000 accounts in Colombo and hope to reach 10,000 within a year as they move into the other regions. “We will manage both Matale and Katugastota areas from Kandy and by March open a unit in Puttalam (in the north-west) as well,” says Managing Director of the ABC Investments Mohammed Razeek. These are areas with significant concentrations of Muslim people who make up the island's third largest ethnic group after Sinhalese and Tamils. The Islamic finance firm also said that they want to become a full fledged Islamic bank as soon as regulators allow it. “The Central Bank is studying the Islamic banking concepts at the moment and once the provisions are altered in the banking act we are ready to become a fully fledged bank,” Razeek said. Sri Lanka has allowed Islamic banking to be carried out in licensed commercial banks as a regulated and legal activity. The firm says that senior Muslim ministers in the government are backing moves to allow Islamic banks in the country. The firm also says that they have a strong funding backing from different countries and has already signed a Memorandum of Understanding with the Central Bank of Sudan to get experts to work with the firm. These professionals will help the firm in their takaful insurance sector. “We will be working closely with Sudan and we will also look at Bahrain and Malaysia for the funding in takaful insurance,” Razeek said. The firm hopes to get funds from Al Subair Charity foundation and is looking to invest 100 million rupees as they plan to start off with general insurance. ABC Investments also plans to provide apartments to middle and lower class sectors as part of their real estate programme. The investment group has already purchased 150 perches in Piliyandala, near Colombo, where they plan to start their project for middle class housing. “We will not go into providing luxury apartments as a lot of companies already have done that.” ABC Investments is one of the recent investment groups looking to promote the Islamic financing concept in Sri Lanka. First Global Group, another investment company, recently concluded a seminar ‘Know It All’ to educate the business community on Islamic banking. The Islamic Takaful insurance concept has a growing customer base in Sri Lanka with Amana Takaful.

Sunday, 22 July 2007

Growing significance of Islamic finance in the international financial system: one of six trends in the financial sector in Malaysia

Bank Negara Malaysia will soon introduce a more facilitative process for product innovations with revisions to the new product framework approval, aimed at improving time to market. The new framework will provide for more simplified regulatory processes and allow greater flexibility for well-managed banks and insurers to introduce new products more quickly into the market. Bank Negara deputy governor Datuk Zamani Abdul Ghani said qualifying banks and insurers were expected to exercise this flexibility responsibly and, in particular, with due regard to interests of consumers. He was delivering the text of Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz's keynote address yesterday at the 11th Malaysian Banking Summit themed "The Malaysian Banking Industry Reinvention and Transformation" In her speech, Zeti said the realignment of the regulatory and supervisory structures with the central bank in November last year marked a significant turning point in consolidating these changes. "As a result of the realignment, the Bank is better positioned to conduct effective surveillance of the financial system; to address regulatory overlaps and duplication within the system; to deal more strategically with the weight of multiple objectives and range of issues confronting the financial system, and more importantly, to preserve regulatory neutrality in the management of similar risks between different financial service providers," she said. Zeti said in looking at the future terrain of the financial sector in Malaysia, six trends were particularly important. The six trends are the changing configuration of the global economy and global financial markets, regional economic and financial integration, financial sector development amidst increased liberalisation in the Asian region, increased role of domestic demand in Asian economies, growing significance of Islamic finance in the international financial system, and developments in regulatory structures and approaches. "It can be expected that all these trends will have a significant bearing on the future of the banking industry," she said, adding that two dimensions of regulatory change would be relevant to the context of the new environment. She said the emphasis on creating a strong risk management culture that was fundamental to sound banking operations would become significantly more pronounced. Zeti said the transition to Basel II and the implementation of the risk-based supervisory regime were important elements of the change. "Regulations will continue to focus more on facilitating market-led adjustments that will allow the industry to evolve in response to market developments, while maintaining a sufficient degree of regulatory oversight to maintain financial stability and public confidence. "This includes the adoption of principles-based regulations and an increased focus on harnessing market forces and discipline, as well as internal oversight functions, to reinforce prudential regulation and supervision. The aim is to promote a more efficient and responsive financial system," she said. She said banks would increasingly be exposed to external developments and forces of market discipline, and that there were several particular areas in which banking institutions could take strategic positions to influence such developments.

