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Tuesday, 22 June 2010

Pakistan Developing Shariah-Compliant Products for Money Market

June 16 (Bloomberg) -- Pakistan’s central bank is developing Shariah-compliant products for its interbank money market as a shortage of investment options hurts earnings at Islamic lenders.
The products “will provide some flexible and convenient mechanism for managing the surplus liquidity in the Islamic banking industry,” according to a statement by the State Bank of Pakistan released late yesterday, citing Acting Governor Yaseen Anwar. It will also “provide a platform for developing benchmarks for the pricing of Islamic finance products.”
Pakistan, the world’s second-largest Muslim country, plans to double its Islamic banking industry in the next three years to 12 percent of the size of its conventional one. Islamic banking globally is growing at twice the pace of conventional banking, Lim Hng Kiang, Singapore’s trade and industry minister, said June 14 at an Islamic finance conference.
The shortage of bankers trained in Islamic services is a “challenge that poses a serious threat to the growth and development of the industry on sound footings,” Anwar was cited as saying by the central bank. “The pace of growth of the industry is much faster that the supply of trained and well qualified Islamic bankers.”
The $1 trillion industry for financial services complying with Muslim law, which prohibits interest payments, is expanding 15 percent annually, according to Afaq Khan, chief executive officer at Standard Chartered Plc’s Islamic Unit in Dubai. To ensure Islamic investments meet Shariah principles they have to be vetted by recognized scholars. Transactions are based on the exchange of asset flows rather than interest.
Sukuk Sales
The Islamic finance industry’s assets may reach $1.6 trillion by 2012, according to the Kuala Lumpur-based Islamic Financial Services Board, a standards setting body.
Pakistan first introduced Islamic financial services in 2001, and sold its first overseas sukuk notes in January 2005, raising $600 million from international investors. Pakistan had 42.2 billion rupees ($491 million) of outstanding domestic sukuk, or Islamic bonds as of April 30, less than 1 percent of its 4.6 trillion rupees of regular debt, central bank data show.
The country plans to increase the number of full-fledged Islamic banks to eight from six by 2013, Salim Ullah, director for Islamic banking at the State Bank of Pakistan, said this month.

Sunday, 20 June 2010

Islamic finance set to cross $1 trillion: Moody's

ABU DHABI: The market for Islamic financial products is poised to surpass $1 trillion in value this year as demand surges globally, a senior Moody's official said on Monday. With a growth rate of 20 percent per year, the market for products such Islamic bonds and savings products was worth around $950 billion at the end of 2009, said Anouar Hassoune, vice president, banking at Moody's. 

"The outlook is vast and the potential market in the long term is $5 trillion," he told Reuters in an interview on the sidelines of an investors' conference. Demand for sharia-compliant financial services, partly reflecting its immunity from sub-prime exposure, is driving the growth of the industry. "Many customers are switching from conventional to Islamic banking, not only because of the certainty it had zero exposure to sub prime but also because of absence of interest and speculation," he said on the sidelines of Moody's annual GCC credit risk conference. 

The core of Islamic banking is the Arab Gulf region, where it has captured a 35 percent market share. This compares with Malaysia where Islamic banking has only a 20 percent market share and Turkey where it has a 5 percent share, he said. Still, Islamic finance faces key challenges such as diversification and tight liquidity. "Islamic banks are concentrated by sector and they need to diversify globally," he said, adding there was huge room for growth in Indonesia and North Africa which have sizeable muslim populations. 

Sukuks issued in 2007 totalled $35 billion but fell more than half to $15 billion in 2008 before rising slightly to $20 billion in 2009. Sukuk issuance this year is expected to touch $25 billion, he said. 

However Gulf Islamic banks face a lack of liquidity due to a small retail deposit base, coupled with their exposure to the real estate sector which suffered in the last two years due to the financial meltdown. "Moreover, Gulf Islamic banks are still lagging behind conventional banks in the way they manage their risks and there's a large room for improvement here," he said.

Saturday, 12 June 2010

Banking licences to boost Malaysian Islamic finance

Bank Negara Malaysia’s deputy governor Datuk Mohd Razif Abd Kadir told reporters that the issuance of two Islamic banking licences with US$1 billion capital, later this year, will significantly boost the country’s position as a hub for Islamic finance.
“This is a major liberalisation and a real breakthrough in line with the government’s move to further liberalise some of the strategic sectors,” he said.
As well as the Islamic banking licences, Razif said the central bank would also issue two more takaful licences and five conventional banking licences.

