Putting the faith back in finance

Today, we live in an environment where trust in financial institutions’ ability to bring capital to its most effective use has eroded. It would be an understatement to say that people have lost faith in finance. From the subprime mortgage debacle to the collapse of Lehman Brothers and the recent LIBOR fixing scandal, finance is a much derided industry. “Banker bashing” is all too common, with one particular financial institution even being referred to as a “giant vampire squid,” underlying people’s disgust towards the behavior of financial institutions and their focus on maximizing profits without any regard for the consequences.

Risk transfer and risk mitigation is the modus operandi of most financial institutions. This is particularly true in the case of debt financing, where the borrower or entrepreneur bears most of the risk while the investor expects to be compensated with a high interest rate while having security over the borrower’s assets in case of default. “Risk sharing” does not really register in most investors’ vocabulary.

Can a case be made for finance based on risk-sharing principles? One solution could be faith-based finance. Charging “usury” or “interest” is prohibited in all Abrahamic faiths, though there are varying definitions of what really constitutes usury among the different faiths and sects. In theory, both Judaism and Christianity are against exploitation through charging interest but formalized mechanisms and institutions to provide equitable alternatives to borrowers have not been established.

Alternatively, Islamic finance has established clear alternatives to the exploitative nature of charging interest. It goes a step beyond banning interest by also prohibiting speculation or investing in businesses which are deemed socially harmful (gambling, alcohol, weapons manufacturing, pornography, etc). Islamic finance emphasizes the concept of risk sharing, where the borrower and the financier work together to grow the business and share the profits. Being a relatively new phenomenon, the first Islamic financial institutions emerged in the 1970s in the Middle East and have now spread to major financial centers globally with over $1 trillion in assets. Even though it has achieved significant success, the industry has had its share of problems, with below par performance being the subject of great debate.

Despite these debates, one of the key successes of Islamic finance has been that the ethical nature of financing has attracted a considerable number of non-Muslim customers, as has been witnessed in Malaysia where over 50% of Islamic bank customers are non-Muslims.

Islamic finance shares much in common with impact investing in terms of its goals of poverty alleviation and equal wealth distribution. It should be a welcome addition to the impact investing landscape. Acumen Fund has already provided financing on a Musharakah (profit sharing) basis to one investee. Leveraging these Islamic modes of financing also has the potential to unlock large pools of capital from Muslim countries (where Islamic financial institutions and philanthropists are unable to make interest-based investments).

The success of Islamic finance and its acceptance with non-Muslims bodes well for the further development of socially responsible investing. Maintaining an ethical foundation while sharing risk between investor and entrepreneur will benefit all mankind, not just those of a particular faith.

(Ancumen Fund / 27 Feb 2013)

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Dubai plans central Islamic finance regulatory board

Dubai plans to set up a central sharia board to oversee all Islamic financial products used in the emirate, and will encourage government-linked entities to issue and list sukuk on the local bourse, senior officials said on Wednesday.

The government announced last month that it wanted to become a global centre for Islamic finance and other businesses based on Islamic principles. But it will face tough competition from established centres such as London and Malaysia, where trading of sukuk (Islamic bonds) is much more active.

"We follow international standards of Islamic economies and will be the world's number one centre for Islamic finance," Dubai's ruler Sheikh Mohammed bin Rashid al-Maktoum, who is also prime minister of the United Arab Emirates, told reporters on Wednesday.

Eissa Kazim, secretary-general of the committee leading Dubai's Islamic economy initiative, said: "We will harmonise all standards, structures and regulations through having a unified sharia board at a government level to oversee the industry."

Sharia boards are groups of scholars which rule on whether financial instruments and activities are religiously permissible. Most major Islamic banks and finance firms around the world have them; the rulings of different boards are sometimes inconsistent and the scholars are sometimes open to suggestions of conflicts of interest.

A government-level sharia board could reduce such confusion over standards in Dubai's Islamic finance industry, helping it attract business. With the prominent exception of Malaysia, few countries have a central board and other Gulf countries have followed a loose, decentralised model of regulation.

Having products in Dubai approved by a single entity could help to harmonise their structures, make it easier to create and list them on the bourse, and boost their appeal to investors.

"Unifying the sharia board will limit discrepancies between different structures and will boost confidence in our local market," said Hussain Al Qemzi, chief executive of Noor Islamic Bank.

New issues of sukuk jumped to about US$121bn worldwide in 2012, according to Thomson Reuters data, from around US$85bn in 2011. Dubai's share of this was relatively small and most of the emirate's issuers have listed their bonds and sukuk overseas, taking secondary market liquidity with them.

Almost US$9.2bn worth of sukuk is listed on the Dubai market, but US$7.5bn of sukuk issued from Dubai is listed internationally and around US$1.5bn is unlisted, said Kazim, who is also Dubai Financial Market's chief executive.

