Islamic funds and investments industry witnesses rapid global expansion

More than 400 key players, regulators and thought leaders in the global Islamic funds and investments industry are set to gather in the Kingdom of Bahrain on the 27th and 28th of May 2013 for the 9th Annual World Islamic Funds and Financial Markets Conference (WIFFMC 2013) - the largest and most influential annual gathering of international leaders in the Islamic investments industry.

Held in strategic partnership with the Central Bank of Bahrain, the 9th Annual WIFFMC 2013 will set the stage for critical discussions that will focus on "Broadening the Base of Investors and Issuers; and Boosting the International Growth of Islamic Capital Markets and Investments".

Announcing the launch of the event, David McLean, Chief Executive of the World Islamic Funds and Financial Markets Conference, noted, "Today, the global Islamic finance industry has grown to become an increasingly substantial segment within the global financial markets and has gained significant interest as a viable and efficient alternative model of financial intermediation. The industry has also recorded tremendous growth in the last few years, with some key markets reporting their Islamic finance industry to be growing 50% faster than conventional finance. This positive trend can be attributed to the rapid geographical expansion of Islamic securities products and services that have enjoyed remarkable growth in key markets across Europe, Asia Pacific, MENA and the Central Asian states."

He also noted, "The potential size of the Islamic finance market is vast, and the sustained rapid pace in the growth of Islamic finance hinges on attracting new international investment flows as well as new capital market issuers. Recent industry estimates reveal that the global Sukuk market is expected to grow more than 140% to reach $292bn in issuances by 2016."

"However it is essential that some of the critical challenges in the Islamic funds and investments industry are urgently addressed in order to ensure that the industry has solid and strong foundations for future development and growth, fully capitalizing on its true potential," he added.

The 9th Annual World Islamic Funds and Financial Markets Conference (WIFFMC 2013) will be inaugurated on the 27th of May with a special opening address by Abdul Rahman Mohammed Al Baker, Executive Director - Financial Institutions Supervision, Central Bank of Bahrain. 

Speaking ahead of the event, Abdul Rahman Mohammed Al Baker said, "The international Islamic banking and finance industry has a come a long way and today has a diverse range of financial products and services flourishing throughout the Middle East, Europe, Asia and Africa. Global Islamic banking assets held by commercial banks are set to cross US$2 trillion in 2013, up from the $1.3 trillion of assets held in 2011 and the industry has been enjoying a remarkable growth rate of approximately 20%. However, notwithstanding this progress, there is still a substantial investable surplus in the Islamic world which is not being put to productive use due to a shortage of Shari'ah-compliant investment vehicles - and supply continues to fall short of demand even with record issuances. Looking at the growth expectations of the global Islamic finance and investments industry and its growing global investor base, it is important that the industry further enhances innovation of new Islamic instruments and investment vehicles and reach out to markets outside its traditional boundaries."

"Given the considerable capacity of Islamic finance to meet large investment requirements, I hope that the discussions at this year's World Islamic Funds and Financial Markets Conference, held under the theme 'Broadening the Base of Investors and Issuers', will help to further realize the full potential of this vibrant industry," he said.

He also said, "The Central Bank of Bahrain is once again delighted to be hosting this prestigious event."

The inaugural address will be immediately followed by a keynote address by Dr. Khaled Al Fakih, Secretary-General and Chief Executive Officer of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), which will analyse key strategies for adapting new global financial standards to the Islamic investments industry and creating stronger regulatory frameworks to support the international development of the Islamic funds and investments industry.

A key highlight of WIFFMC 2013 will be the high-profile CEO and Industry Leaders' Power Debate. The session moderated by Dr. Sayd Farook, Global Head Islamic Capital Markets, Thomson Reuters and featuring Hasan S. AlJabri, Chief Executive Officer of SEDCO Capital; Rachid Ouaich, Chairman and Co-Founder of Islamic Finance Professionals' Association; and Mohieddine Kronfol, Chief Investment Officer Global Sukuk and MENA Fixed Income, Franklin Templeton Investments (ME) Limited, will share critical insights on overcoming the challenges facing the Islamic asset management industry and will address the need for cross-border distribution of funds and improving the competitiveness of Islamic funds.

