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Friday, 29 February 2008

Capita to launch Sharia-compliant insurance

Sharia policies will comply with strict Islamic beliefs, which are in conflict with conventional insurance products

Outsourcing giant Capita, best known for running London's congestion charge, is to launch an insurance business in April tailored to comply with Islamic beliefs. The initiative will see Capita initially sell car and home insurance by working with British Islamic Insurance Holdings. Life insurance, investments, savings and ethical financial products are to be launched later this year.

Capita, also known for collecting the BBC licence fee, will sell the policies as well as process claims and run the company's back office. The deal should be worth £87 million to Capita over eight years.

Conventional UK insurance products are in conflict with Islamic beliefs as the Koran prohibits "riba", loosely translated as interest but interpreted by many progressive Muslims as usury or extortionate interest. Insurance also contains elements of uncertainty and gambling that make it unsuitable for devout Muslims.

Bradley Brandon-Cross, chief executive of British Islamic Insurance Holdings, said: "The Muslim faith states that, because of various product features, conventional UK insurance options are in conflict with Islam and this creates a dilemma for British Muslims. We are planning to create a British insurer that operates in a way that removes this dilemma and creates an exciting new sector in the British insurance market."

The insurance product will comply with "Takaful" principles. Takaful is an Islamic insurance concept which has been practised in various forms for more than 1400 years. It originates from the Arabic word Kafalah, which means guaranteeing each other or joint guarantee. The Takaful system is a form of mutual insurance based on co-operation and responsibility. The principles of Takaful are that policyholders co-operate among themselves for their common good; each pays a subscription, which eliminates uncertainty and losses are divided and liabilities spread across a community pool. No individual should derive advantage at the expense.

Capita has been operating in the financial services market since 2000, first in the general insurance market and latterly in the life and pensions arena. The insurance sector has provided some of its biggest contract wins in the past year, when it began a £722 million contract with Prudential to administer 7 million mature life and pensions policies. The contract win has seen 1,750 Prudential UK staff transfer to Capita and a further 1,250 staff in Bombay have also joined Capita.

Since the turn of the year it has been taken on to run back office in Norwich of Marsh, the US-based insurance broker, in deal which is expected to be worth £200 million over 10 years.

Capita said yesterday that pre-tax profits had risen in the year to December 31 by 19 per cent to £238.4 million on turnover up 19 per cent to £2.07 billion. The company has all of its 2008 revenue of £2.3 billion in the bag and said that it has very good visibility on 2009 and 2010 earnings.

Paul Pindar, chief executive, said that any economic downturn was likely to be good for Capita as other companies looked to outsource their back offices.

Increasingly, Capita is also running other companies' front office and sales operations. For instance, it runs customer contact centres for DSG, formerly Dixons, and eircom, the Irish telecoms operator.

Capita has said that it will increase its dividend by 33 per cent, in line with a five-year average of 32 per cent increases. It has also proposed to return 25p a share through a special dividend. --(TimesOnline)


Maybank Islamic launches two treasury products

KUALA LUMPUR: Maybank Islamic Bhd yesterday launched two treasury products – Foreign Currency Commodity Murabaha Deposit-i and Foreign Currency Commodity Murabaha Placement-i.

In a statement, the bank said the launch of the products was in line with its strategy to grow its business under its International Currency Business Unit (ICBU).

The first product is a syariah-compliant liquidity management product to facilitate investors to mobilise their surplus funds into the Islamic financial market while the latter is a management product that can be used to facilitate inter-bank transactions.

As a start, the products would be offered in four currencies: US dollar, euro, British pound and Australian dollar, it said.
The minimum deposit in foreign currencies offered is equivalent to RM1mil for a minimum tenure of 14 days.
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Nigeria: Micro Bank Becomes Shariah Compliant

The Integrated Micro-Finance Bank (MFB) Limited has officially launched a Sharia compliant division of the bank and introduced a range of interest free products.

Launched in Lagos on Wednesday by the Kano State Governor, Mallam Ibrahim Shekarau, the IMFB stated that the interest free products are structured on the principles of equity, fairness and available not only to Muslims but non-Muslims alike.

According to the Managing Director of the bank, Simon Aiknsete, the new products are Lease Financing (Ijara), Partnership Financing "A" (Musharaka), Profit Sharing (Mudaraba), Cost-Plus Financing (Murabaha), Partnership Financing "B" (Musharaka) and Childrens Investment Account (IMAAD)

Stating where the bank will not invest people's investment, Akinsete said "our bank will not finance business or transactions that have alcohol or alcoholic products, pork and pork products, meats or meat products that are not permissible by Sharia, tobacco and tobacco products, gambling services and lotteries, activities that are harmful to human being, child labor, activities that capable of damaging the environment and arms."

The Kano State Governor, Alhaji Ibrahim Shekarau who was represented at the event by the State Director-General at the Directorate of Youth and Sports Development, Alhaji Gambo Ado, said the growth of Islamic finance as an ethical means of investing wealth arose because Muslims in Nigeria want to invest their monies to get good returns, but in accordance with Islamic principles.

Shekarau therefore called on Muslims across the country to take the challenge to fully develop its Islamic finance industry. "This will make the country's role as the financial centre of West Africa, if not the whole Africa more complete," he said. --(AllAfrica)
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Thursday, 28 February 2008

Modern Technology and Islamic Banking

By Lahem al Nasser

Riyadh, Asharq Al-Awsat- Banks are considered amongst the primary beneficiaries of modern technology whereby customers are no longer required to physically visit branches as they can carry out transactions from settling bills to dealing in local and international stock markets [from their own homes].

The extent to which these banks can benefit from technology differs according to laws and the electronic infrastructure in which these banks exist between a legal advanced electronic system and one that is underdeveloped. However, the services offered by Islamic banking have not benefited from modern technology in the way that they should have; most transactions that take place within the Islamic banking sector are conducted manually and this leads to delays in procedures, paperwork, and in some cases violation of rulings issued by the legitimate authority as a result of human error.

Perhaps the reasons that Islamic banking services are not benefiting from modern technology lies in the short-sightedness of those in charge of this sector as they overestimate the expensive costs of technological advancement that is required in order to benefit from it without actually considering the anticipated advantages.

Moreover, supervisory bodies have failed to adopt the approach of technological development in Islamic banking and in turn this leads to a lack of incentive for development from these institutions.

Some might question how technology may benefit Islamic banking services especially since Islamic banking is based upon mutual transactions such as Murabaha [where a financer, such as a bank, buys a commodity and sells it to the client at an agreed higher price] and Ijarah [where banks lease an asset to a client at a certain price and for a fixed period] and these result in ownership and partnership contracts [joint ventures].

The truth is that if we look at the level of online sales in the United States in 2007 that was estimated at US $259 billion (according to a report by the National Retail Federation) we will see that the use of technology in Islamic banking simply requires foresight and strong will so that e-commerce, after its significant development, can be utilised in completing Islamic banking transactions in terms of funding and investment.

