Latest from GIFC

Friday, 31 July 2009

Islamic Finance and Mobile Banking: Could, Would, Should

Islamic Banking has developed rapidly over the last 30 years. Islamic Banks have proliferated in number and in geographic reach, with services now offered regularly on four continents. A number of innovative, successful financial products have also been developed, enabling Shariah compliant bonds, mortgages and savings accounts. The values of assets held by Islamic Banks are expected to top one trillion by 2010. Perhaps most important, millions of clients now have access to services which serve their financial needs without placing them in a religious dilemma.

While this success should be lauded, it should not lull Islamic Banks into complacency. Rather, the banks should remain vigilant for new opportunities that enable equally vigorous growth over the next 30 years. One key opportunity for Islamic Banks has emerged in the dynamic growth of mobile financial services. Over the last decade mobile financial services have been transformed in offerings and scope, from niche products providing account information to a plethora of applications which enable access to bank accounts, move funds, and allow for the transfer of remittances; all from the security and convenience of mobile phone. The increasing ubiquity of mobile phones, especially in developing nations, has allowed consumers to benefit from the accessibility of the system, enabling some to open and regularly access bank accounts for the first time in their lives. Banks have benefited from the low costs of running the systems and the massive increase in their potential client/depositor pool.

While mobile financial services have been adopted widely, they have yet to be utilized heavily in many traditionally Islamic nations. This lack of use is all the more curious, given that in many of those nations high rates of mobile phone ownership exist side by side with generally minimal access to formal banking. This presents an opportunity for Islamic banks, potentially allowing them to both expand their consumer base and assist the needy in their communities. Three questions should dictate whether Islamic banks adopt mobile financial services: could Islamic Banks utilize mobile financial services, would they benefit those companies, and should, in light of their underlying philosophy, Islamic Banks adopt such services?

Could Islamic banks adopt mobile financial services? Both Islamic banking and mobile financial services share complementary, fee based business models. At an operations level, Islamic banks would have to partner with mobile network operators to provide the service, though this would not be a serious hindrance. Most, if not all, mobile phones sold today are capable of handling the technology for mobile financial services. To avoid engagement in situations involving riba, Islamic banks should investigate the finances and operations of the partnered telecom with care. However, especially when mobile network operators and Islamic banks have had longstanding relationships, this should not be a problem.

The question then is would the adoption of mobile financial service technology benefit Islamic Banks? The cost of providing mobile financial services is radically lower than that of operating traditional 'brick and mortar' branch sites. In Karachi, it is estimated a traditional 'brick and mortar' branch office costs around $28,000 to run per year. In contrast, the provision of mobile financial services in the same city costs the operator a mere $300 per year. While the adoption of mobile financial services may be a large investment initially, the sharp difference in operating costs enables a banks to quickly recoup their initial investment and soon generate significant, Shariah complaint, profit.

The adoption of mobile financial services will also enable Islamic banks to radically expand their depositor pool. The percentage of banked individuals in major Islamic nations, such as Egypt and Pakistan, is estimated to stand at 10-15%. In contrast, mobile phone ownership is many Islamic nations is extremely high; above 50% in Pakistan, and a staggering 120% in the UAE. The adoption of the full spectrum of mobile financial services by Islamic Banks will enable many of the currently unbaked to enjoy accessible, safe, and Shariah-compliant financial services for the first time. Increased deposits, a good in their own right, will also increase the pool of funds with which the banks can provide Shariah compliant finance to businesses, individuals, and even governments.

Finally, at a philosophic level, should Islamic Banks provide mobile financial services? One of the original focuses of the Islamic banking movement was the promotion of development throughout the Islamic world. While Islamic Banking has succeeded in enabling large project finance, it has had less success in promoting small scale, pro-poor growth. The general lack of access to basic financial services in Islamic majority nations has inhibited economic growth, especially amongst the poorest and most needy members of society. Mobile financial services will allow for Islamic banks to reach and assist those in need in their nations. Those same banks could consider the provision of mobile services to the poor at reduced, or no cost, in order to better help the population.

As Islamic banks adopt and innovate within the mobile financial services model, it is likely Islam specific applications will be developed. Future zakat may be provided to the needy electronically, via mobile technology, enabling continuous, secure provision of assistance to the needy of society. Future calls for assistance on specific projects, or for disaster or war stricken areas could go out electronically; giving would flow back across the same channels.

To their benefit, some Islamic Banks have begun to provide mobile financial services, primarily for those who already hold accounts. However, the banks should expand such services, tailoring the products offered to benefit both banked and previously unbanked members of society. Mobile financial service technology offers Islamic banks an unprecedented option to grow as business and to fulfill their social mandate. It is time they embraced the technology, and brought Islamic banking to a new level.


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Wednesday, 29 July 2009

Islamic Finance Key to Asian Revival, Kuwait Finance House Says

July 29 (Bloomberg) -- Islamic finance will play a central role in reviving Asian economies as investors look to emerging markets to deliver higher returns than the U.S. and Europe, according to Kuwait Finance House.

Demand for investments backed by tangible assets like power plants and property grew after banks outside of Asia were hit hardest by the global financial crisis, Baljeet Grewal, managing director of the second-biggest Islamic bank’s research unit, said in a phone interview from Kuala Lumpur yesterday.

“Islamic finance is no longer on the periphery and so any crisis which impacts the global economy will of course impact it,” Grewal said. “However, we believe there will be an Islamic finance-led recovery driven by sukuk issuance and a move to Islamic deposits, which we already saw when some of the large American banks went down.”

Sales of Islamic bonds, also known as sukuk, increased from $144 million in January to $1.9 billion in March and $2.3 billion this month, according to data compiled by Bloomberg. Indonesia, which offered dollar sukuk for the first time in April, received bids for seven times the amount it sought and Malaysia said yesterday it would introduce a trading platform to make it easier for companies to buy and sell commodities like palm oil and rice that are used to back Islamic loans.

Muslim Populations

Islamic finance, which bans the payment of interest and stipulates agreements be based on the transfer of goods or services, will expand in Asia’s emerging markets because they have stronger growth prospects than the U.S. and European economies and larger Muslim populations, Grewal said.

Petroliam Nasional Bhd., Malaysia’s state oil company, is meeting today with investors in Kuala Lumpur about a possible sale of both conventional and Islamic dollar bonds and will hold further meetings in the Middle East, Europe and the U.S. next month, a person familiar with its plans said yesterday.

Kuwait Finance House Research forecasts Islamic assets under management globally will grow between 12 and 15 percent to as much as $1.1 trillion this year, compared with 23.5 percent growth in 2008. The deceleration is due mainly to a correction in property prices, Grewal said.

The economy of Indonesia, where around 200 million people, or 86 percent of the population, are Muslim, is forecast to grow at 5.5 percent in 2010, according to nine economists surveyed by Bloomberg, compared with 0.6 percent for France, home to some 5 million Muslims, the most among western European nations.

Indonesian Banking Assets

Islamic banking assets in Indonesia increased by 35 percent a year from 2004 to 2008, to 2.2 percent of the country’s total banking assets, Kuwait Finance House Research said. Bank Indonesia, the central bank, forecast 15 percent of the nation’s total banking assets will be structured in accordance with Muslim laws by 2015.

Sales of Islamic bonds plunged to $13.9 billion in 2008 from a record $31 billion a year earlier, according to Bloomberg data. In 2004, $5.8 billion Islamic bonds were sold compared with $2.2 billion in 2000.

Investors shouldn’t be discouraged by some recent high- profile defaults, Grewal said. In May, Investment Dar Co., the owner of half of luxury carmaker Aston Martin Lagonda Ltd., missed a payment on $100 million of debt, becoming the first company in the Persian Gulf to default on Islamic bonds.

