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Thursday, 29 June 2017

SMEs offer huge opportunities for Islamic banks

There is no doubt that there is significant demand for Islamic banking services, both from the world’s Muslim population and from non-Muslims. Islamic banking assets are growing annually at rates of up to 20 per cent: total Islamic banking assets are currently estimated at $1.8 trillion (Dh6.6 trillion) and are set to reach $2.3 trillion by 2017. Despite the high growth rates, however, these assets represent only about 3 to 4 per cent of total global banking assets. The reasons for the shortfall are diverse. Islamic banks are generally considered to be more conservative than their conventional counterparts, with the products and services they offer often simply mirroring those of conventional banks.

A lack of standardisation and different interpretations of Sharia-compliance have also been impediments to growth. It is clear that Islamic banks need to look for new opportunities to diversify their revenue streams and asset portfolios. As more and more conventional banks are now discovering, the Small and Medium Enterprise (SME) sector provides a huge opportunity for increasing profitability and diversifying risks.

Widely recognized as engines of economic growth, SMEs are key contributors to sustainable gross domestic product (GDP) in all countries, including those in Mena. These businesses operate predominantly in the manufacturing and service sectors, creating employment opportunities for both skilled and unskilled workers. Less well known is that a large number of SMEs, especially in the Middle East and North Africa (Mena) region, would prefer to deal with Islamic banks rather than conventional ones.

These SMEs are often unable to access banking services, since few Islamic banks have stepped up to the challenge of catering to their needs. Lack of access A recent study commissioned by the International Finance Corporation in nine Mena countries (including Pakistan), which together comprise more than 90 per cent of Islamic banking assets in the region, highlights this huge demand for Islamic banking products and services by SMEs. According to the study, approximately 32 per cent of formal SMEs in Mena (about 1.5 million businesses) remain excluded from the formal banking sector because of a lack of Sharia-compliant products. While the study reiterates several of the now well-researched and documented reasons for lack of access to finance for SMEs, it also reveals a gap of between $8.63 billion to $13.20 billion for Islamic SME financing, and a corresponding deposit potential of $9.71 billion to $15.05 billion across these countries.

This potential is a “new to bank” funding opportunity that is still untapped, as Islamic banks and other financial institutions lack adequate focus on this segment to offer Sharia-compliant products. The study also reveals that the majority of Islamic banks are currently unprepared to take advantage of this opportunity. On an aggregate, SME offerings by Islamic banks stand at 17 per cent, compared to 36 percent by other banks. This indicates that the majority of Islamic banks are not offering Islamic SME products, either because of a perception of high risk or an unclear business strategy. 

There are also lapses with regard to the branding or marketing of SME products, since most SMEs are unaware of the availability of such products from their banks. As a result, Islamic banks have clearly been unable to service the SME sector effectively in these countries. With the right focus, processes, products and services, it is possible for Islamic banks to take advantage of this huge potential. With a number of banks globally failing to sustain SME banking operations because of a lack of preparation, however, it’s vital to ensure that they develop proper capacity first. To build effective and sustainable SME banking operations, Islamic banks will need to do the following:

Adopt specific market segmentation approaches to be able to better understand the market dynamics, quantify the business opportunity, build appropriate propositions, and deploy the optimal operating/business model.

Broaden product and service offerings by developing product programmes, and providing non-borrowing services, such as cash management, payroll management, payments, collections, and trade finance solutions.

Design SME banking models and tailored customer value propositions to target SMEs.
Leverage IT and use mobile banking and other alternate channels to enhance financial inclusion and reduce the cost of delivery and administering an account.
Streamline/realign their transaction execution processes to make the execution of Islamic transactions easier for SMEs.

Provide SMEs with advisory services to aid and facilitate their creditworthiness and bankability.

Incorporate appropriate credit evaluation techniques (such as behavioural scoring, credit scoring, and cash flow and programme-based lending) and build stronger early warning systems and collections frameworks to target and manage SMEs better, price products more effectively, and reduce risk exposure.

Streamline credit approval processes and focus on building relationships with SMEs (existing and prospective customers), which would ensure quick delivery of credit. Once Islamic banks have put in place the requisite infrastructure and capabilities, there is little doubt that the SME sector will be able to provide them with a profitable and sustainable revenue stream.

(Agencies/Pakistan Observer - 29 June 2017)
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Islamic finance & management events in Kuala Lumpur, Malaysia - 2017-2018

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Wednesday, 28 June 2017

UAE’s AED522 billion Islamic banking assets will help fuel the growth of the country’s Halal sector

UAE’s AED522 billion Islamic banking assets will help fuel the growth of the country’s Halal sector

DUBAI, 28th June, 2017 (WAM) -- The UAE’s AED522 billion Islamic banking assets will help fuel the growth of the country’s Halal sector, according to a research conducted by Orange Fairs and Events, organisers of the Halal Expo – Dubai, 2017.

