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Monday, 21 February 2011

Profit for delayed period of project is not Shariah-compliant: Dubai Grand Mufti

Charging of profit for the delayed period in Islamic finance property projects has been described as non-Islamic or 'haram' by the Dubai Grand Mufti, Dr Ali Mashael.
Some Islamic banks and mortgage companies have asked investors to pay advance installments (the rental profit or Ijara) even though an already delayed project is not yet completed or handed over.
Many Islamic finance projects are nearing completion, and investors have received notices from the Islamic banks and mortgage companies that they will have to pay profit for the period the property has been delayed.
During the economic boom, many investors got in to agreement with Islamic banks and mortgage firms and the developers where the investor pays a down payment of about 5 per cent of the property price to the developer at the time of signing the contract.
After that, the bank -- as owner -- pays the developers, and at the time of property handover, the investor pays the value of the property as rent-to-own installments to the banks over a period of time.
However, many property projects have been delayed. And now, the Islamic banks and financie firms are asking the investors to pay the rent on these properties, even for the delayed period. 
However, Dr Ali Mashael said that this is not compliant with Islamic finance rules.
“As per the Islamic finance principles, the two parties must stick to the original agreement. 
Also, the bank should not charge the customers the rent amount or profit during the property delay period. This is the risk which the bank should take alone and not pass it to the customers.”

He added that even if the building materials costs has increased from the initial time when they signed the agreement, still the bank does not have the right to increase the amount they charge the customers.
“This is the basics of Islamic finance. If the banks do not follow this, they are being like conventional banks, not Islamic.”
He pointed out that the bank must take all the things and issues into consideration before getting into any project.
“If they incur losses from these projects, it is not the investors fault. Then why they [investors] are being charged for it. The bank must take the full responsibility of the delay period, not the customers.”
Several investors has complained to Emirate 24|7 claiming that banks and mortgage firms were not in compliance with Shariah finance.

AA, a Syrian investor said: “I purchased a flat in 2007 from a property project which was financed by a leading Islamic finance provider.  The initial agreement was that I pay the developer 5 per cent of the apartment value and then lease the flat  from the bank on a 20-years lease period after which I will own the flat.
“The agreement said that the flat will be delivered in 2009. However, due to the delay, the flat till today  has not been handed over to me. I received an email from the finance company asking me to pay Dh180,000 which it says is the  profit they are charging me for the mortgage during the delay period from 2009 to-date. It also said this amount will increase on daily basis as this depends on the interest rate.”
AA added: “This is not Islamic finance at all. I purchased this apartment from an Islamic finance company because it is safe and it protects the rights of investors and guarantees that we will not suffer due to unexpected reasons. Then how come they are doing this to us?”
The Islamic financial institution was approached for comment by Emirates 24|7, but so far has not issued any statement.

Another investor who is facing similar situation said that it is wrong what the banks and finance firms are doing to investors.
“Why do we have to pay rent for the delay period? It is supposed to be Islamic financing, and thus we should not pay the rent on a flat which is not yet occupied by us.”

(Emirates 247)
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Sunday, 20 February 2011

Islamic banking burgeoning in Indonesia

It is only in Indonesia that Sharia banking assets are growing at the rates never seen before, reaching 47 percent to US11.14 billion dollars in 2010.

Transactions are done like regular banks here in Bank Syariah Mandiri Jakarta, one of the biggest Sharia commercial banks in the country with up to 530 branches scattered throughout the nation.

And like most banks, Sharia commercial banks also advertise their products through the internet, deploying internet banking, mobile banking while offering similar financial services and additional products that offer more benefits to its Moslem and non moslem customers.

Bank Muammalat, another notable Sharia commercial bank, has exercised Sharia principles since May 1992, years before the Indonesian Central Bank, Bank Indonesia, regulated the incorporation of Sharia principles in Sharia bank practices in 1998.

In 2008, Bank Indonesia passed a law that allows banks to offer services that comply with Islamic ban on interest charge.

Expecting to pass similar Sharia banking law, the Ugandan central bank has recently sent delegates to learn about the success of Islamic finance in Indonesia, planning to open the first Sharia bank back home at the start of 2012.
Growing at an exhilarating rate, more conventional banks have started to consider opening their own Sharia counterparts, moving to Islamic finance as another alternative to expand.


