Malaysia exposes Shariah scholars to jail for breaches

The Malaysian law that exposes Shariah scholars to jail terms for rule breaches will ensure tighter compliance, in a market where the regulator has already made progress in unifying standards.

Under the Islamic Financial Services Act 2013, which took effect June 30, scholars may be jailed for up to eight years or fined as much as 25mn ringgit ($7.6mn) if they fail to comply with central bank rules. It is the first time Shariah advisers have been expressly made accountable, according to Lee Hishammuddin Allen & Gledhill, a Kuala Lumpur-based law firm.

Malaysia set up a dedicated system in the 1990s to avoid disputes over the financing methods that comply with the Shariah. Goldman Sachs Group was criticised by some advisers in 2011 for not ensuring its debut sukuk, approved by Ireland’s central bank, would be traded at par value as mandated by Islamic law. Some lenders are appointing scholars who don’t have a thorough understanding of financial products due to a shortage of experts, according to consultancy Amanie Advisors in Kuala Lumpur.

“It’s a very good move to stress the accountability of Shariah boards,” Said Bouheraoua, a scholar who advises Affin Islamic Bank Bhd, said in an August 16 interview in Kuala Lumpur. “A doctor who goes against the fundamental rules of medicine is accountable. The same goes for Shariah scholars.”

Religious experts advise companies on whether their products and services comply with Shariah laws. Under Bank Negara Malaysia regulations, a Shariah scholar can only sit on one board for each type of Islamic financial institution, meaning they can only advise one bank or insurer.

In most countries there is no limit to the number of companies an expert can assist. One Syrian scholar was advising 101 financial institutions, standard-setting bodies and other entities, according to a 2011 report by Funds@Work AG, an investment research company based near Frankfurt.

The Malaysian single board rule has led to a shortage of scholars, according to Baiza Bain, the Kuala Lumpur-based managing director at Amanie. Demand for advice has increased as the nation’s Islamic banking assets climbed 6.3% to $162bn in May from the end of last year, figures from the Malaysia International Islamic Financial Centre show.

“What the liability that’s presented by the Act does is to actually put more emphasis on training or retraining of experts,” Baiza said in an interview yesterday. “Financial institutions would have to put a higher standard of care because they know that the Shariah advisers are not going to just sit there and stamp whatever they have produced.”

Worldwide sales of sukuk, which pay returns on assets to comply with Islam’s ban on interest, have declined 35% to $21bn so far in 2013 from the same period in 2012, data compiled by Bloomberg show. Issuance totalled a record $46.5bn for the whole of last year.

Goldman Sachs set up a sukuk programme based on a so-called commodity Murabaha structure, or a cost plus mark-up transaction, that was approved for listing on the Irish Stock Exchange by the Central Bank of Ireland in October 2011. Goldman declined to provide any more details on the debt, it said in an e-mailed response to Bloomberg.

In 2007, BLOM Development Bank of Lebanon signed a contract with Investment Dar Co to place a Wakalah deposit, where capital is raised to acquire assets that are entrusted to an agent. BLOM sued Investment Dar after the Kuwaiti company missed a payment on its deposit. Investment Dar contradicted its own scholars’ assessment and argued the financing from BLOM breached Shariah principles because Dar “was taking deposits at interest,” according to a court document.

The new Malaysian regulation would raise the standard of advice and level of services dispensed by religious experts, according to Mohamad Akram Laldin, a member of the Malaysian central bank’s Shariah Advisory Council.

“People will be more aware of their duties and responsibilities,” Akram said in an August. 15 interview in Kuala Lumpur. “This means that before they sign off on certain things, they will think twice.

(Gulf Times / 24 Aug 2013)

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

Islamic scholars propose new sharia board model

A group of Islamic scholars is proposing a fresh solution to charges that banks' sharia boards are open to conflicts of interest: create partnerships between the boards and Muslim depositors, to insulate the boards from pressure exerted by bank managements.

Sharia boards, composed of experts in Islamic financial law, supervise Islamic banks' activities and products to make sure they conform to religious principles, such as bans on interest and pure monetary speculation.

Traditionally, banks appoint prestigious scholars to their sharia boards and pay them handsome fees and retainers. This has left the system vulnerable to charges of conflict of interest: the scholars are being paid by the institutions which they are supposed to be supervising impartially.

