Malaysia at forefront of global Islamic finance

The robust growth seen in Malaysia’s Islamic banking sector has elevated it to the upper echelon of the global Islamic finance realm, according to Standard Chartered Saadiq Bhd (Saadiq) chief executive officer (CEO) Wasim Saifi.

“If you look at the progress of Islamic banking in Malaysia, Islamic banking here is much better positioned in every sense.

“Malaysia has been by far the world’s major sukuk market as consistently more than 60 per cent of sukuk issuances (and in some years even higher than that) happen in Malaysia so it has become a very important capital market from the Islamic side, probably the most important one.

“The good thing about the Islamic capital market here is that not only do you have Malaysian corporates and government linked companies (GLCs) going for sukuk issuances, you also have international companies from the Middle East and Far East coming in to tap the Malaysian ringgit market for sukuk issuance,” he said.

Wasim, who is also Standard Chartered Bank’s global head of Islamic consumer banking, pointed out Malaysia’s rare position as one of the only countries with various types of Islamic banking players operating in the country.

“You’ve got the strong domestic local Islamic banks (such as Bank Islam and Bank Muamalat) and local conventional banks with Islamic subsidiaries which are very large and robust (such as Maybank and CIMB Islamic).

“Then you’ve got the international banks (such as Saadiq) that are present in this country and the Middle Eastern Islamic banks and the regional Islamic banks operating in this country.

“So, Islamic banking here has five different levels of players. When I look around the world, there aren’t too many places which have so many different types of Islamic players operating in this industry,” he stated.

Wasim was speaking at a press conference yesterday following the official opening of Saadiq’s first branch in Sarawak, located at tHe Spring Mall.

The CEO also opined that Malaysia enjoyed a very strong Islamic liquidity pool and with government’s focus remaining so strongly on developing the Islamic banking market, that liquidity pool was increasing day by day and becoming a very attractive market for people to come in.

When asked about areas in the Islamic finance realm that could receive special attention or focus, he said there were always opportunities for growth and improvement and Saadiq recognised that from its perspective.

“Malaysia has become such an important Islamic market for us. As you know, last year we moved our global consumer Islamic team from Singapore to West Malaysia.

“The idea is to focus on seeing we can further develop the market. There is still room for further growth. I think from the product proposition side, the market needs to see further enhancement happen.

“If you look at conventional versus Islamic banking, there are still some gaps, especially when you look at areas like wealth management. So those are areas that we’ll further develop.

He noted that there was still a lot that needed to happen on the education side of customers. There were people who knew of Islamic banking but they did not know how the Islamic products were actually structured and how they worked and therefore how they were complying with requirements.

“Malaysia has done better than other countries but there is still room for growth in term of people understanding how Islamic banking truly works. The third area, which is very important, is continuing further to focus on the talent pool available because Islamic banking is growing so rapidly.

“We’re looking at 23 to 24 per cent of total banking assets in the country and the government’s aspiration to take that to 40 per cent.

“This growth requires qualified people with Islamic academic training and Islamic work experience to be able to focus on and fuel that growth.

“That is an area where we need a lot more focus from an infrastructure perspective to provide Islamic training and academic preparation so that the whole growth of the Islamic banking industry can be managed,” he added.

(Borneo Post Online / 22 Feb 2013)

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Qatar has potential to become major Islamic finance platform, says QIIB CEO

Qatar can become a major global platform for Islamic finance in view of its resources, expertise in Shariah-compliant products and services, and world class regulatory framework, said International Islamic (QIIB) chief executive officer, Abdulbasit A al-Shaibei.

Qatar, he said, is significantly active in the major global Islamic centres such as Malaysia. Also, Islamic finance has growing demand in Qatar and the region.

“We have the resources, expertise, empowered regulators and adequate manpower (human resources) in our country. We can easily build a much stronger platform for Islamic finance in Qatar that can cater to, not just the region, but the whole world,” al-Shaibei said in an interview with Gulf Times.