Confirming his participation at the event, Hasan S. AlJabri, Chief Executive Officer of SEDCO Capital, commented, "Though the international Islamic finance industry has had some success on innovation, there is still room for more diversification in product development, geographic reach and asset class diversification. Islamic investors have traditionally found it difficult to access the same investment opportunities as conventional investors. This lack of asset class diversity in Shari'ah-compliant investment products represents both a challenge and an opportunity. The significant increase in cross-border Islamic investment activities coupled with Islamic investors' increasing recognition of the importance of diversification in their investment portfolio, calls for the Islamic funds and investments industry to tap into new asset classes and develop new funds for better diversification and portfolio management."

"I am looking forward to the important discussions at this year's World Islamic Funds and Financial Markets Conference (WIFFMC 2013) that will seek to overcome the challenges in the global Islamic investments industry and improve the competitive position of Islamic funds and I am delighted to be a part of this important gathering of industry leaders," he noted.

The World Islamic Funds and Financial Markets Conference (WIFFMC), now in its 9th annual edition is set to gather more than 400 international industry leaders from over 120 leading organizations. The prestigious WIFFMC 2013 Islamic Investment Institution of the Year Award will also be declared at the event.

(Ame.Info / 16 May 2013)

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KFH-Research: $1.2 trillion assets of the rich in GCC

A report issued by KFH-Research about wealth and funds management mentioned that one million wealthy families in the GCC own investment assets worth $1.2 trillion.

The report added that Kuwaitis third in assets that are worth $150bn. The report noted that Islamic funds remain slow in developing their structures, despte increasing demand for islamic finance services in the region and the world; especially that there are 1030 funds that triggered growth in managed assets to reach $64bn by end of October.

The world's population of HNWIs grew by a marginal 0.8% y-o-y to 11.0 million in 2011, after witnessing robust growth rates of 17.1% y-o-y in 2009 and 8.3% y-o-y in 2010. The aggregate financial wealth of these HNWIs however declined by 1.7% y-o-y to $42.0tln in 2011, mainly due to challenging global macroeconomic conditions and volatile global financial markets. To compare, the aggregate financial wealth of HNWIs had gained 18.9% y-o-y in 2009 and 9.7% y-o-y in 2010 given the significant rebound from crisis-related losses post the global financial crisis.

Asia Pacific was the star performer, which saw the number of HNWIs in the region rose by 1.6% y-o-y to 3.37 million individuals in 2011. This was the first time Asia Pacific surpassed North America in terms of HNWIs. However in terms of asset values, the financial wealth of Asia Pacific HNWIs stood at $10.7tln in 2011, a slight decline of 1.1% y-o-y. In 2011, Hong Kong and India were hit by declines in their equity markets capitalisation. In Hong Kong, concerns on the European sovereign debt crisis weighed on the outlook for growth.

Meanwhile in India, sentiments were dragged down by the lack of faith in the country's political process and the slow pace of domestic reforms. Elsewhere in Singapore, financial wealth was impacted by the sharp drop in export revenues. In contrast, Thailand's financial wealth increased on the back of significant real estate gains as well as a solid growth performance.

North America's HNWIs were at 3.35 million individuals in 2011, almost unchanged from the previous year. North America continued to dominate the largest share of the global HNWIs' financial wealth in 2011. At $11.4tln, North America HWNIs' total financial wealth declined by 2.3% y-o-y in 2011.

In Europe, the number of HNWIs grew by 1.1% y-o-y to 3.17 million individuals in 2011, supported by the growing number of HNWIs in Russia, the Netherlands and Switzerland. The aggregate financial wealth of European HNWIs however declined by 1.1% y-o-y to $10.1tln, impacted by the on-going European sovereign debt crisis and investors adopted more cautious and risk-averse investment approach.