Saturday, 21 July 2007

London eyes Islamic finance centre: the crown up for grabs

Lately, London has been getting publicity in terms of it becoming a rival Islamic financial centre to the likes of the GCC countries, Southeast Asia and Pakistan. New British prime minister Gordon Brown has said that he would like to see the City going out of its way to be a prominent Islamic finance centre. In the past few years, whether you look at the retail market or the wholesale market, the UK government has been very pro-active, especially in changing tax regulations to facilitate Islamic finance. It changed the sukuk rules this year in fact, to treat it as a bond rather than a leasing product. But is London really going to emerge as a threat to the GCC or South East Asian centres? "On the retail side I don't think we are competing with the GCC or even Southeast Asia," says Nigel Denison, director and head of markets of the newly-inaugurated Bank of London and the Middle East (BLME). "Because here it is so much focused on the client base in the UK and the local Muslim population, [and] is very much local." On sukuk, however, it may be different, with London already competing, although the markets may develop in tandem. "The interesting thing to watch will be the secondary trading in sukuk. Dubai, Bahrain and to a lesser extent Qatar all have their local businesses traded in their respective markets, which of course fragments liquidity and pricing capabilities. [Yet] it is difficult to see London completely taking over." With the big international banks coming onto the scene, they might actually have an advantage by not being Islamic. Denison explains: "because they just treat sukuk as a bond, they will short it, they will repo it, they will swap profits - in terms of hedging they have all the tools available." Capabilities: Many consider London has now even left behind New York as the global financial hub, with its own advantages of a solid infrastructure, a favourable tax regime, and the people and systems in place. There is no doubt the capabilities are there. And there is politics, too. The UK Government is keen to promote contact with the Islamic population. So, how much competition will it be for the Gulf? Participants like Denison recognise that the local players will still be based in the region, "so you can't really say it is going to be taking over in that sense". But possibly the secondary market may end up in London because it will be centralised that way. The trading desks are already in situ. As the world of Islamic finance evolves, it will be interesting to see who will ultimately take the crown. But the identity of that winner is probably still several years away. - (GN, 20 July 07)

Friday, 20 July 2007

Profile 023 - Qatar Islamic Bank

Qatar Islamic Bank (QIB) – an Islamic bank of global stature – was established in 1982 and has been leading the Islamic banking industry for over 25 years by aggressively spreading its presence in Qatar, the Gulf, the Middle East, Asia, Europe and North Africa.
- First Islamic bank of Qatar - One of the world’s 5 largest Islamic banks - 10% share in the local banking market and 57% share in the local Islamic banking market - Operates locally through 18 branches. Number of branches to increase to 22 during 2007 - ATM network comprising 85 ATMs spread all over Qatar - International investment operations in Asia, Middle East, Europe and North Africa (Qatar, Lebanon, Malaysia, UK, Bahrain, and Yemen) - Well-coordinated correspondent banking network handling 312 accounts in 69 countries.

UAE lender prices Islamic asset-backed securities that will revolutionise Islamic debt market

Dubai-based mortgage lender Tamweel said on Thursday it had priced asset-backed securities that comply with Islamic law, a new instrument arrangers say will revolutionise the Islamic debt market. The bonds, like traditional Islamic bonds known as sukuk, are asset-backed. But unlike sukuk, they allow buyers direct access to the underlying asset. These are kept separate from the borrower, arranger Morgan Stanley said. The assets used to back Tamweel's bonds were lease-to-purchase contracts on residential properties -- a method of buying homes that complies with Islamic law. This type of bond can fetch a higher credit rating than the issuer, especially when the bonds are based on strong underlying revenue-generating assets. The arrangement also insulates the issuer from creditors should volatility hit the assets, and the bondholders are not exposed to the issuer's future actions, said a Morgan Stanley official who did not want to be identified. "This transaction has paved the way for many similar transactions going forward, particularly for companies that have strong cash-flow generating assets that can ... be funded against," the official said. Tamweel priced its debut asset-backed securitisation at 35 basis points over the one-month London Interbank Offered Rate, the firm said in a statement. The eight-year bonds were marketed in the Gulf, Asia and Europe, where demand was strongest. They are expected to receive investment-grade ratings of Aa2 by Moody's Investors Service and AA by Fitch Ratings, Tamweel said, which intends to use the money raised to finance expansion. Islamic law, also known as sharia, bans the charging of interest and any investment in businesses involving alcohol, gambling, pork, weapons and pornography. - (Reuters, 19 July 07)