He stressed that Qatar was one of the first countries in the world to identify the significance of Islamic banking. Qatar is now home to major and reputable Islamic banks such as QIB, QIIB and Masraf Al Rayan.

“We have had the first Islamic bank in our country in the 80s through QIB. Qatar International Islamic Bank was established in the 90s. Masraf Al Rayan was established a few years ago.

“On the conventional side, the largest bank in the entire Middle East by assets is Qatar’s QNB,” al-Shaibei pointed out.

Qatar is one of the first countries that identified the potential and importance of Islamic debt markets. In 2003, $700mn was raised for the sovereign through a seven-year sukuk, which was joint-lead managed by HSBC and QIIB.

“Our banking industry, Shariah-based in particular, has grown phenomenally over the last few years. We now have many Qataris with proper competence, knowledge and expertise in Islamic banking. In our banking industry, we have significantly gained because of them,” he said.

On Dubai’s recent initiative to build a global centre for Islamic economy, al-Shaibei said: “I strongly believe we have the potential to do it on a global scale here. If we can play an active role in leading Islamic financial centres such as Malaysia, why can’t we do it here?”

He said the credibility of Qatar’s Islamic banks is indisputable.

“In Shariah-based banking, we have proper risk management in place.  Also, our banking principles are highly value-based and customer-centric. In Qatar, we have a well developed banking regulatory framework, which are of truly global standards. Our regulators are all very competent. We also are blessed with a pool of Shariah scholars who advise us on Islamic financial principles,” al-Shaibei said.

“Whenever our Islamic banks do cross border transactions or issue sukuks around the world, they are well received. A case in point is our own sukuk.”

QIIB’s $700mn five-year sukuk last year was very successful in the international market with subscription exceeding $5bn or seven-fold oversubscription.

“QIIB was very pleased with the success of the transaction, which highlighted the confidence placed by investors in the bank’s credit story and its strategy,” al-Shaibei said.

Islamic economic principles play a growing significance in today’s global business environment, with Islamic economy size reaching $2.3tn and a growing community of 1.6bn Muslims around the world.

Recently, Ernst & Young’s World Islamic Banking Competitiveness Report 2013 said global Islamic banking assets are expected to reach $1.8tn by 2013, up from the $1.3tn of assets held in 2011.

(Gulf Times / 24 Feb 2013)

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Grubbing the Islamic Banking Industry of Pakistan

The long history of Islamic banking has gotten remarkable embellishments in the recent years. With the industry touting a global size of $1.35 trillion in 2012; the growth engines are yet to gun, with experts predicting the industry to attain a size of $4 trillion by 2015. 

Islamic banking assets have grown by 33 percent since 2010 - twice as fast as the conventional banking assets and in the wake of widespread developments ongoing in the Islamic banking industry (IBI), the gap between the conventional banking and its ethical spin - Islamic banking is narrowing substantially, with every passing moment. 

The third quarterly Islamic banking bulletin released by State Bank of Pakistan indicates that the IBI is gaining its foothold in Pakistan. With a handsome network size of 977 branches nation-wide as of 3QCY12, IBI accounts for 8.1 percent of the entire banking industry assets and 9.3 percent of the industrys deposits. In comparison, the IBI represented 7.3 percent and eight percent of the total banking industry assets and deposits respectively, in 2011. 

Much in line with the conventional banking moves, the assets of IBI were predominantly inclined towards investments which grew by a staggering 58.1 percent YoY, in September 2012, while financing, the other important component of the industrys asset mix, stayed in the lurch, growing by mere 11 percent YoY. 

The upsurge in IBI investments was essentially driven by the phenomenon of the industry parking its funds in the Federal government securities. As of 3QCY12, the share of GoP securities in IBI overall investments enlarged to 71 percent. 

Delving into the details of IBI financing mix, the major chunk remains concentrated in individual financing (16.2 percent), followed by textile (15 percent), energy production and transmission (11.9 percent) and Chemical and Pharmaceuticals (7.8 percent). While in terms of financing mode, Murabaha financing stole the spotlight accounting for 38.6 percent of the share, followed by Diminishing Musharaka (37.1 percent) and Ijarah (10.5 percent). 

