Islamic finance industry in Malaysia needs more perks

KUALA LUMPUR: Islamic finance (IF) still requires incentives like tax deductions to spur the industry further, say top industry executives. 

CIMB Islamic Bank Bhd’s chief executive officer (CEO) Badlisyah Abdul Ghani said government started offering incentives only from around 2004/2005 to jumpstart the industry amid strong demand for IF products but few suppliers in the market.

“The demand was there but the players were not keen to do the business. So, the reason the incentives were given was to get the industry moving. As a result of that, the supply of IF instruments and products became more, and the interest from consumers grew as they now had more choice of products,” he said during a panel session on the internationalisation of IF at the Malaysian Banking Summit here yesterday.

He went to say that the industry was, in fact, asking the government for more incentives under the upcoming national budget.

“One of the things that I personally asked for was to allow banks to have a double-tax deduction or tax rebate for investment in information technology, so that we can get rid of all the manual interventions that we currently have today in the provision of IF products,” he said.

The panel, which included Hong Leong Islamic Bank Bhd’s CEO Raja Teh Maimunah and Maybank Islamic Bhd'’ CEO Muzaffar Hisham, had been asked by a member of the audience if the IF industry here would be able to sustain itself should the incentives be discontinued.

Malaysia, which first embarked on Islamic finance 30 years ago, has become a global hub for the industry even as other jurisdictions have sprouted up.

However, the industry still needs incentives while it aspires to be an international Islamic financial centre, Raja Teh said.

“We’ve not really gotten the kind of traction we want. Until and unless we truly have got that kind of volumes, I don’t see those incentives being pulled out so quickly,” she remarked.

Meanwhile, Badlisyah said Malaysia had a lot to offer the world, in terms of innovation and development as it had already built up expertise in all segments of the IF industry.

It can also lead by example in terms of how the industry is governed, in terms of its comprehensive framework and legislation.

He stressed that the IF industry was no different from conventional finance in that it was also susceptible to a financial crisis, the likes the US had seen.

“It is susceptible to the same crisis because greed is human nature. It’s got nothing to do with the industry. 

We can have all the structures in the world, the best governance and regulatory framework, but the moment we do not manage greed, it is dangerous,” he said.

(Business Times, 29 July 2012)

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

Malaysia: Need to build up confidence to promote Islamic finance globally

KUALA LUMPUR: Although Malaysia has one of the most established and regulated Islamic finance frameworks, local financial institutions need to build up confidence to promote it in the global Islamic finance market.

CIMB Islamic Bank Bhd chief executive Badlisyah Abdul Ghani said although Islamic finance had been thriving in the domestic market, most of the local banks had not been active in the global syndication market or even the sukuk market.

He said Malaysians tended to be apologetic about their own Islamic finance framework, perceiving it as inferior to other syariah-compliant frameworks, rather than introducing it as a quality market-leading financial product.

“This is not healthy for the international market because we are supposed to be the leader here. That is the only thing that is lacking in our initiative to internationalise our framework,” he said at the 16th Malaysian Banking Summit.

He said Islamic finance had helped Malaysia achieve financial inclusion and, if the World Bank could introduce the Malaysian Islamic finance model to its member countries and Organisation of the Islamic Conference (OIC) countries and encourage them to replicate it, it would help the countries to be financially independent. “And that would enhance global trade.”

Badlisyah also said that Malaysian Islamic financial institutions seemed to overlook the less popular OIC countries in favour of the rich nations in the Gulf Cooperation Council (GCC).

“Somehow, we seem to bypass the natural markets for Islamic finance. Malaysia can play the role of a big brother' for the OIC countries which have yet to develop their indigenous Islamic finance,” he said.

“There is a lot of talk in the international financial market that Islamic finance has too much focus on the rich, institutional investors, big corporates and the likes despite our affinity with ethics.”

Hong Leong Islamic Bank Bhd chief executive Raja Teh Maimunah Raja Abdul Aziz, however, noted that there would be much to overcome before the Malaysian Islamic finance model could penetrate the OIC countries.

“The objective of syariah and how to deploy equity in justness which is not easy because at the end of the day it is about bottomline and numbers (so) to go to the OIC countries as banks is also based on credit rating,” she said, highlighting that most of the banks in those countries were either poorly rated or not at all.

While local banks might want to reach out to introduce the Malaysian Islamic finance framework, she noted that without the acceptable credit rating, local banks would not be able to create any correspondent relationship.

