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Tuesday, 28 April 2009

Malaysia Retools Finance - Opening Way for 2 Mega Islamic Banks

(WSJ, KUALA LUMPUR) -- Malaysia unveiled a liberalization of its financial sector, promising to issue new licenses for up to nine financial institutions by 2011 and allowing higher foreign-equity participation in select sectors.

The move underscored Prime Minister Najib Abdul Razak's intent to attract foreign investment and diversify sources of growth, though it fell short of scrapping restrictions on foreign shareholdings in Malaysian banks.

Malaysia will grant up to two new licenses to conventional banks this year, the first time in more than a decade that licenses are being offered to foreign operators. The country also will grant two licenses to foreign investors to operate Islamic banks; two for new takaful, or Islamic insurance, operations; and three additional conventional bank licenses in 2011, Mr. Najib said at a news conference.

Prime Minister Najib, who took office this month and also is the finance minister, said the licenses will be issued to "world-class banks" that offer a "significant value proposition" to Malaysia.

Additionally, the cap on foreign-equity shareholdings in local Islamic banks, investment banks, conventional insurance and takaful operators will be raised to 70% from 49% now, he said. But the 30% foreign-equity shareholding cap for conventional banks will be retained, he added. Current rules also prohibit a single foreign investor from holding more than a 20% stake in a local bank.

Mr. Najib said the new Islamic banks must have a minimum of $1 billion in paid-up capital.

The liberalization measures, to be implemented between this year and 2012, are in line with plans to "promote structural change within the economy," he said. The government last week said foreign investors putting money in some segments of the services sector will no longer need to partner with ethnic-Malays, scrapping a decades-old requirement.

Analysts said the latest measures indicate that the authorities see domestic banks as ready to compete with international players.

"The award of new licenses should bring about competition and promote expertise on the domestic sector, which is healthy," said Lim Sue Lin, a banking analyst with Hwang-DBS Vickers Research.

TA Securities banking analyst Wong Li Hsia said the liberalization wouldn't have an immediate impact on local banks, but could create "a more competitive" environment in the years to come.

"It will be more challenging but good for the local finance sector, as it requires banks to become even more efficient," she said.

Some foreign competitors who had been hoping to raise their stakes in local financial institutions could be "a little disappointed" after the decision to retain the cap on foreign shareholdings in conventional banks, Ms. Wong said.

Central Bank Gov. Zeti Akhtar Aziz said the nine new licensees will be exempted from the foreign-equity rules, which means they are allowed to be 100% foreign-owned.

Ms. Zeti also said foreign-owned conventional banks operating in Malaysia will each be allowed to open up to four new branches by the end of 2010.

"A higher foreign-equity limit beyond 70% for insurance companies will be considered on a case-by-case basis for players who can facilitate consolidation and rationalization of the insurance industry," she said.

Tuesday, 21 April 2009

Bankers eye Islamic finance jobs as crisis hits

MANAMA (Reuters) - A growing number of investment bankers whose jobs have been axed due to the global financial crisis are leaving conventional banking to move into Islamic finance, banking executives say.

Executives from Islamic banks told a Reuters Islamic Banking and Finance Summit this week the number of applications from conventional bankers wanting to enter the industry, seen as having huge growth potential, was rising sharply.

And most agreed the move from conventional to Islamic banking was relatively straightforward.

"It's totally changing. I'm seeing CVs from the London market, also the Far East, and more than anywhere else, from Dubai," said Nabeel Kazerooni, head of private equity at Bahrain-based Islamic investment bank Gulf Finance House (GFH) GFHB.BH.

Earlier this week Japanese brokerage Nomura Holdings Inc said it would cut another 50 investment banking jobs, while UBS AG said it was culling 8,700 posts, almost half in its wealth management division.

With all these bankers out of work, the appetite for jobs in Islamic finance is picking up, executives said.

"The days of a shortage of Islamic bankers and the outrageous compensation that some were being paid are finished," said Simon Eedle, managing director of Global Islamic Banking at France's Calyon.

GFH's Kazerooni, who is based in Bahrain, said jobseekers were also pushing harder than ever to get themselves noticed.

"People buy the ticket and fly out here and say, 'I'm here, please interview me'," he said.

A number of banks are building up their Islamic finance units in the wake of the global credit crisis, tapping into a nascent industry estimated at $700 billion to $1 trillion in asset size and enjoying 15 to 20 percent annual growth.


Most participants at the summit agreed a background in Islamic law was a bonus but not a must. Many banks have in-house scholars who are consulted on whether a structure is sharia-compliant, and know-how of conventional banking is actually highly prized, especially in the Gulf Arab region.

"Today the Islamic element of the transactions is relatively straightforward," Kazerooni said. "You have good scholars who help a lot. You need good lawyers, then you are fine."

Objections which could arise are more related to fears that conventional investment banking practices, blamed by many for being at the root of global financial crisis, could spill over.

"There is a danger of these conventional investment bankers trying to impose their ideas onto Islamic structures. It is very dangerous," said M. Hidayathullah Baig, head of Islamic finance and advisory at Bahrain-based investment bank First Energy Bank.

Most, however, see an inflow of skilled investment bankers as a huge opportunity.