Talking about the asset quality, NPFs of IBI grew by 19.7 percent YoY in September 2012, resulting in increased provisions translating into a coverage ratio of 63.7 percent, up from 62.3 percent in September 2011. Albeit, infection ratio also soared from 8.8 percent to nine percent in 3QCY12, yet lower when compared to the industry average of 15.5 percent. 

On the liabilities side, deposits grew by 35.4 percent YoY in 3QCY12, with mainstream growth coming on the heels of saving deposits, followed by fixed deposits and non-remunerative current accounts. Currency-wise, local currency deposits dominated, grabbing 95.6 percent share. 

Liquidity status of IBI also portrays a dazzling picture as both the important liquidity indictors - Liquid Assets/Total Assets and Liquid Assets/ Deposits charted an increase YoY to tally 46 percent and 54.4 percent in 3QCY12, however still strive to match the industry average. The main issues faced by IBI in managing its liquidity is the lack of developed Islamic money market and the shortage of highly tradable investment instruments with limited risk and predictable returns. 

Profitability of IBI reached Rs7.7 billion in 3QCY12, conversely ROA and ROE plunged owing to high NPLs and operating expenses. Operating Expense to Gross Income of Islamic banking industry is higher than overall banking industry which can be attributed to the expansionary phase of Islamic banking industry. 

Going forward, Islamic banking, locally and internationally, is envisaged to ride a bullish highway with Agricultural and SME sector presenting a golden opportunity to the IBI in Pakistan to diversify its portfolio and expand its reach. 

Globally, with conventional banking grappling against the global financial crisis since 2008, IBI is gaining impetus in many parts of the world by adding stability to financial and economic backdrop with its conservative and ultra ethical demeanor. The major challenge that it faces is on the front of asset deployment and pleads the central banks to provide an enabling infrastructure along with 

regulations to allow IBI to enlarge their array of products.

(Business Recorder / 20 Feb 2013)

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Malaysia banks on reforms to spur Islamic finance growth

KUALA LUMPUR, Feb 21 — Regulatory reforms are underway to help Malaysia’s Islamic banking industry expand further, but for government plans to succeed, they will need to be matched by action from some reluctant banks.

The government originally aimed for 20 per cent market share for Islamic banks by 2010, but despite double-digit growth in both lending and assets, the sector has fallen shy of this mark.

Islamic banks have added RM111.6 billion in assets over the past two years, bringing their share of total banking assets in Malaysia to 19.6 per cent in December 2012, central bank data shows.

Their share of loan business crossed the 20 per cent mark in January 2012, reaching 21.3 per cent last December.

Malaysia now aims for an even more ambitious target — a 40 per cent share of Islamic domestic financing by the year 2020 — and intends to make the industry more international, according to the country’s master plan for capital markets development.

To achieve this, regulators have introduced new rules over the past two years and are preparing to release a brand-new legal framework for Islamic finance this year.

But private-sector banks need initiatives of their own, including steps to address a leadership vacuum and to strengthen their overseas strategies, says Ashar Nazim, Islamic financial services leader at consultants Ernst & Young.

“In the absence of these initiatives, these numbers are very ambitious — 40 per cent is very difficult from population dynamics alone,” he said.

Strategy

Malaysia’s proactive Islamic finance policies have made it a global model, but regulators have refrained from directing the strategy of Islamic banks.

“The market has to be demand-driven,” central bank governor Zeti Akhtar Aziz said at a media conference in September. “We can put the enabling environment, but we can’t require banks to offer products and services.”

That makes the issue of who decides banks’ strategy important, and critics believe bank boards often fail to give direction.

“Board composition is very vanilla, very ordinary,” Nazim said. “The quality of boards is under heavy criticism, that is where the struggle is.”

Few of Malaysia’s Islamic lenders have ventured overseas and only a handful have a significant regional presence. Some have established presences in Indonesia, but the vast bulk of their revenues remain domestic.

CIMB Islamic, the Islamic arm of CIMB, derives around 10 per cent of its earnings from business in Indonesia, Singapore and Brunei, according to the bank.