(The Star Online / 28 July 2012)

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

Kazakh sukuk debut opens to door to Islamic finance

The 240 million five-year Malaysian ringgit ($75.5 million) issue on July 18, which generates an annual payment of 5.5 per cent, has set the benchmark for Islamic bond issuers in the former Soviet republic, the Development Bank of Kazakhstan said.

The issue is part of the bank’s 1.5 billion ringgit Islamic note programme under the sharia principle of murabaha, approved this year by the Malaysian central bank and the Sharia Advisory Council of the Securities Commission of Malaysia.

“The next sukuk issue will depend on market conditions and the bank’s borrowing requirements,” the state-owned Development Bank’s press office said in a written response to questions.

“The number of issues will depend on the size (of each issue),” it said, adding that it could issue a further 1.26 billion ringgit under its existing programme.

Two decades after the collapse of the Soviet Union, majority Muslim Kazakhstan is making a bid to become a regional centre of Islamic finance, which is based on religious principles such as bans on interest and pure monetary speculation.

About 70 per cent of Kazakhstan’s 16.7 million population is Muslim. Since the global financial crisis, investors are more receptive to alternative forms of banking and keen to tap pools of Islamic investment money in the Gulf and southeast Asia.

Malaysian investors took up 62 per cent of the Development Bank’s debut issue. The bank said the highly developed Islamic finance market in Malaysia was the ideal model for Kazakh issuers.

In the first 11 months of 2011, Malaysia accounted for 71.2 per cent of total global sukuk issuance, it said.

“Not only is this sukuk issue the first in the history of Islamic finance in Kazakhstan. It is the first in the countries of the CIS (Commonwealth of Independent States),” the Kazakh bank said.

Halyk Finance (Kazakhstan), AmInvestmentBank and Kuwait Finance House acted as joint lead managers of the issue, with HSBC and RBS as coordinating joint lead managers.

‘ICEBREAKER’

Yerlan Baidaulet, adviser to Kazakhstan’s Ministry of Industry and New Technologies, said he was working on potential sukuk issues with other institutions in the country.

“We could have two or three deals. For sure, there will be one more sukuk from Kazakhstan (this year),” he said.

“The window has been opened. (The Development Bank) is playing the role of icebreaker.”

President Nursultan Nazarbayev, in power since Soviet times, has said he wants Kazakhstan’s commercial capital, Almaty, to be a hub for Islamic banking in the former Soviet Union, which includes other majority Muslim states and Russian republics.

A sovereign sukuk issue mooted in 2010 did not materialise. Finance Minister Bolat Zhamishev told Reuters in June that Kazakhstan had no pressing need to borrow abroad. Its National Fund to collect windfall oil revenues contains $51.4 billion.

Nevertheless, the Development Bank said its issue would serve as a model for other quasi-sovereign companies and banks to tap Islamic finance markets.

“We are convinced that this deal will open the way for other issuers in the region looking to diversify their funding on Islamic markets,” Zhaslan Madiyev, deputy chairman of the bank’s management board, said in a statement accompanying the issue.

Baidaulet, who is also executive director for the CIS and Eastern Europe at the Islamic Development Bank, a Saudi Arabia-based multilateral lender, said interest in sukuk reflected a desire among investors to work closely with the real economy.

“The way we are promoting Islamic finance in Kazakhstan is different,” he said.

“It’s not just a religious matter. It’s about the needs of the economy.”

(Dawn Business.Com / 27 July 2012)

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

Deutsche Bank: “Sukuk Premium Disappeared” - will stimulate a boom in sukuk issuance while lengthening tenors

The”sukuk premium” – the additional cost which borrowers must pay to issue an Islamic bond instead of a conventional bond – has effectively disappeared, and this will stimulate a boom in sukuk issuance while lengthening tenors, a senior executive at Deutsche Bank said.

“I don’t think there is an Islamic premium anymore,” Salah Jaidah, head of Islamic finance at the bank and chief country officer for Qatar, said in an interview this week.

Until late last year, sukuk issuers commonly paid a premium because they catered to a smaller investor base and because investors were not as familiar with sukukstructures as they were with conventional bonds.

This year’s heavy investor demand for sukuk, due to the appetite of cash-rich Islamic investment funds and the Gulf’s growing reputation as a relatively high-yielding safe haven, has transformed the market. Many high-grade credits – such as Qatar, in its record $4 billion deal this month – now pay less to sell sukuk than they would for conventional bonds.

