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Sunday, 30 August 2009

Recession sparks interest in Islamic finance

LONDON, England (CNN) -- With irresponsible banking practices taking the blame for bringing about the global economic crisis, there has been a surge of interest in Islamic finance.

Now, a slew of academic courses are springing up to meet the demand of those wanting to break into an expanding market.

According to ratings agency Moody's, the global Islamic finance sector is worth $700 billion and has the potential to be worth $4 trillion.

What's more, the ethical principles underpinning Islamic finance are seen by some as offering a more sustainable alternative to profit-oriented conventional banking. The result is that academic institutions are lining up to offer formal training in the area.

"There is a huge demand for Islamic finance courses now, so large that it's difficult to cope with," Professor Habib Ahmed, Sharjah chair in the school of government and international affairs at Durham University, England, told CNN.

Durham will launch a Masters degree in Islamic finance from October, becoming one of a number of European institutions to offer Islamic finance programs.

"Islamic finance has been growing by 15 to 20 percent per year for some time and there is a lot of interest at the moment. People are looking for alternatives after the economic crisis."

"Islamic economists believe that if the principles of Islamic finance were followed the crisis wouldn't have happened. We are seeing a lot of non-Muslim countries, including the UK, France, Japan, Hong Kong and Singapore encouraging Islamic finance," he said.

There are many differences between Islamic and conventional banking practices. One fundamental difference is that Islamic banks do not charge interest. Rather than borrowers and lenders, the system is based on buyers and sellers.

"Conventional banking is biased to the seller. Islamic finance is trying to level the ethics between the two parties," Aly Khorshid, an Islamic finance scholar who writes for Islamic Banking and Finance magazine, told CNN.

"People think the Islamic system is based on faith, but it's based on justice. The system is based on justice for the two parties and how you get to the justice is extracted from Islamic faith," he said.

Khorshid said that there are similarities between "ethical investment" schemes and Islamic finance, in that the Islamic system does not allow investment that harms people or the environment. He credits the rapid growth of the Islamic finance sector on the success of "sukuk" -- Islamic bonds.

In the West, banks including Lloyds TSB, HSBC, Deutsche Bank and Citibank all offer Islamic finance products, catering to a niche market of Muslim borrowers.

But while Islamic banks allow Muslims to take advantage of financial services that are consistent with their religious beliefs, it is the ethics underpinning Islamic finance that are attracting the interest of conventional finance institutions keen to learn lessons from the banking crisis.

Although Islamic banks have suffered from the global repercussions of the economic downturn, they emerged largely unscathed from the initial banking meltdown that brought about that financial turmoil.

Ahmed told CNN that is because Islamic banks are not allowed to deal in mortgage-backed securities or credit-default swaps, two of the practices accused of helping bring about the banking crisis.

Khorshid said that although it's too early to say if Islamic finance has dealt with economic downturn better than conventional finance, the Islamic system has many more layers of risk assessment and management, which could help protect it from the problems afflicting conventional banks.

But the growth of Islamic finance has brought its own problems. Critics say some banks use Islamic finance to package what are essentially conventional products. "Islamic banks are also driven by the profit motive and sometimes that can dominate the ethics," Ahmed told CNN.

While Europe is catching up with the demand for these banking products, the U.S. is lagging behind. Ahmed says that regulatory and legal changes are needed for Islamic finance to grow in the U.S., but he adds there are signs that Canada may become a North American center for Islamic finance.

The lack of Islamic finance services in the U.S. is reflected in a relative lack of demand for Islamic finance courses, but in the UK there is the opposite problem.

With students coming from Asia and the Middle East to get the qualifications that will help them take advantage of the Islamic finance boom, Ahmed says it is difficult for universities to find qualified teaching staff. "Most people with PhDs in Islamic finance are working in the industry, making a lot of money," he told CNN.

He added that Islamic finance products have the potential to appeal to the non-Muslims market, pointing out that in Malaysia the majority of customers for Islamic banks aren't Muslims.

"If people look at the principles they'll see something beneficial in terms of economics, rather than just religious reasons. It's a type of ethical finance that may be attractive to a lot of people."

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Sunday, 23 August 2009

Malaysian banks launch standardised murabaha deposit contract

KUALA LUMPUR, Aug 20 (Reuters) - Malaysian Islamic banks on Thursday launched a standard agreement for commodity murabaha deposit accounts between banks and corporates, aiming to remove a key barrier to the sector's growth.

The Association of Islamic Banking Institutions Malaysia -- which groups banks such as Bank Islam (BIMB.KL), CIMB Islamic and the Malaysian units of Kuwait Finance House (KFIN.KW) and Al Rajhi 1120.SE -- said the master contract would be similar to an interbank murabaha agreement launched earlier.

"Such a standard agreement will certainly promote and uphold the tenets of transparency and consistency in Islamic financial transactions, which eventually will result in product effectiveness and operational efficiencies of Islamic banks," the association's president Zukri Samat said in a speech.

Under a commodity murabaha deposit account, a company that wants to place surplus funds with an Islamic bank will appoint the bank as its buying agent. The bank then buys commodities such as metal or palm oil on behalf of the company.

The bank then offers to buy the commodities from the company on a deferred cash payment basis, with the sale price including a profit to the company from the sale.

Murabaha is widely used as an Islamic financing tool.

The International Islamic Financial Market, an industry body backed by the central banks of several Muslim countries, has estimated that the global commodity murabaha market is valued at more than $100 billion.

But the structure has been criticised as a sham, with some bankers saying deals can be done with no true sale taking place and no real transfer of risk to the buyer of the goods.

"Some jurisdictions actually do not recognise commodity murabaha," Zukri said. "This is the responsibility of the various people, the sharia scholar,s to try to bring down the gap. Of course we cannot agree on everything.

"Islam allows for different views and different opinions so long as you don't deviate from the main principle of Islam."

Islamic law is interpreted differently by different religious scholars, resulting in some sharia banking practices being accepted in certain jurisdictions but rejected in some others.

Some regulators and bankers say this lack of uniformity makes it hard to sell products cross borders and can raise the cost of transactions. But some practitioners argue that the absence of standardisation helps the industry to innovate.

The murabaha master agreement comes after Bahrain-based industry body Accounting and Auditing Organization for Islamic Financial Institutions said this month it would screen Islamic banking products for sharia compliance to promote uniformity.

Zukri said the murabaha agreement would unlock the potential of the Malaysian Islamic money market which has more than 6 billion ringgit ($1.7 billion) of average daily transactions. ($1=3.532 Malaysian Ringgit)

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Sunday, 16 August 2009

Unused surplus liquidity a risk factor for Islamic finance

Underutilised surplus liquidity at most Islamic financial institutions (IFIs) has led to weak asset-liability management, increasing liquidity risk, said rating agency Moody's Investors Service.