“Sukuk have defaulted largely because of the fall in real estate prices which impacted ratings and prompted subsequent downgrades, but sukuk raised against infrastructure assets like power and water, they are still extremely strong,” Grewal said. “If you benchmark the risk of sukuk default and conventional bond default there’s no argument Islamic bonds have been the safer alternative.”

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Tuesday, 28 July 2009

Plans in motion for first Islamic retail bank in Australia

The Muslim Community Cooperative Australia (MCCA) has stated its ambition to become the country's first Islamic retail bank.

MCCA chairman Dr. Akhtar Kalam said its ambitions would be hastened as more and more consumers turn to the principles of Islamic Banking & FInance (IBF) as an alternative to the current offers in the marketplace.

Dr. Kalam opened the symposium by saying the MCCA was too big to remain a co-operative and yet too small to become a bank.

He said it would work with the federal government to address the challenges and find an Islamic Finance and Banking solution.

"I am confident that the Islamic principles of ethical investment and finance will be immensely attractive to Australian Muslims and non Muslims and in doing so, provide the momentum that will ensure MCCA's goal is realized to be our nation's first retail Islamic bank," Dr. Kalam concluded.

The symposium was opened by assistant federal treasurer, Nick Sherry.

Sherry said Islamic finance was an area of growing interest in Australia, and referred to the retail opportunities the industry offered to both Muslim and non-Muslim customers.

Australia has over 340,000 Muslims and Sherry said the offering of retail Islamic finance products contributed to fostering social inclusion, by enabling Australian Muslims to access products that may be more consistent with their principles and beliefs as well as widening the choice of products for non-Muslims.

Under Islamic law, charging interest on a loan is forbidden.

(Broker News)

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Monday, 27 July 2009

Islamic finance takes root in Australia

SYDNEY // The pioneers of Islamic finance in Australia have predicted that strong demand for their services can help prevent further global economic meltdowns.

Sharia-compliant banking is a multibillion-dollar worldwide industry, and while commonplace in Indonesia and Malaysia, it remains on the fringes of Australia’s financial sector. Its proponents believe that an ethical system that eschews the payment of interest in adherence to Islamic principles can help conventional banks steer a more stable and less greedy course.

“There have been many studies done to prove that Islamic banking could have avoided the global financial crisis. The Islamic banks have fared much, much better in this recession. There is a lot that the conventional world is now studying to see how it could do things better or differently to potentially avoid another global crisis,” explained Nail Aykan, from the Muslim Community Co-operative in Melbourne, which has helped hundreds of Muslim families in Australia buy a home.

“As the Muslim world is rediscovering its faith, people are coming to the realisation that they must make every possible effort to avoid interest and, hence, in the last decade there has been an incredible demand from the Muslim world for an alternative banking model,” he said.

The Muslim Community Co-operative was founded in the early 1990s. It was initially funded by shareholders but now borrows from non-banking lenders and has lofty ambitions.

(The National)

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Saturday, 25 July 2009

Global Islamic Wealth Management Conference 2009, Kuala Lumpur (17-18 August 2009)

GlobalPro Consulting, Asia Pacific's premier Islamic finance consulting and training provider is organising the Global Islamic Wealth Management Conference 2009 on 17-18 August 2009.

The conference will be held at Grand Millennium Kuala Lumpur (the 5-star international hotel). Topics to be discussed include Islamic principles and philosophy of wealth management, Islamic wealth accumulation (Islamic investment/business), Islamic wealth distribution (wassiyah, faraid, wakaf, hibah), Islamic wealth protection (takaful), Islamic wealth purification (zakat), retirement planning, risk management and financial planning.

Speakers include Shariah scholars, Islamic financial consultants, Islamic wealth and asset management experts and academicians.

For more information and to register/request for brochure, please visit the organiser's web site:

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UK's only Islamic insurer targets entrepreneurs

LONDON, July 24 (Reuters) - Salaam Halal, the UK's only stand-alone Islamic insurer, will expand next year to offer insurance -- or takaful -- to companies run by Muslim businesses, the company's CEO said on Friday.

Bradley Brandon-Cross told Reuters the company, which launched in 2008, wants to launch the first takaful product range for Muslim-owned small and medium-sized business in Britain, which he estimated number around 140,000.

Major European insurers have been considering a move into the European takaful market, seeking to tap demand from the millions of Muslims on the continent [ID:nLE729394], but the market is still in its infancy and growth is hard to predict.

Salaam Halal -- which has so far focused on car and home insurance -- will particularly target businessmen with less than 1 million pounds ($1.65 million) annual turnover, typically lawyers, accountants, doctors and retailers.

"It was always our intention to look at these markets. We will be very much focusing on this project in 2010," Brandon-Cross said.

Takaful works like mutual-insurance but there is a clear segregation of the assets owned by members and those owned by the insurer. Members contribute to a common pool to fund claims and members benefit if the pool is left in surplus.

Investments made using the pool of funds adhere to sharia law and shun sectors such as alcohol and gambling.

Ernst & Young has estimated the global takaful contributions will reach $7.7 billion in 2012, double the volume in 2007, at the conservative end of estimates.

Salaam Halal is considering offering life savings products in partnership with other insurers in the UK and outside the UK, which Brandon-Cross declined to name. The company may also move into European countries with large Muslim populations, such as France, Germany and the Netherlands.

Salaam Halal is the trading name of Principle Insurance Company Ltd, whose shareholders are investors are institutional and private, predominantly from The Middle East and Malaysia.
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Friday, 24 July 2009

Takaful for mutual benefits

Takaful is the great success story of this region's insurance industry, but will it ever catch on in the West, and are its Gulf prospects truly long-term?

From Manama to Malaysia, takaful, or Islamic insurance, is on the rise.While still a relatively immature industry, takaful is looking to ride on the back of the explosive growth of Islamic finance in the Arab world, and increase its share in the global insurance market.

Global accountancy firm Ernst & Young predict that the international takaful market could be worth $7.7bn by 2012, up from a mere $1.4bn in 2004. Last October, the world's second largest reinsurer Swiss Re said in a report that takaful grew 25 percent a year from 2004 to 2007, while the conventional insurance market posted low double digit growth at 10 percent in the same period.

Half of the market will go Takaful. It could be as high as that; up to 50 percent in five years.Like all Islamic financial products, takaful has to adhere to the strict principles of Sharia law. Income derived from interest is forbidden, along with revenue derived from prohibited activities or trade such as gambling, pornography, and alcohol. Takaful in Arabic means joint guarantee and it works on the basis that a group of people agree to share risk by putting money into investment funds, sometimes through a charitable donation, and then draw on these funds when there is damage or loss to a party.

"There is tremendous opportunity because it [insurance] is very underserved - insurance as a whole is very underpenetrated [in the Gulf], says Dinesh Chandiramani, director of distribution in equity and credit sales at Dubai-based investment bank Arqaam Capital.

"People are looking at decent growth for the sector of around 15 to 20 percent on an annualised basis because there is a nascent market right now which is in the process of being built up. It could grow significantly beyond that if the product is well-received and people start to buy into it," he continues.

Nick Frei, chief executive of Bahraini Islamic insurer t'azur predicts that takaful could have a 50 percent market share in the Gulf's insurance sector by 2014.

"I firmly believe half of the market will go takaful. It could be as high as that; up to 50 percent in five years" says Frei.

But the rise of takaful has not been plane sailing. It still only makes up a fraction of the global insurance market and the sector's growth has been hamstrung by a dearth of takaful reinsurers. Some are emerging, such as the Dubai-based Takaful Re, but generally there are too few companies to underwrite the risks of the smaller takaful players.