In the Middle East, the number of HNWIs increased by 2.7% y-o-y to 0.45 million individuals. Total financial wealth of the Middle East HNWIs grew by 0.7% y-o-y to $1.7tln.

Globally, the US, Japan and Germany combined accounted for 53.3% of the world's HNWI population in 2011, up from 53.1% ion 2010. However, the share of global HNWI population held by these three countries combined has been eroding gradually from 54.7% in 2006. The HNWIs of emerging and development countries continue to grow faster than those of the developed countries.

GCC Accumulation of Wealth

The GCC region is blessed with one of the world's most valuable commodities i.e. oil. Since the 1970s, whenGCC oil companies were nationalised and oil prices surged, the region's GDP as well as individual fortunes have grown significantly.

Between 1980 and 2011, the aggregate nominal GDP of GCC states combined grew at a cumulative annual growth rate (CAGR) of 16.5%, from $250.7bn in 1980 to approximately $1.4tln in 2011. Similarly during this period, GCC total population has grown at a CAGR of 7.7%, from 13.5 million in 1980 to 43.2 million in 2011. Strong GDP growth has sustained high levels of average nominal GDP per capita for the region, from $21,475 in 1980 to $45,530 in 2011. Therefore, GCC states have consistently maintained high levels of savings in the past two decades (with the exception of oil price crisis in early 1990s), with the gross national savings averaging at 46.2% in 2011.

Market consensus is that there are around 1 million wealthy households in the GCC region, with total investable assets of $1tln to $1.2tln. Of these, around 260,000 to 280,000 households have total assets of more than $1mln in each household. 

By country, Saudi Arabia has the most number of wealthy households, estimated between 600,000 and 625,000, followed by the UAE (200,000-220,000) and Kuwait (120,000-130,000). Naturally, Saudi Arabia also has the highest total investable assets in the region, estimated at $500bln to $550bln, followed by theUAE ($260bln to $280bln) and Kuwait ($140bln to $150bln).

Islamic Finance

Islamic asset and wealth management is a niche segment of the Islamic financial services industry that has experienced stable growth since 2004. Islamic funds have grown from 285 in 2004 to 1029 as at end-October 2012. Despite this, Shariah-compliant funds have been slow to develop sophistication and market depth. One of the main reasons remains the fact that Islamic mutual funds are dependent on the availability of other Shariah-compliant solutions. Until the Islamic equity and fixed income markets had sufficient volume, Islamic wealth management solutions were lacking opportunities.

As the Islamic finance industry gains momentum across the globe and awareness of Shariah-compliant solutions amongst various populations increases, Islamic funds have become increasingly retail driven. Furthermore the rising wealth in Muslim nations, especially in the emerging economies and oil-rich countries, has helped drive investible assets to new heights. As at end-October 2012, assets under management of Islamic funds grew to $64bn from $29.2bln in 2004.

By domicile, Islamic funds are majorly focused in Saudi Arabia and Malaysia followed by Ireland, the US and Kuwait, as at end-October 2012.

Islamic funds raised in 2012 were largely equity funds, constituting 59.0% in terms of assets under management, while a further 20.5% being mandated to invest in a mixed portfolio of assets, which normally also consist of a large portion of equities. Money market funds also remain popular this year given below average equity returns and considerable concern on the prospects of economic growth in many developed and emerging countries. Despite this, new funds have been mandated to invest globally as well as other traditional markets in the Asia Pacific and Middle East.

Mixed asset funds have been the best net performing asset class for Islamic investors from 2007 until the end-October 2012, growing by 50.66%, while equity and commodity funds returned 46.15% and 32.73%, respectively, over the same period. Islamic equity funds witnessed steep declines in 2008 before rebounding in 2009 and 2010. However, the asset class lost 5.01% in 2011 in line with the global equity markets. The most profitable asset class this year has been the real estate funds, achieving a 13.00% year-to-date return, followed by equities (9.38%), mixed assets (8.89%) and sukuk funds (5.56%).

