Latest from GIFC
Wednesday, 31 December 2008
Tuesday, 30 December 2008
A few financial conglomerates from Japan have expressed interest to work with Aseambankers Malaysia Bhd in developing Islamic capital market products
While Aseambankers plans to enhance the sukuk market in Japan, the conglomerates, through the Malaysia International Islamic Finance Centre (MIFC), are keen to invest in the region.
"We are seriously looking into this (Japanese) market," Mohammed Rashdan said in an interview with Business Times in Kuala Lumpur.
He did not specify when the deals would be sealed since "the global financial market is still highly volatile and stressed (so) that even the most optimistic of these investors would really want to pick the best time".
According to Mohammed Rashdan, Islamic finance has attracted interest not only in Japan but also South Korea of late, partly because of the general collapse of the conventional financial system across the world.
He pointed out that Islamic finance does not encourage excessive leverage or use of derivatives and is viewed as safe in terms of having underlying asset values backing the financial instruments.
"There is ample global liquidity resident in the Gulf. Greater participation from Japanese and Korean institutions will attract that liquidity into this region, and we hope to be right there in that playing field," he said.
Apart from this, Aseambankers is also working on "a significant mandate" with a party from Saudi Arabia, despite the challenges posed by the current financial crisis.
The Malayan Banking Bhd (Maybank) group's key outpost in the Gulf is in Bahrain. It is also looking at other potential locations, especially Saudi Arabia and the United Arab Emirates, specifically Abu Dhabi.
"Through Bahrain we have done several smaller mandates in the Gulf, but the one we are working on now is significant," Mohamed Rashdan said, without elaborating.
He also said that Maybank's recent completion of its acquisition of Bank Internasional Indonesia (BII) would provide Aseambankers an opportunity to expand its reach. Aseambankers is Maybank's investment banking arm.
"There is great potential there, especially Islamic banking opportunities which are still nascent.
"Furthermore, Aseambankers can leverage on the BII platform to launch investment banking and brokerage services in Indonesia," Mohamed Rashdan said.
Aseambankers is also looking at setting up key offices in Singapore and Hong Kong, he added.
Alfalah Consulting - KL: www.alfalahconsulting.com
Islamic finance consultant: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
Sunday, 28 December 2008
Let's make self assessment and reflection (muhasabah) on past one year we lived through in order to improve ourselves in the coming years. Tomorrow should be better than today and next year should be better than this year...continuous improvement is required on all Muslims.
Let's live on the true spirit of Hijrah and Jihad....
The 1st Muharram 1430 (known as Maal Hijrah/Awal Muharram in Malaysia) falls on 29 December 2008.
Peace to all...Salam!
Halal Banking Revolution goes from strength to strength - Islamic finance still active as the credit crunch deepens
'Our new product range means our new customers now have products priced from the equivalent of 5.49% on their home finance,' explains Keith Leach, Head of alburaq. He continues: 'The new year could bring even lower rates for our customers. If rates continue to fall as predicted, from March 09 many of our customers could be paying a rate equivalent to 4.5% or less.
In addition to the improving prices, there are plenty of other advantages for those choosing alburaq's Islamic alternative. Recently, banks have been criticised for varying margins; imposing collar rates and reducing the range of mortgage products they offer.
'Collar rates' have made the headlines recently as many mortgage holders have discovered to their cost that their mortgage payments will not fall inline with the general drop in rates.
alburaq works very differently, as Leach explains: 'When applying for a mortgage, the public would be well-advised to study carefully what margin will be applied, for how long it is guaranteed and whether there is a ‘collar' rate. One of the distinguishing features of our products is that we fix our margins so these are clearly known from the outset and we don't have a ‘collar' on our rates. In addition, we don't tie-in our customers for when we offer incentives, like fees assisted or cashback offers. We also allow unlimited overpayments, which isn't always available with other Islamic or conventional mortgages.'
Leach continues: 'Unlike many of the UK banks, we continue to offer a full range of products and we are still offering buy-to-let finance - which has almost disappeared from the conventional market.'