Therefore, many takaful companies go down the conventional route when it comes to reinsurance, and because of the lack of options available to the industry, it usually comes with Sharia scholars' approval.

Currently, Malaysia, the world largest Islamic financial centre, is the market leader in takaful. It is home to some of the biggest Islamic operators in the world such as Takaful Malaysia, which aims to capture over half of the market share of the industry in under three years-despite the economic gloom. In comments made by the group's managing director Datuk Hassan earlier in the month, the industry is worth RM12bn ($3.65bn), with his company's current share at $1.13bn.

In conventional insurance, risk is sold at a price depending on age, background and financial status, introducing a largely commercial aspect. In takaful, transactions that are deemed to be uncertain are banned.For example, a Western insurance broker will sell risk, such as home insurance, not knowing whether there will be claim on the house.

In the West, insurance companies may invest in ventures which make their money from interest or in sectors that are forbidden by Islam.

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Thursday, 23 July 2009

Unicorn International Islamic Bank expects 300% rise in profit

KUALA LUMPUR: Unicorn International Islamic Bank Malaysia Bhd expects to increase its profit by 300% this year, said its chairman Datuk Vaseehar Hassan Abdul Razack.

“Currently, we have three to four projects in the pipeline where we expect to invest between USD50 million to USD100 million for each project,” he told reporters after the signing ceremony for Citta Mall Project today together with Bank Rakyat and Puncakdana Sdn Bhd.

Unicorn international and Bank Rakyat arranged a club deal Islamic financing of RM101 million for Puncakdana to develop the RM280 million Citta Mall.

(The Star M'sia)

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Wednesday, 22 July 2009

Bay al-Sarf

Bay al-Sarf is a contract of exchange of money for money. This contract is tightly regulated under Shari`ah because it can be easily manipulated for the purpose of producing an interest-bearing loan, which is prohibited in Islam.

Ibn Rushd examines the three forms of sale that can arise in a market where goods and money are in existence:
"when two commodities are exchanged, one may serve as a currency and the other as a priced commodity, or both may be currencies. When a currency is exchanged for a currency the sale is called 'sarf', and when a currency is exchanged for a priced commodity, the transaction is sale proper ('bay'). Similar is the sale of a priced commodity for another priced commodity (barter)"
ibn Rushd: Bidayat al-Mujtahid (p. 154, Garnet, 1996)

The rules of bay al-sarf derive largely from the well known hadith:
"Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt - like for like, equal for equal, payment being made on the spot. If the species differ, sell as you wish provided that payment is made on the spot".
Hadith : Muslim

Gold and silver were the currency of use at the time of the Prophet, peace be upon him, and he approved their use by the act of using them himself. It cannot therefore be said that it is wrong to use gold and silver as money.

Many jurists have used analogy to argue that the hadith on gold and silver represent all forms of monetary medium, and that therefore all forms of currency should obey the rules established for gold and silver exchanges. This position is not however unanimous, and there are those who argue that the rules do not apply to other items, copper for example since copper is not one of the six items mentioned in the hadith (the so-called ribawi items). Under such an interpretation, an exchange of 10 copper coins today for 12 copper coins tomorrow would not be a riba transaction. Similarly, there are some jurists who argue that because money is to be regarded as gold and silver only, then paper money is not a proper form of money and a loan of 10 paper dollars made today in return for 12 paper dollars to be received tomorrow is not a form of riba. These however are minority views and it should be noted that most jurists do agree that where an item is being used as money by custom (urf) among a local population, it should obey the rules that are stated in the hadith regarding gold and silver.

Based upon the above hadith, it is established that if gold is to be exchanged for gold, the exchange must be made on the spot, with the amounts being of equal quality and quantity. Because both countervalues must be settled immediately, a forward transaction (in which one of the countervalues is delivered at a future date) is not allowed. Given that exchanges must be equal for equal, a ten dollar not cannot be exchanged for nine one dollar notes. Proceeding from here, commissions on currency exchange will be questioned by some scholars because of the contravention of the 'equal for equal' ruling.

Other scholars argue that if the monetary system were correctly designed, then money would comprise gold and silver throughout the world (i.e. American money would be made of gold, Malaysian money would be made of gold, etc.) and hence there would be no need for foreign exchange in the first place. Here, the arguments over the Shari`ah position on modern foreign exchange and currency trading are seen to arise because these markets are of themselves built upon un-Islamic foundations.

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DIFC Authority releases updated version of ‘Guide to Islamic Finance’

The Dubai International Financial Centre Authority today announced the release of the updated version of its ‘Guide to Islamic Finance in or from the DIFC’.

Apart from incorporating the new landmarks in the evolution of its model Islamic insurance regulatory framework and operating practises, the latest publication also takes into account the changing overall scenario as a result of the ongoing financial crisis that is gripping the world.

At the same time, the publication retains and expands on its original aim of assisting those parties from within the region and outside, who are interested in learning about the rapidly expanding world of Islamic finance.

The publication provides a summary of the underlying concepts in Islamic finance and examines the issues facing the Islamic financial services industry, both in DIFC and beyond; now and in the future.

The Islamic Financial services industry is growing at a phenomenal rate. What emerged as a niche industry has now pervaded almost every major financial market in the world. Markets are seeking to introduce Islamic products under various labels like Islamic Finance, Shariah-compliant Finance, or even Alternative Finance, but whatever title is used, it is without doubt one of the fastest growing financial sectors in the world. Most global banks either have a subsidiary or a division dedicated to Islamic Finance.

Abdulla Al Awar, Chief Executive Officer of DIFC Authority, pointed out that the DIFC had identified Islamic Finance as one of its major pillars even before it became globally popular. “Since then the DIFC has successfully worked towards becoming a hub for Shariah-compliant finance.

“Perhaps now is the opportunity for Islamic Finance to come out from the shadows of conventional finance and provide financial products in line with Shariah to an investor base that is currently unsatisfied and unsure of the conventional financial system,” he said.
There are many factors for this phenomenon. Many conventional forms of banking and insurance have been prohibited or restricted in the Islamic World on the grounds that they contravene the tenets of Islam.

But, in recent years, there has been a dramatic growth in Islamic or Shariah-compliant financial products, reflecting a number of trends including changes in Islamic law such as the approval in 1985 by the Grand Counsel of Islamic scholars of the Takaful system as the alternative form of insurance written in compliance with Islamic Shariah and the emergence of an international market in Sukuk (Shariah-compliant) bonds.

Other factors are economic development giving rise to infrastructure and other projects which require Shariah-compliant forms of financing, rising incomes among the Arab population resulting in the need for Islamic consumer financial products such as insurance, mortgages, pension plans and investment funds, and changing demographics resulting in the growing need for pensions and other retirement savings products.

The publication points out that the total size of the Islamic Banking industry is currently estimated to be between US $800 billion to $1trillion, and is estimated to have a global potential of $4 trillion. It is growing at 15-20 per cent per annum and within the next 8-10 years Islamic banking industry is projected to capture half of the savings of the world’s 1.6 billion Muslims.

Currently, market penetration amounts to an estimated 20 per cent of the Arab population. This figure is expected to rise dramatically and it is expected that within the next decade, 50 to 60 per cent of the total savings of the world's 1.2 billion Muslims will be in the form of Shariah compliant products.

More interestingly, as conventional banking faces troubled times, Islamic banking, which is asset-backed as opposed to debt-based, offers a viable alternative and is becoming increasingly popular in global financial capitals such as London, which ranks second after Dubai in terms of the number of listed sukuks.

