Bangladesh: Islamic funds gain stronger foothold

Bangladesh can improve its weak infrastructures by utilising Islamic funds available globally, said a senior official of a foreign bank.

The country's stable economy can help attract more Islamic funds from international financiers, said Afaq Khan, chief executive officer (Islamic banking) of Standard Chartered Bank.

Khan was sharing his views on the prospects of Islamic banking in an interview with The Daily Star at Sonargaon Hotel recently.

“The total size of the world's Islamic funds is estimated at $1- $1.3 trillion, which is growing at 15-20 percent on average annually,” said Khan, who came to Dhaka to launch the bank's Shariah-based product Saadiq for its corporate clients in the country.

Most shariah-based financiers in the world are eager to invest in large infrastructure projects, he said. Bangladesh can attract these investors, thanks to a positive economic outlook of the country.

“All the ingredients are here to attract the Islamic financiers as you have a stable economy, stable regulations and fast economic growth,” said Khan.

The country needs to tell its success stories and future plans to the Islamic investment community globally, he added.

Standard Chartered Saadiq is ready to cooperate with the government in the processes of bringing in the Islamic investors to the country by utilising its global network, said Khan.

Islamic banking is now an issue of great interest for many, including the western non-Muslims, as the system remained almost unhurt during the global financial crisis, said the official.

Shariah-based banking is growing much faster than conventional banking, he said. Currently, the banking giant has Islamic banking operation in six countries -- Indonesia, Malaysia, UAE, Bahrain, Pakistan and Bangladesh.

Of the countries, Indonesia has the highest annual growth rate at 45 percent, followed by Bangladesh at 25-30 percent, said the 50-year-old official.

“Conventional banking is riskier than Islamic banking because it deals with debt trading and keeps itself involved in market speculations, which the European and American banks experienced,” he said.

“At present 19 percent of the industry assets and 16 percent of the industry deposits are Islamic. So, there is an accelerated demand for Islamic banking products in the market,” said Khan.

The London-based bank started its Islamic banking operation in Bangladesh in 2004 with consumer banking products under the bank's group branding Saadiq.

“Islamic banking operates in real economy. This banking has no room for gambling, speculation, excess leverage, or the greed for windfall profit,” said Khan.

He joined StanChart in 2003 with a mandate to launch the Islamic business division for the bank. Since then, he has been responsible for the strategic build-up of a global Islamic banking business covering retail, corporate and investment banking with a wider product capabilities and award winning solutions.

Khan, who has 22 years of banking experience, believes Bangladesh could be a big market for the Islamic banks. “Around 90 percent people here are Muslims. So, the country has an immense potential for the growth of Islamic banking.”

But he feels the business prospect would depend on diversification of products, services and adequate training of the officials.

"Saadiq" is the brand of this bank's Islamic banking, which has rolled out more than 250 products and solutions relating to consumer and wholesale banking.

An Islamic bank traditionally generates its profits from Sharia-compliant investment activities. This profit is shared back with the bank's customers at a pre-agreed ratio. An account holder is entitled to a share of these profits according to the funds he holds in his account.

Khan said Islamic banking differs from conventional banking, primarily because it does not look to charge or deliver interest.

In Islamic banking, profit is generated through investment and trading, said Khan, who did an MBA from the University of Western Illinois in the US.

The official said this return rate has to match the level of return provided by interest levels of conventional banking.

Islamic banking in Bangladesh continues to show strong growth since its launch in 1983.

At present, out of 47 banks, seven private commercial banks are operating as full-fledged Islamic banks. Besides, 16 conventional banks are engaged in Islamic banking, according to Bangladesh Bank's annual report for 2010-11.

The total deposits with Islamic banks and Islamic banking branches of the conventional banks stood at Tk 67,580 crore by the end of December 2010. This deposit accounts for 17.5 percent of the deposits with the total banking system, according to BB Data.

Total credit of the Islamic banks and the Islamic banking branches of the conventional banks stood at Tk 62,870 crore by the end of December 2010. This was 19.1 percent of the credit of the total banking system.

The global banking giant targets Bangladesh as one of the potential markets for its Islamic financial products and services.

As part of the move, the bank launched its Shariah-based wholesale banking product Saadiq for its corporate clients on August 2. Earlier the product was for retail customers only.

