Latest from GIFC

Thursday, 31 January 2008

Maybank unit to grow Islamic trade finance

KUALA LUMPUR (31 Jan 08): Maybank Islamic Bhd, the full-fledged Islamic banking unit of Malayan Banking Bhd (Maybank), is targeting its Islamic trade finance business to grow by 10% to 15% in the current financial year ending June 30.
Acting chief executive officer Ibrahim Hassan attributed this to the rapid growth of Islamic finance, coupled with the bank's new foreign Islamic currency products and others in the pipeline like syariah-based treasury and wealth management products.
Maybank Islamic yesterday launched two foreign currency products – Malaysia's first Islamic On-shore Foreign Currency Financing (OFCF-i) and Islamic Foreign Currency Account (FCA-i).
“We have been experiencing good growth in Islamic financing, mainly in the area of auto finance and business banking.
“With the introduction of these new products, the bank is confident of achieving the targeted growth,” he said after the launching of OFCF-i and FCA-i.
According to Ibrahim, Maybank Islamic is currently the market leader in Islamic trade finance with a 50% share as at last December.
For the same period, Islamic trade finance accounted for 30% of Maybank's total trade finance business.
The value of total Islamic banking assets for the period stood at about RM26bil, of which RM19bil was Islamic financing assets.
Ibrahim said the new products were designed to meet the needs of individuals and businesses for international trade financing and foreign currency, for investment, education and employment abroad.
OFCF-i is a short-term trade financing facility to finance import and export in foreign currencies. OFCF-i adopts the principle of Murabahah for imports and Bai-at-Dayn for exports.
The minimum financing for this product is US$30,000 or its ringgit equivalent in foreign currency.
The currencies eligible for OFCF-i include US dollar, euro, yen, Swiss franc, British pound and Singapore dollar.
Meanwhile, FCA-i offers four major currencies – US dollar, euro, pound and Australian dollar.
The account is based on the Mudharabah principle and caters to individual and business customers. FCA-i accounts can be opened for export proceeds, receivables, education and employment needs.
For individual accounts, the minimum deposit is US$1,000 or its equivalent. FCA-i offers flexibility, safety and convenience for receiving and transferring overseas funds.
Individuals can pay for their overseas education or if they are employed overseas, their salaries can be paid into their FCA-i accounts.
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Differentiating Between Sukuk and Debt Bonds

By Lahem al Nasser

In my last article I discussed the necessity of taking into consideration the controversial jurisprudential dispute entailed in Islamic bonds (sukuk) during the rating process conducted by credit rating agencies.
In response to the aforementioned article, I received a comment from the General Manager of Moody’s Investor Service in the Middle East, Mr. Jihad al Nakhla, in which he expressed his rejection of the idea that credit rating agencies should take the jurisprudential dispute into account during the rating process. He cited a number of considerations; including his statement that credit rating is an independent opinion that determines the issuers’ ability to fulfill the terms and pay back the debt in accordance with the their credit worthiness.
Credit rating also highlights the legal risks involved in sukuk and the nature of the contractual relationship between its members. As for the assessment of Islamic bonds, this process is conducted in collaboration with Islamic fatwa committees and the concerned consultants who are together in charge of determining whether the sukuk in question are Shariaa-compliant or not.
Let us assume that we must consider the contentious jurisprudential dispute entailed within the structure of Islamic bonds and ratings; it must be clarified that in order to deem sukuk as Shariaa-compliant it is necessary to resort to an external competent jurisprudential committee to offer its legitimate opinion. This means that our remarks upon the legitimate authority result in involving us so that we become party to the dispute, and thus lose the independence required for any credit rating agency.
Mr. Jihad concluded his comments by saying that many Muslims have sufficient confidence in the scholars of fatwa committees and therefore it was not necessary to take the controversial jurisprudential dispute sukuk into consideration during the credit rating process. Mr. Jihad believes that there is no difference between Islamic bonds and debt bonds since they all are liability related.
These are the major points in Mr. Jihad’s comment. Clearly, his comment was of great benefit to me and included valuable information.
Mr. Jihad’s argument has made it clear to me that the points of difference between us do not lie in the details but rather in the basic view of Islamic bonds. Mr. Jihad believes that sukuk are just like debt bonds. His viewpoint supports the idea upon which I elaborated in my previous article regarding the credit rating agencies’ perception of sukuk.
I believe that Islamic bonds or sukuk should be regarded from an independent perspective that considers their particularity since the concept is based upon the fact that sukuk holders own part of an asset, utility or service, and thus the ensuing profit is an outcome of this asset, utility or service. Moreover, the other perception is that the structure of sukuk should conform to Shariaa; this is a fundamental difference between sukuk and debt bonds.
For the jurisprudential controversy to affect credit rating, we must decide whether it is deemed risky or not in terms of its impact upon the liquidity of sukuk and its impact upon contractual commitments resultant of sukuk.
With respect to its impact upon liquidity, undoubtedly sukuk that comply with Shariah are considered a decisive factor for the majority of investors regarding whether they should or should not invest in these bonds. Other criteria follow and this is exactly what I had asserted in my previous article.
As for its impact upon the commitments of sukuk holders, Standard & Poor’s Agency stated in a report that focused on the issue of Islamic bonds (12 January 2006) that it will take the jurisprudential dispute into account when rating sukuk if the aforementioned bonds were subject to legitimate courts since the dispute over them may compel the court to invalidate these sukuk in the end.
I would like to clarify a certain point that was mentioned in my previous article, which is that I did not request that rating agencies offer their opinion regarding whether the Islamic bonds in question are Shariaa-compliant or not. Rather, I simply demanded that the jurisprudential dispute entailed in sukuk be considered in the process of rating and acknowledged in their reports.
For instance, if the opinion upon which sukuk had been based was found to be contradictory to the legitimate criteria set by the Auditing and Accounting Organization for Islamic Financial Institutions or if it flouts resolutions issued by Islamic jurisprudential academies, then the agency should make mention of it. This is not considered a judgment upon sukuk or an amendment to the approved authority; rather it is a practice to ensure transparency and clarity in the credit rating report. This would be easy to implement and does not require a legitimate Shariaa authority but rather a researcher schooled in Shariaa, as this information is available and attainable for whoever has Shariaa knowledge background.
In conclusion, I believe that the existence of rating agencies that specialize in Islamic banking similar to the International Islamic Agency for Rating will solve this dilemma that results from a lack of consideration for the particularity of Islamic banking.
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Tuesday, 29 January 2008

GCC economic boom boosts Islamic project finance

The Middle East’s premier business intelligence service, MEED, today launched the Islamic Project Finance Report. The report details how the economic boom in the GCC is fuelling the growth in Islamic compliant borrowings for major projects.
The report also includes details of the challenges faced by the Islamic project finance sector and the increasing number of western banks adopting Islamic banking regulations within newly created divisions.
The insights from the report reveal that:
The value of Islamic project finance deals being closed is projected to grow to US$30,000 million in 2012. This could represent up to 30% of all major structured deals finalised in the region.
The driving force behind the development of the Islamic project finance market has been the economic boom in the GCC, brought about by strong oil prices. High rates of economic growth coupled with record balance payments surpluses are fuelling unprecedented liquidity in the regional banking market.
Globally there are now 300 Islamic financial institutions in more than 70 countries. At the start of 2007 they had total assets of about $300,000 million.
Figures for the first half of 2007 show that the balance sheets of the top 20 banks in the GCC grew by more than 30% over the corresponding period in 2006. The positive trends are expected to continue for the foreseeable future.
Much of the impetus behind the development of sharia-compliant corporate borrowing products has come from banks and professional advisory firms that are non-Islamic.
Edmund O’Sullivan at MEED, commentetd: “As the economic boom continues in the GCC, so interest in Islamic project finance and banking increases. There have been challenges in the past with the GCC courts and a shortage of qualified advisers but we now find that standards are improving and many Western banks are adding Islamic banking divisions.
“Improvements in availability and quality of product will inevitably lead to greater integration of Islamic project finance in the GCC and other Islamic and non-Islamic countries”.
The report provides insights into key trends in GCC project finance and the relationship with the Islamic finance sector. It also has an in depth analysis of how the Islamic finance sector works and the challenges faced for clients wishing to use Islamic financial products.