The publication says assets under management in Islamic Funds are estimated to be between $50-70 billion and the total value of sukuks issued is valued at more than $88 billion, of which $13 billion is listed on NADAQ Dubai.

Hari Bhambra, Senior Partner, Praesidium, said: “Islamic Financial Institutions based in the DIFC are clearly ready to respond to this opportunity and this publication provides information on the manner in which Islamic Finance can be offered in or from the DIFC.

“Praesidium has developed this publication with the DIFC Authority to assist those parties interested in learning about Islamic finance generally and gaining an understanding of the operating environment of the DIFC,” he said.

Bhambra said the publication provides a summary of the underlying concepts in Islamic finance and examines the issues facing the Islamic financial services industry, both in DIFC and beyond; now and in the future.

It also sets out the regulatory environment developed by the Dubai Financial Services Authority (DFSA) for Islamic finance and the scope for the application of such requirements to new product offerings, such as Shariah-compliant REITs.

(Al Bawaba)
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Shariah-Compliant Equities Deliver Positive Returns in Q2 2009

S&P Global Benchmark Shariah Index Series Reveals World's Best & Worst Performing Sectors and Markets for Shariah Investors during Q2 2009
LONDON, July 21, 2009 - Stocks deemed to comply with Islamic law delivered positive returns during the second quarter of 2009 according to Standard & Poor's, the world's leading index provider.

In the recently published S&P Shariah Report, the S&P Global BMI Shariah Index produced returns of 18.93% over the second quarter to June 30, 2009. This compares to the non-Shariah Global BMI Index, which returned 23.89% in the same period. The S&P GCC Composite Shariah Index returned 27.65% beating the S&P GCC Composite Index, which returned 23.65% over the same period.

Alka Banerjee, Vice President Standard & Poor's Index Services said: "2009 has been a turbulent year for equity markets, however many indices are still delivering positive returns as certain sectors rally despite the downturn.

"In particular, the S&P Global Benchmark Shariah Index Series has benefited from the recent boost in healthcare and energy stocks. Ironically however, whilst Shariah investors benefited from the indices' low exposure to financials last year, as they generally do not comply with Islamic law, they did not benefit from the rally in the conventional financial sector over the last quarter."

Mirroring trends in the broader world equity markets, S&P's Global BMI Shariah Index shows that Info Tech, Energy and Healthcare were the best performing sectors within the Shariah-compliant universe in the Q2, with gains of 20.1%, 19.5% and 16.8% respectively. Conversely Islamic financials, which are Shariah-compliant, contributed to the strong performance of the S&P GCC Composite Shariah Index.

To download a copy of the latest quarterly S&P Index Services Shariah report, please click here. For a complete breakdown of S&P Shariah index performance by country and sector, please contact the media representatives listed below.

S&P's Global Benchmark Shariah Index Series covers 52 developed and emerging markets as well as ten GICS (Global Industry Classification Standard) sectors. It is part of S&P's family of Shariah-compliant indices, designed to offer a comprehensive set of Islamic investment solutions for both benchmarking and investing activity.

S&P's Shariah Indices are screened by Ratings Intelligence Partners, an independent Kuwait-based consulting company, which collaborates with the S&P Index Committee to apply a set of independent and objective guidelines for the day-to-day maintenance of each Shariah index. Standard & Poor's Shariah Indices undergo sector and accounting-based screens that exclude businesses that offer products and services which are considered unacceptable or non-compliant according to Shariah-law.

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Global Islamic Finance Group (GIFG) is on facebook - Connecting the World to Islamic Finance

Global Islamic Finance Group (GIFC) fan page is on facebook.

GIFG is the premier networking group for Islamic finance professionals, academicians, intellectuals, scholars, researchers, regulators, students and other interested parties to discuss and share news, information and knowledge on Islamic finance (Islamic banking, takaful, Islamic capital market, sukuk, Islamic investment, Islamic financial planning, Islamic wealth management).

GIFG is aiming to be the world's premier Islamic finance network.

What are covered in GIFG:
- discussion board
- Islamic finance videos
- Islamic finance events
- Islamic finance news
- Islamic finance information
- photos
- Islamic finance links

Join now

Monday, 20 July 2009

Global recession and promises of Islamic finance

Dr. M. Mizanur Rahman

THE world economy is in the grip of a financial crisis. The crisis originated in the United States (US) with plunging house prices, stock price declines, and a severe credit crunch (falling credit availability), and then spread across Europe and major Asian countries. This financial crisis is far more serious than any experienced over the last four decades. International Monetary Fund (IMF) considers this financial crisis as more serious than the great depression of the 1930s. In spite of billions of dollars of bailout and liquidity injections by a number of developed countries, the crisis is showing no signs of abating. There is hence a call for a new architecture that would help minimise the frequency and severity of such crises in the future. But before we call a new architecture to redesign the financial market let us try to determine the primary cause of the financial crises.

Causes of present global crisis: It is very difficult to find out the causes of this financial crisis in one word but it is generally recognised that most important cause is excessive and imprudent lending by banks and financial institutions. There are several factors which make this possible for banks to resort to such unhealthy practice. Of them, the most important factor is the inadequate market discipline in the financial system resulting from the absence of profit and loss sharing (PLS). Mind-boggling expansion in the size of derivatives, especially credit default swaps (CDSs) is also an important factor as it claimed to provide protection to lenders against default. Another important factor is the “too big to fail” concept which tends to give an assurance to big banks that the central bank will definitely come to their rescue and not allow them to fail.

The false sense of immunity from losses introduces a fault line in the system. Banks do not, therefore, undertake a careful evaluation of the loan projects. This leads to an unhealthy expansion in the overall volume of credit, to excess leverage, and to an unsustainable rise to a steep decline in asset prices, and to financial frangibility and debt crisis, particularly if there is overindulgence in short sales. This can be justified by a comment “a bubble is more likely to develop when investors can leverage their positions by investing borrowed funds.”

The sub prime mortgage crisis in the grip of which the US finds itself at present, is also the result of excessive and imprudent lending. Securitisation of the “originate-to-distribute” model of financing has played a crucial role in this. Mortgage originators collateralised the debt by mixing prime and sub prime debt. By selling the collateralized debt obligations (CDOs), they passed the entire risk of default to the ultimate purchaser.

They had, therefore, less incentive to undertake careful underwriting. Consequently, loan volume gained greater priority over loan quality and the amount of lending to sub prime borrowers and speculators increased steeply. The lenders are not confident of repaying this excessive and imprudent lending which results and excessive resort to derivatives like credit default swaps (CDSs) to seek protection against default. The buyer of the swap (creditor) pays a premium to the seller (a huge fund) for the compensation he will receive in case the debtor defaults. If this protection had been confined to the actual creditor, there may not have been any problem. The problems arise when the hedge funds sold the swaps not to just the actual lending bank but also to a large number of others who were willing to bet on the default of the debtor. These swap holders, in turn resold the swaps to others. The whole process continued several times. While in genuine insurance contract only the one actually insured claims compensation, in the case of CDSs several swap holders will claim compensation. This accumulates the risk and makes it difficult for the hedge funds and banks to honour their commitments.

Although many Americans are blaming the Jewish lobby and Israel for the current catastrophic financial crisis affecting the USA and the world (Abrahamam Foxman, New York Times, October 7, 2008), there is still no proof that anyone can blame the global markets crisis on any one group nor can one blame it on any other country. Therefore, it may not be anything to do with religion or ethnic groups rather this global economic crisis driven by greed. But without making any debate of putting responsibilities on any body’s shoulder nor even blaming any religion or ethnic groups we will broadly discuss the feature of the financial system and will see if the Islamic financial system can be an alternative of the conventional financial system.