Issuing a stable rating on most Islamic banks, Moody's said ample liquidity levels, resilient capital bases, high asset returns and relatively low funding costs of Islamic banks add to their strengths.

However, the agency cautioned that future upgrades may be constrained by issues related to their "underutilised excessive liquidity, inadequate corporate governance and weak risk management, particularly in terms of handling of asset liability maturity mismatches".

The risk of underutilised surplus liquidity arises from the scarcity of medium- and long- term funds to reduce the gap between assets and liabilities.

"Currently, IFIs are highly dependent on short-term funds to manage their longer tenure liabilities. The issue has become even more crucial in today's capital market environment because the frequency of asset write-downs is on the rise," said Anouar Hassoune, Vice-President and Senior Credit Officer at Moody's.


Strong liquidity

The liquidity profile of Islamic banks has been strong, said the agency in its report, 'Liquidity leverage trade off for Islamic banks and its impact on their ratings'. The "good liquidity" reduces liquidity risks in the economic downturn.

"Their liquidity profiles have perhaps been one of the most important strength of the IFIs. This provides them with surplus cash to use as shock absorber against possible future shortages pertaining to investment opportunities and payment obligations," said the rating agency.

Owing to their less direct exposure to sub-prime products, Islamic banks are considered a safer option by customers who have been shifting their deposits from conventional banks. "This activity has been recorded in a number of countries, especially in the UAE, Kuwait and Bahrain," said the report.

The excess liquidity has helped Islamic banks increase their deposit volumes. Their deposit base in the third quarter of the last year increased by 34.37 per cent in comparison to the previous year.

"The Islamic banking industry has experienced exponential growth over the 30 years since its inception and we expect Islamic banking assets and assets under management to reach $1 trillion (Dh3.6trn) by 2010. The total assets held by Islamic banks globally amounted to about $840 billion at year-end 2008 and the entire global potential market is worth at least $5trn.

"Islamic banks often rely conservatively on their excessive liquidity base, largely in the form of surplus liquid assets, which has to some extent sheltered them from the global financial meltdown. Nevertheless, they have not fully escaped the effects of the credit crisis and are experiencing the woes of an evolving industry characterised by extremely high growth rates, but also by lagging corporate governance and risk management issues," Moody's noted.

The retail entrenchment, it added, is a good strategic shift, one "suitable for the current environment with wholesale funding restricted and liquidity ratios lower".

In spite of the tough economic climate, most IFIs in the GCC have been able to seek opportunities by using their surplus liquidity to aggressively boost their deposit volumes. They also aim at increasing their market share by growing lending volumes, while maintaining the focus on retail and corporate sectors, the report added.


Key concern

In spite of ample liquidity and their success over the past three decades, most IFIs are grappling with the issues of liquidity, balance sheet management and overall risk management, Moody's pointed out.

Operational models of IFIs are built upon fundamental values that discourage use of disproportionate levels of debt to finance assets, as well as speculative and doubtful investments, which have inhibited the industry in terms of user of leverage. As a result, IFIs funding portfolios are highly concentrated in a few liquid assets and are deficient in terms of a securitised asset base.

The underutilised surplus liquidity has led to weak asset-liability management, which translates into liquidity risk.

Mentioning the impact of the economic challenges, the report said falling asset prices, credit seizures and liquidity crunches have created a tough situation where retail-funded, commercial Islamic banks are better placed than their rivals. They enjoy low leverage and abundant liquidity.

Shariah-compliant investment banks, meanwhile, are wholesale funded with a concentrated deposit base. They are also highly exposed to crucial and illiquid asset classes such as real estate, private equity and venture capital. "Consequently, they have suffered far more, with two of them defaulting recently," said Moody's.


Current assets

Islamic banking is faced with a conundrum. Its institutions maintain a high concentration in short-term assets such as deposits and expensive liquid assets, but at the same time they are exposed to highly profitable but illiquid long-term assets and they have limited access to long-term funding solutions.

"The nature of the Islamic banking model and Shariah-compliant laws applicable to available asset classes means that these banks are persistently faced with a swap between liquidity and profitability."

The report said traditionally IFIs have not been heavily leveraged, neither in terms of credit leverage nor financial leverage. Conservative financial leverage maintenance is primarily due to limited incentives that IFIs have to grow debt-like liabilities as their assets tend to be highly profitable, they set aside extra capital buffers to prepare for expansion and cheap funding is available.

IFIs generally maintain financial leverage of about 5.4x in the GCC. "On the other side of the balance sheet, the average credit leverage of GCC IFIs is close to 55 per cent, which in turn reflects Islamic banks' keenness to keep ample asset liquidity in the event of funding sources becoming unavailable.

"IFIs use cash from deposits and short-term liquidity assets to finance long-term liabilities. These are universal, but they vary greatly among the banks in their composition because of their business characteristics. As a result, the liability makeup affects the IFI funding structures differently."

Moody's said asset-backed transactions could expose Islamic institutions to high credit risk. "In order to mitigate this long-term liability related risk, an IFI should have a vast pool of assets with a maturity range at its disposal to close the asset liability gap."

The strengths of ample liquidity, resilient capital bases are partly offset by the banks' weak asset-liability management and below-par qualitative characteristics such as corporate governance and risk management, which highlight the volatility of this emerging market sector.

"Our view is that the sector's high profitability may not be sustainable and that this will eventually affect ratings, given that the banks' ratings are influenced by restricted asset diversification and inefficient corporate governance structures," said Hassoune.

The inability to efficiently monitor risk, primarily liquidity risk, remains a basic problem with IFIs. "Liquidity management has always been challenging for IFIs, but it is now being exacerbated by the shortcomings of this nascent industry – shortcomings such as a scarcity of liquid instruments, a lack of regulatory consistency and the underdeveloped nature of the Islamic money market."

Even as most of them are expected to survive the impact of declining property prices and rebound with the help of systemic government support and the resurgence of global markets, liquidity-risk-related issues will persist, said Moody's.

Pointing out the different approaches that large and small banks had to the liquidity stress, the analysts said larger Islamic financial institutions – such as Saudi Arabia's Al Rajhi Bank or Kuwait's KFH – prefer to protect their asset liquidity, capitalisation and reputations at the expense of growth and profitability. However, smaller banks are keen to quickly gain market share.

"Such a strategy is apparent in the competitive UAE market. With market liquidity scarce, most banking players have tended to refrain from lending (thus keeping credit leverage at relatively low levels), leaving room for those competitors with ample asset liquidity to use their own balance sheets to capture extra shares of the lending market.

"For instance, Dubai Bank [one of the UAE's smaller Islamic banks] has pursued such tactics. Prior to the crisis, the bank managed to accumulate sizeable asset liquidity on its balance sheet, which it used extensively throughout 2008, resulting in a doubling of its size despite the worsening global credit situation, but at the expense of capitalisation, which declined as financial leverage rose," said the agency.