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Islamic Banking Assets in Malaysia Worth RM147 Bln Last Year

KUALA LUMPUR, Jan 29 (Bernama) -- Islamic banking assets in Malaysia at the end of last year stood at RM147 billion, accounting for 12.3 percent of the total banking assets in the country, said Deputy Finance Minister Datuk Dr Ng Yen Yen.The size of the outstanding corporate sukuk market meanwhile, was at RM150 billion as at December last year, she said here after witnessing the signing of a memorandum of collaboration between Islamic Banking and Finance Institute Malaysia (IBFIM), Kuala Lumpur Chinese Assembly Hall (KLCAH) and the Authority of Shenyang of China."Out of the total Malaysian capital market bonds approved, 55 percent were Islamic bonds. This shows the way Islamic finance is moving forward (in Malaysia) since efforts to grow the segment were established in 1983."And today we are considered the world's top expert in Islamic finance, where Malaysia is providing consultancies to many other countries on Islamic finance," said Ng.There were eight full-fledged Islamic banks established in Malaysia as at the end of last year.The spread of Islamic finance was also notable from the listed companies in the local stock exchange, with 86 percent of the 853 companies being syariah-compliant, she added.In her keynote address, Ng however said in order to grow Islamic finance further, people should change the view that it is only for Muslims."Islamic finance is another financial instrument for global financial participation; be it banking, insurance, bonds, assets management and such," she added.Islamic finance is the fastest growing segment in finance globally with an average annual growth of 15-20 percent, and it is foreseen to grow continuously, said Ng.Thus the collaborative agreement signed today which will see IBFIM helping to introduce Islamic finance to Shenyang, the largest city in northeastern China with a population of 7.2 million, is aimed to benefit not only the Muslims there but the entire Chinese community, she added."Shenyang is the first `spot' in China to be so futuristic and visionary to take up Islamic finance as one of its future finance direction."With over US1 trillion (US$1=RM3.23) of global total Islamic finance assets to date, China itself has now come to participate in Islamic banking because they know that is where the future is and where many opportunities will be," she added.

Lloyds TSB expands Shariah compliant services

LloydsTSB has expanded its Shariah compliant services by launching an account that allows banks to move money around the world on behalf of their individual and business clients, in keeping with Islamic Shariah law.
The Islamic Nostro Account is the first of its kind, claims LloydsTSB, to be offered by a mainstream Western bank and is a Shariah compliant version of the account used by all banks to distribute payments to customers across the world. Whenever individuals or businesses send money to other countries, the payments are made from one bank to another and are passed through a Nostro account in the process.
The new Lloyds TSB account is designed to ensure that the UK's two million Muslims and 100,000 Muslim firms can make and receive international payments without compromising their faith. Many of these customers regularly make, or receive, international payments through the estimated 250 Islamic banks worldwide. However, until now, the process of transferring this money between banks has not been in line with Islamic principles.
The Nostro account adheres to the principles of Islamic law, because it does not pay interest on money banks hold in the account; does not provide an overdraft facility; and does not allow any of the funds held to be invested in industries - such as alcohol and gambling - which are prohibited under the rules of the faith.
The global Islamic financial services market is now worth an estimated $480 billion and is growing at almost 15% a year. As the range of Shariah compliant products and services widens, with developments such as the Nostro account, the market is expected to grow even further. ---(MoneyExtra)


HK can be Asia's Islamic financial centre - CE Donald Tsang

Hong Kong is well-placed to become a centre for Islamic finance in Asia, Chief Executive Donald Tsang says, inviting Kuwaiti banks and financial-services companies to extend and diversify their global reach through the city.

Addressing the Kuwait Chamber of Commerce & Industry at a business lunch today, Mr Tsang said Hong Kong's sound financial services infrastructure and well-established legal system make it an attractive location for such investments.

The first Islamic retail fund launched recently in Hong Kong had attracted about US$45 million worth of orders by last December.

Noting Hong Kong is already a market of first choice for Middle Eastern companies, Mr Tsang said average annual bilateral trade with Kuwait grew 20.5% from 2002 to 2006 - in 2006 it was worth US$264 million.

"One way to further deepen the trading relationship is for Kuwaiti companies to capitalise on Hong Kong's special status within China. One of our biggest advantages is a unique free trade pact between the Mainland and Hong Kong, what we call our Closer Economic Partnership Arrangement, or CEPA for short."

"We welcome investment by sovereign wealth funds, which are becoming more prominent in financial markets and are a positive force for global markets. We can also learn a great deal from your expertise in the provision of Shariah-compliant services," Mr Tsang said.

The final day of his Kuwait visit, the Chief Executive later met Kuwait Investment Authority Managing Director Bader Mohammad Al-Saad and Kuwait Chamber of Commerce & Industry Chairman Ali Mohamad Al Ghanem. He also toured the Kuwait Aquarium & Scientific Centre.

Mr Tsang next heads for the Saudi Arabian capital Riyadh to continue his Middle East tour. He will return to Hong Kong February 1.
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Sunday, 27 January 2008

High oil prices to boost Gulf Islamic bonds

by Nadim Kawach

January 27, 2008

High oil prices have given rise to issuance of Islamic securities after creating massive business opportunities in the Gulf. The UAE has emerged as the world’s leader in this process, according to a Gulf report.

As crude prices are expected to remain strong and Gulf governments are encouraging investment, the sukuk issuance is expected to gain momentum in the region, said the report by the Global Investment House (GIH), a well-known financial and investment consultancy firm based in Kuwait.

Although the sukuk activity emerged only a few years ago, it has sharply grown in the Middle East and other parts of the world, with the value of issuance surging from around $7.2 billion (Dh26.4bn) in 2004 to $27bn in 2006 and nearly $39bn in the first 10 months of last year, GIH said in a study about Islamic financial instruments.

“The recent surge in oil prices has benefited the GCC states tremendously. The abundant liquidity has helped them embark on major infrastructure and real estate projects, in addition to projects in many other economic sectors,” it said.

“The GCC governments have also allowed the private sector to take part in these mega projects, and they have introduced a myriad of legislations that helps their future visions, and relaxed others that impede their growth targets. In the midst of the real estate boom across the GCC, private corporate bodies in need of financing saw the sukuk market as a favourable means… In the absence of conventional securitisation in many Islamic countries, sukuk issuance will remain a favoured structured finance funding option.”

The report noted that while there may be a cyclical element of current demand stemming from high oil revenues in the GCC, it supplements a long-term upswing in demand for Sharia-compliant securities from Islamic institutional investors.

“In addition, hedge funds and conventional investment institutions are beginning to hold sukuk for purposes of either yield pickup or diversification.”

Its figures showed the UAE has emerged as the world’s number one in sukuk issues during 2001-2007, contributing nearly 36.2 per cent of world’s total.

Malaysia accounted for around 32.1 per cent in the same period despite the fact that Malaysia had the largest number of sukuks issued, amounting to 137, compared to the total number of 29 in the UAE.

“It is important to note that the Emirates had a few huge sukuk issues in 2006 and 2007, which helped the UAE surpass Malaysia in the total sukuk size. A few examples of these are the $3.52bn Nakheel sukuk, the $3.5bn PCFC sukuk, and the $2.5bn Aldar Properties sukuk.”

The report expected a steady growth in the sukuk market worldwide in the coming years on the grounds more countries are considering issuing sukuks to diversify their investor base and deepen domestic capital markets. “The increase in demand, along with the standardisation of Islamic securities, is to fuel further growth of the sukuk market… Similarly, hedge funds and conventional institutional investors have increasingly been drawn to Islamic securities in search for yield pick-up and diversification.”

According to GIH, the total number of sukuks issued in the world during the last six years is around 360. It predicted sukuk issuance will reach $100bn in the next five years.

“In the Middle East, sukuks represent a significant new development in global capital markets as one of the fastest growing sectors in Islamic finance,” it said.