“I don’t think we’ll see a significant shift... but we are really endeavouring for our business overseas to contribute more than the 10 per cent,” said Badlisyah Abdul Ghani, chief executive of CIMB Islamic.

“There is no point in setting up business in a new market if we can’t be competitive; there are certain parameters that need to be in place before we can operate effectively. Government support is the main criterion.”

Beyond Indonesia, Islamic banks see little chance for expansion of the industry in Asia; although China has a large Muslim population, there are major regulatory obstacles and a lack of infrastructure in the country’s Muslim areas.

That leaves the Middle East, but for many Malaysian banks, that is seen as a step too far. With the exception of a few representative offices, no Malaysian bank has ventured into the Middle East.

“There are small markets in the Middle East such as Bahrain, Qatar and Oman, but these are city states and they are already well-banked,” said Rafe Haneef, chief executive of HSBC Amanah Malaysia.

Maybank Islamic, the Islamic arm of Malayan Banking, has said expansion plans will focus on Southeast Asia, with further plans for China, London and the Middle East. Its Indonesian unit was converted into a full-fledged Islamic bank in 2010.

Structure

At home in Malaysia, Islamic banks’ expansion is hampered by their structure, analysts believe: they are mostly subsidiaries of conventional banking groups and leverage the branch networks of their parents to reach out to customers.

For instance, Public Islamic Bank distributes its products through the 248 branches of its parent, Public Bank, the country’s third largest lender. Bank Islam, the country’s largest standalone Islamic lender, has less than half the assets of Maybank Islamic.

“Our model leverages on the joint network. I am personally not so keen to set up branches,” said the chief executive of another Malaysian Islamic bank, noting: “We are bottomline-driven.” The executive declined to be named.

This contrasts with the Gulf, which has major, standalone Islamic banks such as Saudi Arabia’s Al Rajhi Bank, Bahrain’s Al Baraka Banking Group and Abu Dhabi Islamic Bank.

Using conventional bank branches reduces costs and risks. But it can also reduce the appeal of Islamic banking to some customers, while it may dilute management’s focus on the Islamic side of the business and constrain the Islamic operation’s room for manoeuvre.

Malaysian regulators have been actively promoting the concept of creating a very large, standalone Islamic bank, and have even created a specific licence for such a “mega” bank. It would be defined as having paid-up capital of US$1 billion (RM$3.1 billion), compared with RM300 million for a regular banking licence.

The theory is that such a large Islamic bank could compete because of its size and also because it would be able to choose its strategy independently from a conventional parent. So far, however, there has been little concrete interest in the financial community to establish such a bank.

(The Malaysian / 21 Feb 2013)

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Study on Cross-Border Tax On Islamic Finance

A new study into the cross border tax burden on Islamic finance transactions in the Middle East and North Africa region, relative to the tax burden placed on conventional finance, underscores the importance of regional tax legislative changes to equalize the tax treatment of shariah-compliant financial options.

The study reviewed the tax treatment of four common Islamic finance structures, commodity murabaha, sukuk, salaam and istisna in eight MENA region countries: Egypt, Jordan, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Turkey and also in the Qatar Financial Centre.

The report shows that while simpler Islamic finance transactions can be carried out in some of these countries without prohibitive tax costs, only Turkey and the QFC have a tax system that enables sukuk (bond) transactions to be carried out without excessive tax costs.

Islamic finance is of growing importance within the MENA region, but the taxation systems of almost all countries were developed in an environment of conventional finance. This can mean that Islamic finance suffers a tax burden that is not suffered by conventional finance. The study aims to support local authorities to revise their regimes to make Islamic finance transactions across borders as competitive as conventional finance in tax terms.

Most Islamic finance transactions seek to achieve economic outcomes that are similar to those achieved by conventional finance. However, to achieve these economic outcomes the Islamic finance transactions typically require more component steps than the equivalent conventional financial transactions, which results in the greater tax burden.