The Islamic financial system: Allah says in the Holy Qur’an that a society where there is no justice will ultimately head towards decline and destruction (Al-Qur’an 57:25) which implies that the most important objective of Islam is to realise greater justice in human society. Justice requires a set of rules or moral values, which everyone accepts and faithfully complies with. The financial system may be able to promote justice, if it satisfies at least two conditions based on moral values. One of these is that the financier should also share in the risk so as not to shift the entire burden of losses to the entrepreneur, and the other is that an equitable share of financial resources mobilised by financial institutions should become available to the poor to help eliminate poverty, expand employment and self-employment opportunities and, thus, help reduce inequalities of income and wealth.

To fulfill the condition of justice, Islam requires both the financier and the entrepreneur to equitably share the profit as well as the loss. For this purpose, one of the basic principles of Islamic finance is: No risk, no gain”. This should help motivate the financial institutions to assess the risk more carefully and to effectively monitor the use of funds by the borrowers. The double assessment of risk by both the financier and the entrepreneur should help inject greater caution into the financial system, and go a long way in reducing excessive lending. Islamic finance should, in its ideal form, help raise substantially the share of equity and profit-and -loss sharing (PLS) in business. Greater reliance on equity finance has supports even in mainstream economics. This is because all the financial needs of individuals, firms, or governments cannot be made amenable to equity and PLS. Debt is, therefore, indispensable, but should not be promoted for inessential and wasteful consumption and unproductive speculation. For this purpose, the Islamic financial system does not allow the creation of debt through direct lending and borrowing. It rather requires the creation of debt through the sale or lease of real assets by means of its sales- and lease-based modes of financing (murabaha, ijarah, salam, istisna and sukuk). The purpose is to enable an individual or firm to buy now the urgently needed real goods and services in conformity with his/her ability to make the payment later.

Prospects of Islamic Finance over Conventional Finance: The current financial turmoil has provided an opportunity for Islamic finance to position itself as a viable alternative to conventional finance by providing investors with other asset classes and markets that provide stability. Under current political crisis, there is much talk about the creation of a new international economic order. There is a growing consensus that the unregulated capitalism that has led us to this crisis needs to be reconfigured to provide greater resilience and stability to the financial system.

The strengths of Islamic finance are derived from shariah principles, which also happen to be sound business principles. The shariah injunctions require that financial transactions be accompanied by an underlying productive activity thus giving ride to a close link between financial and productive flows. The shariah principles prohibited excessive leverage and speculative financial activities thereby insulating the parties involved from too much risk exposure.

It is worth speculating to what extent the world financial crisis could have been averted, or at least its impact considerably reduced, if the principles of Islamic finance had been more widely practiced. There is now a greater awareness and interest among the world financial community about the merits of Islamic finance. Literature shows that there is already a growing demand for Islamic financial products in the global market, far exceeding their supply. In recent years we have witnessed a rapid expansion of the Islamic financial services industry. Today Islamic finance is fast becoming an accepted component of the global financial system.

Bangladesh’s direct involvement in the development of Islamic banking and finance has significantly transformed the financial landscape at both the national and international levels, making the country a leader in the Asian as well as international race to become a important Islamic financial centre.

It is observed that the vibrancy and dynamism of Bangladesh’s Islamic financial system today is reflecting in its continuous product innovation, diversity of Islamic financial institutions, as well as the availability of Islamic finance talent and expertise which demands the comprehensive regulatory and legal infrastructure in the country.

It can be hoped that the Islamic capital market in Bangladesh can function as well as offer a wide range of products such as shariah-compliant stocks, Islamic unit trust funds, Islamic exchange-traded funds, shariah-compliant real estate investment trusts, structured products and derivatives.

The country can offer sukuk bond which will be able to establish several industries and also develop a deep and liquid market. In this regard, we can follow the model of Malaysian sukuk market which is one of the world’s largest and most innovative sukuk market. For establishing the sukuk market, Bangladesh may have to liberalise its foreign exchange administration rules so that different foreign development banks and multinational corporations can join in growing the sukuk markets.

Conclusion: Therefore, from the above discussion it can be concluded that the Islamic financial system is capable of minimising the severity and frequency of financial crisis by getting rid of the major weakness of the conventional system. It introduces greater discipline into the financial system by requiring the financier to share in the risk. It links credit expansion to the real goods and services which the seller owns and possesses and the buyer wishes to take delivery of. It also requires the creditor to bear the risk of default by prohibiting the sale of debt, thereby ensuring that he evaluates the risk more carefully.

In addition, Islamic finance can also reduce the problem of subprime borrowers by providing credit to them at affordable terms. This will save the billions of bailout dollars spent for the crisis-ridden bank. This does not help the poor because their home may have already become subject to foreclosure and auctioned at a give-away price.

The problem is that Islamic finance has at present a very small share of global finance. However, it is the ability of the system to solve a problem that matters. If Muslims themselves establish the system genuinely and successfully with proper checks and controls, the whole world will ultimately come around to it and the financial sector of Bangladesh will also be benefited out of it.

The writer is an economist and researcher. He can be reached at Email:

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Sunday, 19 July 2009

Deal of the Week: Saudi Electricity sukuk issue

After several months of inaction, the Middle Eastern sukuk - or Islamic bond - market sprung back into action this week when Saudi Electricity Company (SEC) raised 7 billion Saudi Dollars, equal to US$ 1.9 billion.

The Kingdom’s dominant electricity supplier, advised by Allen & Overy, issued the first significant –and by far the largest – Middle East sukuk of 2009. SEC's sukuk raised more than twice as much as the next largest this year: The Kingdom of Bahrain's $750 million issue last month.

Sukuks differ from standard bonds because instead of paying interest, which is banned under Islamic law, they entitle investors to a share of future revenues. SEC’s sukuk is secured on the future fees the company will receive from signing up and then connecting new customers to its power grid.

Atif Hanif, the A&O associate who lead the deal, said the sukuk was a good prospect because Saudi Arabia has a rapidly growing population with strong demand for domestic electricity where SEC holds a state-authorised monopoly.

A&O, which has not previously advised SEC, secured the deal because Hanif had arranged the company’s previous sukuk in 2007 while at Baker & McKenzie. SEC had also worked with Zeyad Khoshaim, a partner at Abdulaziz AlGasim, A&O’s Saudi affiliate, who was at Baker & McKenzie with Hanif.

The pair co-ran this week’s SEC deal with assistance from associates Jonathan Marshall, Ahmed Al Bassam and partners Roger Wedderburn-Day, a sukuk specialist, and Julian Johansen, a Riyadh-based Arabic speaker.

Since Saudi regulations state that documents must be in Arabic but most investors wanted them in English, the lawyers had the added complexity of agreeing translations and definitions on top of the standard negotiations.

Khoshaim called the sukuk "a landmark deal for the Saudi market and a much needed boost for regional debt capital markets."

The sukuk was co-arranged by HSBC Saudi Arabia and Samba Capital, who were advised by White & Case’s Saudi affiliate, The Law Office of Mohammed Al-Sheikh.

Islamic finance links:
Islamic finance consulting and training (GlobalPro Consulting- Kuala Lumpur,Malaysia)
Islamic finance consultant and trainer (Ahmad Sanusi Husain-Kuala Lumpur,Malaysia)

Saturday, 18 July 2009

Islamic banking less exposed to meltdown

Dhaka, Jul 17 (—Islamic banking is less exposed to risks like the global financial crisis as it is not based on predictions but on profit or loss sharing, a visiting top Sharjah Islamic Bank official says.

