The Islamic Development Bank (IDB) exploring microfinance options in UK

LONDON, 9 Rajab/30 May (IINA)-The Islamic Development Bank (IDB) is exploring social and financial inclusion opportunities in the UK including the provision of community-based microfinance, SMEs (small-and-medium-sized enterprises) financing and technical assistance programs.

An IDB delegation, led by its President Dr. Ahmed Mohammed Ali, participated in a roundtable here Monday with financial institutions, law firms, corporates and community organizations and leaders.

Dr. Ali said that in addition to the direct assistance to microfinance institutions, initial discussions have taken place with the UK’s Department for International Development (DFID), World Bank and CGAP to start some pilot projects in various common member countries and eventually develop a global Islamic microfinance facility.

In the UK, there are several initiatives aimed at helping small business start-ups and young entrepreneurs and to promote financial inclusion. These include Community Development Financing Institutions (CDFI), the Enterprise Capital Fund, and regional ones such as Bolton Business Ventures.

On Monday, Lord Young, the former Conservative cabinet minister, announced the launch of a GBP85 million initiative to help young people in the above respect. The reality is that the UK is facing a multi-billion pound funding gap for small businesses.

One microfinance initiative that is seeking to cooperate with the IDB is GLEOne London, whose CEO Nicholas Nicolaou, revealed that the entity is working on a program to assist Muslim immigrants starting up small businesses and becoming entrepreneurs.

In fact, City law firm Norton Rose; Gatehouse Bank, one of the five UK-authorized Islamic banks; and international auditing firm and consultancy KPMG have been cooperating with GLEOne London to develop an Islamic microfinance product based on the Mudaraba (trust funding) concept.

According to Farmida Bi, Partner at Norton Rose, the product is ready to roll out and addresses the various tax and legal issues especially under the Consumer Credit Act, which protects the rights of customers.

Dr. Ali reiterated IDB’s support for various microfinance initiatives. He stressed that the Islamic banking industry registered a year-on-year growth of 35 percent in 2010 to 2011. Within OIC countries for instance, Islamic financial institutions are becoming major economic players in an increasing number of these countries.

In Indonesia, for instance, a recent Central Bank of Indonesia report has indicated that the industry is growing very fast at a rate of 35 to 40 percent per annum and is expected to capture up to 20 percent market share of the total banking industry in the next few years.

“If this trend continues the Islamic financial industry will become a major industry with an important role to play in global finance. London being the gateway for Islamic banking in Europe, needs to be prepared for this tremendous growth of this industry,” he said.

Dr. Ali also held talks with the Lord Mayor of the City of London, Alderman Ian Luder; the Sheriff of the City of London, Alderman Alan Yarrow; the British Consul General in Jeddah, Mohamed Shokat, and Richard Thomas, CEO, Gatehouse Bank, at Mansion House, the official residence of the Lord Mayor.

The IDB president’s visit was at the invitation of the Lord Mayor who earlier this year visited the bank’s headquarters in Jeddah.

Dr. Ali also met Andrew Mitchell, UK Secretary of State for International Development, to review progress on the implementation of the Memorandum of Understanding (MoU) signed by the two parties in Jeddah in March whereby the UK and the IDB agreed to cooperate in co-financing projects in IDB member countries aimed at generating youth employment and reducing poverty.

Alderman Luder stressed the close and historical relations between the City of London and the IDB and the GCC countries, in particular, Saudi Arabia. The City of London, as a premier international financial center, has much to offer not only in innovation, but also in education and training and also in the growing phenomenon of Islamic finance.

Dr Ali emphasized that the visit was a testament to the IDB’s partnership with the UK and specially with the City of London. “We have worked together to further some areas of our common interest. This visit also provides IDB with the opportunity to support the development of Muslim communities in the UK,” he said.

IDB’s Medium Term Note Program amounting to $6.5 billion for sukuk issuance is registered with the Financial Services Authority in UK and is listed on the London Stock Exchange.Under this program, IDB has made several issuances in US dollars, as well as pound sterling denominated private sukuk issuances have been made.

As far as the money market placements are concerned, the IDB has over the years increased its exposure to the UK’s financial institutions and IDB stands ready to do more in this regard when appropriate opportunities are identified.

The IDB is working with such recognized institutions as the Prince of Wales’ Prince’s Charities and has contributed just under $1 million to help young people in the inner cities to start up projects or small businesses.

The IDB has also been providing assistance for economic and social empowerment to UK citizens as part of IDB’s special assistance program for cooperation with Muslim communities in non-member countries. To date IDB has approved a total of 19 projects for the UK and further projects are being planned. These projects are mainly in the field of education, social welfare and research.