Standard Chartered To Boost Islamic Banking Presence In Malaysia

DAVOS, Jan 25 (Bernama) -- Datuk Seri Abdullah Ahmad Badawi said Standard Chartered plc, one of the world's largest banks, is to expand its presence in Malaysia, especially in Islamic banking.The Prime Minister said Standard Chartered Group chairman Mervyn Davies gave him the assurance when the banking chief called on him here last night.Standard Chartered Bank Malaysia Bhd was the first foreign bank in the country to offer Islamic banking products in July 1992.It has 37 branches in Malaysia and was the first bank to be established in the country, in 1875.Abdullah told a press conference last night that Davies had described Malaysia as pioneering Islamic banking and possessing much potential for growth in this sector.Davies also felt, according to him, that Malaysia should expand its skilled human resource in Islamic banking to grow the industry and contribute towards national development.The bank chief praised the Malaysian government for its management of the national economy and saw bright prospects for the country, Abdullah said.The Prime Minister said similar opinions were expressed by Laurent Beaudoin, chairman and chief executive of Bombardier Inc, an international transportation systems company based in Canada, at their meeting last night.Abdullah also met Ukrainian President Viktor Yushchenko and said later that they had agreed that the bilateral joint commission be revived without delay.This will facilitate cooperation in several fields including trade, investment, air services, space travel and education.Abdullah pointed out that Ukraine was the base from which Malaysia's first astronaut, Sheikh Muszaphar Shukor, flew to the international space station last year.Yushchenko also asked Malaysia to study the possibility of resuming sending its students to Ukraine, and Abdullah said this will be considered by the Education and Higher Education Ministries.The Ukrainian leader also urged Petronas to step up its cooperation with its Ukrainian counterpart.

Niger: Zakat as poverty reduction strategy

Idowu Samuel writes on efforts of Niger State governor, Mu’azu Babangida Aliyu, to eradicate poverty among the people.

Apparently, he rode into the Government House of his state in a glorified furry. And hardly had he been sworn in as governor than he began to demonstrate impatience in making a difference in Niger State.
And by now, the story of the Talba, Mu’azu Babangida Aliyu, is becoming scintillating to the ordinary man on the streets of Minna and the entire Niger State. That has been the lot of Governor Aliyu, an accomplished bureaucrat who retreated into politics less than a year ago.
Analysts are wont to believe that six months usually could not have been enough for an administrator to show stuff in office, given the need for him to first settle down, study the situation on ground before being able to apply personal and sundry logic in dispensing with governance. Yet, for Governor Aliyu, the need to change the face of politics in his state and the attitude of government to solving problems should entail restless moments for all officials of government if only to guarantee prompt delivery of electoral promises.
Watchers of the new government agree that Governor Aliyu is in firm grip and hence, is at ease in driving the civil servants, especially members of his cabinet, for the onerous task of infusing confidence in the ordinary man in the state about what his government is up to. He had not attained six months in office when his vision and mission began to occur as a big hope to the people who hitherto believed that government was never meant for commoner to assess.
Increasingly, Governor Aliyu is making himself popular through the simple logic of devoting attention to the downtrodden. He looks determined to wrest poverty among his people to standstill, going by the initiative that his government has displayed to that effect. For instance, the war his government is waging against poverty is finding good expression in a principle that the government must constantly pay Zakat to its people as a sure way to eradicating poverty in their midst.
He has taken steps ahead of his mission in fighting poverty. At the tail end of last year, the Niger State Government mobilised resources and paid the civil servants their salaries by December 12. The beneficiaries were more than surprised. They had hardly overcome the euphoria when the Talba pulled another fast one on the workers. He paid everyone of them bonus to their salaries for the month of January. Stupefied beyond limit, the civil servants in the state concluded that no government since the evolution of the state 31 years ago had been so magnanimous.
Just last week, the Governor Aliyu-led government gave a proper definition to its idea of wiping out poverty in the state by means of Zakat offering to its people. It did that through the state’s National Poverty Eradication Programme (NAPEP). It was the first time that the government in the state would assemble the downtrodden with a mission to removing the toga of poverty on their shoulders. Even street urchins, the lame and the blind were not left out.
The government started by offering the sum of N70million as loan to the people through their co-operative societies. At the last count, 1, 640 of such co-operative societies were identified. However, at the ceremony marking the disbursement of the sum which was held in the Government House last week, 74 among the co-operative societies cutting across different segments received different sums of money. The government made it known that others so left out would get theirs in subsequent attempts.
Expectedly, the expectant beneficiaries formed a huge crowd at the Government House during the disbursement ceremony. The list of recipients started with the Minna Central Market Multi-Purpose Co-operative Society which took home the sum of N2million. Then came the turn of Shambo Multi-purpose Co-operative Society which received the sum of N1million. There was also the Women Mellon sellers which took home the sum of N300,000.
To take care of the physically-challenged among the crowd, the government categorised them into five groups including the blind, the crippled, deaf and dumb, lepers and the HIV/AIDS careers and offered each group N250,000. There were other individuals who went home with different sums of money to take care of their private businesses.
Interestingly, each of the groups had made ready plans on what to do with the largesse from the state government. While those in the blind category agreed to set up weaving and knitting industry, the deaf and dumb said they would establish telephone business in strategic areas of Minna, while the crippled looked forward to setting up poultry farming business.
The beneficiaries did not depart from the government house without taking words of encouragement from the governor. While handing over the cheques to them, Governor Aliyu charged all to put the monies received to judicious use in order to compel the state government to do more.
He said his administration would continue to devote attention to the plight of the downtrodden by creating decent living for them and other people in the state, a reason, according to him, the government would not relent in funding poverty eradication programmes so designed for the state.
He described the soft loans offered the needy as a Zakat which he said his government would pay regularly in the spirit of fighting poverty even as he condemned street begging with emphasis that since the Islamic religion forbids street begging, his government would gear up in making the state comply with precepts of the religion about taking care of the poor.
The Chairman of NAPEP in Niger state, Alhaji Ilyasu Dhacho, in his speech at the ceremony, unveiled the government’s plan to minimise poverty. He said that the motive of the government was to whittle down the pang of poverty among the people, saying the government established NAPEP as part of its strategies for poverty eradication.
He commende the state government “for giving everybody a sense of belonging by taking governance to the doorstep of the masses, disclosing that the intention of the state government was to reduce the gap between the rich and the poor within a short period.
Dhacho said if Governor Aliyu could go this far in the fight against poverty in less than a year, the implication is that the government would do more than expected if accorded necessary co-operation by all well meaning citizens of the state.
“Those of us in NAPEP are fully aware that the Talba is full of surprises. We could not but be happy because we know the greater plan that the state government has for the fight against poverty. That is the reason each one of us has not rested on our oars in facilitating the process of delivery of the visions and the good intentions of the government for the ordinary citizen of the state. “If I may add, the intention of the government now is to put a stop to street begging. The governor has the zeal to do that since he has always been complaining about high level of poverty in the state. The process is on already and be rest assured that those who benefited from the loan disbursement would not return to the streets. This will be achieved when the plans by their groups to establish small scale business ventures that would engage each of them come to fruition.
The Niger State Government gesture of magnanimity to the poor interestingly caught the attention of the Federal Government which sent a representative. The National Co-ordinator of NAPEP, Dr. Magnus Kpakor, who was represented by Hajiya Binta Tsada, a director of the programme, disclosed that the Federal Government had already listed the state among 12 other states in Nigeria set aside to benefit from a cash transfer programme meant to take care of less privileged families in the concerned states.
Tsada said Niger State was included among the privileged states mainly because of its registered initiatives in fighting poverty among its people even as he commended the commitment of Governor Aliyu to poverty eradication.
Tsada told the the Nigerian Tribune that the government had plans to make itself a model in the task of fighting poverty and has to that effect designed measures aimed at discouraging corruption in the corridors of power. That he said would amount to blocking all loopholes in fund disbursement and expenditure.