"You need more bankers who can do what the conventional guy does, the proper analysis, due diligence, proper structuring, that's what we need in the region," Kazerooni said. "It's a great opportunity for us to get access to these talented people."

Majid al-Sayed Bader al-Refai, chief executive of investment bank Unicorn, agreed: "I'm interested in those big smart players that are being kicked out in Europe and America, that's who I want to get my hands on. We've always had very high-caliber Westerners with us, but now you have even more to choose from."

Hedge funds seen unsuitable for Islamic finance

GENEVA (Reuters) - Hedge funds basing their investment strategy on sharia, or Islamic legal principles would face significant disadvantages compared with non-sharia hedge funds, some exponents of Islamic finance say.

Many strategies would be difficult to achieve because they would be too expensive to perform in a Sharia-compliant way, or because the tools themselves would be inappropriate under Sharia law. "You cannot have long-short hedge funds, because the idea of short selling, or selling something that you don't own, runs contrary to the principles of Islamic finance," Fares Mourad, Head of Islamic finance at Swiss private bank Sarasin told Reuters. "I have not seen a credible structure that resolves this," Mourad said.

Toby Birch of Birch Assets Ltd said that as sharia forbids riba, or interest, most fixed-income strategies would be ineligible. Restructuring cash flows to make them sharia-compliant would send costs soaring, he said.

Birch also doubts whether hedge funds could in principle be sharia-compliant, calling Islamic hedge funds "something of an oxymoron."

"In theory hedge funds can charge higher fees for their ability to increase returns or reduce risk," he said.

"However if managers are to achieve this they need to use products such as interest-based gearing, which runs against sharia tenets, or derivatives, which often have the net effect of increasing overall systemic risk."

While the concept of shared risk between counterparties in a transaction is embraced under sharia principles, shifting risk onto unwary third parties might be frowned on, he said.

Islamic products can be costly in any case, because there are things like sharia board expenses and extra monitoring of the product. Adding on the typical hedge fund cost structure would make products uncompetitive, said Marc Rochat, chief executive of Faisal Private Bank.

There are some combinations of Islamic financial products that could be used to ensure absolute returns, but their costs reduce the upside, he said.

Also, the theological ground is shaky.

Birch said some funds considered to be sharia-compliant use swaps, which give investors access to the returns of an asset without holding the asset itself, to invest in products whose source of return is unacceptable under sharia principles.

"This is an area of controversy, while such structuring might obey the letter of sharia, it is not compatible with the spirit," said Birch.

The same is true of some structured products, said Rochat. "I have seen products judged sharia-compliant even though they were based on funds of hedge funds whose underlying investments were not compliant," he said.

Such ambiguities would persist until a recognized regulatory body could be established to sanction, or otherwise, products designed to be sharia-compliant.

Saturday, 18 April 2009

Shariah-compliant funds gain momentum in India

Mumbai: No investing in a company whose debt is at least one-fourth its assets. No investing in a company that makes or sells alcohol, pork or tobacco. No investing in a company that charges interest on the financial services it offers. No investing in a company whose interest income exceeds 3% of its total revenues.

These are a few of the tenets that a Shariah-compliant mutual fund follows. The Shariah is a code of Islamic law that regulates the conduct of human beings in their individual and collective lives, and Shariah-compliant mutual funds are fast gaining acceptance in India.

Rising demand for such funds has fund houses and even insurance companies lining up for a piece of the action. Case in point: Taurus Asset Management Co. Ltd, Benchmark Mutual Fund and Tata AIG Life Insurance Co. Ltd. Taurus Ethical Fund, which complies with the Shariah, collected at least Rs5 crore during its new fund offer period.

These funds are open to anyone who stands by the philosophy behind the Shariah, and follow the tenets of Islamic economic law. They don’t invest in companies involved in gambling and nightclub activities either.

More are joining the fray. Reliance Money Ltd has launched a Shariah-compliant portfolio management service. Standard and Poor’s has also launched two major indices in the Indian market—S&P CNX 500 Shariah and S&P CNX Nifty Shariah.

Experts say investors who are keen on investing based on their personal beliefs or want to make socially responsible investments are opting for these funds, especially because returns on investment don’t seem to be compromised despite the restrictions the Shariah imposes.

Mohit Mirchandani, equities head of Taurus, says: “We looked at how the Shariah index in India has done from February 2006 to December 2008. The broader indices lost about 35%, and the Shariah indices also lost about 35%. So these indices are moving together.”

The global size of this market is estimated at $1 trillion (around Rs50 trillion), and this segment is expected to grow at 10-15% annually. Experts are specially optimistic about the scope of this segment in the country, and expect more fund houses to develop their own Shariah-compliant funds over the short and medium terms.


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Indonesia raises $650 million in first-ever offering of global Islamic bonds

JAKARTA, Indonesia (AP) — Indonesia's first-ever sale of global Islamic bonds raked in $650 million and drew orders for seven times that amount, easing funding pressure on the government as it seeks ways to plug the 2009 budget deficit.

Finance Ministry official Rahmat Waluyanto said the overwhelming response to the five year dollar-dominated sukuk — bonds that are structured to avoid paying interest in line with Quranic teachings — pointed to improved investor confidence.

The global credit crunch had forced shut the international dollar sukuk market for more than a year.