In the wake of the global financial crisis, economic recession and the impact of the eurozone debt crisis, the issue of embedded inclusiveness especially of the financial services industry is increasingly important. Not surprisingly, the IDB President appealed to the financial institutions to help in this respect.

“Achieving sound and sustainable socio-economic development is not simply a financing issue. It is a much broader endeavor,” said Dr. Ali, adding: “It is not within the bandwidth capacity of a single institution or even a single country. It requires strong commitment to reform the socio-economic system and its institutions. All stakeholders, including the government, private sector, civil society and donor community, have to play an active role and align their priorities and activities to achieve this common goal. Due to the strong banking traditions in the UK, it can contribute significantly to this endeavor.”

This, he added, is a once-in-a-lifetime opportunity and called upon all the Institutions to pull together and work towards building “an equitable, just and stable financial system which is capable of providing sustainable growth with employment creation for our own future. IDB would be happy to cooperate with initiatives in this regard.”

A key delivery vehicle for inclusiveness which the IDB has been promoting is through SME financing and microfinance programs aimed at generating employment, especially youth employment, and economic growth.

Due to the recent changes in the MENA region as a result of the Arab Spring, there has been a demand for funding of SMEs. In this context, the Bank has launched the IDB Youth Employment Support (YES) Program for which the IDB’s Board of Executive Directors approved $250 million to help empower Financial Institutions, Employers, Education and Vocational training organizations in the Arab Region to reduce youth unemployment.

Dr. Ali revealed that the targeted countries include Tunisia, Egypt and Morocco and that the first disbursements have started with Tunisia. However, he pointed out that it is up to the receiving countries to come up with project proposals to access the funding.

Furthermore, the Islamic Solidarity Fund for Development has allocated $500 million for Islamic microfinance and a similar amount for vocational literacy programs (VOLIP). The IDB Islamic Microfinance Development Program was established to strengthen the Islamic microfinance institutions and develop the overall enabling environment for them.

According to the IDB, the French Development Agency (AFD) and the Consultative Group to Assist the Poor (CGAP) are also collaborating with the IDB in the development of Islamic microfinance.

(Internatonal Islamic News Agency  / 30 May 2012)

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UK: The rise of Islamic finance

There has been much debate about the Arab Spring in the past 12 months, with the world’s eyes watching what this will mean for the rest of the globe.

At its very heart lies individual and societal freedoms, but what is particularly interesting is that it is likely to result in more democratically-elected Islamic governments with the promise of moral leadership and shares values. This in turn will result in much greater demand for Islamic finance and wealth management solutions.

The global Islamic finance industry is currently purported to be worth more than $1 trillion (£619bn). It is expected to continue to grow in line with the development and expansion of the financial markets generally with a growing number of new shariah-compliant stocks and sukuk – a financial certificate similar to a bond – and a general desire to assert a specific Islamic identity to social activities.

But while the term Islamic financial planning might conjure up images of the Gulf or north African regions, we believe the UK is, and will continue to play, a pivotal role in advancing the growth.

The UK is home to more than 2m Muslims and an leading financial centre. It offers great potential and currently boasts Islamic assets worth more than $19bn (£12bn).

The UK has 22 banks that offer Islamic finance products, far exceeding that of any other Western country. Many mainstream financial groups recognise the need to service Muslims’ financial requirements, as well as those of many non-Muslims whose investment principles are aligned with the ethics promoted by Islamic law.

I believe that as Islamic finance expands and the range of products continues to broaden, there will be a growing demand for education and skills, where once again the UK institutions are leading the way.

Already the UK’s banks, sukuk issuance and exchange-traded products are supported by a sturdy infrastructure. This includes more than 25 major law firms and the largest four professional services’ firms in the country, while up to 10 universities and business schools offer qualifications in Islamic finance education.

Furthermore the UK’s Islamic finance sector recently received a major structural boost following the integration of the UK Islamic Finance Secretariat into TheCityUK, an independent body that promotes UK-wide financial and related professional services. UKIFS is the leading cross-sector body that assists with the promotion and development of Islamic finance.

The events of 2008, the financial crisis and the ensuing panic ‘destroyed’ trillions of dollars of wealth. Among the worst hit were retail investors and so-called tried and trusted investment wisdom failed to counter the crisis.

Against this background, and faced with the challenges ahead, many have concluded that a rethink is necessary to the way we invest and, in particular, how we assess risk.

One can argue that if conventional institutions had followed the basic principles of Islamic finance that provides an additional risk screen, exposure to toxic sub-prime debt, sparing some investors from the worst excesses of the crisis could have been avoided. It is also interesting to note the Middle East by and large escaped the brunt of the crisis.

