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Friday, 14 July 2017

Fund Fact Sheet - PMB Investment Berhad - ended 30 June 2017

Ahmad Sanusi Husain - Agency Manager/Consultant - PMB Investment Berhad (Kuala Lumpur)
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Master Prospectus - PMB Investment Berhad - dated 28 April 2017

Ahmad Sanusi Husain - Agency Manager/Consultant - PMB Investment Berhad (Kuala Lumpur)
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Monday, 10 July 2017

Opening up the sukuk market

Despite the challenges faced by the sukuk market, there have been a number of significant developments in recent months, including regulatory changes in the US and the inclusion of sukuk in a number of key indices. These could help change market dynamics, address some of the shortcomings and increase both issuance and demand. One critical issue that continues to be cited by investors is the lack of liquidity, particularly in the secondary market where trading is limited. 

A lot of sukuk investors, particularly Islamic banks, are hold-to-maturity investors not due to Sharia principals but because there is such a scarcity of sukuk assets.  This is in turn a consequence of the limited volume of issuance, with demand far outstripping supply. Investors know that, if they sold a sukuk, they might face difficulty finding a suitable replacement for their portfolio. Nonetheless, an upside of this demand/supply gap is that sukuk has in the past proven to be a usefully defensive stock compared to conventional bonds, not least for distressed issuers. The demand-supply gap is itself caused, at least in part, by the complexity of issuing a sukuk, particularly for those unfamiliar with this segment of the financial market. Whilst issuing a conventional bond might take just a few weeks, an initial sukuk issuance can take many months as identifying appropriate sukuk assets and finalizing the sukuk structure often takes longer than expected. 

That may explain why, after a wave of sukuk from new issuers such as the UK and Luxembourg in 2014, the number of new entrants to the market has dwindled. There are still some non-traditional markets where activity looks promising though, such as formosa sukuk in Taiwan – a number of large financial institutions from the Middle East and beyond have issued such instruments and other corporate issuers have looked closely at following them. The complexity involved in sukuks can also be off-putting for some investors, particularly the way that interpretations of what is, or is not, Sharia-compliant differ in different parts of the world, not least between the two key markets of Malaysia and the Gulf countries. 

Unfortunately, this is unlikely to change quickly, despite industry attempts to improve standardization, and investors will need to understand and be patient in the meantime. Such concerns are not eased by reports that highlight how interpretations within a country may change over time. An example of this is the ongoing efforts of UAE-based energy firm Dana Gas to persuade a court in Sharjah to rule that its $700 million sukuk is no longer Sharia-compliant and should thus be cancelled and replaced with a new instrument. 

Despite these concerns, investor demand is such that new issuance is almost always oversubscribed, even as the size of sukuks continue to grow. As a case in point, the market saw a $9 billion Saudi sovereign sukuk earlier this year, which became the largest issuance to date.  Increasingly, we see that sukuks have become a part of mainstream investments for fund managers, central banks, sovereign wealth funds and banks. The demand momentum is also being helped by ongoing developments in the regulatory environment. One significant change came with the Saudi sovereign sukuk – among the disclosures in the prospectus was one which stated that sukuks might be considered an asset-backed security under the Dodd-Frank regulations. The full impact of that has yet to be seen, but it may be followed by a similar approach from regulators in other markets, in which case it could reduce issuance. 

Another area of potentially great significance is the inclusion of sukuks in the EMBI and JACI indices published by JP Morgan. This is seen as a very positive development, as it brings sukuks onto the radar of many more investors and fund managers. It has already helped to bring the spreads on sukuks from the likes of Indonesia, Turkey and South Africa into line with their commercial bonds. With pricing relatively flat between conventional and Sharia-compliant bonds, issuers will need additional reasons if they were to tackle the complexity involved in a sukuk.  “Maybe there is some pricing benefit but it’s probably not enough in itself to be a reason to do a transaction. There needs to be something else out there,” said Michael Bennett, Head of Derivatives and Structured Finance at the World Bank, during the recently concluded Global Borrowers & Bond Investors Forum in London. We saw this played out with sukuk issued by the International Finance Facility for Immunisation (IFFIm). 