The Saadiq brand will offer a core comprehensive suite of products related to cash management, trade, term and working capital financing for corporate clients to fulfil their banking requirements in a Shariah compliant way.

(The Daily Star / 26 August 2012)

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$ 66.4 bn sukuk issued globally in H1

The volume of sukuk issued globally during the first half of the current year reached $ 66.4 billion, according to a report released by KFH-Research, an affiliate of Kuwait Finance House (KFH).

The increase in sukuk issuance during the period was triggered by large sums of money pumped by sovereign authorities and central banks to absorb excess liquidity, the report said.

It said the GCC countries used to be a main market for sukuk during the first half of the year, despite the absence of Kuwait and Qatar.

The global sukuk currently represents a dynamic part of the Islamic financial system that continues to grow at a remarkable pace.

After the largest quarterly issuance witnessed to date in the Q1 2012, the global sukuk market has continued its growth trend throughout the Q2 2012 on both primary and secondary market fronts, the report said.
The first half of 2012 witnessed a diverse range of new issuances which round up at $ 66.4 billion for the period, while the secondary market grew to $ 210.8 billion, representing a y-o-y growth of 40.1 percent and 30.5 percent, respectively, it said.

The growth of sukuk issuances this year can be attributed to a number of factors, including the declining yields for both corporate and sovereign issuances given significant demand, the rarity of high quality high yielding papers and the flight to fixed income safety amid more concerns emerging from Europe, the report said.
The primary sukuk market has been driven by the increasing number of funds raised by sovereigns and central banks to soak up excess liquidity and provide short-term investments, while new jurisdictions continue to enter the fray.

Malaysia has continued its dominance in the market issuing $ 18.5 billion in the second quarter to total $ 46.8 billion for the first half period.

The market share of Malaysian issuances has consistently been around 70 percent over the past five years and shows no signs of slowing down.

The UAE was the second largest domicile of issuances over the quarter with $2.4 billion worth, closely followed by Saudi Arabia with a pinch lower than $ 2.4 billion, according to the report.
By region, South Asia accounts for the majority of sukuk issuances in H1 2012 (79.3 percent), Indonesia maintaining the region’s second spot outside of Malaysia.

Indonesian issuances have grown significantly of late with the nation launching its “project sukuk” program as well as issue an encouraging number of sovereign certificates, mostly via auction or private placement, for fiscal financing.
Year-on-year Indonesia’s primary sukuk market has grown by 221.1 percent until end-1H 2012, it said.
According to the report, the MENA region, and more specifically the GCC region, has been a key market for issuances this year, growing by 6.1 percent despite no Qatari or Kuwaiti issuances thus far.

On a quarterly basis, GCC sukuk issuances have grown by 112.3 percent y-o-y in the 2Q12, although 39.5 percent lower than the Q1 2012.

During the Q2 2012, there have been a number of notable sukuk. Among them are the Islamic Development Bank’s $ 800 million, issued with a return of 1.357 percent over its five-year tenure, significantly lower than the $ 750 million issued at 2.350 percent during the Q2 2011.

Dubai issued its dual tranche sovereign sukuk Ijarah during April with a return of 4.900 percent for the five-year tenure ($ 600 million) and 6.450 percent for a 10-year tenure ($ 650 million).

Subsequently Dubai Islamic Bank entered the market in May with a five-year $ 500 million paper, managing to set a return at 4.752 percent, almost 15 basis points lower than its sovereign counterpart, the report said.
The second quarter has bolstered projections for the sukuk market moving forward given the higher uptake in sukuk issuances as well as the continued lower funding costs.

Significant demand for high quality papers means that issuers continue to benefit from better credit terms, it said.
The second half of the year is expected to have a further $ 30 billion worth of sukuk papers mature as at end-Q2 2012 and corporates will be eager to raise and refinance long-term facilities and improve financing efficiencies, the report said.

(Arab News / 23 August 2012)

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Oman: Strong demand for Islamic banking products projected

Demand for Islamic banking and insurance products is expected to be fairly robust when Islamic banks, Islamic windows and Takaful companies formally roll out their products and services, starting from as early as the fourth quarter of this year. According to a prominent expert on Islamic banking, demand will be driven by a number of categories of potential customers who have been “waiting patiently” for Islamic financial services to become available in the Sultanate.