Seven Islamic banks out of the 23 registered commercial banks in the UAE represent nearly a fifth of the country’s banking assets. Islamic banks’ assets grew three times more than the conventional banks’ assets during Q1 2017, said the research, quoting data from the UAE Central Bank’s latest quarterly report.

"In the first quarter of 2017, Islamic banks’ assets had a higher growth of 3.2% than the conventional ones-1%- while on an annual basis Islamic banks grew by eight percent and continued to dominate the conventional banks growth that showed an increase of 5.9 percent," the CB report mentioned.
Islamic banks’ credit to individuals recorded 7.6 percent to AED126 billion in Q1 2017 compared to a two percent growth in the conventional banks’ credit to individuals that reached AED224 billion for the same period.

Raees Ahmed, Director of Orange Fairs and Events, organiser of the Halal Expo – Dubai, 2017, said, "This means Islamic banks’ personal finance, including Islamic credit card sector is growing at a higher rate than that of the Conventional banks’ personal finance and credit card segment.
"The split between conventional and Islamic banks indicates that the growth in Islamic financing is much steeper than that for the conventional banks’ loans. This effectively means that lending in the Halal sector is going up at a much higher rate than that of the non-Halal sector, as was evident in the first quarter of 2017."

(Emirates News Agency)

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How Islamic banking will boost the UAE’s halal sector

Islamic banks’ gross credit increased 8.4 per cent to AED343 billion in the first quarter of 2017, including AED325bn domestic credit that grew 7.4 per cent that will help the UAE’s halal economy to grow faster than non-halal sectors.
The UAE’s AED522bn Islamic banking assets will help fuel the growth of the country’s halal sector, according to research by Orange Fairs and Events, organisers of the Halal Expo Dubai 2017 in September.
The meteoric rise of Islamic banking
Seven Islamic banks out of the 23 registered commercial banks in the UAE represent nearly a fifth of the country’s banking assets. Islamic banks’ assets grew more than three times the conventional banks’ assets during the first quarter of 2017, according to the UAE Central Bank’s latest quarterly report.
“In the first quarter of 2017, Islamic banks’ assets had a higher growth (3.2 per cent) than conventional assets (one per cent), while on an annual basis Islamic banks grew by eight per cent and continued to dominate the conventional banks growth that showed an increase of 5.9 per cent,” the report, issued by the UAE Central Bank, said.
“The share of conventional banks’ assets at the end of Q1 2017 is 80.3 per cent of the total, while the share of the Islamic banks assets is 19.7 per cent. Islamic banks’ financing growth has been dominating the conventional banks’ loans increase in the first quarter of 2017 in almost all subcategories, with exception of financing to government and GREs.”
Gross credit of the Islamic banks in the UAE recorded an 8.4 per cent growth to AED343bn – or nearly double the rate of 4.4 per cent growth rate of gross credit of the conventional banks in Q1 2017.
Similarly, domestic credit growth of the Islamic banks also rose 7.4 per cent to AED325bn in Q1 2017. The growth rate is nearly double than the 4.1 per cent growth in domestic credit growth of the conventional banks.
Elevated assets driving growth
Higher assets and gross credit growth rates empower the Islamic banks to fund the Halal industries and help fuel the growth of Halal or Islamic economic activities. By nature, Islamic banks engage in ethical finance and asset-based lending – that eliminates speculation-based high-risk financial activities and insulate the sector from economic crises – witnessed during the 2008-09 global financial crisis – when the asset-based ethical finance emerged stronger and helped Islamic banks to overcome the stress tests by a wider margin compared to the conventional lenders – many of whom collapsed and had to be bailed out by governments.
Islamic banks’ credit to individuals recorded a 7.6 per cent to AED126bn in the first quarter, compared to two per cent growth in the conventional banks’ credit to individuals that reached AED224bn in the q1 2017.
Raees Ahmed, Director of Orange Fairs and Events, organiser of the Halal Expo Dubai, 2017, says, “This means Islamic banks’ personal finance, Islamic credit card sector is growing at a higher rate than that of the conventional banks’ personal finance and credit card segment.
“The split between conventional and Islamic banks indicates that the growth in Islamic financing is much steeper than that for the conventional banks’ loans. This effectively means that lending in the halal sector is going up at a much higher rate than that of the non-halal sector, as was evident in the first quarter of 2017.
“Islamic banks’ credit to the business and industrial sector grew 7.6 per cent to AED151bn in the first quarter of 2017. This means that the credit growth to the halal industries and business sector remains higher compared to the non-halal industries and services sector. This is also a reflection of the UAE’s growing importance as a centre of the global halal economy.”
Muslims spend trillions in various sectors
This State of the Global Islamic Economy Report, 2016-17, estimates global Muslim spend across sectors at over $1.9 trillion in 2015, while the Islamic Finance sector has around $2trn in assets.
Food and beverage tops spend by the global Muslim population, at $1.17trn in 2015, followed by clothing and apparel at $243bn, media and recreation at $189bn, travel at $151bn, and spending on pharmaceuticals and cosmetics at $133bn.
The report estimated the revenues from halal-certified food and beverage products to be $415bn; while revenues from halal fashion clothing purchased by Muslim women to be $44bn and revenues derived from halal tourism services to be $24bn, in 2015.
The global halal products and services sector is growing at eight per cent year-on-year to $2.3trn (AED8.44trn) – higher than the GDP of more than 200 countries in the world, according to research by Orange Fairs and Events.
Of this, about 67 per cent represents the food and beverage industry, worth $1.4trn (AED5.13trn).