The World Bank worked with the organization to issue two sukuks in 2014 and 2015, raising $500 million and $200 million respectively. For the IFFIm, it was a way to diversify its investor base and raise its profile in the Middle East. Against the backdrop of sector-specific issues, wider geopolitical events also have the potential to prompt concerns. The diplomatic and economic standoff between Qatar and three of its Gulf neighbours – Saudi Arabia, the UAE and Bahrain – which began in early June may raise the caution against getting involved in instruments issued from some of those countries. However, the general view is that this should be a short-term concern and the market is fairly optimistic that a solution will be found before too long.If this situation, along with the others mentioned earlier, can be successfully addressed, then the prospects for continued growth for sukuks look bright. 

Nade Ali Shah Nade Ali Shah, Head of DCM Sovereigns and Supranationals at Standard Chartered

(Euro Money - 10 July 2017)
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Sunday, 9 July 2017

Islamic banking: an ethical alternative to the conventional financial system - a special reference to UK

Islamic finance is an unconventional financial system which has witnessed impressive growth over the last decade. In 2015, the business represented $4.5 bn in the UK.
Global Islamic investments have increased by 150 per cent since 2006, and according to estimates, the sector is growing 50 per cent faster than the overall banking sector.
At the 2013 World Islamic Economic Forum, former Prime Minister David Cameron announced the government’s plan to make London into the Western capital of Islamic finance through issuing a £200m-worth Sukuk, the equivalent of a bond in conventional finance.
However, despite this major milestone, this year’s Global Islamic Economy report revealed that Islamic finance is still very little known by the general public, Muslims and non-Muslims.

An interest-free system

Islamic finance differs from conventional banking in several aspects. The system has to function in accordance to Sharia law, an ensemble of precepts derived from the Quran which address all areas of Islamic society from marriage to commercial transactions.
The key principle that underlies Sharia-compliant finance is the prohibition of interests, considered as a means of exploitation and unjust to the consumer. Conventional banks lending subprimes charge the lower earners with higher interest rates. This logic, justified as being a reflection of the risks of insolvency involved, is deemed unethical by the Islamic banking system.
Equally, the ethics of Islamic finance prevents any investment considered haram, or sinful. It includes industries such as alcohol, pork, tobacco, arms and pornography among others.
Since gambling is also forbidden, the most unsafe financial products which bet on uncertain events, such as derivatives, futures or swaps are not used by Islamic banking either. Speculation is consequently banned too, the financing coming from deposits rather than money borrowed from wholesale markets.

The principle of risk-sharing

The risks linked to a loan are shared between the bank and the customer.
Khalid Khan, the branch manager of Al Rayan Bank, the UK’s first wholly Islamic bank, explains: “We don’t work with interests, we work in a partnership. Once our client invests money with us, we become partners, we share the risks, the profits and the losses.”
Instead of lending the money to the buyer to purchase a house or a car, for instance, it is the bank which buys the item and re-sells it to the buyer providing a profit payable in instalments.
In an unstable market still marked with uncertainty since the 2008 financial crisis, the demand for products that encourage risk-sharing is constantly rising in both the Islamic and conventional sector.

A growing demand from non-Muslims

One doesn’t need to be Muslim to open an account in an Islamic bank. In fact, the sector attracts more and more non-Muslims, traumatised by the 2008 financial crisis, and in quest of a more ethical system.
Simon Walker, Head of retail sales at Al Rayan Bank, explains: “We appeal to both the Muslim and non-Muslim market. Seventy percent of customers that came to us last year were non-Muslims.”