The additional transactions required by Islamic finance are at risk of being subject to transfer taxes or to taxes on income or gains. This can be seen most clearly by considering the sukuk transactions (bond), reviewed in detail in the report, where in many cases a transaction, which is economically equivalent to the issue of a conventional bond secured on real estate, gives rise to transfer tax and capital gains tax liabilities, makeing the sukuk transaction prohibitively expensive to carry out.

The study, led by Islamic finance consultant Mohammed Amin with support from regional branches of PwC and Ernst and Young, considers two alternative approaches to the modification of tax law to facilitate Islamic finance which, for simplicity, the authors term the Malaysian approach and the United Kingdom approach.

The Malaysian approach is based upon the regulatory authorities putting in place a process for advance determination of whether a transaction does or does not constitute Islamic finance. For those transactions that are certified as being Islamic finance transactions, tax law can be modified relatively easily to give these Islamic finance transactions the same taxation outcome as the equivalent conventional transactions. Where intermediate transactions are necessary to effect the Islamic finance structure, the intermediate transactions can readily be disregarded for tax purposes.

The United Kingdom approach is based upon the philosophical objective of separating religious matters from tax law. Accordingly, the United Kingdom does not want the tax treatment of a transaction to depend on whether or not it is Shariah compliant. Indeed, the United Kingdom wishes to keep all religious references out of tax law. Accordingly, the United Kingdom has proceeded by defining certain kinds of transactions using purely secular free-standing language which makes no reference to Islam or to Islamic finance. Once the transactions have been defined, their tax treatment can be specified in a manner that results in the same tax treatment that will be given to equivalent conventional finance transactions. The United Kingdom approach requires much more complex drafting of tax law since no reference can be made to external Islamic finance sources; conversely, it has the merit of keeping religion out of tax law.

In the case of Muslim majority countries, such as those in the MENA region, the study recommends the Malaysian approach as being quicker and simpler to implement.

The report is described as being “Phase One.” Subject to resources, the team intends to extend the work by looking in a similar way at matters such as the impact of consumption taxes like Value-Added Tax on Islamic finance transactions.

(Global Tax New / 21 Feb 2013)

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Q&A on Islamic finance and riba

Islamic Finance Column - II — By Ashar Nazim —

1) What is the current status of Islamic finance?

n Islamic finance has a current global market size of over $1.2 trillion and is expected to grow at a rate of 15 to 20 per cent per annum in the foreseeable future. There are close to 500 financial institutions worldwide and over 75 countries where Islamic banking is practiced.

2)What is Riba (interest)?

According to Encyclopedia Britannica the definition of interest is “the price paid for the use of credit or money”. A working definition of interest is “any predetermined/conditional additional amount in a loan over and above the principal”. No explicit definition of Riba/interest has been given in the Quran, but it can be derived from a verse as any sum received over and above the principal (“if you repent yours is your principal” — 2:279). In a Hadith narrated by Hazrat Ali (RA) the definition of Riba is given as any conditional excess in a loan over and above the principal. In other words, Riba or interest is the rent charged by the lender for the use of his money by the borrower.

3) If an Islamic bank cannot charge interest from its customers then how does it make money?

n The verse of the Quran “And Allah has permitted trading and prohibited Riba” is the guiding light for Islamic banks. They cannot lend money on interest but they can buy goods and commodities and sell them onwards to their customers on deferred payment basis (Murabaha). They can also buy assets and give them on rent to their customers (Ijarah). They can manage money for their customers by investing funds in Shari’a compliant investment opportunities and charge a fee for this service. They can also enter into a joint partnership with their customers for an asset purchase and then gradually sell their partnership share to the customer (Diminishing Musharaka). Hence there are many Shari’a compliant ways to do business and earn legitimate returns by an Islamic bank.

(Oman Daily Observer / 20 Feb 2013)

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Egypt: Conventional banks enter Islamic banking sector

There has been growing interest recently among conventional banks in Egypt who own licences to provide Sharia-compliant services, to restructure their branches which offer such services.

Such banks are looking to increase their investment and transaction portfolios in a bid to boost profits amid the current dearth in investment opportunities for traditional banking.