For example, when a customer requires Murabaha financing in order to buy a car, he goes to the bank and fills in a request form (some banks allow this to be carried out via telephone or online banking). After this form is approved, the customer visits the bank once again to sign the form and the Murabaha document. The bank then asks the customer to choose the car that he wants by visiting the showroom that the bank deals with. The bank then purchases the car from the showroom and then signs the Murabaha document and the gives the customer permission to take the car from the showroom (some banks carry out the procedure at the showroom itself).
This process, however, sometimes entails error on the part of some employees who aim to facilitate and shorten the procedure for the customer; for example, they may make the customer sign the Murabaha contract before the purchase is processed by the bank and this in turn nullifies the contract and outlaws the entire deal since the bank is trying to sell a product that it does not own.

What I hope for is that this process could be carried out through the Internet where the customer would make his request and then would be notified whether that request has been approved or rejected. If it is approved the customer is to sign the request form and the Murabaha document that is available on the website and accordingly the customer would be allowed to browse the various cars available at the showroom through databases. When the customer chooses the car, the bank then automatically purchases it from the showroom. This process is governed by a contract between the bank and the showroom explaining the mechanism through which this process is carried out as well as the ensuing legal commitments. The bank then sells the car to the customer on the basis of the Murabaha process via the bank’s website where the customer electronically approves the Murabaha contract and prints the receipt, which outlines the specifications of the car. This is then handed over to the showroom and the customer takes his new car. This series of procedures adheres to Shariah to realize the bank’s ownership of the car avoiding paperwork and human error; this is how technology could be used in the services of Islamic banking.

Shouldn’t the endeavour to advance technology to solve the problems of Islamic banking services be a priority rather than attempting to find loopholes?

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Pakistan banking system improving but vulnerable to political risks - Fitch

MUMBAI (Thomson Financial) - Fitch Ratings said the Pakistani banking system has, over the last decade, gradually evolved from a weak state-owned system to a slightly healthier and active private sector driven system.
It however added that the resolution of the current volatile political environment and its likely impact on the economy would be a key driver in determining the fortunes of the Pakistan banking system.
Fitch noted that the private sector controls nearly 80 pct of the system assets, as opposed to the early 1990s when 90 pct of the system assets were controlled by the government.
The Pakistani banking system is made of 53 banks, which includes 30 commercial banks, four specialised banks, six Islamic banks, seven development financial institutions and six micro-finance banks. The four largest commercial banks account for 44.2 pct of system assets, while eight second-tier banks account for a further 35 pct. The system grew at a compounded annual growth rate (CAGR) of 17.8 pct between 2001-06. Loans too grew at a strong CAGR of 24.2 pct during the same period, before slowing down to only 2 pct during the first nine months of 2007 amidst greater political uncertainty, which in turn affected economic sentiment.
Fitch noted that Pakistan's banks have historically enjoyed low cost of funds as a result of their large low cost deposit base resulting in some banks enjoying interest spreads of around 7.5-8.5 pct.
Asset quality, which constrained banks' performance in the 1990s, has since improved with the reported gross NPL ratio declining to 7.7 pct at the end of the first nine months of 2007, from a staggering 23.5 pct in 2000.
Fitch further noted that the liberalised environment of the past few years drove M&A activity in the banking sector, resulting in 36 transactions between 2001-07.
'Such M&A activity may continue provided there is political stability. Likely players would include foreign banks seeking a footprint in Pakistan or a consolidation among smaller local banks, where the process may be shareholder driven,' Fitch said.
It added that bigger banks are unlikely to pursue an aggressive deposit/asset growth strategy, especially against the backdrop of the current political environment.
Fitch said the bigger players are more likely to focus on consolidating their existing position and enjoying the high interest spreads, which the agency believes could prevail at least in the short term.

Pakistan banking system improving but vulnerable to political risks - Fitch

MUMBAI (Thomson Financial) - Fitch Ratings said the Pakistani banking system has, over the last decade, gradually evolved from a weak state-owned system to a slightly healthier and active private sector driven system.
It however added that the resolution of the current volatile political environment and its likely impact on the economy would be a key driver in determining the fortunes of the Pakistan banking system.
Fitch noted that the private sector controls nearly 80 pct of the system assets, as opposed to the early 1990s when 90 pct of the system assets were controlled by the government.
The Pakistani banking system is made of 53 banks, which includes 30 commercial banks, four specialised banks, six Islamic banks, seven development financial institutions and six micro-finance banks. The four largest commercial banks account for 44.2 pct of system assets, while eight second-tier banks account for a further 35 pct. The system grew at a compounded annual growth rate (CAGR) of 17.8 pct between 2001-06. Loans too grew at a strong CAGR of 24.2 pct during the same period, before slowing down to only 2 pct during the first nine months of 2007 amidst greater political uncertainty, which in turn affected economic sentiment.
Fitch noted that Pakistan's banks have historically enjoyed low cost of funds as a result of their large low cost deposit base resulting in some banks enjoying interest spreads of around 7.5-8.5 pct.
Asset quality, which constrained banks' performance in the 1990s, has since improved with the reported gross NPL ratio declining to 7.7 pct at the end of the first nine months of 2007, from a staggering 23.5 pct in 2000.
Fitch further noted that the liberalised environment of the past few years drove M&A activity in the banking sector, resulting in 36 transactions between 2001-07.
'Such M&A activity may continue provided there is political stability. Likely players would include foreign banks seeking a footprint in Pakistan or a consolidation among smaller local banks, where the process may be shareholder driven,' Fitch said.
It added that bigger banks are unlikely to pursue an aggressive deposit/asset growth strategy, especially against the backdrop of the current political environment.
Fitch said the bigger players are more likely to focus on consolidating their existing position and enjoying the high interest spreads, which the agency believes could prevail at least in the short term.

HSBC incorporates its Islamic banking unit

PETALING JAYA: HSBC Bank Malaysia Bhd has announced the incorporation of its Islamic banking subsidiary, HSBC Amanah Malaysia Bhd, in line with its efforts to provide comprehensive Islamic financial services to the Malaysian market. The new entity would now be a full-fledged Islamic bank, it said in a statement.
HSBC Bank deputy chairman and chief executive officer Irene M. Dorner said the new entity would provide the opportunity for HSBC to increase its role in Malaysia's Islamic finance industry.
"We hope to be able to launch our Islamic bank in the second half of this year," she said in the statement.
The bank said HSBC Amanah would complement HSBC Bank's banking and financing solutions by providing a full suite of innovative products and services to retail and corporate clients when it opens its first branch.
With the establishment of the Islamic banking subsidiary, HSBC Amanah would become a distinct, local and legal entity with a universal banking license, it added.


Wednesday, 27 February 2008

Islamic banking enters new phase of innovation

'Islamic banking has entered a new phase of innovation', said Mr Ahmed El Shall, CFO of Dubai Bank, speaking at the Annual General meeting of the UAE Financial Markets Association (UAEFMA).

