Malaysia: PLUS Berhad in record RM23.4 billion (US$7.3 billion) sukuk (Islamic bond) sale

PLUS Berhad’s record RM23.4 billion (US$7.3 billion) Islamic bond sale is attracting life insurers with higher-than-average yields and maturities of as much as 25 years.

The Malaysian company is taking over the nation’s biggest toll-road operator PLUS Expressways Bhd in the first leveraged buyout using syariah-compliant bonds. PLUS offered RM11.3 billion of sukuk at a maximum yield of 5.07 per cent for a bond due in as long as 19 years, compared with average yields on global Islamic notes of 4.1 per cent. A portion of the total issue will be privately placed, at tenors of 20 to 25 years, according to the underwriters.

Companies in Malaysia have issued RM44.2 billion of sukuk this year, with almost 80 per cent due in less than 10 years, according to data compiled by Bloomberg. Sales of longer- dated debt may help set a benchmark for companies seeking funding for road and rail projects as part of the government’s US$444 billion development plan for the next decade.

“It’s rare to see an AAA-rated company issuing Islamic bonds with such long maturities,” Michael Chang, who oversees US$1 billion as head of fixed income at MCIS Zurich Insurance Bhd in Kuala Lumpur, the local unit of Zurich Financial Services AG, Switzerland’s largest insurer, said in an interview yesterday. 

“PLUS sukuk will be in demand among insurers, both Islamic and non-Islamic. It will also help deepen the Islamic bond market.”

PLUS was set up by Malaysia’s biggest pension fund, the Employee Provident Fund, and government-owned UEM Group Bhd. to take over the highway assets of PLUS Expressways following their RM23 billion acquisition of the company. In a leveraged buyout, the buyer borrows money to purchase a controlling interest in a company and usually uses the acquired assets as security for the loans or bonds.

Izzaddin Idris, chief executive officer of UEM, couldn’t be reached for comment yesterday when phoned by Bloomberg. The head of corporate communications at the company didn’t reply to an e- mail with questions.

PLUS is offering RM11.3 billion of sukuk maturing in five to 19 years. Orders close tomorrow and the bonds are expected to be issued on Jan 13, according to a sales advisory sent to investors on Dec 14. Malaysia’s CIMB Group Holdings Bhd, AMMB Holdings Bhd, Malayan Banking Bhd and RHB Capital Bhd are lead-managing the sale.

Malaysia’s five-year ringgit-denominated Islamic bonds yielded 3.37 per cent yesterday, the lowest level since Oct 18, 2010, according to data compiled by Bank Negara Malaysia. Ten- year notes yield 3.81 per cent. The Bloomberg-AIBIM-Bursa Malaysia Sovereign syariah Index, which tracks the most-traded local-currency debt, was little changed at 105.4510 yesterday. The gauge has climbed 4.3 per cent this year.

State-controlled power producer Tenaga Nasional Bhd sold RM4.85 billion of 20-year Islamic bonds at a yield of 4.9 per cent in October and attracted bids for 4.7 times the amount on offer. The PLUS sukuk surpasses the previous Malaysian record of RM12 billion sold by telecommunications company Binariang GSM Sdn in 2007.

There are still funds in the market looking to invest in sukuk even after new issues rose to an all-time high this year, according to Mohd Noor Hj A Rahman, chief executive officer at OSK-UOB Islamic Fund Management Bhd in Kuala Lumpur.

Sales of local-currency Islamic bonds in the Southeast Asian nation, the world’s biggest market for the debt, climbed 81 per cent in 2011, from RM24.4 billion in the same period of 2010, according to data compiled by Bloomberg. Global offerings of sukuk, which pay returns on assets to comply with Islam’s ban on interest, jumped 68 percent to US$26.3 billion, compared with US$15.7 billion in the year-earlier period.

“Demand for PLUS will be strong as there’s still plenty of liquidity in the market,” Mohd Noor said in an interview yesterday. “We’d be interested as there aren’t enough sukuk.”

Investors in Asia and the Middle East will be attracted to the PLUS sukuk because of its top credit rating and the potential for currency appreciation next year, according to Malek Khodr Temsah at Albaraka Banking Group BSC in Bahrain. PLUS Expressways is rated AAA by RAM Ratings Services Bhd, their highest investment grade, while Malaysian Rating Corp has assigned a preliminary AAA rating to PLUS Bhd.

“It makes for quite a compelling investment opportunity,” Temsah, assistant vice president of treasury and investment at the Manama-based bank, said by e-mail yesterday. “The hunt for yield will continue to be one of the dominant themes of global capital flows in 2012, despite the heightened risk aversion and this will bode well for state-backed corporate issuers out of Asia.”

Albaraka’s Temsah said his bank is only allowed to invest in dollar-denominated Islamic bonds given the risk-averse mandate of the company. The lender will be looking to adjust these “parameters” in 2012, he said.

Syariah-compliant bonds gained 6.6 per cent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets rose 6.8 per cent, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

“The yield for the PLUS sukuk is quite attractive compared with Islamic government bonds,” Calbert Loh, head of treasury at Kuala Lumpur-based Bangkok Bank Bhd, who helps manage RM2 billion, said in an interview yesterday. “Insurance companies would love to buy the longer-dated paper for returns on their life insurance policies.” -- (Bloomberg/15-Dec-2011)

-----

Alfalah Consulting Malaysia:  
www.alfalahconsulting.com

Islamic Investment Malaysia: 
www.islamic-invest-malaysia.com

Malaysia, Emirates plan sukuk to fund aircraft

Malaysian Airline System Bhd (MAS) and AirAsia X Sdn are joining Emirates in planning sales of Islamic bonds as banks curb lending on Europe’s debt crisis.

MAS, voted Asia’s leading air carrier by World Travel Awards this year, may sell sukuk to partly fund an order for RM12 billion (US$3.8 billion) of aircraft due to be delivered by the end of 2014, chief executive officer Ahmad Jauhari Yayha told reporters in Kuala Lumpur on Dec. 7. AirAsia X, the region’s first long-haul budget service, may issue syariah-compliant debt to expand its fleet, CEO Azran Osman Rani said in an interview in the capital on Dec. 13.

