Malaysia: IFSA milestone for Islamic finance

Often times, when a general election draws near, I usually get a bit nostalgic and proud of what my country has achieved within 56 short years as an independent and sovereign nation.

It also gets me excited about what else we, as Malaysians, can do to better ourselves as a nation of dreamers and builders.

Naturally, as a Malaysian who has been involved in the Islamic finance industry globally, I am especially proud of what my country has achieved in this field over the years. The industry’s humble beginning in Malaysia started formally in 1963 when Lembaga Tabung Haji was established by the government to facilitate savings among Muslims in a syariah-compliant manner to prepare for their haj.

I am too young (since I was not born yet at that time) to know what actually transpired then, but I am glad it did happen because it led to the creation of the first regulated licensed Islamic bank in the world, Bank Islam Malaysia Bhd, 20 years later. A great many things happened after that, including the establishment of the first licensed takaful company in the world, the first licensed Islamic window operations and the first licensed Islamic asset manager.

Islamic finance was the epitome of the democratisation of the financial market in Malaysia. It brought about real financial inclusion for all.

There are just too many deliberate and structured developments that the industry players, the government of the day and the financial regulators did since then to develop the industry for me to mention here. As such, suffice for me to say that they were generally positive developments that helped propel Malaysia further as a global leader in the industry every step of the way.

Nonetheless, what I will identify as the most important development made, which helped change the world’s view on Islamic finance, is the institutionalisation of a comprehensive legislative, regulatory, legal and syariah framework for the industry in Malaysia – the first of its kind since the fall of the Ottoman Empire in the early 20th century. I dare say that this can and should be considered as one of the most significant paradigm shifting events in mankind’s modern hi story. All Malaysians should hold their heads high for this contribution to modern civilisation.

Thirty years haved passed and today, as a result of the comprehensive framework established, Malaysia has become the largest, deepest and broadest Islamic finance market anywhere in the world with the most comprehensive product offerings – from the simplest basic savings product to the most sophisticated investment products for everyone and anyone in the country, be they individuals or corporate bodies, residents or foreigners, Muslims or non-Muslims.

Clearer sense of destiny

As I contemplate on what to expect in Malaysia post the 13th general election (GE13), I can’t help but be excited with the prospect of Islamic finance moving forward. The reason for my excitement is because finally after 50 years of existence in the country, Islamic finance is being given the needed facelift and makeover.

Unbeknown to many, come May 2, the comprehensive legislative, regulatory, legal and syariah framework that has propelled the Malaysian Islamic industry to be where it is today will be overhauled, refreshed and strengthened in the much-awaited Islamic Financial Services Act (IFSA).

Malaysia’s Islamic finance industry is ready to move forward.

The new IFSA, read together with the Central Bank Act (CBA), provides a much stronger and more effective platform for Islamic finance, unparalleled with any other platform anywhere else in the world.

Islamic finance is now, for the first time, completely institutionalised as a component of the Malaysian financial market by parliamentary legislation.

Its future posterity and prosperity cannot be subjected to the whims and fancies of any individual who may or may not believe in Islamic finance.

Any fundamental change in the industry must now be congruent with what Parliament has set and if it is not, then only Parliament can make the change.

The sanctity and certainty of syariah management and governance in the industry has also been embedded and institutionalised comprehensively in parliamentary legislation.

The IFSA and the CBA clearly define the different duties and responsibilities of all parties in the industry in regard to syariah-compliance and help clarify the relationship between the financial regulators, the licensed financial institutions and the judiciary. It is the first time such thing has ever been done in the world. As a result, the certainty of doing business in the Islamic finance industry will be better than ever and will provide a very conducive platform for the industry to grow bigger and better. Perhaps it is time people look at doing global sukuk issuance under Reg S or 144A using Malaysian law instead of English law.

I anticipate there will be a period of adjustment for the industry in Malaysia as we take in the various changes that the industry will have to go through post the IFSA.

Once everything settles down, I foresee many new product offerings coming up and the Islamic financial institutions attaining a more enhanced competitive edge in the market vis-a-vis conventional riba-based financial institutions. I see the industry entering into its next 50 years of development with a renewed confidence and clearer sense of destiny.