The AGM was held on 15 February 2008 at Le Meridian Mina Seyahi, and was attended by treasury market professionals from UAE banks. Mr El Shall, who is also the Chairman of the Islamic Bank's Liquidity Management Task Force set up by the Central Bank of the UAE, said that product development in Islamic Banking is now extending to the relatively nascent Islamic money markets and derivatives segments. Mr El Shall traced the growth of Islamic finance from its humble origins more than three decades back to the vibrant and thriving industry that it is today, where everyone wants a piece of the action.
Most of the growth in recent times has taken place in Sukuk, the Shari'a-compliant equivalent of bonds. Outstanding Sukuk issued is estimated to be in excess of $90bn. While the recent turmoil in the credit markets has affected the Islamic bond markets, with issuers having to call off their borrowing programmes, according to Mr El Shall it is only a matter of time before new issues start hitting the market. He also stated that various governments are already lined up to issue Sukuk, including those of the UK, China and Japan.
'Another important development,' Mr El Shall pointed out, 'is the interest that has been generated in the concept of Wakala, which is emerging as an accepted form of deposit placement both in the retail and wholesale segments. Wakala refers to an agency agreement in which the deposit-taker manages funds for the depositor for an expected rate of return.' 'In the wholesale segment in particular, a popular alternative to Wakala is Murabaha, which involves the buying and selling of permitted commodities, with the return to the depositor taking the form of profit on such trades. However, this method is generally cumbersome due to the tedious documentation involved,' he added.
Mr El Shall also noted, 'Recent developments in the Islamic derivative market have been more in the form of embedded optionality in deposit and financing products. Currency-linked deposits and Reduced Rate Currency-Linked Financing are just two of the recent products that have enriched the Islamic product repertoire, while innovative products with pay-offs similar to exotic options such as single-touch and no-touch options are also in the product pipeline.' He concluded by emphasising, 'Structuring Shari'a-compliant products is a major challenge and can be a painfully slow process.
New entrants to the Islamic banking sector have been striving to be more innovative and come up with Shari'a-compliant solutions that can match those offered by conventional banks.' The UAE Financial Markets Association is the standard-bearer for financial markets professionals in the UAE, and is affiliated to ACI - The Financial Markets Association, which is the global umbrella body of national associations. Among other things, the UAEFMA provides a forum for discussion on issues affecting the markets and gives feedback to official authorities and industry on ways to foster the growth of the UAE market. --(AMEInfo)

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Moody’s proves London must go for Islamic finance

By Frank Kane
on Wednesday, February 27 , 2008

If Alistair Darling, the British Chancellor of the Exchequer, is harbouring any last minute doubts about whether or not to announce plans for the issue of “Islamic gilts” in his forthcoming budget, I suggest he takes a look at the report issued today by Moody’s, the credit rating firm with an enviable reputation for getting things right.

Moody’s says Islamic finance has enjoyed three consecutive years of growth at 15 per cent plus, and shows no sign of slowing.

In particular, the market for Islamic bonds – sukuk – is “phenomenal”, says the firm. The full report can be read elsewhere in this newspaper, but just a couple of figures should be plucked out to illustrate the dynamic growth taking place in Islamic finance.

The total market is worth $700 billion (Dh2.56trn) – a conservative value, according to some other estimates – and new issuance of sukuk last year rose 71 per cent to $32.65bn. Within this global analysis, the largest proportion of sukuk was issued by the financial services sector, followed by real estate, then power and utilities.

Geographically, most came from the Gulf and Malaysia.

Given the power of the sovereign wealth funds in this part of the world, that is not surprising, and Malaysia too with its large Muslim population should also figure high on any list of issuers.
But financial services, real estate and utilities are all areas where the City of London is proud of its world-class expertise, and London can also boast a track-record in financial innovation second to none.

After the Moody’s report, Darling should accelerate his plans to issue Islamic bonds in London. It would be a shame if Kuala Lumpur beat London to the prize in this dynamic, growing market.

The new issuance of sukuk last year rose by this percentage to touch $32.65 billion.--(EmirateBiz)


Malaysia’s sukuk market the largest in the world

KUALA LUMPUR: The Malaysian sukuk market is now the largest Islamic bond market in the world with more than 62% or US$60 billion (RM195.6 billion) of the global outstanding sukuk having been originated in the country, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said.
“Supported by a comprehensive infrastructure, including the settlement and bond information system, Malaysia has an attractive primary sukuk market with an average annual growth of 17% over the 2001-2006 period.
“It also has one of the most active secondary markets with a turnover of sukuk trading registering more than US$40 billion annually,” Zeti said in her keynote speech on "The Evolution and Opportunities of Islamic Finance" at the Nikkei Islamic Finance Symposium in Tokyo last Saturday.
She said the Malaysian bond market had been liberalised to enable foreign entities to raise ringgit and foreign currency denominated funds. "International issuers may thus issue multi-currency sukuks or alternatively have the flexibility to swap domestic currency funding into other currencies."
Zeti also announced that a Malaysian corporation recently issued the world's largest-ever sukuk amounting to US$4.7 billion, which was two times oversubscribed.
Globally, she said the total Islamic finance assets had surpassed the US$1 trillion mark, growing fivefold in five years and the global Islamic financial market was expanding at an annual growth of 20%.
Zeti said the increased diversity in Islamic financial products, including sukuk bonds, had made them more attractive as investment subjects. She said global sukuk market had registered a remarkable growth, increasing at an average of 40% with a current size of US$80 billion. --(StarMY, 26Feb08)

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Sharia finance: plenty of interest in no interest

The Halal banking revolution is taking off, says Kara Gammell

The British Government is believed to be planning to raise funds by issuing Shariah-compliant bonds in the Middle East, which would be the first time a Western country did so, but many British banks already provide financial services in accordance with Islamic law.

Junaid Abbas Bhatti, an expert in Islamic Finance said: "The industry is growing at 15pc a year, so it's no surprise that the Western world's financial markets are starting to sit up and take notice of the Halal banking revolution.

"Islamic banking is far more complex than a simple prohibition on the giving and receiving of interest."

Emile Abu-Shakra of Lloyds TSB said there are now 2m Muslims in the UK. He added: "Our research tells us that three quarters want banking services that are in line with their faith.
''We have developed a range of products - from current accounts to mortgages - designed to meet the needs of needs of Britain's Muslim community.

"Not only has this made its possible for Muslims to bank according to their principles, but it has also helped to make Britain a real centre for Islamic finance."

The main difference between Islamic and conventional banking is that Islamic teaching says that money itself has no intrinsic value, and forbids people from profiting by lending it, without accepting a level of risk.

In other words, interest - known as "Riba" - cannot be charged.

Sana Ayub-Shah, 26, and her husband Sajib Shah, 30, from Ilford, Essex, opened an Islamic current accounts through their bank, Lloyds TSB, and said: "It means our money was being handled in a way that did not breach their beliefs: "It offers features, like no interest received, that allow me to follow my religion through my bank account."

Wealth can only be generated through legitimate trade and investment and any financial gain relating to this trading are shared between the person providing the capital and the person with the expertise.

So conventional mortgages and loans with interest are prohibited.

The Islamic Bank of Britain is the UK's first and only stand-alone Sharia-compliant high street bank, regulated by the Financial Services Authority, and approved by the Sharia Supervisory Committee.

Now the Government is said to be considering offering Shariah-compliant investment certificates or "sukuk". Sukuk, which are often referred to as Islamic bonds, make similar types of payments to investors as conventional bonds but these are not interest-based.

The precise way a sukuk works depends on the type of contract used, but one common way is to use a lease - or "Ijara" - contract. Here the money from investors is used to buy an asset, which must accord with Shariah law.

Once the asset is purchased, it can be leased to generate a rental income, which is paid to investors. At maturity, the underlying assets are sold, allowing investors to get back their original investment.