The airlines are turning to Islamic markets on prospects European lenders will reduce credit next year due to the region’s financial crisis, according to Standard & Poor’s. Syndicated loans in Europe, the Middle East and Africa fell 31 per cent to US$184.4 billion this quarter from the previous three months, while global sales of sukuk rose 38 per cent to US$7.2 billion, according to data compiled by Bloomberg.

“Banks in Europe are less willing to provide financing for large asset purchases because of the region’s debt crisis and the need to preserve capital,” Hang Tuah Amin Tajudin, vice president of Kuala Lumpur-based OCBC Al-Amin Bank Bhd, the Islamic unit of Singapore’s Oversea-Chinese Banking Corp, said in a Dec 19 interview. “Sukuk is a good option as there’s still pent-up demand.”

Average yields on sukuk have dropped eight basis points, or 0.08 percentage point, to 4.09 per cent since reaching a seven- month high of 4.17 per cent on Dec 9, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Yields fell 65 basis points this year, following a 252 basis-point decline in 2010.

Yields on emerging-market bonds fell five basis points this month to 6.06 per cent and are down seven basis points since the end of last year, according to JPMorgan Chase & Co’s EMBI Global Sovereign Index.

“Sukuk may not necessarily be priced lower than conventional bonds but they offer the airlines a source of diversification,” Michael Oh-Lau, head of debt markets at Kuala Lumpur-based Maybank Investment Bank Bhd, said by e-mail on Dec 12. “The sukuk market opens doors to a wider group of investors.”

Islamic bonds are “naturally suited” to airlines given their structure and because aircraft can be used as the underlying asset to back the debt, said Badlisyah Abdul Ghani, chief executive officer of Kuala Lumpur-based CIMB Islamic Bank Bhd, a unit of CIMB Group Holdings Bhd.

Sukuk can be based on a sale and lease agreement such as Ijara, where the asset is rented out and final ownership is optional. Islamic bonds can also use Murabaha, a three-party transaction where a bank buys a product on behalf of the customer and sells it back at a mark up. There is also Istisna, a contract to make an item at an agreed price with the potential buyer making periodic payments.

“More airlines can be expected to look at the Islamic market for financing,” Badlisyah said in a Dec. 12 interview. “Ijara is a perfect Islamic structure for airlines.”

Selling syariah-compliant notes is an option for Emirates, the biggest international carrier, chairman Sheikh Ahmed bin Saeed al Maktoum said at the Dubai Airshow on Nov 15. Gary Chapman, president for group services, didn’t answer calls to his mobile phone this week seeking comment.

The company, based in the United Arab Emirates, sold US$550 million of floating rate dollar-denominated Islamic bonds in June 2005, the world’s first sale of sukuk by an airline. The price of the notes was 98.36 on Dec 20, compared with 94.12 at the end of last year, according to data compiled by Bloomberg.

Loans in Europe, the Middle East and Africa are poised for the worst quarter since the three months ended March 2010 and have climbed 8 per cent in 2011 to US$1 trillion from the year earlier period, data compiled by Bloomberg show. Global sales of Islamic bonds, which pay returns on assets to comply with Islam’s ban on interest, rose 68 per cent to US$26.4 billion, short of the 2007 record of US$31 billion.

The deteriorating outlook for the airline industry and the clampdown on lending may encourage companies to turn to the Islamic bond market, Shukor Yusof, a Singapore-based aviation analyst at S&P, said in an interview on Dec 20.

Profits may drop 57 per cent this year and 49 per cent in 2012 as Europe’s crisis hurts bookings, the International Air Transport Association said in a Dec 7 statement. Companies may be unprofitable next year should the contagion “spiral out of control,” according to the Montreal-based agency that represents 240 airlines worldwide. Jet fuel prices have increased 14 per cent this year to US$119.40 per barrel.

“Many airlines won’t be able to raise funds from their traditional sources,” said Shukor. “It’s natural for the Emirates and the Malaysian Airlines to look at sukuk as they are from Muslim jurisdictions.”

Syariah-compliant bonds returned 6.7 per cent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets rose 7.9 per cent, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

The difference between average yields and the London interbank offered rate, or Libor, was little changed this month at 286 and narrowed four basis points in 2011, according to the HSBC/NASDAQ index.

The yield on Dubai’s 6.396 per cent Islamic notes due in November 2014 fell two basis points to 5.89 per cent yesterday and has decreased from the year’s high of 6.64 per cent on Jan 31, according to data compiled by Bloomberg. The difference in yields between Malaysia’s sukuk and the Dubai Department of Finance’s debt narrowed three basis points yesterday to 316, data compiled by Bloomberg show.

The Bloomberg Malaysian Sukuk Ex-MYR Index of foreign- currency Islamic debt sold by companies in Malaysia climbed to 104.2280 on Dec 20, the highest level since Nov 17. The gauge has gained 5.8 per cent this year.

AirAsia X, the long-haul affiliate of Asia’s biggest discount carrier AirAsia Bhd, is looking at Islamic bonds as it may add at least another 60 aircraft to an existing order of 30 Airbus SAS planes, CEO Azran said.

Emirates is building the world’s biggest fleet of wide-body jets and signed an order for US$18 billion of planes on Nov 13 with Boeing Co.

“In today’s environment, you need a variety of funding sources,” Azran said in telephone interview in Kuala Lumpur. “The situation in Europe plays a part.” -- (Bloomberg: 22-Dec-2011)