By definition, it cannot guarantee any interest or fixed rate of return on deposits like the conventional banking system, Ibrahim Iqbal Karmally, the head of trade finance for the Sharjah Islamic Bank, told on Friday.

Karmally is visiting Dhaka to conduct a workshop on 'International Trade payment: Islamic Trade Finance' organised by the International Chamber of Commerce, Bangladesh.

The workshop was held on Friday at the city's China-Bangladesh Friendship Conference Centre.

"But basically, it is not away from the concept of return (interest ) to your clients," Karmally said, after the inaugural session.

Asked on the prospects of Islamic banking, he said that system is not based on predictions which gives it the advantage to less external shocks like the recent financial meltdown.

"The total GDP of the world is around $ 30 trillion where as the total credit market is $ 64 trillion. This gap is prediction."

Islamic banking is gaining popularity across the world as the global financial turmoil seems to have had limited impact on it, Mahbubur Rahman, ICCB president said at the launch of the workshop.

"Even the Vatican says banks should look at the rules of Islamic finance to restore confidence among their clients at the time of global economic crisis."

Islamic finance industry has been in an expansionary phase in recent years, banker Mamun Rashid told the audience.

"In fact, there is currently over $ 800 billion worth of deposits and investments lodged in Islamic banks, mutual funds, insurance schemes and Islamic wings of conventional banks.

Over 60 participants from 22 banks are attending the workshop designed to provide understandings of the Islamic international trade financing and the risks associated in the trade structure framework.

The Islamic banking industry started in the country back in 1983. Currently, of the 48 banks, six commercial banks run fully fledged Islamic banking.

In addition, 21 branches of 10 conventional banks are engaged in Islamic banking, according to central bank figures.

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Islamic Finance to Reduce Fiscal Deficit in India

At a time when economic recovery needs more stimuli by the Government of India (GoI), there is also an urgent need to safeguard the economy from the debt trap because the GDP growth rate fell to 6.7% in 2008-09 from 9% in 2007-08; the debt servicing reached 58.83% of the total expenditure for the year 2008-09. It means maximum receipts are now spent for debt servicing which accounted for 15.87% of the Gross Domestic Product (GDP), while the debt receipts were 9.78% of the GDP in 2008-09. Even the interest payments were 21.39% of the total expenditures by GoI and 5.77% of the GDP in 2008-09. Notably the revenue deficit in 2008-09 is already 30% due to high debt serving ratio to total revenue expenditure.

In an attempt to find the actual reasons behind the high fiscal deficit, it is observed that the increased debt receipts by GoI to finance revenue expenditures (especially high debt servicing); increased subsidies on food, fuel and fertilizer; and rural development through schemes like NREGS, farmer’s loan waiving scheme and Sarva Shiksha Abhiyan are the three most important factors of high fiscal deficit. Since there is a need for more stimuli to counter recession in the economy, it is expected that the plan expenditures may further increase whereas due to recession, the revenue receipts may decline. This decrease in revenue receipts and increase in plan expenditure may increase the fiscal deficit to an unwanted high level. Working upon different options to reduce the fiscal deficit, it is found that Islamic finance can reduce the fiscal deficit even if revenue receipts decline and plan expenditures increase.

Islamic financial products have a great role to play in reducing the fiscal deficit in emerging economies by replacing the debt based investments for infrastructure with funds mobilized through equity based Government Securities for infrastructure projects. Let’s see how Islamic finance may help us reduce our present fiscal deficit.

Notably the total revenue expenditure is 142.92% of total revenue receipts reflecting 30.03% revenue deficits. The major cause of this high revenue deficit is high debt service ratio to total revenue expenditures. For a developing economy like India, in the proposed plan we project increasing capital expenditures, but in the revised estimates of 2008-09 budget, the revenue expenditure is 89% and the capital expenditure is just 11% of total expenditure; all due to high debt servicing ratio (66%) to total revenue expenditure. Notably the interest payment alone is 24% of total revenue expenditures. So, with capital expenditure being as low as just 11% of total expenditure and debt serving being as high as 59% of total expenditure, how can we go about planning to foster inclusive growth?

Debt Finances crossed the Planned Estimates:

The debt based finances for investments under 11th five year plan document was proposed to be 48.42% of total receipts for 2008-09, whereas the revised budget estimates reveal that the debt receipts were 96.38% of total capital receipts in 2008-09. This reflects our inability to mobilize targeted amount of non debt receipts, causing high fiscal deficit due to interest payments over borrowed debt receipts.

According to 11th plan documents, projected investments in 2008-09 should be of Rs. 321,579 crores while total plan capital expenditure in the revised budget observed just Rs. 41,301 crores. So the plan capital expenditure is just 12.84% of targeted investment in 2008-09. This shows our inefficiency to make budget development pro inclusive growth and to foster growth. So, it is better that GoI reduce debt borrowings which ultimately increases revenue deficits; and shift the focus on infrastructure investments to stimulate the economy at a time when GDP growth rates and employment growth rates are falling.

Actual Debt Receipts are 210% of the planned Estimates:

Since the revised estimates on debt receipts (Rs. 326,515 Crores) is already 210% of estimated requirements of debts (Rs. 1,55,704 Crores) by year 2008-09 as projected in 11th five year plan documents, the GoI should seriously think about this increased debt receipts. The funds utilized for debt servicing (Rs. 530,010 Crores) are already 162% of debt receipts to finance fiscal deficit (Rs. 3.26.515 Crores), the GoI should revisit its budgeting. How good is it to increase the debt receipts at a time when Indian industries are looking for more affordable credits from banks to meet the challenges after the global meltdown?

In year 2008-09 the deficit budget cost an amount of Rs. 192,694 crores to GoI which was paid as interest over the debt receipts borrowed to finance the deficit budget. This may be called as loss to GoI because had there been equity based receipts against debt receipts, GoI would have saved this amount.

Financing Fiscal Deficit through subsidized bank loans is not good

In the 11th five year plan document it was projected that by year 2008-09, to meet the proposed investment needs around 50% debt receipts worth Rs. 63,207 crores would be mobilized as domestic banks credit. However, the figures of revised budget estimates for 2008-09 states that market loans (amounting Rs. 261,972 Crores) are over 80% of total debt receipt by the GoI. The increased flow of subsidized bank loans to GoI for financing fiscal deficit is in fact creating problems for economic growth of the economy because it is creating hurdles for banks to increase the supply of cheaper credit to the private sector at a time when they need it to minimize their output cost and combat recession. It is observed that besides a fall in international demands, the availability of equity finance or cheaper credit sources have affected business confidence. The equity financial sources are drying up after reversal of capital flows from stock markets due to the global meltdown. External Commercial Borrowings (ECBs) and Export Credits have also declined. This has all affected the growth rate for industries.

Besides evaluating the fall in annual growth rate of Gross Domestic Product (GDP) from 9.0% in 2007-08 to 6.7% in 2008-09, it would also be important to analyze the growth trend for different industries during last year. The Manufacturing industry employing a majority of non agricultural-workers observed the deepest fall where annual growth rate fell to 2.4% in 2008-09 compared to 8.2% in 2007-08. Similarly the annual growth rate of agriculture, forestry and fishing fell to 1.6% in 2008-09 against 4.9% an year ago.

However, the increase in annual growth rate for Community, Social and personal services has remarkably increased to 13.1% in 2008-09 as compared to 6.8% in 2007-08 reflecting the impact of increased expenditures by the Government through financing schemes like NREGS. But it is important to note that such expenses have not only increased the fiscal deficit beyond the estimated budget for 2009-10, but only 9% of the Indian workforce engaged in Community, Social, and Personal services is expected to be benefited through it.

Thus the excess flow of subsidized bank credits to GoI for financing the budget deficit is ultimately restraining the economic growth.