Questioning "Shari'ah Conversion Technology": Yusuf Talal Delorenzo

Innovation is a cornerstone of the financial markets. Without the development of securitization, derivatives, and other complex financial instruments it’s safe to argue that it would be impossible to fuel the growth of the global economy. Since the growing Islamic Finance industry exists as a subset of the global financial system there is always a steady stream of new ideas being proposed and tested by Islamic financial institutions. At the center of this process of testing new ideas are the Shari’ah (Islamic law) supervisors who advise Islamic finance institutions on the Shari’ah compliance of their products and investments.
Yusuf Talal DeLorenzo is currently Chief Shari’ah Officer and Board Member at Shari’ah Capital. He is a well-known and respected Shari’ah advisor and Islamic scholar whose career spans more than 30 years. He serves as a Shari’ah advisor to over 20 global financial entities, including index providers, banks, mutual funds, real estate funds, leasing funds, institutional investors, home finance providers, alternative asset managers and others.
Shaikh Yusuf is also author of the three volume “Compendium of Legal Opinions on the Operations of Islamic Banks”, the first English reference on the fatawa (religious ruling) issued by Shari’ah boards. Shaikh Yusuf is also a special consultant, appointed by the Asian Development Bank and the Islamic Development Bank in Jeddah to the International Financial Services Board (“IFSB”) on the subject of Sukuk.
He recently delivered a paper questioning the validity of a proposed structure whose purpose is to “wrap a non-Shari’ah compliant underlying into a Shari’ah compliant structure.” The paper is a bold attempt to correct some of the recent attempts to ostensibly make halal (lawful) what is clearly haram (unlawful) by calling for due consideration for both the letter and the spirit of the Shari’ah.
Following is part of the paper's introduction that lays out the issue [available for download here]:

"Recently, a financial stratagem known as "Shariah Conversion Technology" was developed, the purpose of which is to affect a total returns swap or to "Wrap a non-Shariah compliant underlying into a Shariah compliant structure."
In other words, the objective of the mechanism is to use non-compliant assets and their performance to bring returns into a so-called Shariah-compliant investment or investment portfolio. This point is key to the entire transaction, and for that reason it needs repeating. What the product proposes to accomplish is to bring to the Islamic investor returns from investments that are not compliant with Shariah principles and precepts.
In June of this year, 2007, a pioneering Islamic bank in the Gulf launched a principal protected note that was the first product using this "Shariah Conversion Technology' to be offered to the investing public. This was followed by another such product, also offered by a Gulf-based Islamic bank. Prior to this, the stratagem was used in structured products offered by multinational banks to institutional investors and the treasuries of Islamic banks and finance houses. All of these products have been approved and certified by Shariah supervisory boards. Not all of these products, however, bring to the Islamic investor returns from investments that are compliant with Shariah.
The questions that such a product immediately bring to mind are: How can Shariah boards approve such returns? Does the circumstance of direct or indirect delivery to the Islamic investor change the ruling? When the Shariah of Islam is understood to differ from other legal systems because it may be characterized as both positive law and morality, is it possible to ignore the moral aspect of a financial transaction like this?
The means of delivery, a wa'd or promise, is widely seen to comply with Shariah norms. Since it is compliant, at least to the letter of the law, some Shariah scholars have approved products that use a wa'd to deliver returns from non-compliant investments. By doing so, however, they have failed to consider the purpose of the transaction, they have failed to consider the movement of the cash and, most importantly, they have failed to consider the ramifications for the industry as a whole.
At a very fundamental level, the reason for these failings is that they have not discerned the difference between the use of LIBOR as a benchmark for pricing and the use of non-Shariah compliant assets as a determinant for returns."
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Tamweel Islamic bond is ‘oversubscribed’

by Agencies on Saturday, January 26,2008

Tamweel, the second largest mortgage lender in the United Arab Emirates by market value, said on Saturday its sale of Dh1.1 billion convertible Islamic bonds had been oversubscribed.

The bonds, which carry a profit rate of 4.31 per cent, can be exchanged for Tamweel's stock at Dh8.33 per share, the company said in a statement. Tamweel's shares last traded at Dh6.70 and closed at Dh6.92 on December 12, the day before the sale was announced.

Islamic bonds, or sukuk, comply with Islam's ban on lending on interest and offer investors a share of profits from underlying assets instead.

Barclays Capital was the lead manager and bookrunner of Tamweel's sale which ended on Thursday, the mortgage lender said.

"Issued in the midst of difficult market conditions, the sukuk was oversubscribed within hours of launch," Tamweel's Chief Executive Officer Adel Al Shirawi said in the statement.

He did not say how much investors had offered for the bonds.

Larger rival Amlak Finance delayed a sale of Islamic bonds planned for the fourth quarter because of the fallout from the credit crisis triggered by US mortgage defaults.

Tamweel will use the funds for expansion, Shirawi said. The mortgage lender has applied to list the bonds on the Dubai International Financial Exchange. (Reuters)

Saturday, 26 January 2008

Over 500 Companies Expected At Halal Showcase

KUALA LUMPUR, Jan 24 (Bernama) -- More than 500 Muslim and non-Muslim companies are expected to take part in the Malaysia International Halal Showcase (MIHAS) 2008 to be held here from May 7 to 11.Malaysia External Trade Development Corporation (Matrade)'s chief executive officer Datuk Noharuddin Nordin said today that 235 local companies and seven foreign companies from Australia, Brunei, USA, Iran, India, Kazakhstan and Turkey have confirmed their participation."We expect 350 local and 150 companies from 30 countries to join this year's showcase," Noharuddin added.Last year's MIHAS attracted 330 local and 96 foreign companies with total sales of RM683.2 million, he said during a media briefing here today.This year, sales is expected to be even higher in view of the new sectors joining in the event such as food processing and packaging machinery companies.Other participating companies include those from food manufacturing, cosmetics and healthcare, pharmaceuticals and herbal products as well as Islamic banking and takaful products.More people today understand that the halal concept is not limited to food but many other aspects such as manufacturing and packaging, he said."It is hoped that this additional sector will attract exhibitors and traders interested in the acquisition of food processing machinery including devices, utensils, storage, displays, serving equipment and packaging materials certified suitable for the manufacturing of halal food," said Noharuddin.He said the event will be also a good avenue for buyers and sellers in the halal market to establish new business alliances in trade and business. He said there will be 300 buyers from more than 30 countries at the event.He said halal products and services were also gaining acceptance among non-Muslims and that the global market value for halal consumable and non-consumables products was estimated to touch RM2.1 trillion annually.Current global market value for Islamic financing, takaful and other services is also on the rise and it is estimated to touch US$1 trillion.MIHAS 2008 is expected to attract 40,000 visitors.-- BERNAMA

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Islamic insurer plans IPO amid meltdown

Abu Dhabi-based Islamic insurer Mithaq Lil-Takaful said it aims to raise 82.5 million dirhams ($22.46 million) in an initial public offering (IPO) that begins on Saturday, amid a meltdown in global and Gulf markets.The insurer, also called Mithaq Liability Insurance Company, plans to sell 82.5 million shares at 1 dirham each and a fee of 3 fils, in a sale open to nationals of the UAE and other Gulf states, state news agency Wam reported late on Monday."There is a huge demand for Islamic insurance or takaful in this region, and the new company is aiming to get a share of the pie," Mithaq chairman Abdulla Saeed Al-Qubaisi told newswire Reuters on Tuesday. The sale - equivalent to 55% of the company's share capital - closes on February 4, with shares listing on the Abu Dhabi Securities Market (ADSM) in March.It will be the UAE's first IPO in 2008, amid one of the worst-ever days for Gulf stocks. Saudi shares plunged a record 10% on Tuesday leading the biggest retreat in Arab benchmarks since a 2006 crash as investors, spooked by a US economic downturn, dumped regional shares, bonds and currencies.Dubai's index fell 6.21% , its biggest one-day loss since March 2006, and Abu Dhabi's 6.8%, a record."The insurance business is growing at 15 to 20% annually and is projected to double by 2010," Al-Qubaisi said. National Bank of Abu Dhabi (NBAD) is arranging the sale. In Islamic insurance, or takaful, risk and reward is spread equally between the customer and the insurer, unlike in conventional insurance where the insurer takes on all risk and receives a premium. (Reuters)

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Islamic finance: Let's not get our wires crossed