Bids exceeded $4.6 billion but Indonesia was only able to accept the value of underlying assets, $650 million, said Waluyanto, adding he hoped the successful issuance would broaden the sukuk investor base on the international market.

He also hoped the sale — and possible future offerings — would "help cover our 2009 budget deficit."

The deficit is expected to balloon to over $12.9 billion this year as the government pumps money into the economy to spur growth.

By issuing global Islamic bonds, the government of the world's largest Muslim-majority nation also hopes to diversify its funding instruments.

The global Islamic bonds, sold Thursday and Friday, mature April 23, 2014 and pay a fixed 8.8 percent rate of return.

Middle Eastern and Islamic investors scooped up 70 percent of the bonds while buyers from the U.S. and Europe bought the remaining 30 percent, Waluyanto said.
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Takaful sector booms as customers switch

LONDON/DUBAI (Reuters) - Growth in the emerging global Islamic insurance industry, or takaful, is waning slightly due to the economic slowdown, but remains strong as more people switch from conventional insurance.

The global market is seen growing as much as 30 to 40 percent annually in the next three to five years and could reach as much as $11 billion by 2015, Ahmed al-Janahi, managing director of Noor Takaful, told the Reuters Islamic Banking and Finance Summit, held around the world this week.

Industry players agree the takaful market is in a better position to weather the global economic downturn than the conventional market, given their asset-based investment strategies.

"We have seen the likes of AIG and others burning so many people, so even in the West, people are looking at takaful on ethical and not just religious grounds," said Sheikh Abdul-Aziz bin Naif al-Orayer, chairman of Bahrain-headquartered Islamic insurer t'azur.

Under Islamic insurance, members contribute to a pool of funds which is used to indemnify participants who suffer a loss. Profits made from investing the funds are distributed among members.

Abdul Rahman Tolefat, chief executive of Bahrain-based Allianz Takaful, said these profits give takaful an advantage over conventional insurance.

"There's more transparency, you know whether you join a surplus or a deficit fund," he said, adding the majority of the firm's customers are non-Muslims.


While takaful is growing rapidly in the Gulf Arab region, Indonesia and Malaysia, the market is virtually non-existent in Europe and this could be an interesting area for expansion.

The UK has one stand-alone pure sharia insurer, Salaam Halal, which is marketing its products to Britain's Muslim community. HSBC Amanah is also present with a home insurance product.

France, home to around 5 million Muslims, is also changing its legal system to allow Islamic financial institutions, which are expected to include takaful companies.

The first movers could get a huge advantage, according to Mohammed Khan, director for takaful business at PricewaterhouseCoopers.

"Some of the bigger players in Europe definitely have plans to offer takaful products. The question is when's the right time to launch them," Khan said.

Insurers from other countries will wait and see how Salaam's business develops before dipping their toes in the industry, he added.

Large insurers, although potentially better positioned than niche players in terms of capacity, will not necessarily be able to make a move into the market after chalking up losses on their investments. Those with capital remain cautious.

"We're in a period where the deployment of capital is important. It's not that easy to raise capital," Khan said.

But the emergence of specialists like Salaam could increase pressure on big insurers to offer Islamic products.

There may be room for both large and niche players in the takaful market, in the UK at least, said Humayon Dar, CEO of the Islamic consultancy division of BMB group.

"Takaful is a better growth area for Islamic finance compared with retail or investment banking," Dar said.

Africa: Chase bank has launched Shariah compliant products

Chase bank has launched Shariah compliant products, to diversify its product range to better cope in a highly competitive banking sector in the country.
Its entry into this category of banking will heighten competition for customers between it and two fully-fledged banks started last year.
Gulf African Bank and First Community Bank started operations mid-last year, while other conventional banks have also introduced such products. Among these banks are KCB and Barclays, which are among the top five banks in the country.
Speaking during the launch on Thursday evening, the bank’s managing director, Zafrullah Khan, said Chase wanted to ride on the growth of Islamic banking to grow its business.
“Islamic banking has become a world phenomenon, experiencing exponential growth on all continents, and appealing to both Muslims and others. With the framework in place and the product approved by the Central Bank, we are ready,” he said.
Known as Imam Banking, products are tailored for corporate, small-and-medium enterprises, as well as individuals. The accounts will include current accounts, savings accounts and fixed period investments.
The minimum opening balance is Sh1000 and a monthly fee of Sh350 for individuals but free for students. The minimum for corporate companies is Sh10,000.
Mr Khan said the bank’s Eastleigh and Mombasa branches will be Imam banking centres. He added that the bank would also study the recently introduced Tawadul (capital markets) in Riyadh and Dubai to introduce a Sharia compliant investment bank.
“We are currently developing Sharia compliant investment banking and wealth management products with our partners, Genghis Capital Limited and Winton Investment Services,” he said.
The management also intends to introduce Sharia compliant insurance products (Takaful).