(AME Info - 28 June 2017)
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Tuesday, 27 June 2017

Continued Islamic banking surveillance vital

WHEN the International Monetary Fund (IMF) publishes a market, sector or country report, governments, regulators and market players take note. Such reports are treated as a barometer of the state of a country or industry at any given time and may impact on the international ratings of a sovereign, market or institution and, therefore, the cost of finance or the chances of a country getting a standby facility from the fund.
These publications can be as banal as they are subjective, often based on selective assumptions and on dated data, even though several member countries excel at releasing timely statistics to the last quarter in the financial year.
A few days ago, IMF published its latest offering — multi-country case studies on “Ensuring financial stability in countries with Islamic banking”, which supplements a report published in March this year giving country experiences with reforms to strengthen regulatory oversight of the global Islamic banking sector. This latest report “reviews experiences with and the progress made in adapting prudential, safety nets and resolution frameworks to Islamic banking”.
The case studies comprise several countries from a range of regions, with different levels of development and approaches to Islamic banking. These, according to the IMF, were “designed to provide a representative sample of country experiences so as to enrich the policy conclusions. Such a multiplicity of experiences can help to identify common challenges that countries face in reforming their regulatory frameworks and to distil best practices”.
How the IMF and the authors of the report can justify the above sentiments is beyond comprehension, for the countries featured exclude the single largest and most important Islamic finance market in the world in terms of assets under management, Saudi Arabia, and the country which is home to the first Islamic commercial bank, Dubai Islamic Bank. , in 1975, the UAE, which also entertains the ambition of developing Dubai as the Global Islamic Economy and Finance Hub. The featured countries are Bahrain, Djibouti, Indonesia, Kenya, Kuwait, Malaysia, Nigeria, Pakistan, Sudan, Turkey and the United Kingdom. Is this report a mere re-working of the earlier one, or was this an oversight from IMF the fund staff for political or bureaucratic reasons?. Indeed, an IMF Consultation IV team visited Saudi Arabia in March.
Malaysia, due to through proactive policies adopted by successive governments, from Tun Dr Mahathir Mohammed Mohamad to Tun Abdullah Ahmad Badawi and Datuk Seri Mohd Najib Abdul Razak, has has led the global industry in developing a world-class Islamic finance architecture complete with regulatory, legal, reporting, product innovation, syariah Shariah governance, consumer protection and education frameworks. The IMF report acknowledges that Malaysia has one of the most developed Islamic finance industries in the world, which has seen rapid growth, particularly in the aftermath of the global financial crisis, with prospects for further growth high.
“Malaysia’s experience,” stresses the IMF, “underscores the critical role of an enabling regulatory environment in promoting growth and stability of the Islamic banking industry. The institutional and regulatory framework covers a range of areas, including regulatory, legal, Shariah syariah governance, consumer protection and safety nets. Financial instruments and interbank investment allow surplus banks to channel funds to deficit banks, thus maintaining the funding and liquidity mechanism necessary to promote stability in the system.”.
The fund, however, urges Malaysia “to progressively adapt its regulatory framework in line with emerging risks and needs of the industry,”, and warns that the “absence of long term funding on the liability side could increase maturity mismatches and increase liquidity risks for banks.”. Therefore, continued enhanced financial sector surveillance will be key to safeguarding financial stability, and further adaptation of stress testing techniques to Islamic banking will be important for early identification of risks. The IMF also urges the resolution regime (insolvency, liquidation, etc.) for Islamic banks should be continually reviewed to ensure that it fully complies with international best practices.
These are stating the obvious, given the fund’s observation that Malaysia’s Islamic banking sector is supported by highly developed financial markets and infrastructure that enable the banks to manage various risks, and includes a well-developed Sukuk and interbank market and safety nets such as a Lender of Last Resort (LoLR) and deposit insurance, as per the provisions of the Islamic Financial Services Act 2013 and the Malaysia Deposit Insurance Corporation Act 2005.
Among the key takeaways of the report is the need for greater consistency in the application of capital adequacy requirements in relation to profit-sharing investment accounts, among others. Bahrain, Sudan and Malaysia have adopted relevant standards of the Islamic Financial Services Board, while others still apply the regime for conventional banks.
Also, a robust syariah Shariah governance framework and internal risk controls are imperative as well as fit and proper requirements for syariah Shariah board members should include an appropriate level of knowledge of Islamic finance.
The report also highlighted the need to develop Islamic capital and interbank markets, and to adapt central bank monetary operations, including the LoLR framework. Regular sovereign issuance of Sukuk with different maturities to provide a benchmark pricing curve and to increase the provision of High Quality Liquid Assets (HQLAs) is vital.
A key requirement that which the IMF recognises and endorses, and which several countries where Islamic banking is prevalent do not, is a centralised syariah Shariah board at the central bank, pioneered by the as Syariah Shariah Advisory Councils by Bank Negara Malaysia and Securities Commission, to help standardise industry practices, give syariah Shariah certainty and improve consumer perceptions. However, consumer protection, save in Malaysia, in many countries, save in Malaysia, are not anchored in laws or regulations and do not have cost-effective enforcement.
In a nutshell, Islamic finance, according to the IMF, while it has made impressive progress over the last four decades, is very much “a work in progress” that which should be under constant surveillance.
(Mushtak Parker - New StraitTimes, Malaysia - 27 June 2017)
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Monday, 26 June 2017