---

Alfalah Consulting Malaysia: www.alfalahconsulting.com

Sukuk market is the fastest growing segment of international finance

"The sukuk market is the fastest growing part of Islamic finance. Indeed it is one of the fastest growing segments in the global financial market. Having attracted interest from the business community worldwide, it has helped place Islamic finance as a viable industry and as an asset class that is not confined to Muslim countries but as part and parcel of the international financial market," says Muhammad Al-Bashir Muhammad al-Amine, who is currently group head of Shariah compliance at Bank Al-Khair (formerly Unicorn Investment Bank) in Bahrain, in the introduction of his book titled “Global Sukuk and Islamic Securitisation Market - Financial Engineering and Product Innovation”.
The book is the latest analytical offering on the subject of sukuk and was published by Brill under its Arab and Islamic law series. The claims in the above paragraph are in contrast to the outrageous claim on the cover of the book that "The sukuk market is the fastest growing segment of international finance".
Much of the literature on the contemporary Islamic finance industry has had the unfortunate tendency of excessive eulogizing of the virtues and values of the Islamic system of financial and economic management based on descriptive rather than empirical and philosophical analysis. At the same time the style also bordered on exaggerated claims about the Islamic finance industry and its role and impact on the global financial system.
To be fair, some of the literature on Islamic finance and economy in the last decade or so has shown a remarkable improvement and in some cases have even threatened to offer a valuable alternative to the cornucopia of literature on the political economy, finance, development and the market - written largely from a neo-liberal or purely Keynesian or monetarist capitalist point of view.
While Al-Amine's “Global Sukuk and Islamic Securitization Market - Financial Engineering and Product Innovation” does not necessarily fall into any of the above categories, it is important to put some of his initial claims in perspective. The sukuk market may or may not be the fastest growing component in Islamic finance. There has been very little empirical research done on this and much of the statistics are extrapolations from aggregate figures issued by some individual securities regulators ort professional associations or by some information, data and news outlets.
The base figure at the same time for sukuk originations is very low - there are about $120 billion to $150 billion of sukuk outstanding in the world today of which over 60 percent are from Malaysian issuers. Compare this to the several trillion dollars each conventional bond market and the hedge fund market.
At the same time, the commodity Murabaha and Tawarruq market remain the single largest markets in the Islamic finance industry with an estimated $1.2 trillion of funds invested.
Similarly, the interest from the business community worldwide has been at best curiosity of a potentially interesting new fund-raising asset class, but in reality this interest has translated into a peripheral acceptability of and involvement in the sukuk market. How many Western or non-Muslim corporate/multilateral/quasi sovereign sukuk issuances, for instance, have come to the market? Hardly enough to count on both hands - Saxony Anhalt, East Cameron Partners, International Innovative Technologies (IIT), GE, Nomura, IFC, World Bank, Shell Malaysia and Tesco Malaysia. This is hardly the stuff of sukuk as a wild fire accelerant of global finance.
The point I am trying to make is that sukuk market dynamics is as complex as other asset classes whether in Muslim jurisdictions or non-Muslim ones. These relate to a cornucopia of issues - regulatory framework, enabling legislation, ratings, Shariah structures, purchase undertaking, guarantees, especially third party Sukuk guarantees, SPVs (special purpose vehicles), trust laws, court procedure (in case of defaults and recourse to law especially for different creditors), listings, secondary market, arbitration clauses and so on.
As such, any analysis will have to start from the basic proposition of the dynamics of the issuer jurisdiction, and these vary dramatically from country to country. Most Muslim jurisdictions for instance do not have Sukuk legislation in place, let alone tax neutrality or even the basic Islamic banking laws in place. Saudi Arabia, the world's largest Islamic finance market in terms of assets and liquidity, does not have a dedicated stand alone Islamic banking law in place, although its Sukuk law was designed in tandem with the debut sukuk offering of SABIC (Saudi Basic Industries Corp.), the world's largest exporter of petrochemicals, the SR3 billion SABIC I Sukuk issued in 2006. At the same time there are serious barriers to entry for investors in Saudi public Sukuk offerings because these are by law restricted to Saudi nationals and in the odd exception extended to GCC citizens.
These should not detract from Dr al-Amine's prodigious effort contained in 10 hefty chapters. These cover the growth of Islamic finance; concept and development of the sukuk market; Shariah basis for sukuk structures; sukuk structures; Global PLS sukuk structures; Securitization and sukuk; governing law in sukuk structures; Shariah convergence; risk factors in Sukuk Structures; and rating sukuk. These chapters contain valuable information and analysis, although the author could have been more forthcoming and thorough in the frankness of his conclusions and projections.
Even with this effort, there are a number of gaps - nothing on regulatory and legal frameworks (or the lack of them) which is an essential prerequisite to the development of an onshore sukuk or Islamic capital market. There is very little discussion of credit enhancement in sukuk structures through third party guarantees such as the initiative being contemplated by ICIEC and by Danajamin, the Bong and Sukuk Guarantee Agency in Malaysia.
Even in the governing law in sukuk structures, the examples used are curious - the Shamil/Beximco and TID/Blom Bank cases - these involved Murabaha and Wakala arrangements and not sukuk. Instead the legal issues raised by the default of the East Cameron, TID, IIG and the SAAD/AlGosaibi Sukuk issuances should have been covered in this chapter.
The East Cameron does get a cursory treatment in the Chapter on Securitization and Sukuk although the underlying issues are not discussed adequately especially the structure, the legal and the Shariah aspects. For instance, how come the lawyers for East Cameron Partners in the Chapter 11 Bankruptcy proceedings requested a ruling "that the sale of the ORRI (overriding royalty interest) was in essence a secured loan and not a 'true sale'". Surely this raises questions or at least an analysis of the Shariah basis of the structure and whether indeed the scholars were provided the relevant and complete information prior to them approving the Shariah basis of the structure. If not, investors and creditors may have been liable to claim compensation on the basis that the transaction was fraught with Gharar in that there may have been improper disclosure relating to the transaction.
The author rightly concludes that the growth of Islamic finance had outpaced that of the conventional industry in several countries and regions (the Middle East and Southeast Asia) in recent decades. This growth, he says, is likely to continue "at a furious pace in the coming years as the present size of the industry represents only a very small percentage of the overall global financial market place." His optimism is underpinned by his prediction that "this change will perhaps take place rather more quickly than many may expect," although he does not offer the reasons for this optimism, especially at a time when many Muslim countries are faced with volatility partly precipitated by the so-called Arab Spring events.
To the author, the holy grail of the future development of Islamic finance is the sukuk market, although the underlying assumptions on market growth and the involvement of the West are over-optimistic and empirically unproven and at best ambiguous. In his mitigation, Al-Amine rightly warns that "for the sukuk market to develop we need a robust market infrastructure in the region ns where Islamic finance is witnessing its rapid growth." At the same time this will also depend on developing a strong bond market in these regions; the Shariah legitimacy and authenticity of sukuk structures; a better engagement and discourse on sukuk structures by AAOIFI and the OIC Fiqh Academy, perhaps moving towards a more scientific way of issuing and developing fatwas in Islamic finance complete with market consultation and method of articulating these opinions and therefore paving the way to new ideas; the development of legal frameworks which are sustainable and based on internationally recognized standards and practices; and the potential role of sukuk in facilitating liquidity management, the strategy, for instance, on which the International Islamic Liquidity Management Corporation (IILM) has embarked upon.
Securitization, says Al-Amine, is expected to play a positive role in the future development of the sukuk market and seems to be the best way for the future of sukuk structuring because of the securitization condition of 'true sale' and legal transfer of ownership rather than just beneficial ownership. "These conditions shifts the risk of sukuk from the originator of the sukuk to the underlying asset. These principles ware more in line with Shariah principles than those followed so far in unsecured sukuk where the risk of the sukuk is fundamentally based on the creditworthiness of the originator," he maintains.
The author could have been more critical of the approach of the international rating agencies in rating not only sukuk but also Islamic finance products and institutions per se. They have stubbornly refused to design separate rating criteria to accommodate the specificities of Islamic finance in contrast to the Malaysian rating agencies RAM Rating Services and Malaysia Rating Corporation (MARC), which between them rate the largest number of sukuk issuance sin the world.
This book I believe is a valuable contribution to the literature on sukuk and Islamic finance, especially for regulators, market players, advisories, researchers, academics and students alike, although the author should be a little bit more discerning in some of his choices of references, especially media articles and reports by some institutions. (ArabNews/23-Dec-2011)