Asset-backed arrangements

Islamic banks belong to an emerging and conservative industry, so they maintain high levels of liquidity to mitigate the adverse effects of any potential run on deposits.

Overall, less granular deposits or deposit concentrations have been a negative rating factor for the IFIs, said Moody's.

Furthermore, an IFI's balance sheet is based on a "pass-through" mechanism or PLS asset-backed arrangements that allow it to link the returns on its PSIA deposits to asset yields, mitigating its asset-liability mismatch exposure. "This is a risk factor commonly faced by conventional banks.

However, at an Islamic bank, such a risk is more direct and 'mechanical' and is known as 'displaced commercial risk' [DCR], which is defined as the risk of liquidity suddenly drying up as a consequence of massive withdrawals should the IFI's asset yield returns for PSIA-holders be lower than expected or, worse, produce losses. From an operational perspective, this feature creates risks pertaining to premature deposit withdrawals."


Sukuk market

Moody's said the sukuk, or Islamic bond, market is growing but the growth is still insufficient. At the end of 2008, the size of the sukuk market was $106bn, a 10 per cent increase over the previous year's $97bn.

Growth in this segment has led to local debt capital market growth. The popularity of sukuk has contributed to further invention in terms of alternative Islamic assets, with 14 different sukuk structures used so far.

The agency said taking advantage of sukuk was a much-needed solution to the problem of increasing the Islamic banks' funding variety. However, in spite of the enormous success, "the sukuk market is not as deep or liquid as a regular bond market".

"Regardless of growing demand fuelled by banks, corporations and governments in the GCC region, there is a shortage of supply. Additionally, the sukuk market is still stagnant: holders keep their bonds to maturity and there is relatively little secondary market trading," it added.


Innovative solutions

The issue, said Moody's, can be addressed by innovative solutions such as the introduction of a range of Shariah-compliant instruments and the management of asset-liability mismatches, originating from the shortage of long-term funds.

Progress in this field is essential as their underdeveloped funding portfolios are not nearly sufficient to maintain their current performance and allow them to develop into a dominant financial industry, said the rating agency.

(Shveta Pathak/Emirates Business)

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

Thursday, 13 August 2009

Malaysia’s leadership role in Islamic finance


KUALA LUMPUR: Malaysia can assert a leadership role in the world of Islamic finance as it has the standing in the Muslim world since it is one of the pioneers of the modern Islamic banking system.

Fajr Capital Ltd chief executive officer Iqbal Khan said Malaysia could assume a more assertive leadership role as it had a large amount of goodwill among Muslim nations.

He said it was Malaysia’s natural right since the country had done much in promoting Islamic banking and finance. “Islamic finance adds value and does not compete with the rest of the Malaysian economy,” Iqbal said in a panel discussion on the role of Islamic finance in the changing global landscape at the World Capital Markets symposium.

Islamic Banker editor Mushtak Parker said there was potential for Muslim nations such as Saudi Arabia and Malaysia to raise Islamic finance issues to the mainstream agenda at international forums.

“In the April G-20 summit in London, Saudi Arabia, Turkey and Indonesia were represented but not one of them brought up issues relating to Islamic finance,” he said.

He said there was a need for the 10 economically important Muslim nations to come together in a G-7 type summit to discuss issues that were important to the industry.

“There must be decision making at the political level,” he added.

However, panel members agreed that Islamic finance was not the solution for the global financial crisis that reached its peak last September with the bankruptcy of Lehman Brothers Holdings Inc.

Parker said it was important not to present Islamic finance as the panacea to the troubles affecting the global financial system as the industry was still at an infancy stage.

(The Star)

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Wednesday, 12 August 2009

Top scholar sanctions Islamic tawarruq structure

KUALA LUMPUR: Tawarruq must meet the standards of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and cannot be a standalone funding tool, a top scholar said, outlining conditions for the use of a structure that has split the syariah banking sector.

Tawarruq is a bedrock of the US$1 trillion (RM3.5 trillion) Islamic finance industry and is widely used as a financing and liquidity
management instrument.

But growing disputes about the permissibility of some forms of tawarruq under syariah law have thrown markets into disarray, with practitioners warning of catastrophic consequences if the structure were to be revoked.

Seeking to calm investor worries, influential syariah scholar Sheikh Yusuf Talal DeLorenzo said tawarruq is allowed when it is applied properly, adding arguments against it are removed from commercial realities.

“Tawarruq from my perspective has been carefully researched and explained by AAOIFI,” the 60-year-old American scholar told Reuters in an interview, referring to the body which sets guidelines used by much of the industry.

“AAOIFI has developed a standard through its own methodology which is very thorough and that standard, as far as I’m concerned, still stands. There’s a great deal of misunderstanding in the marketplace that’s a disconnect between scholars who are actively involved in the field of finance and scholars who are not.”

Other prominent syariah scholars such as Sheikh Nizam Yaquby, Mohd Daud Bakar and Mohammad Akram Laldin have also recently defended the use of tawarruq.

The International Council of Fiqh Academy, a leading industry body driven by the Organisation of Islamic Conferences, had earlier ruled organised and reverse tawarruq to be “a deception” that seeks to disguise the use of usury.

Confusion over the structure’s status has been compounded by the fact that compliance with standards of Islamic finance industry bodies such as AAOIFI and IFSB is voluntary, and there is no ultimate arbiter in case of disputes.

In its basic form, tawarruq is an asset sale to a purchaser with deferred payment terms. The purchaser then sells the asset to a third party to get funds. Organised tawarruq is similar although the transactions are executed through banks.

Reverse tawarruq is akin to organised tawarruq, although the buyer would be a financial institution seeking liquidity.

“If tawarruq were suddenly withdrawn, this would have a dramatic effect because many Islamic financiers routinely use this instrument as a means of liquidity management and to provide their customers with working capital facilities,” law firm Denton Wilde Sapte had said in a note in May.

DeLorenzo, however, said tawarruq should not be used as a financing instrument on its own.

“Modern tawarruq is not intended as a transaction in and of itself. Rather it is intended as a means to an end,” said DeLorenzo, a scholar of Islamic transactional law, who sits on about 15 syariah boards, including AAOIFI.

“What people don’t understand, unfortunately, is that they think tawarruq is just a way of disguising a loan. It’s really a link in a transactional chain.” — Reuters

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Tuesday, 11 August 2009

Islamic finance: Which way now?

The Middle East may be the spiritual home of Islamic finance, but the region needs to decide in which direction the practice is headed.

Islamic finance in the Middle East is at a crossroads. In one direction is a brave new dawn of standardised norms, efficiently-issued fatwas and a greater array of financial ­products. On this route the Middle East would ­continue to dominate the sector globally, but would risk losing the spiritual and ­philosophical premise of Islamic finance itself. Going down the other path would see a return to the essence of the discipline, resulting in spiritual significance and moral authority, but potentially a resultant loss of ground to jurisdictions such as the UK or France.