“Overall, there are clear indications of a strong uptake of Islamic banking products,” said Khalid Yousaf, Director — Islamic Finance Advisory Services, KPMG Oman. “However, we have to remember that a successful launch of Islamic banking products and services will depend largely on their competitive pricing, marketing and utility to the end-users,” he added in comments to the Observer.

A veteran of green-field/start-up bank operations in both conventional and Islamic Banking, Yousaf has worked in senior positions with Citibank and Bank of America in the UK, Turkey, USA, Belgium, Greece and Pakistan. He has also worked in senior consulting roles in the IFC, EBRD and USAID-funded projects in Serbia, Georgia and Iraq. In his first media interview since joining KPMG Oman as Director — Islamic Finance Advisory Services, Yousaf says he envisions demand for Islamic products and services to be “fairly strong” when they eventually come on the market in Oman.

Part of this demand, the expert explains, will come from investors who wish to deal only with Sharia-compliant banking products and services, the absence of which locally has led them to invest their funds with Islamic banks outside Oman. “Once Islamic Banking products become available in Oman, they’re very likely to bring their deposits and investments back home and invest in Sharia-compliant products,” Yousaf notes.

Yet another category of potential customers will be those who currently do business with conventional banks out of necessity and in the absence of Sharia-compliant options. They will very likely switch to Islamic banking as soon as it becomes available, he points out. The third category belongs to strict adherents of religious tenets who do not deal with conventional banks at all because they consider their activities as “haram” and “riba-based” and as a result, deal in cash only. “They’re very likely to transfer their funds and use the services of Islamic Banks and Windows. Islamic Banking in Oman will also encourage Omanis resident abroad to deal with Islamic Banks and Windows back home,” says Yousaf.

The KPMG Director is of the view that development of Islamic banking products and services in a new market like Oman will be gradual, rather than explosive. “Islamic banks will need to educate their target market customers about the Sharia-compliant aspects of their products and services, their competitive features and advantages over conventional banking. Customers who have a better understanding of Islamic banking will switch to it faster than others who may take the ‘wait and watch’ approach. There may also be skeptics who may challenge the Sharia-compliance aspects. Their objections and concerns would need to be addressed by the executive management and scholars in Sharia Supervisory Board of Islamic banks.”

The Central Bank of Oman (CBO) has opened the door for the licensing of full-fledged Islamic Banks, as well as Islamic Windows of conventional domestic and foreign banks operating in the Sultanate. In the pipeline are two Islamic Banks, Bank Nizwa and Bank Al Izz. Also gearing to launch Islamic Window operations are: bank muscat, National Bank of Oman, BankDhofar, Bank Sohar, ahlibank, National Bank of Abu Dhabi and Oman Arab Bank.

(Oman Daily Observer / 26 August 2012)

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Redefining Islamic finance

An indicator of how this very important debate has begun to enter the mainstream was published in this newspaper some time ago in which the legitimacy of the interest-free financial instruments proffered by these banks was questioned. It was argued that an economic transaction would be considered riba- (interest) free if it avoids the multiplier mode of money-making, profit-taking and capital creation.

But the questioning of claims made by financial institutions, Islamic or otherwise, which purport to offer interest-free banking and products apparently styled according to the Sharia is not a phenomenon confined to Pakistan. With the Islamic finance sector termed as the fastest-growing segment of the global finance industry, religious and financial experts, in tandem, are making more and more queries about the authenticity, according to religious scriptures, of the financial services on display.

A widely held view is that since the Sharia dictates pure Islamic values and provides direction to religious goals, perhaps if Islamic banks were to adhere to these basics they could end up playing a much bigger role in the new frontier of banking and finance.

The generic term here becomes ‘contextual’ banking but, in reality, the bigger picture appears to provide for a healthy future for Islamic finance, if, of course, its basic principles are followed, in the key markets of the future: Africa, Asia and the Far East.