 He added that Bank Negara Malaysia had received applications from international financial institutions and banks from Europe as well as the Middle East.

Friday, 11 June 2010

Gulf Arab states may have a single Shariah board for the region’s Islamic financial institutions by 2013

June 10 (Bloomberg) -- Gulf Arab states may have a single Shariah board for the region’s Islamic financial institutions by 2013 to standardize the industry and increase services available to Muslims, a Shariah scholar said.
A region-wide Shariah council is “not a far-fetched reality” since there is a pool of experts in the United Arab Emirates, said Hussain Hamed Hassan, head of Dubai Islamic Bank PJSC’s Shariah committee and chairman of the Shariah Coordination Committee of the Islamic Financial Institutions in the U.A.E. “It will happen, but it’s a question of time.”
Regulators around the world, including Bahrain and Malaysia, are looking for ways to better evaluate risks of the Islamic banking industry and make products suitable for investors globally. Malaysia’s central bank is preparing a system that would enable cross-border transactions among Islamic financial institutions, Governor Zeti Akhtar Aziz said in May.
Islamic law, or Shariah, restricts investors to transactions based on the exchange of assets rather than money alone because interest payments are banned. Islamic products are reviewed and approved by a board of scholars and, without globally accepted standards, financial institutions and bond issuers rely on rulings by these scholars to offer services to devout Muslims.
“How can an industry progress when a bank in Sharjah cannot buy the sukuk issued by a bank in Dubai? The industry needs to have some stability in order for it grow,” said Hassan, who also serves on the Shariah board of the Bahrain- based Accounting & Auditing Organization for Islamic Financial Institutions.
Demand for Shariah-compliant products is increasing as the wealth of Muslims rises, spurred by export-led Asian economic growth and crude oil income in the Persian Gulf. Created in the 1970s, the Islamic finance industry’s assets may quadruple to $2.8 trillion by 2015 from about $700 billion in 2005, according to the Kuala Lumpur-based Islamic Financial Services Board.
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Wednesday, 9 June 2010

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Tuesday, 8 June 2010

Malaysia’s Islamic banking system is well on track to achieve 20 percent of total banking market share by the end of 2010

Malaysia’s Islamic banking system is well on track to achieve the stated goal of the Islamic Financial Services Master Plan of 20 percent of total banking market share by the end of 2010. Currently the market share of Islamic banking of the total banking sector is about 19.6 percent, but judging by the latest figures published by Bank Negara Malaysia, the central bank, the Islamic banking sector is growing strongly again as it leads the rest of the banking sector out of recovery as a result of the global financial crisis, which has affected the Malaysian banking sector far less because of measures taken during the Asian financial crisis in 1998.
First quarter 2010 figures for various market indicators show strong growth compared with the same period in 2009. Total Islamic banking deposits, according to Bank Negara, for instance, increased from 156,580.5 million ringgit at end March 2009 to RM192,141.1 million at end March 2010. Similarly, total assets of the Islamic banking system increased by some RM46 billion for the same period from RM194,450.9 million to RM240,565.2 million.
Similarly, total Islamic banking financing for the above period increased from RM110,281.7 million to RM141,253.3 million with an increase of RM40 billion, suggesting that while Malaysian banks did cut back on lending and financing, it was not as severe in other countries especially those in the West and in the GCC countries. The two largest financing segments were higher purchase (Ijara of Bai Bithaman Ajil) financing especially of cars and housing financing. Higher purchase in first quarter 2010 accounted for RM40.91 billion of financing extended, while housing finance accounted for RM24.361 billion.
In this respect the three most popular modes of Islamic finance in first quarter 2010 were Bai Bithaman Ajil (deferred payment) comprising RM45.936 billion; Ijara Thumma Al-Bai comprsing RM40.232 billion; and Murabaha (cost-plus financing) comprising RM23.427 billion. Musharaka financing (equity partnerships) accounted for a paltry RM2.837 billion while trust financing (Mudaraba) was even more woeful at RM295 million for the first quarter of 2010.
The total capital of the Islamic banking sector in Malaysia increased from RM16.977 billion at end March 2009 to RM 20.903 billion at end March 2010, with TIER 1 capital increasing from RM14.281 billion to RM17.305 billion for the same period. The total risk weighted assets similarly increased from RM115.126 billion to RM140.452 billion respectively.
In terms of capital adequacy ratio, Malaysian Islamic banks remained steady and strong. Risk weighted capital ratio changed slightly from 14.7 percent to 14.8 percent, while core capital ratio (CAR) decreased marginally from 12.4 percent to 12.3 percent for the above period.
Not surprisingly, because of tough market conditions, the performance returns of Malaysian Islamic banking sector for savings deposits at commercial banks decreased to 0.91 per centon investment accounts at end March 2010 as opposed to 0.95 percent in 2009 and 1.15 percent in 2008.
The Takaful (Islamic insurance sector) also grew but modestly once again suggesting that the sector is finding it difficult to penetrate the general insurance market in Malaysia. There are eight Takaful providers licensed by Bank Negara in Malaysia. Their number of offices fell by 157 in 2008 to 104 in 2009, reflecting the impact of the global recession and the financial crisis. Even the number of Takaful sector employees hardly increased by much totaling 2,499 in 2009 compared with 2,411 in 2008.
Total Takaful fund assets increased from RM10.569 billion in 2008 to RM12.445 billion which is modest compared to the conventional insurance market. Similarly total net contributions income increased from RM3.025 billion in 2008 to RM3.521 billion in 2009.
However net benefits and claims payments, according to Bank Negara Malaysia, jumped from RM866.1 million in 2008 to RM1.208 billion in 2009.