Oliver Agha, name partner at Abu Dhabi-based Agha & Shamsi sums up the gravity of the situation facing not just the Middle East but jurisdictions worldwide.

“There’s a struggle for the soul of Islamic finance,” he argues. “There has been a strong pull to commercialise Islamic finance so that it becomes indistinguishable from ­conventional finance. Many earlier structures reflected ‘replication of conventional banking structures’ and were essentially conventional structures in Islamic garb. Many of the sukkuk structures in the market reflect this ‘replication’ and in fact have been called into question by scholars.”

But Ayman Khaleq, an Islamic finance specialist and partner at Vinson & Elkins based in Dubai, feels that the Middle East needs to act fast to prevent up-and-coming ­jurisdictions, including the UK, France and Luxemburg, from seizing the initiative.

“Islamic countries are complaining that the UK government hasn’t lived up to its commitment to issue a sukkuk, but my view is that no ­Middle East country, bar Bahrain - and if you count the quasi-government ­bodies in Dubai - has done so,” he says. “If the Islamic world isn’t careful the US, or ­another jurisdiction, will issue a ­sovereign-backed sukkuk before, for example, Saudi ­Arabia, and that will be a cause of serious ­embarrassment.”

That could happen sooner rather than later. The granting of Royal Assent for the UK 2009 Finance Act, which removes the tax obstacles to sharia-compliant ­structures, is paving the way for the ­development of Islamic finance here. This is already being reflected in an increased demand for ­Islamic finance lawyers. The Lawyer has spoken with two firms that are in the process of recruiting into this area in London. ­However, Omar Kabbani, Middle East recruiter at Fox Rodney, says demand ­outweighs supply.

“Some law firms are awake to the fact that London could be a European hub and are starting to make enquiries, but there aren’t that many Islamic finance lawyers left in London, so we’ll see a ‘retuning’ of lawyers working in related disciplines to become Islamic finance specialists,” he says.
Khaleq points to the lack of standardisation and institutionalisation in the sector as being factors undermining the development of Islamic finance globally.

“There are four different schools of jurisprudence within Sunni Islam alone,” he says. “Each one interprets transactional ­matters in differing ways. There’s a need for greater harmonisation in the fatwas being issued, even if such harmonisation falls short from an outright standardisation.”

But Agha rebuts this view. “When people claim there’s lack of standardisation in Islamic finance they’re missing the point. Islamic finance isn’t about producing ­widgets to specification and selling them en masse with the ‘Islamic label’. It’s a ­spiritual discipline where any financing has to genuinely comport with Islamic ­principles of jurisprudence.”

But Islamic finance lawyers in the Middle East might not be throwing in the towel before the advances of the foreign ­competition. First, most of the sharia ­scholars are based in the region and so any products developed in the UK will ­ultimately rely upon sanction by sharia boards overseas. Second, those sharia boards are bulking up further and are ­mooting bringing lawyers on board.

“At the moment board members don’t need any formal qualification, but there’s a trend in Saudi to start recruiting lawyers and accountants to sharia-compliant boards,” says Hussein El Zein, Middle East recruiter at Sheffield Haworth.

Additionally, having an active office in the Middle East is going to be a huge ­advantage to firms wanting to win work in the UK because it will supply them with the necessary investment contacts.

Furthermore, the religious history and the legislative codes that underpin the work of Islamic finance lawyers and the boards is firmly rooted in the Middle East. As a result Agha is adamant that the Middle East will continue to dominate the sector.

“Islamic finance is like a tree,” he ­maintains. “It needs the right soil to grow and flourish. The environment in the Gulf ­Cooperation Council [GCC] is particularly favourable to Islamic finance, naturally, as the prevailing law of the land is sharia. As such, the GCC and countries such as the United Arab Emirates, Saudi Arabia and Bahrain will continue to be leaders in this space.”

(The Lawyer)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
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Sunday, 9 August 2009

Moves to plug the gap in Islamic finance carry risks

The Islamic finance world is huge and growing hugely," says Chris Oulton, chief executive of Prime Rate Capital.

As yet, this upbeat description does not apply to money market funds, largely because the traditional short-dated instruments used in such funds are outlawed due to Islam's prohibition on interest.

But Prime Rate is endeavouring to help plug this gap by launching a Sharia-compliant money market fund, using Sharia commodity investments to mimic the characteristics of a Western money market fund.

The fact that Prime Rate's product will be just the second Sharia liquidity fund available in Europe, after last month's launch from the Bank of London and the Middle East, is testament to how slowly the Islamic asset management industry, as opposed to general Islamic finance, is developing.

Rushdi Siddiqi, global head of Islamic finance at Thomson Reuters, has a measured take on the situation. "This particular industry is young and there are growing pains." Questions of demand, performance and liquidity must all be resolved before Islamic asset management can be considered mature, he says.

An obvious question to ask is what Islamic asset management is, but finding an answer is not easy. While there is consensus on how to build a Sharia-compliant equity fund, extending that to other asset classes is not straightforward. For an equity fund, the manager simply needs to use a screen to exclude companies involved in activities deemed unacceptable such as alcohol consumption, gambling or pornography. Conventional financial stocks are excluded because of the prohibition on interest-bearing debt, which further precludes companies with too high a level of debt.

All of this is sufficiently well established that nearly $16 billion (Dh59 billion) was held in Islamic equity funds at the beginning of this year. "The key issue in terms of building out to other asset classes is going to be screening," says Siddiqi. "Equity screens don't work, so each vertical silo [asset class] requires its own screening proposition."

Sukuk, the Islamic equivalent of fixed income, for example, was rocked last year when a scholar on the Sharia committee of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (Aaoifi) was reported as saying 80 per cent of current sukuk structures were not Islamic.

This is a striking example of what Siddiqi calls "Sharia risk," the danger that a product thought to be acceptable will be rejected by influential authorities.

"It comes down to whether you know the scholar," says Tim Harvey, head of sales in Europe, the Middle East and Africa at ETF Securities, which has six products that are officially Sharia compliant.

In this context, "officially Sharia compliant" means a board of Sharia scholars has decided the products are acceptable, and Harvey can show statements or fatwas from the Sharia boards of HSBC Amanah and Al Qalam, a UK-based Islamic bank, to that effect. Any Islamic institution using the products however, would have to submit them to its own Sharia board for approval, although the names authorising the fatwa may be authoritative enough to be fast tracked.

Although there is no central authority, the scholars on Aaoifi's board carry great weight. Largely as a result of the uncertainty surrounding sukuk's Sharia status, issuance in 2008 was less than a third that of a year before. While this year may see a return to the levels of 2006 - about $27 billion, according to Ernst & Young's annual Islamic Funds and Investment Report - this is still a far cry from the $47 billion of 2007.

