Kamil: Islamic Economics Can Speed Up Development

ZAWYA.COM--Saleh Kamil, chairman of Al Baraka Banking Group , has called on Muslim countries to implement the Islamic economic system efficiently to boost their economic and social development.

"We have to understand Islamic economics clearly and implement the system in our societies properly. It would be a gift from us to humanity and would serve as an important means for spreading the message of Islam," he said.

Addressing the 34th symposium on Islamic economics at Jeddah Hilton on Wednesday night, he said: "We as scholars and bank managers have to play our role in projecting the glittering face of Islam.

"The Islamic economics is based on the teachings of God, who knows better the needs of humanity and how to tackle their various problems."

Kamil urged Islamic banks to make sure their operations are successful in realizing the objectives of Islamic economics. "What is our objective? Are we here just to mobilize funds in the name of Islamic banks?" he asked.

The symposium commended Custodian of the Two Holy Mosques King Abdullah's initiative to strengthen the private sector's participation in nation building.

"This will promote economic activities and capital flows among Arab and Muslim countries," said Adnan Ahmed Yousif, president and CEO of Al Baraka Banking Group . He said the symposium would contribute to further strengthening the Islamic banking and finance industry.

The symposium was attended by well-known scholars in the field of Islamic banking, in addition to a number of senior executives in Islamic banks and institutions.

Participants include Ahmad Khaled Babacar, secretary general of the Islamic Fiqh Council; Abdul Basit Shaibi, CEO of Qatar International Islamic Bank; and Abdul Razak Khuraiji, executive vice president and head of the Islamic Banking Development Group at NCB.

The discussions focused on issues related to 'zakat', (or alms giving practiced by Muslims) including measuring zakat for crops and fruits, and trading in the global gold market.

The first Al Baraka symposium was held in Madinah in 1981, Yousif said, adding that the symposium was instrumental in finding economic solutions to the problems faced by Muslim communities.

He commended the role played by chairman Kamil and thanked scholars, researchers, executives and Islamic banking staff for their contributions.

Al Baraka is a Bahrain-based joint stock company licensed as an Islamic wholesale bank by Central Bank of Bahrain, and is listed on Bahrain bourse and Nasdaq Dubai. It is a leading international Islamic bank providing its services to around one billion people. The group's total finance and investment jumped from $2.7 billion in 2003 to $14.3 billion in 2013, the CEO said. [P.K. ABDUL GHAFOUR]

© Arab News 2013

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United halal-Islamic finance sector to build USD4trn empire

ZAWYA.COM--Rushdi Siddiqui's passion for Islamic finance radiates through his columns, his conference speeches and his relentless pursuit to take the industry to its next level. 

Having worked for two of the world's most well-known financial media giants Thomson Reuters and Dow Jones as their chief Islamic finance go-to guy, Siddiqui has earned the stripes and experience to forge his own path.

As early as 1998, he introduced the concept of Islamic indices at Dow Jones, and has since pushed the idea of Islamic investing at the governmental level and with many stock exchanges across the Muslim world.

As global head of Islamic Finance and Organization of Islamic Countries at Thomson Reuters , he led the team that established the world's first Islamic equity index, first sukuk index, first Islamic sustainability index, first halal food index, and first Islamic interbank benchmark rate (IIBR).

He also participated in the world's first Islamic Exchange Traded Fund (ETF) in Turkey and France, Malaysia and the US, led the index provider to be the first to have licensed Islamic assets under management of USD 7 billion, and led the team to establish the world's first comprehensive pre-trade, multi-asset Islamic finance platform.

But there is much more work to be done, and Siddiqui has ventured out on his own to launch Azka Capital.

As co-founder and managing director of the private equity advisory firm, he is focused on halal industry initiatives with Islamic financing, which he believes are industries that have much in common, but hardly communicate with each other.

He remains an advisor to Thomson Reuters on Islamic finance, the halal industry and OIC countries.

In an interview with alifarabia.com, Siddiqui outlines his hopes and frustrations for the industry he has helped to nurture.

What was your primary motive to start your own PE advisory firm, Azka Capital, and what are your key areas of focus?

In travelling to over 35 Muslim and non-Muslim countries over the span of last 15 years, one sees many challenges on financial inclusion, youth unemployment, access to capital, and so on, i.e., the Arab Spring moment in waiting. The challenges are really disguised opportunities in waiting, so it's really about being able to see it, grab it, and run with it.

I wanted to do something global and impactful with like-minded people for Muslims, but it had to be something 'compliant.' Once in the Islamic finance space for a period a time, like 15 years, the default thinking is 'compliance,' hence, employment in the conventional space was neither an option nor welcomed in that space.

I've worked for great companies like Dow Jones and Thomson Reuters and have learned so much, so it was time to put it all together and possibly start the process of building the next 'Dow or Thomson' with the right people - as chemistry is key to success.

I've always been interested in private equity, but there are not many pure-play compliant PE firms with the dedicated focus for the triple bottom line: returns to investors, society and man on the street. Furthermore, the area of focus had to be about building and growing something linked to the real economy and less financial engineering play.

What's interesting about the Islamic private equity space is the financial ratios we started in with Dow Jones Islamic Market Index (DJIM) in 1999 are used here, hence, come full circle!

