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Sunday, 30 November 2008

Are Islamic banks the financial institutions of the future?

With the search underway for a new monetary system for the post-financial crisis era, Islamic banking gains a new reputation for stability.


Islamic banking has grown at an annual rate of 15% and reached a volume of $1 trillion, five times higher than in 2003.

With the financial crisis reaching its peak, more and more politicians and economists agree that yesterday's financial world and tomorrow's financial world will not have much in common.

A new codex is needed. Germany's president Horst Koehler said, that the world needs a second Bretton Woods, referring to the gathering of leaders after World War II which led to a global monetary system based on the gold standard and on fixed exchange rates.

Bretton Woods, named after a city in New Hampshire, ceased to exist in 1971, when then-US president Richard Nixon nullified the gold standard. As a reaction Western European states declared their own monetary system in 1973.

Did this nullification led to the current financial crisis? Without the gold standard, dollars could be printed with no limit, leading to excessive leveraging and a debt-laden economy.

Low-interest rates led to asset inflation on the global stock exchanges. In the case of the TMT-bubble at the end of the 1990s this inflation was created without any real economic performance (most internet start-up where in debt).

Asset-based system

In an Islamic monetary system, money itself has no value. 'Islam denies the conventional
mentality that out of every dollar a new dollar has to be created', says Shariah scholar Dr. Imran.

This means, that capital can only increase in value in value if a financial vehicle's underlying asset increases in value. Since interest is forbidden under Islamic law, money can not add value to itself.

Closer to real economy

Loans, derivatives and hedge funds are haram, because short-selling and speculation are also haram. Further more, the risk-sharing concept of Mudaraba, when entrepreneurs are granted capital and share the profits with the bank, moves Islamic banks closer to the real economy.

As a result, most Islamic banks have performed well so far in 2008. Nearly all Islamic banks reported profits in the first nine month of 2008. Despite the recent turmoil in Dubai's real estate market, Islamic home developer Deyaar's Q3 profits jumped 56% to Dhs312 ($84.9).

Other Islamic banks such as Gulf Finance House (GFH) also show no let-up in expanding. On November 10, GFH unveiled its master plan for a $5bn Energy City in Libya.

Although Islamic banks' stocks fell too, Islamic banks seem to be better prepared for any worsening of the financial crisis (as yet). Investing in permissible stocks line with Shariah also has its benefits for the private investor. Conventional banking and insurance shares, which lost the most this year, are haram too.

(AMEinfo)
towards excellence>>www.globalpro.com.my

Saturday, 29 November 2008

Meltdown far from over, new mortgage crisis looms

WASHINGTON, Nov 28 - Black Friday's retail shoppers hunting for holiday bargains won't be enough to stave off what's likely to become the next economic crisis. Malls from Michigan to Georgia are entering foreclosure, commercial victims of the same events poisoning the housing market.
Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.
That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies' credit.
"We're probably in the first inning of the commercial mortgage problem," said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.
That's bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.
Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.
But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.
"It's a toxic drug and nobody knows how bad it's going to be," said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells in the residential market.
Unlike home mortgages, businesses don't pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end.
About $20 billion (RM 70 billion) will be due next year, covering everything from office and condo complexes to hotels and malls.
The retail outlook is particularly bad. Circuit City and Linens 'n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.
Those retailers typically were paying rent that was expected to cover mortgage payments. When those $20 billion in mortgages come due next year - 2010 and 2011 totals are projected to be even higher - many property owners won't have the money.
Some will survive, but those property owners whose loans required little money up front will have less incentive to weather the storm.
Refinancing formerly was an option, but many properties are worth less than when they were purchased. And since investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.
California, New York, Texas and Florida - states with a high concentration of mortgages in the securities market, according to Fitch - are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.
The worst-case scenario goes something like this: With banks unwilling to refinance, a shopping centre goes into foreclosure. Nobody can buy the mall because banks won't write mortgages as long as investors won't purchase them.
"Credit markets have seized up," corporate securities lawyer Michael Gambro said. "People are not willing to take risks. They're not buying anything."
That drives down investments already on the books. Insurance companies are seeing their stock prices fall on fears they are too invested in commercial mortgages.
"The system has never been tested for a deep recession," said Ken Rosen, a real estate hedge fund manager and University of California at Berkeley professor of real estate economics.
One hope was that the US would use some of the $700 billion financial bailout to buy shaky investments from banks and insurance companies.
That was the original plan. But Treasury Secretary Henry Paulson has issued a stunning turnabout, saying the US no longer planned to buy troubled securities. For those watching the wave of commercial defaults about to crest, the announcement was poorly received.
"He's created havoc in the marketplace by changing the rules," Rosen said. "It was the stupidest statement on Earth."
The Securities and Exchange Commission is considering another option that might ease the crisis, one that would change accounting rules so banks don't have to declare huge losses whenever the market declines.
But the only sure-fire remedy is for the economy to stabilize, for businesses to start expanding and for investors to trust the market again. Until then, Tross said, "There's going to be a lot of pain going forward." - AP
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic finance can help in the blueprint for a new global economic order