Full details and terms for alburaq's Shari'ah-compliant products are available by visiting www.alburaq.co.uk or by calling (freephone) 0800 587 88 66.
alburaq is the UK's most innovative provider of Shari'ah-compliant Islamic Home Finance, and has launched a wide range of products for the Halaal Mortgage market.
Alburaq is a brand name belonging to ABC International Bank plc (a subsidiary of the Arab Banking Corporation), a major Middle-Eastern banking group in which government agencies of Kuwait, Abu Dhabi and Libya have significant share-holdings. ABC was founded in 1980, and is headquartered in Manama, Bahrain. The Group has a well-established international network including offices in Paris, Milan, Frankfurt, London and of course the Arab world. ABC Group is one of the largest banks in the Arab world, with assets totalling approximately US$33 Billion (December 2007).
Islamic banking is a faith-based system of financial management, which derives its principles from the Shari'ah - Islamic ethics derived from three sources:
• The Holy Qur'an
• The Hadith (sayings of the Prophet Muhammad) and
• The Sunnah (practices and traditions of the Prophet Muhammad)
For Muslims, giving or receiving interest (known as 'Riba' in Arabic), is strictly forbidden. All of alburaq's products are free of from Riba, and operate in accordance with Shari'ah principles. Prior to launch, all alburaq products are reviewed by a Shari'ah Supervisory Committee (SSC), composed of respected Islamic scholars. Products are only launched once their structure and associated contracts have been approved by the SSC.
Islamic finance consultant: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
Saturday, 27 December 2008
It aims to not only attract such transactions to Malaysia but also to pro-actively participate in the transactions originating from the Middle East and other region.
In a statement here Friday, the bank said the move follows the introduction of the Malaysian International Islamic Financial Centre (MIFC), and in support of Bank Negara Malaysia's initiative to enhance Malaysia's position as a centre of origination, distribution and trading of Islamic financial instruments.
"In line with our aim to be the first Japanese bank to aggressively promote Islamic finance, our initiative is supported fully by the Bank of Tokyo-Mitsubishi UFJ Ltd, and the parent bank and head office in Tokyo has also established a high-level standing committee to promote Islamic banking and further support all Islamic financing activities of the group," the bank said.
In February 2008, the bank received BNM's approval to set up the International Currency Business Unit (ICBU) within Bank of Tokyo-Mitsubishi UFJ Malaysia.
It then established the Islamic Banking Department in April 2008, followed by the historic appointment of Shariah Committee by a Japanese bank.
BTMU said with the continued growth of importance and acceptance of Islamic finance it wanted to encourage more of this business to originate from Malaysia.
"It is said that there is approximately US$700 to US$1,000 billion of funds within the Islamic finance system, growing at around 10 to 15 percent annually.
In the Gulf and Asia, Standard & Poor estimates that 20 per cent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile," BTMU said.
The Islamic financial market's growth in importance has also attracted some of the largest capital markets in the world such as London and Singapore to develop financial services and products to capture this market.
In addition, ambitious plans have been announced to make London the western capital of Islamic finance as the government announced tax relief for sukuk in March 2007.
Other financial centres such as Hong Kong has also joined the bandwagon.
The bank said Malaysia has progressed significantly in the development of Islamic financial services, especially in terms of the size of investments and an increase in the number of Islamic financial institutions.
In meeting the needs of the growing Islamic financial services, BTMU has taken the leadership role in attracting deals to Malaysia and actively participating in the Islamic financing transactions originating from the Middle East and other regions.
Towards this, it established the ICBU which can play an active role both as a booking office and as an arranger for Islamic financing activities.
The bank's ICBU will facilitate the potential participation of the bank in large deals originating from various parts of the world.
With the increasing number of players from Malaysia, the MIFC (Malaysia International Islamic Financial Centre) will attract more banks to set up their respective hub in Malaysia not only to enjoy the incentives provided but also to participate in the ever-increasing size of the Islamic financing opportunities.
The bank's financial products, vetted for its documentation and implementation by the Shariah committee, will be at par with all global Islamic financing products.
Among the reasons for the BTMU's move to embark on Islamic financing business include the huge opportunities in the sector, especially funds originating from the Middle East, and the vast opportunities emerging in Malaysia's new regional growth corridors.