Mega Islamic Banks Needed To Boost Islamic Banking

The conversion of one of the local mega traditional banks into an Islamic bank will boost the country's Islamic banking and finance industry, says a foreign Islamic banking official. Kuwait Finance House (Malaysia) Bhd managing director K. Salman Younis said there is a need to create a mega Islamic bank to cater to local and regional growing demand."The size is important for success," he told reporters at the sidelines of the 11th Malaysian Banking Summit 2007 here Friday.Younis said the Islamic finance industry was currently fragmented and allowing more players into the market would only make the industry more fragmented.There are a lot of small players but what the industry needs is the size, he said.An increase in the minimum level of shareholders funds in the local banks would also encourage small banks to look at merger possibilities. - (Bernama, 20 Jul 07)

Thursday, 19 July 2007

Malaysia Aims For First Syariah-compliant Exchange Traded Fund (ETF) To Be Listed

Malaysia is aiming for the first Syariah-compliant exchange traded fund (ETF) to be listed as the next step of the national agenda, Deputy Finance Minister Datuk Dr Awang Adek Hussin said Thursday."We hope more and more will be coming onstream and we want to take the lead in terms of having the first Syariah-compliant ETF listed in our market," he told reporters after officiating the listing of AmInvestment Bank's FBM30etf on the Main Board of Bursa Malaysia here.FBM30etf, the country's first equity ETF, allows investors to gain exposure to the top 30 largest listed companies by market capitalisation as it tracks the performance of the FTSE Bursa Malaysia Large 30 Index."We don't want to set a date or timeframe but it is sufficient for me to say that this will be the next step in the listing of Syariah-compliant ETF for us," Awang Adek said.He said the listed Syariah-compliant ETF would meet the demand of investors and promote the country as an international Islamic financial centre. An ETF is essentially a unit trust fund, except that it is traded on a stock exchange. It represents a basket of securities and is designed to track the performance of an index. The performance of an ETF usually mirrors that of the index it tracks.The government would organise a conference in late August or early September to discuss what needed to be done and "this would be the next immediate step", Awang Adek said."We are going to have a conference to bring the relevant Syariah scholars together to discuss about this and also familiarise everyone, including the scholars, in terms of the nature of the instruments," he said.Awang Adek said the government would get a wide spectrum of views on the matter as it was a difficult task to get everybody to agree on certain things."But I suppose we have to move along. There are, of course, some differences in terms of Islamic instruments introduced in individual countries," he said.Meanwhile, the FBM30etf performed commendably on its maiden listing, closing at a premium of four sen to its initial price of RM8.67 at RM8.71 with 20,150 lots changing hands.Throughout the session today, it moved between RM8.68 and RM8.73 after opening at RM8.65.Based on a Morgan Stanley report in February this year, the ETF market has total assets under management exceeding 435 billion euros (one euro=RM4.74) with over 750 ETFs globally. - (Bernama, 19 July 07)

Bank Danamon Launches Dirham Card -The First Syariah Card in Indonesia

The First Syariah Card in Indonesia; Offers the Benefits of Conventional Credit Cards, Based on Syariah Principles