In 2011, working with Idealratings, I led a team to launch the world's first Halal Food index, Socially Acceptable Market Investments (SAMI), with the former prime minister of Malaysia, Tun Abduallah Badawi, a people's prime minister! We expanded the conversation about halal, a USD 2.3 trillion industry, into an asset class from just about ingredients, certification, etc.

Halal is not just about meats/foods, but also about pharmaceuticals, cosmetics, logistics, etc., all linked to the real economy, yet very unstructured and fragmented. Combine it with food security, [it becomes] a national security issue in, say, GCC, this is what I will (Insha'allah) return to with my colleagues.

Who is your target market?

It comes down to creating risk-adjusted portfolio value for, say, GCC investors who have traditionally invested in real estate, oil/gas, and healthcare. The halal sector is: (1) easy to explain (one has to eat); (2) it's a consumer non-cyclical, hence, its bandwidth of volatility is less than real estate; (3) it's about intra-OIC and inward OIC investing (mandate of the Islamic Development Bank); (4) it's about making consumer investors of halal products into stock investors (eventually), and (5) it's about creating a Muslim 'Fortune 50' company inorganically.

Thus, strategic investors include family offices, high-net-worth individuals, sovereign wealth funds, food companies, Western investors looking for the next BRICS story in the emerging markets, etc.

How different is it to venture out on your own, compared to working with one of the most recognized media companies in the world?

There are many lessons learned from Dow Jones and Thomson Reuters , and probably the most important ones are about leadership/vision, motivating, budgeting, brand building/protecting, business development, etc.

Obviously, managing costs is paramount to survival, I have seen first-hand [over the years] 'Islamic start-ups' that have burned their investor money on large salaries, first- class travel, five-star hotel, client entertainment, etc. You must manage investor money as if it's your own, and have to think three times before spending.

Do you think the industry is living up to its potential? What more would you like to see for the industry to flourish?

The simple answer is 'no, not yet.' The industry captains have been dropping the 1.8 billion Muslims, but how many are bankable? How many has Islamic finance touched? Today, it seems Islamic finance is only about the bankable. But, the Islamic bank has a fiduciary duty to maximize shareholder value, and does zakat and purification address their CSR [corporate social responsibility] obligations beyond the deposit taking community?

Furthermore, the industry is relying too much on the debt capital market and structured products (less now) for providing solutions and addressing growth. For example, look at the business model or Islamic leverage used by ArCapita, Gulf Finance House, Gulf Investment House, Investment Dar, etc., where are these companies now?

Where is (Islamic) venture capital? Micro-finance? SME financing? These areas (small companies) employ the largest amount of people, contribute the largest percentage of GDP, and are the foundation of knowledge-based economies yet access to risk capital is minimal. For example, I'm involved in an Islamic crowd funding initiative in Egypt called www.shekra.com, and it's a good beginning. Where is the Islamic development bank on crowd funding?

Sukuk and syndicated Murabaha loans are not entrepreneurial capital, the pre-requisite for knowledge-based economy, hence, the equity part of the Islamic capital market is the developmental need of the hour. For example, how has sukuk directly benefitted the man on the street, I have yet to see/hear conversation [about] agricultural sukuk for farmers in, say, the post-Arab Spring North African countries.

The first order of business for the IDB and countries that are true Islamic finance hubs, like Malaysia, is to establish an industry body for the Islamic equity capital market as there is minimal coverage from AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) and IFSB (Islamic Finance Services Board).

This would actually establish the foundation for Shariah-based investing, hence, a blue print for the compliant financing side.

You have discussed halal as a key area of focus in many of your columns and work, do you think that is a way for the Islamic finance industry to enter the mainstream, as in business to consumer segment?

Yes, period. Prohibition against interest and encouragement of lawful or 'halal' food are mentioned in the same chapter of the Holy Koran, yet, these two' inter-related industries,' amounting to about USD 4 trillion, do not speak to each other.

Halal is about the real economy, much like real estate, hence, it is the heart of Islamic banking: collateral based financing as there are hard assets (factories, warehouses, etc), consumable products (repeat business), and customers (demographics or Muslims). Furthermore, Muslims do not control the halal food supply chain, hence, integrity risks are slowly cropping up in Europe, where pork DNA found in halal food.

Thus, Islamic finance can reduce concentration risk associated with real estate by expanding into a less volatile real economy linked sector: halal.

Do you think Islamic finance has managed to capitalize on the conventional financial sector's weaknesses in the aftermath of the global financial crisis?

At one level, the answer is no, as Islamic finance institutions are not cropping up in Europe or US since 2008. However, no new initiatives will be launched during damage control period.

The question that comes to mind is: What is the message the industry needs to convey to Western jurisdictions about Islamic finance?

1. It's beyond prohibition against interest and pork;

2. Its focus should not be about USD 1.3 trillion or USD 1.6 trillion or 15-20% growth per annum or sukuk issuance reached more the USD 100 billion in 2012;

3. It's not about religion (though accountability to a higher authority), but business and financing based upon transparent rules;

4. It's about collateral-based financing within manageable levels of debt;

5. It's about investment returns linked to asset-backed financing with resorting to derivatives to [generate] returns

6. It's about another level of (Shariah) compliance, where the product offering is as advertised/promoted, i.e. no hidden surprises.