Yes! Our country’s GE13 is coming and as much as I am intrigued like everyone else about the possible outcome of our democratic election, the one thing that I am sure of is that irrespective of the election result, our Islamic finance industry is poised and ready for more great things. I would urge all my fellow proponents of Islamic finance to be ready for the next push.

(F.M.T News / 04 March 2013)

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

Sukuk Lure Eyes of Westerners

CAIRO – Proving more stable during financial crises, Islamic bonds (sukuk) are increasingly luring the interest of investors in the West as an alternative vehicle for investment.

“European problems helped fuel demand for alternative products like sukuk in emerging markets, which is why we’re seeing a strong wave of interest coming in from Western investors lately,” Mohammed Dawood, managing director of debt capital markets for HSBC’s Islamic banking division, told The New York Times on Thursday, February 28.

Sukuk have lured the interest of many investors in several Western countries, whose economies have been shrinking in recent months.

Sukuk, which conforms to Islam's prohibition of usury, typically work as profit-sharing vehicles.According to a research by Standard & Poor’s nearly 38 percent of a $500 million, 10-year sovereign sukuk issued by Dubai were swiftly obtained by Western investors.

Firms that issue sukuk make payments to investors using profits from the underlying business, instead of paying interest.

The money, however, can’t be invested in alcohol, gambling, tobacco, weapons or pork.

Muslims-majority Malaysia is the hub of the sukuk market, accounting for 74 percent of the $135 billion Islamic bond issuance in 2012.

Sukuk have often proved to be more stable than conventional bonds during the global financial crisis.

The sukuk market has reached $111.9 billion in the eight years to 2008, according to the International Islamic Financial Market.

Global sales of sukuk have reached $6.6bn in 2012, from $2bn a year earlier, according to data compiled by Bloomberg.

Booming Sukuk

Economists agree that the sukuk market has been gaining more demand among investors.

“The developing global Islamic asset management industry is also creating further demand for sukuk,” said Paul-Henri Pruvost, a credit analyst at Standard & Poor’s.

Experts predict more growth in the sukuk market, especially in the Gulf area and North Africa.

“What drives sovereign issuances is the same as any business — if they see an opportunity to get a good amount of money from the market at an attractive rate, they will turn to the market to raise funds,” said Ahsan Ali, global head of Standard Chartered Bank’s Islamic banking division, based in Dubai.

“Corporate entities will begin to access the market, as well.”

Countries facing economic troubles as Egypt and Tunisia are also expected to tap the sukuk market as a new avenue of financing for large-scale infrastructure projects, including airports and roads.

“We’re seeing that there’s a big push to develop capital markets in this part of the world, to increase the investor pool and encourage more issuers,” said Dawood.

“Places like Kuwait and Oman opening up the sukuk market contributes to that development.

Saudi Arabia, which was a major issuer of Islamic bonds last year, “is poised to become one of the largest Islamic markets in the world,” he added.

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

( On Islam / 28 Feb 2013)

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

The International Monetary Fund (IMF): Malaysia economy resilient

The International Monetary Fund (IMF) praised local policy makers for successfully mitigating the harsh external economic climate, bringing about sustained growth in the first three quarters of 2012 and bringing headline inflation down to a welcome low of 1.3% last September.

Growth was primarily driven by domestic demand supported by improved sentiment and fiscal transfers to low-income households, as well as investment growth in the private and public sectors.

The IMF, in its Malaysia: Financial Sector Stability Assessment report, forecast that improving exports would help the economy expand 5% this year, in spite of the uncertainties of the coming general election.

The report highlighted the capitalisation and profitability of banking institutions, evidenced by significant improvements of asset quality in the last five years.

The IMF relied on stress tests indicators to determine the banking system's resilience to economic and market shocks, and concluded that smaller banks and liquidity would be a potential vulnerability, given banks' reliance on demand deposits.

The report also stated that pre-emptive measures taken by Bank Negara included reductions in the Policy Rate, extension of access to the central bank's standing facility to insurance companies, a temporary reduction of the Reserve Requirement and the extension of a Government Deposit Guarantee (GDG) on all local and foreign currency deposits.

Although total government debt as at December 2011 stood at RM456bil (52% of gross domestic product), IMF credited the Government for the development of its bond market, which had a market turnover of 2.5 times a year comparable to regional peers.