It is also forbidden to buy shares in any company that makes money from Riba - such as Western banks. Another way some banks do not comply with Shariah law is if they lend to companies that deal in such activities as alcohol, pork products, pornography, arms-trading, not to mention many other prohibited - or "Haraam" activities.

Islamic Bank of Britain says it generates all its profits through Shariah-compliant trading and investment activities and then share the profits with customers at pre-agreed ratios. Mr Bhatti said: "We use the Islamic principle of Qard for our current accounts. A Qard is a loan, free of profit. In essence, it means that your current account is a loan to the bank, which is used by the bank for investment and other purposes. Obviously it has to be paid back to you, in full, on demand.

"Our savings accounts give the customer a Halal profit on their money. The bank uses the customers' money to invest in ethical businesses and then shares the profits it has made with account holders. If the bank makes no profits at all, then the customers will get no profits on their savings."

The Islamic Bank of Britian also offers an Islamic Home Purchase Plan where the customer and the plan provider purchase the property together, and become joint owners. The home owner then pays rent on the share of the property that they do not own and over time is able to purchase a greater share of the property and reduce rental payments. This is known as "Diminishing Musharaka with Ijara".

Lloyds TSB also offers a Shariah-compliant student account which includes an interest-free overdraft of £500 for the first six months, and then £1,000 between months seven to nine, rising to £1,500 after nine months for the remainder of their three year course. Students on longer courses may be offered an interest-free overdraft to £2,000.

To cater for Muslim families, The Children's Mutual offers a Shariah Baby Bond as a stakeholder child trust fund with charges capped at 1.5pc a year. This ethical fund invests in the shares of companies that are not involved in activities banned under Shariah law.


by Michelle de Klerk

When Sana Ayub-Shah, 26, and her husband Sajib Shah, 30 (see above), from Ilford, Essex, found out they could open Islamic current accounts through their bank, Lloyds TSB, they jumped at the opportunity of having the "peace of mind" that their money would be handled in a Shariah-compliant way.

The couple have held the accounts since their wedding last April. Mrs Shah, an investment banker, said she had been very satisfied with the product and would advocate its use to other Muslim families. Having an Islamic bank account meant their money was being handled in a way that did not breach their beliefs: "It offers features, like no interest received, that allow me to follow my religion through my bank account."

The couple also have money invested in Premium Bonds, but would be willing to move their money across if further Islamic product options came on to the market. Mrs Shah said the couple was more than happy to forgo the small amounts of interest paid on normal bank accounts in favour of being "better Muslims"t. Mr Shah, a manager in the NHS, has also recently set up an online T-shirt company at and would be investigating the Islamic business account options available. --(Telegraph)

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New push for Sharia-based transactions

MANAMA: An accounting watchdog has launched a major initiative to streamline Sharia compliance of financial contracts for Islamic finance transactions.

The Accounting and Auditing Organisation for Islamic Financial Institutions' (AAOIFI) contract certification programme involves certifying that financial contracts between Islamic financial institutions and their clients comply to international Sharia standards.

Objectives of the programme are to ensure harmonisation of Islamic finance practices and to enhance confidence in the Islamic financial systems. For the Islamic financial institutions, the certification programme will provide independent endorsement on Sharia compliance that can assist the institutions in their marketing of Sharia-compliant products to their customers.

"The contract certification programme, which marks an important milestone for the international Islamic finance industry, will be overseen by AAOIFI's Sharia Board and Accounting and Auditing Standards Board. Our Sharia board comprises all the eminent leading scholars and is acknowledged as the foremost global authority on Sharia for international Islamic finance." said AAOIFI secretary general Dr Mohamad Nedal Alchaar.--(GDN)

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Tuesday, 26 February 2008

Islamic microfinance gains popularity in war-torn Afghanistan

by Rahilla Zafar, Kabul

After spending several years in Iran as a refugee struggling to make a living working in a beauty parlour, Shooperi Sharif never imagined that one day she would have a business of her very own.

Sharif and her family fled Afghanistan during the Taliban regime in 1996. In 2002, shortly after their downfall, the family returned to Kabul. With war-shattered Afghanistan lacking basic infrastructure and institutions – including schools, Sharif began teaching school-aged children in her home.

Last year, the 34-year old mother of three took a microfinance loan from the Foundation for International Community Assistance (FINCA) to expand her school. After successfully paying off her loan, Sharif’s loan officer encouraged her to use the skills she learned in Iran and open a beauty parlour in her neighbourhood.

Sharif immediately saw it as a good opportunity. While many schools have reopened in her neighbourhood, there were not so many beauty parlours. “I had never taken a loan before; it gave me a lot of confidence to see that I could borrow money in my own name and pay it back. In Iran, as an Afghan, I would never have had an opportunity like this,” she says.

Sharif is one of thousands of Afghans who refuse to take interest-bearing loans. Trying to cater to potential clients such as Sharif, FINCA in 2006 became the first microfinance institution (MFI) in Afghanistan to offer non-interest bearing Murabaha Islamic loans (contracts where sellers declare their cost and profit).

Following the guidelines of Murabaha lending, she went along with her loan officer to buy items such as tables, mirrors and chairs for the parlour. The goods were sold to Sharif at a two per cent mark up which she is paying back in monthly installments.

Paul Robinson, FINCA’s country director in Afghanistan, says not only are the products better received than conventional forms of lending, the Murabaha practice is also better for business. “The advantage of Murabaha loans is that 100 per cent of the money goes into the business. When you do small business lending at Bank of America for instance and you are a small business, as a banker, I would give you a cheque with the name of the store, rather than giving the borrower cash to make sure all the money goes into the business,” Robinson says. FINCA began its operations in Afghanistan in 2004. Two years later, following market demand, they switched their products to the Murabaha practice.

One borrower, Gul Khana, has felt the benefits of a Murabaha loan first hand. A widowed mother of four, the 37-year old was one of FINCA’s first clients in 2004, using the money to open a bakery in Kabul.

“Now that all the money I am borrowing goes into business supplies, I earn more. Before, when I would receive cash directly, there was always some of the money that I would use to purchase other things not relating to my business,” she explains.

Providing Shariah-compliant loans has made it possible for FINCA to expand in areas of Afghanistan where other MFIs have been turned away for charging interest.
There are currently 14 microfinance institutions in Afghanistan that are supported by the Microfinance Investment and Support Facility, Afghanistan (MISFA) – a multi-donor venture established in 2003.

With just over 400,000 borrowers in Afghanistan, the popularity of Islamic loans has enabled FINCA to become Afghanistan’s fastest-growing and second-largest MFI with nearly 60,000 clients.

“Many NGOs (non-governmental organisations) are coming to me and asking how we are working in such volatile regions as Kunar and Langahar province in eastern Afghanistan. FINCA is able to do so, because we hire local people to work there that the community knows and trust. You have to learn from the local people and develop a delivery mechanism that goes with the values and norms,” Robinson explains.

“Islamic products are not that difficult to develop. Here, in the developing phases, you have to understand the needs of the clients and build delivery systems people are comfortable with,” Robinson adds.

FINCA employee Zul-fi-Qar Mandozai, who previously worked for a rival MFI, says that from his experience working in the central province of Kapisa, clients are more comfortable with Islamic-compliant products.