Jaidah said the shift in the market’s perceptions was not temporary. “This trend will continue,” he said.

Sukuk issuance volumes regionally as well as globally have already surpassed lastyear’s total, including Qatar’s issue, which was the largest-ever dollar-denominated sukuk and on which Deutsche Bank was lead arranger and bookrunner.

Global dollar-denominated sukuk issuance so far this year stands at $12.8 billion,according to Thomson Reuters data, the vast majority from the Gulf Arab region; total dollar sukuk issuance last year was $11.2 billion.

Deutsche Bank placed fourth in the Thomson Reuters Islamic debt capital markets league table rankings for the first six months of this year, up five places year-on-year. It is ranked third in the Middle East DCM ranking.

Jaidah said that in addition to stimulating issuance, the new popularity of sukuk would permit issuers to lengthen tenors beyond the five years which was previously used for the vast majority of issues.

“Sukuk will be attractive for longer maturities, and used for infrastructure spending, for example. This is very encouraging. It will allow a lot of issuers on the conventional side to tap Islamic markets.”

Governments making plans for their debut issues of international sovereign sukuk include Turkey and South Africa, as well as other sub-Saharan African nations.

“Many nations are looking at issuing sovereign sukuk, even non-Middle Eastern nations. We think North Africa will also be very active when it comes to issuing sovereign sukuk,” said Jaidah, who was previously Qatar Islamic Bank’s chief executive.

“A lot of sovereign transactions will be more liquid. It’s an opportunity to create more liquid sukuk. This liquidity is an added attraction of the sukuk market.”

He declined to discuss specific mandates but noted that for first-time sukuk issuers, the process to enable them to print a deal can be a long one.

“We’re focusing on readying potential issuers for sukuk. We’re exploring, we’re convincing, the clients are learning.”

(Gulf Business / 27 July 2012)

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

Zakat: Charitable giving in Islam

Muslim commitment and potential to support charitable causes in the UK should not be underestimated, says Fadi Itani.

As the Islamic holy month of Ramadan commences, in this year from 21 July, millions of Muslims in the UK will be fulfilling a fundamental part of their faith by donating a proportion of their wealth to charitable causes around the world. The general concept of Zakat is well known, yet even among many Muslims the detail and intricacies of this spiritual act of giving are not fully understood.

Understanding Zakat

Zakat is the compulsory form of charity for all Muslims based on the amount of wealth they have held over an Islamic year (the Muslim calendar is based around the moon and lasts for either 354 or 355 days). For Muslims, Zakat is not simply a form of charitable giving but rather a means of achieving spiritual, moral and social objectives - a path to ‘purification’ of a donor’s wealth and a mechanism to redistribute income to the poorer elements of the Islamic economic system.

Each year, every Muslim is compelled to pay 2.5 percent of their wealth should they be in possession of the minimum amount of wealth on which Zakat is due (known in Islam as the nisab.)

Zakat is the third pillar of Islam and is closely aligned to the second pillar of Salat (prayer). It is a mandatory act of worship for Muslims and is considered both an obligation to God and an enshrined moral duty to the poor.

Common misconceptions

Zakat is commonly paid by Muslims during the holy month of Ramadan - the Islamic time of fasting and a period of intense spiritual reflection and worship. Zakat paid during Ramadan is believed to increase rewards given to the individual, as declared by the Prophet Muhammad (pbuh).

However, this standard practice by the majority of Muslims tends to counteract the true spirit of Zakat. When Zakat payment is due – i.e. if an individual has been in ownership of the minimum “Zakatable” wealth for one lunar year – then it must be paid on time and not delayed, even if rewards for charity are increased during Ramadan.

Traditionally, Zakat distribution would not be concentrated in one period but rather spread over a length of time so that recipients could be supported throughout the year. The early history of Islam also indicates that the collection and distribution of Zakat would normally be dispersed regionally to beneficiaries in the same surroundings. Today, Zakat donations are commonly distributed to international causes such as poverty alleviation or helping people meet their basic needs.

Zakat contribution to global development

While data on Zakat flows is limited, attempts to chart the potential of this form of giving are emerging. Islamic financial analysts recently estimated that each year, somewhere between £130bn and £645bn are given as mandatory and voluntary donations across the Muslim world. At the low end of this estimate, this is 15 times more than global humanitarian aid contributions in 2011.