Islamic Finance needs consistency -Faisal Pvt Bank CEO

GENEVA, April 15 (Reuters) - The development of a harmonised global set of sharia-compliant products is being hampered by the lack of a recognised body to oversee the Islamic finance industry, a bank chief executive said on Wednesday.
Faisal Private Bank's Chief Executive, Marco Rochat, said the absence of a global set of harmonised rules on sharia compliance created an unlevel playing field.
Some investments permitted to some investors but not to others, he told Reuters.
"We need a body to oversee the market and ensure trading compliance, like you have in traditional banking, or in accountancy. A regulated environment would help a lot of investors," Rochat said."
He said the market for sharia-compliant products was still unregulated. That meant there were, at times, large differences between accepted products in the Middle East, North Africa and Malaysia.
"We need to see this period as the beginning of an evolution in this area," Rochat said. Without a broader and more coherent oversight, different markets will continue to treat products in an ambivalent manner, he said.
"In the case of money-market funds, some (boards of sharia scholars, whose role is to approve or reject products on the basis of sharia compliance) see the returns as interest, others sanction it," Rochat said.
"Also, capital protected products are widely used, but scholars could object to them because in theory there is no risk to your capital."
Rochat -- whose bank advises on almost $500 million, which is invested entirely in sharia-compliant products -- said the lack of harmonised rules meant a lot of inappropriate products were sold to sharia investors.
The main problem, he said, was that there was only a handful of scholars with the experience and reputation to judge the suitability of such a wide range of products.
Yet broad and consensual oversight is a necessary step if Islamic finance is to fulfil its potential to cater for up to a billion Islamic customers, and perhaps gain ground among a non-Islamic base as well.

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UBS sees growth in Islamic finance

DUBAI (Reuters) - UBS AG, the Swiss-based bank which is slashing staff to offset losses, sees growth opportunities in Islamic finance and plans to expand in this market, its new head of Islamic finance said on Wednesday.
Armen Papazian said he was named to the post by UBS Investment Bank 2-1/2 weeks ago with a global mandate to design innovative products.
"My appointment comes as a new commitment to take that business forward in line with the strategic targets of UBS and reemphasize that this is a strategic target of the bank," Papazian told the Reuters Islamic Finance and Banking Summit.
He declined to give any estimates, however, for growth potential in the sector, what products UBS plans or how much Islamic finance might contribute to UBS' bottom line.
Switzerland's largest bank needs new revenue. On Wednesday, it announced first-quarter loss of $1.7 billion and said it is laying off 11 percent of its workforce.
A number of banks are building up their Islamic finance units in the wake of the global credit crisis, tapping into a nascent industry estimated at $700 billion to $1 trillion in asset size and a 15-20 percent annual growth rate.
Royal Bank of Scotland, Rothschild and Bank of New York Mellon all are expanding in the field.
Under Islam, interest is banned. Sharia-compliant products are often asset based, sharing profits rather than paying interest. Papazian sees demand for innovative approaches to Islamic finance that does not merely reverse-engineer debt products.
"It is not about taking alcohol out of wine. It is about creating an attractive and tasty drink out of grapes. That is the challenge, and that innovation challenge is still very much relevant to the field of Islamic finance," he said.
Growth in the sector has been hampered by uncertainty over scholarly views on whether Islamic finance products truly comply with Sharia law and a lack of standardization. This has made each product expensive and more time-consuming to construct.
"I believe there is a lot of work to be done at the lab level," he said.
The global economic downturn and the financial turmoil -- caused by credit excesses -- can act as a catalyst for new approaches to finance based on Sharia principles, he said.
"The crisis opens up doors, unleashes a process of rethinking on many levels. There is an opportunity for Islamic finance to contribute," he said.

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Malaysia eyes law change to help sharia banks

KUALA LUMPUR (Reuters) - Malaysian courts hearing Islamic finance disputes must refer to national sharia advisors under a proposed change, the central bank chief said on Friday, as the country seeks to boost its image as an Islamic finance hub.
Under proposed changes to the law, judges would be guided by either the central bank or the capital market regulator's sharia advisory body in deciding Islamic banking matters, Zeti Akhtar Aziz said.
"In the new central banking act which is due to be presented in parliament, the court shall refer to the sharia advisory council on sharia matters," Zeti told the Reuters Islamic banking summit.
"It would allow for the consistent application of the interpretation given by the sharia advisory council."
Mostly Muslim Malaysia has the world's largest Islamic bond market and wants be a hub for international sharia banking and insurance and fund and wealth management businesses.
Islamic banking matters in Malaysia are heard in civil law courts staffed by judges who are not formally trained in sharia.
Judges currently can choose whether or not they want to seek the advice of national sharia advisors when faced with Islamic banking disputes.
An earlier court decision casting doubt on the validity of a popular Islamic finance contract sparked fierce debate about judges' ability to handle sharia financial matters.
In the case, the court had said the bai bithaman ajil or deferred payment sale contract, as structured by most Malaysian banks, resembled a conventional banking loan.
A higher court has since ruled that bai bithaman ajil is an Islamic sale transaction which should not be compared with a loan.
Islamic finance is based on sharia, which is open to varying interpretations, resulting in differences of opinion on the permissibility of certain contracts.
Lawyers and academics have suggested Malaysia employ judges skilled in sharia banking law or create special courts to hear Islamic finance cases.
One lawyer said the proposed law change could meet some resistance from lawyers and judges.
"Legally, it would not be right," said Mohamad Illiayas, a Kuala Lumpur-based Islamic banking lawyer. "Judges are vested with the constitutional authority to decide all questions of law, including Islamic questions of law."
Investors generally view Malaysia as adopting a more market-driven approach while the Middle East is seen as taking a more conservative view in sharia interpretation.