---
Consulting/training: www.alfalahconsulting.com
Consultant/trainer: www.ahmad-sanusi-husain.com
Islamic investment: www.islamic-invest-malaysia.com

Press Release : Alfalah Consulting to Organise KL Conference on Islamic Finance 2011

KUALA LUMPUR,  Aug 13 : Kuala Lumpur-based Alfalah Consulting, is organising the KL Conference on Islamic Finance 2011 over two days from 20 March 2012 in Kuala Lumpur.

The company is an international consulting and training provider specialised in the area of Islamic finance, business, management, personal and professional development and motivation.

The conference would explore key principles, instruments, development and issues on Islamic finance.

It enables individuals, investors and corporations to learn and understand better about Islamic finance from a wide spectrum of expertise.The conference will be an excellent platform for networking and exchange of experience, issues, ideas and outlook about the industry and services.

For more details please visit the event site: http://islamic-finance-conference.net
Organiser's web site: http://alfalahconsulting.com

Islamic banking in India: Existing legal provisions have scope to allow Islamic banking

Mirwaiz Umar Farooq has set in a wind of change when he vouched for implementation of Islamic Banking practices in the state. It took no time to bring top line mainstream political leaders into its fold unleashing a debate on the issue. Even as possibility of Islamic Banking practices in the country has been debated for quite some time now, the politicizing of the issue has made it an impossible task. 

The absence of Islamic banking, as pointed out in various studies from time to time, has emerged as one of the major reasons of backwardness of Muslims in India. These studies revealed that Muslims in India have worst credit- deposit ratio due to unavailability of interest free loans. With 97% workers engaged in unorganized sector, the Indian Muslims need interest free loans to improve their labour output ratio and value additions for foster inclusive growth of the country. It’s fervently believed that if Islamic banking practices in India are allowed, the Muslims in unorganised enterprises will translate their liabilities into assets. 

It’s needless to mention that Indian think tank is well aware about the benefits of implementing Islamic banking practices in the country. But the ‘bias’ in the governance practices in the country has confined the scope of Islamic banking in India to debates only and notion is given that these kind banking practices are impossible within the existing legal framework.

Whenever demand for Islamic banking emerged, government lost no time to announce committees and these committees too lost no time to recommend huge scope of Islamic banking. And surprisingly, the Reserve Bank of India with equal pace always shelved these recommendations - hinting that Islamic banking is not possible in the existing legal framework. Sometimes notion has been given that RBI Act has to be amended which is not a small job. 

There was one internal working group of RBI which was supposed to examine the feasibility of Islamic banking business in India. The group concluded that Islamic Banking in India is not possible unless the Banking Regulation Act is amended. Even as implementation of full-fledged Islamic banking needs some amendments in the Act, an objective study would have found scope of recommending at least interest-free banking. There is no need to amend any Act to allow interest-free banking and our prevailing Acts already have provisions for interest free based transactions.

For example, as per the Section 17 (1) Reserve Bank of India Act 1934,  banks are authorized to accept money on deposit without interest from and the collection of money for the central and state governments, local authorities, banks and other persons. As per the Act, RBI has the power to regulate transactions in derivatives, money market instruments, etc. in public interest, or to regulate the financial system of the country to its advantage, determine the policy relating to interest rates or interest rate products and give directions in that behalf to all agencies or any of them, dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature as the Bank may specify from time to time.

Then there is the Banking Regulation Act 1949. It has empowered the RBI to control advances by banking companies. Sections 21 and 21A of the Act states: “Every banking company shall be bound to comply with any directions given to it under this section. RBI’s policy or bank’s practice of charging interest cannot be pulled to judicial discretion.” 

In view of the above stated legal provisions, as pointed out by various legal experts also, the Reserve Bank of India is in a position to allow the banks to accept deposits without interest and lend money at zero interest. 

So in this context, it is the RBI’s interest policy declared from time to time which is a hindrance to interest-free banking. 

All of us know that the world today faces two major problems - acute poverty and ethical deficit. Both these problems are directly related with our financial system. And it’s the banking system which can very easily remove poverty and minimize inequalities. But the system demands alternative banking mechanism which should be based on interest-free transactions where the financier should also share in the risk so as not to shift the entire burden of losses to the entrepreneur. Besides, an equitable share of financial resources mobilised by banks should become available to the poor to help eliminate poverty, expand employment and self-employment opportunities and, thus, help reduce inequalities of income and wealth.

(Greater Kashmir, 20 Aug 2011)

--------------------------------

KL Conference on Islamic Wealth Management:

http://islamic-wealth-management.net

KL Conference on Islamic Finance :

http://islamic-finance-conference.net/

Alfalah Consulting: http://alfalahconsulting.com

Islamic banking: Panacea to economic growth, says experts

Islamic banking system has been identified as a major contributing factor to the economic development of the country.

A Professor of Economics at the Usman Dan Fodio University, Sokoto, Prof Chika Aliyu said the introduction of Islamic banking in Nigeria will make cheap capital available for the people who have the entrepreneurship skill and expertise to engage in small scale businesses.

Under the system, the capital received from the bank, he said, would be interest-free and help people without job to start a business of their own.