By Mohammed Abbas
Reuters: January 26, 2008

The green-fronted Kuwait Finance House Auto mall on Bah-rain's main showroom highway is a bank that sells cars. Here, the motorist can pick the model that takes his fancy and, at the same time, fix up the Islamic financing and Islamic insurance to buy it - a sign of the rate at which Islamic banking is growing.
Opened in June last year to meet rising demand in the Gulf archipelago, the bank offers murabaha-based purchase plans, a method of Islamic financing that lets customers buy automobiles without taking an interest-based loan.
As traditional western bankers count the cost of a reckless lending spree, Islamic banking - which complies with Islam's law banning the receipt of interest - is surging. Estimated by some experts to be growing by about 15 per cent a year, the sector has been forecast by management consultants McKinsey & Co to reach $1 trillion in assets by 2010.
Even as new bank branches pop up almost daily in Bahrain - a hub for banking in the Gulf and home to one of the sector's most influential standards bodies - some bankers are worried.
Their concern is that the training of scholars essential for the Islamic banks' supervision may not be able to keep pace.
A small group of Islamic scholars - experts in Islamic law, known as Sharia - holds sway over the booming bank sector, and some in the industry wonder whether their expertise is being stretched too thin.
"There is lots of growing interest and we have many more sophisticated Sharia scholars who are graduating now, (but) it's not growing fast enough to meet demand," said Shaikh Nizam Yaquby, one of the world's most respected Sharia scholars.
"This industry is growing phenomenally."
Some Sharia experts say it may take more than a decade to train more scholars and even the optimistic ones do not expect a new generation of scholars for at least five years.
"The industry can't wait that long," said David Pace, chief fin-ance officer at Bahrain's Unicorn Investment Bank. "Two to three years is about enough ... The lack of scholars does not mean the industry is paralysed but it slows down development."
Established in 2004, his bank is one of several Islamic lenders set up to tap rising demand from the world's 1.3 billion Muslims for financial services that comply with their beliefs.
Instead of interest, Islamic banks operate on the principle of sharing risk and reward among all parties in a business venture.
Murabaha, for instance - the instrument on offer at the Auto mall - involves the bank buying a car and selling it to the customer for a stated profit, with payment deferred.
Investment in sectors such as alcohol, pornography and gambling is prohibited.
Scholars are essential for the supervision of the industry, but a handful currently dominate the Islamic review boards at the world's top banks and financial institutions.
There is a lack of consensus on what qualifications and experience are needed for the role, and some experts ask whether the shortage could lead to conflicts of interest and inadequate supervision. "These bankers think the wombs of mothers are going to deliver graduated Sharia scholars. I tell them you have to take steps," Yaquby said.
Yaquby, who has been involved in Islamic teaching since 1976, estimated there were roughly 50 to 60 scholars in the world qualified to advise banks operating internationally on Islamic law. Ten times as many are required for the Middle East alone, he said.
Like most scholars, Yaquby divides his time among several banks. One of them, HSBC, lists advisory roles for him at Abu Dhabi Islamic Bank, BNP Paribas, Dow Jones, Lloyds TSB, Citibank, Standard Chartered and others. He is also a board member of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions, one of the world's top Islamic finance standards bodies.
In Britain - the most active European market in the Islamic banking scene - the Financial Services Authority watchdog in November highlighted possible "significant" conflicts of interest in that concentration of expertise. "The shortage of appropriately qualified scholars ... raises concerns over the ability of Sharia supervisory boards to provide enough rigorous challenge and oversight," the FSA said in a report on the industry.
Last month the London-based Chartered Institute of Management Accountants said the rapid growth of Islamic banking had fuelled a need for both Muslim and non-Muslim financial experts, and it hoped to set up both a diploma and perhaps a master's degree in conjunction with a university. However, being considered a scholar skilled enough to advise on deals sometimes worth billions of dollars is not easy.
High standard
Scholars must be expert in Islamic law and Islamic banking, but also have a thorough knowledge of the laws and banking systems, which requires a high standard of English. Even then, a scholar will only be taken seriously after years of experience, according to many of the delegates at a Bahrain conference on Islamic banking in December.
"You can learn the technical aspects relatively quickly," said Mansoor Ahmad, a Sharia student. "But it's not as easy as that. It does take 15 or 20 years. It requires a lot of experience ... mere knowledge will mislead."
Yasser Dahlawi of consulting firm the Sharia Review Bureau, which advises companies on Sharia compliance, said scholars need at least a doctorate and a decade's experience.
Complicating matters is the lack of a globally accepted qualification as a Sharia scholar, just as there are no globally accepted standards for Sharia rules, which are to some extent open to interpretation.
Illustrating this, the head of Sharia structuring at one of the world's largest banks, who spoke on condition of anonymity, disagreed with Dahlawi on what it takes to be a scholar.
He said it was better for students to learn through apprenticeships with scholars who can trace their learning to Islam's roots. "I don't care whether they have a PhD or not," he said.
"The way traditional Islamic teaching has been handed down is not through certificates or degrees. You need to trace your teaching back to the Prophet. It's a lineage of understanding."

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Credit Rating and Islamic Bonds

By Lahem al Nasser

According to a report published by the Saudi 'Al-Eqtisadiah' newspaper, credit rating agencies have unanimously agreed that when assessing sukuk (Islamic bonds), they do not take into account whether the bond is Shariah-compliant or not. This is because agencies believe that the decision regarding whether the Islamic bonds in question are Shariaa-compliant or not is a matter that fatwa committees should deal with.

The truth is; I believe that this is an unacceptable deficiency in the principle of rating in view of the fact that risks related to Shariaa should be taken into account when rating Islamic bonds. This is because declaring sukuk as non-Shariaa compliant, because they are based on fatwas that flout resolutions issued by the jurisprudential academies and the concerned 'ijtihad jamaei' (collective interpretation) institutions or because they are based on opinions that are contentious among scholars will affect bond underwriting and buying among investors. This, in turn, will result in a decline in the liquidity of these bonds (meaning its ability to circulate).

Raymond Hill of Fitch Ratings agrees with this last fact. Undoubtedly the liquidity aspect of Islamic bonds is an important factor in the decision made by investors to buy the bond or not. Additionally, it has proven that upon finding out that bonds were not Shariaa-compliant, after having bought them, investors then sell them at a lower price so as to get rid of them but end up losing a portion of their investment – and that is if they can find someone to buy them in the first place.

We may also add to this the legal risks entailed in the case of disputes over these bonds or which result as the outcome of sentences that declare them non-Shariaa compliant, which then makes them susceptible to invalidation or diminishes the rights of their holders by nullifying some of their conditions in accordance with the judiciary's discretion.

Therefore, the regulation of these bonds using Islamic Shariaa law and the prevalent known jurisprudential opinions is required of credit rating agencies, and the impact of rating must be reflected on these bonds. This is so as to reassure investors with regards to the outcome of such rating.

All credit rating does not take into account the jurisprudential views on which the Islamic bonds are based since the strength of the jurisprudential view or its deviance is not considered a rating capable of expressing with utmost clarity and transparency the risks involved in this type of investment.

My assessment of the fact that credit rating agencies do not take Islamic jurisprudential opinions into consideration in the rating process could be summed as follows:

First: Credit rating institutions deal with Islamic bonds in the same way they deal with debt bonds without considering the particularity that sukuk have over the traditional debt bonds, which is that the former represent a share of ownership while the latter entail no ownership.

Second: The absence of competent jurisprudential expertise within these institutions [credit rating agencies], which could help clarify this dimension [Islamic bonds], which means that these institutions avoid delving into this field.

Third: The lack of a legitimate, clear and consensually agreed upon criterion with regards to Islamic bonds that credit rating agencies could implement and use as a reference and for arbitration.

This deficiency may be treated by uniting the efforts of the credit rating agencies and the supporting Islamic banking institutions, such as the committees for auditing and accountability within Islamic financial institutions and the Islamic financial services councils and international Islamic rating agencies, to set the criteria for rating Islamic bonds so that the controversial jurisprudential dispute inherent within sukuk can be taken into account.

These institutions should also employ the expertise of Shariaa law scholars so as to clarify this field, thus enabling the establishment of a legitimate and united Shariaa-compliant criterion for Islamic bonds.

•Lahim al Nasser is an Islamic banking adviser.