Jakarta, 19 July 2007 (ANTARA) - PT Bank Danamon Indonesia Tbk. (Bank Danamon) and MasterCard today launched the Dirham Card, the first ever syariah card in Indonesia which uniquely offers the full functionality and benefits of a conventional credit card, while the relationship among transacting parties is based on syariah regulations."As a major milestone of our business this year, the introduction of the Dirham Card is intended to complete our range of card offerings to our customers," stated Sebastian Paredes, President Director of Bank Danamon. "This business initiative also demonstrates our strength and continued commitment in the syariah banking segment as well as in the cards business," he added.During the past few years, Bank Danamon has leaped from 12th to 6th in its rank among the largest card issuers in Indonesia; hence it is now one of the fastest growing card businesses in the country."We are proud to introduce the Dirham Card as our special offering in relation to Bank Danamon's 51st anniversary on July 16th," stated Hendarin Sukarmadji, Syariah Director of Bank Danamon. "We believe that this initiative supports the intention of Bank Indonesia for a more active role of syariah banking in Indonesia's economic development, and contributes to Bank Danamon's strategic priority towards becoming a leading financial institution in Indonesia," he added.The Dirham Card is a product of the collaboration between Bank Danamon and MasterCard with all networks or merchants throughout the world to provide payment services to card holders."The uniqueness of the Dirham Card lies in the 'akad', the term for transaction contract or scheme which it uses; namely Ijarah, Kafalah and Qardh," Hendarin. The Dirham Card is introduced based on Fatwa No. 54/DSN-MUI/X/2006 of the Indonesian Ulemas Council's National Syariah Board or Dewan Syariah Nasional Majelis Ulama Indonesia (DSN-MUI) and Bank Indonesia Letter No. 9/183/DPbS/2007 on the approval for the Danamon Syariah Card.The three contracts, or 'akad', can be distinguished as follows. "On the Ijarah scheme, the card issuer acts as the provider of payment and service system for the card holder. For the provision of this service, the card holder is charged a membership fee," explained Hendarin. "Meanwhile, in the Kafalah transaction scheme, Bank Danamon Syariah as card issuer, acts as the guarantor (kafil) for the card holders against the merchants, of all obligations to pay (dayn) which arise from the transactions between card holder and merchant, and/or cash withdrawal from banks other than the ATM of the bank issuing the card. Based on Kafalah, the card issuer can accept a fee (ujrah kafalah)," he continued."Under the Qardh scheme, the card issuer acts as the lender (muqridh) to the card holder (muqtaridh) through the cash withdrawal from the bank or ATM of the card issuing bank. The card holder is therefore obliged to return the same amount of funds he withdrew at the time," stated Hendarin.In summary, the benefits offered by the Dirham Card can be several, namely:- Does not implement interest mechanisms. Instead uses a 'rent' system based on the 'Ijarah' principles;- Competitive and a 'fair' pricing as it employs a fee calculation which appreciates partial payment;- Manages a charity fund, or Qardul Hasan, generated from the business; for example from late fees, which will be used to fund charity activities;- The basic benefits including to pay for utilities: electricity, telephone, water, cable TV bills, get merchants discounts and purchase cell phone airtime value reload vouchers;- Enable card uses for spiritual purposes, such as umrah pilgrimage, or spiritual tours;- Worldwide acceptance at all MasterCard networks throughout the world."Bank Danamon's integrated information technology enables support for the Dirham Card on its conventional and Syariah branch as well as its ATM networks, which will allow customers to conduct transactions in all provinces throughout Indonesia," continued Hendarin. As of March 31, 2007 Bank Danamon operates close to 1,400 branches including its Danamon Simpan Pinjam (DSP), Syariah units and Adira. In addition, it provides access to over 14,000 ATMs, including those in association with ATM Bersama and ALTO networks nationwide, and ATM DBS Bank and Cirrus all over the world.Furthermore, Bank Danamon Syariah customers can enjoy the ease of shopping in stores which bear the MasterCard Electronic logo throughout the world, as well as phone banking services through the Danamon Access Center (021-3435 8888) and HP Banking Danamon.Vadyo Munaan, Vice President and Senior Country Manager, Indonesia, MasterCard Worldwide, stated, "MasterCard is committed to always provide payment product innovation specifically designed to supplement the lifestyle and needs of MasterCard card holders. We understand the needs of cardholders in Indonesia and the launch of the Syariah-compliant Dirham card provides cardholders with an alternative payment solution. MasterCard is very proud to have this opportunity to work with Danamon in launching the Dirham Card."