The sector faces challenges

UK Islamic banks have extra levels of supervision compared to conventional banks. Every Islamic bank requires a Sharia supervisory committee that constantly assesses the Sharia-compliance of the financial products offered by the bank and ensure that no transaction breaches any precept of Islam.
A few organisations, such as the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), have been created to issue guidelines and standards for Sharia compliance at a global level, but those recommendations cannot be enforced upon the banks.
The lack of regulating institutions stems from the fact that there is no unique interpretation of Sharia law. Scholars from competing schools of thought often have contrasting views, making a particular operation Sharia-compliant to one school of thought, but not to another.
To Mufti Abdul Qadir Barkatulla, this is a major drawback for the growth of Islamic banking. He explains:
“The Islamic financial institutions cannot really compete with mainstream institutions. Firstly, because they don’t benefit from an economy of scale, secondly, the costs of funding are still too high, and finally, the regulations are not yet harmonised at a global level.”
Another problem is the shortage of Sharia scholars in the industry that leads individuals to hold positions in several companies’ Sharia supervisory committees. This can lead to conflicts of interests and undermine the reputation and credibility of the system.
Those issues explain that even though Islamic banking has been around for almost forty years in the UK and its growth has outstripped that of conventional banking in recent years, it still represents only 1% of the whole banking market. It will have difficulties to become more than a niche market if it does not tackle those issues adequately.
But to Mufti Barkatulla, Islamic finance does not intend to compete with the conventional system:
“We have no quarrel with conventional finance. Every community and every culture live according to their own lifestyle and Muslims are entitled to have their own. There is no system which will correspond to the whole humanity.”
(Evening Standard - UK - 9 July 2017)
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Friday, 7 July 2017

Islamic finance provides Kenyans with cushion against drought

Hamara Hujale tries to keep an eye on two squirming children and a pot of simmering ugali – a white doughy dish – as she reaches for her buzzing phone.
After speaking a few words, she hangs up and scribbles in a wrinkled notebook.
"My driver has found another customer so won't be back for another 30 minutes," she says with a satisfied smile.
Hujale, who lives in the northeast Kenyan town of Wajir, used to make and sell kitchen utensils, "mostly to pastoralists who would use them as dowry for their daughters' weddings".
"But as they lost their animals to drought, they had no money left to buy my products. So I had to find an alternative," she said.
Last year she secured a loan of 370,000 Kenyan shillings (about $3,560) through Crescent Takaful Sacco, an Islamic finance institution, and used the money to buy a tuk-tuk and set up a taxi business in Wajir.
Access to credit is critical to help communities prepare for and cope with increasingly frequent climate shocks like droughts and floods, experts say.
But in this Kenyan region bordering Somalia, where over 90 percent of the population is Muslim, few banks or institutions offer financial services that comply with Islamic law, which bans gambling and speculation, including interest-bearing loans, said Diyad Hujale, a programme coordinator at Mercy Corps, a charity, and no relation to Hamara.
To remedy this, in 2016 a project helped set up the county's first private cooperative offering financial products in accordance with Islamic principles – such as interest-free loans, with no fees for late payment.
The initiative, which is part of the Building Resilience and Adaptation to Climate Extremes and Disasters (BRACED) programme, is funded by the UK Department for International Development (DFID) and led by Mercy Corps.
Gladys Mutisya, manager of the Wajir sacco, said it targets "the unbanked: pastoralists – who make up half of our clients – farmers, and poorer communities in general."
"We're trying to fill a gap that banks and traditional institutions are not able or willing to fill."
Diyad Hujale explained that while Sharia-compliant financial services already exist in Nairobi, the capital, and elsewhere in the country, they are too far away and expensive for local residents to access – so the braced programme supported the sacco to hire and train staff in Wajir.
Preparing for shock
The toughest challenge in this largely pastoralist county is prolonged drought, which Hamara Hujale said "affects everyone".
In addition to her kitchen utensil business, she used to herd over 100 goats - but drought has claimed many of them.
"I can't even remember how many have died," she said, bending to smell her pot of ugali.
Catherine Simonet of the Overseas Development Institute (ODI), a London-based think tank, said that families with little or no disposable income are most affected when drought hits.
Repeated droughts create "a vicious circle where they not only have no alternative income if they have lost their harvest, for example, (but) they are also made more vulnerable to the next shock", she said.
To avoid this situation, Mutisya said the sacco's clients tend to take out loans in "good times", such as the harvesting season, when they can most easily qualify for loans.
They then hold the cash as easily accessible savings, so that in dry periods they can buy food and fodder for their animals to survive.
Business for Resilience
While many clients use the sacco as a way to boost their cash on hand, others like Hamara Hujale take out larger loans to set up their own businesses.
That fills a key gap in the market that is not met by other banks or institutions, Diyad Hujale said.
"Wajir is vast and its residents earn very little, so to most investors they don't make 'business sense,'" he said.
Simonet concurred that the potential for pastoralists to launch businesses is often underestimated.
"We tend to only look at pastoralists for example as households, when they're also producers, businesses, and a hugely untapped source of investment," she said.
Key to the sacco's model is trust, said Mutisya. "We don't just blindly give out loans. We assess the viability of our clients' business ideas and we train them on issues like accounting."
To minimise risk, the financial institution often lends money to groups rather than individuals. "The group's cohesion and reputation acts as a guarantee for us," Mutisya said.
Hamara Hujale, who took out a loan on her own, now makes up to 2,000 shillings ($20) per day from her two businesses – nearly twice as much as when she only sold utensils.
"But I need the money to repay over 30,000 shillings per month to the sacco," she said. Her dream, once she has repaid the loan in full, is to "buy a bigger car to serve as a taxi in rural areas".
Since the sacco opened, about 500 accounts have been created, Diyad Hujale said.
But "we're only present in a 20km radius around the town, when the entire county needs us," he said.
He hopes mobile phone technology will allow the initiative to expand and reach more people through an online platform, without the need to physically meet with an agent.
"Currently the only way to get a loan outside of Wajir town is for our agents to travel to outside villages, so the operation is currently very costly," he explained.
Simonet said a mobile service would make particular sense for pastoralists.
"Pastoralists not only live in rural areas, they are also constantly on the move. So to them a physical branch or agents don't make sense," she said.
(Business Daily - Kenya - 7 July 2017)