Overall, Islamic funds have evolved into wealth management vehicles, which cater to investors who want exposure to capital markets inside a Shariah framework. The Islamic asset management landscape post-crisis has seen investors that are more discerning in their investment choices. This is due to risk aversion and limited capital, resulting in the change of appetite to a more domestic centric nature (Asian investors prefer Asian-themed funds and Middle East investors prefer GCC funds).

Moving forward, both the demand for and supply of Islamic funds is expected to grow given the mounting wealth and preference for Shariah solutions. Future demand is expected to be generated from the growing attraction of Islamic funds for diversification in an uncertain economic environment, the growing preference for Islamic alternatives, as well as the improving track record of Islamic funds which opens investment opportunities to the larger fund managers, insurance funds and pension funds.

(Ameinfo.Com / 08 Dec 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
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Malaysia's pension reform may boost Islamic funds

* Malaysia liberalising pension market

* Govt sees 73 bln ringgit into private pensions by 2020

* Eight fund managers approved to offer products

* Product limit raised if it includes Islamic offerings

By Bernardo Vizcaino

SYDNEY, July 23 (Reuters) - Malaysians will have more room to allocate part of their retirement contributions to Islamic investments under sweeping government reforms to the pension system.

At present, the Employees Provident Fund (EPF) receives public pension contributions and invests the money. Some of that investment is in sharia-compliant areas such as sukuk and halal stocks, but contributors have limited scope to ensure the money is being used that way. A maximum 20 percent of savings can be placed through the EPF into a single mutual fund.

Under the new, voluntary Private Retirement Scheme (PRS), which will not replace the EPF but supplement it, contributors will be able to allocate money to a wide range of products offered by private-sector fund management firms. This will allow them, if they choose, to target sharia-compliant investment - potentially increasing the amount of money going into Islamic instruments.

The scheme's governing body which will oversee how the fund managers operate, the Private Pension Administrator (PPA), was officially launched last week.

"PRS will contribute towards the growth of Islamic fund products," Zakie Ahmad Shariff, board member of the PPA and chief executive of the Federation of Investment Managers Malaysia, told Reuters.

The initial rollout of 30 PRS products will include six Islamic funds, he added.

"Early adopters will have much to gain - especially for the Islamic players," said Mahadzir Ahmad, a wealth management consultant and an instructor at the Financial Planning Association of Malaysia.

GROWTH

As of March 31 the EPF managed assets worth 488.5 billion ringgit ($154 billion), according to company data. That is larger than the 435.36 billion ringgit of assets under management in Malaysia's entire fund management industry, according to securities commission data.

At least partly because of PRS, Malaysia's private pension industry is expected to grow to 73 billion ringgit by 2020 from effectively zero now, according to a report by the government's Economic Transformation Programme. The securities commission has a more modest but still sizeable estimate; in April last year, it said: "Over the next ten years, it is projected that assets under management in the private retirement scheme industry will grow to 30.9 billion ringgit."

Sharia-compliant funds have on average held 10.6 percent of total assets under management in Malaysian retail products over the last two years, according to Reuters calculations based on securities commission data.

If this ratio is maintained under the PRS scheme, Islamic funds could theoretically see inflows of 3.3 billion to 7.7 billion ringgit.

All eight of the approved PRS fund managers already have sharia-compliant retail products. They include some of the country's most established firms such as CIMB-Principal, AmInvestment and Public Mutual.

Firms will begin offering conventional products first but sharia-compliant products will soon follow, said Nancy Chow, director of marketing and strategic product development at AmIslamic Funds Management. AmInvestment plans to have an Islamic PRS, she said.

Hwang Investment Management will include sharia-compliant products in its PRS range, Steve Lim, chief product officer at Hwang Investment Management, said in a statement. "We foresee our investment in PRS to break even after three years."