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Guidance Residential - Sharia-compliant Home Financing

Friday, 25 January 2008

Islamic finance hits its stride

Just 10 years ago Islamic financing techniques, despite being used by transport companies, were still relatively niche products compared with conventional investments, lending and leasing.
Now, as each week passes, new deals are announced and landmark transactions are closed across the Middle East, Africa and Asia, and even in Europe and the United States.
With the global conventional financial community set for a relatively cautious approach in 2008 because of restricted liquidity emanating from the global credit crunch, many in the Islamic finance sector are suggesting that this year could see considerable growth for sharia-compliant financing techniques offered by Islamic and non-Islamic institutions alike.
"In general, I would say that interest in Islamic financing for the transport industry, including aviation, shipping and rail, is increasing," says Davide Barzilai, a lawyer in the Islamic finance practice at Norton Rose in London. "However, we must not forget that Islamic finance is still a small portion of the money in the Middle East region."
But the appeal of Islamic finance is not confined to moveable assets in the transport industry. There is clearly strong demand for infrastructure projects, which many in the sector say fit perfectly with the profit-sharing ethos of sharia-compliant financings.
The financing standard was effectively set high several years ago, when in late December 2005 Dubai Ports World's USD5.7 billion acquisition of P&O featured a USD2.8 billion sukuk (bond) to part-finance the deal. Law firm Denton Wilde Sapte played a major role on the financing side, advising Dubai Islamic Bank and Barclays Capital on the sukuk.
The firm also advised Dubai Islamic Bank on a USD1 billion sharia-compliant musharaka bridging facility to secure the acquisition. Law firm Clifford Chance advised the Dubai Ports Authority on this bridge facility.
More recently, large-scale projects have been financed using increasingly marketed and hence increasingly popular sharia-compliant structures.
A landmark example is the recent transaction in which the Multilateral Investment Guarantee Agency (MIGA) - a World Bank Group member - said it had provided its first-ever guarantee for sharia-compliant project financing. This is a USD427 million guarantee to support investments into a new container facility at Doraleh Container Terminal in Djibouti, which is expected to significantly improve port facilities and help the country become a major business hub in East Africa. The terminal is being developed jointly with Dubai Ports World.
Djibouti is strategically located on one of the fastest-growing east-west international shipping routes at the crossroads of Asia, Europe, the Gulf of Aden and East Africa. Development of the port and transport sector is at the heart of its poverty-reduction strategy.
MIGA's guarantees protect the investments of Dubai Ports World as well as those of the financing banks - Dubai Islamic Bank, Standard Chartered Bank and WestLB - against the risks of transfer restriction, war and civil disturbance, expropriation and breach of contract, according to the agency.
Support will total USD422 million to cover funding provided by these three banks as well as other participating banks under an Islamic project finance facility. MIGA's participation allows syndication of a significant amount of financing provided by several banks on favourable terms and conditions under an Islamic financing structure.
MIGA will reinsure USD5 million with the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) under MIGA's facultative reinsurance programme. This represents MIGA's first collaboration with ICIEC at the project level.
MIGA's presence played an important role in mitigating perceived political risks for the banks and enabled project sponsors to raise the financing needed to make the project a reality. This is the first project that MIGA has supported in Djibouti, which joined the agency in January 2007.
"Increased liquidity in Islamic financial markets is leading to growing demand for guarantees that can support sharia-compliant deals," says Yukiko Omura, executive vice-president of MIGA in Washington, DC. --(Jane's)

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AFB to roll out slew of banking products

KUALA LUMPUR: Asian Finance Bank (AFB) Bhd aims to promote Islamic Banking Solutions with the launch of its first two consumer financing products -- Home Financing-i and Personal Financing-i.
Chief executive officer Faisal Alshowaikh said in a statement, "We are confident that these two products will further promote Islamic Banking Solutions to residents and non-residents of Malaysia."
He said that AFB has already obtained approval for 33 products from Bank Negara Malaysia and would roll out all of them as it enters the second year of operations in Malaysia.
Under AFB Home Financing-i, there are two financing options -- fixed rate and hybrid fixed rate, as well as a variable profit rate that is capped at an agreed ceiling rate.
The package offers competitive profit rates that are calculated based on non-compounding basis, the bank said.
There is no locked in period or early termination fee attached in the package, aimed at customers who prefer flexibility on early settlements.
AFB anticipates Home-Financing-i to receive good response in targeted high growth areas such as Klang Valley, Johor and Penang.
Personal Financing-i package is aimed at customers in need of cash advances for personal consumption up to RM150,000, with minimum financing of RM12,500 and maximum tenure up to five years, it said.
No collateral or guarantor is required for this facility, it added.
AFB is also offering Foreign Currency Account-i as well as other deposit accounts such as Mudharabah Savings and Junior Savings to all customers.
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Islamic Scholars will discuss Sharia’a Finance in London

The FINANCIAL, 25/1/08 -- Some of the world’s leading authorities on Islamic Finance will be meeting in London this week to discuss the launch of new Sharia’a-compliant products for the UK banking market, Islamic Bank of Britain reports.

The Islamic Bank of Britain’s (IBB) Sharia’a Supervisory Committee (SSC) will get together this Friday (25th January 2008). The agenda for the meeting will include a review of forthcoming Investment (Treasury) and Home Purchase products, as well as undertaking a Sharia’a review of the bank’s activity in 2007.

The Committee consists of Sheikh Dr. Abdul Sattar Abu Ghuddah (Committee Chairman), Sheikh Nizam Yaqoobi and (UK-based) Mufti Abdulkadir Barkatullah, and between them represent almost a century of Sharia’a-compliance experience. All three committee members are very much in demand by Islamic Financial institutions from around the world, and have chosen to utilise their expertise to further the cause of Islamic Finance in collaboration with IBB.

Mufti Barkatullah explained his commitment: “Islamic Bank of Britain is leading the way in promoting Islamic Finance in the UK, and I look forward to helping IBB with its pioneering role in the development of the industry.”

According to Islamic Bank of Britain “IBB is the first Islamic finance institution in the UK authorised and regulated by the FSA to operate as a bank. All Islamic Banks are overseen by a Committee of qualified and experienced Scholars, who are charged with ensuring that all products, services and processes comply with Islamic principles. In addition to Sharia’a reviews and approving the bank’s operations, the Committee also provides advice and guidance, based on their knowledge and experience within the Islamic Finance industry”.

As well as an external and independent review by the Scholars, IBB also has an internal Sharia’a Compliance Officer, who is responsible for continuously monitoring the day-to-day activities of the bank, and reports directly to the Sharia’a Supervisory Committee.

“The work of the Sharia’a Supervisory Committee is fundamental to the existence of IBB,” comments Shaher Abbas, the bank’s Sharia’a Compliance Officer. “Their approval is required before we launch any product, and they regularly review our business to ensure we are in compliance with the Sharia’a. This gives our customers complete peace of mind that we are operating in accordance with Islamic and ethical principles.”

IBB offers a number of products and services to it’s customers including Savings accounts, Treasury accounts, Personal Finance and Commercial Property Finance. The bank recently launched two new Commercial Centres for Islamic Finance – in London and Birmingham – to cater for the needs of its High Net-Worth and Business Banking customers.

About Islamic Bank of Britain

Islamic Bank of Britain has pioneered Sharia’a-compliant retail banking in the UK and has launched a wide range of products, including current accounts, savings accounts and personal finance. The bank was also the first to introduce Sharia’a-compliant Business banking to the UK, and now offers a wide range of institutional and business banking products and services, including commercial property finance.

Several of the bank’s products remain unique in the UK retail market (e.g. Sharia’a-compliant personal finance and Sharia’a-compliant savings accounts).

Whilst the bank offers products and services that are designed in accordance with Sharia’a principles, it is an inclusive bank and welcomes customers of all faiths.

Sharia’a-compliant banking operates without the use of interest. The products that are offered are structured in a different way to those provided by conventional banks. The bank uses the latest technology to ensure that it provides customers with a reliable and quality service on a par with other banks in the UK.

DIFC will be Islamic finance hub

Dubai: The Dubai International Financial Centre (DIFC) is creating new infrastructure as part of its efforts to become a global Islamic finance hub, a senior official said on Thursday.
Chief executive officer Nasser Al Shaali said Dubai wants to take advantage of both the "demography and geography" of the region to achieve this goal.
Islamic finance in the Gulf is gaining popularity and assets of banks in the sector are growing faster than their counterparts in conventional banking.
Globally, assets of Islamic financial institutions are estimated to be more than $500 billion.
"We want to build critical mass in this sector by creating an international point of reference for Islamic finance regulations, stand-ards and practices," Al Shaali said at a bankers lunch organised by Emirates NBD.
He said the planned initiatives include setting up of the DIFC Sharia Centre, an Islamic hedge funds platform, an Islamic finance portal, a commodity murabah exchange, and creation of a judicial acad-emy and research centre.
"We already have developed the world's only model law, which can be applied to regulate the Islamic finance sector by any jurisdiction and we would be happy to assist," he said.
Malaysia and Bahrain are among the countries where Islamic banking and finance sectors have made considerable progress. Islamic banking, which follows Sharia's ban on interest, has received a boost in the Gulf from high oil export revenues of Arab countries.
The DIFC, set up by the government in 2004 to make the emirate a financial services hub, has attracted more than 500 companies that include top foreign financial institutions.
The Dubai International Financial Exchange, which is part of the DIFC, is the world's biggest bourse for Islamic bond listings in terms of value, which is about $16 billion.
According to Al Shaali the DIFC is also strengthening its standards in areas such as insolvency, accounting, compliance for auditing and corporate governance.