Tuesday, 4 July 2017

Islamic finance gets on its feet in North Africa

4 July 2017 (Gulf Times)

Governments in North Africa are increasingly leaning towards solid regulations for Islamic finance in a quest to find Shariah-compliant alternatives for decreasing conventional funding sources in order to rein in their current account and budget deficits. These initiatives come at a time when the share of global Islamic finance assets of Muslim-majority North African countries stand at just around 1%, according to calculations by Standard & Poor’s, indicating substantial potential for the entire banking and finance sector in the region. Currently, just a few Islamic retail banks operate in North African states, and they account for only a very small proportion of total bank deposits, while corporate Islamic banking is rarely heard of.

After Morocco, whose central bank in March this year delivered an Islamic finance regulation framework that allows the launch of Islamic banks with the aim of tapping Islamic investors, Algeria emerged as the next North African country to venture into the Islamic finance industry, this time to counter a significant drop in oil income. The North African Opec member is now for the first time initiating an action plan that encompasses preparations to establish a regulatory and legal framework for “participatory funding” – read: Islamic finance – and to issue “sovereign bonds for participatory funding” – read: sukuk. Plans are to set up no less than six state-run Islamic banks overseen by a yet-to-establish national Shariah board to start Islamic financial services by the end of 2017 or in early 2018.

These activities of widening the footprint of Islamic finance in North Africa are being initiated in a region where a combination of lacklustre economic growth, informal economic structures, a general lack of banking services outside urban centres, the economic fallout from the Arab Spring and lower sovereign income from commodities have made changes in the structure of the financial sector necessary, if not imperative. And, as a result of the global economic slowdown over the past decade, the limited capacity of multilateral lending institutions has also pushed North African countries to consider Islamic finance structures as an alternative to raise foreign currency funds. 

Algeria is more a laggard, though. Aside from Morocco, Tunisia and Egypt implemented new laws allowing for the issuance of Islamic bonds in late 2013. While the government of Mauritania committed to developing an Islamic finance system in 2014, Libya in the same year said it aims at running its entire economy and banking system on Islamic lines. But the country keeps struggling with the implementation of this plan with its economy in shambles and internal strife unabated. 