Several governments in the Muslim world have made efforts to centralise the management and distribution of Zakat donations. In Malaysia, a massive £286m was collected in Zakat donations in 2010, while in Egypt the government estimated that £480m was given to charity by Egyptians in 2009, enough to pull nearly all of Egypt’s poor out of poverty in strictly financial terms.

Shifting mindsets

At Zakat House, the UK’s first charity dedicated to the collection and distribution of Zakat funds, we are aiming to better inform Muslims on the objectives of Zakat and redress the flow of funds to under-resourced causes based in the UK. We believe that Zakat donations have huge, unfulfilled potential to make a greater difference to charities in the UK in line with the true teachings of the Prophet Muhammad (pbuh).

Our recently launched ‘Just Zakat’ campaign aims to alter donor perceptions of Zakat, and allows them to spread their Zakat over several worthy causes based in the UK and abroad in line with the categories of recipients entitled to receive it.

Currently, five charities make up our coalition of organisations eligible to receive funds under the Just Zakat banner, with two of these focused on providing services to beneficiaries in the UK.

Our website is growing and we are aiming for it to become an extensive resource base on the virtues and practical application of Zakat, as well as dispelling common myths and misconceptions associated with this religious concept of giving.

We are constantly on the look-out for other small and pioneering charities in the UK eligible to join and receive donations within our coalition group.

For more information about our campaign and to see how you can get involved, please visit the Just Zakat website.

Fadi Itani is the CEO of Zakat House a central collection organisation for Zakat in the UK.

(Civil Society.com / 26 July 2012)

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

Islamic finance's fortune turns in Egypt

CAIRO // When Ahmed El Naggar opened the world's first Islamic bank in Egypt in 1963, the country looked as if it could harness that legacy to grow into one of the biggest Islamic finance hubs in the world.

But years of suspicion that the Muslim Brotherhood, illegal at that time, would use Islamic finance as a way to gain prominence in the country has left Egypt trailing behind its Arabian Gulf neighbours mainly because no tight regulation or laws have been implemented.

As Egypt's first Islamist president Mohammed Morsi takes the helm, the country's Islamic finance fortunes are beginning to look up.

The Muslim Brotherhood wants to boost the market share of Islamic banks to 35 per cent in five years from 5 per cent now. It also wants to add an Islamic banking section to the country's banking law, which currently has no specific regulations covering the sector. Analysts say the draft amendments, although delayed by the dissolution of parliament, signal an opportunity to quicken the pace of Islamic finance development in Egypt.

"The Arab Spring opened the door to Egypt's re-entry into Islamic finance in the coming six months and the pace is going to be quicker with Islamists in power," said Shahinaz Rashad, the executive director of Metropolitan, a financial consultancy firm that has also worked on carrying out Sharia-compliant transactions.

She said Islamic finance could be one alternative to hugely unpopular taxes and cuts in government spending to reduce budget and balance of payments deficits inflated by a year of political and economic turmoil.

In February, the Egyptian government said it was preparing to raise US$2 billion (Dh7.34bn) through its first issue of Islamic bonds to help to plug the deficit gap, which is equivalent to 8.8 per cent of GDP. Soon after, the country's regulator said it was finalising regulations that would allow local companies to issue Islamic bonds, a much-awaited move expected to boost market liquidity.

The Egyptian government also signed an agreement this month with the Islamic Development Bank, based in Saudi Arabia, that will provide $1bn to finance energy and food imports.

The finance, which is part of a previously announced agreement to provide Egypt with $2.5bn, signals that Egypt must operate some of its financing in a Sharia-compliant manner, said Ms Rashad.

Egypt's economy was badly damaged after a drawn-out uprising that began early last year. International reserves had fallen to $15.53bn by the end of last month from $36bn in January last year and the balance of payments deficit has doubled to $11.2bn in the nine months to March this year from $5.5bn a year earlier.

Islamic banking may not offer a "fix-all" for Egypt's economy, analysts say, but it would encourage a fairer playing field.

Egypt now has 14 Islamic banking licences but only three fully fledged Islamic banks, including Faisal Islamic Bank of Egypt, Al Baraka Banking Group, headquartered in Bahrain, and Abu Dhabi Islamic Bank of Egypt. Despite several more lenders with Islamic finance windows, the approximately 120bn Egyptian pounds (Dh71.66bn) of assets in Egypt's Islamic banking industry are dwarfed by Egypt's conventional banks.

Total assets of the entire banking sector are about 1.3 trillion pounds, according to Egypt central bank data.

Bankers say the country has to work more to convince international investors that Egypt's sukuk is worth buying.