Similarly, it would contribute to the reduction of inflation because the conventional banks are promoting inflation with the interest on the capital given to investors.

Prof Aliyu who spoke recently during the 5th Da’wah Workshop organised by the Lekki Muslim Ummah, LEMU at the Lekki Central Mosque auditorium encouraged people to learn more about Islamic banking and interest-free banking.

The economist said non-interest banking is an arrangement which is based on financing without interest and it is not necessarily Islamic. 

“Not all interest free banking is Islamic banking but Islamic banking must be interest free and it must comply with Shariah principles,” he said.

 He said Islamic banking does not only operate with the removal of interest from the transaction but also has some Islamic precepts and values to comply with. Such values include; honesty, integrity, benevolence, kindness and charity. 

In his lecture on Ethical Financing and Sustainable Economy, the Islamic alternative, Head of Investment, Management and Research at Lotus Capital, Taofiq Agbaje said Islamic banking is required in Nigeria for the purpose of bringing people who have never had any dealings in the financial sector. 

Agbaje said the system has helped significantly in infrastructural development such as good roads, rail system, and electricity, among others.

He stressed that, countries like United Kingdom and Germany which have small Muslim population have adopted this style of banking as an alternative and they have used it to develop their economics. 

“In developed nations, those who have enjoyed the bank mostly are non-Muslims,” Agbaje said.

He explained that the system allows banks and their customers share profits and losses together.

“There is the need to bring into the knowledge of people that this is only an alternative,” he said.

(The Nation, 17 Aug 1011)

Takaful markets grow despite operational differences – S&P

Standard & Poor's Ratings Services says operational issues ‘commonplace’ in the Takaful sector but it will continue to grow rapidly, relative to the conventional insurance market, and become increasingly meaningful in overall scale in target domiciles

Standard & Poor's believes that while the essential Shari’ah-compliant operational model affords a further level of corporate governance, particularly so in those domiciles where corporate governance is poorly established, often the Shari’ah interpretation creates a more complex, and so inefficient, operational model compared with conventional insurance companies. And since conventional companies employ tried and tested systems, are typically long established, and have larger business volumes, they deliver better economies of scale that some Takaful companies are struggling to achieve. We believe this is creating some difficulties for both Takaful fund members and investors.

In December 2010, the IFSB (Islamic Financial Standards Board) published IFSB 11 Standard on Solvency Requirements for Takaful (Islamic Insurance) Undertakings, while AAOIFI (Auditing & Accounting Organisation for Islamic Financial Institutions) standards also cover the application and interpretation of Shari’ah for the Takaful sector. In a sector where scholarly interpretation of religious texts is essential, but can differ widely, Standard & Poor's welcomes the introduction of a more consistent framework for reporting and controlling Takaful companies.

The variety of interpretations of Shari’ah law within the Takaful sector, and its auditors, is causing material inconsistency in the published accounting information from the sector. As analysts using both published and, where appropriate, confidential information, Standard & Poor's uses the financial statements as a reference point for its credit rating analysis. The ratings agency notes that the IFSB Standard 11 requires the separate solvency monitoring of Takaful funds from shareholder (operator) funds. As Takaful funds are the sole responsibility of the members (contributors), there is regulatory logic in this, although S&P said, “In our view this seems to ignore the role of the shareholder in its active support and management of the Takaful fund, as demonstrated through the provision of Qard Hassan (interest free loans), solvency margin and capital employed.”

In its interactive ratings of Takaful companies, Standard & Poor's is of the opinion that there is real fungibility from shareholder funds (and the attaching assets) to the Takaful fund if the latter is in deficit (unless demonstrated otherwise). At the early stages of a company's development, when Takaful fund deficits could be likely, this standard could create an onerous set of operational constraints. Standard & Poor's said it will continue to monitor the overall capital adequacy of a Takaful company by combining both Takaful funds surpluses (and deficits) with shareholder funds.

Standard & Poor's has some concerns about the management of fund surpluses. AAOIFI proposes that Takaful fund surpluses can only be distributed to the managers of the Takaful fund and therefore not to members, as is commonly understood to date, nor the investors in the company. The agency said there are concerns that this ruling creates real moral hazard for both the fund members and the shareholders. As an example, for certain types of underwriting risk, claims development can happen over many years, and it is conceivable that a fund that is apparently in surplus for years one to four can turn into deficit in year five. Questions that arise from this ruling are: if those surpluses are distributed prematurely to the management team, are they subsequently recoverable from that team? Or is it the responsibility of the current/new members to restore the health of the Takaful fund?

To date, the core business of the Takaful sector has tended toward high volume/low value types of risk with short-tail claims development characteristics, typically the retail sector such as motor and medical. Where the risk profile of the Takaful fund is homogenous, then S&P believes the establishment of and distribution of surpluses to members should be uncontroversial. However, as the Takaful sector grows in scale, it will increasingly seek to underwrite larger risk values in more commercial sectors, for example, marine and aviation. Although use of ReTakaful capacity can control loss exposures from high-value covers, the agency questions the feasibility of a single Takaful fund comprising such a heterogeneous mix of risks. For example, a large commercial loss event on an aviation risk could push a fund into deficit, when the retail contributors from very different risk-types, such as motor and medical, remain in surplus. Therefore, should they realistically be expected, under the cooperative doctrine, to support risks, which as individuals they are totally unfamiliar with? This aspect of Takaful fund management is less of an issue for the ReTakaful sector. The same issue exists in the family Takaful sector. To date, the core business has been very short-tail medical risks, but as the longer-term life risks develop, the members of such different operational risk types could be combined.

From a credit rating perspective, Standard & Poor's expects a Takaful company to have at least good risk-based capital adequacy, which encompasses prudent technical reserving, so the issues highlighted above are very much internal management issues for each company, rather than real external rating constraints. However, they are an indication of the still-evolving operational framework for the sector that creates ongoing uncertainty.

One of the themes of the recent International Takaful Summit was the impact of social media on the development and penetration of Takaful into its targeted communities. Early adopters of services such as Facebook and Twitter typically tend to be relatively young and/or highly proficient users of technology. The relatively low average age of populations in the Middle East and South East Asia, the key areas of growth for Takaful, combined with this population's predisposition to use these services, means that insurance companies will need to embrace different ways of communicating with their target customers, as well as the greater use of technology to drive their businesses forward. A number of insurers in the Gulf are already beginning to use technology, such as SMS, to support their existing customer service infrastructure. Therefore, the integration of more-sophisticated tools to market and win new business can only be a matter of time.