MELBOURNE, Nov 28 - The world today faces extraordinary economic circumstances - a global financial crisis of a magnitude not seen since the Great Depression.
A new global finance blueprint must emerge from this crisis. The influences shaping this new blueprint will be different to those that shaped the post-World War II finance and capital-market era.
The new influences will include the emerging dominance of China, India, the Middle East, Asean and South America.
Developed economies and emerging nations are casting for new inspiration. In Melbourne, the global crisis intruded at a recent colloquium on Islamic finance.
The aim had been modest enough: to introduce to Australians the basic principles and concepts underpinning the Islamic financial system. And to raise awareness of business opportunities - in Australia and internationally.
In the event, the prospects for Islamic finance to help lift the Wall Street blues became clear; and in that endeavour, the role for services-oriented Australia.
The evident worth is in broadening the range of thought and inspiration for a refurbished global financial system.
Evident, too, are the opportunities for Australia in pragmatic engagement with emerging nations of the Islamic world, and access to sovereign wealth in the Middle East.
More profound - in bridging Islamic banking with conventional banking - is the prospect to reinforce the ongoing cross-cultural dialogue between Islamic and non-Islamic communities based on universal values.
At the root of the global financial crisis is what Prime Minister Kevin Rudd identifies as "extreme capitalism" driven by greed.
Gordon Brown, descended from generations of his father's family who worked the land, admires the ability of the free market to release the dynamism and enterprise of people.
Thus the Labour Government of the British Prime Minister is pro-business and pro-market, "and always will be".
But as he writes in a commentary in The Daily Telegraph, "I also know that we do not live by markets alone". Markets rely on values that they cannot generate themselves.
"Values as important as treating people fairly, acting responsibly, co-operating for the benefit of all ... are not born in markets, nor in states," he writes.
"These values ... are learned in families, neighbourhoods and communities, and developed in the relationships we enjoy as a society."
Brown's view accords with the Islamic Sharia principles that encompass religion, ethics and business practice.
Islamic finance is founded on religious practice of justice, fairness, trustworthiness and honesty, while seeking to ensure an equitable distribution of wealth. It prohibits the payment of interest, and rests on the principle of a sharing of profit and loss. It views interest-based transactions as unjust, because the risk is borne primarily by the borrower.
Islamic finance is based on the financing of tangible assets. Islamic institutions do not lend money at interest; rather they invest in the assets for which funds are sought.
Islamic finance today manages assets in excess of US$300 billion, and is growing at an annual rate of 15 to 20 per cent, with a presence spanning more than 300 Islamic financial institutions in 75 countries.
This growth in Islamic banking and investment management will be a piece of any new system that emerges out of the ashes of Wall Street.
For some time now, the global system has been experiencing a migration of personal and corporate wealth and economic strength from the nations of the West - with its people living on a rich cocktail of various forms of debt - to the nations of the East, a number of which are largely in surplus.
This migration should accelerate in the next few years as the world, and particularly the West, works to deal with the lingering issues of the financial bail-out and subsequent restructure, as well as the now widely
predicted slowdown in economic growth.
Many of the nations of the East are in the Islamic world, particularly in the Middle East and, of course, our neighbours, Malaysia and Indonesia.
Many, including all the Muslim nations, have large and growing populations providing strong prospects for a growing customer base.
There are more than 1.4 billion followers of Islam in the world today, constituting 20 per cent of the world's population. Islam is the fastest-growing religion in the world. There are now about 400,000 followers of Islam in Australia, and their average age is well below the national average.
The Islamic world is the source of most of the world's oil, and dependence on oil from Muslim nations is expected to grow.
In the wake of the credit crunch, the Islamic world cannot be ignored, not only as an emerging consumer market and source of investment capital, but as a source of alternative ideas incorporated into the councils of the world. - The Age

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Alfalah Consulting:  www.alfalahconsulting.com 
Consultant/Trainer: www.ahmad-sanusi-husain.com 
Islamic Investment: www.islamic-invest-malaysia.com


The rise of Islamic finance: expansion of Islamic finance a global phenomenon

Since the summer of 2007, the global financial system has undergone a period of dramatic turbulence, which has caused a widespread reassessment of risk in both developed and emerging economies. The global financial turbulence appears to have had a limited impact on the Islamic finance industry, which has been in an expansionary phase in recent years.

This rapid growth has been fuelled not only by surging demand for Sharia’ah compliant products from Muslim financiers but also by investors around the world, rendering the expansion of Islamic finance a global phenomenon. In fact, there is currently over $800 billion worth of deposits and investments lodged in Islamic banks, mutual funds, insurance schemes (known as takaful) and Islamic branches of conventional banks.

Besides its wide geographical scope, the expansion of Islamic finance has been also taking place across the whole spectrum of financial activities, ranging from retail banking to insurance and capital market investments. But perhaps the most striking has been the growth of sukuk, the most popular form of securitised credit finance within Islamic finance. Sukuk commoditise capital gains from bilateral risk sharing between borrowers and lenders in shari’ah-compliant finance contracts into marketable securities without interest rate charges.

The sukuk market has held its own amid groundswell concern about the credit crunch and dysfunctional money markets. Although the current level of issuance remains a fraction of the global volumes of conventional bonds and ABS, the sukuk market had soared in response to growing demand for alternative investments before the first episode of severe market disruptions in 2007 showed first effects.

Gross issuance of sukuk has quadrupled over the past few years, rising from $7.2 billion in 2004 to close to $39 billion by the end of 2007, owing in large part to enabling capital market regulations, a favourable macroeconomic environment, and large infrastructure development plans in some Middle Eastern economies.

By 2008, however, sukuk volumes dropped to $15.2 billion (about 50 per cent) while the structured finance market dried up with just $387 billion issued (down by about 80 per cent) during the same time. Factors contributing to this decline include the presentation of new rules on sukuk, the global financial crisis, and Gulf states’ currency risk.

The slowdown in issuance was most pronounced in Malaysia, where fewer domestic transactions at smaller volume have balanced the market shares of Gulf Cooperation Council and Southeast Asian countries.

The rapid evolution of Islamic finance activities points to the available profit opportunities that beckon. This in turn has prompted a vetting process among a number of jurisdictions around the world to establish themselves as leading Islamic financial centres. In this regard, the case of London is perhaps the most remarkable insofar as it has managed to extend its leading position in world financial markets to become a centre for Islamic finance. Similarly, Hong Kong, New York, and Singapore are also making important advances to accommodate Islamic finance within their jurisdictions and aspire to join the ranks of the more established Islamic centres such as Bahrain, Dubai, and Kuala Lumpur.

In the authors’ opinion, all these developments underscore the fact that Islamic finance has established itself as a permanent element within the global financial landscape. Nevertheless, important challenges lie ahead especially in light of the current global financial turbulences.

Main challenges ahead

Islamic finance faces many challenges, including recent regulatory changes, illiquidity issues, liquidity risk management concerns, need for harmonised regulation, regulatory disparity amongst national supervisors, and a potentially unlevel playing field.

Recent regulatory changes concerning the structure of sukuk warrant careful consideration and might temper some of the recent enthusiasm for Islamic capital market products. In February 2008, the shari’ah committee of the Accounting and Auditing Organisation of Islamic Financial Institutions issued recommendations regarding the role of asset ownership, investment guarantees, and the shari’ah advisory and approval process in sukuk origination and trading.

These proposed rules attracted significant attention prior to their release, following a statement by the chairman of the shari’ah committee in November 2007 indicating that 85 per cent of sukuk issues in the GCC do not concur with shari’ah principles. Shari’ah scholars raised objections to principal guarantees via repurchase agreements, among other concerns.

Most sukuk have been sold with a borrower/creditor guarantee to repay the full notional at maturity, or, in the event of default or early redemption, mirror the structure and payout of a conventional bond. Such a promise (and not the option) to repay capital violates the principle of risk-sharing in Islam.

The debate about the general applicability of these recommendations with regard to the approval process of sukuk (and the screening of both their structure and characteristics of underlying assets) has raised concerns about the economics of Islamic securitisation and the shari’ah governance of Islamic capital markets at large.

The sukuk market is also still plagued by illiquidity due to high originator concentration, large diversity of deal structures, and regional fragmentation. In addition, the lack of information from private sources about securitised assets in many sukuk and the prevalence of 'buy-and-hold' investments inhibit efficient price discovery and information dissemination.