Fearing an even higher fiscal deficit?

To reduce the fiscal deficit, it is simple to either cut the expenses or increase the revenues. But under present conditions, it is not possible either to increase the revenue receipts or to cut the expenditures because any increase in taxation will be disastrous at a time when recession has hit the business community and is already demanding for more stimuli to recover. When there is mounting pressure to increase the stimuli, the expenditure is suppose to increase further. Moreover the political promises (to provide subsidized foods and increase flagship programme expenses) by the new Parliamentarians before the election would also increase the plan expenditures. It all increases the possibility of any further increase in the current fiscal deficit.

What the Government should do now?

Considering the constraints to increase the revenue receipts and cut the plan expenditures to control fiscal deficit, the GoI needs to innovate new products for public finance. As almost 60% of total expenditures are made for debt servicing, GoI needs to substitute the debt receipts with equity funds. Since SEBI failed to protect the stock markets and NBFCs dealing in MFs and VCs are not in a position to mobilize huge long term investment funds, GoI needs to innovate Sovereign equities to mobilize adequate amount of non debt receipts for consolidation of public finance.

Considering the available options of capital sources in the international market, there are chances to get Islamic funds instead of mere equity funds from the Muslim countries. The equity funds are somehow different from Islamic Funds in the manner that when equity funds are mixed with debt funds, it doesn’t remain Islamic Funds.

Islamic Bond (Sukuk) for public finance in India:

Islamic economist Dr. Shariq Nisar in his paper ‘Islamic Bonds (Sukuk): Its Introduction and Application’ writes that the recent innovations in Islamic finance have changed the dynamics of the Islamic finance industry. Especially in the area of bonds and securities, the use of Sukuk or Islamic securities have become increasingly popular in the last few years, both as a means of raising government finance through sovereign issues, and as a way for companies to obtain funding through the offer of corporate Sukuk. Beginning modestly in 2000 with a total of 3 Sukuk worth $336 million the total number of Sukuk by the end of 2007 has reached 244 with over US$ 75 billion funds under management. Dr. Shariq summarizes the growth of Sukuk in following table.

Recent studies about Sukuk at indicate that the Sukuk market has managed to come back modestly, but only for higher corporate issuers. IFIS data show that so far this year, more than $7.6 billion of Sukuk has been issued. Almost all this year's fund-raisers have been governments or government-related, the overwhelming majority from Southeast Asian countries such as Indonesia. The Middle Eastern market that drove the pre-2007 boom has also sprung into life this month with a $500 million issue for the government of Bahrain, which was boosted to $750 million because of strong demand. Thus there is no harm if GoI study the feasibility of innovating Islamic products to consolidate public finance in India.

Scope of Islamic Bond in India:

Since India houses the second largest Muslim population of the world, it is expected that at least 20% of Indian Muslims who are economically better off and desperately looking for real Islamic investments would grab it with enthusiasm. Unfortunately, so far India has yet to launch any real Islamic bond or Mutual fund because somehow all the so called ethical mutual funds have been mixing equity funds with debts.

Moreover unofficial sources indicate that considering the higher growth rate of India, some larger Islamic banks and financial institutions like Islamic Development Bank, Dubai Islamic Bank and others want to invest in Indian infrastructure but do not find suitable opportunities. So, we study the prospects of Islamic Bond (Sukuk) issues from GoI to finance infrastructures.

Fiscal deficits can be reduced by the Sukuk funds:

Since returns to Sukuk holders come from the actual returns from the project there is no chance of any interest burden on the economy. In case there is any loss in the specified project that will also be duly shared by the Sukuk holders. Thus Sukuk finance negates any possibility of interest burden on the economy and removes the chance of fiscal deficit due to interest payments on borrowed debts to finance infrastructural needs of the economy.

We have higher revenue expenditures due to higher debt servicing ratio to total expenditure. The problem is also that capital expenditure is much behind the target and growth rate can’t be fostered if we lack infrastructure. Thus while we need to stimulate the economy, it is better to introduce Sukuk by the Indian Government as it would not only help build infrastructure, increase capital expenses and stimulate the economy, but also reduce the revenue deficits, debt servicing ratio and revenue deficits.

Financing the deficit through more subsidized bank loans is creating problems for the banks to reduce lending rates for the private sector; as a result the private sector is getting lower amounts of credit at higher costs. Besides the recent global recession, this hardening credit supply is adversely affecting the growth rate of agriculture and the manufacturing industry, as reflected by negative growth rates during the last 6 months. Thus the finance deficit is not helping the majority of the Indian workforce as agriculture and manufacturing collectively provide livelihood for around 63% of the workers. So, to foster growth and ensure it is inclusive growth by way of providing sufficient and affordable credits to the private sector, the increased flow of subsidized bank loans to GoI should be reduced; otherwise the private sector will continue to suffer and we may not be able to attain a desirable growth rate even by increasing the fiscal deficits to stimulate the economy.

Since Sukuk is bounded with religious faith, the economic rationality is a secondary aspect in the decision making by the investors. The top priorities for Sukuk holders are to ensure that –

1. The returns are Halal (legal according to Islamic ethics) and investments will be used for building potential infrastructures for national development. Thus the investments and returns may draw tax incentives as well, which may stand as compensation against lower rate of returns.

2. The investments are meant for legal share (proportionate ownership) in the infrastructure.

3. There would not be any fraud or cheating by the fund managers and the investments would not be spent for promoting unethical and unlawful activities (as prohibited by Islamic ethics).

4. The investments will be in safe hands to carefully develop the assets and not manipulate them.

5. Even if the rate of returns are low as compared to market returns on other investments, the advantage of earning Halal income and the tax incentives on investments in infrastructure, would be some compensatory advantages to the Sukuk holders.

Since all sorts of returns on Sukuk are free from interest and does not exceed the actual asset value, whatever is paid as returns to Sukuk holders paid from the actual earnings from the asset created by that particular investment. There is no need to borrow any debt to pay Sukuk returns or repay the whole Shukuk funds because all the Shukuk holders collectively own the asset. They will thus proportionately gain or lose according to appreciation or decline in the value of that particular asset.

Indian Institute of Islamic Infrastructure Funds (IIIIF):

It is desirable that the GoI set an autonomous financial corporation as ‘Indian Institute of Islamic Infrastructure Funds’ (IIIIF) to grab the national and international market of Shariah Funds and mobilize adequate funds for the infrastructural investments in India. If IIIIF succeeds in soliciting cooperation with leading Islamic investment and development banks around the world, hopefully we may not need debt based receipts for deficit finance especially to meet the infrastructural requirements in India. The services of such banks may be solicited through GoI securities with assured lease rent after completion of particular infrastructure projects. Once India manages to mobilize project based Islamic Infrastructure funds, with such funds specific borrowed debts may be repaid to reduce the debt burdens.

Based on the projection by the Planning Commission of India, the estimated requirements of infrastructure investment is Rs. 20,56,150 crores. Considering the commercial aspects of different sectors, it is expected that IIIIF may help us arrange 93% of the total requirements amounting Rs. 19,12,420 crores for 11th five year plan’s infrastructural needs. Only the investment need of water supply and sanitation amounting Rs. 1,43,730 may not be sellable otherwise infrastructure projects of all other sectors seem sellable through equity based Government securities by IIIIF, upon which, any specific amount as % of investment could be assured as returns in terms of lease rents after completion of the projects. IIIIF along with RBI and the Ministry of Finance may design such equity based Government Securities (Sukuk). Further such securities may be traded in open market as RBI has recently framed policy for stripping and reconstitution of Government securities to enhance the trading scope of securities. However for Sukuk, there could be assured lease rent or dividend as rate of returns instead of interest.