The African Development Bank (AfDB) in a study came to the conclusion that North Africa has significant demand for an Islamic finance system to provide Shariah-compliant banking services with its domestic population and to tap global Islamic investors, with a focus on the Gulf. 

North Africa has poor infrastructure and therefore a substantial need for project finance, the AfDB said, adding that Islamic financing facilities had the potential to harness funds for both commercial and development projects, could diversify funding sources, ensure better monitoring of funds deployment and could contribute to private sector development in North Africa. Even more so since there has been some positive capital market development in North Africa, with stock markets in Egypt, Morocco and Tunisia showing more liquidity and higher trading activity in the recent past, while sovereign and corporate sukuk could attract investment funds from Arab investors and provide a useful instrument for liquid holdings of Islamic banks.

According to Mohamed Damak, global head of Islamic finance at Standard & Poor’s, North African project finance would strongly benefit from more Islamic fund inflows.
“Shariah-compliant banking previously presented an attractiveness that was at best exotic for regulators and banks active in these markets. Now, the perception is changing and public awareness is increasing,” he said.

“We believe that Islamic finance can be a good fit for infrastructure and project finance in the region, as banks lack long-term funding capability required by these projects,” he added, noting that several projects in renewable energy, transport infrastructure and communication are ongoing or expected to be launched in the future in North African countries. 

“Using sukuk to finance some of these projects could help diversify investor bases and tap additional pools of resources,” Damak said.

(Arno Maierbrugger - Gulf Times - 4 July 2017)

Monday, 3 July 2017

Analysis: Can GCC Islamic banks escape the oil-price cycle?

What was unthinkable, or at least not admitted, just years ago is beginning to happen in Islamic finance. More and more stakeholders now concede that the Shari’ah-authorized way of banking has hit a glass ceiling.
They acknowledge that Islamic banking and financial services have largely failed to innovate at the speed they were expected to, and are got caught in the image warp of not being much different from conventional banking.
It is also admitted that, just like several other businesses, Islamic finance appears to be caught in an oil-price cycle, definitely in the Gulf and wider Middle East region. While acceptance of ground realities is a positive sign, what seem amiss is collective efforts to tackle the challenges in an already fragile economic environment.
But is this the only challenge and what needs to be done about it? Diagnosis as well as prescription differs with different stakeholders and so does priorities.
An IMF working paper, released last year, says that oil price performance has been an important driver of business and financial variables in the GCC economies. “First, stronger performance of real and financial variables tends to be associated with oil price upturns,” the report said.
Dr. Helmi Hamdi, Senior Research Fellow at Aix-Marseille School of Economics, begins with a wider perspective. He says that current problems faced by Islamic finance relate to absence of common regulation and harmonization.
According to him, these challenges have hit the growth and performance of the industry as a whole. However, he hastens to add that this could also be attributed to slowdown of global economic activity, which remained fragile with an uneven growth, thereby affecting Islamic business activities all over the world.

The asset-energy conundrum

According to Dr. Hamdi, primary challenge for Islamic finance emerges from drop in oil and energy prices, which negatively affect growth of oil-exporting countries. “Since most important part of Islamic finance assets is located in oil-exporting countries, the sector has been negatively impacted by the slowdown of economic performance,” he says.
There are industry insiders who have been making similar arguments for a long time now. Rushdi Siddiqui, who is now Advisor at Wall Street Blockchain Alliance and Mentor at VC firm Quest Ventures, and is an industry veteran, says Islamic finance is deeply linked to oil/commodity prices and hence remains as volatile as price per barrel of oil.
“When oil is $80/barrel, surpluses exist, infrastructure projects are many, banks are lending to SMEs, and non-Muslim countries want part of the petro-liquidity. Conversely, when the price bandwidth is $35-50/barrel, there is a lot of pain for governments, SMEs, banks, and consumerism,” Siddiqui wrote as early as late last year.
“The sooner Islamic finance phases out linkage to oil then it will better control its funding and its destiny,” he says. Rushdi’s prescription may be simple, and urgent, but unfortunately, it doesn’t seem to be happening.