Since only a handful of large banks and managers are behind the bulk of transactions completed by a small number repeat issuers, origination and servicer risk from narrow asset supply poses challenges to investor diversification.

Moreover, sukuk are typically not available at short-term maturities, which significantly limits their application for money markets. Notwithstanding the compelling value proposition of sukuk, without efficient and transparent capital markets and appropriate legal frameworks to operate within, Islamic capital markets will not continue to grow meaningfully in the near future.

Similarly, liquidity risk management of Islamic banks is an important challenge and is constrained due to limited availability of tradeable Islamic money market instruments and weak systemic liquidity infrastructure. At the moment, there is no widespread shari’ah-compliant short-term Islamic money market, and Islamic repo markets have not yet fully developed.

Islamic money markets with longer maturities, which are based on commodity murabaha transactions (mark-up financing), sometimes suffer from unreliable brokers with low credit-worthiness. Some investment banks are currently designing new complex products, compliant with shari’ah law, that attempt to overcome the shortcomings of the Islamic money market.

Financial innovation in Islamic finance is still hampered by the need for harmonised financial regulation. As discussed, governance issues, especially the shari’ah compliance of products and activities, constitute a major challenge for the Islamic finance industry. Although shari’ah rulings by legal scholars are public, there is still considerable heterogeneity of scholastic opinion about shari’ah compliance, which undermines the creation of a consistent regulatory framework and corporate governance principles. Given the rising global integration of the Islamic financial services industry, greater supervisory harmonisation across national boundaries is essential.

There is also regulatory disparity among national supervisors, with each regulator typically working independently. Various Islamic countries have teamed up in a bid to create more liquidity and enhance market transparency with a view to becoming a centre of Islamic finance, while more specific regional initiatives provide a valuable platform for drawing further attention to structured finance as an important element of local capital market development.

Finally, the regulatory authorities are also being called upon to foster an environment where Islamic banking can offer a suitable response to investors’ and depositors’ demand for Islamic products. This is not to say that regulatory advantages should be given to Islamic institutions, but rather that a level playing field should be provided. In fact, it is possible that in the initial stages of the process, some Islamic transactions will fall into legal voids and thus may not be permitted by the existing legal framework or may be viewed with reticence by the general public. Therefore, the authorities’ attitude should be akin to the British Financial Services Authority’s stated policy of “no obstacles, no special favours” .

The future

Despite the number of challenges outlined above, the long-term prospects look promising for Islamic finance. Financial institutions in countries such as Bahrain, the United Arab Emirates, and Malaysia have realised considerable demand for shari’ah-compliant assets and are gearing up for more shari’ah-compliant financial instruments and structured finance. In addition, financial innovation, driven by both domestic and foreign banks, will promote alternatives modes of intermediation and contribute to further development and refinement of shari’ah compliant derivative contracts.

As Islamic finance comes into its own, greater regulatory harmonisation will be inevitable. Recent efforts have addressed legal uncertainty imposed by Islamic jurisprudence, discrepancies of national guidelines, and poorly developed uniformity of market practices.

The Islamic Financial Services Board has moved ahead with its standardisation efforts of the Islamic financial services industry that will foster the soundness and stability of the system. Globally accepted prudential standards have been adopted by the Islamic Financial Services Board that smoothly integrate Islamic finance with the conventional financial system.

Finally, despite the declining global sukuk issuance in 2008, emanating from both the Accounting and Auditing Organisation of Islamic Financial Institutions decision and the impact of the financial crisis, the sukuk market will regain momentum, driven by demand from financial institutions, insurance companies, and pension funds across Islamic and non-Islamic countries.

Many challenges still lie ahead, but the banks’ search for profitable opportunities and the ensuing financial innovation process in tandem with favourable regulatory developments at domestic and international levels will ensure that the Islamic finance industry will continue to develop at a steady pace in the long-run. The jury is still out how Islamic finance will be affected in the short-run by the repercussions of the global financial crisis.

(Business Spectator)


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Alfalah Consulting - KL: www.alfalahconsulting.com 
Islamic finance consultant: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Thursday, 27 November 2008

Dr Mahathir: Asia must make changes to monetary, financial systems


NUSA DUA (Bali), Nov 27 - It is important for Asian countries to initiate changes to the monetary and financial systems to reduce the impact of the current financial crisis of America and Europe, and perhaps enable earlier recovery, former Malaysian prime minister Tun Dr Mahathir Mohamad said Thursday.
He said that after witnessing all the systems of the West, which seemed to be crumbling now, the world was about to view Asian practices and systems more positively.
"Asian countries must therefore make their voices heard, including those of the small developing economies. It would be fatal for them if they allow, as in the past, the rich and the powerful to devise the systems by which they must all function.
"In particular, the banking system and practices need to be looked at from the Asian developing economies' point of view and interest," he said when delivering a keynote address at Indonesia's National Committee On Governance's 2nd Annual Top Executive Forum on Governance here.
Dr Mahathir said that in a Eurocentric world, Asians tend to accept everything that came from the West as right and proper and it was difficult for Asians to reject what originated from the Europeans.
"But that culture, that blind acceptance of the systems and ways of the Europeans must be modified, if not discarded. What we're seeing today is the collapse of a very fundamental European institution, that of money and banking," he added.
Dr Mahathir said it was not enough for Asian countries to just tweak their present system of governance as they must be prepared for radical change and Asian ideas must find a place in the development of those changes.
Asian countries, he stressed, must go back to the drawing board, question the system that have been used for centuries, consider redefining them, introduce new rules and regulations and provide for better governance.
"We may have to throw out the syatem altogether and devise a new one," he said, adding that all those were not in Asian culture.
"But our culture must not stand in the way of necessary reforms, if it means saving our economies and our states," he told the participants of the two-day forum.
Earlier, in his speech on "Governance Reform in Asia: Cultural Perspectives", Dr Mahathir told some 100 top executives of companies operating in Indonesia that Asians were culturally conservative and orthodox and also had an inferiority complex, believing that Europeans were superior people.
So, when Europeans came with ideas about globalisation, borderless world and free trade, the general tendency was to accept those ideas and reforms of governance must be made to accommodate the new vision of the world as a global village, to make possible the free flow of capital and the sanctity of unregulated markets, he said.
"But even as these things were being initiated, the world came to realise that the American financial crisis was not going to be confined to America alone but would engulf the whole world. Not only are they not delivering the expected benefits that they seem to have done to the world's economy in the past but they seem about to destroy it," he said.
Believing that Asian countries would not want to be dragged down by an economic and financial crisis not of their own making, he asked whether they should be carrying out reforms of governance to facilitate globalisation and free trade as they had been urged to do.
On the US dollar, Dr Mahathir said that without gold it had no backing at all and was basically a useless piece of paper and that only the demand for the US dollar to settle trade payments kept its value up.
"It is doubtful if the US knows how much US dollar is in circulation in the world. It's very poor security feature also makes it easy to forge," he said, adding that the US owed the world an estimated US$14 trillion dollars, an amount which it could never hope to pay, what more when every day the US government had to borrow US$1.5 billion to finance its administration.
Responding to a question later, Dr Mahathir reiterated his call made years ago that trade payments among countries be made in gold dinar and pointed outthat the Bretton Woods agreement too provided for gold to back currencies as gold has real value. - Bernama