Some experts are of the opinion, though, that the issue plaguing Islamic finance today is not that the industry is not realising its ideal (tayyib) but the concern that even the halal is being diluted. They point out that, just as in conventional finance, Islamic finance also sees many cases where the transactions claim to be legitimate but may be considered unethical. The key here would be the creation of a business model that is truly Sharia-based — not merely tagged as ‘Sharia-compliant’.

But the problem may not rest entirely with financial institutions. A widely held belief questions why individual governments do not endorse holistic frameworks designed to help the Islamic finance industry expand in a sustainable manner. Some blame is also apportioned to politicians and policymakers with critics questioning if they even understand the true meaning of Islamic finance.

Even within the world of Islamic finance, many inconsistencies in the legal, accounting, regulatory and fiscal frameworks have been pointed out by experts, who point to a heavy industry reliance on exemptions which they term as being ad hoc.

Additionally, most Islamic banks appear to function in a tax-free environment and regulators have sometimes been thought to be influenced by political agendas, or by the presence of dignitaries acting as directors.

In market-driven countries, say experts, Sharia governance can be an issue and that across the board there is a need for some regulatory oversight for Sharia governance. Unfortunately, most Sharia boards appear to only have a role limited to certifying certain products; they still do not have industry-wide standards. This would appear to be particularly true in Pakistan where the line between so-called Sharia-compliant banking and products and conventional financial options has become increasingly

blurry.

Islamic finance experts across the world ask a very relevant question concerning this state of affairs. Does the Islamic finance mission need to be restated? In order to achieve this a completely new strategy would have to be devised. A more transparent Sharia-governance structure could lead to a more forward-looking corporate approach for Islamic financial institutions. And this could, in turn, help this sector to clearly define corporate targets for social responsibility. There could be a concerted effort to ensure that these targets are completely aligned with Islamic principles and that the integrity of these principles is not compromised. Unfortunately, as appears to be evident from the current state of affairs, most Islamic financial institutions seem bent upon trying to justify their actions through what can only be termed sketchy Sharia guidelines tailored to suit their needs.

No thought is given to the important concepts of personal social responsibility or corporate social responsibility — both key and indispensable components of Islamic teachings. And no planning seems to have been put in place to attempt to overhaul the state of affairs.

Perhaps if the Islamic finance sector worldwide were to evolve a definite vision that truly focuses on the socio-religious implications of its financial instruments, it would help to create definitive change not just in the Muslim world but far beyond.

After all, this sector has no shortage of funds. A recent report by the Deloitte Middle East Islamic Knowledge Centre states that Saudi Arabia, one of the main contributors to the global Islamic finance industry, has an estimated $94bn in Islamic finance assets. According to the report, these Saudi assets represent 26 per cent of total GCC Islamic finance assets and 8.2 per cent of global Islamic finance assets.

So there is no question about the lack of finances. But in order to bring about the kind of lasting change that the Islamic finance sector aspires towards, these statistics will need to be backed up by genuine dedication and the will to design, create and implement this revolution.

(Dawn Opinion.Com / 24 August 2012)

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Malaysia reforms could aid Islamic banks in rural areas

KUALA LUMPUR/DUBAI, Aug 24 (Reuters) - Financial reforms in Malaysia could spur the growth of the country's Islamic banks by giving them more opportunity to tap into rural areas, which have a greater proportion of Muslims than urban centres. But concerns about profitability may slow the expansion.

The central bank issued new agent banking guidelines this month that expand a pilot programme allowing lenders to offer basic financial services through non-bank retail outlets.

"It will be a cost-effective channel for financial institutions to reach out to the underserved parts of the population, particularly those in rural areas," said central bank governor Zeti Akhtar Aziz.

The guidelines list 474 rural districts, or mukims, which can be serviced through the initiative; some of them have the highest proportions of Muslims in the country, and also the lowest average household incomes. This could give Islamic banking an important role in the government's efforts to expand financial services to the poorest sections of the population.

The populations of the Malaysian states of Kedah, Kelantan, Perlis and Terengganu are on average 89.3 percent Muslim, much higher than 46.4 percent for the capital Kuala Lumpur, data from the Malaysian Department of Statistics shows. Those same four states hold 40 percent of the mukims that could be reached through the new agent banking programme.

Malaysia's Islamic banks collectively held 19 percent of the country's banking assets as of June, according to central bank data.