“At the previous organisation I worked for, so many villagers refused to take the loans because they charged interest,” he says. Joyce Lehman, a microfinance program officer for the Gates Foundation, agrees that more Shariah-compliant products need to be offered. Lehman previously worked as chief of party for the Afghanistan Research and Evaluation Unit (ARIES), the United States Agency for International Development-funded rural finance projects in Afghanistan and as MISFA’s chief operating officer.

“Out in the field, MFIs are losing clients to other organisations that provide Shariah loans and it’s that type of market competition that is making MFIs look into providing Shariah products,” she says.

Commercial banks that are offering small- and medium-sized enterprise loans are also finding a strong demand for Shariah-compliant products as they expand in Afghanistan. “ARIES is encouraging commercial banks to lend to SMEs by training staff and providing capital if needed. In the south and east of the country especially, many banks are finding potential borrowers to not be interested because the loans aren’t Shariah-compliant,” says Lehman.

With Afghanistan’s financial system being just four years old, switching to a Shariah-compliant system is too difficult a task to fathom for many banks. MISFA is currently working with ShoreBank International on a project providing technical assistant to commercial banks providing SME loans.

“In the context of Afghanistan, in my view, developing Shariah-compliant products are critical. We have received some resistance from pockets here and there, but nothing that would derail the whole sector. However that doesn’t mean we should be complacent. We are bringing people from the Middle East where there is good experience in Islamic banking products to do some training here,” says MISFA’s managing director Amjad Arbab.

Recently, ARIES released a study on microfinance funded by the UK’s Department for International Development (DFID). In the report ‘Microcredit, Informal Credit and Rural Livelihoods: A Village Case Study in Kabul Province’, researchers Erna Andersen and Paula Kantor found that communities were often divided on their views on interest-bearing loans.

On one of the MFIs examined, the researchers wrote: “For a programme seeking to expand its client base in order to achieve operational sustainability in a Muslim environment, more direct attention to ensuring all staff explain programme costs and charges would be seemingly important.”

Andersen and Kantor found that in this particular community, many problems arose from local religious leaders disapproving of interest-bearing loans. There is little doubt that as the financial sector expands in Afghanistan, both commercial banks and MFIs will have to follow the lead of FINCA and provide more Islamic lending products. As the pioneer organisation in providing such services, FINCA has proved that such a task is not so daunting.

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Islamic banking and finance to continue growth: Moody's

PARIS - Islamic banking and finance, which respects sharia laws banning usury, is growing fast and will continue to do so, international credit ratings agency Moody's Investors Service said on Tuesday.

It said the Islamic finance market had grown 15 percent in each of the past three years, with global volumes at 97.3 billion dollars (65.74 billion dollars) by the end of 2007.

The market has shown no sign of slowing down, reflecting in part the huge revenues the Middle East states are generating from their oil and gas exports, it added.

Islamic banking fuses principles of sharia or Islamic law and modern banking but Islamic funds are banned from investing in companies associated with tobacco, alcohol or gambling considered taboo by Muslims.--(Turkish Press, 25Feb08)

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Turkey: Halal certification a must for export market

İstanbul yesterday hosted a symposium on halal food -- food prepared in accordance with Islamic teachings -- where businessmen called for the establishment of a halal food certification system in Turkey without delay.

Speaking at the symposium, organized by the Food Auditing and Certification Research Association (GİMDES), Independent Industrialists and Businessmen's Association (MÜSİAD) President Ömer Bolat stated that many countries have been requesting halal certificates on their imports and that Turkey is being put at a disadvantage in these markets since it does not yet have a certification system.

Bolat pointed out that halal certification is very important, especially for the food industry. Bolat noted that the volume of the halal food market is expected to hit $600 billion this year, which constitutes 5 percent of total world trade. He said after the establishment of a halal food certification system, Turkey's annual exports to the Middle East and Africa would exceed $20 billion.

Professor Ahmet Akgündüz, chancellor of the Islamic University of Rotterdam, said the halal food concept has gained importance in recent years and pointed out that the certification was first launched in the non-Muslim country of Singapore. He noted that a certification system has also been developed in Western countries, saying that Turkey lacks such a system.--(Today's Zaman)

Monday, 25 February 2008

QIB takes Islamic banking to great heights globally

The Islamic banking industry is relatively new compared to the conventional banking. Introduced 30 years ago, it was operating in a limited number of Muslim countries. Three decades ago, Islamic banking was targeting and planning to serve only Muslim clients keen to deal only on Shariah compliant base.

Since the beginning of the 21st century we witnessed a radical change and the number of Islamic banks significantly increased and their geographical spread grew exponentially to be present today in almost 76 countries covering all continents.

The potential and promising future of Islamic banking were probably the main reasons that pushed major international conventional banks to embrace the Islamic banking wave.
Most of them opened an Islamic window under their main platform with an objective to capture within the Islamic industry the lion share using their muscles. The paradox is that international conventional banks with their 400 years banking experience were newcomers next to their peers with 30 years of Islamic banking experience.

This is why today full fledge Islamic banks, mainly from the GCC, are leading the growing Islamic banking industry. Backed up by their countries’ booming economies and natural resources such as oil and gas, these banks are now going global offering Shariah compliant financing solution to clients in all continents where the demand for the product is expected to reach $4 trillion in five years period. Their strengths are a banking concept based on transparency, win-win relationship and ethical banking values and services.

One of the most active Islamic banks in GCC, eager to play a major role in the international finance arena is Qatar based, Qatar Islamic bank (QIB). With more than 25 years experience in Islamic banking, an outstanding financial performance record and the leading position in its own country in Islamic banking, QIB is leading the way in global expansion of Islamic banking. We have met with QIB Chairman, Sheikh Jassim bin Hamad bin Jabor Al Thani to talk to us about this success story and to tell us more about QIB’s future plans and strategy in the booming Islamic banking sector.

Qatar Islamic Bank (QIB) closed 2007 with not just a record profit year but the fourth consecutive year of outstanding financial performance, outperforming many in the banking industry. Would you please share with us some of the key figures and brief highlights of main reasons behind this performance?

The last four-years journey was a breakthrough in QIB history. In four years we have almost tripled our total assets that reached QR21.3bn in 2007 representing a year on year increase of 43 percent vs 2006, and 40 percent average increase for the last four years. During the same four years period we have more than doubled our deposits that reached QR12.2bn a 39 percent increase vs 2006 FY, and a 26 percent average increase for the four years. This is mainly due to our aggressive local expansion plan whereby we have now 22 branches in Qatar and our unique products range enabled us to consolidate our existing customers base and attract new ones despite the fact that all conventional banks during this period opened Islamic windows and new full fledge Islamic banks were established in Qatar.

Our financing and investments simply tripled in four years reaching QR15.9bn in 2007 representing a 57 percent increase vs 2006, and an average growth of 39 percent for the same four years. 2007 in particular was an exceptional year where we managed to convert some corporate financing traditionally with conventional to Islamic financing. We represented this in the aviation industry with Qatar Airways for an Airbus 340-600, with Al Waab city mega project financed on Shariah compliant base and Salam bounian who mandated us for a $150m sukuk issuance for the gate project. We also used our Shariah compliant scheme to finance partially other projects such as Qanat Quartier at the Pearl Island or a desalinisation plant for Qatar Electricity and Water. We consolidated and strengthen our leading position in real estate financing. We are the only Islamic bank with an in house real estate department that not only provides financing to customers but a total solution up to turnkey project. Our real estate investment funds outside Qatar continued being a success year on year, achieving an average revenue that exceeds its counterparts.