The credit crisis, l and ll, flushed an important point: investors had more risk than they thought as the credit rating agencies and regulators were not seeing or refused to see the telltale signs of a bubble about to burst, producing global systemic risk to the financial system.

Dubai has unveiled plans to become a Islamic hub? Bahrain and Malaysia tried to do the same, but both have had mixed results. Do you think Dubai can succeed and what does it need to do to ensure success?

Sheikh Mohammad's announcement about positioning Dubai as an Islamic economy, led by Islamic finance and halal, is now taken very seriously because his grand vision and sheer will (plus some leverage) made Dubai a global brand in a short period of time. 

For Dubai to become an Islamic hub for, say, sukuk, it needs to establish an enabling infrastructure with the appropriate stakeholders to offer a 'Euro-bond' platform of the 1960s/70s. So, it's not just about benchmark-size sukuk, contract modalities, league tables, etc., but a platform for issuers to bring compliant paper into market efficiently and expeditiously to take advantage of credit pricing.

For the halal industry, Dubai should not attempt to focus on research, academic papers, ingredients, stunning debate, and even certification as these issues are being raised in Malaysia, Brunei, and elsewhere. There is minimal value added in repeating and recycling on Dubai brand, instead focus should be on: Halal as an asset class to address food (cum national) security. The food, agriculture and land bank funds that have been launched have yet to meet expectations for a number of reasons, from political sensitivities to not understanding food supply chain and entry wedge with appropriate investment vehicle.

[Also,] building a global 'go-to' information platform on USD 2.3 trillion halal industry, much like what we did at Thomson Reuters with the Islamic Finance Gateway (IFG). Today, as the world is hyper-connected and quality information starved, access to credible and continuously updated information is key to surviving (including against fraud in halal sector) and eventually thriving. This actually builds the foundation for a transaction portal, B2B2C2G, for halal, much like Alibaba.com.

Today, Dubai does not house an industry body for Islamic finance, as AAOIFI, IIFM, IIRA and CIBAFI are in Bahrain and IFSB is in Malaysia. The time is ripe and right for Dubai to house the world's first industry body for the USD 2.3 trillion halal industry and modeled after Islamic finance bodies but with the Dubai flair! This is something we, at Azka, have started to map out.

I believe enough time has been spent on thinking about Islamic economy (in the ivory tower by academics), it's now time to bring it to the ground level and execute by stakeholders of practitioners.

There is still skepticism about IF even in Islamic countries. What can the industry do to change it?

Islamic finance must address the 'what's the difference (to conventional finance)' question. For example, many Muslims do not understand why there has to be sale/purchase of, say, copper to buy a house/car in a compliant-manner. Thus, if they don't understand it, they will not participate.

Second, Islamic finance needs to have the courage to deploy the mountain of liquidity we hear about towards risk capital in selected Muslim countries. Thus, as a trial balloon it will 'win over' the hearts and minds and lead conventional finance.

Finally, Islamic finance must fit in, but, more importantly, stand out as a value-added proposition to challenges of Muslims and those with aligned values. It's not just about compliant-financing for financing sake, but development finance, holistic consumer approach, CSR (beyond zakat), etc.

Which area (sub-sector or country) of Islamic finance do you think is most promising?

A. The most promising area is the most undeveloped area: Islamic equity capital market (iECM). Today, Islamic finance is heavily debt bias, led by the sukuk poster child, and as one can be conventionally over-leveraged, one can be Islamically over-leveraged. There is no 'divine put,' hence, defaults and bankruptcies exist in Islamic finance.

The development of the iECM will bring balance to today's Shariah-complaint (debt bias) Islamic finance. It will move the industry towards Shariah-based finance, and financial inclusion of the under-banked and non-bankable. It's the equity capital markets that develop countries and diversify economies, and raise the standard of living.

For example, look at the assets under management (AUM) to bank deposit ratio or stock market capitalization to GDP ratio, and one will see G20 non-Muslim countries having higher ratios (for both) than Muslim countries. Thus, Islamic finance, at one level, captures the depositor money play, but it does not get circulated beyond real estate.

© alifarabia.com 2013

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Changing the Rules

ZAWYA.COM--Malaysia is known as a leader in Islamic finance; new laws to be rolled out later this year will see it leading the industry in a new direction

When it comes to Islamic finance, Malaysia may seem to have it all but it still wants more. Late last year, Malaysia announced that it is aiming to double the share of Islamic banks in the country from 20 per cent to 40 per cent by 2020. The blueprint which charts how it will get there is contained within the Islamic Financial Services Act 2012 (IFSA), dubbed the world's first comprehensive legal framework for Islamic finance. Recently, Malaysia's leaders have elaborated on what this means for the industry.