But Zeti dispelled suggestions that Malaysia was relatively liberal in its interpretation of the sharia's tenets.
"Very serious research is undertaken to develop products and so on and therefore it is not promoting innovation at all cost," she said. "Attention is being paid to sharia compliance."
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3-Day Executive Overview on Islamic Banking and Finance

GlobalPro Consulting is organising a 3-Day Executive Overview on Islamic Banking and Finance to be held on 5-7 May 2009 at the Legend Hotel, Kuala Lumpur.

Learn the fundamental, principles and the operations of Islamic banking and finance from the industry's experts and practitioners. It is also an excellent platform for networking and exchange of ideas and solutions.

Even the tallest towers rise from the ground, and it must be built on a solid foundation. This executive overview is a preparation for a solid foundation on Islamic banking and finance towards building a towering Islamic banking and finance system and industry.

To register for the event please visit the the organiser's web site:

Please register early to ensure a seat.

Training & Consulting on Islamic Finance & Management

Thursday, 16 April 2009

Switzerland's largest bank sees US$1.75b Q1 loss, 8,700 jobs cut

ZURICH (AP) - UBS AG, Switzerland's largest bank, said Wednesday it expects a first quarter loss of nearly 2 billion Swiss francs (US$1.75 billion) and that it will cut 8,700 jobs worldwide by the end of next year.
It also said clients have continued to withdraw their money from the bank in the wake of its decision to cooperate more closely with foreign authorities over tax evasion.
The company, which has been hard-hit by subprime-related losses, said it will "adapt its size to the changed market conditions and lower levels of business."
"UBS is planning cost savings by the end of 2010 of approximately 3.5 to 4 billion francs compared to 2008 levels," the bank said in releasing details on its situation in advance of the annual shareholders meeting.
In prepared remarks for the meeting, new Chief Executive Oswald Gruebel said the bank knows where it has to set to work.
"It will be a long road back to success without any quick fixes," said Gruebel.
"Rather, we will move forward step by step in a rigorous and disciplined manner."
The bank, which already has suffered billions of dollars of losses over the past two years and received a bailout from the Swiss government, said it "estimates that it will report a loss attributable to shareholders of almost 2 billion francs in first quarter 2009."
It said the shortfall is due mostly to losses of about 3.9 billion francs on previously disclosed bad investments, credit loss expenses and adjustment in values of toxic assets.
UBS said its wealth management and Swiss bank division recorded an outflow of net new money totaling 23 billion francs.
That occurred mainly after the announcement of a settlement with U.S. authorities over their investigation into UBS's alleged assistance to wealthy Americans seeking to avoid paying U.S. taxes.
At the same time it said its wealth management Americas unit recorded net new money of around 16 billion francs.
The bank said it still expects to have a tier 1 capital ration of about 10 percent at the end of the first quarter.
The bank said the job cuts would be unavoidable because it needs to have cost savings in all areas.
"UBS expects to reduce the number of its employees to about 67,500 in 2010," a statement said.
"At the end of March 2009 UBS employed 76,200 people in over 50 countries."
The bank said it would continue to reduce risks and was conducting a review to decide which high-risk and unpromising businesses it will exit.
UBS has been in a showdown with Washington over wealthy American tax evaders.
It has provided U.S. investigators the bank details of up to 300 wealthy Americans suspected of tax fraud, but has refused to identify about 50,000 more U.S. account holders Washington wants.
The Swiss bank has previously announced a $780 million fine and restitution package agreed with U.S. authorities to settle the tax evasion investigation.
Full first-quarter results and other details about the banks plans will be released May 5, it said. - AP.

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Wednesday, 15 April 2009

Sukuk to revive in 6 months: StanChart

DUBAI (Reuters) - The market for Islamic sukuk is set to revive in six months with sovereign and corporate issuers raising at least $10 billion in 2009, the chief executive of Standard Chartered Bank Saadiq said on Wednesday.

Issuances of sukuk, the Islamic alternative to conventional bonds, would fall from about $15 billion last year but still demonstrate strong growth potential, said Chief Executive of Standard Chartered Saadiq, Afaq Khan.

"I think it will come back in the next six months or so," Khan told the Reuters Islamic Banking and Finance Summit in Dubai as Indonesia prepared to sell its first Islamic bond.

"Ourselves and two others are leading the initiative. We expect it to close by late next week, depending on markets," Khan said.

Islamic debt issuance globally slowed sharply last year amid a worsening outlook for the world economy and as liquidity dried up because banks cut lending.

New Islamic bond issuance fell by two-thirds to a three-year low in 2008, with sales in the key Malaysian market dropping 78 percent, according to the Islamic Finance Information Service, which tracks industry data.

Still, interest has not disappeared, Khan told the summit, saying Standard Chartered was in ongoing talks with many potential issuers.

"We are seeing a broader spectrum of issuers talking to us and across the markets," Khan said. "Financial institutions are looking, sovereigns are looking, corporates who have proven track records are actively looking."

Bahrain said on Wednesday it would issue a $500 million sukuk on May 27, although Abu Dhabi and Qatar have opted to issue conventional bonds in the last month.