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Alfalah Consulting - KL: www.alfalahconsulting.com 
Islamic finance consultant: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Halal Agency Readies Global Standard Draft For Six Industries By Next May


HONG KONG, Nov 27 (Bernama) - The International Halal Integrity Alliance (IHI) is working on draft guidelines for at least six industries feedback at the World Halal Forum (WHF) next May in Kuala Lumpur in its goal of forging a global Syariah-compliant standard.

It is now engaging stakeholders and governments in various countries including non-Muslim states to tap best practices and expertise, IHI chief executive officer Darhim Hashinm told Bernama.

"Like in logistics for example, we went to Holland because that is where the expertise is. The Port of Rotterdam is the first halal services certified port, so it is only natural," said Darhim who held an industry roundtable with representatives from Australia, Japan, the Philippines and Hong Kong on food services here.

The non-governmental organisation, sanctioned by the 57-member country Organisation of Islamic Conference (OIC)and registered last year, has identified developing standards for 10 sectors and aims to come up with recommendations for at least six by May.

The areas involved are logistics and cold storage, food services, laboratory testing, finance, pharmaceuticals, cosmetics and toiletries, animal feed, animal welfare, slaughter process and non-meat processed food.

Darhim explained that a host country will be identified for each sector and it would not necessarily be a Muslim country, citing Holland as the lead point for halal logistics.

"We started with logistics because it is the hardest area, there is no benchmark whereas for others it is a lot easier like in Islamic finance, Malaysia and Bahrain are the leaders, and in animal welfare, New Zealand and the United Kingdom are very strong on this, we just have to exclude the part on pigs," he said.

Darhim stressed that although IHI is based in Malaysia, which pledged RM15 million to fund the organisation, the bid for a global halal standard should not be perceived as a Malaysia agenda.

"The evolution is already happening, Muslim countries and governments are becoming more conscious of the need for a global standard, it is changing because Muslims are travelling more and they are getting more exposed to non-Muslim countries like China and the Europe region," he said.

But the task is not without its obstacles, Darhim admitted, especially in dealing with countries which already have well-entrenched halal certification systems.

"There s a lot of sovereignty involved but we are not asking them to throw out their systems. We are engaging them, to come out with a standard operating procedure and we will promote the importance of accreditation which will separate the cowboys from the genuine players," he said.

"In a simple way, IHI will audit the auditors. Central Asian countries, Palestine and several other countries have also approached us for assistance to develop their systems," he added.

Kazuo Nakamichi, director if the Islamic Centre in Japan, said although his country has a small Muslim population, there were industries which were interested in a global halal standard because they want to trade with Muslim countries.

The industry roundtable saw Nakamichi and fellow participants exchange experience and discussed concerns over raw resources, cross-contamination and uncertified halal labelling by food suppliers and restaurants.

Cheong Loon Lai, Malaysia's Consul General in Hong Kong, who also attended the meeting said a group of his counterparts here, led by the United Arab Emirates, had taken recently the lead to speak to major hotels here to have halal menus.

"This will make it easier for us to host functions at such establishments and the response has been positive. The Shangri La Hotel, for instance, has been very supportive," Cheong said.

Darhim lauded the move diplomats' move, saying that it could be emulated by envoys of OIC members in other countries.

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Financial dilemma: For many Muslims, conventional loans can be a sin

Wafiq Fannoun is founder and director of Reba Free LLC and
director of the Islamic University of Minnesota
By Katherine Glover | Tuesday, Nov. 25, 2008 (MinnPost)
Seven years ago, staff at the Neighborhood Development Center made a realization. Plenty of Somalis and other Muslim immigrants had attended the St. Paul-based center's trainings for small-business entrepreneurs — but in more than a decade, not one Muslim had ever taken advantage of the center's small-business loans.

The reason? Islam forbids "reba," or usury. To some, the term refers merely to excessive interest, but to others, it includes the payment of any kind of interest — making conventional bank loans a sin for them.

As a result, in 2001, the Neighborhood Development Center partnered with a local group called Reba Free LLC and became one of the few institutions in the United States to offer financing that complies with Shariah law, based on the Quran and Islamic traditions.

Brian Singer, the center's director of lending, explains how it works: "Basically what we do is we buy something and sell it to someone at a profit, and that profit is similar to the interest we would have earned had we just loaned the money."

This approach is known as Murabaha financing. Another model is Ijara, in which a financial institution purchases something for a customer — a house, for example. The customer pays for the house over time, while also paying rent to the financial institution at a rate comparable to what the interest would be on a conventional loan.

Singer said the center has made 62 of these interest-free transactions, totaling more than $1 million, since launching the project in 2001.

Small but growing
Shariah-compliant financial products are common in countries with large Muslim populations, but banks have been slow to offer them within the United States.

A smattering of community banks, such as Devon Bank in Chicago and University Bank in Ann Arbor, Mich., have created products in response to requests from Muslim customers, but larger banks have been much more hesitant to enter the market.

HSBC used to offer Shariah-compliant finance in the United States, but in 2006 the company stopped because, according to a company statement, demand was "not large enough to warrant continuation of the product at this time." HSBC still offers Islamic banking products in several Middle Eastern and Asian countries, as well as in the United Kingdom.

The problem is U.S. regulations, said Hussam Qutub of Guidance Residential LLC, which offers nothing but Shariah-compliant home finance. The company is based in Reston, Va., but offers mortgages in 24 states, including Minnesota.

The company launched its product in 2002 — but first, its legal team had to work closely with Shariah scholars to create a product in compliance both with Islam and with U.S. regulations.

"Those discussions took a little over two years, and with that came a lot of legal costs," Qutub said.

And each state has its own rules, so expanding requires even more legal footwork. "Some states say if our neighboring state approved you, we approve you ... but others say, 'I don't care what you're licensed for, we do it our way,' and then the lawyers get involved again."

Texas initially refused Guidance Residential's application. It took three and a half years and nearly a quarter of a million dollars in legal fees to finally get approval to do business there, Qutub said.

On the positive side, however, Shariah-compliant mortgage providers have not been hit as hard as the rest of the mortgage industry.