"In Malaysia, the new legal framework for Islamic banking and Takaful that will come into force this year, will pave the way for the development of an end-to-end Shari'ah-compliant regulatory framework for the conduct of Islamic financial operations," explained Dr. Zeti Akhtar Aziz, Governor of Bank Negara Malaysia in a speech at the Brunei Darussalam Islamic Investment Summit 2013. "This new framework provides clarity on the fundamental requirements of Shari'ah that must be adhered to for the contractual arrangements between the financial institution and the customer to remain enforceable. The framework also outlines the operational requirements for the effective application of Shari'ah principles in the conduct of Islamic financial institutions. This aims to strengthen the risk management practices beyond the traditional credit, market and liquidity risks, to also include inventory risk, ownership risk and Shari'ah compliance risk. The legislation also provides for the resolution of Islamic financial institutions to be in line with distinctive elements of the relevant Islamic contracts, thus improving the legal and procedural aspects for the orderly resolution of Islamic financial institutions.

"This is to provide greater certainty and to build public confidence in the system as a whole. This necessitates a legal framework that enforces end-to-end Shari'ah compliance in the Islamic financial services industry - through provisions and mechanisms that unambiguously define the conduct and governance of Islamic financial institutions. It needs to recognise the distinct elements in Islamic finance and identify risks and challenges associated with the different Islamic contractual arrangements and the instruments for the appropriate regulatory treatment of the Islamic financial transactions. There is also a need for court recognition and acceptance of the Islamic contracts within the common and civil law systems, with a consistent approach of interpreting the rights of the contracting parties based on Shari'ah principles. This will lend certainty and predictability to the financial transactions and is particularly important in evolving legal frameworks that are facilitative of cross-border transactions as Islamic financial activities continue to venture beyond domestic borders."

The new rules will shakeup the industry in different ways. For example, under the new rules many insurance companies will have to split their life and general insurance and conduct the two as separate businesses. Takaful companies, which are more likely to have a composite licence, are the most likely to feel the effects of this. However, industry players see this as a positive step for the industry.

"The recent introduction of the Islamic Financial Services Act 2013 (IFSA) on 22 March 2013 has marked another step for the Islamic finance industry in Malaysia," Zafri Ab. Halim, Chief Executive Officer of Great Eastern Takaful, told Islamic Business & Finance. "There are mixed responses from the market, however in general it generates a positive step moving forward.

"IFSA reiterates and binds the importance of Shari'ah, proper governance and customer conduct for the Islamic finance industry in Malaysia. This is actually very good for the industry as it shows how the industry has matured and grown. IFSA will also harmonise the regulatory framework covering both the conventional and the Islamic finance industry. Where there are specificities to the Islamic sector, these are covered via an additional provision. Thus, the approach provides clarity and structure 

to regulations.

"However, the challenge is on the Takaful operators' readiness to comply with the new regulatory requirements considering the lack of resources and talents available. Another challenge is changing some conventional processes to be compliant in a short period of time."

Resources to support these ambitious plans were much discussed at Malaysia's 2014 budget consultation meeting, held on 18 June. Finance Ministry Secretary General, Tan Sri Dr Mohd Irwan Siregar Abdullah is quoted by Bernama as saying that robust growth in the global Sukuk market, led by Malaysia in recent years, had made it an important sector for the Government.

"We talked about agro Sukuk to help companies involved in farming activities raise capital to finance their businesses, alongside other forms of Sukuk. We are also looking at other ways to introduce new products in the Sukuk market in the coming years. This is to enable Malaysia to continue being the industry leader," Abdullah told Bernama.

Malaysia's Islamic capital market had contributed significantly to the development of the global Islamic capital market, Bernama quoted Abdullah as saying. At the same time, he reportedly added, non-Muslim countries like Japan and Korea have been attracted to learn from Malaysia on how to introduce Islamic financing to raise their own capital.

In his keynote speech as the 4th Annual World Takaful Conference: Family Takaful Summit, Abdullah explained, "Malaysia's Islamic finance industry has been in existence for over 30 years and that Malaysia's long track record of building a successful domestic Islamic financial industry of over 30 years gives the country a solid foundation that adds to the richness, diversity and maturity of the financial system in Malaysia."

According to Zeti, exporting Malaysia's wisdom will help bind Asia's growing economies. "The trend for greater regional economic and financial integration will also provide substantial opportunities for Islamic financial institutions to facilitate the integration process in the region and with other parts of the world, and thus have a greater role in financing Asia's future growth," she said.

© Islamic Business and Finance 2013

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‘Islamic Finance is as British as Fish and Chips and the FA Cup Final’ says Lord Mayor of London

GLOBALISLAMICFINANCEMAGAZINE.COM--Beyond the talk of proliferating market size, volume of issuances outstanding and innovative new structures and underlying assets, the global Sukuk market is poised to take that great leap forward to a new higher level. Emerging Sukuk models, such as that of the International Islamic Liquidity Management Corporation (IILM), for instance, serve not only to enhance financial stability by facilitating liquidity management for international Islamic financial services, but also to cater for economic development and debt management.

The 2013 London Sukuk Summit, judging by the feedback from speakers and participants, indeed raised the bar of the Sukuk discourse and at the same time managed to engage newcomers to the industry. “It was my first time at such an outstanding event as I have only recently been involved in Islamic Finance,” emphasised Robert Fresco, Director, Legendre Patrimoine.