Thursday, 25 December 2008
That is the view of two key players in the sector here, who both see strong growth ahead.
Mr Vince Cook, chief executive of The Islamic Bank of Asia (IB Asia), a Singapore-based unit of DBS Group Holdings, told The Straits Times: 'While we're not immune...we're also not seeing any of the Islamic banks having the problems you're seeing at some of the bigger investment or conventional banks.
'So I think the recovery may come quicker for Islamic banks.'
Mr Syed Abdul Aziz Syed Kechik, chief executive of OCBC Al-Amin Bank, agreed: 'Islamic banks may bounce back faster once the global outlook strengthens as they are ultimately designed to safeguard themselves from over-exposure to risks associated with excessive leveraging and imprudent risk-taking.'
Mr Cook said IB Asia has also avoided the flagging property sector in Gulf states like Dubai, unlike some other Islamic banks.
'We're in a fortunate position where we're still young enough not to have entered into that particular piece of the market,' he said.
IB Asia was launched last May to help DBS tap into capital flows and investments between the Middle East and Asia - two regions which Mr Cook believes will remain the fastest growing regions despite the ongoing crisis.
OCBC Al-Amin Bank started as a full-fledged Islamic bank in Malaysia on Dec 1 after operating under OCBC's Malaysian subsidiary for the past 13 years.
Islamic banking, which follows syariah or Islamic law, forbids payment of interest, speculation or investment in businesses such as gambling and alcohol.
The ban on interest earnings and the lack of Islamic structured products shielded such banks from assets like the sub-prime loans that have caused such havoc at many conventional banks.
'We expect the international economic environment to remain challenging in 2009, even for Islamic banking,' said Mr Abdul Aziz.
'Still, it is noteworthy that Islamic finance continued to demonstrate its evolution and strong growth over 2008 as most banks had significantly lower or no exposure to toxic assets (like) sub-prime loans.'
Mr Cook echoed the point: 'The Islamic sector was not caught directly by sub-prime; the principals of syariah would not have allowed us to participate in that type of product.'
He also feels that the man in the street might take a fresh look at Islamic banking after the woes encountered at conventional banks.
He said IB Asia is considering introducing simpler syariah-compliant structured products that will differ from conventional ones.
'But we want to wait till the dust settles from the fallout from the conventional side before launching anything,' said Mr Cook.
He added that IB Asia could offer syariah-compliant products for heartlanders through POSB, another DBS vehicle.
'I can think of no technical impediment; but we definitely have received enquiries and there is a level of interest.'
Mr Cook said IB Asia could extend its reach to markets such as Hong Kong, Taiwan and even China, without making additional investment thanks to the reach of DBS' Asian franchise.
'There are a couple of things in the wealth management and consumer finance side which we can do jointly with DBS and in a number of countries as well,' he said.
OCBC is also looking to enhance its Islamic banking presence beyond Malaysia and Singapore.
'While most of OCBC's existing engagement within the region has centred on conventional banking, many customers have shown keen interest to explore opportunities in Islamic banking,' said Mr Abdul Aziz.
'With OCBC Al-Amin Bank, we will continue to enhance our position in the market through the promotion of various Islamic finance products....We are also looking at widening our product range through innovations, especially in the area of treasury and structured products.'
Alfalah Consulting-Kuala Lumpur: www.alfalahconsulting.com
Islamic Consultant & Trainer: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
Wednesday, 24 December 2008
Organised by GlobalPro Consulting, this 2-day conference has been specifically designed to explore the opportunities, latest trends and developments, providing an in-depth concept and practical aspects of sukuk (Islamic bond) and other Islamic investment banking services.
Major players such as corporate bankers, treasury, investment bankers, fund managers, financial controllers and individuals will learn from prominent speakers with different wide spectrum of expertise. This conference will definitely give benefit and enhance understanding and insight to the delegates of the distinct features of sukuk and investment banking.
Topics to be discussed include overview on sukuk, shariah principles on sukuk, sukuk: towards viable secondary market, Islamic investment banking: new producr development and innovation, Islamic investment banking: challenges and opportunities, sukuk credit ratings and legal framework of sukuk and some current issues.