Dana Gas debacle highlights need for unified Islamic finance regulator

Islamic finance was set to be the wave of the future after the global financial crisis because it concerned real, asset-backed financial products. Shariah-compliant banking was seen as less risky than conventional finance and was hailed by the ethical lobby as the way forward at a time when banks and bankers were generally regarded with suspicion, if not outright hostility.
Western financial institutions woke up to the fact that here was a rich new vein of business to mine, and before you knew it all the major banks in the world had Islamic finance departments. Sometimes, these amounted to little more than one highly-paid scholar with a fatwa stamp in an office in Wall Street, but all were agreed there was great potential in Islamic finance, worth an estimated $2 trillion of assets globally.
Economic policymakers in the Arabian Gulf were quick to seize the opportunity. As the birthplace of Islam, where could be better to base the new financial industry? In 2013, Sheikh Mohammed bin Rashid Al-Maktoum, vice president and prime minister of the UAE and ruler of Dubai, declared his emirate would be the “capital of the Islamic economy” within three years.
It was an ambitious target, but by 2016 one leading policymaker said that the emirate was “80 percent” of the way toward it, pointing to Dubai’s position as the top global listings market for sukuk (Islamic bonds), an increasingly important halal food industry and its role as a center for family-oriented tourism, lifestyle and entertainment.
Other Gulf countries also claimed pre-eminence. Saudi Arabia, of course, was the leader in Islamic tourism as the location of the holy mosques of Makkah and Madinah; Bahrain pointed to its historic role as a center for scholars of Islamic finance and fatwa issuance. It looked as though the Middle East was about to overtake Malaysia as the global center for Shariah-compliant economic and financial products.
But that momentum now appears to have stalled. A recent report from Standard & Poor’s, the global ratings agency, said that Islamic financial assets had accelerated toward the end of 2016, but that such progress was “unsustainable” in the long term. 
The agency said that economic worries in core Islamic markets, and currency fears, had made the Islamic economy less attractive; and it pointed out too that a lack of standardization was a barrier to creating a truly global industry based in the Middle East. The Islamic economy would continue to grow but at much lower rates than in the boom years from 2007 onward.
It is against this background that recent events at Dana Gas, an energy company based in Sharjah in the UAE, should be seen. In 2013, the company issued sukuk totaling $700 million. Dana, which does a lot of its business in Egypt and Iraq, had problems getting paid in those countries and the cash was a necessary bridge for it as it went about the process of enforcing payment terms.
It did this with some success, winning arbitration awards against the two countries totaling $900 million, while simultaneously paying down the sukuk obligations, its Chief Executive Patrick Allman-Ward recently announced.
All of which makes its most recent actions puzzling for investors and worrying for advocates of the Islamic financial system. Earlier this month, Dana said it had received new legal advice which meant its sukuk were no longer to be considered Shariah-compliant “due to the evolution and continual development of Islamic financial products and their interpretation.” 
Dana said it was proposing to replace the existing sukuk with new bonds, but in the meantime would not be making payments on the old sukuk and was seeking an injunction from the Sharjah courts to stop sukuk holders taking any action to enforce their claims against Dana.
Of course, circumstances change, and so do legal opinions. The advisers on the original sukuk may have slipped up, and only realized their mistake recently in light of new interpretations. But regardless of that, the Dana move has shocked some in the Islamic financial community who argue that, regardless of the changed interpretation, there is a legal and moral imperative to meet the terms of the obligations which were deemed Shariah-compliant when they were first drawn up.
There are much wider implications too. Many of the UAE’s biggest companies have outstanding sukuk similar to Dana’s, running into many billions of dollars. Will they too be suddenly regarded as non-Shariah-compliant?
Dana’s actions also appear to go against one of the basic precepts of UAE finance since the crisis in 2008: That bond repayments (including sukuk) will be regarded as a top priority in the event of a liquidity squeeze, above ordinary equity and bank obligations. This was the principle that saw Dubai World through the potentially life-threatening events of 2009 and 2010 when global investor patience with Dubai was being sorely tested.
Finally, the Dana debacle appears to confirm the belief that what is really needed is a much more standardized regulatory approach in the Islamic finance market. This will be difficult, with Islamic authorities strung out around the world, from Kuala Lumpur to the Gulf.
But the Gulf countries — led by Saudi Arabia, the UAE and Bahrain — could make a good start by urgently agreeing on a central Shariah financial regulatory agency to agree on the unification of existing standards.
(by Frank Kane - Arab News, 26 June 2017)
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Friday, 23 June 2017

