Sunday, 21 August 2011
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 :
Thursday, 18 August 2011
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)
Wednesday, 17 August 2011
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)
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.
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)
Monday, 15 August 2011
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)
The Islamic banking community needs to focus on financial planning, according a report launched by Bank Sarasin in Bahrain.
It also calls for the industry to move forward by developing the Sharia framework, diversifying products and differentiating its offerings.
Bank Sarasin's Islamic Wealth Report 2011 provides investors with an in-depth overview of developments in the Islamic wealth arena in 2010 and explains how best to manage assets according to religious requirements.
'This approach exemplifies Bank Sarasin's aim to minimise risk and maximise opportunities for its clients, a key objective in today's volatile markets,' a spokesman for the bank said.
'This year's report opens by explaining the required approach to Islamic financial planning before focusing on the key areas of philanthropy, the family office service, mutual funds and sukuk, before concluding with an insight into Bank Sarasin's current economic outlook for 2011.
'Islamic financial planning is largely neglected by the Islamic banking industry,' said head of Islamic finance Fares Mourad.
'It requires a detailed process, as well as structures and products to ensure Muslim investors are fully compliant with Sharia law.
'We are proud to have extended our holistic approach to offer a comprehensive Islamic wealth management service,' he said.
The key challenges and opportunities addressed in the report include managing the Islamic wealth cycle through the entire process of wealth acquisition, preservation and distribution and achieving the required balance between spiritual and worldly obligations.
It also addresses the challenges facing Islamic mutual funds to achieve growth and performance and recommends standardisation, education and diversification of sukuk in order to increase the supply of products and the liquidity of the market.
The domestic fund managers may also establish their Islamic fund management companies and enjoy various tax incentives and privileges that lead to reduction in the cost of doing business and expedient market entry. For more information on the establishment and application procedure for Islamic fund management company, please contact Securities Commission
REIT is an investment vehicle that proposes to invest at least 50 percent of its total assets in real estate, whether through direct ownership or through a single purpose company whose principle asset comprises of real asset.
The issuance of the real estate investment trusts (REITs) guidelines by the SC (to replace the existing property trust fund guidelines) has helped kick-start the REITs industry in Malaysia. Subsequently, the SC released the Guidelines for Islamic Real Estate Investment Trusts (I-REITs Guidelines) to facilitate the introduction of Shariah-compliant REITs.
Malaysia became the first jurisdiction in the global financial sector to issue the I-REITs Guidelines. The I-REITs Guidelines was set as the global benchmark for the development of I-REITs. The thrust of the I-REITs Guidelines is to provide clear guidance on and new investment opportunities in collective real estate investments through a Shariah-compliant capital market instrument.