Concerns over the household debt were raised, as it was now the highest in the region. House prices in urban areas had also spiked.

Bank Negara took recovery measures, revising eligibility requirements for credit cards in 2010, and tightening its lending conditions based on the loan-to-value or LTV ratios on mortgages.

The Federal Government also reintroduced the Real Property Gains Tax for housing disposals within five years of purchase, which was further raised in January 2011.

Additional increases are contained in the 2013 Budget.

New blueprints such as the Financial Services Act and the Islamic Financial Services Act enacted last December would serve to address shortfalls in oversight of financial holding companies.

IMF recognised that Bank Negara and the Securities Commission practised effective risk-based supervision for the range of banks, insurance companies and securities firms operating in Malaysia.

It proposed that the effectiveness of supervision, however, could be enhanced by addressing existing gaps in enabling legislation and regulatory policy.

Moving forward, further development of the domestic Islamic financial system would present opportunities and challenges.

Malaysia is a global centre for Islamic finance, and as products with new features such as a greater degree of risk-sharing are developed, it would be important that users both domestic and foreign are clear about the changes involved, the IMF said.

The authorities published a Financial Sector Blueprint and a Capital Market Masterplan Two covering this decade, while a Corporate Governance Blueprint covers the first half of it.

These aim to support Malaysia's transition into a developed nation by 2020, integrate Islamic finance in the region and progressively reduce the direct role of the state in the financial markets.

The report pointed out that the Labuan International Business and Financial Centre (IBFC), which does bank lending, reinsurance, leasing and trust company business, needed a substantial review for its legislative framework for regulation.

This bodes well with the IBFC's plan to change its business model to focus on traditional offshore business, Islamic finance and service for high net-worth individuals.

“New legislation enacted in 2010 gives stronger enforcement powers and enhances the ability of the Labuan Financial Services Authority (LFSA) to cooperate with foreign authorities. However, the new laws should be revised to further meet international standards, including strengthening the governance of the LFSA. Some key aspects of the regulatory reforms in 2010 should also be revised in order to meet international standards.

“For instance, Labuan could focus on serving as a back office centre for financial services business carried out in Kuala Lumpur (such as wealth and fund management for those wishing to use Islamic products) and trust company business using the network of double taxation treaties and location as strategic advantages.”

(The Star Online / 02 March 2013)

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

Standard Chartered, Saadiq look to grow SME business

Standard Chartered Bank Malaysia (Standard Chartered Malaysia) and its wholly-owned Islamic subsidiary bank Standard Chartered Saadiq Bhd (Saadiq) are looking to grow the small and medium enterprise (SME) banking sector as it is among the fastest growing segments in the country.

Standard Chartered Malaysia country head (Consumer Banking) Sonia Wedrychowicz noted that SME was the fastest growing customer segment in the country with a two digit growth rate every year.

“A lot of the innovations that we are bringing in from the conventional side are getting immediately reflected in the syariah-compliant SME products.

“For example, when you see advertising for just one CASA account we’ve introduced for the conventional side, we’ve got also an Islamic version immediately.

“The same is happening for SME as we’re just about to launch a great new value proposition which is going to be available for SMEs both on the conventional side as well as for Saadiq.

“Every new product, initiative, innovation and digital platform we’re trying to do at the same time for both ‘legs’ as we call them to have a full fledged proposition,” she said at a press conference after the launch of Saadiq’s first branch in Sarawak recently.

The country head, who is originally from Poland, described the SME development pace in Malaysia as being ‘amazing’, based on her observation of the number of SMEs blossoming here.

“Our branches are usually located in the middle of the SME centres so the opportunity is there. We’re trying to make sure that we’re the main bank for the customers.

“I’m happy to tell you that all of our products are very much based on the customers’ needs, so when we approach the customers, we want to be the main bank, from lending to deposits as well as to the investment needs of the customers.

“So, we are happy to the main bank for the majority of our customer base and we’re going to grow the business even more this year,” she stated.

Meanwhile, Saadiq chief executive officer Wasim Saifi (who is also global head of consumer banking) made a concurring observation on the Islamic side of banking in that SME sector remained one of the bank’s fastest growing segments on a global scale.