The conference will feature a panel of distinguished local and international speakers, moderators and panelists ranging from top industry leaders, regulators to renowned scholars.
Some of the speakers include Mr Zairulnizad Shahrim (Associate Director, Islamic Markets, AmInvestment Bank Berhad), Mr Mohamed Ariff Tun Dr Ismail (Vice President, Aseambankers), Mr Alhami Mohd Abdan (Head, Islamic Finance, Investment Banking, OCBC Bank Malaysia Berhad) and Mr Mohamad Illiayas Seyed Ibrahim (Senior Partner, Illiayas (Advocates & Solicitors).
Tuesday, 23 December 2008
An environmental and Shariah-compliant fund has been launched by Da Vinci Invest of Zurich Green. Known as the Falcon Fund, it will invest in the carbon markets and forestry.
The carbon markets are steadily growing and are characterised by recurring inefficiencies, enabling a range of arbitrage strategies.
The fund will work closely with advisors to use halal (permissible under Islamic laws) trading strategies. It will concentrate on the more vanilla structures and strategies.
The fund will actively trade the carbon markets on a short-term basis and invest in forestry for the long term. Da Vinci Invest expects this strategy provide consistent value growth, diversification and an environmental benefit. Rainforest Invest, Forest Finance and Miller Forest will source opportunities in Panama, Costa Rica and Paraguay.
Only land formerly used for agricultural will be planted. No rainforest will be cut to farm the plantations. The Da Vinci Green Falcon Fund will charge a 2% management fee and a 20% incentive fee.
Da Vinci Invest, incorporated in 2004 as a UK company, is based in Zug. Da Vinci Invest's multi-strategy platform includes Volatility Arbitrage, long/short gamma strategies, gamma scalping and automated arbitrage trading. The portfolio is primarily delta neutral and hedged against rising or falling markets.
Da Vinci Invest employs different trading strategies to benefit from various forms of anomalies in the volatility of several underlying products. Spread trading accounts for 70% of our trading strategy (pairs trading and volatility spreads where the implied volatility of an option is inconsistent with its historical volatility or recent implied volatility). Its proprietary statistical models and automated trading robots monitor global markets and exploit situations where unexpected events push derivative prices unreasonably high or low.
(Hedge fund Review)
Sued after getting stuck on the house he was robbing
In October 1998, A Terrence Dickson of Bristol Pennsylvania was exiting a house he finished robbing by way of the garage. He was not able to get the garage door to go up, because the automatic door opener was malfunctioning. He couldn't re- enter the house because the door connecting the house and garage locked when he pulled it shut. The family was on vacation, so Mr. Dickson found himself locked in the garage for eight days. He subsisted on a case of Pepsi he found, and a large bag of dry dog food. This upset Mr. Dickson, so he sued the homeowner's insurance claiming the situation caused him undue mental anguish. The jury agreed to the tune of half a million dollars and change.
10 years later we hear about this equally crazy lawsuit (the story below is extracted from FoxNews):
The U.S. government's bailout of the American International Group is helping promote Shariah law, a lawsuit filed in federal court in Michigan alleges.
The suit — brought with the support of the Thomas More Law Center, a non-profit law firm that promotes conservative Christian values — claims that making U.S. taxpayers comply with Shariah, the Islamic legal framework based on the Koran, is unconstitutional.
This month, AIG announced that it would offer Shariah-compliant homeowner insurance policies, known as takaful, to U.S. customers through one of its subsidiaries. To be Shariah compliant, companies cannot earn interest and must agree to send a percentage of their revenue to Islamic charitable groups.
The lawsuit — by Iraq war veteran Kevin Murray, on behalf of U.S. taxpayers, against Treasury Secretary Henry Paulson and the Federal Reserve — claims that by subsidizing AIG, the federal government is conveying "...a message of endorsement and promotion of Shariah-based Islam ... and [a] message of disfavor of and hostility toward Christianity and Judaism."
In September, the U.S. Treasury and Federal Reserve took a nearly 80-percent stake in AIG when it injected $150 billion to help prop up the troubled company.