During this four-year period QIB net profit quadrupled to reach QR1.255bn in 2007 a 25 percent increase vs 2006, with an average profit increase of 74 percent for the last four years. Both the capital and the shareholders equity tripled in four years with an average growth of 82 percent and our return on asset is one of the best in the world as we were ranked 14th worldwide in 2006 and 2nd in profits growth among the Arab banks. Overall, our performance is by far above the industry average whether in comparison to the total banking industry or to Islamic banking.

What strategy did QIB put in place to achieve this outstanding performance?

QIB has developed a five-year strategic business plan that is on going up to 2012. The objectives of this plan are to consolidate and maintain our leading position in the Islamic banking in Qatar and to become a leading global provider of Islamic banking via an aggressive international expansion plan and the development of new financial instruments covering the increasing demand on the banking and financial services on the local and international market.

To put this into execution we have been through a total reengineering process of the bank. We have used external advisers and auditors to evaluate our position in several fields such as IT or HR and organization structure. The management team and the external advisers developed a strong and aggressive plan that we have successfully executed and is currently on going.

I would like to highlight the role undertaken by the Shariah Control Board presided over by Dr Youssef Al Kardawi, where the board has endeavoured, since the bank started in 1982, to find and develop legitimate solutions for the banking, financing and investing services. Hence, the committee's achievements and QIB experience in this field became an important reference for developing the Islamic banking services in Qatar and abroad.

The committee plays a role in enhancing the ambitions of the board of directors to expand the bank's activities internationally through developing the financing houses established abroad and opening new investment houses in promising markets such as in Asia, the Middle East, North Africa and Europe.

What about the organization structure and employees' contribution to this success?

We have put in place a new organization structure that addresses the bank requirements and challenges. We have attracted high caliber talents with expertise in their respective fields and strong determination to raise Islamic banking to new heights. We have created stand alone specialized structures dedicated to retail and consumer banking, corporate banking and private banking.

We have established an investment banking and business development structure to oversee the bank expansion and investment internationally and to develop Shariah compliant sophisticated financing structure to convert totally or partially mega project financing from conventional to Islamic banking. Our employees are one of our strongest assets. We do have today more than 600 employees in Qatar of which about 30 percent are Qatari talents and we also employ via our subsidiaries internationally around 150 employees.

On top of a strong performance, we have also witnessed a major change in the identity and overall communication activities. What were the reasons behind this change?

After 25 years in the market place we believed that this was the right time to revamp the entire image and identity of QIB. We are now competing at an international level and we need to build strong image and brand awareness not just in Qatar but globally. Our aim is international standards at all levels. To achieve this we have clear upgrade plans in place where required. For example we are upgrading our IT system to the latest technology available, we developed a new website and even our offices’ interior design was upgraded. All these among others are part of our plan to combine authenticity and modernity to reach global international standard while maintaining our Shariah compliant roots.

The success of our global strategy is already acknowledged. Fitch and Capital intelligence respectively upgraded our rating from BBB+ to A- and for our 2007 performance we have already received four awards among which are "Best Real Estate Finance House" and "Most Improved House" from Euromoney in addition to "Best Rebranding" and "Best Advertising Campaign" from the Business and Islamic Finance magazine.

What makes QIB keen on international expansion?

In our strategy we have included aggressive growth plan both locally and internationally. We believe in globalization and in exponential growth of the Islamic banking industry. With our 25 years experience in this field we see it normal at this stage to build a global network. Part of our mission is to serve and promote the Islamic banking industry. This will be achieved by transferring the know-how and expertise to our network in different continents.

Thanks to our investments houses, subsidiaries and affiliates, we are proud to say that we have already established the first Islamic banking global network under one roof and this is via the Arab Finance House in Lebanon, the Asian finance bank in Malaysia, the European finance House in UK and QInvest in Qatar, our investment arm in Qatar licensed by QFC and in operation since May 2007. QIB global network is able to offer cross continent Islamic financing solutions to any corporation worldwide in compliance with the Islamic Shariah.

How do you see competition within the Islamic banking industry?

We compete in the total banking industry and not just in Islamic banking and of course globally not just in Qatar. It is with such a wide competitive map in our strategic plan that fast growth in market share and performance can be achieved. We continue to lead the Islamic banking sector in Qatar with around 57 percent and we hold about 10 percent of the total banking industry. Our expertise and experience allows us to offer alternative solutions to convert clients or mega projects financing from conventional to Islamic financing and this is going to be a major source of growth.

What do you foresee for Islamic banking in general and what are QIB plans in particular?

QIB is strongly committed to Islamic banking and will continue playing a major role to raise the profile and the awareness of Islamic finance. We believe that in Qatar the Islamic banking will continue to grow faster than the conventional sector. At a global level we expect that by 2010 the Islamic banking will reach $1 trillion. We have strong plans to maintain our leading position in Qatar with a 25 percent growth rate. We are going to put state-of-the-art key performance indicators to measure our performance on 360 degree scale including for example earning /employee.

We will increase our branches network to achieve 35 within the next few years. We will expand our ATM network and launch e-banking. We will develop a unique incentive and concierge programme for our private banking customers. Moreover, we do expect a strong growth in projects and corporate financing via an alternative finance solution conversion programme targeting key companies in Qatar. We do have plans to reengineer our real estate development subsidiary Aqar and prepare it for further challenges.

We will continue with QInvest looking for major investment opportunities and turn them into reality as we have successfully done recently with the acquisition of 40 percent of the prestigious Shard of Glass in London.

We will also establish two new financial institutions, a private equity fund firm and a sukuk specialized institution. We plan to operate the two institutions from the QFC. In 2008 we will also build the foundation for a Takaful company.
We will continue our support to the Qatarisation programme and of course continue our corporate and social responsibility programme.

What is next in the agenda for the international expansion?

The expansion plan will continue. We are now licensed by the FSA in the UK to open the European Finance House (EFH) in UK. We will expand our European presence and prepare to open Finance Houses in France and Germany. We will also expand our Asian presence and on top of Malaysia the Asian finance bank we will open representing offices in Indonesia, Singapore and Brunei. In Lebanon we will continue our expansion and Arab Finance House will move from 4 to 7 branches. We are now in final stages of feasibility study to expand to Turkey and Egypt and we are seriously considering the other GCC countries. We do also have a strategy of acquisition as part of our growth plan and are evaluating few options. Moreover, we will continue looking for the right opportunities to consolidate our existing international funds portfolio. --(ThePeninsular)
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Sunday, 24 February 2008

Executive Diploma in Islamic Law (Islamic Banking and Finance) programme launched