The agent banking scheme originally started as a pilot programme in 2010 with participation from Maybank, RHB Bank and government-owned Bank Simpanan Nasional - all conventional lenders with sharia-compliant offerings. The pilot currently serves over 65 percent of the mukims identified in the guidelines, against 46 percent at the end of 2011, according to the central bank.

At present the combined network consists of 2,322 agents who have handled more than a million transactions worth over 190 million ringgit ($61 million) since the pilot began. No data is available on how many transactions were sharia-compliant.

The prospects for tapping new Muslim consumers appear healthy; RHB's Islamic business has been growing at an average rate of 20 percent compared to 8 percent for its conventional business, according to Abdul Rani Lebai Jaffar, chief executive of RHB Islamic, part of the RHB group.

PROFITABILITY

The relative poverty of some of the mukims involved in the agent banking scheme may deter banks from expanding into them aggressively, however.

Expansion will depend on whether banks choose to create separate task forces to manage larger groups of agent relationships, Jaffar said.

"We currently have a very small number of agents operating under the programme, but it has shown a positive response," he said. "For now, we are still leveraging on the bigger RHB network."

Executives at other banks said they would be cautious. "We are looking into the guidelines to see what kind of role we can play," said a senior official at Maybank, who asked not to be named under briefing rules.

"We have always striven to use all the distribution channels that are available to us, but I think we have a pretty good reach at this stage. For now it will be business as usual."

Foreign banks in Malaysia will tend to remain focused on urban areas which have proven to be more profitable, said Wasim Saifi, chief executive of Standard Chartered Saadiq, the Islamic arm of Standard Chartered Malaysia.

At present the agent scheme is outside the bank's scope of operations, but it will consider the scheme in the long term, Saifi added. "There is a lot of value in getting our distribution to reach more local areas. It would certainly be a great opportunity, and going forward it is something we will have to look at.

(Reuter / 24 August 2012)

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Global takaful to reach $12B by yearend

Manila, Philippines -  Global takaful contributions are forecast to reach $12 billion by the end of 2012, after expanding by an annual average growth rate of 19 percent in the past two years.

Takaful is an Islamic insurance concept, which is grounded in Islamic muamalat (Islamic banking), observing the rules and regulations of Islamic law, otherwise known as Shari’ah.

There are an estimated 230 takaful companies and another takaful re-insurer with an estimated $11 billion in volume.

Saudi Arabia is reportedly the largest market for Islamic insurance, with gross contribution amounting to $500 million.

Other key markets are Malaysia, Qatar, Kuwait, United Arab Emirates (UAE), and Pakistan.

According to the prestigious Ernst & Young, Malaysia and UAE achieved growth rates of over 24 percent.

“The challenge was once again, maintaining growth with profitability in the current economic climate. There were positive developments in the Gulf Cooperation Council (GCC) with more operators showing profitability than previous years,” Ernst & Young said, in its World Takaful Report 2012.

The Saudi Cooperatives continued their growth performance yet still struggled in generating shareholder returns, it added.

The members of the GCC are Saudi Arabia, Kuwait, Bahrain, Qatar, UAE, and the Sultanate of Oman.

It was founded on May 1981, with the aim of collectively promoting coordination between member states in all fields in order to achieve unity.

The report said however that the return on equity for the takaful industry was lower than conventional counterparts, both in the GCC as well as in Malaysia.

A significant contributing factor to the lower ROE was the lower investment returns for the industry relative to returns yielded by conventional insurers.

“The industry has now obtained significant market share versus conventional insurance in most GCC countries as well as Southeast Asian markets. There are a number of drivers behind this growth but one that is becoming increasingly important is regulatory support through appropriate amendments in legislature to provide a level playing field with conventional insurance companies,” the annual report said.

In Southeast Asia, the key players are found in Malaysia, Brunei and Indonesia. The three nations account fro gross written contributions (GWC) worth roughly $2 billion of the total contributions.

In fact, the subregion is expected to expand dramatically as the Saudi regulators disallowed the pure takaful model.

“The primary hub for takaful may well shift from GCC to Southeast Asia,” the report stated.

The key business lines in the major markets are family and medical, marine and aviation, property and accident, and motor.