"The suit is aimed at persuading the U.S. government it is unconstitutional to engage in the promotion of a faith," Frank Gaffney of the Center for Security Policy told FOX News. "In this case, Islam, and its practices, which include among many other things, Shariah."
While takaful insurance is more common in Europe and Southeast Asia, it is relatively unknown in the U.S. The Ernst and Young professional services firm earlier this year called takaful insurance a growth industry, in part because it is perceived as more stable than conventional insurance, which allows for elements of speculation, interest and gambling.
Gaffney, who opposes Shariah, said the federal lawsuit sheds light on a problem that is under the radar. "There's also a host of other aspects of Shariah that are now beginning to be adopted or accommodated in our country. We think far from being frivolous or innocuous or innocent, these represent a form of, what I think [is] best described as stealth Jihad."
A constitutional law expert who reviewed the court documents for FOX News said he questioned whether the case will ever get to trial.
"The plaintiff is going to have a very hard time in showing they have standing under the establishment clause," said Robert Tuttle, who specializes in religion, law and the establishment clause of the Constitution at George Washington University. The establishment clause, part of the First Amendment, prohibits the establishment of a national faith.
"The question is whether the government has funded religion, not whether the religion is good or bad that the government has funded. Then the next question is whether the government is responsible for what AIG has done."
While the case raises interesting legal questions about the use of federal bailout money, Tuttle adds: "I can't imagine any court saying, under existing law, that the government will be responsible for what AIG does. And I think there's an interesting law professor question there."
Neither AIG nor the Treasury Department would comment on pending litigation, though a spokesman for AIG told FOX News that takaful insurance has been available in non-U.S. markets since 2006, and AIG has never had any problems.
Germany managed to acquire this position thanks to its geographical location at the heart of Europe allowing it to attract international companies. Berlin was awarded the title of ‘City of the Future’ in 2006/07 by the fDi [Foreign Direct Investment] magazine affiliated to the Financial Times Group. The award is given annually to the European region or city that offers the best opportunities for foreign investment. Germany is also renowned for the number of its scientific research centres that encourage creativity and innovation. Companies with distinctive brand-names such as Daimler-Benz, BMW, and Siemens invest €250 million into scientific research and development on an annual basis. Due to this cooperation between economic activity and scientific research, Berlin ranked second in the European Innovation Index. The city is also renowned for its social stability and rule of law.
According to the 2007 census, the number of Muslims in Germany amounts to 3.4 million, and constitutes 4.1% of the German population of 82 million. This makes Islam the second largest religion in Germany, after Christianity, and Germany has recently demonstrated its responsiveness to the Islamic faith with an average of one man and one woman converting to Islam per week.
Germany went down in Islamic banking history as the first European country to issue sovereign Sukuk when in 2004 the German federal state of Saxony-Anhalt issued Islamic Sukuk worth €100 million. Islamic financial services had begun even before that in Germany with Commerzbank launching the Al Saqur investment fund targeting the Gulf region. However, this fund was later closed after its assets declined from an initial €40 million in 2000 to just €4 million in 2005. The largest private bank still active in this area is Deutsche Bank, which offers five Shariah-compliant mutual funds in Dubai, although they are not German-market orientated.
In addition to this, some insurance companies also offer Islamic Takaful insurance services outside of Germany. The Hannover Re Group is considered the first European insurance company to offer full Takaful insurance to Islamic Takaful insurance companies. Therefore, we can see that all the Islamic financial services offered by German financial companies target foreign markets, especially the Gulf States and Malaysia. This leaves the Muslim community in Germany, which owns a high capacity of savings, lacking Islamic financial institutions offering services like Islamic banking and Islamic insurance.
Due to Germany’s geographical location and its economic potential, Islamic financial institutions, which will develop in Germany without doubt, will serve both the German Muslim community, as well as the Muslim community of the entire Eurozone, the population of which is estimated at 18 million.
As a result of the global financial crisis, perhaps the world has become more open-minded towards an Islamic financial system.
Perhaps now is the time for Islamic financial institutions and Muslim investors to make their move.