Another challenge is that sukuk are not immune to the problems of the global financial environment. Two Middle Eastern issuers and one US-based issuer of Islamic bonds have recently been unable to meet their obligations. In Western terms, they defaulted, but since the concept of sukuk is relatively new, there are no established ways to work out what to do in the circumstances.

Siddiqui is optimistic: "That's the industry growing up." Once the restructurings are worked through, he predicts, there will be better pricing because the downside is clearer to issuer and buyer.

On the positive side, he says, due to the uncertainty some investors are selling off their sukuk holdings at a discount, thereby creating a buying opportunity for new sukuk funds, such as that of HSBC Amanah.

Asset managers wishing to offer sukuk funds to investors also face a lack of effective secondary market. Most sukuk are bought on issuance and held until maturity, leading to difficulty in finding assets to buy and in pricing assets held.

Such sukuk funds are open-ended despite the difficulty of managing a fund that investors can redeem at any time, yet for which there is no market for the underlying assets. To manage this issue, many of these funds have high minimum investments to restrict them to the institutional or private wealth market, as well as swingeing redemption fees.

Not all Sharia investment requires religio-financial engineering: ETF Securities' Sharia products are exchange traded commodities, investing in physical metals, not designed with the Islamic market in mind.

"We knew many Muslim asset managers who work in global capital markets who said to us 'these products are Sharia compliant'," says Harvey. "Eventually we thought we should do something with that."

The company asked Al Qalam to check the suggestion a couple of years ago, and last year HSBC Amanah issued a fatwa saying the products passed muster. Now, Harvey is fielding an increasing number of enquiries from investors in the Gulf.

(Financial Times)

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Saturday, 8 August 2009

Malaysia: Islamic finance industry thriving

THE Islamic financial industry in Malaysia has bloomed over the years and with 17 stand-alone Islamic banks, the country is poised to become one of the biggest Islamic financial hubs in the world.

The sector is also expected to see further stimulus following the liberalisation of the financial sector, which allows for an increase in foreign equity ownership of up to 70% in Islamic banks, investment banks and insurance companies.

According to the Association of Islamic Banking Institutions Malaysia, the country’s Islamic financial system started from the establishment of the Malaysian Pilgrims Fund Board (Tabung Haji) to the setting up of the country’s first Islamic bank, Bank Islam Malaysia Bhd, which commenced business in 1983.

Following that, Bank Negara permitted existing conventional banking institutions to offer Islamic banking services via their existing infrastructure and branches, pushing further the growth momentum of Islamic finance, deposits and insurance in the country.

Islamic banking assets accounted for 17.4% of total banking assets in the local financial system while in the bond market, the sukuk market accounted for 57% of the total market as at end-2008.

Maybank Islamic Bhd executive vice-president and acting chief executive officer Ibrahim Hassan said Islamic financing assets grew at a compounded annual growth rate (CAGR) of 15% between 2004 to 2008 compared to conventional banking loans and advances, which grew at a CAGR of 10% during the same period.

“Going forward, most banking analysts are optimistic over the positive outlook and growth prospects of the Islamic banking industry in the medium-term.

“Bank Negara anticipates syariah-compliant assets will continue their double-digit growth momentum in line with continuing efforts and promotions to make Malaysia the world’s leading international Islamic financial centre,” he said.

Ibrahim said the Islamic banking industry was also gaining popularity not only among the Muslim community but also non-Muslims.

“This can be attributed to a number of factors such as the proliferation of Islamic products and services which share common features as well as competitive pricing and packaging with that of similar conventional products,” he said adding that another key factor was the various incentives provided by the Government to promote the growth of Islamic products.

Maybank Islamic’s total financing stood at RM23.4bil last year compared with RM21.7bil in 2007, while total Islamic deposits stood at RM18.8bil in 2008 compared with RM16.8bil in 2007.

HSBC Amanah Malaysia Bhd executive director and CEO Musa Abdul Malek said Islamic finance growth remained on an uptrend as Bank Negara continued to focus on providing conducive regulatory framework to accommodate the growth and development of the industry.

“This includes human capital development to position Malaysia as an international Islamic financial hub coupled with the industry players’ active participation by introducing innovative products and upgrading their service platform.

“Currently, Islamic finance represents about 17% of the whole banking industry compared to 6% in 2000,” he said.

The ringgit sukuk market for corporate bonds, according to Musa, accounted for over 68% of all corporate bonds issued in the Malaysian market last year.

Sukuk bonds account for more than 70% of total overall corporate bonds issued in the ringgit market year-to-date.

“This marks tremendous success in the Government’s foresight and its pro-active involvement towards the progress of Islamic financing in the domestic landscape and towards establishing the country as a foremost international Islamic hub,” he said.

Musa said HSBC was committed towards the growth of the sukuk market in Malaysia and globally.

“We will continue to advance in product innovation having successfully executed a number of world’s first in the sukuk market both domestically and globally, including the US$600mil five-year sukuk by Malaysia Global Sukuk in 2002,” he said adding that the bank had been in the Malaysian Islamic banking sphere since 1994 via window operations, prior to the establishment of HSBC Amanah in August last year.

Musa said HSBC Amanah had seen encouraging results in its first year of operations.

“We hope to continue contributing effectively towards the Government’s vision for the Islamic finance industry to constitute 20% of the overall banking and insurance market by 2010,” he said.

OCBC Al-Amin Bank Bhd is in the process of enhancing further its syariah-compliant assets building capacity and investment banking in Malaysia, says director and chief executive officer Syed Abdull Aziz Syed Kechik.

He said the bank was poised for further growth based on the potential of the Islamic capital market going forward.

“We hope to close several sukuk issues by year-end. We’re also exploring initiatives to expand the sukuk issuer base to the regional market,” Syed Abdull Aziz said.

OCBC Al-Amin, which started operations on Dec 1, 2008, has a total asset size of RM3.7bil.Its customer deposits and outstanding financing stood at RM2.7bil and RM2.2bil respectively as at Dec 31, 2008.

Syed Abdull Aziz said the bank had built a niche in the mid-tier issuers market. “In the last five years, with the exception of the second half of 2008, the sukuk volume showed a positive growth trend averaging above 10%.

“For 2009, as the domestic market has yet to demonstate recovery of confidence in mid-tier names, our view is that it will still be a challenging year,” he said.

He said that in the long run, the industry was expected to focus more on product innovation coupled with cross-border financing and investment activities to attract liquidity into Malaysia.

“The development of more innovative products and services based on musyarakah (joint venture equity financing) and murabahah (cost plus profit commodity investments) principles is expected to intensify with more players coming into the market,” he said.