“I was in charge of launching the first French Sukuk in green energy. The Sukuk Summit was incredible for me and my company, because of the high quality of the speakers and delegates that were present from around the world. Their expertise and insight over the two days of the conference was invaluable. I am now better informed about the Sukuk market and the key players in the industry. The event highlighted how important the Sukuk market is and its importance to the future of Islamic Finance. I hope to be a part of next year's Sukuk Summit and to further establish the business relationships which I had initiated at this year's event,” he added.

The opening session indeed attracted the participation of a premier division of key figures in the global Sukuk architecture. The Lord Mayor of London, Alderman Roger Gifford, in his welcome address, reminded that London as a centre for business and finance has always thrived on openness - openness to the movement of capital and ideas, openness to talented people, and an openness to global business. As such, London’s evolution as a Centre for Islamic Finance, complementing the role of centres in North Africa, the Gulf and Asia, reflects that same global approach.

The Lord Mayor gave the delegates much food for thought when he declared that “in the 21st Century, Islamic Finance is as British as fish and chips and the FA Cup Final. It is an integral part of London’s competitive offer. I look forward to seeing this market thrive and grow in the years to come.”

An international outlook on and clear domestic demand for Islamic Finance - need to be supported by sound regulatory structures, suggested the Lord Mayor. “The Islamic Finance sector is a much valued component in the cluster of services offered by London and the UK, subject to the same regulatory requirements - whether that is in capital adequacy, governance, fairness to clients, the ability and integrity of staff at all levels. This is a strength of London as a centre for Islamic Finance - especially when allied to the strong ethical culture that is at the core and heart of the sector - and should be at the heart of all business,” he added.

Alderman Gifford reminded delegates that the UK’s National Infrastructure Plan provides fantastic opportunities for investors - as the country looks for new capacity and the renewal of the old, across power, water, housing, transport and waste disposal. “All of these offer opportunities which can be met though Sukuk issuance or other Shariah-compliant means, by sovereign wealth funds and other pools of assets in state, corporate or individual hands” he added.

The Baroness Morris of Bolton, the UK Prime Minister David Cameron’s Trade Envoy for Kuwait, Jordan and the Palestinian Territories, representing Baroness Warsi, the Co-Chair of the UK Government Task Force on Islamic Finance and a Senior Minister of State at the Foreign & Commonwealth Office and the Minister for Faith & Communities, conveyed a considered message to the delegates about the “golden opportunity’ presented by Islamic Finance in the UK.

The UK Government in fact also hosted a lunchtime reception for the Sukuk Summit delegates at the historical Lancaster House, where Alan Duncan, Minister of State for International Development and a member of the ministerial team on the UK Islamic Finance Task Force, echoed the historical connections between the contemporary Islamic Finance industry and the City of London and why the Government is committed to working with the industry to further promote London as a premier and preferred hub for Islamic finance. The Co-Chair of the Task Force is Greg Clark, Financial Secretary to the Treasury and the fourth Minister is Lord Green, Minister of Trade.

“It was on a visit to Malaysia and Indonesia,” explained Baroness Warsi, “that I became acutely aware of the power and potential of Islamic finance. Globally the market has grown 50% faster than the traditional banking sector. Britain and British businesses of all sizes can no longer afford to ignore new and emerging markets. We need to demonstrate to the world that the UK is a first class destination for foreign investment and commerce - to show that Britain is open for business. We must constantly be striving for more, and Islamic Finance provides one area where development is possible. It’s not a silver bullet, but it is a golden opportunity. Not least because ten of the world’s 25 rapid growth markets are Muslim majority countries.”

Islamic Finance, continued Baroness Warsi, is not merely for Muslims but for anyone interested in ethical and socially-responsible financial intermediation. The sector is now a global mainstream one which is projected to grow five-fold by the end of this decade. “In the wake of the financial crisis, the principles upon which Islamic finance are based seem more important, more attractive, than ever before. Principles of balance; shared risk; fairness; due diligence; oversight and transparency. Principles that prevent you from selling what you don’t own or attaching a value to assets that do not exist. Islamic Finance could be a sensible, measured banking option, at a time when confidence remains low and the Government is working with the G8 to improve the transparency of financial institutions. This is the right time, right place for Islamic Finance. I am proud to say that the Coalition Government agrees,” she maintained.

She urged the City of London to respond to the challenge and opportunity presented by the global Islamic Finance industry. Given that London is already a major centre for Islamic Finance education, Baroness Warsi, confirmed that the UK Government is looking “at the introduction of accreditation for Islamic Finance education as well as a regulatory body for training providers.”

The UK Government, she added, will support the Islamic Finance industry “in its aim to broaden the range of products and services, reducing the risk of over-exposure and ensuring that high quality Islamic (product) alternatives are available to (British) customers. The Government’s role is to create the regulatory and tax frameworks to allow the market to thrive, and, ultimately, help to produce the growth that Britain needs. By championing Islamic Finance, I believe we are doing just that.”

One way of doing this is the mobilization of Islamic funding and investment for infrastructure projects in the UK. “We are looking at ways the Task Force can mobilise funding, for example in to the top 40 priority infrastructure projects indentified in the National Infrastructure Plan. This is a huge opportunity for the UK, and is a cross-Government effort. The Financial Secretary of Treasury, the Commercial Secretary to the Treasury and I are looking at this in great detail. We will be engaging with private investors, Sovereign Wealth Investors, and major stakeholders including the Islamic Development Bank, in order to realise this vision,” explained Minister Warsi.