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Sunday, 6 June 2010

Seminar: Overview on Islamic Finance and Financial Planning - 12-13 July 2010 - KL

Date: 12-13 July 2010

Venue: Hotel Istana, Kuala Lumpur, Malaysia


i)    Overview on Islamic finance
ii)   Main Principles and Instruments for Islamic banking and finance
iii)  Overview on Islamic financial planning 
iv)  Islamic wealth creation and accumulation
v)   Islamic wealth protection
vi)  Islamic wealth distribution
vii) Islamic wealth purification
viii)Risk management
ix)  Retirement planning
x)   Islamic investment/endowment etc.


Industry practitioners, Islamic finance consultants and Islamic financial planners.

Who Should Attend:

CEO, managers, officers of financial institutions and corporations, Islamic financial planners and consultants, university lecturers and students, lawyers, investors and other related parties.

For further info >

Saturday, 5 June 2010

Pakistan Plans to Double Islamic Banking in 3 Years

June 3 (Bloomberg) -- Pakistan plans to double Islamic banking services in the next three years to meet rising demand as an economic recovery helps boost household wealth, according to a central bank official.
The industry will grow to 12 percent of conventional banking from 6 percent in two to three years, driven by “increasing awareness and interest” within Pakistan for investments that comply with Muslim tenets, Salim Ullah, director for Islamic banking at the State Bank of Pakistan, wrote in an e-mail. The global economic crisis will also bolster appetite for Shariah-compliant products, he said.
Pakistan’s central bank forecasts the $150 billion economy will expand 4.1 percent in the fiscal year ending June 30, rebounding from a 1.2 percent pace of growth in the previous 12 months, the worst performance in two decades.
“Although the growth would be driven by domestic factors, the heightened global interest in Islamic finance, specifically after the recent financial crisis, will also contribute to the growth of Islamic banking in the country,” Ullah said.
The central bank has given preliminary approval to establish two more banks that will offer full-fledged Islamic banking services, taking the total to eight, he said. The biggest of the existing six is Meezan Bank and the nation has another 13 lenders that provide both conventional and Islamic services.
New Investment Products
The South Asian nation introduced Islamic financial services in 2001, and sold its first overseas sukuk notes in January 2005, raising $600 million from international investors. Pakistan had 42.2 billion rupees ($491 million) of outstanding domestic sukuk as of April 30, less than 1 percent of its 4.6 trillion rupees of regular debt, according to central bank data.
The future growth in Islamic financing “will be led by deposits, which will force institutions to diversify their investments,” Ullah said. The central bank plans to support the expansion by providing more Shariah-compliant money-market products, he said.
Islamic financial products, created in the 1970s, must be vetted and approved by recognized scholars to ensure investments and services comply with Shariah law. Sukuk pay returns backed by physical assets because interest payments are forbidden.
Banker Shortage
The main challenges facing the industry are a shortage of Shariah-qualified bankers and an inadequate supply of liquidity management instruments, Ullah said.
“Most of the bankers are trained in conventional banking and this is putting a strain on the industry’s profitability,” he said. “The sustenance of growth momentum with such a human- resource base will be a huge challenge.”
In addition, the Islamic banking institutions are developing “replicas” of conventional banking products, which is limiting their growth, Ullah said. These institutions need to “think beyond conventional banking products and develop their own based on inherent strengths.”
Global Islamic bond sales are growing for the first time since 2007. Offerings of sukuk climbed 10 percent to $6.1 billion so far in 2010, the most since a 47 percent increase in the same period three years ago, according to data compiled by Bloomberg.
Assets to Quadruple
The Islamic finance industry’s assets may quadruple to $2.8 trillion by 2015 from about $700 billion in 2005, according to the Kuala Lumpur-based Islamic Financial Services Board, an agency that sets standards.
Gross domestic product in South Asia’s second-biggest economy increased at an average pace of about 7 percent in the five years from 2004 to 2008, boosted by aid from the U.S. and other donor countries that was sent to help fight Taliban militants.
“There was some slowdown in the pace of growth in Islamic financing in the past two years due to the slump in overall economic activity in the country caused by the unfavorable domestic and international business environment,” Ullah said. The pace of economic growth is picking up and a large number of Muslims are placing their funds with Islamic financial institutions, he said.