Malaysia: Bina Darulaman issues RM50m sukuk

KUALA LUMPUR: Bina Darulaman Bhd (BDB) has issued its maiden RM50 million Sukuk Wakalah, the first tranche of its seven-year RM100 million Sukuk Wakalah Programme.

In a statement on Friday, the Kedah-based property and construction company said the sukuk was based on the underlying syariah principle of Wakalah Bi Al-Istithmar (investment agency).  

BDB said it planned to use the proceeds for general corporate purposes, including infrastructure development, potential land bank acquisitions and working capital requirements of existing and future projects.

The sukuk programme was also part of the company's financial planning to optimise its property arm, currently worth about RM1 billion of gross development value, it said.

Group managing director Datuk Izham Yusoff said the issuance of the sukuk marked a milestone in the group's financing activities.

In considering the financing options, he said, the board had in August 2016 given the green light for the company to explore a debt funding programme either from bank or debt capital markets.

"Given the long-term nature of our projects, the flexibility, efficiency and pricing of financing structures are critical. Our priority is to add value to the company's financial position and financial performance," he said.

BDB had on June 1, 2017, lodged with Securities Commission all required information and relevant documents relating to the Sukuk Wakalah Programme pursuant to the SC's Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework.

Malaysian Rating Corp Bhd has assigned a short-term rating of MARC-2IS on the sukuk programme.

Maybank Investment Bank Bhd is the principal adviser, lead arranger and lead manager for the programme and Maybank Islamic Bhd is the syariah adviser. - Bernama

(The Star-Malaysia-23 June 2017)
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Wednesday, 21 June 2017