Credit is tight, Qutub said, but foreclosure rates are minimal.

"We have customers who pay their bills," he said. "They're very much involved in the process, and they really do live within their means."

Nazir Gurukambal, vice president of Islamic finance at Devon Bank in Chicago, reported a similar experience. With the economy lagging, there have been some late payments, he said, but no defaults. And he's heard the same from colleagues at other banks as well.

Gurukambal said it's because the only groups offering these mortgages are small banks or other organizations that are very careful about whom they provide financing for. "We haven't gone into subprime or zero percent down," he said.

Wafiq Fannoun, founder and director of Reba Free LLC and director of the Islamic University of Minnesota, said there's a cultural factor as well. "We [Muslims] try not to get a lot of debt. In Islam, every person is responsible for his actions."

Local options
The Neighborhood Development Center had a slightly easier time developing its Shariah-compliant small business financing. "We're a nonprofit organization," Singer said, "so we don't have to worry about regulations the way a bank would."

But the center did need the approval of Islamic scholars, so it partnered with Fannoun of Reba Free.

Fannoun had been approaching banks since the early 1990s to persuade them to offer Shariah-compliant products. "They would come back at me with free checking," he said. "The market was not big enough at that time."

He purchased a house himself in the mid-1990s using a conventional mortgage. He later refinanced with a Reba Free mortgage when it became an option. But he's heard reports of strict Muslims who saved until they could afford to pay for a house upfront rather than having to pay interest.

Gurukambal at Devon Bank estimates that about a third of Muslims will refuse conventional loans no matter what, a third will use whatever offers the cheapest rates, and a third prefer Shariah-compliant financing but will accept conventional loans if nothing else is available.

There still isn't any group based in Minnesota that offers Shariah-compliant home mortgages, but the local Guidance Residential office has financed more than 230 homes in Minnesota, and there are several other institutions serving the state, including Devon Bank.

The African Development Center of Minnesota, which, like the Neighborhood Development Center, offers Shariah-compliant small-business financing, has plans to start offering home mortgages in the near future.

And bigger banks are aware of the concept.

Wells Fargo & Co. made an equity investment in the African Development Center, which was used for Shariah-compliant small-business financing, according to spokeswoman Peggy Dunn. And customers with Wells Fargo savings accounts can opt out of receiving interest on their money.

But the bank itself does not offer Islamic financing.

"The question comes up every once in a while, and I know that we do look at it occasionally," Gunn said. "But at the current time, we do not have a product."
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London warms to Islamic finance


The land of Adam Smith now teems with a vibrant Islamic banking sector, with even non-Muslims being lured by the model's promise of transparency and stability.

Shabaz Bhatti is proud to be a devout Muslim – but his plans to remortgage the family home with one of Britain's new generation of Islamic banks isn't just about religion.
The 30-something driving instructor wants reliability, and believes Britain's growing Islamic finance sector offers this in a way that myriad traditional main street banks no longer do.
"It's simple and straightforward, which is great because ... it seems as though interest rates right now could go ballistic," says Mr. Bhatti, whose parents immigrated to England from Pakistan.
At a time of almost unprecedented financial volatility, Islamic banks are being hailed as bastions of stability. Growing numbers of individuals and companies are now embracing their workings, which are based on Koranic principles.
Using law changes and generous tax breaks, the British government is now attempting to transform London into the Western world's center for Islamic finance. Conventional banks and financial institutions are also rolling out a range of Islamic finance products.
Globally, the market for Islamic financial services is estimated to have grown more than threefold over the past decade – from around $150 billion in the mid-1990s to $500 billion in 2006.
Keen to tap into this, Britain's authorities are planning to become the first Western government to issue an Islamic bond – called a sukuk – structured to comply with the sharia law principles of Islamic finance, which forbids all forms of interest payments.
Sharia law also prohibits investing in any enterprises involved with alcohol, gambling, tobacco, and pornography – a fact that nicely dovetails with the growing number of Westerners seeking socially responsible investments.
According to a new study by International Financial Services London (IFSL), an independent organization representing Britain's financial services industry, Islamic finance will emerge largely unscathed from the current global crisis, largely because its structures make little or no use of many of the complicated instruments blamed for the current problems in conventional finance, such as derivatives and short-selling.
Although Islamic finance does allow for risk-taking, it does not permit excessive uncertainty, known as gharar. All deals to buy or sell are invalid if the object dealt with is not certain and transparent.
When risks are taken, the Islamic financial model insists they are shared. In retail, this involves the customer and their bank sharing the risk of any investment on agreed terms, and dividing any profits between them. Products revolve around principles such as murabaha, a form of credit enabling customers to make a purchase without having to take out an interest-bearing loan. The bank buys the item and then sells it on to the customer on a deferred basis.
Bhatti, who lives in the leafy London suburb of Wimbledon with his wife and young daughter, is currently a customer of Abbey National, a traditional, Western bank. He has had no objection to using conventional Western financial products. However, in the past, the couple were customers of the Bank of Kuwait when they bought a home costing nearly $200,000 in the London district of Croydon.
The Bank of Kuwait valued the house at about $270,000, based on what it was expected to be worth at a later date, and arranged for the family to pay the money back in equal installments over the next 16 years. Now, Bhatti is planning to return to such an arrangement by transferring his conventional mortgage to an Islamic bank.
"With the current economic situation, our plans to go back to Islamic banking are not just about religion, they're a financial decision. It's more secure ... and it's clearer for the future," he says.
More than 26 banks in the UK offer Islamic financial products, including major institutions such as HSBC. Six Islamic banks are wholly compliant with sharia law. A pioneer of Islamic retail banking has been the Islamic Bank of Britain, which has 64,000 account holders and branches in cities including London, Birmingham, and Manchester. The bank recently launched its most competitively priced sharia mortgage to date, offering terms that company executives hope will lure takers beyond its core market of Britain's 2 million working Muslims.
This country's growing Muslim community is helping broaden London's reputation as a financial capital, says Patrick Lamb, an official who joined a British government delegation this week to the World Islamic Banking Conference in Bahrain, where the UK authorities and a range of London-based banks and firms showcased their expertise.
"We have by far the largest concentration of Islamic finance anywhere in Europe," Mr. Lamb says.
Along with home and retail finance, increasing numbers of companies are also turning to Islamic finance to raise money for expansion, ranging from steel manufacturers to luxury gift firms, which are often owned by Muslims or have Muslim shareholders. Money from wealthy Gulf investors has been pouring into Britain in recent years. There is no more potent symbol of this than the skyline of London's financial center, known as The City.
A fund from Kuwait spent more than $600 million recently to buy the Willis Building, one of the tallest in the district, while nearly $3 billion is coming from Qatar to finance the building of what will be Europe's tallest building, a 1,000-foot-tall structure known as the Shard of Glass.
(Christian Science Monitor)
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Wednesday, 26 November 2008

The current trends in Islamic finance, which accounts for more than $800 billion worth of assets worldwide

Quo Vadis Islamic Finance?