If 50 percent of total bond issuance from Dubai is Islamic and listed on the local bourse, "Dubai can easily top the list of Islamic financial centres," said Kazim.

Most debt issuers in Dubai are government-related entities which will definitely consider listing their sukuk locally, he added.

Last month Dubai Financial Market, which runs the emirate's securities market, published draft standards for sukuk with a consultation period that closes this Thursday.

(Arabian Business.Com / 27 Feb 2013)

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Egypt: time for a sukuk

Egypt’s continued political turmoil has made its life hard in international debt markets, but its government is hoping to secure new funds by less conventional means through the issue of the country’s first sovereign Islamic bonds.

According to a Bloomberg report, the government plans to raise up to $1bn by June through sukuk sales, with one for domestic investors and one for foreign investors.

“The international market is waiting for Egypt’s sukuk sale,” said Ahmed El-Naggar, adviser to Finance Minister El-Morsi El-Sayyed Hegazi, to Bloomberg. El-Naggar said in an interview with the news agency that the cabinet has finished a draft law to pave the way for the issuance, which would be debated in parliament this week.

Egypt needs funding desperately, with forex reserves at a 15-year low and the pound under pressure, as well uncertainty over a $4.8bn IMF deal. Meanwhile, continued political unrest has prompted multiple rating agency downgrades, most recently by Moody’s, which on February 12 cut Egypt from a B2 to B3 rating, six below investment grade.

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Demand for sukuk, which were first issued by the Malaysian government in 2000, grew strongly in 2012. Data from Dealogic shows total value of new Islamic bond issuance in 2012 to be $44.6bn, up from $33.1bn in 2011. Gulf Co-operation Council issuance accounted for just under half of the total, signifying the strong demand for the security among Egypt’s Arab neighbours.

With demand for sukuk expected to remain strong, they may provide an easier way for Egypt to raise money than western capital markets, Aliasgar Tambawala, an investment manager at Mashreq Capital, explained to beyondbrics.

“There is huge demand in the Middle East for sukuk”, he said. “The issue would likely be well subscribed within the region. The Saudis and Qataris are supporting Egypt already, so the regional demand is likely.”

At current market conditions Tambawala said he expects the Egyptian sukuk to trade with a yield of 6 to 6.5 per cent, but stressed that market conditions between now and the eventual issuance could change significantly.

Tambawala added that he expected the issuance to be primarily dollar denominated given the need to expand foreign exchange reserves. On Monday, the Egyptian government said it hopes to reach reserve levels of $19bn by the end of June, from their reported level as of January of $13.6bn.

He said that any issuance in unlikely prior to the settlement of a deal with the IMF on the stalled $4.8bn loan package. “Until something is sorted out on the IMF loan side, and until there is [political] stability, the likelihood of issuing something before that is low. They can’t pull off a dollar sukuk right away under current conditions, there is too much uncertainty. And for that to go away [Egypt] requires the IMF package.”

Seperately on Monday, the Egyptian government said that negotiations with the IMF would re-open in early March.

(Beyondrics / 26 Feb 2013)

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Kenya Re sets sights on Islamic finance

The Kenya Reinsurance Corporation is planning to venture in sharia-compliant business as it seeks to expand its presence in the growing Islamic finance segment.

The local reinsurer has confirmed that it will start ReTakaful insurance in the country and the areas where it already has a presence in West Africa and the Middle East markets.

“There is a change in the insurance market and we want to take full advantage when it fully blossoms,” said the firm’s managing director, Mr Jadiah Mwarania, during an interview at the head office in Nairobi.

ReTakaful is the alternative form of the conventional reinsurance, which strictly forbids the aspect of brokerage, profiteering, and issues of commission which are against the Islamic faith.

According to Mr Mwarania, the development is part of Kenya Re’s 2013-2017 core strategic areas that touche on market expansion and development of products.

The firm elected a sharia-based supervisory board last year to advise the firm on acceptable aspects of the ReTakaful.

“The intention is to have a department that fully complies with all ReTakaful requirements so that Takaful firms do not shy from giving us business. Now that we are compliant, it will give confidence and inspiration to the Muslim community,” he said.

Members of the board are Abdulkadir Hashim (University of Nairobi lecturer), Mohamed Badamana (chairman, department of animal production, University of Nairobi), Mohamed Ali (Thika Islamic College), and Mwanakombo Noordin, the director of the Moi University Coast campus.

Takaful started in Sudan in 1979 and has experienced sizable growth over the past few years.

The mode of religion insurance is defined into three distinct settings; the Wakalah Model, which is fee-based and where the administrator acts as both an agent and the administrator.

The fee, which is usually a combination of the administration and investment fee, remains fixed annually and all the surpluses belong to the policyholders.

The second model is Mudharabah, which is the pooling of funds for purposes of profit-sharing.