Nigeria: The Sukuk Investment Opportunity

The N100 billion Sukuk, a non-interest bond that is being issued by the federal government is another opportunity for investors to earn returns and contribute to the infrastructure development of the country, writes Goddy Egene
Since the fall in price of crude oil, the revenue of the federal government has been affected significantly given that oil was a major source of government funds. As a result of the decline in revenue, the government has been contending with the challenge of financing its budget deficit. And the onus for the efficient management of government’s debt and sourcing for funds to finance budget deficits rests on the Debt Management Office (DMO).
However, the agency, under the management of Dr. Abraham Nwankwo, has been using innovative strategies to raise funds to successfully fund the budget deficits over the years. While DMO has been raising funds through bonds both on the domestic and international markets, the agency is now accessing the local market for N100 billion through Sukuk. This is the first time the federal government is taking this option to raise funds and it has been seen as another innovation from the DMO. It will open on June 28, 2017.
Sukuk is an Islamic bond, structured in such a way as to generate returns to investors without infringing Islamic law that prohibits riba or interest. Sukuk is said to be ‘Shariah compliant’ because it eliminates the interest elements that are associated with a conventional bond.
Analysts have said that the Sukuk is yet another debt offering from Nigeria, who has been looking for all possible ways of funding her deficit budget and triggering the revival of its economy.
Understanding the N100bn Sukuk Issue
The DMO last week said the Sukuk, which is the first for the country, is a 7-year tenor debt instrument and will go on sale from June 28, 2017, for three days via book building. It will be traded on the Nigerian Stock Exchange (NSE) and the FMDQ Securities Exchange OTC platform. The bond will target retail and institutional investors and First Bank and Islamic wealth manager Lotus Capital will act as managers for the sale. Minimum subscription amount is N10,000.00 with multiples of N1,000.00 thereafter.
According to DMO, as part of its Strategic Plan, 2013-2017, it has the objective of developing alternative sources of raising finance for development and attracting a wider pool of investors. “One of these is the issuance of a sovereign non-interest financing products (Sukuk) in the domestic debt market would not only serve as an alternative source of financing for the government, it would facilitate the mobilisation of idle funds and more efficient allocation of scare resources within the economy.
The introduction of Sukuk is not only seen as a means of raising investible capital for the government and promotion of greater financial inclusion but as a part of the plan to fast track the development of infrastructure and engage in purposeful and project-tied capital raising,” DMO said.
On the benefits to investors, they will earn rentals/profits income will be paid half-yearly directly into Sukuk holder’s account. The bond is also a good investment opportunity towards retirement and future projects.
According to some market operators, the Sukuk is a good move that portrays DMO as giving investment opportunities to all Nigerians irrespective of the religion. While it is said that other bonds issued by the government, have been mostly patronised non-Muslims who, the Sukuk will cater for the interest of Muslims.
It is believed that with this move by the government, the country is seeking to utilise its large Muslim population to garner capital to fund part of the deficit in the recently signed 2017 budget. Nigeria is home to the largest Muslim population in the sub-Saharan Africa, with also one of Africa’s fastest-growing corporate banking sector and consumer population.
Booming Sukuk Market
The likely success of the N100 billion Sukuk may not be an issue considering the huge booming international market for the product. Besides, Osun State, which issued N10 billion Sukuk in 2013 had a successful outing as it was 120 per cent subscribed. Historically, the first Sukuk, worth RM125 million, was issued in 1990 by Shell MDS in Malaysia. The market experienced rapid growth culminating in the first issuance of Sukuk in the international markets when the Central Bank of Bahrain issued the first US-dollar denominated Sukuk worth $100 million.
Currently, Sukuk issuances across the globe stand at about $120 billion, up from just $15 billion in 2008. In June 2014, the United Kingdom became the first country outside of the Islamic world to issue a sovereign Sukuk, highlighting the growing importance of this innovative financial instrument across the world. In that debut issuance, the UK government raised £200 million to build residential buildings. Other countries outside the Islamic world that have issued Sukuk over the last two years include Hong Kong, Senegal, South Africa and Luxemburg. The five largest Islamic finance markets in the world – Malaysia, Saudi Arabia, UAE, Kuwait and Qatar – continue to account for over 90 per cent of global Sukuk issuances.
By the end of 2015, total assets under management in the global Islamic finance industry surpassed $2.5 trillion as more and more investors continue allocating their funds to Shariah compliant instruments across the globe. There is therefore a huge, unmet demand for Sukuk issuances from high-potential economies like Nigeria, especially in view of the fact that similar issues by peer countries were oversubscribed.
SEC, DMO Collaboration
The issuance of the first sovereign Sukuk is a result of collaborative efforts of DMO and the Securities and Exchange Commission (SEC). Before now, Nwankwo and the DG of SEC, Mounir Gwarzo had pledged to partner to ensure a deeper bond market including non-interest products such as Sukuk.
For instance, Nwankwo stressed the importance of non-interest products, explaining that a sovereign Sukuk issuance had been part of the institution’s strategic plan designed four years ago.
He had therefore solicited support from the SEC, especially in the area of capacity building in order to realise the goal of issuing Nigeria’s first sovereign sukukthis year.
On his part, Gwarzo assured the DMO of the commission’s continued support, while pledging to take measures that would help enhance the capacity of relevant staff of the DMO.
He said: “Within the context of continued decline in the prices of crude oil in the international markets, attendant drop in both foreign exchange and government revenues as well as fragility of growth from major emerging markets like China, the need for alternative sources of capital to finance infrastructure becomes increasingly more compelling. Both government agencies therefore agreed on the urgent need to begin mobilising capital in order to address the nation’s investment needs. Particularly, issuing a sovereign Sukuk will attract significant amounts of affordable capital from the Gulf countries and other established Islamic markets around the world into Nigeria.”
As Nwankwo Quits DMO
Nwankwo, who became DG of DMO in 2007, will be leaving office at the end of June and the Sukuk issuance is seen as his parting gift. However, he would be remembered for many achievements the agency recorded during his tenure.
Given his solid academic background and position as one of the pioneer management staff of DMO, Nwankwo led the charge in the transformation of the capital market and played a pivotal role in the repositioning, strengthening and resuscitation of the FGN Bond market.
The DMO formulated a National Debt Management Framework (NDMF), 2008-2012, a review of same and publication of the revised (2nd) NDMF, 2013-2017 which incorporated debt management policies and guidelines. The agency has ensured regular and timely servicing of government’s debt has ontinued to conduct an annual Debt Sustainability Analysis (DSA) and has successfully prepared a Medium Term Debt Management Strategy (MTDS), 2012-2015 which is being implemented.
One of the major objectives of MTDS is to achieve optimal composition of external and domestic debt structure and to ensure low cost of government debt consistent with a prudent level of risk.
DMO has consistently promoted policies to encourage the creation of opportunities for private sector access to long term capital in both domestic and international capital markets in order to sustain and expand their businesses.
Determined to facilitate access to the international capital market for Nigerian corporate players, DMO issued $500 million Sovereign Eurobond in 2011. This was followed with $1 billion dual-tranche Eurobonds in July 2013, thus creating benchmarks for corporate borrowers. In 2014, DMO issued FGN Bonds in Global Depository Note (GDN) format for the first time aimed at diversifying the investor base and attract foreign investors to the domestic securities Market.
Besides, DMO developed a template for the establishment of Debt Management Departments (DMDs) which include outline of the legal institutional human resource framework. All the 36 states including the federal capital territory (FCT) have established DMDs) in conjunction with the agency.
Also DMO assisted in the managing and restructuring of the debt of cash strapped states in the country as a result of their failure to meet their financial obligations. Following the announcement of a bailout package for the states by President Muhammadu Buhari, 22 states applied to DMO for their debts to be re-structured into Federal Government of Nigeria Bonds. The agency successfully concluded the restructuring of N322.788 billion short term commercial bank debts of 11 states out of the 22 states to long term domestic bond at 14.83 percent yield in 20 years.
Just recently, DMO introduced the FGN Savings Bond targeted at retail investors and now the Sukuk. It is a consensus among analysts that whoever will succeed Nwankwo needs to work to sustain and improve on DMO’s achievements under his leadership.
(This Day-Nigeria-21 June 2017)
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Tuesday, 20 June 2017