As I explored and looked in more detail at Islamic financial planning I became acutely aware that sharia law dictates a specific approach to investing – it provides specific requirements for wealth preservation and transfer. Regardless of the impact on their net wealth, Islamic investors are faced with the issue of family and generational wealth management. The complexity of Islamic requirements is so great that wealthy investors may need to establish professional family offices to assist with asset management, business management and legal issues

Naturally the dramatic rise in Islamic finance has prompted many to ask what it entails. Broadly speaking, shariah-compliant investing can be categorised by three overriding principles: procedural, substantive and charitable.

The first prohibits the use of interest payments – riba – based on the principle that it is unacceptable to benefit from lending money. It also forbids the use of gambling – maysir – and uncertainty – gharar – resulting in financial products that are structured in such a way that risk and profit are shared between the investor and the organisation arranging the investment.

The second stipulates that investment should only support practices that are in line with shariah law and investment in companies involved with alcohol, gambling, pork, pornography and tobacco are prohibited.

Last, charitable principles call for the setting aside of a certain amount for the purpose of charity, as a means of purifying one’s wealth and to help others.

But far from deter investment, there has been a boom is Islamic financial investments. To date the London Stock Exchange has seen more than $19.5bn (£12bn) raised through 31 issues of sukuk, with 10 new sukuk listings in 2011 and two in early 2012.

Globally sukuk issuance is expected to rise a further 50 per cent this year, with companies increasingly turning to capital markets as a result of banks reaching their lending limits.

However while there are significant opportunities to invest in high-quality global companies with strong balance sheets and sustainable income streams, we believe that this is a rather conventional way of looking at things and could be the wrong starting point when considering financial planning.

Many people are familiar with Islamic finance products and terms such as riba, sukuk and takaful – Islamic-compliant insurance – but there is less known about the merits of financial planning.

At its essence financial planning is more than just the use of shariah-compliant products. Clearly while any investment product, irrespective of industry or sector, has to be shariah-compliant, it is more important for the entire client or customer experience to be in accord with the principles of Islamic investment.

Institutions often believe that by merely using shariah-compliant products they have offered the client an experience in a manner consistent with Islamic law, but financial planning promotes the idea of helping individuals identify and achieve their long-term financial and life goals.

In my experience product solutions are irrelevant if one does not understand an individual’s lifestyle objectives and has a clear picture of their goals, dreams, hopes and fears. An investment, be it Islamic or not, is meaningless unless set against these objectives and revisited on a regular basis through a trusted relationship. After all what is right for one person is not necessarily right for another.

Although the main principles of shariah-compliant investing are enshrined in Islamic law, they still have to be applied.

Therefore I see their net result as adopting and following highly-ethical business standards and practices that result in socially responsible investing applied against a moral value-based framework. The lifestyle approach that I follow is, in my view, entirely consistent with the principles of shariah law. Lifestyle financial planning is relevant and appropriate to both Muslims and non-Muslims. For Muslims in particular it provides a complete solution rather than a solution based simply on the use of sharia-compliant products.

Only through this method do I believe that clients can truly enjoy a shariah-compliant investing experience.

Niraj Vyas is financial planning director for Guardian Wealth Management

(F.D Adviser / 03 May 2012)

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UK fund launches groundbreaking equity sukuk

London-based Ethical Asset Management has launched what it calls the world's first "investment sukuk", aiming to resolve a major area of controversy in Islamic finance by treating the vehicle as an equity instrument rather than as a bond.

The firm aims to raise 200 million pounds ($318 million) through the sukuk in the next 12 to 18 months, with 50 million pounds required to start buying the assets which will back the instrument.

The initial tranche will buy between two and four assets, Ethical Asset's founder and chief executive Saadat Khan told Reuters. The sukuk is a closed-end private placement fund, structured as a Jersey property unit trust.

Traditional sukuk, often described as "Islamic bonds", have been criticized by a number of Islamic scholars and investors for resembling conventional debt products; payments on them can be seen as akin to interest payments, which are banned under sharia principles.

Instead, Ethical Asset will invest money raised by the sukuk in income-generating student housing in Britain, projecting annual net returns of 4 to 6 percent, and give investors ownership of those assets - which it says will make the instrument closer to an equity product than debt.

Ethical "will provide investors with full ownership, which includes exposure to the risk/reward that is integral in a sharia transaction," Khan said.

The sukuk's maturity is expected to be five to seven years, he said. "We want to provide a commercially viable option...which does not rely on debt and can still deliver secure and stable returns."

RISK

The nature of the equity sukuk means investors will directly face risk in the student housing market, and there is no guarantee that they will receive returns of 4 to 6 percent.

Khan said he expected the British student housing market would remain strong despite weakness in the larger British real estate market.