Assets in the Islamic finance industry are worth between $750 billion and $900 billion, Khan said, adding the industry was still growing between 15-20 percent per year.

Conservative lending principles have barred Islamic lenders from risky subprime financing, but the sector has been hit, albeit to a lesser degree than conventional banks.

"If you compare apples to apples and one is Islamic and one is conventional, I would say that Islamic would be better off or equal to conventional," Khan said of the impact of the global financial crisis.

Islamic syndications in 2009 would be "definitely more than sukuk," he added.

Companies were likely to come back to market after reviewing their business plans to adjust to the global economic slowdown and Standard Chartered is continuing to talk with sovereign issuers, he said.

"We have lots of leads, but some of our customers for good reason say they are revisiting their business plans, but the conversations are ongoing with all of the customers," Khan said.

"As the corporate issuers are able to review their business plans and reassess their capital needs, they will come back to the market and tap the source of Islamic liquidity that comes in this space."

Demand from the world's 1.3 billion Muslims for investments that comply with their beliefs has soared, with some estimates seeing assets growing to $1.6 trillion by 2012.

Training & Consulting on Islamic Finance & Management

Saturday, 11 April 2009

Islamic banking sees light amid crisis

By John Irish

DUBAI (Reuters) - Islamic finance is slowing as the global financial crisis hits its hubs in Malaysia and the Gulf, but the sector now has a chance to move on to Western economies seeking to boost their financial centres.

Regulatory differences still plague efforts to build cross-border Islamic banking, and harmonisation among different schools of thought is one of the nascent industry's main obstacles as it looks to grow in European countries with large Muslim communities.

"There is a need for petrodollars in the West so more countries will be pandering to the rhetoric of Islamic finance to try to recycle petrodollars to their own financial capitals, be that London, Singapore or Kuala Lumpur," said Mahmoud El-Gamal, chair of Islamic Economics at Rice University.

In a sign that cultural barriers may be coming down, some experts see sovereign wealth funds injecting cash into global financial centres with the aim of advocating Islamic finance.

As the industry expands into non-Muslim or secular states, the need to educate others about the sector has become greater.

With much high-flying banking talent available after the collapse of the Western banking system, a shortage of staff with Islamic finance knowledge may no longer be a challenge.

But with crisis comes opportunity. The easing market has provided scholars, lawmakers and bankers a window to reassess structures including the sukuk, known as Islamic bonds, which are still under the spotlight as different bodies debate on how compliant instruments are with Islamic law.

Sukuk, once the industry's hottest product, have dried up, with the Gulf Arab region seeing no issues in the first quarter of 2009.

Activity in the Islamic loan sector is picking up with two Dubai government entities managing to refinance about $2.8 billion (1.9 billion pounds) through Islamic instruments in April, but experts remain unconvinced the market will return to its previous highs.

"There has been a sharp slowdown in Islamic financing," said Mohsin Khan, senior fellow at the Peterson Institute for International Economics in Washington.

"So much so that last week last, when Dubai's Department of Civil Aviation renewed $600 million, eyebrows went up thinking it was a big deal, but relative to a couple of years ago it isn't."

Next week, Reuters journalists in London, Dubai, Bahrain, and Kuala Lumpur will bring together the industry's heavy hitters to ask them how they will overcome those challenges, and where they see future opportunity.

Interviewees at the Reuters Islamic Banking and Finance Summit include the chief executive of Bursa Malaysia, a senior official of the UK treasury, some of the world's largest Islamic financial institutions as well as regulatory and ratings agencies.


Demand from the world's 1.3 billion Muslims for investments that comply with their beliefs has soared, and assets that comply with Islamic law range between $700 million and $1 trillion, with some estimates seeing assets growing to $1.6 trillion by 2012.

"Islamic finance instruments were structured the same way as conventional finance instruments so I think it was propaganda to say they were insulated," said Gamal. "In 2009, Islamic finance could grow faster because many multinational banks had to cut back quite a bit on lending..."

Islamic law bans interest, and bond holders are paid returns derived from underlying assets. Investing in sectors such as alcohol, pornography and gambling is also prohibited, and deals must also be structured so that risk and reward is shared.

The industry needs to diversify from property loans and ordinary lending to include advanced treasury services, innovative asset management, balance sheet and securitisation management, consultancy Oliver Wyman said this week.

"This will allow them to address needs of underserved market segments such as Islamic financial institutions, corporates, sovereign wealth funds and private wealth clients," it said.

Islamic and other Arab lenders have spent on expensive schemes to reconcile an ethical image with the possibility of mortgage foreclosures, an increasing possibility as economies feel the pinch of the global financial crisis.

Former boomtown Dubai has suffered the sharpest downturn in its property market, where prices could fall almost 40 percent this year according to a Reuters poll. Standard and Poor's has said Dubai's economy could shrink 2-4 percent in 2009 as thousands of expatriates leave the Gulf's commercial hub.

"Islamic banks have been active in trade finance and property and -- both of them falling -- these are the two main profit centres for Islamic finance," said Khan, a former IMF director. "If these don't recover they will face problems building up their loan portfolio."