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
Monday, 22 December 2008
JEDDAH: Islamic banks are the least affected by the current global financial crisis triggered by subprime tsunami in the United States, the CEO & general manager of Islamic Corporation for the Development of the Private Sector (ICD) said.
In an exclusive interview with Arab News, Khaled Al-Aboodi said, “Islamic banks are Shariah-compliant and Shariah does not allow them to invest in subprime products as compared to conventional banks.”
Al-Aboodi, who began his career with the Saudi Ministry of Economy and Finance in 1982, became ICD chief in 2007. Talking about the recent banking crisis, he said you must have seen that most conventional banks worldwide were in trouble because they don’t deal with Shariah products. “Islamic banks are very strict in their policies which are monitored closely by Shariah boards at various stages,” Al-Aboodi said.
He said ICD is in the process of setting up an asset management firm in the Kingdom, which will be named Ewaan Capital and will deal with Shariah-compliant mortgage financing. ICD has applied for a license from the Capital Market Authority (CMA) and already had initial discussions with the Saudi Arabian Monetary Agency (SAMA), the Kingdom’s central bank.
ICD, an Islamic Development Bank (IDB) affiliate, applies Islamic modes of financing in operations that include installment sales, leasing, Mudaraba, Murabaha and equity participation, Al-Aboodi said. The authorized capital of ICD is $1 billion. ICD’s shareholders are the IDB (50 percent), Islamic member countries (30 percent) and five financial institutions from member countries (20 percent).
He said the mandate of ICD is to support economic development of its 48 member countries through provision of finance to projects promoting private sector as a vehicle for economic growth and prosperity. The projects financed by ICD are selected on the basis of their contribution to economic development taking into account factors such as creation of employment opportunities and contribution to exports.
ICD also accepts co-financing for its projects and advises governments and private sector groups on policies to encourage the establishment, expansion and modernization of private enterprises, development of capital markets, improvement in management practices and for enhancing the role of market economy, he added.
In 2007-08, the market for ICD evolved further and investment diversified into new markets. Bangladesh became a new member of the ICD as a beneficiary country and financing of projects in the country increased from $5.3 million to $6 million.
Despite global economic slowdown and negative impact of a tightening financial market, ICD achieved its targets. Al-Aboodi said this year ICD approved $340 million in financing which is a 6 percent increase compared to last year. Since its founding in 2001, ICD has approved projects worth $1.2 billion, he said.
“The global financial crisis is creating some kind of uncertainty but we will try to meet demands from the private sector and we expect same growth next year,” he added. “So far none of ICD projects is affected by the global crisis,” Al-Aboodi said after visiting various countries and taking the first hand information of the ongoing ICD projects. Al-Aboodi recently visited Azerbaijan, Kazakhstan, Uzbekistan, Russia, Turkey and Bosnia where ICD has financed private sector projects. In Azerbaijan, ICD has established Caspian International Investment Company (CIIC), which has started operations after reaching the projected capital of $70 million.
He added, “The first Islamic investment company was set up after identifying investment opportunities offered by the developing Azerbaijan economy - the fastest growing economy in the world.” Al-Aboodi, who also participated in “Agroinvest.kz-2008”, the first international investment forum, held in Astana, Kazakhstan, in October, signed memorandums of understanding (MoUs) with Kazagro national holding company and Food and Agriculture Organization (FAO) to explore Kazakhstan’s agricultural potential and establish contacts with Kazakh entrepreneurs.
He said ICD also organized a half-day seminar in June for knowledge sharing and information dissemination among IDB member countries on the challenges and solutions for public-private participation (PPP) in the social sectors such as health, education and other related fields. ICD, which was recently admitted as an associate member to the Islamic Financial Services Board (IFSB), had signed a $12.5 million Ijara (lease) agreement with Arab Malaysian Vegetable Oil Products Company Ltd., to set up the first palm oil-based vegetable oil refining and downstream processing plant in Yanbu. The project would produce cooking oil and have an annual production capacity of 90,000 metric tons. It will also produce non-hydrogenated downstream products such as vegetable ghee, fats, shortening and margarine. The project plans to export up to 90 percent of its production while the rest will be sold in the Saudi market.