Wednesday, 18 July 2007

Malaysian banks as gateway to Islamic banking for Japanese banks

TOKYO -- Malaysian banks can be the gateway for banks in Japan to access the Islamic banking and financial market in Asia as well as the world due its strong foundation in the industry, International Trade and Industry Minister Datuk Seri Rafidah Aziz said Wednesday. The Islamic banking system's robust growth was evident with high profitability in 2006 and it has also been one of the services sectors aggressively promoted in Malaysia, she said."Indeed, Islamic banking per se is the fastest growing segment in Malaysian banking with Syariah-compliant asset rising to US$34 billion or 13 percent in terms of market share for less than three percent a decade ago," she told about 700 participants of the "Investment Opportunities in Malaysia" seminar here. The Islamic debt market has also seen tremendous growth, Rafidah said, adding that Islamic corporate bonds now amounted to US$36 billion or 48 percent of the total corporate bond in issue.The minister is in Tokyo, the key industrial city and capital of Japan, as part of her trade and investment mission from July 15 to 24. This is a second stop after Seoul, South Korea. She will also be going to Fukuoka and Hong Kong. Members of the mission include Malaysian Industrial Development Authority director-general Datuk R. Karunakaran, Malaysia External Trade Development Corporation chief executive officer Datuk Noharuddin Nordin, other government officials and representatives from the private sector.Present at today's seminar were Japan's Economy, Trade and Industry Minister Akira Amani and The Bank of Tokyo-Mitsubishi UFJ Ltd's chief executive officer for Asia and Oceania, Tatsuo Tanaka.In his speech, Amani also acknowledged Malaysia's capability in the Islamic banking and financial market."Anticipating the increased interest in Islamic finance, Malaysia has put into place a comprehensive Islamic finance system that includes best practices in legal and regulatory infrastructure, a diversity of market players and a wide range of products and services," Rafidah said.This advanced stage of development has prepared the enabling environment for Malaysia to further spur the growth of Islamic finance and evolve into an Islamic financial hub, offering itself as a gateway to promote investment and fund flow to the East Asian region, in particular between West Asia and East Asian countries like Japan, she said.In addition, Malaysia is also offering itself as a platform for the issuance of Islamic bonds, especially by multinationals and multilateral institutions, given the growing demand by Islamic and conventional investors, she added. - (Bernama, 18 July 07)