Islamic Finance in terms of Sukuk may help India raise required infrastructure investment funds for the Government and the corporate sector. It may solve the most threatening challenge of our economy by providing equity funds for infrastructure against Government Securities enabling GoI to reduce its fiscal deficit after repaying borrowed debts for capital expenditures through equity funds; and also by arranging equities for the corporate sector. It is hoped that the proposed IIIIF may reduce the fiscal deficit allowing India to foster inclusive growth as it carries following promising features –

1. Reduce the fiscal deficit of India even if the revenue receipts decline and we need to increase the plan capital expenditures to stimulate the economy.

2. Help India save up to 6% of our GDP in the amount we pay as interest over debt receipts.

3. Enable GoI to repay debt receipts borrowed for financing the infrastructure investments.

4. Provide desirable equity fund for the corporate sector at a time when external financial resources are dried up and the cost of domestic bank credits are not affordable.

5. Once GoI succeeds in arranging sufficient infrastructure funds through Sukuk and repays debts borrowed for capital expenditures, it would reduce the load of public finance on domestic banks thus enabling them to reduce the cost on credits specified under PSA for private sector enterprises.

There could be many more significanct outcomes of IIIIF if we resolve it without any prejudice for the sake of national interest.

(by Syed Zahid Ahmad / Asia EconoMonitor)

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Islamic banking still almost unhurts by global economic meltdown: ICCB President

ICCB President Mahbubur Rahman on Thursday said, the relative stability of Islamic banking institution, in current recession has drawn attention of all concerned.

Even the Vatican said banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis. Available information says that about US$ 1 trillion of assets are managed according to Islamic investment principles.

ICCB President Mahbubur Rahman made the observation while inaugurating a day-long ICC workshop on "International Trade Payment: Islamic Trade Finance" at the Bangladesh China Friendship Conference Centre organized for the bankers here today, said a release of ICCB.

The topic of Islamic Finance has emerged in recent decades as one of the most important trends in the financial world. There has always been a demand in a number of countries for financial products and services that conform to the Shariah (Islamic law).

With the development of viable Islamic alternatives to conventional finance, Muslims are beginning to find Shariah compliant solutions to their financial needs, Mahbubur Rahman mentioned. The ICCB President said, it is evident that Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities.

It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European finances and businessmen, he said.

It is estimated that Islamic Banking is growing at a rate of 10-15 percent per year and with signs of consistent future growth. It is understood that Islamic banks have more than 300 institutions spread over 51 countries, plus an additional 250 mutual funds that comply with the Islamic principles, the ICCB President added.

He stated that Islamic banking is now an issue of great interest for many including Western non- Muslims, because the system still remains almost unhurt by the onging global financial crisis. The Islamic banking industry in Bangladesh also continues to show strong growth since its inception in 1980's.

At present, out of 48 banks, 8 private commercial banks are operating as full- fledged Islamic banks. Besides, 21 branches of 10 conventional banks including 2 foreign banks are engaged in Islamic banking, he mentioned.

Chairman of ICCB Standing Committee on Banking Technique and Practices Mamun Rashid Said, besides its wide geographical scope, the expansion of Islamic finance has also been taking place across the whole spectrum of financial activities, ranging from retail banking to insurance and capital market investments. He observed that 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.

Iqbal Ibrahim Karmally, coordinator of ICC UAE Banking Commission and Head of Trade Finance at Sharjah Islamic Bank who conducted the workshop also spoke at the inaugural session. As many as 63 participants from different banks attended the workshop.

(The New Nation)

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Thursday, 16 July 2009

Maybank Singapore To Launch First Islamic Term Deposit For Retail Clients

SINGAPORE, July 16 (Bernama) -- Maybank Singapore will launch the first Islamic Term Deposit (Term Deposit-i) targeted at retail clients tomorrow, making it the first bank here to offer the Islamic banking product to that market segment.

As the first mover in the market, Term Deposit-i will pay profits upfront, the bank announced today, bucking the local trend of Islamic term deposits for high networth customers.

A similar product, Profit Now Account-i was launched by Maybank Islamic Bhd in Malaysia last May and it was well-received with more than RM1.3 billion total deposits to date.

In a statement here Thursday, the bank said Islamic banking products were sought after by local customers who were scouting for alternative investment avenues with the current change in investment landscape.

The bank is offering for a limited period, promotional rates of 0.6 percent, one percent and 1.4 percent for a tenure of three, six and 12 months respectively.

The minimum placement is S$10,000 (S$1=RM2.42) for a 12-month tenure or a minimum of S$25,000 for a three- and six-month tenure.

This deviates from the current available Islamic term deposit products in the market.

Some products require a minimum placement of US$500,000, catering only to the high networth segment.

The bank said Term Deposit-i was based on the commodity Murabaha principle, which was on a cost plus profit sale concept.

Under this concept, a specific syariah-compliant commodity will be identified and used as the underlying asset for the sale and purchase transaction between the customer and the bank.

Maybank Singapore currently offers other innovative Islamic banking products such as iSAVvy Savings account-i, a syariah-compliant online savings account.

The bank said since the introduction of the Islamic deposit products in 2005, it had seen an average year-on-year increase of over 40 percent in Islamic deposits.

This increase aligned with the global expected growth of over 40 percent to US$1 trillion by 2012, Maybank said.

Maybank Singapore Islamic banking head, Mohd Ismail Hussein, said the current market presented an opportune time to take on a back-to-basic approach.

"Consumers are on the lookout for an alternative to conventional products and this term deposit, being syariah-compliant may well match their needs," he said.

Mohd Ismail said Islamic banking was a fairly new concept in Singapore but was gaining momentum including from among the bank's non-Muslim Islamic banking customers.

"With Maybank being the market leader in Islamic banking in Malaysia, the operations in Singapore is in good stead to 'break the ice' between Islamic banking and the local retail market," he said.
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Islamic Finance Market Requires Adaptability by Tech Vendors

The Islamic finance market, which has grown to $700 billion to $750 billion in assets, offers huge potential for technology vendors whose products can handle a diverse set of regulations, according to a report issued by research firm Celent.

“Because Islamic banking practices and regulations differ by region and country, key factors in a decision of which vendor to select are a solution’s flexibility and adaptability,” wrote Celent. “The core banking technology used by financial institutions is essential for meeting local customers’ needs; regulatory reporting, operational requirements and Shariah boards’ approvals.” Shariah refers to a code of law and conduct derived from principles set out in the central religious text of the Islamic faith, the Koran.

According to Celent, the largest growth potential for Islamic banking is in Turkey and Pakistan while Iran and Saudi Arabia are mature markets.

The Celent report evaluated nine Islamic banking software and service vendors: Infosys; International Turnkey Systems; Misys; Nucleus Software, Oracle, Path Solutions, SunGard; Tata Consultancy Services (TCS) and Tenemos. All of the technology solutions have multilingual and multicurrency functionality and accommodate the same Shariah-based products including Wadiah; Mudarabah; Murabahah; Musharakah; Ijara; Bai Salam; Istina’a and Sukuk. Of those Sukuk – debt contracts resembling Western-style securitizations – are the most popular.

Under Islam, interest is banned so Shariah-compliant products are often asset-based and share profits. Growth in the sector has been hampered by uncertainty over scholarly views on whether Islamic finance products truly comply with Shariah law and a lack of uniform interpretation which can make product development more expensive.

Shariah boards, which oversee adherence of financial practices to the Islamic code, are essential in the development of new products for banks and other institutions, according to the report. This can lengthen time to market for new products to be approved.

(Security Industry News)

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