Tuesday, 1 June 2010

Islamic Finance under Indian Legal System

It is possible to operate a financial institution following the extant laws and regulations and at the same time ensure that the transactions carried out by the institution comply with the principles of Islamic Shari’ah. The existing statutory regime provides enough leeway to follow the law and Shari’ah at the same time. Thus, it is possible to carry on financing activity based on Shari’ah by constituting;
(a) a co-operative credit society or a non deposit accepting Non-banking financial institution or
(b) a trust or a company registered with SEBI operating as Domestic Venture Capital Fund or
(c) a Foreign Venture capital Fund, registered with SEBI or
(d) run Takaful business (Islamic Insurance as a co-operative Society where the cover is available to members only) or
(e) open an Islamic window in a conventional bank without awaiting any change in the existing laws and regulations and without contravening any of the existing Laws or Regulations. 
The easiest way to introduce Islamic Financial system in the Indian Financial market is to start doing whatever is permissible within the extant laws and get noticed. The Government and the Regulator then, will have to step in, to regulate the working of Islamic Finance. It is un-realistic to expect that the Government will facilitate introduction of Islamic financial system by taking suitable Legislative measures or by issuing necessary administrative fiat and ensure that each of the Shari’ah compliant transactions is defined in the statute in a manner that suits the requirement of Shari’ah scholars. Hence, the absence of suitable statute and the problem related thereto will have to be tackled by the practitioners of Shari’ah till such time as the regulators find it desirable to come out with solutions. In any case, it is not necessary to wait for the Government to put on platter all the Legislative reforms for financial transactions to be carried on, based on Shari’ah.
The question that we need to ask ourselves is, are we serious? Do we want to carry on financial transactions as much as possible on Shari’ah principles? If the answer is yes then we must start working for it. Have reliable (i) Co-operative Credit Societies (ii) Co-operative Takaful Societies, (iii) Domestic Venture Funds (iv) Shari’ah compliant Mutual Fund and (v) Shari’ah Compliant Window in a conventional Bank to carry on the activities strictly on Islamic Shari’ah Principles. It is possible to carry on all these activities without seeking any change in Laws and regulations. And, this needs to be told to the masses. Not everybody is aware of it and there is need to make people aware and convince them of the factual position.
In UK the FSA while trying to provide level playing field for Islamic financial transaction involved the Imams of Mosques to generate public awareness. Something similar needs to be done to increase awareness among the masses and create a demand for Islamic Financial Transactions. For the success of the Islamic Financial Institutions, there has to be a demand and the demand would be made only when people are aware of what is possible. Again, for the Government and the Regulator to feel the need for regulatory changes, there has to be enough Islamic Finance activity to justify introduction of Legislative changes.
If there are viable Islamic Financial Institutions in place, ready to lend a helping hand in a non-discriminatory manner, the advantages of the system would be there for all to see, the Government, the Regulator and the foreign investors. To expect the Government to take the first step is trying to put the cart before the horse. Such a move is also likely to face serious hurdles in a democratic country like ours, where public opinion is not always based on logic and sound reasoning. The writ petition in the Kerala High Court against the efforts of establishing a Shari’ah compliant NBFC where the Government of Kerala was inclined to be a minor participant, shows that those interested in the introduction of Islamic Finance in India, will have to work for making their demand acceptable by bringing awareness and showing that the benefit of the structure proposed by them is for all to avail and the benefit is far more than that available under the conventional arrangement. Acceptability will come only if the alternative system is shown to be beneficial for reasons beyond religious belief. An average Indian would like to know whether introduction of Shari’ah Financing would;
a.       Create value for the Financial System;
b.       Contribute to the Economic Development of the Country;
c.        Expand consumer choice; and
d.       Allow fair competition in providing credit access and in making various financial services available at competitively price.