In terms of globalising the Takaful brand – in essence expanding it to the non-Muslim community – efforts are under way to establish Takaful companies in "developed" regions, such as Europe and the US, but so far with limited success. We see part of the problem as the use of sometimes unfamiliar language (to the non-Arab/Muslim), particularly where an established "conventional" equivalent exists. This does not help the value proposition being promoted by the Takaful sector, and, said S&P, needs real definition and promotion. The agency said the successful development of the Takaful sector depends on the identification and promotion of a real value proposition that is distinctive from that being offered in the conventional insurance sector.

(CPIFinancial, 14 Aug 2011)

http://islamic-finance-conference.net

http://alfalahconsulting.com

Arbitration on the increase in Islamic finance

In the high court in London earlier this year a Muslim businessman brought a case against a fellow Muslim businessman concerning a dispute over the arbitration process relating to a contract between the two parties. The one businessman objected to his counterpart appointing a non-Muslim arbitrator stressing that under Islamic law the arbitrator must be Muslim.

Normally arbitration involves an alternative dispute resolution to costly litigation. But in the above case, the dispute was over the arbitration process itself. Whether an arbitrator must be a Muslim in a case involving a Muslim business or say in the Islamic finance industry is a moot point. At the Kuala Lumpur Regional Centre for Arbitration (KLRCA), for instance, the general requirement for a case involving Islamic financial institutions, says Director Sundra Rajoo, "is that the prospective arbitrator has to either be an Islamic scholar with experience in arbitration or an Islamic Banking Law practitioner. The arbitrator need not be a Muslim and what we look for in an arbitrator is their qualification and their award writing skills."

KLRCA claims to be one of the first arbitration centers in the region to provide institutionalized Islamic Banking and Financial Services Arbitration based on specialized Islamic Banking and Financial Services Arbitration Rules. 

Given the growing number of court cases involving Islamic banks or financial transactions over the last few years, including several in the high court in London, financial regulators are keen to see the industry adopt alternative dispute resolution schemes involving arbitration. The Shariah, the Islamic Canon Law derived from the Qur’an, the Muslim holy book, the Sunnah, the practices of the Prophet Muhammed (peace be upon him), and Hadith, the authentic sayings of the Prophet Muhammed, prefers dispute resolution through arbitration than through lengthy and in modern times, very expensive litigation.

According to Rajoo, "the business and commercial fraternity would prefer arbitration to litigation due to several factors. We opine that the Shariah fraternity would prefer arbitration due to the confidentiality of the proceedings, as goodwill means an awful lot to the financial and business sector as well as the expertise and knowledge of the arbitrator. Apart from that, the enforceability of arbitral awards in foreign jurisdiction may also attribute to the preference of arbitration over litigation to resolve disputes." 

Arbitration is fast becoming the preferred method of dispute resolution as opposed to litigation. It forms an integral part of financial and businesses culture especially those dealing with transnational companies. According to Rajoo, the KLRCA presided over 50 arbitration cases of which 40 involved domestic parties and 10 involving foreign companies. 

Both the KLRCA and other centers are witnessing a steady increase in the number of arbitration cases, including several involving Islamic financial institutions and the number is increasing on a yearly basis.

Muhammad Ibrahim, deputy governor, Bank Negara Malaysia, in a speech a few months ago, warned about the importance of an effective adjudication system to give customers, banks, and other stakeholders recourse to law. "An efficient and authoritative adjudication system," explained Ibrahim, "helps create certainty and establishes the legitimacy of Islamic financial contracts. Islam places great importance on contracts and on parties to a contract. The ability of parties to enforce a contract is thus critical as it constitutes the core of maintaining the confidence of the public at large. Therefore, there is a crucial need for a dispute settlement mechanism that is able and competent to dissect in a judicious manner Shariah matters in contracts, so that issues of dispute in Shariah interpretation could be resolved and enforced accordingly." 

In Malaysia, for adjudication purposes for instance, added Ibrahim, a dedicated judge in the commercial division of the high court in Malaysia has been assigned to preside over litigations relating to Islamic banking and finance. The court's adjudication role in Islamic finance is reinforced by the support from the SAC in its capacity as a consultative body to the Malaysian judiciary system. 

Under the law, the Central Bank of Malaysia Act 2009 prevails, if a question concerning a Shariah matter arises in any proceedings relating to Islamic financial business, where the court or the arbitrator shall take into consideration any published rulings of the SAC or refer the matter to the SAC for its ruling. The SAC's rulings are binding on the courts and arbitrators. 

This referral system, explained Ibrahim, preserves and enhances the sanctity of Shariah rulings and the consistency in the interpretation and application of Shariah principles in Islamic financial transactions. To complement the court system, specific arbitration rules for Islamic banking and financial services have also been developed, enabling disputes for both domestic and international cases to be dealt with by the KLRCA. 

Indeed, KLRCA sees itself as the pioneer in Islamic banking arbitration. Since the launch of the Islamic banking and financial Arbitration Rules in 2007, stressed Rajoo, "we have worked towards positioning KLRCA as the go-to center for Islamic banking arbitration. Some of the initiatives that we have thus far include expanding our pool of Islamic Banking Arbitrators. KLRCA has also initiated negotiations with the Central Bank of Malaysia in hopes of revising the Islamic banking arbitration rules to cater for the current needs of the society. We intend to obtain the assistance from various Islamic banking scholars, eminent arbitrators to revise the rules to ensure that the awards rendered are in compliance with the New York Convention on the Enforcement of Foreign Arbitral Awards. 

The Asian economies are high growth ones where high single to double digit GDP growth has prevailed before and even now after the global financial crisis and the credit crunch. Not only has Asia's trade and investment increased with the West but also intra-emerging country trade has increased ten-fold over the last few years. Increasingly, businesses are at a risk of being sued in foreign jurisdictions where their commercial rights and obligations become subject to unfamiliar laws and procedural process. 

One of the most effective ways to avoid being sued in a foreign jurisdiction, advises Rajoo, is to ensure that all commercial contracts entered into contain a comprehensive and effective arbitration clause. There is increasing recognition throughout the modern world that arbitration is the most effective way of resolving international commercial disputes. 