PRODUCTS

Under PRS, fund managers will be required to offer a minimum of three "core" products catering to different investor risk profiles. A maximum of seven products can be launched under the scheme by a single PRS provider, but if it intends to offer both conventional and sharia-compliant options, it can offer up to 10, according to securities commission guidelines.

This could encourage fund managers to launch Islamic products to maximise their access to PRS money. The initial products will be available from September, the securities commission said.

Guidelines also allow for the outsourcing of the fund management function, which could open the door for boutique firms to tap into the sector without the need for established sales channels.

In order to encourage take-up in the PRS scheme, the government is offering incentives such as personal tax relief, tax deductions for employers on their contributions to the scheme, and tax exemption on income received by PRS fund management firms.

Some details of how the PRS scheme will work, and whether it will impact Malaysia's current retirement age of 55 years, are not clear, Ahmad said. "These details are not forthcoming yet."

The personal tax relief of up to 3,000 ringgit may need to be increased to make it enticing to higher income earners, he added. Without a significant tax benefit, "the take-up might not be as great.

(Reuters / 23 July 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Cash-rich Islamic funds fuel wild Dubai sukuk rally

* Dubai 2014 sukuk yield plunges 235 bps since February

* Fundamental factors support a rally

* But some think euphoria has gone too far

* Liquidity temporarily boosted by maturities

* Approach of Ramadan may be spurring purchases

By Rachna Uppal and Mala Pancholia

DUBAI, July 18 (Reuters) - A spectacular rally in Dubai-linked Islamic bonds is pushing yields to record lows and influencing prices in the entire Gulf debt market. Some investors think the rally has reached excessive proportions, potentially setting bonds up for a partial pull-back when the euphoria starts to fade.

Dubai's $1.25 billion sovereign sukuk, issued at a profit rate of 6.396 percent in November 2009 and maturing in 2014, was yielding just 3.2 percent on Wednesday, for example.

That is a yield plunge of about 2.35 percentage points since early February -- an impressive gain for any credit and especially for Dubai, which until recently was seen as the ugly duckling of the Gulf because of its 2009 corporate debt crisis.

"Dubai Inc bonds have rallied significantly in the past few weeks and compressed spreads to ridiculously low levels," a regional trader said, requesting anonymity because he was not authorised to speak publicly.

"The market has been overbought for a while and now it's just trading on sentiment."

PLAUSIBLE

Dubai-related sukuk have been surging across the board. Emaar's $500 million, seven-year sukuk, issued at 6.4 percent last week, was bid at 5.78 percent on Wednesday.

There are some well-known and plausible reasons for the rally. Dubai's property market, the source of its debt problems, has been stabilising and even picking up in some areas, while its state-linked firms have been moving aggressively to resolve their debt restructurings.

Dubai's five-year credit default swaps, which represent the cost to insure against default, tightened to around 323 basis points this week, a nearly one-year low.

"Barring broader risk-off sentiments in global markets, the key to watch is whether Dubai CDS can break through the 300-320 bracket...that could well be possible if risk stays bid," said Raza Agha, senior economist for the Middle East and North Africa at RBS in London.

In Emaar's case, the company's business appears to be recovering significantly; analysts polled by Reuters on average expect the big property developer to post in coming weeks a second-quarter profit of 516.3 million dirhams ($141 million), which would be a 106 percent increase on a year earlier.

SPECIAL FACTORS

Special, temporary factors also appear to be behind the Dubai sukuk rally, however, and the market could lose steam when these eventually fade.

One factor is an excess of idle funds, especially Gulf Islamic funds, searching for investment targets. This has been expanded by the maturing of several big regional bonds in the past few weeks.

"Several sukuk have matured recently, and the holders of that paper are now looking to redeploy that cash into new sukuk. This has helped to increase liquidity in the market even more," said Nick Stadtmiller, head of fixed income research at Emirates NBD.