On all these counts Islamic Finance stands a better chance to score high marks.
i.         A significant Muslim population is likely to provide the critical mass for the success of the Shari’ah compliant banking activity.
ii.       A report on financial inclusion revealed that the ratio of deposit accounts (data available as on March 31, 2004) to the total adult population was only 59%. Despite serious efforts in the past the banking facility has not reached to a large section of Indian masses. As per a survey conducted by Reliance Money, 35 % of the Muslims live in urban areas and 80% of them because of their illiteracy, ignorance or, belief, the last playing an equally important role, do not avail banking facility. This is also borne by the Sachar Committee Report. Hence there is need for innovative approach to popularise banking services among the masses. An Islamic window in a conventional bank, having a local feel, would encourage such people to become constituent of a bank and thus help the financial inclusion effort made by the Government and the Reserve Bank of India.
iii.     Unlike the industrialised countries, India’s GDP is growing continuously at a high rate. It makes sense for the investor to catch the investment opportunity in India.
iv.     A number of Indian banks and financial institutions have a presence in Middle Eastern and South Asian markets for decades, allowing them to develop knowledge and expertise of local markets and systems. So there is no dearth of technical knowledge.
v.       The branches of Indian banks in the Middle East want to introduce Islamic financial services through ‘Shari’ah compliant windows’, of Indian Commercial banks. This would need approval by the respective Boards of the Bank. If they are allowed to do Shari’ah financing, they would be able to increase their client base and contribute to the development of Islamic finance through their knowledge of product development. They would also be able to create similar products for domestic market.
vi.   India has a large pool of legal, accounting and financial engineering skills. In fact, a number of Islamic banks in the Middle East and other centres are being managed by experts from India.
It is interesting to note that huge investments in India, in Dollar terms, are taking place in Shari’ah compliant transactions. The big investors whether from India or a foreign country, have enough opportunities to make Shari’ah compliant investments. These investments are being routed through NBFCs and Mutual funds. One of the reasons why such investments do not get noticed is that they involve bulk investments and do not touch the life of ordinary masses. They are not very material from the angle of financial inclusion. It is only when the financing in a Shari’ah compliant manner is carried out keeping ordinary people in mind and its advantages are seen to have positive impact on their lives that the need for suitable legislative changes will get addressed. ‘Economic reason’ is likely to succeed much better where ‘politics and religion’ have failed. 
i.      We need to focus the man on the street. The NGOs, the Social workers and in fact everybody who wants introduction of Shari’ah financing should start contributing in whatever manner possible in their respective locality for its success under the extant regime. If there is sincerity in the effort, it is bound to get noticed. The Working Group constituted by Reserve Bank to examine the financial instruments used in Islamic Banking came to the conclusion that “appropriate amendments are required in Banking Regulation Act, 1949 and separate Rule and Regulation will have to be framed to permit the business of Islamic Banking.” In relation to Islamic banking window in the branch of a banking company, the working group observed that “such branches may be able to undertake only those activities, which are permissible to a banking company in India as per the provisions of Banking Regulation Act 1949.”
ii.    For a full fledged Islamic bank to operate in India, Legislative changes are imperative. These changes may take a long time to get introduced. But, that need not hold the introduction of Shari’ah financing under the existing legislative regime. There is sufficient scope for a conventional bank to open a specialised counter to carry out Shari’ah financing activity and introduce products and services that comply with the extant laws and the rules, regulations, directions issued under and the Shari’ah. The need is to avail the existing opportunity and make the effort relevant for the masses, changes in law will come in due course. 


[The writer is Former joint legal adviser, Reserve Bank of India. He was involved in revising the Banking and Finance laws of Bangladesh to facilitate Islamic Finance. Presently he is partner in India Law Services.]

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