"There is no accepted benchmark for the sukuk business in Egypt …so for a company in Egypt to issue a sukuk instrument and be in a position to have an investment grade instrument is pointless because nobody would buy it," said Douglas Johnson, an investment banker based in New York and the chief executive of Codexa, a specialised investment bank that creates Sharia-compliant financial structures.

He said better regulation and a stronger capital market law was needed before Egypt could begin to attract the billions of dollars of sukuk investment Saudi Arabia, Malaysia and other Islamic finance hubs were getting.

"The next government in Egypt is going to have to prioritise getting the economy back to shape before restructuring and, to be brutally frank, Islamic finance probably has to stand in line," said Mr Johnson.

(The National / 25 July 2012)

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Islamic Finance - An alternative banking model?

Whether you're bored of bank bashing or not, there's no denying that people are searching for more trustworthy, transparent places to place their cash. And with the Islamic Bank of Britain (IBB) launching a table-topping 4% expected profit rate for its two-year fixed account, will faith-based bank accounts prove a popular alternative?

Contrary to what you may think, the account is open for anyone to apply. And as an Islamic bank, IBB does not pay interest. The rate is offered as an 'expected profit rate', because the Bank invests the funds into Sharia compliant and ethical trading activities. These activities deliver a profit over the 24 month term.

But you can trust in this, as IBB said it has never failed to deliver the expected rate.

How do Islamic bank accounts work?

Islamic banking products forbid the payment or receipt of interest and refuse to invest in "unethical" industries such as the gambling, pornography or the tobacco trades. They have become increasingly popular across a wide range of religious groups and general consumers.

Islamic finance turns traditional financial institutions on their head. It has to be Sharia, or Islamic law, compliant. Sharia is taken from the Koran, one of whose central tenets - that money has no intrinsic value - might sound alien to the denizens of the City.

The principles of Islamic banking are more than 1,400 years old, but the practice is relatively new. It was launched in Egypt in 1963.

"As the credit crunch has mutated inexorably into a recession, with bankers having eclipsed politicians, lawyers and even journalists as public enemy number one, the growing number of Islamic finance institutions in Britain might just be sitting pretty," reports the Times.

The UK now has a handful of fully Sharia compliant banks and dozens of other financial institutions have set up special branches or firms. They include the Qatar Islamic Bank(QIB), and the Islamic Bank of Britain, which has headquarters in Birmingham.

So are the basic principles what banking needs?

Could Sharia principles set us on the path to building real and sustainable economies?

Central to Islamic finance is the fact that money itself has no intrinsic value, it is simply a medium of exchange. Each unit is 100% equal in value to another unit of the same denomination and you are not allowed to make a profit by exchanging cash with another person.

But it does not abolish inherent business risk, and it can finance an asset bubble as well as any Western bank. Reflecting in part the world it comes from, it can be conservative and far from enthusiastic about innovation in either technology or finance.  And - this may be positive or negative - Islamic banking would have been unable or unwilling to finance growth through debt.

However, authors Andrew Sheng, ex-chairman of the Hong Kong Securities & Futures Commission and Ajit Singh, emeritus professor of economics at Cambridge University, said there is growing convergence between Islamic and western finance. It has an important role to play in reframing western finance in an ethical framework.

 "...Islamic finance could prove to be a serious alternative to current models of derivative finance."

"The test of any alternative financial system depends ultimately on whether it is - or can be -

more efficient, ethical, stable, and adaptable than the prevailing system.

"For now, there is no Islamic global reserve currency and no lender of last resort. But the Islamic world is the custodian of huge natural resources that back its trading and financial activities."

There should be a return to "back to basics" banking across the board, rather than merely among Islamic banks.

Some mainstream banks such as Lloyds and HSBC offer Islamic products. HSBC, for example, has Islamic mortgages that are in demand even from non-Muslims.

Some of the tenets of Islamic banking will appeal to anyone who agrees with the underlying principles of equitable distribution for everyone. And they are deemed efficient and productive by many.  

The International Herald Tribune adds: "Islamic banking and financial institutions provide a good example of Sharia sensitive business. There are a number of studies comparing efficiency and productivity of Islamic banks with their conventional interest-based counterparts, on the global, regional and national levels. The results of such studies are at best inconclusive, suggesting that Islamic banks are on average at least as productive, profitable and efficient as conventional banks in the jurisdictions wherein they co-exist with conventional banks."

(Mindfull Money / 25 July 2012)

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