(The Star)

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Friday, 7 August 2009

Islamic finance can be more attractive to institutional investors

KUALA LUMPUR: Islamic financial products should be positioned as safer assets with more stringent risk management standards to attract more institutional investors, a leading Islamic fund management firm said.

“Islamic products are not similar to conventional products as they include social ethical standards based on the syariah concept,” said Datuk Noripah Kamso, chief executive officer of CIMB-Principal Islamic Asset Management Sdn Bhd.

“(So) we have to embrace the risk management (standards inherent in Islamic products) in order to convince potential investors,” she said yesterday at the Global Islamic Equity Markets & Products Conference.

Noripah said there was also a need to educate potential investors on Islamic financial products, such as on syariah-compliance, and convince them that such products could give them the desired returns

“European and British institutional investors, for example, are worried whether their investment will give back the returns if invested in just certain industries.

“If we are able to prove that the performance of Islamic products is equal to that of conventional products, this will help us (gain greater access to) the global international market,” she said.

Another panelist, ING Funds Bhd chief executive officer Datuk Steve Ong, noted that there were limitations to what Islamic finance could invest in, so investors should know what they were getting into.

“Islamic finance clearly states what (can) be invested in and what cannot, so for investors, you must know what you are investing in,” he said.

Ong said there were opportunities for Islamic products to go big globally, especially in the retail sector in markets such as China and Indonesia where the population was huge.

“Islamic products need to be structured so that they will appeal to the needs of people in these countries,” he said. “If we can structure the products based on social responsibility rather than religious (obligations), then we are doing it the right way in making the products an asset class for all.”

Meanwhile, AmInvestment Bank head of Islamic markets Mohd Effendi Abdullah, interviewed by Reuters on the sidelines of the conference, said that global Islamic bond issuance in 2009 was likely to be around last year’s US$14.25bil level, with sales in Malaysia expected to account for more than half.

Issuance from Malaysia was expected to total at least US$8.3bil, compared with US$6.3bil in 2008, he said. Effendi said government issuance and funding for infrastructure projects would drive sales this year.

(The Star)

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Islamic private equity: An untapped opportunity

As the economies of the oil producing countries of the Middle East and North Africa (Mena) region have boomed over recent years most areas of finance have witnessed spectacular growth rates. Islamic private equity, however, has not been a particularly large beneficiary of this growth. The reasons for this are hard to fathom.

There is a close relationship between Islamic tenets of investing and private equity.

By its nature private equity is participatory and inevitably it must lead to the sharing of both risks and rewards.

As long as the company seeking the private equity infusion is not operating in a haram area of business such as pornography or liquor, or is not heavily indebted, then few forms of co-investing could be more pure from a Shariah compliance perspective.

The reality of the matter is that there is a close relationship between Islamic private equity and conventional private equity and therefore as private equity has grown in size across the globe then we might have expected its Islamic counterpart to have done the same.

Immediately prior to the financial crisis, conventional private equity had become the whipping boy of the financial world and there was much talk of the need for increased legislation and greater transparency in the industry. Too many people were making enormous amounts of money out of private equity transactions that were, in essence, being fuelled by excessive cheap debt.

Islamic private equity never fell into quite the same trap, largely because of the prohibitions inherent in the Islamic financial system against too much debt.

The Shariah requirement that transactions have a productive activity underpinning them, and that financial flows and assets remain correlated, meant that debt simply never had the chance to balloon out of control in the Islamic sphere to the same extent that it did in the conventional market.


Size of the market
Industry estimates suggest that the global private equity market is worth around $2,200bn at present although the volume of transactions completed in the first quarter of 2009 is miniscule. According to Greenpark Capital, a specialist secondary investor in private equity, deals closed in the first quarter of 2009 amounted only to $2bn. A market with too many sellers and too few buyers inevitably means depressed asset prices.

Figures for the Islamic private equity industry are much harder to come by, but estimates from Yasaar Media research suggest that the industry is approaching $3bn in funds raised and deals done, much of it in the Mena region. This is a far cry from the $40bn that pundits suggested was the kind of level that the industry would reach by 2011. For an overall Islamic finance industry, whose size is estimated at around $800bn, it is not hard to see that private equity does not play a very significant part yet.

Before the credit crisis some observers had postulated that there were not enough potential Shariah compliant target portfolio companies around to be able to soak up the Islamic private equity funds available. Remember that at this time there seemed to be money for even the most speculative of investments, redolent of the dot.com boom where there was too much money chasing too few opportunities.

The picture that has emerged since the collapse of Lehman Brothers is still far from clear but there is now much less of a mismatch between the financial heft of investors and potential Shariah compliant private equity targets and the undeniable conclusion is that the Islamic private equity sector is particularly well placed for expansion at present.


Long-term view
The Islamic private equity model is very similar to the classic Mudarabah model with the alliance of general partner and limited partner being a straightforward example of what a Mudarabah is supposed to be. Equally importantly, the long time frame involved in most private equity transactions is complementary to the overall tenets of Shariah investing.

In its most basic form, Shariah finance is about participatory investing for the long term health of both parties in the transaction as well as to the overall Islamic financing system.

The reality, however, is that that the Islamic private equity industry is still in its infancy both in terms of overall size and the number of players in the market. One of the core developments that will be needed for the mature development of the industry is for more and better qualified human capital: More people with a higher level of training. This is a requirement that afflicts much of the Islamic finance industry and the same dilemma applies here: Does the private equity firm employ private equity experts and teach them Shariah? Or does it employ people who understand Shariah and then teach them the art of private equity?

In order to address this issue fully, however, there needs to be a greater level of standardisation across countries to ensure common levels of compliance. In this way the Gulf-based Islamic private equity practitioner can engage staff from Islamic markets in Asia and vice versa without the usual culture shock that so badly affects Islamic retail banks trying to ferry staff in from overseas to meet demand.

As the financial sector leaves the realm of excessive cheap debt and enters a world where any form of financing is much harder to come across, then Islamic private equity becomes a much more attractive beast when compared to its conventional cousin. Expensive debt is burdensome and paying down debt has been a real focus for most finance houses of late. The beauty of Islamic private equity is that it has no tolerance for high levels of debt and in practice if a private equity fund takes a stake in a portfolio company whose debt level is too high then the first priority has been to refinance conventional debt through Shariah compliant instruments.


Dependence on Shariah advice
Indeed this kind of refinancing manoeuvre illustrates the 'intrusive' influence of Islamic financing principles in a private equity transaction. The Shariah involvement in an investment does not end when the documents are signed and money exchanged but rather it carries on for the length of the portfolio investment. If a company has been taken over as part of an Islamic private equity portfolio then it must remain Shariah compliant in all significant respects throughout the duration of the investment.

The Shariah advisers on the transaction will have an ongoing duty to ensure that the tenets of Shariah are not strayed from: The portfolio company will not incur excessive debt or begin trading in haram areas of business.