The Keynote Speaker, Sheikh Abdullah Saoud Al-Thani, Governor of the Qatar Central Bank (QCB) and current Chairman of the Governing Councils of both the Islamic Financial Services Board (IFSB) and the IILM, laid out a roadmap of the exciting potential and implicit challenges for the global Sukuk market going forward.

In Islamic banking and finance, explained Sheikh Abdullah, the Fractional Reserve banking system does not exist but instead, a 100% reserve banking system exists. “An Islamic bank,” he emphasised, “cannot lend what it does not have, and this you may say, is unfortunate, as this will always cause a disadvantage compared to its conventional competitor, and a level playing field can never exist. This disadvantage though, may become Islamic Finances greatest strength.”

Islamic Finance's essence lies in the concept of risk sharing, which provides a great deal of motivation to develop the Islamic Capital Markets, as these instruments, such as Sukuk, are built on this essence. In most Muslim countries, market share for Islamic banks is well below 20%. “I can only think of the possibilities of what can happen with the Sukuk industry if the momentum of growth for Islamic Finance continues at that 40% compounded rate from 2004 to 2011 that it experienced,” suggested Governor Abdullah.

The mobilisation of investments from Islamic funds especially retail unit trusts into Sukuk issuances that allow for a wider investor base given that the estimated 1,000 such funds lack sophistication, since Islamic equity and fixed income markets do not have sufficient volumes, represents a major opportunity. Savings rates in many Muslim countries too are among the highest rates in the world, which alone presents a large inherent potential for Sukuk and the Islamic Capital Markets, including the promotion of financing and direct investment into Shariah-compliant SMEs.

However, several challenges exist that can limit this potential.

For institutions offering Islamic Financial Services, the limited availability of Shariah-compliant instruments in several jurisdictions continues to pose substantial challenges. The combination of supply and cost considerations has resulted in unnecessarily large holdings of cash by most Islamic Financial Service providers to meet their short-term liquidity needs.

“Addressing the limitations that constrain effective liquidity management practices will be critical not only to support the further development of Islamic Finance, but, more importantly, to promote global financial stability,” stressed Sheikh Abdullah.

Sheikh Abdullah warned that the existing mechanism of Shariah scholars’ involvement in product development, harmonisation and approval may not be adequate for a rapidly growing market that needs to expand according to international standards.

A basic requirement for Shariah compliance of any Sukuk structure is that it shall be backed by real (tangible) assets. Some concern, however, has been raised regarding the limited number of such assets available with Islamic financial institutions. Moreover, according to some reports, the cost of issuing Sukuk can be as much as 60% higher than conventional bonds. These factors could slow down the growth of the Sukuk market.

The strong performance of Sukuk has been largely on the back of sovereign and quasi-sovereign issuances, with corporate issues lagging behind despite the strong growth. Regulation is also a key issue for Sukuk especially creating a level playing field in terms of tax neutrality for both conventional and equivalent Islamic products. The increased use of credit ratings in Sukuk, with the three international credit rating agencies using conventional methodologies to rate Islamic financial instruments including Sukuk despite the fact that Islamic financial institutions and instruments have their own characteristics, also needs to be reconsidered.

Professor Rifaat Abdel Karim, CEO of IILM, in his Special Address, presented a unique vision of the IILM Sukuk Golden Triangle connecting financial stability, economic development and debt management.

The multilateral Corporation was established by central banks, monetary authorities and multilaterals and is mandated to develop and issue short-term Shari’ah-compliant financial instruments to facilitate effective cross-border liquidity management for institutions that offer Islamic financial services. The IILM endeavours to enhance cross-border liquidity flows, international synergies between institutions and more importantly to facilitate financial stability within the Islamic financial systems.

It is no secret that the dearth of Shariah-compliant high-quality, liquid assets (HQLA) is a key risk to which Islamic financial institutions are exposed. According to Professor Rifaat, Sukuk can play a vital role in funding the real economy by ensuring that the funds are used only to finance real assets and that excessive leveraging cannot take place. This contributes to enhancing financial stability. Sukuk can also be tradable and offer a return that can be predictable at a relatively commensurate low risk. As such, they can be Shariah-compliant substitutes for conventional fixed-income securities. As such the IILM short-term Sukuk issuance programme, launched in April, indeed aims at enhancing the ability of Islamic financial institutions to manage their liquidity both nationally and on a cross border basis by creating and issuing Shariah-compliant HQLA.

These instruments, maintained Professor Rifaat, will over time have the characteristics to meet market requirements and recently promulgated international guidelines for liquidity requirements such as Liquidity Coverage Ratio (LCR) Standard adopted by the Basle Committee in January.

The Committee in fact gave national regulators of Islamic financial institutions significant discretions to determine what instruments may be treated as eligible for their liquidity requirements. Not surprisingly, the IILM is focused on obtaining appropriate regulatory treatment for its Sukuk consistent with the requirements of the Basel Committee, and according to Professor Rifaat, “the IILM has started to work closely with its member central banks and relevant regulatory bodies to obtain clear regulatory treatment for the IILM Sukuk and it is likely that this treatment will be favourable for the international Islamic Financial Services industry.