Difficult times ahead

Global rating agency, Standard & Poor’s, estimates that Islamic banks in the GCC are expected to face a tough year ahead as the slowdown in asset growth is likely to persist this year. Dr. Mohammed Damak, Head of Islamic Finance at S&P Global Ratings, says GCC Islamic banks’ profitability is likely to be negatively impacted by the rising cost of funding, and squeeze on banks’ intermediation margins.
Dr. Damak believes that as the economic cycle turns, GCC Islamic banks’ asset quality indicators will deteriorate in the second half of this year and in 2018. “Such weakening was not noticeable in in 2016 because – as is typical – banks had started to restructure their exposure to adapt to the shift in the economic environment”, he says.
According to Dr. Damak, very few Islamic banks have set aside significant amounts of profit-equalization reserves, which they build in good years and use to smooth returns, if needed. That said, owing to their relatively low cost bases, GCC Islamic banks should be able to protect their profitability somewhat over the next two years.

Silver lining

It would be unfair to suggest that it is all doom and gloom in the industry. In almost two decades, Islamic finance industry has indeed launched many policies to modernize its financial services.
Dr. Hamdi, for instance, gives the example of Islamic banks today offering a wide range of financial products based on latest technological tools such as e “E-I-banking” and they have embraced latest financial innovations in their business such as FinTech.
“New Islamic financial and investment platforms, micro takaful and micro-Islamic institutions are also new types of innovation. So it is not fair to say that Islamic banks stopped innovating,” he says.
According to him, as for oil price, both Islamic and conventional banks are affected and it is a matter of business cycle. “The history shows that oil price was volatile since 70s. Therefore, both models must adopt new strategy and new business model that is not highly dependent of energy prices in general,” says Dr. Helmi.
Needles to add, this would only happen when oil dependent countries diversify their economies and lower the weight of oil price dependence, which doesn’t seem to be happening anytime soon.
(Ehtesham Shahid - Al Arabiya (English) - 3 July 2016)
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Sunday, 2 July 2017

UAE Shariah board aimed at strengthening consistency

A new central Sharia board for banking and finance in the UAE will be a boon to the US$2 trillion Islamic finance industry, which has been rattled by a declaration by Dana Gas’ that its US$700 million sukuk is no longer Sharia-compliant.

Four years after issuing the Sharia-compliant bonds, the Sharjah-based energy firm said in June last month it is restructuring its sukuk maturing in October because it is no longer lawful under UAE legislation due owing to the “evolution and continual development of Islamic financial instruments and their interpretation”.

The Dana Gas saga is now entangled in the courts, but it has revived a debate about the need for standardisation in the complex world of Islamic finance, where different scholars issue fatwas or religious edicts for products.

But the UAE Cabinet decision in May to appoint members for a central board called the Higher Sharia Board for Banking and Finance “to strengthen consistency of the Islamic finance industry across the UAE”, according to a statement on state-run Wam news agency, could help to tackle issues such as lawfulness of sukuk, experts said.

“As we have seen with the recent Dana Gas sukuk restructuring, there is uncertainty regarding the Sharia compliance of various sukuk structures, which impacts the growth and trust in the market from international investors,” says Khalid Howladar, the managing director of the risk and ratings Islamic finance advisory Acreditus. “A central Sharia board would help to remove these types of dispute and bring more efficiency, transparency and confidence to the sukuk market and will help to support the UAE’s role as a key centre for Islamic capital markets.”

The UAE Cabinet statement did not provide many details about the remit of the new central board, except for saying it would be “responsible for setting rules, standards and general principles for banking and financial activities that comply with Islamic laws as well as setting a general framework for Islamic governance and fatwa issuance on matters highlighted by the Central Bank or other financial institutions in the country”.

The UAE’s sukuk issuance, which is dwarfed by the conventional bond market, could increase if the board helps to streamline the process of selling Sharia-compliant instruments.