While this need for an extra level of oversight might be interpreted as an extra level of cost, it is absolutely essential in maintaining the integrity of the Islamic private equity system as well as the credibility of all those involved in the transaction.

(AMEInfo)

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Thursday, 6 August 2009

Crisis creates opportunity for Islamic wealth management

Beneficiaries from the financial crisis are few and far between but it could prove to be the making of Islamic wealth management. While sharia-compliant financial services have enjoyed strong growth among ordinary banking customers and institutions, the wealthy have been slower to embrace Islamic finance.

Humayon Dar chief executive of BMB Islamic, an alternative asset manager with a focus on Islamic finance, said: “Historically in the Middle East and North Africa region, the high net worth and ultra-high net worth families have not been interested in Islamic finance.”

Many wealthy individuals in the Gulf preferred to seek familiar western financial brands that could offer the latest hedge funds or structured products.

The regional head of a privately owned Swiss wealth manager, said: “Previously, the best shot at getting hold of the personal wealth of the local families was to offer commercial banking facilities. The big banks with good brands did well and pushed products as hard as they could. It was about packaging sexy products. But wealthy investors are realising that the big banner plus a familiar brand does not necessarily equal the safest place to put your money.”

The more constrained approach of Islamic institutions, which in theory do not engage in usury (charging interest on loans), short selling or leveraged investing, among other western practices, might look attractive by comparison. This, at least, is the bet being made by Bank of London and the Middle East, a UK-based institution that recently launched a sharia-compliant private bank.

Adrien Gayler, a former Merrill Lynch executive who is heading the private banking business, said: “It is a more conservative, simpler and safer approach with a range of products that is inevitably somewhat limited.

“It means clients probably will not benefit as much in a rapidly rising market, but in a downturn they will be protected.”

Ironically, the trend in Islamic finance in recent years has been towards trying to mimic complex and risky western financial products. By giving money to a counterparty which separately invests in underlying hedge funds or derivatives, an Islamic investor is able to receive a payout that tracks the performance of assets to which he would not otherwise be able to gain exposure.

Such structures need to be approved by a recognised sharia practitioner but many banks, particularly in the thriving Malaysian Islamic finance market, have succeeded in launching them.

Islamic investors who bought such products have seen hefty losses, prompting a backlash against financial institutions adopting more flexible interpretations of sharia law.

However, according to Dar, this reflects the general rise in risk aversion, rather than a decisive move by Islamic investors away from products replicating western practices.

He said: “Islamic investors like the risk-return profiles of traditional, western private banking products but with a sharia wrapper. Otherwise, they face the problem that the universe of sharia-compliant assets is quite small. Once normality returns to markets, the objections to these products will go away.”

Other wealth planning tools familiar in Europe are also being adapted for the Islamic market. FirstRand Trustees, a Guernsey-based arm of South Africa’s FirstRand bank, launched a sharia trust deed targeted at Muslim wealth owners with offshore or international assets this year.

(Wealth Bulletin)

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Wednesday, 5 August 2009

Unicorn International Islamic Bank M'sia hunts for Malaysian target

Unicorn International Islamic Bank, Malaysia's first international Islamic bank, plans to buy a 40 per cent stake in a local Islamic bank to boost its presence in the country.

"We hope to identify a good target in the next six to 10 months," chairman Datuk Vaseehar Hassan Abdul Razack said in an interview in Kuala Lumpur.

It may spend as much as US$200 million (S$287 million) on the purchase. Malaysia recently allowed foreign investors to buy up to 70 per cent of local Islamic banks.

Unicorn, which had failed to buy a stake in Bank Islam, the country's oldest Islamic bank, has been looking for a mid-sized institution since then.

The bank's current focus here is investment and corporate banking as well as treasury. It also prefers to offer private equity and asset management on an "opportunistic basis".

Corporate banking provides it with stable revenue growth compared with investment banking where revenue from arranging a couple of sukuk a year, yielding US$7 million to US$8 million, is more lumpy in nature, Vaseehar said.

Unicorn has plans to accelerate the activities of its treasury division in the short to near term, apart from corporate banking services which contribute 30 per cent of revenue.

The bank recorded its maiden profit of RM812,546 last year, after its first year of operations with an international bank licence.

It expects to triple its asset base this year, driven by investment and corporate banking activities. Its assets stand at US$122 million.

Unicorn may move its Bahrain-based global treasury office to Malaysia.

"Compared to Bahrain, the Malaysian money market is much more active and more sophisticated, which makes more sense to have the global treasury here."

It wants to develop US dollar treasury products in Kuala Lumpur and expand its three-man team housed at Menara Standard Chartered.

Currently, it is doing about US$220 million worth of treasury products.

As the first foreign bank to obtain a licence under the Malaysian International Islamic Financial Centre initiative, Unicorn can do a wide array of syariah-based banking business with foreigners in international currencies.

With an active treasury, it can take deposits as well as carry out money market transactions across the globe.

A billion-dollar US asset management company with an Islamic division has already shown interest in Unicorn's products.

Unicorn Bank, the first bank to introduce the wakalah deposit concept - a syariah-compliant product widely accepted by Gulf Cooperation Council member countries - is also keen to promote wa'ad, a foreign exchange forward contract.

"To make Malaysia an international Islamic hub, we need players to come and do non-ringgit cross-border transactions," Vaseehar said, adding that he was hopeful of developing an Islamic forex trading hub in Malaysia by early next year.

(NST)

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Tuesday, 4 August 2009

High quality sukuk in demand

KUALA LUMPUR: High-quality sukuk such as triple A rates and double A rates seem to be in demand now among investors, according to Bank Rakyat Malaysia & International Islamic University Malaysia syariah advisor Prof Datuk Mohd Azmi Omar.

“However, the complicated structure of sukuk issuance will be costly and issuers need to consider the cost factor to be attractive,” he said, adding that sukuk issuance must also be syariah compliance.

He was one of the panelists yesterday during The Asian Islamic Financial Market as a Source of Capital for Issuers at the forum.

Another panelist, AmInvestment Bank Group director/head of Islamic markets Mohd Effendi Abdullah, said the cost of issuing sukuk depended on the ratings given on the sukuk, whether double A or double B.

“The cost of issuing sukuk may be different from one country to another as the infrastructure to support the issuance may not be there,” he said.

He said to make sukuk products more attractive to investors, the Islamuic financial market needed to come out with more innovative products.

Allen & Overy counsel Hooman Sabeti-Rahmati said the transaction cost for Islamic structured products such as sukuk was not different from structured conventional bonds.

“However, sukuk products give an alternative funding to investors and more options are always beneficial to them,” he said.

Dubai International Financial Centre Islamic finance executive director Nik Norishky Thani said the costs of issuing sukuk varied, depending on certain factors.