Islam and "Best Practices" Micro Finance

How does one go about reducing poverty levels and providing micro finance (MF) in Muslim societies? How does one make a choice between the Islamic model of MF and the MF best practices that reflect wisdom and lessons learnt from decades of "real-life" MF experiments. While the former is normative and therefore, largely an untested proposition, the latter are well-experimented and well-documented and made widely available among the global MF community - primarily by the Consultative Group to Assist the Poor (CGAP), a multi-donor consortium dedicated to advancing microfinance. CGAP envisions a world in which poor people everywhere enjoy permanent access to a range of financial services that are delivered by different financial service providers through a variety of convenient delivery channels. It is a world where poor and low-income people in developing countries are not viewed as marginal but, rather, as central and legitimate clients of their countries’ financial systems. In other words, this vision is about inclusive financial systems, which are the only way to reach large numbers of poor and low-income people. As a way forward to realize this vision, CGAP has come up with a set of key principles of MF that together constitute the essence of "best-practices" MF. These principles broaden the definition of MF from micro-credit to provision of an array of financial services, such as, savings, insurance and remittance as a panacea for the poor and the under-privileged to move out of poverty into a state of increasingly better standard of living. The principles advocate free pricing of the services. They emphasize that access to MF and not cost of MF should be under focus in designing and implementing a poverty alleviation strategy. The strategy should aim at sustainability through a shift from a charity-based donor-dependent approach to a market-based for-profits approach emphasizing systemic efficiency and transparency and restricting use of donor funds to temporary support in the initial stage of an MFI and capacity building. Recent writings advocate use of charity for providing social safety nets for the extremely poor who are unbankable and therefore, unserved by the for-profit MFIs. The principles also underscore inclusiveness and integration of MF with the formal financial system. How should one deal with poverty under Islam? All principles or laws in Islam owe their origin to its holy book – the Quran and the sayings and deeds of its Prophet (peace be upon him) encapsulated in books of Hadith. Consider this saying of the Prophet (peace be upon him) that forcefully drives home the central message of Islam regarding poverty, "Poverty is almost like disbelief in God." On another occasion the Prophet (peace be upon him) is reported to have said "There is no asceticism in Islam". Islam views poverty to be a curse to be eradicated through productive efforts unlike some world religions and philosophies (such as, Sufism) that celebrate asceticism. There is indeed a clear convergence between the objectives of Islam and the "best practices" MF. How does one deal with the poor? How does one go about eradicating poverty? Lessons from real-life experiences reflected in the "best practices" MF indicate a dual approach – use of charity as well as "for-profit" micro finance. It however, asserts that donor funds should complement private capital, not compete with it. The charity-based approach should be restricted to either providing temporary start-up support designed to get an institution to the point where it can tap private funding sources or devoted to capacity building to take care of the shortage of strong institutions and managers. A charity-based approach is also needed for providing social safety net to the extremely poor and the destitute and therefore, unbankable. How does the above compare with the Islamic approach to dealing with the poor and alleviating poverty? Zakah and sadaqah as instruments of charity occupy a central position in the Islamic scheme of poverty alleviation. Zakah is the third among five pillars of Islam and payment of zakah is an obligation on the wealth of every Muslim based on clear-cut criteria. Rules of Shariah are fairly clear and elaborate in defining the nature of who are liable to pay zakah and who can benefit from zakah. The first and foremost category of potential beneficiaries is the poor and the destitute. A greater degree of flexibility exists with respect to beneficiaries of sadaqah. The primary issue with zakah and sadaqah-dependent institutions is the issue of sustainability as they are essentially rooted in voluntarism. Funds mobilized through charity could fluctuate from time to time and may not lend themselves to careful planning and implementation. The issue of sustainability is addressed in the institution of awqaf through creation of permanent and income-generating physical assets. Awqaf has historically been the major vehicle for creating community assets. On the flip side, the restrictions on development and use of assets under waqf for pre-specified purposes introduce rigidity into the system. While Islam strongly encourages charity from the giver’s point of view, it seeks to minimize dependence on charity from the beneficiary’s point of view and restricts the benefits to flow to the poorest of poor and the destitute, who are not in a position to generate any income and wealth. A famous hadith not only underscores the above, but also demonstrates how to design and implement a strategy of poverty alleviation. The hadith is broken down into numbered statements so as to highlight the key principles of such strategy that follow from them.A man of the Ansar community came to the Prophet (peace be upon him) and begged from him. (#1) He (the Prophet) asked: Have you nothing in your house? He replied: Yes, a piece of cloth, a part of which we wear and a part of which we spread (on the ground), and a wooden bowl from which we drink water. (#2) He said: Bring them to me. He then brought these articles to him and he (the Prophet) took them in his hands and asked: Who will buy these? A man said: I shall buy them for one dirham. He said twice or thrice: Who will offer more than one dirham? A man said: I shall buy them for two dirhams. (#3)He gave these to him and took the two dirhams and, giving them to the man of the Ansar, he said: Buy food with one of them and hand it to your family, and buy an axe and bring it to me. (#4)He then brought it to him. The Prophet (peace be upon him) fixed a handle on it with his own hands (#5) and said: Go, gather firewood and sell it, and do not let me see you for a fortnight. (#6)The man went away and gathered firewood and sold it. When he had earned ten dirhams, he came to him and bought a garment with some of them and food with the others. (#7)The Prophet (peace be upon him) then said: This is better for you than that begging should come as a spot on your face on the Day of Judgment. Begging is right only for three people: one who is in grinding poverty, one who is seriously in debt, or one who is responsible for compensation and finds it difficult to pay. (Sunan Abu Dawood, Kitab al-Zakah, Book 9, Number 1637)The components of this hadith can be seen to emphasize the following fundamental conditions of a successful microfinance program:#1. Access of the poorest of the poor to the program: The Prophet (peace be upon him) was the spiritual as well as the political leader of the Muslims in and he was accessible to the poor and the needy at all times for economic and financial assistance;#2. Careful assessment of the financial health of the poor; enquiry blended with empathy; insistence on contribution and beneficiary stake: Many failed MF programs owe their failure to inadequate evaluation of the client's financial condition. Provision of micro finance does not stand to reason for a person in need of social safety nets resulting in the funds being consumed away instead of being invested. The poor come in disparate categories with varying needs of consumption and productive investment and risk of delinquency and default. Microfinance programs involving indiscriminate funding of the poor, such as, most government-managed ones are destined to fail. Insistence on beneficiary stake is of course, a device to reduce moral hazard and enhance efficiency.