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Saturday, 19 February 2011

Tuesday, 15 February 2011

Malaysia: New Syariah Governance Framework to boost progress of Islamic finance

KUALA LUMPUR, Monday 14 February 2011 (Bernama) -- The new Shariah Governance Framework for Islamic Financial Institutions 2011 introduced by Bank Negara Malaysia (BNM) last October would be a catalyst in bringing the country's Islamic finance industry forward, says a researcher.
International Shari'ah Research Academy for Islamic Finance (ISRA) executive director Dr Mohd Akram Laldin said the framework is aimed at enhancing and strengthening the Syariah element in Islamic financial institutions and for them to attain a syariah-based operating environment.
"This framework is a catalyst to bring about progress for the industry and to ensure that the syariah institutions are being properly operated by all the parties," he told reporters after a dialogue session here today.
Mohd Akram was one of the panelists at a dialogue session here on the Shariah Governance Framework for Islamic Financial Institutions organised by Zaid Ibrahim & Co.
On the framework, he said it had been issued at the right time considering that the country's Islamic finance industry was on the expansion mode.
"We are a step ahead in issuing such a framework," he said, adding that it was the first and one-of-a-kind framework in the world.
Issued by the central bank October last year, the framework replaced the previous Guidelines on the Governance of Shariah Committee for Islamic Financial Institutions (2004). It regulates the governance of syariah committee of Islamic financial institutions.
The new framework has enhanced the roles of the key organs of an Islamic financial institution including the board of directors, syariah advisory committee and management in ensuring compliance.
The framework also provides a comprehensive guide in discharging matters relating to Islamic principles and outlining and clarifying the functions of syariah review, audit, risk management and research.
All Islamic financial institutions in Malaysia have been given until June this year to comply with the new framework.

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Islamic private equity on the rise, hurdles remain

Demand for Islamic private equity in Gulf Arab states is on the rise among investors who value its more prudent debt approach and its flexibility in structuring deals, even though the sector faces hurdles in the form of a shortage of qualified professionals and restrictions in its investments options. 