Earlier this week, Saudi Arabia's Dar al-Arkan Real Estate repaid a $1 billion sukuk from cash and proceeds from land sales. Prior to that, two Dubai state-linked firms, DIFC Investments and Jebel Ali Free Zone (JAFZA), repaid their sukuk, freeing up $3.25 billion. Emirates airline also repaid a $550 million sukuk.

A second factor is the approach of the Ramadan holy month, which is expected to begin around July 20. Trading turnover tends to fall during that month, so investors are scrambling to get hold of bonds before that happens; the dramatic rally of the secondary market has made some of them desperate.

Although there has been heavy supply of new sukuk in the last couple of months - the government of Qatar issued a $4 billion sukuk earlier this month, the largest dollar-denominated Islamic bond ever seen - there is no sign that it has satisfied investor demand. Oversubscriptions have prompted diappointed investors to buy the new sukuk in the secondary market, bidding prices up further.

And the global financial crisis continues to encourage interest in the Gulf, which to many looks like a safe haven compared to Europe and the United States.

This factor is unpredictable, however. If the global crisis continues to worsen and oil prices resume falling, the Gulf could quickly lose its safe-haven image. And if the global outlook somehow improves in coming months, investors will no longer need safe havens as much.

Some analysts also note that Dubai's economic, fiscal and corporate debt outlook, while improving, still carries risks. Sources told Reuters this month that Royal Bank of Scotland and two other banks had abandoned talks on restructuring Dubai Group's $10 billion debt and threatened to bring unprecedented legal action against the investment vehicle of Dubai's ruler.

"Debt refinancing will remain an issue for the next several years, but the progress to date bodes well for the process," Emirates NBD's Stadtmiller said.

"I would expect regional credit markets to be relatively stable if global risk aversion were to spike, but it would be a mistake to assume the local market would be immune to global problems." 

(Reuters / 18 July 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic funds seek socially responsible roadmap

May 31 (Reuters) - The Islamic investment sector can widen its customer base by adopting a socially responsible model, according to industry experts, but distribution channels, a sophisticated investor base and incentive schemes need to be enhanced first.

The links between Islamic finance and socially responsible investments (SRI) are not new, but the former needs a similar transformation which brought SRI into the mainstream.

"The common synergy between the two investor classes should be exploited," said Lynette D'Souza, head of investment strategies group at Saudi-based NCB Capital, at an Islamic conference held in Manama last week. This can lead to greater economies of scale, she added.

Islamic banks are keen to build such scale in order to reverse downward trends in efficiency and profitability, according to an April report by A.T. Kearney.

Islamic finance, with strong roots in the Middle East and Southeast Asia, adheres to religious principles which forbid investing in gambling, tobacco and alcohol. This resembles the screening methodology used by the SRI industry, which has strongholds in North America and Europe.

The limited geographical overlap has caused problems for Islamic banks with little international distribution capability, frustrating both established and new fund managers seeking critical mass to make their products economically viable.

DISCRETION AND INCENTIVES

Assets in Islamic funds, estimated at $58 billion, have marginally changed in the last two years reaching a ceiling of 800 products.

"The industry can break out of these figures by going cross-border," said Sohail Jaffer, deputy chief executive at Dubai-based FWU Global Takaful Solutions. But managers need to get their "international marketing act" together, he said.

Fund houses such as AmInvestment, NCB, and Al Rajhi have sought distribution using UCITS, a passport for investment products, with mixed results. Instead of a regional canvas, they "should focus on two or three markets", Jaffer said.

Others have opted for incubation, investing four to five years to build a track record, according to Noripah Kamso, chief executive of Malaysia's CIMB-Principal Islamic Asset Management.

SRI had a similar slowdown a decade ago which ushered in the era of discretionary mandates - currently over 90 percent of SRI assets are managed this way, according to Eurosif. This business model is making inroads in Islamic finance, with some fund managers outsourcing the advisory skill-set.