#3. Transformation of unproductive assets of the beneficiary into income-generating ones through rigorous valuation (on the basis of price discovery through auction method); Involvement of the larger community in the process:Often the poor own high-market-value assets, such as, land in a prime city location without being able to derive income or benefit from the asset. While ownership of land does provide them with a bulwark against unforeseen adversities, this is an uneconomical and wasteful method of insurance. What is desirable here is a way to transform the unproductive asset into a productive one that could generate income. The original asset is not lost but transformed into an income-generating one. The price at which the original asset is disposed of must be fair and should not take the form of a distress sale resulting in loss of value to the seller. Contemporary finance theorists find the auction system to be the most efficient process of discovery of the intrinsic worth or the fair price.The involvement of larger community in the poverty alleviation program is also highly desirable for success of the program. For many contemporary successful MFIs, the right strategy is to involve grass-root NGOs in the process. #4. Meeting of basic needs on a priority basis and investment of the surplus in a productive asset;Once again this highlights the need to take into account the consumption needs of the clients before expecting them to create wealth. The realization about the need for a social safety net and to link the same to micro finance at a later stage has come only recently in the MF industry.#5. Direct involvement of the program in capacity building in the run-up to income generation and technical assistance to the beneficiary; Commitment of top management of the program;This part of the hadith demonstrates a unique form of commitment and involvement on the part of the Prophet (peace be upon him) in the program of poverty alleviation. The involvement could not be more direct and the commitment more pure. #6. Technical assistance in the form of imparting requisite training to the beneficiary for carrying out the business plan/ income-generating project; monitoring through a time-bound schedule and impact assessment through a feed-back mechanism; andThe need to establish an effective linkage between financial assistance and technical assistance is emphasized among MF professionals as never before. Also the importance of impact assessment can be hardly overemphasized.#7. Transparent accounting of operational results and liberty to use part of income to meet higher needs.In short, the Islamic approach to poverty alleviation is more inclusive than the conventional one. It provides for the basic conditions of sustainable and successful microfinance, blending wealth creation with empathy for the poorest of the poor. There are certain aspects of the Islamic approach that need added emphasis. One, transparency through meticulous accounting and proper documentation is a fundamental requirement of financial transactions in the Islamic framework. As the holy Quran asserts:“O ye who believe! When you deal with each other, in transactions involving future obligations in a fixed period of time, reduce them to writing” and “Let a scribe write down faithfully as between the parties” (2:282)The import and significance of this verse is often not fully understood. Indeed, lack of proper documentation and accounting by beneficiaries is a major challenge confronting microfinance.Two, as discussed earlier, a common feature of successful microfinance experiments is group-based financing and mutual guarantee within the group. This is a highly desirable feature of Islamic societies. Mutual cooperation and solidarity is a norm central to Islamic ethics. The second verse of Surah Al Maida in the holy Quran says: "Assist one another in the doing of good and righteousness. Assist not one another in sin and transgression, but keep your duty to Allah" (5:2) The following hadith by the Prophet (peace be upon him) reinforces this principle of cooperation and mutual assistance. “Believers are to other believers like parts of a structure that tighten and reinforce each other." (Al-Bukhari and Muslim) Thus, while the Islamic approach to MF and the "best practices" MF converge in many respects the former provides some additional areas of emphasis. A word of caution is in order. Care must be taken to avoid labeling the above as "the Islamic approach" to MF as it is based on a rather tiny sample of ahadith. The purpose of the present discussion is simply to demonstrate that there may not be any inherent conflict between the Islamic model and the "best practices" MF. It must be noted however, that our discussion so far has excluded the issue of product design. Conventional MF products are interest-based. Islamic MF products must be free from interest and several other elements forbidden under Islamic law. Contemporary mainstream Islamic finance has expended considerable effort in developing Shariah-compliant products and services for deposit mobilization, financing, remittance etc. using Shariah-nominate contracts that are free from the forbidden elements. These products with minor modifications if required, can be used for microfinance as well. Islamic scholars strongly favor "free pricing" of these products and services as the same is a fundamental norm. It may be noted that best practices MF also argues against price ceilings, eve though the justification provided may be different. To sum up. the Islamic approach to poverty alleviation has several layers. All kinds of assistance are preceded by enquiry and assessment of financial health of the client. A charity based approach inherent in the institutions of zakat and sadaqa exists to take care of consumption needs of the extremely poor and the destitute and creates a social safety net. The other institution of charity – the awqaf is ideal for creation and preservation of assets that can build capacity and provide technical assistance. The social safety net, capacity building and technical assistance is then linked to financial assistance. The financial assistance is aimed at wealth-creation using Shariah-compliant for-profit modes with free pricing. The entire process of course, needs to be completely transparent with proper documentation, accountability and responsibility with a time-bound schedule. Along the way, less or zero-productivity assets would need to be transformed into more productive ones with minimal transaction costs. Provision of financing could involve formation of groups and be made in a graduated manner. Except in the matter of designing products that do not violate Shariah-related prohibitions, there seems to be little room for conflict between Islamic micro finance and conventional best practices micro finance.

(Written by Dr Mohammed Obaidullah, a senior economist with Islamic Banking and Finance Division of Islamic Development Bank Group and is based in Jeddah)
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