The global Islamic finance industry-widely valued at $1tn-is booming and whetting the appetite of many financial institutions in the Gulf region, which want to tap new revenue streams against a backdrop of slower growth and subdued lending.
As private equity activity is picking up again after it came to a virtual standstill during the financial crisis, Shariah-compliant private equity in particular is emerging as a popular investment tool among regional investors. 
“This is in part because of the natural fit between providing risk capital to enterprises and Shariah law’s profit and risk sharing principles, which makes private equity an asset class well suited to Islamic investors,” said Yahya Jalil, head of private equity at Abu Dhabi-based The National Investor, or TNI. 
“Business owners also feel Shariah structures are more company friendly, as Shariah private equity investors are less likely to over leverage the company, and/or use excessive leverage to pay themselves special dividends, which is a significant aspect of certain types of traditional private equity,” he said. 
The global financial crisis highlighted the risk of over-leveraging deals and complex investment structures. Islamic private equity funds, however, have to follow certain criteria, including a maximum debt-to-equity ratio of a target company being around the one-third mark. 
“These criteria have insulated Islamic private equity funds from some of the more highly leveraged and therefore riskier investments,” said Muneer Khan, who is head of Islamic finance at law firm Simmons & Simmons. 
Another significant benefit of Shariah private equity is “the flexibility and variety of structuring alternatives that address a wide range of investment situations,” TNI’s Jalil said. 
The four principal forms of structuring within Islamic finance-mudarabah, musharakah, murabahah and ijarah-provide plenty of flexibility to structure private equity deals, he said. market data show that the share of Shariah-compliant private equity funds as a percentage of total new private equity funds raised has spiked from 5% in 2005 to 50% in 2008. 
The non-government private equity industry in the Gulf region is worth about $20bn, while the Islamic private equity share probably represents about $4bn of available capital in these markets, according to industry estimates. 
GCC firms like The National Investor, Arcapita, Rasmala, Eastgate Capital, Global Investment House and Kuwait Asset Management Co, or Kamco, are some of the regional players that are active in Islamic private equity. Bahrain’ Arcapita in 2009 sold US-based restaurant operator Church’s Chicken to private equity firm Friedman Fleischer & Lowe in a deal valued at more than $300mn. 
As Islamic private equity gains traction, however, there remain a number of obstacles that the sector has to overcome to reach its full potential. 
“The Islamic private equity sector is facing the same challenges as the conventional product providers, namely lack of clear investment strategy, transparent and diligent processes, professional management and investor communication, and a clear exit strategy,” said Markus Massi, partner and managing director at Boston Consulting Group Middle East. 
In addition, the range of businesses Islamic private equity players are able to invest in is more limited. 
“The potential investment opportunities for an Islamic private equity fund are therefore more restricted and some have argued that it makes them more risky due to less diversification,” Khan said. 
Perhaps the biggest challenge is to find sufficient experienced professionals to execute Shariah-compliant deals, he said. 
“One of the biggest obstacles for the industry is a lack of suitably qualified and experienced professionals who can advise on the establishment and successful operation of such funds,” Khan said. 
The Islamic private equity industry in the Gulf region remains largely a play of domestic specialised financial houses, offering conventional and Islamic commercial banks a window of opportunity to tap this fast-growing segment. 
“Shariah-compliant private equity products are an integral part of the product offering of Islamic institutions. However, conventional and Islamic commercial banks have, so far, not capitalised on this development,” said Boston Consulting Group’s Massi. 
“Rather, Shariah-compliant funds are so far offered by specialised, mostly regional, Islamic private equity houses or Islamic investment banks,” he added.
There are currently about 300 Islamic financial institutions operating across 70 countries, and all of them are looking to actively expand their portfolio of Islamic Offerings, said TNI’s Jalil. 
“A relatively small number of specialist players in this space have shown that it is possible to make profitable Shariah-compliant private equity investments. There is no reason why others cannot follow suit if they can assemble the right team to do so,” Khan said. 
Experts expect deal activity to focus on sectors likely to boom in the region because of growing populations, such as oil and gas, food and beverages, healthcare, utilities, education and manufacturing. 
The majority of investors would buy regional Shariah-compliant private equity products from regional Islamic private equity companies as they believe that regional companies can better evaluate regional market opportunities, Boston Consulting Group research shows. For international markets they prefer international product providers. 
That could suggest that the market for Islamic private equity outside the Gulf may develop even faster. 
“The latter (Gulf countries) are still regarded by most asset managers as frontier markets. Countries with significant domestic markets such as Malaysia, United Kingdom etc. and which have well developed markets and product portfolio can offer a wider and broader range of Islamic private equity products sooner than their GCC counterparts,” Jalil said. 
“That said, one would expect that the GCC market will be a strong growth engine for the Islamic private equity market,” Massi said.

(Zawya Dow Jones/Dubai)