For example, last year the UAE sold $6.75 billion worth of international sukuk, a third of $18.42bn of conventional bonds issued, according to data provider dealogic. Already Nasdaq Dubai is a major hub for sukuk listings and will benefit from any increase in domestic sukuk issuance. Nasdaq Dubai has a total of 63 listings, with a value of $51.4 billion, one of the biggest in the world. The listings include sukuk from international companies such the Islamic Development Bank and the government of Indonesia.

“The impact on the industry [from the formation of a Higher Sharia Board for Banking and Finance] will be positive as it will now have a final authority for matters related to Sharia compliance,” says Mohamed Damak, a Dubai-based analyst with the credit rating agency Standard & Poor’s. “It may also help to ease the process for sukuk issuance by having a set of pre-approved structures or fatwas.”

Finding the right structure for sukuk could be time-consuming and costly. Sometimes a premium is imposed on sukuk issuances if they are more complex than conventional bonds.

Islamic products, in general, will benefit from lower costs.

“Standardisation of ?products should lead to a growth in the market as the costs of establishing new products and their time to market should fall,” says Farmida Bi, a London-based lawyer with the NortonRoseFullbright law firm. “A national Sharia board will also ensure that minority views will find it more difficult to gain traction in the market.”

Many Islamic bodies, such as Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and scholars have been calling for the creation of central Sharia board in countries that seek to bolster their Islamic finance industry.

One country that has benefited from having such a mechanism is Malaysia. Its Sharia board is the arbiter for all Islamic financial transactions.

The creation of the central board, however, was just one element that helped Malaysia to become a major centre of Islamic finance and a prolific issuer of sukuk .

“Malaysia has a market which favours sukuk being issued because domestically certain government entities must issue an amount of sukuk and insurance and pension funds must invest in a certain amount of Islamic assets,” says Debashis Dey, a Dubai-based partner at the White & Case law firm.

To have a vibrant sukuk market, the industry will need to have a greater variety of investors buying sukuk, rather than just financial institutions holding on the instruments.

But not all experts agree that a central Sharia board is needed to create harmonisation in the industry.

“Some would argue that such a board would create consistency,” says Abradat Kamalpour, a London-based partner with the Ashurst law firm. “The counter argument is that it could lead to stifling innovation and limiting the hands of banks to develop new products.”

With countries such as Bahrain and Malaysia having their own Sharia boards and a different set of fatwas, the battle to become the global hub of Islamic economy could heat up, particularly since Dubai is positioning itself to take on that role.

“I think any model adopted needs to be flexible to accommodate Sharia standards from different markets,”  says Mr Kamalpour. “This is particularly important for the UAE because Dubai is a global financial centre and needs to allow for transactions to happen from countries that may have different Islamic banking models.”
(Dania Saadi - The National - UAE - 2 July 2017)
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Saturday, 1 July 2017

Islamic finance on strong growth trajectory: IMF

The International Monetary Fund (IMF) taking stock of the growing Islamic Finance market has already acknowledged the growth of Islamic Banking Industry on sound footings in Pakistan.

The recent IMF report on Islamic finance said that Islamic banking emerging as the most developed component of the industry.
Commenting on Kuwait’s Islamic banking industry the IMF said it has grown rapidly to become an important part of the domestic and global Islamic financial system. The country operates a dual system where Islamic and conventional financial institutions co-exist. The banking sector is the most developed part of the Islamic financial service industry and consists of full-fledged Islamic banks only, whereas Islamic windows are not permitted.
Other segments of the industry include investment companies, investment funds, insurance (Takaful), and reinsurance (ReTakaful) companies. The sukuk market has remained small and has been dominated by corporates issuing outside the country.
On the Sukuk segment of Islamic Finance IMF was of the opinion that the underdevelopment of Sharia-compliant financial markets and sukuk instruments continue to pose liquidity management challenges to Islamic banks.
Even with strong supervision, the scale and complexity of corporate structures of the larger Islamic banks could present challenges for risk management, supervision and resolution, because of the presence of non-financial corporations and cross border operations in countries with diverse legal and regulatory frameworks. Such corporate structures, though central to the business model of Islamic banks, can create potential for related-party lending as well as contagion from other parts of the group.

(Pakistan Observer. 1 July 2017)

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