A group of scholars in South Africa, led by Durban-based Ebrahim Desai, a senior figure in the city's Muslim community, proposes that Muslim depositors in each bank fund a sharia compliance body that would be created separately from the bank.

The body would then hire a sharia board to supervise the bank. In this way, the scholars on the board would not be appointed by or report to the bank's management, and would not have a direct financial relationship with the bank.

"We seek a neutral and balanced position," Desai said by telephone, adding that freed of subjection to bank managements, sharia boards would be able to play more strategic and powerful roles in governance.

"This would be in line with the larger interest of the Muslim community in upholding sharia law by maintaining the ultra-independence of the sharia supervisory board."

Emraan Vawda, a colleague of Desai, argued that by their nature, banks were ill-suited to policing their own Islamic activities. "Commercial concerns in the overwhelming majority of Islamic banks far outweigh genuine commitment to Islamic values and precepts," he said.

SCEPTICISM

The proposal is likely to meet with considerable scepticism in the Islamic finance industry. Desai said many institutions had approached him to discuss his proposal but he declined to name them, saying the talks needed to be kept confidential.

One potential issue is whether depositors would be willing to fund the sharia compliance bodies; to compensate for this expense, they might demand higher returns on their money placed with the bank, which the bank might not be willing to provide.

Banks themselves might be reluctant to give authority over their activities to a separate body, while highly paid Islamic scholars might prefer to continue working for bank managements rather than being subject to groups of depositors who could prove more awkward and demanding.

One sharia board member in Dubai, who declined to be named because of the sensitivity of the issue, said the scholars in the South African group were not experienced in the financial world and were instead mostly community-based.

Such scholars can command great influence within their communities and give products informal endorsements to win mass appeal, but they cannot necessarily rule on the finer points of financial contracts, he said.

Desai and Vawda said they had served eight years on the sharia board of South Africa's First National Bank (FNB), the retail arm of South Africa's second-biggest bank FirstRand , where they provided their services at no cost to FNB.

By avoiding financial remuneration, the scholars hoped their decisions would be free of influence, and they rejected several offers to be on FNB's payroll, Desai said. "We were not dictated by money but dictated by principle."

However, working for free is unlikely to become a new model for the mass of Islamic scholars, given the lucrative fees available in the industry.

Desai, Vawda and the rest of FNB's sharia board resigned in July, complaining that the bank had failed to consult with the board on several occasions, and hired a new head of its Islamic finance business without input from the board.

FNB said it aimed to appoint a new sharia board by the end of this year and would draft clear rules and roles for the board, which would not include approving appointments of senior personnel. It said the previous head of its Islamic finance business resigned after the bank conducted an investigation into "internal processes and practices of the businesses aligned to internal governance practice".

(Reuters / 13 Sep 2012)

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

UAE: Abu Dhabi airport contractors near $1.1 billion mainly sharia-compliant finance deal

* Mashreq, First Gulf Bank, Al Hilal among banks on deal

* Financing to be 80 pct sharia-compliant, 20 pct conventional

* Deal is second big sharia-compliant regional project finance deal in Aug

* Islamic financing facility for Medina Airport signed in Aug (Adds details, interview with TAV Airport)

By Bernardo Vizcaino and Praveen Menon

DUBAI, Aug 8 (Reuters) - The consortium building Abu Dhabi's new airport terminal is close to securing a 4-billion dirhams ($1.1 billion) financing deal, which will be mainly sharia-compliant, banking sources said on Wednesday.

A deal would mark the second major regional project finance venture to rely on Islamic financing facilities this month.

Turkey's TAV Insaat, Dubai's Arabtec Holding and Athens-based Consolidated Contractors Co. were awarded a $2.9-billion contract in June to build a mid-field terminal in the emirate.

Dubai lender Mashreq is leading the financing deal which includes First Gulf Bank, Union National Bank , Al Hilal Bank, all from Abu Dhabi, and Jordan's Arab Bank, said two banking sources close to the deal who declined to be identified.

The financing will be 80-percent sharia-compliant with the remainder secured via a conventional loan, the sources said. The four-year contractor finance facility will see all banks provide roughly equal amounts.

An official at Tav Airports confirmed the use of Islamic financing but declined to give further details on the deal.