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Thursday, 24 January 2008

Malaysia launches Islamic exchange traded fund

KUALA LUMPUR, Jan 21 (Reuters) - Malaysia launched on Monday Asia's first Islamic exchange traded fund, as part of efforts to cut the state's holding of listed equity and boost its bid to become a global Islamic financial hub.
The fund has 25 underlying stocks including plantations to energy group Sime Darby, mobile phone firm DiGi, shipper MISC, builder Gamuda and toll road operator PLUS Expressways, its manager i-VCAP Management Sdn Bhd said.
Second Finance Minister Nor Mohamed Yakcop said the fund would help boost the appeal of the Malaysian stock market.
"The National Exchange Traded Fund contributes on all these counts for the equity market i.e. depth, diversity and liquidity," he said at the launch of the fund.
The fund has an authorised size of 10 billion units.
Malaysia's holdings in state-linked firms make up nearly 40 percent of the $292 billion local market. Investors complain stocks are too tightly held and state investment arm Khazanah Nasional is reforming these firms to reduce state equity.
A more vibrant local market would help Malaysia to attract capital and enhance its bid to become a global Islamic finance centre.
Mostly Muslim Malaysia is in a race with Bahrain, Dubai and Singapore to become a global Islamic finance hub. Malaysia has an Islamic finance industry with about $38 billion of assets ranging from stocks and insurance to home loans and pawnbroking.
Islamic banking assets make up over 12 percent of total bank assets.
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Wednesday, 23 January 2008

London Shard skyscraper wins financial backing from Qatari consortium

LONDON, Jan 22 (Reuters) - The "Shard of Glass" development, one of London's most high-profile skyscraper projects, came a step closer to being built on Tuesday after a Qatari consortium agreed to finance the 2 billion pound ($3.88 billion) scheme.
The consortium comprises equal shareholdings of the Qatari Islamic Investment bank QInvest, Sellar Property Group, Qatar National Bank, Qatari Islamic Bank and Barwa, a statement said, after the acquisition of stakes held by CLS Holdings and the family trust of entrepreneur Simon Halabi.
QInvest Chief Executive Professor Abdul Latif Almeer said the development, near London Bridge just south of the City financial district, would " undoubtedly be Europe's most recognisable commercial property landmark."
"Our investment in this 2 billion pounds development not only reflects our admiration for what has already been achieved in getting the scheme to its present level, but also underpins our confidence in the London commercial real estate market," he said.
The news brings to an end months of speculation concerning the future of the development, which has been dogged by financing problems since the onset of the credit crisis last year.
With investment now secured, developer Sellar Property Group said it was confident it could fast-track completion of the scheme by the end of 2011.
But there are concerns that the 2 million square foot project could tip a fragile balance between office space supply and demand in London's financial district, as occupier take-up falters and banking sector job cuts mount.
Two major pre-lets have already been signed for the London Bridge Tower component of the scheme, with Shangri-La Hotels taking almost 200,000 square feet of space and Transport for London (TfL) contracted to occupy 190,000 square feet of office accommodation.
It is estimated that development of London Bridge Quarter will cost up to 1.4 billion pounds, with the majority of the initial construction finance provided by the Qatari consortium.
At 310 metres, London Bridge Tower will be Europe's tallest mixed-use skyscraper, the developer said.

London Stakes Bid to be Key Western Centre for Islamic Finance

As the global market for Islamic financial services has grown three fold over the past decade to $531bn in 2006, so London is setting out its stall to be the key western centre for Islamic finance.

The cluster of expertise in London is represented by 23 banks, nine fund managers and a number of international law firms offering Islamic service while there is a secondary market in Sukuk valued at $2bn a month and a growing market for retail mortgage business according to a new report by IFSL on Islamic Finance co-sponsored by UK Trade and Investment.

IFSL’s report also found daily trading in commodity-based agreements through the London Metal Exchange is a key mechanism for the management of assets and liabilities by Islamic financial institutions and the 23 UK banks outnumber more than four times those of any other country in Western Europe: Switzerland has five and France and Luxembourg each have four.

The UK is also ahead of the rest of Western Europe in establishing fully Sharia compliant banks with three of the 23 UK banks having set up there since 2004. These are The Islamic Bank of Britain, The European Islamic Investment Bank and The Bank of London and The Middle East.

Duncan McKenzie, IFSL's Director of Economics said "Evidence of London's growing role in Islamic finance is shown in the UK being the only western country to feature prominently, 9th with $10bn, in a global ranking of Sharia compliant assets by country."

Minister for Trade and Investment, Lord Digby Jones welcomed the report and congratulated ISFL for producing an in depth and informative report. He said:

"London’s position as the premier Western centre and partner of choice for Islamic finance is a huge step in the right direction, but we mustn't become complacent. UKTI is working hard in partnership with our delivery partners, including IFSL to ensure the UK's offering in this ever expanding sector and London’s status as the global financial centre continues. The results of this report will help shape UKTI strategies to continue positioning the UK as the world leader and investment destination of choice."

UK educational institutions are taking the lead in positioning the UK as a leading centre of learning in Islamic finance. The Securities and Investment Institute, the Chartered Institute of Management Accountants and Cass Business School have each worked collaboratively with overseas partners to offer qualifications that can be accessed by students around the world.

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Tuesday, 22 January 2008

Islamic Banking In Turkey – Indonesia – Pakistan: A Swift Comparison And Benchmarking Against Malaysia