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Monday, 14 February 2011

Takaful: The Cinderella of the Islamic finance industry

Takaful (Islamic mutual insurance), the Cinderella of the Islamic finance industry, received potentially a major boost with the entry at the end of January 2011 of US insurance giant AIG (American Insurance Group) into the Malaysian market through a RM100-million joint venture, AIA AFG Takaful Berhad, between its flagship Asian entity, American International Assurance Berhad (70 percent equity) and Alliance Bank Malaysia Berhad (30 percent equity), a member of the Alliance Financial Group Berhad of Malaysia.
In fact, two further international-local Takaful joint ventures are scheduled to come to enter the market in 2011 following the approval last year by Malaysian Finance Minister and Prime Minister Mohd Najib Abdul Razak of the four new joint-venture family Takaful licenses under the Takaful Act of 1984. This was part of Malaysia’s ongoing financial liberalization of its Islamic finance sector which was announced by Prime Minister Najib in April 2009.
These included AIA AFG Takaful Berhad; the joint venture between AMMB Holdings Berhad (70 percent) and Friends Provident Group PLC, UK (30 percent); one between ING Management Holdings (Malaysia) Sdn Bhd (60 percent), Public Bank Berhad (20 percent) and Public Islamic Bank Berhad (20 percent); and one between The Great Eastern Life Assurance Company Ltd. (70 percent) and Koperasi Angkatan Tentera Malaysia Berhad (30 percent).
This brings the number of Takaful operators in Malaysia to 12. The other Takaful operators include CIMB Aviva Takaful Berhad, Etiqa Takaful Berhad, Hong Leong Tokio Marine Takaful Berhad, HSBC Amanah Takaful (Malaysia) Sdn Bhd, MAA Takaful Berhad, Prudential BSN Takaful Berhad, Syarikat Takaful Malaysia Berhad and Takaful Ikhlas Sdn. Bhd. Further international interest in Malaysia’s Takaful market is the 35 percent equity stake being finalized by Japan’s Mitsui Sumitomo in Hong Leong Tokio Marine Takaful Berhad.
In addition, Malaysia also has four Retakaful Operators, namely, ACR Retakaful SEA Berhad, MNRB Retakaful Berhad, Munchener Ruckversicherungs-Gesellschaft (Munich Re Retakaful) and Swiss Reinsurance Company Ltd. (Swiss Re Retakaful); and one International Takaful Operator in AIA Takaful International Bhd. In addition, there is also strong presence of the Takaful industry in the Labuan International Business and Financial Centre, where there are 14 Retakaful operators incorporated.
“The launching of AIA AFG Takaful Bhd. is another important milestone in our strategy toward developing a progressive Takaful industry that is resilient and is better able to meet the increasingly challenging and competitive business environment,” explained Mohd Razif bin Abd Kadir, deputy governor of Bank Negara Malaysia, the central bank and Takaful regulator, at the launch of the company in Kuala Lumpur.
However milestones in the Takaful sector should to be put in perspective. Ernst & Young estimates Global Takaful contributions at a mere $5.3 billion in 2008, even though the year-on-year growth was 28 percent. However, the base relatively to the global insurance market is extremely low as such any increase looks impressive. The growth by end 2010 was projected to reach a mere $9 billion.
Bank Negara Malaysia estimates that the Takaful industry is expected to grow by up to 20 percent annually (compared to up to 40 percent for the Islamic banking industry) and is estimated to reach $14.4 billion by end 2010.
Malaysia has the single largest Takaful market in the world with an estimated 26 percent of global Takaful assets which according to Bank Negara Malaysia totaled RM12,445.4 million — and not the second largest as one FT publication maintains because for some curious reason it includes the Iranian insurance market which is not Shariah-compliant per se. Iranian insurance companies confirm that the insurance market in Iran is not Shariah-compliant per se. The same applies to the Iranian banking sector.
Bank Negara Malaysia’s Quarterly Bulletin for Q3 2010 stressed that the insurance and Takaful sector remained resilient, supported by strong capitalization and improved profitability with a capital adequacy ratio of 222.7 percent with excess capital of RM19.2 billion. What a pity the data for the insurance and Takaful sectors are co-mingled making it impossible to analyze which of the two was better performing on a quarterly basis.
Takaful Fund Assets, according to Bank Negara Malaysia, comprised only 8 percent of the total assets of the Malaysian insurance and Takaful industry in 2009 — up from 5.7 percent in 2005 and 7.5 percent in 2008.
Total Takaful Funds, however, have more than doubled in this same period from RM5,878.4 million in 2005 to RM10,569.4 in 2008 and RM12,445.4 million in 2009. Similarly, Takaful net contributions income increased from RM1,333.7 million in 2005 to RM3,025.1 million in 2008 to RM3,521.8 million in 2009.
Where Razif is spot on is the growing diversity of the sector-product offerings by Takaful operators have further broadened to cater to the differentiated needs of customers, with family Takaful products (equivalent to life insurance) now dominating the market with a share of 78 percent of net contribution, as compared to general Takaful products (equivalent to general insurance such as fire, car etc) that dominated a share of 63 percent back in 1984.
"Similarly, the Takaful industry,” explained Razif, “exhibits high potential, as demonstrated by its robust expansion with annual growth rate of total assets and contributions averaging between 20 percent and 26 percent over the period of 2004 to 2009.”
Robust expansion may be a slight exaggeration, but Bank Negara Malaysia is rightly confident of the “strong growth prospect for the Takaful sector, in view of the large untapped potential, where out of the 53.5 percent market penetration rate for both Takaful and insurance, the market penetration rate for Takaful was merely 10.9 percent in September 2010.” The untapped areas of business within the family Takaful industry, accounting for 50.3 percent of contributions in September 2010, says the central bank, are micro-Takaful, medical and retirement products.
The Malaysian government can help leverage this growth potential by giving the Takaful sector the same policy and structural support which it has given the banking and capital markets (Sukuk) sectors over the last three decades. This support could take the form of various initiatives including increasing the provision of Shariah-compliant retirement and pension products of both government employees (those who opt for such a scheme) and individuals in general; and the greater use of Takaful products by government-linked companies (GLCs) and the two sovereign wealth funds, Khazanah Nasional and 1 Malaysia Development Berhad (1MDB) in their business.
Malaysia has the most advanced Takaful industry regulatory and legal infrastructure in the world, the same as for its Islamic banking and capital markets architecture. Given its role in providing risk protection, the Takaful industry offers a suite of financial products and services that complement the existing range available for consumers. In recognizing its importance, stressed Deputy Governor Mohd Razif, “focus has been given in developing a dynamic and vibrant Takaful industry within our Islamic financial system. Where the industry is today has been an outcome of an accumulation of efforts in instituting a comprehensive Islamic financial landscape in Malaysia's financial system. A strong institutional infrastructure and effective legal, regulatory and Shariah governance framework are the underpinnings of our Islamic financial industry. In our pursuit to develop Islamic finance, the recent enhancement to the Central Banking Act has accorded formal recognition to the existence of Islamic finance as an arm of the dual financial system, thereby giving significance and due prominence to Islamic finance.”
Moving forward, the new Shariah Governance Framework, which became effective on Jan. 1, aims at enhancing “the role of the board, the Shariah Committee and the management in relation to Shariah matters, including enhancing the relevant key organs having the responsibility to execute the Shariah compliance and research functions aimed at the attainment of a Shariah-based operating environment” of Malaysian Islamic financial institutions including Takaful and Retakaful operators.
Bank Negara Malaysia recently also issued Guidelines on Takaful Operational Framework, which establishes principles governing the operational processes of Takaful business to ensure that business activities and innovations are within the Takaful operator's risk management capacity. “With effective discharge of Takaful operators' duties, the interests of Takaful stakeholders will be safeguarded as the guidelines place emphasis on sound management to ensure sustainability of Takaful operators,” added Razif.
AIA AFG Takaful Bhd., which has a paid-up capital of RM100 million, will concentrate on bancatakaful to further enhance the development of the family Takaful industry in Malaysia, including micro-Takaful, medical and retirement products.
(Mushtak Parker/Arab News)
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Friday, 11 February 2011