This article discusses current trends in Islamic finance, which accounts for more than $800 billion worth of assets worldwide. The industry faces a number of challenges, including economic and legal bottlenecks, banking concerns, and unharmonised financial regulations, but most of them arise from the industry’s infancy. Islamic finance’s long-term prospects seem promising.


LONDON (voxEU.org) -- Since the summer of 2007, the global financial system has undergone a period of dramatic turbulence, which has caused a widespread reassessment of risk in both developed and emerging economies. The global financial turbulence appears to have had a limited impact on the Islamic finance industry, which has been in an expansionary phase in recent years (Economist, 2008; Financial Times, 2008). This rapid growth has been fuelled not only by surging demand for Sharia’ah compliant products from Muslim financiers but also by investors around the world, rendering the expansion of Islamic finance a global phenomenon. In fact, there is currently over $800 billion worth of deposits and investments lodged in Islamic banks, mutual funds, insurance schemes (known as takaful), and Islamic branches of conventional banks.
Besides its wide geographical scope, the expansion of Islamic finance has been also taking place across the whole spectrum of financial activities, ranging from retail banking to insurance and capital market investments. But perhaps the most striking has been the growth of sukuk, the most popular form of securitised credit finance within Islamic finance. Sukuk commoditise capital gains from bilateral risk sharing between borrowers and lenders in shari’ah-compliant finance contracts into marketable securities without interest rate charges.
The sukuk market has held its own amid groundswell concern about the credit crunch and dysfunctional money markets. Although the current level of issuance remains a fraction of the global volumes of conventional bonds and ABS, the sukuk market had soared in response to growing demand for alternative investments before the first episode of severe market disruptions in 2007 showed first effects (Jobst et al, 2008). Gross issuance of sukuk has quadrupled over the past few years, rising from $7.2 billion in 2004 to close to $39 billion by the end of 2007, owing in large part to enabling capital market regulations, a favourable macroeconomic environment, and large infrastructure development plans in some Middle Eastern economies (see Figure 1).
By 2008, however, sukuk volumes dropped to $15.2 billion--about 50%--while the structured finance market dried up with just $387 billion issued--down by about 80%--during the same time. Factors contributing to this decline include the presentation of new rules on sukuk, the global financial crisis, and Gulf states’ currency risk. The slowdown in issuance was most pronounced in Malaysia, where fewer domestic transactions at smaller volume have balanced the market shares of Gulf Cooperation Council and Southeast Asian countries.
Figure 1. Global sukuk issuance
The rapid evolution of Islamic finance activities points to the available profit opportunities that beckon. This in turn has prompted a vetting process among a number of jurisdictions around the world to establish themselves as leading Islamic financial centres. In this regard, the case of London is perhaps the most remarkable insofar as it has managed to extend its leading position in world financial markets to become a centre for Islamic finance. Similarly, Hong Kong, New York, and Singapore are also making important advances to accommodate Islamic finance within their jurisdictions and aspire to join the ranks of the more established Islamic centres such as Bahrain, Dubai, and Kuala Lumpur.
In the authors’ opinion, all these developments underscore the fact that Islamic finance has established itself as a permanent element within the global financial landscape. Nevertheless, important challenges lie ahead especially in light of the current global financial turbulences.

Main challenges ahead for Islamic finance

Islamic finance faces many challenges, including recent regulatory changes, illiquidity issues, liquidity risk management concerns, need for harmonised regulation, regulatory disparity amongst national supervisors, and a potentially unlevel playing field.
Recent regulatory changes concerning the structure of sukuk warrant careful consideration and might temper some of the recent enthusiasm for Islamic capital market products. In February 2008, the shari’ah committee of the Accounting and Auditing Organisation of Islamic Financial Institutions issued recommendations regarding the role of asset ownership, investment guarantees, and the shari’ah advisory and approval process in sukuk origination and trading. These proposed rules attracted significant attention prior to their release, following a statement by the chairman of the shari’ah committee in November 2007 indicating that 85% of sukuk issues in the GCC do not concur with shari’ah principles. Shari’ah scholars raised objections to principal guarantees via repurchase agreements, among other concerns. Most sukuk have been sold with a borrower/creditor guarantee to repay the full notional at maturity, or, in the event of default or early redemption, mirror the structure and payout of a conventional bond. Such a promise--and not the option--to repay capital violates the principle of risk-sharing in Islam. The debate about the general applicability of these recommendations with regard to the approval process of sukuk--and the screening of both their structure and characteristics of underlying assets--has raised concerns about the economics of Islamic securitisation and the shari’ah governance of Islamic capital markets at large.
The sukuk market is also still plagued by illiquidity due to high originator concentration, large diversity of deal structures, and regional fragmentation (Hesse et al, 2008). In addition, the lack of information from private sources about securitised assets in many sukuk and the prevalence of “buy-and-hold” investments inhibit efficient price discovery and information dissemination. Since only a handful of large banks and managers are behind the bulk of transactions completed by a small number repeat issuers, origination and servicer risk from narrow asset supply poses challenges to investor diversification. Moreover, sukuk are typically not available at short-term maturities, which significantly limits their application for money markets. Notwithstanding the compelling value proposition of sukuk, without efficient and transparent capital markets and appropriate legal frameworks to operate within, Islamic capital markets will not continue to grow meaningfully in the near future (Jobst, 2007).
Similarly, liquidity risk management of Islamic banks is an important challenge and is constrained due to limited availability of tradable Islamic money market instruments and weak systemic liquidity infrastructure (Èihák and Hesse, 2008). At the moment, there is no widespread shari’ah-compliant short-term Islamic money market, and Islamic repo markets have not yet fully developed. Islamic money markets with longer maturities, which are based on commodity murabaha transactions (mark-up financing), sometimes suffer from unreliable brokers with low credit-worthiness. Some investment banks are currently designing new complex products, compliant with shari’ah law, that attempt to overcome the shortcomings of the Islamic money market.
Financial innovation in Islamic finance is still hampered by the need for harmonised financial regulation. As discussed, governance issues, especially the shari’ah compliance of products and activities, constitute a major challenge for the Islamic finance industry. Although shari’ah rulings by legal scholars are public, there is still considerable heterogeneity of scholastic opinion about shari’ah compliance, which undermines the creation of a consistent regulatory framework and corporate governance principles. Given the rising global integration of the Islamic financial services industry, greater supervisory harmonisation across national boundaries is essential.
There is also regulatory disparity among national supervisors, with each regulator typically working independently. Various Islamic countries have teamed up in a bid to create more liquidity and enhance market transparency with a view to becoming a centre of Islamic finance, while more specific regional initiatives provide a valuable platform for drawing further attention to structured finance as an important element of local capital market development.
Finally, the regulatory authorities are also called to foster an environment where Islamic banking can offer a suitable response to investors’ and depositors’ demand for Islamic products (Solé, 2007). This is not to say that regulatory advantages should be given to Islamic institutions, but rather that a level playing field should be provided. In fact, it is possible that in the initial stages of the process, some Islamic transactions will fall into legal voids and thus may not be permitted by the existing legal framework or may be viewed with reticence by the general public. Therefore, the authorities’ attitude should be akin to the British Financial Services Authority’s stated policy of “no obstacles, no special favours” (FSA, 2006)