THE International Islamic University (IIUM) and the Malaysian Bar Council have launched the Executive Diploma in Islamic Law (Islamic Banking and Finance) programme.
Representing the Bar Council at the launch were Steven Thiru, Hendon Mohamed and Rashid Ismail.
IIUM was represented by Prof Datuk Dr Sano Koutoub Moustapha, Assoc Prof Dr Haji Azmi Haji Harun and Prof Datuk Dr Zaleha Kamarudin.
Prof Sano, the deputy rector of IIUM, said that under the 9th Malaysian Plan, the Government had emphasised the importance of Islamic banking in Malaysia.
“The Government hopes that the Islamic banking industry will continue to expand parallel with conventional banking.
“By 2010, the Islamic banking industry is expected to constitute about 20% of the overall banking and insurance market.”
Prof Sano also said the Government intended to develop Malaysia as a global Islamic financial hub which would serve as a platform for the origination, issuance and trading of Islamic capital market and treasury instruments, for fund and wealth management, offshore Islamic financial services market as well as takaful and retafakul business.
“This will be complemented by the formation of centres of excellence for education, training, consultancy and research in Islamic banking and finance,” he added.
According to Thiru, the course would also enhance students' knowledge of Islamic commercial and legal principles, especially in banking and takaful.
The programme was the first step in the Bar Council’s plans to collaborate with universities and other bodies to offer professional development events for members, he added.
“This will enable members to broaden their scope of knowledge in different areas of the law,” said Thiru.

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Philippines to launch first guideline book for making Halal food

MANILA, Feb. 24 (Xinhua) -- The Philippines will launch its first guideline book on making Halal food in accordance with international standard, in order to promote the country's food industry, the official Philippines News Agency quoted Agriculture Secretary Arthur Yap as saying on Sunday.
Yap said there is a huge international market for Halal food, so the country must promote the production of the food for both home and foreign consumers, said the report.
The fundamental concept and practices of Halal, which means "lawful" or "permissible" as a broad term used to describe how a Muslim must conduct his life, are embodied in the Muslim holy book Quran, Hadith, the Shariah law, as well as other Islamic jurisprudence, according to the report.
The requirements for Halal products across the globe are estimated to be more than 200 billion U.S. dollars annually.
Yap said the guidelines will provide food processors, traders, exporters and marketing logistic operators with the necessary information in preparing, packing, labeling, and handling of Halal foods.
Hence, people can rely on Halal certification as a seal of food safety and quality assurance, he said.
Muslim religious scholars and leaders in the Philippines have also formed a board that will accredit Halal certifiers to ensure the strict implementation of the Philippine General Guidelines on Halal Food, according to the report.
The Philippines has 10 million Muslims, most of them living in Manila and Mindanao.

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Zeti: Islamic finance can withstand global stress

TOKYO: The Islamic finance industry faces challenges from international market turmoil, but Malaysia's past experience points to its resilience to stress in global markets, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said yesterday.
“We are pleased to report that the Islamic financial system demonstrated its resilience to the stress that occurred 10 years ago during the financial crisis,” Zeti said in a speech at an Islamic finance symposium here.
“We will make every effort to ensure not only the soundness and stability of Islamic finance but also its resilience in an environment of financial stress,” she added.
Zeti was responding to a remark by Bank of Japan (BoJ) governor Toshihiko Fukui who told the same seminar that the rapidly growing modern Islamic finance industry had not been fully tested by serious stress in the international markets.
“Stress tolerance can only be acquired through the experience of riding out numerous crises in the financial market and financial system,” Fukui said, adding that he would closely watch the developments in Islamic finance in this regard.
Fukui added that understanding the flow of Islamic finance capital originating from oil money had become important when considering sustainability of the global economy.
The development of Islamic finance brings diversity to financial markets and transactions, boosting business opportunities and providing a positive impact on the economy through more efficient resource allocation, he added.
There has been growing interest in Islamic finance in Japan, but the participation by Japanese financial institutions in Islamic finance business is still at an initial stage partly due to regulatory obstacles.
The Japan Bank for International Cooperation is set to issue the first Islamic bonds, or sukuk, in Malaysia soon.
The BoJ joined the Islamic Financial Services Board, an international body setting standards for Islamic finance, as an observer member last year in a bid to learn more about Islamic finance. – (Reuters)

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Saturday, 23 February 2008

"The Evolution and Opportunities of Islamic Finance" - Governor of Bank Negara Malaysia's Keynote Address in Tokyo

TOKYO (Nikkei)--Government officials and private-sector leaders from home and abroad shared their views on the current state of Islamic finance at the Nikkei Islamic Finance Symposium in Tokyo Saturday.

Zeti Akhtar Aziz, governor of Bank Negara Malaysia, gave a keynote speech on "The Evolution and Opportunities of Islamic Finance."

Following are highlights of Aziz's speech.
1.The evolution of Islamic finance is evidenced in five dimensions of its development
*Islamic finance is a viable and competitive form of financial intermediation
-- Seen by borrowers as an alternative means of financing
-- Seen by investors as a new asset class
-- Exceptional growth both in Muslim world where the growth is premised on religious and business considerations, and also in the Western world where the growth is much more commercial and business driven.
-- Islamic finance is among the fastest growing financial segments in the world with an estimated annual growth in the region of 15-20 percent.