Islamic finance proves viability worldwide

ISLAMABAD: The Islamic principles of finance have proved their viability worldwide as the Islamic banking and finance is growing at a rapid pace globally, Federal Minister for Finance and Economic Affairs, Abdul Hafeez Shaikh said Tuesday.

“In the wake of recent global financial crisis and debt problem of the third world countries and the Euro Zone, the Islamic banking and finance has established itself and is growing at rapid pace,” he said at the inaugural session of two day International Conference on Islamic Business and Finance.

He said the size of Islamic banking was expected to reach $1.3 trillion worldwide in near future and at present more than 1,100 institutions were offering Islamic finance service across the globe. The size of investments in Islamic banking system reached Rs 424 billion till 2010 in the country and government was taking measures to encourage Islamic banking and finance.

He said this system was very productive for the agriculture field, which could take benefit of it, however urged the banks to extend their role and reach the farming community.

He said the Islamic banks, coupled with a number of dedicated Islamic academic, legal, regulatory and supervisory institutions could provide a solid platform for future growth and development of the Islamic finance industry.

He called up the Islamic banking institutions to enhance awareness about Islamic banking products and develop human resource by facilitating and arranging training workshops, short-term courses and particularly offering post graduate academic institutions.

Vice Chancellor, Riphah International University, Dr Anis Ahmed said the purpose of the conference was not only to discuss the present state of national and international economies but also to reflect our faith and belief.

Senator, Prof. Khursheed Ahmed said adoption of Islamic way of banking was the need of the hour and the Islamic banking and finance represents a change of paradigm. He said new approach was needed to change the fundamentals of finance to evolve a new financial and economic system and urged upon the participants of the conference to revisit the fundamentals and realise the importance of Islamic banking and finance.

The conference has been organised by Riphah Centre of Islamic Business a constituent institute of Riphah International University.

(Daily Times, Pakistan)

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