In terms of economic development, the IILM has developed a unique value proposition in supplementing the sovereigns’ current sources of funding (especially raising longer-term funding) that would allow them to finance development projects in their countries.

Multilateral developments banks (MDBs), stressed Professor Rifaat, are a natural partner for the IILM, and can act as credit enhancement providers for their member countries’ obligations to the IILM. This will increase the ability of their member countries to raise funds by selling assets to the IILM on a “temporary separation of ownership” basis. This would provide the member countries with an opportunity to access an alternative source of funding that could be available during market stress periods.

In terms of debt management, the development of the IILM Sukuk market, said Professor Rifaat, will also allow sovereigns to access funding with varying maturities, thereby avoiding funding mismatches. It will also allow for diversification of risks by issuers and investors. As such, the IILM Sukuk may assist sovereigns in their debt management by enabling them to benefit from either sovereign debt re-profiling or from flexibility in funding arrangements.

Another interesting Special Address was that by Dr Nik Ramlah Mahmood, Deputy Chief Executive, Securities Commission Malaysia, who spoke on ‘Facilitating Retail Participation in the Sukuk Market, thus closing the stakeholder spectrum from high finance to ultra retail.

Dr Ramlah, one of the most proactive regulators in the world involved in the Islamic Capital Market (ICM), passionately argued for “the democratization of financial capital” through the broadening of access to the capital market. Sukuk likes bonds, continue to be the domain of the “big boys”, both on the demand and supply sides. Issues like rating requirements, cost of issuance and complexity of documentation meant that capital raising through Sukuk is predominantly by larger corporations and entities. As such, to Dr Ramlah “widening access to the Islamic Capital Market is critical to the development of a successful and inclusive Islamic Finance industry. In supporting this, key stakeholders such as the policymakers, supervisory authorities, Islamic financial institutions and scholars have to explore innovative and inclusive financial solutions that serve the needs of both high finance and high street.”

Indeed, the first Islamic Principles of Commercial Law asserts that wealth (and property) should be circulated among the general public and actively transferred from one hand to another in the form of investment (and expenditure). “It is for this reason that ensuring investment access to the masses has and continues to be a key driver for the development of Islamic markets in Malaysia. It is for this reason too that Malaysia’s Islamic Capital Market has been systematically designed to ensure accessibility and inclusiveness whilst ensuring the protection of investors, efficiency in intermediation, fair and orderly markets and risk mitigation,” she explained.

With a view to facilitating greater direct retail participation in the corporate bonds and Sukuk market, the Securities Commission Malaysia in 2012 developed the framework for retail bonds and Sukuk as envisaged under the Capital Market Masterplan 2. Retail Sukuk is part of the agenda to extend ICM offerings to the masses, enabling retail investors’ access to a wider range of investment products. Under the Exchange Traded Bonds and Sukuk (ETBS) framework, retail investors have direct access to Sukuk thereby broadening the range of low-risk investment products available to them and facilitating diversification for risk management purposes.

Pursuant to the release of the framework, Malaysia’s first retail (exchange-traded) Sukuk was issued by a government-owned entity, Danainfra Nasional Berhad, a company tasked to undertake the development of the country’s first mass rapid transit (MRT) project at a cost of GBP7.9 billion (RM36.6 billion). The retail Sukuk tranche was part of a GBP323 million (RM1.5 billion) government-guaranteed issuance, of which GBP 65 million or 20% was allotted to retail investors and was listed on the Malaysian Stock Exchange (Bursa Malaysia) in February 2013. Proceeds were to be used to part finance the project’s capital expenditure and operating expenses.

“Among the key decisions we had to make prior to the introduction of the framework,” revealed Dr Ramlah, “was to determine whether retail bonds and Sukuk should be offered OTC or on the Exchange platform. The higher cost of trading retail bonds and Sukuk is also a key issue and may also act as dampener to the broader efforts to encourage secondary market liquidity. In this regard, several incentives were introduced in order to ensure that trading fees for exchange traded bonds and Sukuk are competitive. Another area that requires considerable effort is investor education.”

However, she warned against viewing the development of retail Sukuk in isolation because in Malaysia at least it does not do justice to the many other efforts that have and continue to be pursued to extend the reach and relevance of Islamic capital market products and services to a wider spectrum of issuers and investors.

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Islamic Bank of Britain Showcases Islamic Finance Expertise to Indonesian Officials

CPIFINANCIAL.NET---A total of 13 judges from Indonesia’s Supreme Court, High Court and Religious High Court visited the Bank to learn more about Islamic finance as part of a course they were attending at the Markfield Institute of Higher Education (MIHE) based in Markfield, Leicestershire.

The judges, who were studying Islamic Financial Systems, Law & Arbitration for three days at MIHE, were given a tour of the Bank’s offices. This was followed by presentations from senior IBB executives on how Islamic banking differs from conventional banking and its position within the British legal framework.


Commenting on the visit, Sultan Choudhury, managing director, Islamic Bank of Britain said, “IBB has a long-standing reputation as a leader in the international Islamic finance sector and we are often asked to showcase our achievements and expertise. The delegation of high-ranking Indonesian judges found their visit to the Bank very informative, providing both parties with a forum to share knowledge and ideas.”