World’s largest Muslim countries to cooperate in Islamic finance

The two largest Muslim countries in the world, Kazakhstan (largest in area) and Indonesia (largest as per Muslim population) agreed, among other things, on a close cooperation in Islamic finance and the halal industry, media representatives were told after the First Bilateral Consultation Meeting between the two countries held in Jakarta on June 16. According to Kazakhstan’s Deputy Foreign Affairs Minister Akylbek Kamaldinov, his country would be eager to learn from Indonesia about regulations and financial frameworks for Islamic finance, as well as about halal products, particularly in the pharmaceutical sector.

“Kazakhstan has a vision to become the centre of Islamic finance and halal industry in Central Asia,” he told Indonesia’s state news agency Antara News, adding that the Kazakh government had also invited Indonesian business players to cooperate in developing the halal pharmaceutical industry in the country.

The move comes just shortly after the Indonesian government through its financial services authority Otoritas Jasa Keuangan (OJK) on June 13 launched a road map for the development of Islamic finance in the country for the 2017-2019 period. It is another step towards the development of Islamic finance in the Muslim nation which so far has been a laggard in developing a solid Shariah banking industry which just reached a five-per cent market share despite having been introduced more than two decades ago and despite various regulatory efforts and grassroots initiatives, mostly in form of Islamic financing cooperatives.

The new road map is designed to tackle various challenges related to Indonesia’s underdeveloped Shariah financial industry, which include limited variation of products, low literacy on Shariah finance products or simply the lack of outreach in an archipelago that consists of more than 7,000 islands.

“We will also address the shortage in human resources, optimise coordination with stakeholders and harmonise financial services policies,” OJK chairman Muliaman Hadad told journalists in Jakarta last week.

Plans are to synchronise the development of the Islamic finance industry in Indonesia to develop a master plan for all sectors, including Shariah banking, Shariah capital markets and the Shariah non-banking industry, including investment services and takaful, Hadad said. This should make Indonesia’s Shariah finance industry more inclusive and able to meet the needs of both small and medium-scale to large-scale financing, as well as to compete with conventional financial services, he added.