He said ICD has a big presence in Africa also. It has signed a line of finance agreements with the Arab Bank for Economic Development in Africa (BADEA) to finance private sector projects in its African member countries. ICD has also been involved in charitable exercises for the last few years. Recently, ICD had given away 700 free school bags to the children of needy families and orphans in cooperation with Al-Irshad Charitable Society, Tripoli, Lebanon.
“This initiative came as ICD’s Solidarity Fund strategy to serve needy communities within IDB member countries by providing assistance in different fields and various ways,” Al-Aboodi added.
Sunday, 21 December 2008
Islamic finance is coming of age. Today, for the first time, Islamic structurers in Malaysia and the Middle East are starting to create new financial products and infrastructure from scratch – developments that do not simply wrap their conventional counterparts in a Shar’iah structure but which are Islamic from start to finish.
Already this year, in its effort to develop a wholesale Islamic capital market, Malaysia’s Syariah Advisory Council has approved a Shar’iah-compliant commodity exchange and it has also given the go-ahead for securities borrowing and lending, which will support the creation and redemption of Islamic exchange-traded funds, or ETFs. The first Islamic ETF was launched in January this year.
A broad universe of Shar’iah-compliant underlyings is particularly significant for the structured products market, and most of all for equities structurers. Shar’iah-compliant underlyings often have no volatility market, which makes it difficult for providers to manage their risks, and they are typically illiquid, expensive and difficult to access.
Fixed-income structurers have an easier time of it. The increasing popularity of Islamic bonds has given them more to work with and, in fact, sukuk issuance is now starting to spread outside the Islamic world as borrowers learn to appreciate their value as a way to access new markets. A German state recently issued a sukuk and the UK is also considering one.
But the conventional structured products market in Asia is overwhelmingly dominated by equity and this is where the greatest development in Islamic products is focused.
It has taken a long time to get to this stage. Norfadelizan Abdul Rahman, the head of product development at Bursa Malaysia, describes the evolution of Islamic finance this way: adoption, conversion and, today, genuine architecture. “In the past, most Shar’iah product innovations were focused on adoptions – the study of conventional products and their Shar’iah justifications for use in the Islamic space,” he said at a recent forum on Shar’iah structured products in Kuala Lumpur.
The adoption phase led to the approval in Malaysia of warrants, crude palm oil futures and preference shares, starting in the mid-1990s. This process also allowed 85% of all companies listed on the stock exchange to be approved as Islamic stocks.
The next level of development involved taking conventional products that were not suitable under Shar’iah law and coming up with ways of converting or replicating them. Back in 1998, Islamic financiers created Shar’iah-compliant stock index futures and, more recently, Islamic real estate investment trusts and ETFs.
The global economic slowdown has affected Islamic markets as well, but Malaysian investors in general have not shared the bad experiences of structured product investors in Hong Kong and Singapore.
“Malaysia is protected in a sense, given the regulatory structure,” says Angeline Ong, head of structured products at Citi in Malaysia. “Malaysia has been sheltered from cases like the Lehman minibonds and so on – most of our products are quite conservative in nature and principal-protected by banks in Malaysia.”
However, some investors in equity and commodity products are expecting zero returns, so they are experiencing something of what the clients in Singapore and Hong Kong are going through, but to a much lesser extent.
Malaysian investors buy structured products in a variety of forms. Direct investment in derivatives-based products has only been allowed since 2005 and is still restricted to rich investors. The minimum investment size is either M$250,000 ($70,300) or M$100,000, though the lower figure is only for so-called qualified high-net-worth individuals.
“The first generation of Malaysian structured products will mature in the first half of next year, so it will be interesting to see the final performance of such products and how this will impact the market and investor sentiments,” says Aida Mastura, head of investor sales at Citi Malaysia.
Regular investors cannot buy structured products directly. Instead, they must buy them through structured deposits, which have a minimum investment amount of M$100,000, or through funds, which have been allowed to invest in structured products only since May 2006.
Structured deposits, which the securities commission prefers to call floating-rate negotiable instruments of deposit, are the biggest part of the market by far, making up about two-thirds of the total.