*scope of Islamic finance today has been enlarged and diversified with significant product innovation in the recent years
-- scope of Islamic finance includes private equity, project finance, the origination and issuance of Sukuk, and; fund, asset and wealth management activities
-- these products are competitive both in terms of product structure and pricing
-- Increased breadth and depth of the financial services industry due to:
○ Significant product innovation
○ Emergence of many diverse Islamic financial institutions and development of the Islamic financial markets
○ Enhanced depth and effective functioning of the Islamic financial markets.
*significant regulatory, supervisory and legal reforms undertaken
-- Reforms are taking place in many jurisdictions to create an enabling environment for Islamic finance to grow.
-- The establishment of the Islamic Financial Services Board (IFSB) in 2002 marked an important milestone in the development of internationally accepted prudential regulatory standards and best practices. [BIS equivalent for Islamic finance]
-- IFSB contributes to the harmonization of Islamic finance across jurisdictions.
*Islamic finance increasingly becomes important part of the international financial system and becomes poised to contribute towards greater global financial integration.
- Islamic financial institutions have ventured beyond their domestic borders.
-- Funds raised in Islamic financial markets have drawn investors from financial centers across the globe " diversified investor base and enhanced cross border financial flows.
-- Increased diversity and greater participation in inter-regional investment has allowed for enhanced financial linkages among the major regions.
-- The expansion of inter-linkages among intermediaries and markets contributes to a more efficient allocation of financial resources across borders.
-- Now there are more than 300 Islamic financial institutions worldwide in more than 75 countries both in the Muslim and non-Muslim countries.
*Human capital development in Islamic finance has become more structured and focus to ensure an adequate supply of talent and expertise
-- As the industry evolves and matures, development of talent must be focused on driving innovation and leveraging on advancement in technology to raise the level of performance.
-- High caliber professionals with combined knowledge of Shariah and finance are now in great demand.
-- International Center for Education in Islamic Finance (INCEIF) in Malaysia offers programs to support the global development of Islamic financial services industry.
2.Distinctive Features of Islamic Finance
*Islamic finance operates in accordance with Islamic rules referred as 'Shariah' (pronounced as 'Sha-ree-ah').
*Islamic financial transactions must be supported by an underlying productive activity
-- Islamic financial transaction must be accompanied by genuine trade and business related transactions, thereby avoiding interest-based financial transactions.
-- Instead, Islam encourages business and trade activities that generate fair and legitimate profit.
-- This principle contributes towards insulating the Islamic financial system from potential risks of financial stress triggered by excessive leverage and speculative financial activities.
*The risk and profit sharing feature of Islamic finance allows for better management of risks
-- The Islamic financial institutions share in the profit or loss incurred by the entrepreneur.
-- As such, the risk sharing feature requires a high level of disclosure in the financial contract so that the accountabilities of the respective parties involved are clearly defined.
-- This provides a strong incentive for Islamic financial institutions to appropriately manage its risks. It also allows the market to assign the appropriate risk premiums to the respective companies and thus plays an instrumental role for the market discipline to take effect.
-- The above features provide in-built checks and balances, which serves to promote greater financial stability in the Islamic financial system.
3.The Malaysian Experience in developing Islamic Finance and initiatives to position Malaysia as an Islamic financial gateway to Asian region
*The Islamic financial system in Malaysia has evolved as a competitive component of the overall financial system with a significant number of diverse players in the Islamic banking and takaful industry as well as vibrant Islamic capital and money market. This is supported with institutional development, robust Shariah framework, legal and regulatory framework, wide ranging products and a sustainable human capital development.
*The Islamic financial industry in Malaysia has been expanding at a double digit growth rate. The Malaysian Sukuk (Islamic bonds) market is now the largest Islamic bond market in the world with more than 62% (or US$60 billion) of the global outstanding Sukuk originated from Malaysia. In the equity market, 86% of the listed stocks are Shariah compliant with market capitalization of US$193 billion.
*Malaysia is now positioning itself as an Islamic financial gateway through wide ranging liberalization measures and concerted efforts by the Malaysian Government to promote Malaysia as the International Islamic Financial Center.
-- To position Malaysia as a center for origination, distribution and trading of sukuk, further steps have been taken to liberalize the market to allow foreign corporations including multinational corporations and multilateral agencies to raise funds in the Malaysian bond market. Funds raised by these entities may be used to finance investment activities in other jurisdictions.
-- To raise the significance of the international dimension of the Islamic financial system, wide ranging liberalization measures were implemented, including the issuance new Islamic banking licences and through increasing the strategic stakes possible by foreign interest in our Islamic financial institutions, to up to 49 per cent.
-- Foreign exchange administration rules have also been progressively liberalized. In this regard, liberalization of capital account through the removal of restrictions to foreign exchange transactions has increased foreign participation in our financial markets.
4.Opportunities in Islamic Finance
*Japan's economic relationship with Malaysia through investment and trade is well established, there is a significant potential for strengthening further the financial linkages in future. The potential areas of further financial linkages are in the Sukuk market and the Islamic banking as well as takaful.
*Japan as the largest bond market in Asia and as one of the largest economies in the world can jump start the journey in Islamic finance by capitalizing on Malaysia's strong brand and experiences in Islamic finance
*Opportunities in Sukuk market
-- Sukuk market has become an important avenue for fund raising and investment activities. Conventional financial institutions may enter into alliances with Islamic financial institutions to be co-arrangers, to structure sukuk or other Islamic products based on Shariah compliant assets in this region.
-- The wide ranging availability of such assets and the massive financing needs of the new growth areas in the region will be attracting funds from surplus economies such as from the Gulf economies. Efforts can also focus on facilitating cross listing of sukuk in multiple jurisdictions. Additionally, the viability of setting up of Asian Sukuk Fund as an extension of Asian Bond Fund can also be explored.
-- Huge potential in Sukuk market is evident by active participation of many global players such as investment banks, Islamic banks and securities firms in the issuance of Sukuk.
-- Sukuk brings great benefits to both issuer and investors.
○ For issuers, Sukuk can meet different funding requirements ranging from large infrastructure and developmental projects to capital and business expansion.
○ The issuer also benefits from the competitively attractive pricing of Sukuk ranging from 10 to 20 basis points lower than mainstream bonds.
>> This resulted from the continuous over subscription of Sukuk which ranged from 2 to 13 times.
>> This phenomenal demand for Sukuk is further reinforced by excess liquidity in the global financial system.
>> This demand comes from a wide investor base that comprises both the conventional and Islamic investors.
○ From the investors' perspective, besides the intrinsic value of Sukuk which is largely asset-backed, convertible to shares and exchangeable with shares, there are benefits of diversification.
>> Sukuk is fast becoming a new asset class and as attractive alternative to conventional bonds.
>> Sukuk also generates good investment returns for investors that resulted from the higher pricing of Sukuk in the secondary market due to the "buy and hold" preference and the scarcity of Sukuk.
*Opportunities for greater participation and strategic alliance by foreign players in Malaysia by taking up stake in the domestic Islamic financial institutions. There has been a strategic alliance between one of the world largest Japanese insurance groups with Malaysia's domestic insurance company which resulted in the establishment of Takaful company. As the Takaful industry now has more than 50 Takaful companies worldwide with a total contribution at around US$3 billion and is expected to grow at 20% per annum, there are tremendous opportunities for strong and credible retakaful operators to complement the encouraging growth and expansion of Takaful industry.
*Opportunities for new licences for International Islamic Bank and International Takaful Operator for the conduct full range of Islamic banking business as well as takaful and retakaful business in international currencies.
-- Tax holiday of ten years under the Income Tax Act 1967 is given.
-- Stamp duty exemption for ten years beginning last year has been granted on foreign currency instruments executed by these participants, and on instruments relating to the ringgit and foreign currency Islamic securities.
-- Full exemption for non-resident from withholding tax on any profits or income derived from holding non-ringgit Islamic securities including Sukuk issued in Malaysia.
Japan could also use Malaysia as a platform for innovation and research as we have various institutions, including the industry owned research and training institute in Islamic finance, the Islamic Banking and Finance Institute Malaysia (IBFIM), INCEIF and universities which have undertaken research on Islamic finance. Through smart partnership between Japan and Malaysia, we would create greater synergy, which may bring about new approaches, new technologies and new areas of specialization.
Japan and Malaysia cooperation would contribute towards unlocking potential opportunities in Islamic finance for mutual prosperity.
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Malaysia Central Banker Says Islamic Finance Market Growth At 20%

TOKYO (Nikkei)--At a Tokyo symposium Saturday, Zeti Akhtar Aziz, governor of Bank Negara Malaysia, said the global Islamic financial market is expanding at an annual clip of 20% and is worth more than 1 trillion dollars, or about 107 trillion yen, including insurance policies.

In her keynote speech on "The Evolution and Opportunities of Islamic Finance" at the Nikkei Islamic Finance Symposium, Aziz pointed out that increased diversity in Islamic financial products, including "Sukuk" bonds, has made them more attractive as investment subjects.

While underscoring the stable nature of the Islamic financial system, Aziz said, "Islamic financial transactions must be always supported by production activity" under Islamic law, or Shariah, which bans interest-based transactions, and is free from potential risks posed by speculative trading and other activities.

In the keynote address prepared by Hamad Saudi Al-Sayari, governor of the Saudi Arabian Monetary Agency, and delivered by Saudi Ambassador to Japan Faisal Hassan Trad, the governor noted, "The Islamic financial services industry is becoming an increasingly important part of the global financial system."

(The Nikkei Sunday edition)

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