The reinsurer acts as the entrepreneur and participants provide the capital.

Profits and losses are shared between the firm and the participants in a pre-arranged ratio.

Lastly, which Kenya Re has actively taken part, is the ReTakaful hybrid model, which is a combination of the two.

In Kenya, Takaful Africa Insurance Company pioneered the segment, with Gulf and Community banks taking part in penetration of sharia-based products.

First Community Bank has partnered with Cannon Assurance to develop and sell Takaful products in general insurance.

Africa Trade Insurance Agency (ATI) also joined hands with the Islamic Cooperation for the Insurance of Investment and Export Credit last year in March to offer ReTakaful services for imports and exports between Africa and the Middle East.

(Daily Nation / 26 Feb 2013)

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Egypt Seeks Up to $1 Billion From Debut Sukuk

Egypt plans to raise as much as $1 billion by June from the sale of its first Islamic bonds as the government anticipates a return to political stability will soften the blow of five credit rating cuts.

The cabinet has completed a draft law to allow sukuk sales, incorporating revisions by the ruling Freedom and Justice Party and Shariah scholar Hussein Hamed Hassan, said Ahmed El-Naggar, adviser to Finance Minister El-Morsi El-Sayyed Hegazi. Officials have compiled a list of about 25 projects that could be used as assets to back future sales, El-Naggar said in a phone interview on Feb. 21 from Cairo.

“The international market is waiting for Egypt’s sukuk sale,” said El-Naggar, an FJP official who became a ministerial adviser after the ouster of Finance Minister Momtaz El-Saieed in a cabinet reshuffle last month. “I hope to start with two sales, one for domestic investors and one abroad.”

Chaos that accompanied the 2011 uprising that toppled President Hosni Mubarak has shut Egypt out of international debt markets as Standard & Poor’s lowered the country’s credit rating to B-, the same non-investment grade as Greece and Pakistan. The government last sold dollar bonds in 2010, raising $1.5 billion in 10-year and 30-year notes. The yield on the $1 billion debt due April 2020 jumped 102 basis points this year to 7.06 percent as of 3:08 p.m. in Cairo.

Bumpy Transition

Bouts of violence and political unrest that have disrupted Egypt’s transition to democracy have delayed attempts to boost the Shariah-compliant financial industry in the most populous Arab country. The upper house of parliament, which is dominated by the FJP, is expected to debate the draft sukuk law this week, El-Naggar said. President Mohamed Mursi, an Islamist, plans to hold elections for the lower house in April and has ordered the new assembly to convene in July.

Tunisia and Morocco are also seeking to tap Islamic investors after borrowing costs plunged. The average yield on sovereign bonds that comply with the religion’s ban on interest tumbled 126 basis points, or 1.26 percentage points, last year to 2.65 percent, according to the HSBC/NASDAQ Dubai Sovereign US Dollar Sukuk Index. The yield rose 19 basis points this year to 2.84 percent on Feb. 22, the data show.

Soccer Fans

Global sukuk sales are set to surpass last year’s record of $46 billion, led by issuance from the Gulf Cooperation Council, Mohammed Dawood, Dubai-based managing director of debt capital markets at HSBC Holdings Plc, said in an interview in Dubai this month.

Egypt’s borrowing plans come against the backdrop of increasing opposition to Mursi by some ultra-conservative Salafis, political parties calling for a secular state and soccer-fan groups seeking the removal of the public prosecutor in connection to fatal violence in Port Said last year.

The crisis has erased most of the gains in Egyptian bonds since Mursi’s election in June. The premium investors demand to hold Egypt’s dollar-denominated 2020 debt over the benchmark dollar swap rate, or the z-spread, surged 22 basis points last week to 553, according to data compiled by Bloomberg. It was at 562 today, the highest level since June 25, a day after after Mursi was declared winner in the presidential election.

Credit Risk

The cost of insuring Egypt’s dollar-denominated debt for five years soared 176 basis points over the past month to 635, the world’s second-worst performer after Argentina, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The swaps suggest that “Egypt will have to pay a lot to issue the sukuk,” said Tariq Qaqish, deputy head of asset management at Dubai-based Al Mal Capital PSC. “On a macro level, things are not looking that good. However, this might change if we see political stability which would result in improvement in the economy.”

Egyptian officials held a seven-hour meeting at the Finance Ministry on Feb. 20 to discuss issues including how to secure the best pricing for the first sale, El-Naggar said. The size of the first issuance will be between $500 million to $1 billion, he said.

2013 Growth

The nation’s economic growth slowed in the last quarter of 2012 to 2.2 percent from 2.6 percent in the previous three months and investment declined, according to government data. Expansion may reach 3 percent this year, according to the median estimate of 11 analysts on Bloomberg.