On the average, family and medical accounted for 48 percent of total, followed by motor, property and accident, and marine and aviation.

The Indian sub-continent registered the largest family and medical market share with 76 percent of total business lines.

In the case of Iran, majority of takaful insurance coverage were motor while family and medical accounted for just a quarter of the total.

Meanwhile, the annual report mentioned Muslim population centers worldwide with huge potentials for both Islamic finance and takaful.

These include Egypt, Pakistan, India, Indonesia, Bangladesh, Nigeria, Algeria, Morocco, Turkey, CIS Region, China, and Russia.

According to Ernst & Young, conventional insurance accepts premiums from the insured at a level, which it anticipates will cover claims and result in a profit.

Takaful is based on the concept of social solidarity, cooperation and mutual indemnification.

It is a pact among a group that agrees to donate contributions to a fund that is used to jointly indemnify covered losses incurred by the members.

While the concept of takaful revolves around mutuality and is founded on non-commercial basis, a takaful operator runs the operations and the fund on a commercial basis.

The five key elements of takaful are mutual guarantee, ownership of the fund, elimination of uncertainty, management of the takaful fund, and investment conditions.

(Philstar.com / 21 August 2012)

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Islamic banking versus conventional banking

KARACHI: 

Contrary to popular belief, Islamic finance or banking is not just for Muslims. It aims to lay the foundations of an ethical and fair financial system, which consequently affects the socio-economic conditions of the market it is implemented in. Islamic financing, hence, can aptly service everyone irrespective of religious beliefs, wealth, ethnicity, caste or creed.

Yet, this stance is not as clear as it should be in our country; much less in the outside world where centuries old financing methods are firmly embedded within the economic system.

One of the reasons for this lack of awareness is that the concept of Islamic banking has been commercialised fairly recently. Banks and asset management companies in Pakistan are still struggling with how better to portray Islamic products for consumers’ understanding in minimal ad spaces. There is also a communication gap between the Shariah councils issuing the fatwas pursuant to Islamic Finance, and the managers drafting the advertisements.

A recent survey published in a popular monthly magazine stated that most respondents did not know the difference between conventional and Islamic banking; and that most thought that various advertised ‘Islamic Funds’ are only a marketing gimmick.

But a bigger issue – one which I have experienced personally – is that even financial advisors lack awareness of the concepts behind Islamic finance. I recently asked a finance expert – while deliberating the merits of funds in which I wished to make some investments – the difference between conventional funds and Islamic funds. He answered with a disappointing “nothing!”

For someone who does their homework is keen on not consuming any interest-related income enter, there is a difference. This expert will just lose such customers.

So what is the difference?

An instant answer to the question is the oft-repeated phrase – ‘Islamic products do not offer interest (Riba). The statement is without a doubt true, but this is not the sum total of Islamic finance.

Riba is indeed deemed haram in Islam, for the reason that it is ‘unfairly’ exploitive in nature. It is ‘unfair’ because Riba requires the lender to return the borrowed money, plus an extra amount. This requires the borrower to work harder to return not just the principal, but also the interest or mark-up levied on the amount.

Secondly, interest is set arbitrarily. The concept treats money as a tradable entity which fluctuates volatilely in the markets. There is no set ceiling; meaning that loaning money may become cripplingly expensive for the borrower.

Then how does Islamic finance work?

Islamic financing is asset-backed and believes that only assets with an intrinsic value may be sold for a profit, instead of exchanging money – which is considered to have no intrinsic value – for interest. Each unit of money has the same value as the other of the same denomination, which is simply why there cannot be a profit on its exchange. Hence, Islamic finance lays its foundation on real, non-liquid assets; the exchange and sales of which result in ‘fair’ profits.

The Pakistani financial industry today offers various Islamic products; in wealth management, asset management and banking; spread over short-, medium- and long-term funds. All investments in such schemes are made strictly in Shariah-compliant instruments under the supervision of a Shariah Advisory Board, which comprises of renowned Islamic scholars.

Stakeholders in the industry must now step forth and present a clear picture of Islamic finance: one which presents it as a way of rethinking economics and finance, instead of just as a cosmetic solution tailor-made for religious investors finicky about where their money is going.

(The Axpress Tribune / 20 August 2012)

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