He said the rating for sukuk was necessary to make it appealing to the investors.

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Monday, 3 August 2009

Islamic Wealth Management Conference 2009 - Kuala Lumpur, Malaysia


Event: Islamic Wealth Management Conference 2009

Date: 17-18 August 2009

Venue: Grand Millennium Kuala Lumpur, Malaysia

Organiser: GlobalPro Consulting

Fee: please refer brochure

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India: Islamic way of micro credit the best way to help the poor


Hyderabad: A leading practitioner of Micro Financing in India has strongly advocated the Interest free micro credit or equity financing as the best and the most appropriate method for the country’s poor in enabling them to stand on their own feet.

Vijay Mahajan, chairman, Basix, a micro finance company, said that his company was soon coming out with a pilot project based on the interest free or equity finance.

Vijay Mahajan, a product of IIT and IIM and Princeton University, was speaking at the inaugural session of a five day orientation and training camp on Interest Free Mirco Financing organized by the Human Welfare Foundation in Hyderabad.

“You call it Islamic finance or Shariah compliant finance, it is equity finance in which the investor and the entrepreneur share both the profit and the loss, good fortune and misfortune. Mirco equity fianance is the right way to do it”, he said.

Basix, launched in 1996 has so far provided loans worth Rs 2000 crore to 12 lakh poor household in several states, at an interest rate of 24% and presently has an outstanding of Rs 580 crore with a rate of recovery of 99.1%, he said.

But realizing the tremendous potential in the equity financing, the company was getting ready to launch its new product either in Hyderabad or Chennai soon. “Islamic finance is more equitable for the poor”, he said.

“Interest free finance does not mean only charity. It makes sound business sense. After all, what is venture capital? It is nothing but the equity finance at a large scale and the same has to be brought into the micro finance. It is more equitable specially for the poor people”, he said.

But sounding a word of caution, he said that the interest free credit system can work effectively in small community, where every body knows the other and which is based on Iman or honesty. “The enterprise should be sustainable to ensure that both the investor and the entrepreneur benefit from it”.

In his inaugural presentation Prof A K Siddique Hasan, secretary, Human Welfare Foundation, New Delh,i said that the interest free micro credit was part of the Vision 2016 prepared by the Foundation for the socio-economic development of the poorer sections of the society. The vision includes setting up super specialty and specialty hospitals, clinics, medical aid, schools, scholarships, and empowerment of women, he said.

“This is an ambitious vision and we would like to implement it by 2016 at an estimated cost of Rs 5000 crore”, Prof Siddique Hasan told this correspondent.

Pointing out that Islamic Banking was accepted even by the World Bank, Prof Hasan said that the system was being adopted in several countries across the world.

Pointing out that Muslims in India spend an amount of Rs 12000 crore towards Zakat or obligatory charity every year and there was six lakh acres of Waqf land in the country, Prof Hasan said that the proper and collective use of Zakat and the Waqf could solve all the problems of Muslim community in the country. He said that the Foundation had plans to put in place a network of five hundred micro credit institutions to extend interest free credit to the poor in the country

The camp was being attended by 70 delegates and experts from all over the country.

(By Mohammed Siddique, TwoCircles.net)

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Saturday, 1 August 2009

Islamic economic system could tackle global crisis: Indonesian VP

JAKARTA, July 27 (Xinhua) -- Indonesia's Vice President Jusuf Kalla said that Islamic economic system could tackle the global economy crisis because it was based on real transaction and could create prosperity and economic justice, the private news portal Bisnis.com reported on Monday.

"Islamic world should adopt its own economic system to reduce economic gap amidst 'non-real transactions' in the global trade," he said in the opening speech at a seminar titled "the Islamic World and the Future of World Civilizations", here.

According to Kalla, Islam population, accounting for 25 percent of total world's population, will not suffer if Islamic values in its economic system was implemented properly.

Kalla urged all Muslim countries to adopt Islamic economic system to change the non-real economic paradigm.

"This is our chance to change the world because this (Islamic economy) is from Allah. We could make the world better," he said.

Kalla also urged the Islam world to be united to tackle social problem like poverty. He said that currently, 70 percent of Islam people in developing countries live close to poverty whereas others were very rich thanks to skyrocketing oil price.

In the last few months, oil price has been steadily above 50 U.S. dollars per barrel, making the oil-producing countries, especially Muslim-dominated countries in the Persian Gulf, richer.

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Bursa Malaysia Inks Commodity Murabahah Agreement With Industry Players Under MIFC Initiative - Multi-Commodity, Multi-Currency Trading Platform

Bursa Malaysia and over 26 palm oil commodity suppliers, financial institutions and trading participants, today signed a Memorandum of Participation to collaborate in the Shariah commodity trading platform, Commodity Murabahah House (CMH), which is aimed at facilitating liquidity management and the financing of Islamic financial and investment instruments.

Commodity Murabahah House (CMH), a Malaysia Islamic International Finance Centre (MIFC) initiative operated by Bursa Malaysia’s fully Shariah compliant wholly-owned subsidiary, Bursa Malaysia Islamic Services Sdn Bhd, is an international spot commodity platform which facilitates commodity-based Islamic financing and investment transactions under the Shari’ah principles of Murabahah, Tawarruq and Musawwamah. Initial trades will use crude palm oil to be followed by other Shari’ah approved commodities covering both soft and hard commodities. At present, trades will be Ringgit-denominated whilst efforts are being undertaken to make it multi currency capable, providing more choice, access and flexibility for international financial institutions to participate in this market. This trading platform, which is fully electronic, is the world’s first end-to-end Shari’ah-compliant commodity trading platform designed with the main purpose of serving the Islamic financial markets.

Dato’ Yusli Mohamed Yusoff, Chief Executive Officer of Bursa Malaysia said, “We are the first in the world to innovate a Commodity Trading Platform infrastructure using crude palm oil as the underlying commodity. We expect the innovation of this web-based and fully automated platform to change the way most Islamic financial institutions transact commodity murabahah going forward.

This infrastructure is set to complement our capital and money market offerings. The players, which range from financial institutions, CPO producers to trading participants, will benefit from additional revenue stream, stemming from the low liquidity risk element that is apparent in the financing structure of CMH.”

Dato’ Yusli added, “The implementation of CMH, planned for August this year, is in line with our efforts to further spur the development of the Islamic market in Malaysia. We are confident that this will give Bursa Malaysia the stature to bring forth its Islamic market’s offerings to the global front.”

Commodity Murabahah is widely used as a money market tool by Islamic banks in the GCC. The concept of Commodity Murabahah involves one party buying commodity at a certain cost and selling it to a customer at a cost-plus-profit basis. The customer will then pay the amount and the profit to the party on deferred-payment basis. The customer then sells back the commodity to the commodity market on spot for cash. The trade involves the sale and purchase of real physical assets.

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