Concluding remarks

Despite the number of challenges outlined above, the long-term prospects look promising for Islamic finance. Financial institutions in countries such as Bahrain, the United Arab Emirates, and Malaysia have realised considerable demand for shari’ah-compliant assets and are gearing up for more shari’ah-compliant financial instruments and structured finance. In addition, financial innovation, driven by both domestic and foreign banks, will promote alternatives modes of intermediation and contribute to further development and refinement of shari’ah compliant derivative contracts.
As Islamic finance comes into its own, greater regulatory harmonisation will be inevitable. Recent efforts have addressed legal uncertainty imposed by Islamic jurisprudence, discrepancies of national guidelines, and poorly developed uniformity of market practices. The Islamic Financial Services Board has moved ahead with its standardisation efforts of the Islamic financial services industry that will foster the soundness and stability of the system. Globally accepted prudential standards have been adopted by the Islamic Financial Services Board that smoothly integrate Islamic finance with the conventional financial system.
Finally, despite the declining global sukuk issuance in 2008, emanating from both the Accounting and Auditing Organisation of Islamic Financial Institutions decision and the impact of the financial crisis, the sukuk market will regain momentum, driven by demand from financial institutions, insurance companies, and pension funds across Islamic and non-Islamic countries. Many challenges still lie ahead, but the banks’ search for profitable opportunities and the ensuing financial innovation process in tandem with favourable regulatory developments at domestic and international levels will ensure that the Islamic finance industry will continue to develop at a steady pace in the long-run. The jury is still out how Islamic finance will be affected in the short-run by the repercussions of the global financial crisis.
The views expressed in this article are those of the authors and should not be attributed to the IMF, its Executive Board, or its management. Any errors and omissions are the sole responsibility of the authors.
(Resource Investor)
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Singapore Develops Sukuk Issuance Facility To Promote Islamic Finance

SINGAPORE, Nov 24 (Bernama) - Singapore is in the final stages of setting up a sukuk issuance facility to provide Syariah-compliant regulatory assets to financial institutions as part of its efforts to promote the growth of Islamic finance in the city-state.

The Monetary Authority of Singapore (MAS) said that a number of financial institutions had already expressed interest and the first issue was expected to take place at the start of next year.

MAS said this in a release here quoting its Managing Director Heng Swee Keat who was spoke at the 15th World Islamic Banking Conference in Bahrain Monday.

Heng said that the sukuk structure was based broadly on the Al-Ijarah structure or the sale-and-leaseback of an underlying property.

The Singapore's initiative was first announced at the 5th Islamic Financial Services Board Annual Summit held in Jordan last May.

Sukuk issued by the facility would be given equal regulatory treatment as Singapore Government Securities or SGS and returns would be tied to the risk-free yield of SGS of equivalent tenor.

Heng said the facility was open to all financial institutions that plan to or were currently carrying out Syariah-compliant financial services in Singapore.

"We are issuing on a reverse enquiry basis which means we can size and time the issuance according to the needs of the financial institutions," he said.

Eligible and interested financial institutions were invited to approach the monetary authority as it worked towards a formal launch, Heng said.
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Islamic Finance Showing Evolution And Strong Growth, Says Zeti


Nov 25 (Bernama) -- Islamic finance has continued to demonstrate its evolution and strong growth during the challenging international financial environment, Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz said Tuesday.

"Islamic finance has now become a new vehicle contributing to increasing the financial linkages not only within Asia but also with the rest of the world, thereby facilitating cross-border allocation of capital globally," Zeti said.

"Indeed, a number of international financial centres have recognised Islamic finance as an integral part of their financial system in order to complete the suite of financial products and services being offered, and therefore are actively developing this segment," she said at the launch of HSBC Amanah Malaysia Bhd, the first Islamic Bank within the HSBC group here.

According to Zeti, the Islamic finance industry has not only continued to grow but it has also been able to present a higher level of dynamism.

The key indicators of the Islamic banking sector continued to record a progressive pace of development whereby the Islamic banking assets have expanded by 23 percent to RM234.9 billion compared with a year ago, she said.

The Islamic banking industry now accounted for 16.7 percent of total assets in the industry, she added.

Similar trends could be observed in the growth of deposits that have reached RM180.4 billion, up by 27.7 percent from a year ago, while total financing increased by 24.5 percent to RM143.4 billion, Zeti said.

"This growth has also accompanied by an increase in the number of full-fledged Islamic banking branches," she said.

From January to September this year, 93 new branches were opened, thereby enhancing the outreach of Islamic financial products and services.

Another area that has seen significant growth is the sukuk or Islamic bond market, Zeti said.

The Malaysian sukuk market has expanded significantly with an average annual growth rate of 22 percent since 2001, she said.

"Despite the current market conditions that have affected the volume of new bond and sukuk issuance, the Islamic capital market has continued to structure innovative Islamic financial instruments," Zeti said.

By the first half of 2008, the composition of the more innovative sukuk musharakah had increased to 84 percent as compared to 58 percent of the total sukuk issuance in 2007, she said.

Touching on the potential role of foreign Islamic banking subsidiaries, Zeti said the policy for establishment of the subsidiaries was also part of the initiative to enhance the outreach of Islamic finance and to strengthen international linkages.

"It reflects part of the further liberalisation of the Islamic financial services industry in Malaysia," she said.

Zeti said the foreign subsidiaries have the potential to promote innovative product development and enhanced international integration of the Islamic financial system.

"By leveraging on the global networks available, the foreign subsidiaries are well positioned to engage in innovative product development in a more cost-effective manner," she said.

The foreign subsidiaries also have an important role in enhancing the international linkages of the Islamic finance industry regionally and internationally, Zeti said.