In turn, Kazakhstan could benefit from getting inputs from such a master plan towards a more inclusive Islamic finance industry. The former Soviet republic as early as in 2009 passed its first laws for Islamic banking, becoming the first country in the Commonwealth of Independent States to do so. However, the development of the Shariah finance industry remained in its infancy, which has mainly to do with obstacles such as the 2009 regulation not permitting the conversion of conventional banks into Islamic ones, nor allowing conventional banks to offer Islamic banking products through Islamic windows.

This has been amended only in 2015 as a result of the Kazakh government’s commitment to creating a supportive ecosystem for Islamic finance in the country, driven by its aim to establish the new Astana International Financial Center as a regional Islamic finance hub along the New Silk Road.

Analysts say a cooperation between Kazakhstan and Indonesia could be highly beneficial for both countries in their quests to utilise Islamic finance to diversify their natural resources-centred economies by attracting more foreign investments into non-oil sectors. Islamic finance is also seen as a key enabler to finance much-needed and important transport, energy, technology and communication infrastructure in either nation.

Structurally, both countries have similar problems in reaching out to potential customers, thus it would require similar techniques that could be jointly developed. Challenges include a large percentage of “unbanked” people among the population, as well as a lack of understanding and awareness of how Islamic finance works, what products or investment options are available and what ethical implications Islamic finance has. These problems could be met with regular Islamic finance education and promotion programmes in order to tap the large number of potential Islamic finance retail consumers for both banking and insurance services. 

Another boost could be the development of new banking channels for those living in rural areas, for example mobile banking applications and smart money services including microfinance applications for which there is a huge potential and which could be an inspiration for financial technology start-ups in both Indonesia and Kazakhstan.

(Arno Maierbrugger - Gulf Times - 20 June 2017) 
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Algeria's government planning Islamic finance options, welfare reforms

ALGIERS, June 20 Algeria's new government is preparing the legal framework for Islamic finance and new Islamic bonds and will make changes to its welfare system, largely unchanged for decades, to offset lower oil prices, according to an official document.
The document gave the first indications of policy for Prime Minister Abdelmadjid Tebboune along with new ministers in the key portfolios of finance, commerce and energy. He was named by President Abdelaziz Bouteflika last month.
The North African OPEC member has seen its energy revenues, which account for 60 percent of the budget, more than halved due to the slide in crude oil prices, forcing the government to cut spending, look for new revenue and announce economic reforms.
Tebboune's government will "prepare the regulatory and legal framework relating to participatory funding ... and to issue sovereign bonds for participatory funding," according to its action plan, a copy of which was seen by Reuters.
Tebboune is expected to present his plan to lawmakers in parliament later on Tuesday.
Participatory funding is generally a reference to Islamic financing tools. It was one of the first times the government has so openly discussed such financing options, though authorities have said they plan a local bond that is interest-free, complying with sharia law which forbids interest payments.
Authorities in Algeria are cautious about changes to an economic system still largely state run. Many Algerians are also wary about changes that upset social peace following a 1990s war with Islamist militants that killed more than 200,000 people.
The government has in the past largely failed to diversify the economy away from oil and gas, which make up 94 percent of total exports revenue. But it is under growing pressure to speed up reforms and adapt to the new circumstances.
Tapping into money from the country's informal, parallel market, estimated by some at around $90 billion, is among the government's aims in opting for sharia-compliant funding.
"The government plans encouraging and facilitating work in order to integrate activities of the parallel market into the formal sphere," its action plan said.
Tebboune's government also plans to reform the country's vast subsidy system as part of efforts to cut spending, a change to a system that in the past has helped maintain social peace.
Subsidy accounts for about $30 billion in state spending a year in Algeria, where the government subsidies everything from basic foodstuffs and gasoline to medicine, housing and education.
Algeria will remain committed to social welfare policy, but there are plans to "set up new mechanisms gradually so as to identify categories eligible for state aid in an efficient way," the government said in its action plan.
It aims for a "gradual adaptation of social transfers policy," it said.
To achieve that goal, the government, named just weeks ago after last month's legislative election, will launch consultation with parliament, political parties and civil society to help smooth the changes.
Algeria has increased the prices of subsidised products including electricity, gasoline and diesel for the first time in years, but experts say the price rise is insufficient to cover production costs for those products.
Authorities also started restricting imports, which will decline in 2017 by $15 billion from last year's $46 billion, according to the government.
Financial pressure has forced Algeria to cut spending for this year by 14 percent after a 9 percent reduction in 2016, with foreign exchange reserves falling to $114 billion at the end of 2016 from $144.1 billion in December 2015 and $178 billion the previous year. 
Reporting by Hamid Ould Ahmed; Editing by Patrick Markey and Janet Lawrence - Reuters - 20 June 2017
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