Not surprisingly, the demand for international commercial arbitration as a mode of dispute resolution is growing year by year in line with the expansion of transnational commerce, trade and the rapid globalization of the world economy.

Few foreign parties to international contracts will be content to submit disputes to the national courts of the other party. If they do so, contends Rajoo, it will usually be only as a result of the superior bargaining power of the other party, or a failure to agree otherwise. A claimant, who initiates court proceedings will, in the absence of an agreed submission to the jurisdiction of another court or to arbitration, usually be obliged to sue in the court of the defendant's home country. 

At the KLRCA, the Islamic Banking and Financial Services Rules for Arbitration 2007 is drafted to cater for disputes arising out of business arrangement or transactions which are premised on Shariah principles which would generally be applicable to the Islamic finance and investment industry. The arbitral procedure has to be in conformity with the provisions of Section 56 and 57 of the Central Bank Act of Malaysia 2009. Under section 56 of the said act, "should any question concerning a Shariah matter arises in an arbitral proceeding, the arbitration has to either take into consideration any published rules of the Shariah Advisory Council or in absence of such published rules, refer the said question to the Shariah Advisory Council. The ruling made by the Shariah Advisory Council shall be binding and shall prevail."

Malaysia’s KLRCA has three sets of rules as far as arbitration is concerned The include the Rules for Arbitration of the KLRCA 2010; the Fast Track Arbitration Rules 2010; and the Islamic Banking and Financial Services Rules for Arbitration 2007. It has signed up to the UNCITRAL (United Nations Commission on International Trade Law) and New York conventions. 

The most glaring difference between the conventional and Islamic banking arbitration is that in the latter whenever an arbitrator has to form an opinion on a point related to Shariah principles and decide on a dispute arising from the Shariah aspect of an Islamic banking and financial business, which is based on Shariah principles, the arbitrator shall refer the matter to the relevant Council for its decision. 

In circumstances where the arbitration relates to a dispute arising from the Shariah aspect of an Islamic banking and finance business, that is beyond the purview of the Shariah Advisory Council and the arbitrator has to form an opinion on a point related to Shariah principles and decide on a dispute arising from the Shariah aspect, the arbitrator shall refer the matter to a Shariah expert or council to be agreed between the parties. Arbitration can be very cost effective as compared to litigation as disputing parties has to go through one dispute resolution process as the arbitral awards are final and binding. This is not the case for court proceedings, stress some market experts, as there is an avenue for appeal to the higher courts. Apart from that, parties need not spend countless hours educating the judges on the Shariah or Islamic Finance principles as the arbitrators deliberating their dispute would be an expert in the respective field. This, says Rajoo, would in time save time and costs for the parties.

Global financial crisis can be resolved by adopting Islamic principles: Scholar

Dubai: People’s greed to amass wealth and resorting to Riba (transactions with usury/interest) are the root causes of the current global credit crunch, according an eminent Muslim scholar and community leader from India. 

Referring to the second world financial crisis, All India Sunni Jam’iathul Ulama General Secretary, Sheikh Aboobacker Ahmed says the crisis can be resolved by implementing Islamic finance principles.

He also points out that the non-distribution of wealth for social welfare is the spark that has caused waves of violence, political unrest, riots and racist movements across Western countries.

Sheikh Aboobacker, who led India’s contemporary Muslim multitude from a chaotic and apprehensive stage to one with confidence and hope, is currently in town as the guest of Dubai Islamic Affairs Department during the Holy Month of Ramadan. 

“We should take efforts to bring followers of different cultures and religions together, and alleviate the suffering of the people around the world,” he said, noting that the “fiscal firestorm” that the world has been witnessing is something that has already been mentioned in religious texts, including the Holy Quran.

 “The main cause of this global financial crisis has been usury or interest. The Holy Quran guided us to stay away from Riba (interest), a curse that is enough to jeopardise domestic, national and international peace and financial stability.”

“Living beyond our means, taking loans on interest, and excessive or irresponsible expansion of credit over a long period as well as gambling are the significant causes of this crisis, according to Islamic perspectives. Islam discourages living beyond means that leads to excessive borrowing,” he explained. 

“Islam promotes loans and other banking tools, but without any interest. Selling or buying goods and services based on a mechanism that is supported by interest is not permitted in Islam. Islamic finance concepts, however, still have less presence in the global scenario.”

He also noted, “Islamic banking and insurance are still in their infancy and command a very small proportion of international finance, albeit many international banks have launched Islamic banking sections.”

“The Islamic banking system should be genuine, reflecting the ethics of Islamic teachings for welfare of the society. The Islamic banking system should focus on productive investment, not for speculation and gambling.”

“The Islamic financial system is gradually gaining momentum in Muslim countries, as visionary leaders initiate solid programmes to realise Islamic principles in the new world and enable stability of the global system,” Sheikh Abooobacker added. 

According to him, society has progressed in every walk of life, as much as the religious values that are practiced. “Allah will destroy Riba (usury) and will give increase for Sadaqat (deeds of charity and social welfare),” he said, citing the Quran. 

Islamic principles are against unnecessary and wasteful spending to increase saving and investment. The Prophet (peace be upon him) discouraged borrowing as it can be a cause of concern for individuals throughout their lives. 

(Gulf Today, 13 Aug 2011)

http://islamic-finance.conference.net

http://alfalahconsulting.com

Can Islamic finance play key role in growth and prosperity?

In perhaps one of her more potentially important speeches in recent times, Zeti Akhtar Aziz, governor of Bank Negara Malaysia, the central bank, stressed that the increasing internationalization of Islamic finance and the burgeoning trade and economic linkages between the emerging countries present an important opportunity for the industry to make a meaningful and enhanced contribution toward economic growth and prosperity of these countries.

"The transition of Islamic finance into the mainstream of the global financial system is an opportunity for the Nusantara financial intermediaries, in particular in Indonesia and Malaysia, to open new frontiers and to participate in this trend and thereby strengthen further our economic and financial linkages. With our own respective comparative advantages, we can leverage on the complementarities between our respective economies that will bring forth synergistic effects which will in turn contribute toward expanding the markets, widen the spectrum of products and services, and enhance financial markets activities," she added.