Islamic structures are sometimes criticised as mere financial jiggery pokery – a clever dodge that lets Muslim investors achieve the exact same results as conventional investors. There are certainly some structures and products in the market that deserve such criticism, but Ahmad Chaudry, an Islamic finance specialist at Royal Bank of Scotland, argues that Islamic finance techniques can also offer very different solutions to conventional finance, which can appeal to Muslims and non-Muslims alike.
Islamic mortgages are a good example, he says. With a regular home loan, the would-be homeowner borrows money from a bank, invests it in a property and pays back the loan over time, plus interest. “The only circumstance under which the bank cares about the value of your property is if you default,” says Chaudry. “In Islamic finance, the bank buys the property with you – you share the risk.”
In this type of Islamic mortgage, the investor might buy 10% of the property, while the bank buys the rest. The investor reclaims equity stakes from the bank over time and also pays rent on the bank’s stake. Most important, the investor buys this equity at the prevailing market values, which means the bank is taking risk on changes in the value of the property over time. “This is something we don’t see in conventional finance,” says Chaudry. “The sharing of risk is something that is extremely central to Islamic finance.”
There are of course some contradictions that still vex conservative Islamic scholars and non-Muslim sceptics alike. If risk-sharing really is at the centre of Islamic finance, we might expect Islamic financial institutions to act more like venture capital firms than banks. But they do not – and for good (though not Islamic) reason. A banking system built on equity investing would be far too unstable, and so in practice, Islamic banks end up taking a very similar degree of risk as Western banks.
One of the key techniques to achieving this is the practice of benchmarking. In the mortgage Chaudry describes, for example, there is no Shar’iah-compliant way of determining the rent to be paid so it is simply benchmarked to interest rates, which is apparently acceptable to the Islamic scholars who sign off on these structures.
These sleights of hand are particularly important for creating halal equity structures because Shar’iah rules specify that the profit earned in a transaction must be agreed by both parties at the outset. This is clearly impossible in a product linked to the returns from an equity underlying, so Islamic structurers have come up with two techniques to solve the problem.
The first is an agreement known as a murabahah – or two agreements, to beaccurate. In a typical one-year trade, the first agreement runs for 364 days, in which the bank promises to pay back the investor’s money at par. Then, if the underlying index has appreciated during that time, the bank enters into a one-day agreement, promising to pay the investor the value of the index rise during those 364 days. This is the most common structure in Malaysian equity-linked products.
In the Middle East, Islamic structurers often rely on a form of benchmarking that is wrapped in an agreement called a wa’ad, whereby the bank promises to buy a portfolio of Shar’iah-compliant equities from the investor, plus a profit that is benchmarked to a conventional call option.
Even though these structures look very similar to their conventional cousins, they still present unique challenges for structurers. Shar’iah-compliant products are more expensive because there are more fees built into the structure – such as the cost of the extra legal work and the cost of getting scholarly sign-offs – and bid-offer spreads are much bigger on Shar’iah-compliant underlyings.
But one of the biggest problems is volatility. “You find with Islamic stocks that volatility is quite high, which means that to offer products with an Islamic underlying I need to be able to manage my risk,” says Chaudry. “But there is no volatility market.”
RBS’s solution is to manage the underlying at a fixed level of volatility by adjusting the exposure to it – for example, the investor is 100% exposed to the underlying when it is trading at the target volatility level and reduces his exposure when it is higher.
As the products and techniques on offer are becoming more sophisticated, so too are Malaysia’s investors, but, even so, the structured product market is still in its infancy. The country’s savings rate is 36% of its gross national product and even higher in the Islamic market.
“Islamic banks have too much cash and not enough assets to buy into,” says Lee Kok Kwan, head of treasury at CIMB. “There is always a lot of liquidity on the deposit side.”
This is one of the principal motivations for Malaysia to develop its Islamic capital market – to provide a way for all these deposits sitting in Islamic banks to find a productive use in the economy. The creation of new Islamic underlyings and a greater diversity of products should certainly help in that effort.
This story was first published in the November issue of FinanceAsia magazine.