Indonesia is also preparing itself for a boom in Islamic banking. It is the world’s most populous Muslim nation, with almost 90 per cent of the 250 million population practising the faith. This presents a vast opportunity for the Indonesian Islamic finance industry. According to industry figures, whilst Islamic banking currently only represents 4 per cent of Indonesia’s banking system Islamic banking assets grew by 50 per cent, to US$17 billion, over the last year. Growth is expected to continue through the combined efforts of the Indonesian government and financial institutions seeking to realise the potential of this booming sector.

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Oman: New Developments in Islamic Financial Services

OXFORDBUSINESSGROUP.COM--A new index for Oman’s stock exchange is expected to provide a boost to the Sultanate’s nascent Islamic financial services sector and lead the way for additional sharia-compliant products.

In early June, the Muscat Securities Market (MSM) announced that it was close to launching a new index, one for listed companies that operate according to the principles of sharia, as set down by the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions.

To be known as the MSM Sharia Index, the benchmark will contain 31 listings. Industrial firms will be the best represented, with 18 companies, followed by 10 from the services sector and three from the financial industry.

This is the inverse of the MSM30, the exchange’s primary index, which is heavily weighted towards banks. The low number of financial firm listings in the new index can, to some degree, be explained by Oman’s late entry into the sharia-compliant finance field, with authorisation for Islamic banking coming only in 2011.

One of the smaller Gulf exchanges, the MSM has a market capitalisation of around $30bn (compared to a GDP of about $72bn), with 165 companies trading on its boards.

To ensure that the companies listed on the MSM Sharia Index continue to comply with Islamic business principles, quarterly reviews of their activities will be conducted, a process aimed at both maintaining standards and promoting confidence in the products being offered to investors.

The index is the latest development in Oman’s Islamic financial services market, which has been in existence since Sultan Qaboos bin Qaboos Al Said issued an enabling royal decree in May 2011. Since then, two new institutions – Bank Nizwa and Al Izz International Bank – have acquired banking licences, while established conventional lenders have opened Islamic windows.

In 2012 both Nizwa and Al Izz floated initial public offerings (IPOs), in line with the central bank requirement that they list at least 40% of their shares. The IPOs were strongly oversubscribed, suggesting an appetite for Islamic products on the MSM.

Sharia-compliant banks are expected to draw in new customers rather win market share from their conventional counterparts. As Hamood bin Sangour bin Hashim Al Zadjali, executive president of the Central Bank of Oman (CBO), told OBG in 2012, “The CBO ... believes that the advent of Islamic banking in Oman will complement existing conventional banking, augment financial inclusion and promote growth in the economy for years to come.”

According to Pradeep Asrani, managing director of investment services firm Gulf Baader Capital Markets, Islamic banks will capture a market share of up to 5% within two years, which in turn could promote further expansion into sharia-compliant investment funds and brokerages, as well as sukuks (Islamic bonds).

More generally, the availability of Islamic banking and other financial services is expected to act as a spur to the market and to the economy as a whole. In 2012, Ahmed bin Saleh Al Marhoon, the MSM’s director-general, told OBG that the introduction of Islamic banking would inject more liquidity into local capital markets as individuals seeking sharia-compliant investment options would no longer have to look abroad. The new MSM Sharia Index will provide one more reason for these investors to place their funds locally.

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London Mayor Sees Plenty of Opportunities for Islamic Finance

BLOOMBERG.COM---London Mayor Boris Johnson called for a greater U.K. role in the Islamic-finance market as a Malaysian delegation visited the capital city.

The London Stock Exchange listed $24 billion of sukuk in the past two years, Johnson said in his office today at a meeting with Malaysian Prime Minister Najib Razak. The capital should be at the heart of the Islamic finance market, which is set to grow to $1.6 trillion by 2015, he said.

“Some of the most famous and iconic structures in London are actually built thanks to Islamic finance,” Mayor Johnson said. “The Shard is the product of Shariah-compliant finance. We certainly have plenty of opportunities.”

Built with Qatari-backing, the Shard is western Europe’s tallest building, standing at 309.6 meters (1,016 feet) on the South Bank of the River Thames. Developer SP Setia Bhd. (SPSB)and palm oil producer Sime Darby Bhd. (SIME) led a Malaysian group that bought London’s Battersea Power Station for 400 million pounds ($611 million) last July. The two companies own the site with the Employees Provident Fund.

Johnson said he and Najib tomorrow will join Prime Minister David Cameron to unveil the start of work on the Battersea site. Cameron visited Malaysia, the biggest center for the more than $1 trillion-a-year Islamic finance market, last year to build on a pact to promote bilateral engagement in the industry and created an Islamic Finance Task Force in March. Shariah-compliant bonds pay returns on assets to comply with the Koran’s ban on interest.

London will host more than 1,500 government leaders, scholars and executives at the World Islamic Economic Forum in October, the first outside Muslim world, Najib said.

Malaysia will be a major player in London real estate with investors like the Employees Provident Fund, which oversees $176 billion for more than 13 million Malaysians, Najib said.

“We will probably see quite an upswing in terms of Malaysian companies looking at investing at real estate development and purchasing buildings in London,” Najib said. (Lyubov Pronina)

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