Zeti was addressing the Joint High Level Conference on Islamic Finance organized by Bank Negara Malaysia and the Bank of Indonesia which was held in Jakarta last week in the presence of the Indonesian President Boediono, Raja Nazrin Shah, the ambassador-at-large of the Malaysian International Islamic Financial Centre (MIFC) and Crown Prince of Perak, and Darmin Nasution, governor of the Bank of Indonesia, the central bank.

The theme of the conference, "Enhancing Financial Linkages toward Economic Prosperity," and the location could not be more timely and symbolic. In the aftermath of the global financial crisis in 2008, there has rightly been a debate over the moral compass of market capitalism and conventional banking and how the excesses that nearly brought the global financial system to collapse could be pre-empted.

In parallel has been the debate about how banking should have greater linkages to the real economy and not merely concentrate on high risk and high reward speculative activities especially in gambling on derivatives.

These debates are not confined to conventional banking but are just as relevant to the Islamic finance industry, albeit it was largely unscathed by the underlying causes because of the Shariah proscription on investing in speculative interest-based derivatives but affected by the economic impact of the crisis.

But as the contemporary Islamic finance movement edges toward completing its fourth decade, it is increasingly pertinent to ask whether this “original concept of financial intermediation” from the south countries has started to make an impact on the real economy of the countries in which it is practiced and has contributed to wealth creation and distribution, or is it merely yet another way for Muslim high net worth individuals and shareholders to get richer under the label of ethical banking?

The answers are not easier given the nascency of the Islamic finance sector and the vexed question of how does one evaluate its impact on the real economy given the low base from which it has started effectively as a private sector initiative and given the very diverse nature of the Muslim markets and economies in which it is targeted.

Zeti alluded to three important global trends currently - the significant growth of emerging economies in the world; the greater international integration as economies and financial systems become increasingly more connected; and the fact that no longer is international trade solely between the emerging world and the developed world, but trade amongst the emerging world has increased immensely.

Trade flows between emerging countries has increased four-fold. Similarly, cross-border financial flows are no longer concentrating between the emerging world and the developed markets, but increasingly it is between emerging economies.

"As financial markets and financial systems in emerging economies become more developed, greater financial flows between our economies are taking place. These trends have supported and reinforced the recovery and growth that is currently experienced in the emerging world," explained Zeti.

On the other hand, the internationalization of Islamic finance over the last decade or so has resulted in increased Shariah-compliant cross-border financial flows. With its internationalization, Islamic finance is therefore increasingly contributing to the more efficient mobilization and allocation of funds across regions, and strengthening the financial and economic linkages in particular in between our emerging nations.

This may be true in a limited number of countries, albeit the supportive cost-benefit analysis has yet to be presented both intellectually and statistically. But if one considers the state of intra-Islamic trade, for instance, both at a multilateral and private trade finance level, then the stark reality and challenge of this connectivity (or lack of it) between Islamic finance and the ultimate real economy activity such as financing exports and imports and small and medium-term enterprises (SMEs) becomes apparent.

The establishment of the Islamic Trade Finance Corporation (ITFC) as a stand alone trade finance fund of the Islamic Development Bank Group was supposed to herald a new era for intra-Islamic trade. In 2009, ITFC's trade funding allocations totaled $2.16 billion, of which 82 percent was directed to intra-Islamic trade. The ITFC says that its target for trade funding in 2011 is $3 billion. But put this against the total trade of the 56 IDB member countries of $3.374 trillion in 2009, then the sheer scale of the challenge is much starker.

This is exacerbated by the lack of connectivity between multilaterals such as the ITFC, ICD (Islamic Corporation for the Development of the Private Sector) and other IDB Group entities, with the commercial Islamic banks. The IDB's bureaucracy in dealing with syndication enquiries is legendary and many have been put off also by the perceivedly uncompetitive pricing, mark-up policy and maturity flexibility of the facilities extended by the ITFC, ICD et al.

Massoud Janaekeh, director of Islamic capital markets at Bank of London & Middle East (BLME), for instance, would like to see the ITFC expand its product base to include more Murabaha syndications and structured trade finance solutions, and perhaps more importantly act more as a catalyst to develop and expand the international Islamic trade finance market by providing the platform for Islamic banks to participate in trade. "I think they genuinely can be a market maker, and a truly significant one. They can ease the flow of transactions rather than underwrite all of them by bringing in participation from banks, As such they don't need the capital for underwriting. What they need is other Islamic banks committed to the cause," he adds.

There are similar challenges in other key areas of policy making, regulation, legislation, development finance, affordable housing and so on - may be a little less in Malaysia than in other markets.

That is why the location of Zeti's speech could not be more poignant. Indonesia is the world's most populous Muslim country. Although it is blessed with many natural resources, it is also a relatively very poor country with many of the structural economic deficiencies usually associated with developing countries. The fact that it has only relatively recently emerged from the shadows of decades of military rule and endemic corruption has not helped, although Indonesians have shown that that they have a resilient capability to build workable democratic institutions on the back of almost nothing.

If there is one country that ought to be the laboratory and the showcase for the successful merger of Islamic finance and the real economy then it ought to be Indonesia. With its 220 million population, Indonesia is a banker potential paradise. Think of those retail accounts and consumer finance; the infrastructure and corporate finance opportunities; the asset management and investment mobilization potential; the possibility of project and retail sukuk; and the virgin market for Islamic insurance and pension products.

True Malaysia is engaging with Indonesia on several fronts, whether between the policy makers and regulators, and the private sector investing in Indonesian Islamic financial institutions. This has to a certain extent, as Zeti has suggested, helped create the enabling environment for effective and efficient cross-border financial business. There has also been a greater sharing of technical expertise and experiences on financial markets and infrastructure development including the harmonization of regulatory arrangements.

But to put it bluntly, Indonesia needs to go much further to even come near to Malaysia's Islamic banking model whether in terms of enabling legislation, regulation, Shariah governance framework, product innovation and human capital development. The recent delay in Indonesia's follow-up sovereign sukuk was officially put down to the failure to identify an appropriate pool of assets for the securitization and hence the passing of the required legislation.

Even Indonesia's flagship Bank Muamalat, one of the first Islamic banks in the country, has been plagued by operational issues over the years, only to be saved by an injection of capital by the Islamic Development Bank at the time, which now is reportedly keen to exit the investment.

(Arab News, 24 July 2011)

http://islamic-finance-conference.net
http://alfalahconsulting.com