In March, Saudi-based NCB Capital signed two leading asset managers, TCW and Amundi, to manage seven international equity funds worth a combined $550 million.

An established track record was key to the proposition, Fadi El Khoury, head of Middle East distribution at Amundi, told Reuters. The firm manages $1.4 billion in Islamic assets, across 10 mandates and three funds.

Growth in SRI is also linked to institutional backing from pensions and endowments. There is no equivalent in Islamic finance, but takaful (Islamic insurance) is a contender.

"Takaful is one of the most important trends emerging in the Islamic investment industry," Ruggiero Lomonaco, executive director for Middle East and Africa at the Royal Bank of Scotland, told Reuters.

But takaful alone might not be enough.

"You need drivers, a pension culture...to incentivize people to go into the markets," said Ken Owens, partner at PWC Ireland.

Incentives such as pension disclosure regulation, enacted across Europe over the last decade, boosted allocation into SRI. Institutional investors cite such directives as a key reason for investing ethically, according to the Social Investment Forum.

Such schemes are absent in Islamic finance and the industry lacks a champion to promote the cause, while information portals like Eurosif and the Social Investment Forum have taken the role in SRI. This lobbying is unmatched in Islamic finance, but by drawing parallels, a cohesive voice is gradually emerging.

(Reuters / 31 May 2012)

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Islamic Investment Malaysia:
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Good governance of Islamic funds urged at AAOIFI convention

Manama, May 7 (BNA) -- The two-day AAOIFI Annual Shari’a Conference which began today focuses on governance of the Islamic finance sector, one of the six pillars that those who set standards in the financial sector out to work on if Islamic finance should continue growth and achieve its full potential, said Rasheed M Al Maraj, Governor of the Central Bank of Bahrain.

Delivering the welcome address, the CBB governor said that the AAOIFI set up seven standards relating to governance and two relating to ethics.

 The deficiencies found in financial institutions’ governance has been repeatedly highlighted in the past five years -- following the commencement of the Global Financial Crisis in 2007, he added.

Of the three standards on governance, issued by AAOIFI, the first focuses on the Audit & Governance Committee.  The standard urges the audit committee to review the use of restricted investment accounts’ funds.

The standard emphasises the need to ensure that funds are invested in accordance with terms agreed with the customer.

  “Too often over the past five years we have seen how customers’ interests have been relegated to change focus to bonuses and share price. Neglecting customers is at the risk of losing them,” said the central bank chief.

Caring for the interests of customers is carried on in the AAOIFI Governance Principles paper issued in 2005.  In particular Principle 3 of this paper warns against inequitable treatment of fund providers, said Al Maraj.

The 2009 AAOIFI Corporate Social Responsibility paper also focuses on dealing responsibly with clients and ‘par excellence’ customer service.  If you couple the governance standards with the ethics paper for employees of financial institutions, you find a formidable set of requirements, principles and standards relating to putting the interests of customers first, he added.

The CBB, he said, is pushing ahead with the review of its corporate governance and business conduct rules, as also improving levels of disclosures, to raise the bar for corporate governance.

The CBB chief said that a review of the CBB corporate governance requirements has completed its first stage of internal review.

“Coupled with governance is Shari'a.  From the perspective of the CBB as a regulator, we have noted that all too often, the approach of banks, particularly conventional banks has been to start with a conventional transaction or product and then try to give it a finishing coat of Shari'a compliant paint. Financial institutions must not regard Shari'a compliance as the finishing touch to product development.  Instead, product development needs to start from Shari'a principles: i.e. Islamic financial institutions must become Shari'a driven,” urged Al Maraj.

The growth of Islamic finance hinges on addressing the interest of customers, governance and Shari'a compliance satisfactorily, he surmised.

(Bahrain News Agency / 07 May 2012)

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Alfalah Consulting - Kuala Lumpur:
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Islamic Investment Malaysia:
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