Leading the way among traditional banks offering Sharia-compliant services is Banque Misr, with a total of EGP 22bn in Sharia-compliant transactions.

It is followed by the National Bank of Egypt (NBE), whose total Sharia-compliant transactions totalled EGP 1.6bn.

The Principal Bank for Development and Agricultural Credit (PBDAC) was third with total Sharia-compliant transactions reaching EGP 1bn.

It was followed by the Suez Canal Bank (SCB) with EGP 700m, the Egyptian Gulf Bank (EGB) with EGP 650m, the Arab Investment Bank (AIB) with EGP 230m, and  Société Arabe Internationale de Banque (SAIB) with EGP 200m.

In the midst of this competitive atmosphere in the Islamic banking sector, Islamic banks themselves are preparing to apply their new investment plans.

Financing for small and medium sized enterprises (SMEs) has also seen a spike in interest so far this year, with conventional banks aiming to strike agreements with the Social Fund for Development (SFD) in order to increase their presence within the SME segment.

“Now is the time to apply banks’ delayed plans, which have been studied intensively during the last year,” said Ashraf Tala’at, manager of the Islamic Banking Unit-Treasury at NBE. He added that during the coming period, banks will seek to increase portfolios related to Islamic transactions, in addition to expanding geographically, in order to reach all the market’s segments and achieve profits capable of matching those achieved by specialist Islamic banks operating within the sector.

Tala’at also confirmed that these investment portfolios will focus on SME financing in order for banks to increase their share in this lucrative market which has garnered great interest from all market segments and which allow the banks to utilise their available liquidity to achieve healthy profits and provide employment opportunities.

Tala’at believes 2013 will witness the signing of many Murabaha contracts (an Islamic financing structure, where an intermediary buys a property with free and clear title to it) with the SFD, stressing that the funding rates will increase by a large margin.

He also said that conventional banks which have Islamic branches will try to keep the independence of these branches, which will have their own administration policy as a kind dealing with clients transparently and to achieve the aims of Islamic finance.

Retail banking activity in Islamic banks will remain as is since the market has reached saturation-point. Corporate finance activity is subject to status and stability of the market, where funding currently so low that no clear indicators can be extracted.

Tala’at predicted that after the recovery of the economy, we will see banks compete each other to finance companies once again.

Bank of Egypt owns approximately 34 branches as possess an Islamic National Bank and Arab investment bank branches only, and there is only one branch of the Bank banking company and the Suez Canal, Egyptian Gulf.

Banque Misr has approximately 34 branches offering Islamic banking products and services, while NBE has two branches, as does the Arab Investment Bank (ABC). SAIB), SCB and EGB all have one branch.

Abd El-Rhman El-Kafrawy, director of Islamic banking at PBDAC said that most Islamic banks have begun to increase their funding for SMEs. “The banking sector hopes that economic stability will return, which will contribute in developing focused plans to finance SME projects, which must be funded by the banks under a plan set by the government,” he said.

He also added that retail banking in Islamic banks is yet to meet the market’s needs and yet achieved significant growth rates during 2012. “In order to attract SMEs to seek financing from Islamic banks, we must adopt clear and transparent funding  policies in order to attract customers,” he added.

Head of Islamic banking at SAIB, Alaa Bondoq, said that his bank seeks to increase its Islamic transactions portfolio, which is expected to grow by 20% this year, and added that Islamic banking has achieved significant growth during the last year.

He also mentioned that there currently exists healthy demand for Sharia-compliant transactions, meanwhile most banks are waiting for CBE approval about their request for Ijarah,an exchange transaction applicable in Islamic regions, which involves trading a specified asset available for a payment, and where the ownership of the asset is not transferred.

The Arab Bank and Mashreq Bank have both submitted a request to the CBE for Islamic banking licences, meanwhile the Housing and Developing Bank (HDB) intends to offer Islamic products such as saving certificates and receptacles with variable returns to fulfil customer needs without CBE authorisation for an Islamic license.

(Daily News / 17 Feb 2013)

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