by Paul Wouters

Worldwide, the Islamic finance industry is developing fast. Whilst it makes sense for the Islamic financial institutions to foster growth and to regularly measure themselves against the financial market as a whole, sometimes it is also worthwhile to look around and see what happens in different countries.
It is easy to talk about "market shares" and "deposits", but what do they really mean? And what can be expected in the near future?
Turkey and Indonesia both are secular republics with a large majority of Muslim population, but Islamic finance developed very different. With a population that approximately holds the middle between both countries; the Islamic Republic of Pakistan is used as an outside comparator. To put all into even more perspective, some data from Malaysia are also included as a benchmark.
Worldwide, the Islamic finance industry is developing fast. Whilst it makes sense for the Islamic financial institutions to foster growth and to regularly measure themselves From the very start in 1985 with Albaraka Türk, the Turkish participation banks (before called Special Finance Houses) were poised to aim at the Turkish market as a whole. Therefore they did not really target the small niche of the "convinced" Muslim population in particular. This of course influenced marketing and product development. Part as a consequence of this strategy (and compared to Indonesia), the Turkish participation banks could have a faster growth and now cover roughly 3.5 % assets of the total Turkish banking industry. One may also note the strong growth of the sector that outperforms the conventional counterpart now for 8 consecutive years.
The loss of Ihlas Finance House (2001 – alleged fraudulent insolvency) meant the loss of 40 % of the deposits held by the sector at that time and the subsequent stampede on the other Special Finance Houses (now participation banks) meant another 35 % loss. Because of their ties to the "real economy", the Special Finance Houses were not hit by the big financial crisis that hit Turkey in 2001 and they recovered fast. Their deposits now have been taken into the guarantee fund of the banks (to avoid other shock withdrawals) and the sector has acquired bank status.
There is no specific government aid to the sector and no (government or corporate) Islamic bond. There also is no access to the money markets, so we can hardly talk about a level playing field, as compared to conventional banking.
There are no Islamic windows and therefore foreign market players can only enter the market through shareholdings in the existing participation banks (or have to start their own participation bank from scratch).
A Government sukuk issuance could be in the make, so has been rumored for some time now. The talks on the projected Rent (Ijarah) Certificate however move slow, subject to rather inactive local financial markets, cheap conventional international funding and political factors.
A well thought off strategy of decentralization – for instance using techno / tax incentives and privatizations – created upcoming of several bigger conglomerates throughout the country.
With its’ first established Bank Muamalat Indonesia (together with Bank Syariah Mandiri still today front runner), the situation differs profoundly in Indonesia. As from the very start, products and marketing were directly aimed at precisely that group of clients of "convinced" Muslim (market share of roughly 1.5 %). Whilst the present impressive government initiatives aim to broaden that base (a potential "floating market" of approx. 75 % of the population would be within reach), Bank Muamalat confirms to adhere as before to their strict policies and client target. It might mean an extra strong growth potential for the other market players.
The need to mobilize internal capital and attract foreign investment, required special measures. Indonesia’s Central Bank announced in July 2007 that – subject to full implementation of the "blue print for development of the Indonesian Shari’ah Banking system" - total assets of the Islamic banks (and Islamic business units) are expected to triple by the end of 2008 (growth of approx. USD 6 billion) to reach an overall volume of 5 % on the total Indonesian banking assets. When deposits / loans follow same development, it will be clear that opportunities are at hand (growth potential of approx. USD 5 billion).
Foreign banks are not really visible yet on the Indonesian Islamic finance market. HSBC pioneered as first big international institution with a full dedicated Shari’ah head office in Jakarta - the projected growth potential is enormous: they calculated that roughly 50 % of their clients would be willing to use the products if priced competitive. Recently also Albaraka Group announced the prospect of opening of a branch there.
The first Government Sukuk (plans to raise up to USD 1 billion have been announced) is in the pipeline. Actual issuance could however be postponed till the fourth quarter of 2007 or even the first quarter of 2008, pending parliamentary approval. Indonesia at present already knows corporate Ijarah and Mudharabah Shari’ah Bonds. Access to the money markets has been opened.
Conventional banks that want to participate in the "Islamic pie" need to dedicate 5 % of their assets to such venture. This commitment, together with other incentives, will be responsible for the expected fast growth over the next two years.
From the late 70s onwards, Pakistan has a protracted history of Islamic banking. As from July 1st, 1985 all commercial banking in Pak Rupees was made interest free. The sudden conversion (and lack of preparedness) posed difficulties on implementation however. As from 2001 an evolutionary process was then chosen for, in order to nurture acceptability and development in a more structural approach. The first "Islamic bank license" was awarded to Meezan Bank back in 2002 (founded 1997). But as said, Islamic banking has been introduced since the mid 80’s.
Most note worthy is the present Islamic Banking Policy (December 2001), under which Islamic banking is promoted parallel to conventional banking. Implementation of AAOIFI and IFSB standards is on the way. Besides a Draft for the new Government Securities Bill, Draft Risk Management and Draft Shari’ah Compliance guidelines have been published.
A growth of % 40 per annum is being expected and a % 15 market share is targeted.
Next to the fully fledged Islamic banks, the conventional banks can opt to open up Islamic banks subsidiaries or even dedicated "stand alone Islamic banking branches". A vast concentration of the Islamic banking to the big cities (Karachi and Lahore) can be noticed. There is government and corporate sukuk in the market.
In 2007 ABN AMRO opened an Islamic branch, Emirates Global Islamic Bank has started a dedicated Islamic commercial bank and QATAR Islamic bank has confirmed plans to setup a Shari’ah compliant banking unit soon. Citibank was another big foreign entry.
Starting off in 1983 with Bank Islam Malaysia Berhad, separate Islamic legislation and banking regulations exist side-by-side with those for the conventional banking system.
In order to create an efficient, progressive and comprehensive Islamic financial system, Bank Negara Malaysia recognized the need to, i.e.:
Attract a large number of global players;
Develop a broad variety of instruments; and
Install a comprehensive financial infrastructure.
A large variety of Islamic financial products and services (more then 100) are at present offered by the banks using various Islamic concepts such as Mudharabah, Musharakah, Murabahah, Bai' Bithaman Ajil (Bai' Muajjal), Ijarah, Qard, Istisna' and Ijarah Thumma Bai'.. next to the existence of the Islamic Interbank Money Market.
Probably subject to pressure from the Dubai DIFC, Malaysia recently opened up regulations to allow sukuk issuance in foreign currency and competes with Singapore (and recently also Hong Kong decided to enter the race) to be the prime Islamic finance hub in the Asian region.
First of all, it has to be noted that real entrance of foreign investment in Turkey, Indonesia and Pakistan still bounces on inadequate tax regimes.
Though it is difficult to distract far going conclusions from the table hereunder, at first sight, it is clear that both Malaysia and Turkey share the following characteristics: relative big concentration of the population in bigger cities, lower portion of population working in agriculture and a lower weight of that sector in the overall economy. The GDP per capita (calculated in relative purchase power – not in hard dollars) in those countries also is 2 upto 4 times higher then in the other two countries.
Also in Indonesia and Pakistan there is a remarkable concentration of the Islamic banking sector around the big cities.
In Indonesia and Pakistan, the agriculture sector appear to attract socially very important, but statistically for the total economy less important "rural Islamic banks" (targeting micro finance). There is no such sector in Turkey.
Neither the percentage of Muslim population (Indonesia, Turkey, Pakistan), nor the zeal of the Government to promote Islamic banking (Indonesia, Pakistan) appears to be a determinant for success so far.
The marketing strategy of the Indonesian Islamic banks proved to be successful for the loyal but small niche of the "convinced" Muslim population, but did not succeed to appeal to the "public at large.
The Turkish participation banks on their side are severely handicapped (no sukuk, no money markets, relative few products, no government incentives and no Islamic windows) but expanded thanks to a more neutral banking approach (more focused upon the financial advantages and with slight emphasis to ethical merits).
Looking at the mix of relevant measures that are applicable to the different countries, he following guidelines appear to be clear:
dedicate sufficient means to Islamic rural banking / micro finance for the agricultural areas
create a good level playing field for the Islamic banks to compete with the conventional banks (for instance access to the sukuk and the money markets), without however any specific need to give them prime conditions (challenge makes competitive, superfluous benefits make lazy and distort the market)
open up the markets for international institutions (it attracts financial power and innovation)
install possibilities for all financial institutions to create Islamic windows and / or branches (better product awareness and overall acceptance of the Islamic banking also benefits to the dedicated Islamic banks)
have the conventional banks that want access to the market commit right from the start sufficient means (the need to dedicate assets to the activity enhances growth in the market)
promote diversification of products offered to the public (diversity is one of the handicaps of Islamic finance vis-à-vis the very mature conventional counterpart)
try to spread wealth out of the existing bigger cities to smaller cities and do not focus on the existing metro poles
try create sufficient liquid financial markets and stock exchanges, if needed through strategic alliances
give sufficient attention to international accounting standards, (corporate) governance, transparency and accountability
build strong prudential controls
give bank status and deposit protection
without loosing sight on the underlying principals, focus on market competition, quality of products and pricing thereof

Turkey has about the same market penetration but has approx. 6 times as much assets … tied in the Islamic finance industry as compared to Pakistan. It also has twice as much POS. When you see that the population of Pakistan is about twice as big, the gap even gets bigger.
On the other hand, the overall GDP of Turkey is more then 3 times as big and the same applies to the PPP (purchase power parity) per head. Also notice the dominance of agriculture (both turnover and labor force) in Pakistan and the lack of bigger cities.
With a market penetration that is half that one of Turkey talking in hard USD, the Indonesian Islamic finance still is close to 3.5 times as small as Turkey with only half the POS. The population of Indonesia being 3 times as big, the scale distorts even more.
In spite of the bigger population, the overall GDP of Turkey still is 10 % higher then that one of Indonesia and the PPP per head knows a multiplication of more then 2. Indonesia also lacks the big cities (38 on 231 million people compared to 24 on 74 million people for Turkey) and there also is a larger dependence on agriculture.
Malaysia has by far the best POS coverage of all. The GDP in PPP per capita even exceeds Turkey with 20 %. The comparative GDP (divided by population) is 10 % higher then Turkey. Malaysia has moved away from agriculture and has compared to the population of Turkey twice as much big cities.

(by Paul Wouters, first published at Islamic Finance News (Malaysia)
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