"We are indeed using Islamic finance for our Abu Dhabi project. Details of the financing are to be released later," Burcu Geris, Project and Structured Finance Coordinator at TAV Airports, said in an emailed statement.

TAV Insaat is a unit of Turkish builder Akfen Holding , which holds a stake in airport operator TAV Havalimanlari.

It marks the second time this month that TAV has turned to Islamic finance to fund its joint projects in the region.

Last week, a consortium including TAV said it had secured a $1.2 billion sharia-compliant facility for Saudi Arabia's Medina Airport project.

"Islamic finance through Saudi banks was our first option for financing in Medina Airport," Geris said. "It only came as a natural choice since Saudi banks are both very liquid and very much experienced in structuring and providing Islamic finance facilities.

Saudi British Bank, National Commercial Bank and Arab National Bank were lead arrangers, with National Commercial Bank serving as the Islamic structuring bank.

The Medina Airport project, which also includes Saudi Oger and Al Rajhi Holding Group, is slated to be completed in the first half of 2015.

Islamic project financing in the Gulf Arab region can be complicated because foreign ownership rules can restrict assets being pledged for such deals.

In the Medina Airport transaction, the largest of the three tranches, worth $719 million, used intangible assets in the form of contractual rights which were transferred to the lead arrangers instead of physical assets.

(Reuter / 08 August 2012)

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

Sharia products see significant growth

MANAMA: Islamic financial products represent a class of investment which appeals to those looking for socially responsible or ethical investments and are a fast-growing asset class globally.

It is estimated that investors globally hold more than $1.5 trillion in Sharia-compliant assets and currently there are more than 500 funds globally that comply with Islamic principles, Central Bank of Bahrain executive director of financial institutions supervision Abdul Rahman Al Baker said at the opening session of the World Islamic Funds and Financial Markets Conference (WIFFMC2012) at the Gulf Hotel yesterday.

"One-third of these funds were launched during the past seven years, while sukuk is another Islamic financial instrument that shows a significant growth during the past five years.

"It was estimated that the global sukuk market exceed $200 billion by the end of the first quarter of this year. Actually, the year 2012 saw a revival in the global sukuk markets due mainly to gradual recovery of global economy and investors' sentiment which drives the demand for sukuk.

"It is clear that sukuk issuance in the first quarter of 2012 exceeded all expectations reaching a record $43bn globally. This is almost double the average amount of sukuk issued in any given quarter in the past year, and represents half the total amounts of sukuk issued throughout 2011.

"In spite of the recent credit crunch and widespread global economic slowdown, the prospects for growth in Islamic securities markets are likely to be positive," he said.

"This positive trend can be attributed to the rapid expansion and increasing sophistication of the GCC financial markets, as well as the geographical spread of Islamic securities products and services that record remarkable growth in Europe, Asia Pacific countries, North Africa and the energy rich Central Asian states.

"In Bahrain, the mutual funds industry is one of the fastest growing segments of the overall financial sector. With around $9bn in assets under management, through more than 2,700 funds, the industry has been growing at an annual average of about 15pc in recent years. Overall, there are 100 Islamic funds incorporated and registered in Bahrain with total assets of $1.7bn as of March.

"The CBB, through its enabling legislation, promotes the development of new products for investors in both Islamic and traditional finance, while at the same time providing credible regulation in both areas.

"The CBB, having pioneered the development of sukuk, remains active in the sovereign sukuk market, with a total of $1.2bn medium to long-term sukuk issued, complemented by a regular programme of short term issuance," he added.

"Furthermore, the CBB had successfully issued a five-year maturity Islamic Leasing Sukuk in the local market with a value of BD200m.

"It is the CBB's hope that such initiatives will go a long way in harmonising market practices and creating a deep and vibrant Islamic capital market.

"Generally, the potential size of Islamic finance market is vast, and the accelerated establishment of Islamic finance hinges on attracting the flow of these potential funds into Islamic investment.

"However, it is important to ensure that Islamic funds and investment industry have solid and strong foundations for future development and growth."

(Gulf Daily News / 21 May 2012)

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Alfalah Consulting - Kuala Lumpur:

www.alfalahconsulting.com

Islamic Investment Malaysia:

www.islamic-invest-malaysia.com