Annual investment returns on student accommodation in London jumped to 15.1 percent in September 2011 from 8.4 percent in 2010, according to data from real estate consultancy Knight Frank. Other cities in Britain posted a return of 10.5 percent, down from 14.6 percent in the previous period.

Knight Frank said higher tuition fees at British universities taking effect from this autumn were a concern for the market, since they could potentially affect student enrollments.

Since the start of 2011, a total of 12 sukuk have been listed on the London Stock Exchange, bringing the total to 37 with a combined value of $20 billion, according to the UK Islamic Finance Secretariat, part of the financial lobby group TheCityUK.

(Reuters / 02 April 2012)

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Global Islamic finance assets hit $1.3 trillion

LONDON, March 29 (Reuters) - Islamic financial assets around the world hit $1.3 trillion in 2011, a 150 percent increase over five years as the industry expands into new country's beyond core markets in the Middle East and Malaysia, a report on Thursday estimated.

Developed markets in Malaysia, Iran and the Gulf remain fertile ground for future growth, but considerable potential also exists for expansion as more countries look to cultivate Islamic banking operations, including Australia, Azerbaijan, Nigeria and Russia, the report by lobby group TheCityUK's UK Islamic Finance Secretariat (UKIFS) said.

The figures were based on UKIFS growth estimates projected on end-2010 figures from a survey of the top 500 Islamic Financial Institutions conducted by The Banker publication.

"Considerable potential exists for expansion of the industry worldwide, although appropriate legal and regulatory structures are crucial for its development in individual countries," the report noted.

Morocco is also looking to launch its first fully-fledged Islamic bank in 2013, Reuters reported on Monday

A lack of global standardisation among Islamic institutions has been one of the main challenges for the Islamic finance industry. While regulatory bodies such as AAOIFI in Bahrain and IFSB in Malaysia have attempted to provide standards for sharia-compliant transactions, they are guidelines rather than enforceable rules.

The long-term impact of the Arab spring uprisings as new countries open up to Islamic finance remains to be seen and any further spread of political unrest could negatively affect prospects in some Middle Eastern countries, the report said.

Egypt, for instance, has raised the possibility of issuing a sovereign sukuk (Islamic bond), whileTunisia has set up a working group that will study how to develop Islamic finance in the country.

Sukuk issuance globally increased 62 percent to $84 billion in 2011, with Malaysia accounting for two thirds of that.

Islamic funds under management reached a high of $58 billion in 2010, with the available pool about 10 times larger at over $500 billion, the report found. Fierce competition, though, has driven down management fees worldwide from 1.5 percent in 2006 to 1 percent in 2011.

The new figures are higher than those predicted by Ernst and Young in a report in November, in which the consultancy estimated Islamic finance assets could climb 33 percent from 2010 levels to $1.1 trillion by the end of 2012.

Islamic assets represent only around 1 percent of the global financial market.

UKIFS is a wholly-owned subsidiary of TheCITYUK, a lobby group composed of members across the financial services sector, including lawyers, bankers and asset managers.

(Reuters / 29 MArch 2012)

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Omar Shaikh: Islamic banking could be perfect fit for Scotland

YOU cannot mask what has happened to the banking industry over recent years. Alongside the near collapse of our biggest banks, there has been a disintegration of trust.

It has spurred many of us from the worlds of business, the churches and academia to explore new models of financial institution that bring together Islamic and ethical banking for a more socially-focused view of lending.

Today the Tods Murray/Islamic Finance Council UK (IFC) ethical finance forum will look at the practical challenges relating to marketing and distribution and discuss methods for measuring social returns.

Over recent weeks, these discussions have become even more pertinent against the backdrop of constitutional reform. Scotland’s monetary system is being hotly debated.

We strongly believe the shared values between Islamic finance, the churches and broader ethical banking could provide the bedrock to a more stable and prudent banking sector whatever the outcome of a referendum, and no less so were Scotland to become independent.

We would not want to be in a similar situation to Ireland trying to bail out our banks. IMF studies have shown Islamic banks are more stable than their conventional counterparts and we need to see what we can learn from this to mitigate systemic risk.

Scotland has a tremendous heritage for ethical and prudent finance from the original mutual investment trusts to the Savings Bank movement. Indeed the Savings Bank structure inspired the first attempt at a modern Islamic bank in Egypt more than 40 years ago.

This is also a nation for innovation. In a brave, new world, the Scottish banking system has the opportunity to once again show moral leadership giving the people of Scotland a fair, socially responsible bank system that works for them and ensures Scotland can withstand any future financial crisis.

Many people are already basing their financial decisions on moral considerations, there is a growing appetite for ethical trading and there is an expanding sector of society who will choose social over purely financial returns. That is worth building on.

(ScotMan.Com / 15 March 2012 )

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