"Reinforced by a well-developed legal, regulatory and Syariah framework and with three decades of experience, our Islamic financial system offers a unique platform as a meeting place between those that require funds and those with surplus funds," she said.
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Tuesday, 25 November 2008

Hong Kong confident financial turmoil won’t derail Islamic banking plans

HONG KONG, Nov 25 — The global financial crisis will not upset Hong Kong's plans to become an Islamic banking centre as it sets its eyes on the China and the Middle East markets.
"Our priority is to push ahead with the development of an Islamic bond market. There should be no doubt about our determination to establish a platform for Islamic finance in Hong Kong," Hong Kong Monetary Authority (HKMA) deputy chief executive Eddie Yue said today.
Yue said there was long-term potential in Islamic finance and it was a priority for Hong Kong to tweak its tax regime to provide a level-playing field for Syariah-compliant finance transactions.
"We believe that this is a good time to do the groundwork of installing the necessary legal, taxation and market infrastructure," he told a one-day forum on Islamic finance here.
He said the sharp falls in the Islamic finance markets, including for sukuk or Islamic bonds and also Islamic funded equities, had more to do with the general market conditions and a reluctance to issue US dollar instruments.
"This also reflects how closely integrated Islamic finance is with the global financial system, which is not at all bad news for the industry because when global markets stabilise and take a turn for the better — as they must in the long run — Islamic finance will ride on that curve and excel," he said.
Hong Kong, long established as a conventional financial hub in Asia, moved into Islamic banking last year to tap into the growing pool of Islamic assets that are tipped to swell to US$1 trillion by 2010 and vast millions to be raise for infrastructure projects in the Gulf region.
Yue stressed Hong Kong's links and proximity with China as a key strength in developing an Islamic finance market.
"Our close and increasing economic cooperation with the mainland undoubtedly makes Hong Kong the natural choice for anyone wishing to tap into China's high savings rate and huge growth potential," he said.
"There are opportunities for us to extend our reach to potential Islamic investors and financiers in the Middle East and Asia. The addition of Islamic finance as a new asset class in our financial system will add value to Hong Kong as a thriving financial centre and a leading financial services hub in Asia," he added.
At the forum, Yue witnessed a memorandum of understanding between the Hong Kong branches of Malaysia-based CIMB Islamic and Hong Leong banks for the the former's first Syariah-compliant product in the island city, an interbank money product backed by commodities.
The two banks are the first to offer Islamic banking in Hong Kong.
CIMB Islamic chief executive officer Badlisyah Abdul Ghani noted Hong Kong's commitment to establish its Islamic banking centre.
He said size and liquidity would dictate how fast Hong Kong could grow its Islamic banking pie.
"I think they have made a strong effort on the regulatory side to support that. A lot will depend on the speed of issuances, if there are more issuances, the better," Badlisyah said.
CIMB Islamic is the global leader in sukuk issuance with a 20 per cent share. — Bernama

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One area of the UK’s financial sector has emerged relatively unscathed from the credit crunch – the new Islamic banks


The banking community in the City of London has been hit hard by the economic crisis. But one area of the UK’s financial sector has emerged relatively unscathed from the credit crunch – the new Islamic banks.
These institutions are expanding their balance sheets as demand continues to grow in Europe for financial products that avoid paying interest, in line with strict religious rules. These products instead pay profits from an underlying business or rent from a building used as collateral to raise money.
In contrast to the vast losses – now more than $650bn – at the conventional banks, this expansion rests on a lack of exposure to toxic assets and derivatives, often related to mortgages, that have plunged in value.
Significantly, two of the UK’s five Islamic banks launched this year in the face of the financial crisis. European Finance House opened in January, and Gatehouse Capital followed in April.
A third, Bank of London and the Middle East, launched in July 2007 – a month before the credit squeeze emerged.
The more established of the Islamic banks, European Islamic Investment Bank and Islamic Bank of Britain, are also attracting new customers. IBB, the only retail bank of the five, even launched a sharia-compliant residential mortgage in September, as Lehman Brothers collapsed.
This was a big development for the British market, as it is the first wholly sharia-compliant home loan. Other banks in the UK, such as HSBC and Lloyds TSB, offer Islamic mortgages but these are not considered pure by some Muslims, as these banks use money from conventional business to help provide loans.
In an Islamic mortgage, the customer pays the bank rent rather than interest. The rent is paid over a given period of years, like a conventional mortgage, until an agreed amount has been transferred to the bank. At this point, the tenant becomes the owner.
Sultan Choudhary, commercial director of IBB, says: “We were confident enough to launch the product in spite of the credit problems. We are not insulated from the credit crisis. I don’t think anyone is, but we are not as affected as the other banks because we do not have the exposure in terms of toxic assets. We are also not exposed to wholesale funding, like Northern Rock was. We have assets from shareholders and deposits.”
John Weguelin, chief executive of European Islamic Investment Bank, says: “We are fortunate that many of our clients have not been adversely affected by the credit crisis, although some investors are waiting to see how the markets unfold.”
Humphrey Percy, chief executive of Bank of London and the Middle East, says: “Our balance sheet is still growing as a result of our increasing deposit base and more parties willing to look at Islamic finance as an alter­native way to invest because they see it as competitive as well as ethical.”
London has led the way in developing the sector in the west. The UK is the only country in the European Union that has established Islamic banks.
The British government is also still determined to launch an Islamic bond, or sukuk, although this is one area of sharia-compliant finance that has been hurt by the deepening credit crisis. This is partly because of the slump in the oil price, which has undermined demand from the large pool of investors in the oil-rich Middle East. Institutions in the that region, together with Asia, are the main issuers and buyers of Islamic bonds. Most of the customers and clients of London’s Islamic banks are based in Europe and the UK, which explains why the oil slump has not affected them to such an extent.
Principal Insurance, the UK’s first Islamic insurance company – the first in western Europe – was also launched in May, allowing the UK’s 2m Muslims to insure their car or house in a sharia-compliant way.
However, it is not just Muslims who are looking at using Islamic finance, which has seen its market grow from about $100bn in 2000 to $800bn today.
IBB says many non-Muslims are turning to its products because it has become an increasingly competitive way to raise money.
Ian Yearsley, a retired journalist and lay preacher who lives in south-west London, is one of the bank’s many non-Muslim customers to set up a savings account, which pays on a profitshare rather than interest basis.
“It is an ethical and sensible way to invest my money. It should be remembered that there was a prohibition against usury, or earning interest, among Christians in the Middle Ages,” he says.
The other four banks, all wholesale operations, are also used by a rising number of companies and institutions.
For example, BLME arranged a financing facility for Thamesteel, a Kent-based steel manufacturer, that is part of the Saudi Arabian Al Tuwairqi group. Thamesteel used the money to buy scrap metal.
“We could arrange the financing in an Islamic way at a competitive price,” says Mr Percy.
(Financial Times)

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