The financial crisis is also raising questions about whether consolidation in the sector is the right way to go given the mixed success in conventional markets.

Despite the popularity of Islamic banking and the desire by bankers to develop a greater range of products, the days of Islamic derivatives may still be further down the road as the industry looks to avoid taking a riskier direction.

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Islamic Banking System Must Become Strong Financial Model, Says Don

KUALA LUMPUR, April 10 (Bernama) -- The Islamic banking system must emerge as a strong financial model that need not rely on conventional banking, says University of New Orleans director Prof Dr M. Kabir Hassan.

He said many of the Islamic banks in the world did not understand thoroughly the Islamic banking concept.

"To make it a financial system supported by all communities, the authorities or bank managements must find the sources and new alternatives.

"If the system is copied from the conventional banking system, surely customers will be doubtful," he said after delivering a public lecture entitled "Can Islamic Financial System Be An Antidote To The Global Financial Crisis" at Universiti Putra Malaysia recently.

Kabir said he believed the Islamic financial system was the best solution to revitalise the current financial system facing a global economic crisis.

Islamic financial systems such as Takaful, Sukuk and Ar-Rahnu had proven to be the best alternatives to the current banking crisis, he said.

Kabir said this phenomenon exhorts Muslims to make an evaluation and conduct a study on the approach and current practices of Islamic financial products so that its market become the best choice.

"We need to think of ways to improve the existing Islamic financial system to play the role as the centre of excellence for the world Islamic banking system," he said.

Kabir said the Islamic banking sector needs three phases of banking system to further strengthen the industry.

"The first phase is a system akin to conventional banking where people can deposit their money in the bank and banks use the customers' money for their requirements," he said.

"The second phase is through the mudarabah (syariah compliant) institutions or companies in which the people keep their money and the money is used for developing many things.

"This model is very suitable to finance small-and medium-scale enterprises.

"The third phase is to create a system like the venture capital or musyarakah involving financing infrastructure projects," he added.

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Chinese Interest in Islamic Banking

Riyadh, Asharq Al-Awsat- We will not be able to say that Islamic banking has become a strong competitor to conventional banking unless it is able to surmount the Great Wall of China and settle upon the Chinese mainland and take advantage of what is considered to be one of the world's fastest growing economies. According to the World Bank, the Chinese economy is expected to experience a growth of 6.5 percent –during the [global] financial crisis – while during the same period of time the World Bank expects world growth not to exceed 1.5 percent. China is considered to be the US's largest creditor, and its investment in US bonds exceed one trillion dollars, while its own monetary reserve stands at nearly two trillion dollars, according to the CNN Arabic website. A Price Waterhouse report predicted that by 2050 the Chinese economy would surpass the [combined] economy of the G7 countries. The report based its prediction on Chinese purchasing power, which is founded upon the savings culture that is prevalent among the Chinese population, and their aversion to debt. China is also considered to be one of the more attractive countries for foreign investment which helps to finance this rapid growth. By the end of 2007 foreign investment in China reached approximately $74 billion.
According to Western estimates, China has a Muslim minority in the Xinjiang province with a population between 70 and 90 million. Yet until today, Islamic banking has confined itself to standing on the Chinese borders [and looking in]. Islamic Banking has a presence in Singapore – a country which borders China – as well as Hong Kong – the island under Chinese control – but has not crossed onto mainland China. To be honest I cannot find any justification to the long delay of Islamic Banking in making this crossing, especially since the Chinese government has been making overtures to this industry. This can be seen with regards to the People's Bank of China gaining membership to the Islamic Financial Services Board [IFSB]. The IFSB – whose premises are in the Malaysian capital Kuala Lumpur - is an international body concerned with promoting, strengthening, and developing standards of Islamic financial services.
China – from time to time- has sent positive messages to the Islamic banking industry; this includes monetary authorities in Hong Kong attempting to provide a sound environment for Islamic banking operations by amending their laws to the specifications of Islamic banking, especially with regards to Islamic Sukuk [bonds], as well as the establishment of Islamic indexes on the Hong Kong stock exchange.
Perhaps the newest and most important of these initiatives is what was proposed by the Financial Committee affiliated to the Chinese National Party [Kuomintang] on 3 March 2009 during a session of the People's Political Consultative Conference where they proposed the "development of Islamic banking operations [in China]." In order to justify the importance of adopting this proposal, the Financial Committee was quoted by Arabic.China.Org.Cn as saying "China, in its capacity as a large oil importer, should develop Islamic banking operations as this will…benefit China's economic development."
I would like to suggest that those within the Islamic Banking industry such as; the Islamic Development Bank, Kuwait Finance House, Dallah Albaraka Group, Al Raji Bank, Faisal Islamic Bank of Egypt, Dubai Islamic Bank and other financial institutions, take advantage of the initiatives proposed by the Chinese authorities in order to benefit Islamic Banking itself, and gain a foot-hold within the giant Chinese economy.
In order to achieve this goal, a joint working committee should be formed from the afore-mentioned organizations to implement the following:
- Communicate with the Chinese authorities and explain the nature of Islamic banking, its specification and its needs in order to help the Chinese authorities enact laws which are compatible with the Islamic Banking industry, and provide the appropriate atmosphere for this industry to flourish [in China].
- Study the needs of the Chinese market and formulate an appropriate [Islamic] Banking model for it.
- Study the possibility of establishing a collective Bank made up of the afore-mentioned banking entities in order to enter the Chinese market with strong capital, preferably by persuading the Chinese government to join in this collective bank. This will allow the bank to compete in the fiercely competitive [Chinese] market in which many large Chinese and foreign financial institutions operate.
The growth which the Islamic Banking industry is enjoying today cannot go on forever unless strategic plans are put into place to encourage this. This [continued growth will occur] by seizing the opportunities when they arise, and indeed creating opportunities when none arise of their own accord.
An ancient Arab poet once said "If the wind blows then seize this opportunity…for there is stillness in every storm" [i.e. seize the opportunity when it comes, for if you do not it will pass you by"