Sovereign dollar sukuk sales in the Arab world are limited to Dubai, Qatar, Bahrain and the emirate of Ras Al-Khaimah, according to data compiled by Bloomberg. The yield on Dubai’s 6.396 percent notes due 2014 is little changed this year at 2.12 percent, the data show. The spread between the bonds and Malaysia’s 3.928 percent sukuk due June 2015 was 73 basis points today, down from 80 at the end of 2012.

The Egyptian government is working to amend the nation’s accounting standards to comply with the Accounting & Auditing Organization, a Bahrain-based body known as AAOIFI, El-Naggar said. The government is also preparing to resume talks with the International Monetary Fund for a $4.8 billion loan to help reduce borrowing costs to finance the biggest budget deficit in the Middle East.

The sukuk sale is going through regardless of IMF talks, El-Naggar said. “We are taking the loan into our consideration but in the end the sukuk issue is separate,” he said.

(Bloomberg / 25 Feb 2013)

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Bank of Punjab (BoP) to launch Islamic Banking

Sunday, February 24, 2013 - Lahore—The Bank of Punjab is set to achieve another milestone when it launches Islamic banking in its operations. Apart from shoring up tangible support for the bank in the last four years, the Chief Minister also engendered an environment in the bank that ensured zero tolerance for corruption and eliminated government interference in the bank’s affairs. The Chief Minister Punjab has thus been principally responsible for restoring bank’s trust and goodwill amongst its customers.

In such an environment, backed by prudent financial management through a team of committed professionals the bank has grown from strength to strength during this time leading to , Growth in deposits from Rs.164billion to Rs.266 billion, Growth in branch network to 306 branches across Pakistan, Handling home remittances of Rs.176 billion (USD2billion), Lead arrangement for wheat procurement worth Rs.248 billion, New relationships numbering 545,598 in this period, Largest portfolio of Vehicle financing, now in excess of 20,000 vehicles and Apart from all-round growth in numbers, the bank has also invested in quality in its human resource in terms of both hiring and training. Also, branches have undergone major refurbishment, with renovations of older facilities and introduction of modern, new branches — all with a view to enhancing the end-to-end experience of its customers with the bank.

Today, BoP, as an institution, is large in size, modern in outlook, vibrant in character, prudent internally and customer-centric externally, but most importantly, remains rooted in the core values of integrity beyond reproach and professionalism without compromise. Having successfully accomplished the turnaround in the bank after four years of unrelenting commitment to achieve it, the bank is now poised to take further new initiatives. One such significant initiative is adding a new business stream by entering the Islamic banking sector.

In response to its request, the State Bank of Pakistan has granted approval to adopt the institutional

model of providing Islamic banking products and services through standalone Islamic branches. This business is to be managed by a separate Islamic Banking Division (IBD) in BoP. State Bank of Pakistan has already granted approval for conversion of five branches into Islamic branches by June 30, 2013 and the Bank intends to expand its network of Islamic branches by another ten branches in the remainder of 2013.

BoP is earnestly looking forward to serve the growing demand of its existing as well as prospective customers who have a preference for Islamic banking. In doing so, its IBD will adopt the bestbusiness practices and make itself a robust business unit with a premium on abiding compliance of Shariah guidelines. The bank is confident it will catch up with its peers in the not too distant future and become the bank of choice for Shariah conscious customers.

Equally significantly, with BoPs outreach in rural areas coupled with its Agri set up, the bank’s IBD is also well placed to play a pioneering role in Shariah compliant financing for the under-served Agricultural sector—an objective being long pursued by the State Bank of Pakistan.

(Pakistan Observer / 24 Feb 2013)

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Maybank Singapore Islamic banking provides transport grant to madrasahs

Maybank Singapore Islamic Banking has committed S$36,000 (RM111,654) to subsidise the transport needs of underprivileged students from six madrasahs this year.

Since its inception in March 2012, the Maybank Get-to-School Transport Grant collaboration between Maybank Singapore and Central Singapore Community Development Council has disbursed a total of S$23,400 to 65 students from five secondary schools.

This year, the grant will also be extended to another 100 students from six madrasahs, with each student receiving S$360 in transport subsidy.

The schools are namely, Madrasah Al-Irsyad Al-Islamiah, Madrasah Al-Arabiah Al-Islamiah, Madrasah Aljunied Al-Islamiah, Madrasah Al-Maarif Al-Islamiah, Madrasah Wak Tanjong Al-Islamiah and Madrasah Alsagoff Al-Arabiah.

In his address at the grant presentation ceremony here Friday, Mohd Ismail Hussein, Head of Maybank Singapore Islamic Banking, said his bank found the programme initiated by Maybank Singapore last year useful and practical for needy students, and that was why Maybank Singapore Islamic Banking decided to join in the effort.

"Extending the transport grant to include madrasah students is a sign of our commitment to help Muslim families who are in financial need," he said.

(The Malay Mail / 23 Feb 2013)

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