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Saturday, 4 April 2009

Islamic mega-bank prays for support

By Margaret Doyle

LONDON (Reuters) - Islamic finance is about to get its first mega bank if Sheikh Saleh Kamel has his way.

The billionaire chairman of Bahrain-based Al Baraka Banking Group is head of an alliance hoping to launch a $10 billion Islamic bank before year-end. He will have his work cut out. Islamic banks may have avoided the worst of U.S. sub-prime dross, but Islamic banking has risks of its own.

Islamic finance has enjoyed a benign decade. It has been growing at a 20 percent-odd clip since the turn of the century, with assets of $600 billion at the end of 2008. Moreover, Islamic banks avoided the complex collateralized debt polluting most western banks, thanks to Shar'ia restrictions on riba (interest).

Those western banks have been struggling to repair their ravaged balance sheets, with governments often the only (unwilling) investor.

Al Baraka itself has held back from IPO plans that have been in the offing for several years. But Adnan Youseff told a regional TV station this week that Sheikh Kamel is "accelerating the finalization process."

But investors are taking a risk if they assume that Islamic finance is a whole lot safer than its discredited western counterpart. After all, most Gulf banks are heavily exposed to real estate. As Spanish and Irish banks have found to their cost, it is little consolation to avoid complex U.S. sub-prime debt if you are hammered by a local property bust.

More generally, Islamic banks have yet to test the central tenet of Islamic banking-that depositors are co-investors who share in the risks that they take on. In practice, like U.S. money-market funds, they strain every sinew to ensure they don't "break the buck", or give customers back less than they deposited.

But big real-estate write-downs could mean that banks do not have enough to repay deposits in full. That would test depositors' loyalty. And many Islamic banks, like their western counterparts, have lent long. Therefore, if depositors turn away from their local banks, they could face a liquidity squeeze just as acute as when wholesale markets closed to western banks in August 2007.

After all, depositors do have a choice. There is already a mega-bank offering Islamic finance. It's been in the Middle East for more than a century. It's global. And it's about as safe as banks come. It's called HSBC.

-- At the time of publication, Margaret Doyle did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. --

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Friday, 3 April 2009

Malaysian court rules BBA Islamic contract valid

KUALA LUMPUR, April 1 (Reuters) - A Malaysian court has ruled that a popular but controversial Islamic finance contract is valid, a move expected to boost sharia banks in Southeast Asia's most developed Islamic financial market.
The Bai Bithaman Ajil (BBA) or deferred payment sale contract is the mainstay of Malaysia's Islamic finance industry and is commonly used in home loans. But some religious scholars, especially in the Gulf, say it is an interest-based loan cloaked in Islamic dress.
But in a judgment delivered on Tuesday, the Malaysian appeal court said that a bai bithaman ajil contract, as practised by most Malaysian banks, is valid.
"The court of appeal also reiterated that a bai bithaman ajil contract is a sale transaction and therefore must not be compared to a loan transaction," Bank Islam, which was party to the case, said in a statement.
Most Malaysian banks structure bai bithaman ajil home loan contracts as a two-party transaction where a customer who has paid a deposit for a property transfers his rights to the asset to the bank. The bank then charges him a sum that includes the cost price plus a profit, payable in instalments. An earlier decision by a lower court had said such an arrangement resembles a conventional loan, arguing that the bank should first buy the property from the developer before selling it to the customer for a profit.
Megat Hizaini Hassan, an Islamic finance lawyer, said the appeal court decision was positive for Islamic banks.
Bai bithaman ajil, bai inah (sell and buyback contract) and bai al dayn (debt trading contract) account for over 80 percent of the Islamic banking portfolio in Malaysia, according to Maybank Investment Bank.
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Bank Islam: Bai Bithaman Ajil (BBA) Contracts Valid

KUALA LUMPUR, April 1 (Bernama) -- Customers of Bank Islam Malaysia Bhd and the public at large can now take comfort from knowing that Bai Bithaman Ajil (BBA) contracts are valid and binding.

This followed the unanimous decision by judges of the Court of Appeal yesterday during a proceeding involving Bank Islam.

The decision reaffirmed the bank's practices in relation to BBA contracts are Syariah-compliant and valid, Bank Islam said in a statement today.

According to the bank, the Court of Appeal also reiterated that a BBA contract is a sale transaction and therefore must not be compared to a loan transaction.

The BBA contract means a "deferred payment sale". It is a mode of Islamic financing used for properties and vehicles as well as financing of other consumer goods.

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