“A lot of the SME businesses are managed by the owners themselves and they are personally keen on Islamic finance. Therefore, they want to make sure that their businesses are also buying and taking syariah-compliant products.

“We’ve been able to complete the SME proposition in most of the markets by bringing in products from all sides, including the Islamic side: financing products, cash management products, electronic delivery products that we now have, the syariah-compliant Islamic platform for SMEs to deal with and all aspects of SME requirements,”

he said.

(Borneo Post Online / 23 Feb 2013)

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

Malaysia: Exim Bank to beef up Islamic financing

KUALA LUMPUR: Export-Import Bank of Malaysia Bhd's (Exim Bank)Islamic financing contribution to total loans is targeted to increase to 30% within the next two years from 20% currently.

Managing director/chief executive officer Datuk Adissadikin Ali said the increase would be supported by higher loan disbursements, which was targeted to grow at least 30% annually until 2015.

“Last year, total loan disbursements surpassed 30% growth, year-on-year, to exceed RM3bil.

“In 2013, we are targeting RM5bil in loan disbursements, driven by demand from companies to expand business overseas amid slower domestic consumption,” he told reporters after the signing of an Islamic financing facility agreement between the bank and Dolphin Application Sdn Bhd yesterday.

Exim Bank chief business officer Md Harris Md Taib signed on behalf of the bank, while Dolphin Application was represented by managing director/chief executive officer Eric Low.

On the agreement, Adissadikin said Exim Bank would provide US$10mil (RM30.98mil) in Islamic financing facility to Dolphin Application to part finance the contract for the supply of an integrated automation system to palm oil millers in Indonesia.

Meanwhile, Low said the company was currently focusing on marketing its system to Indonesia and Malaysia, two of the world's major producers of crude palm oil and crude palm oil derivatives, after already exporting the system to 11 countries, including Thailand, Myanmar, India, Papua New Guinea and Latin America.

“The integrated solution developed by Dolphin Application provides palm oil millers with the productivity that will minimise the operation costs of the production,” he said. 

(The Star Online / 01 March 2013)

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

Putting the faith back in finance

Today, we live in an environment where trust in financial institutions’ ability to bring capital to its most effective use has eroded. It would be an understatement to say that people have lost faith in finance. From the subprime mortgage debacle to the collapse of Lehman Brothers and the recent LIBOR fixing scandal, finance is a much derided industry. “Banker bashing” is all too common, with one particular financial institution even being referred to as a “giant vampire squid,” underlying people’s disgust towards the behavior of financial institutions and their focus on maximizing profits without any regard for the consequences.

Risk transfer and risk mitigation is the modus operandi of most financial institutions. This is particularly true in the case of debt financing, where the borrower or entrepreneur bears most of the risk while the investor expects to be compensated with a high interest rate while having security over the borrower’s assets in case of default. “Risk sharing” does not really register in most investors’ vocabulary.

Can a case be made for finance based on risk-sharing principles? One solution could be faith-based finance. Charging “usury” or “interest” is prohibited in all Abrahamic faiths, though there are varying definitions of what really constitutes usury among the different faiths and sects. In theory, both Judaism and Christianity are against exploitation through charging interest but formalized mechanisms and institutions to provide equitable alternatives to borrowers have not been established.

Alternatively, Islamic finance has established clear alternatives to the exploitative nature of charging interest. It goes a step beyond banning interest by also prohibiting speculation or investing in businesses which are deemed socially harmful (gambling, alcohol, weapons manufacturing, pornography, etc). Islamic finance emphasizes the concept of risk sharing, where the borrower and the financier work together to grow the business and share the profits. Being a relatively new phenomenon, the first Islamic financial institutions emerged in the 1970s in the Middle East and have now spread to major financial centers globally with over $1 trillion in assets. Even though it has achieved significant success, the industry has had its share of problems, with below par performance being the subject of great debate.

Despite these debates, one of the key successes of Islamic finance has been that the ethical nature of financing has attracted a considerable number of non-Muslim customers, as has been witnessed in Malaysia where over 50% of Islamic bank customers are non-Muslims.

Islamic finance shares much in common with impact investing in terms of its goals of poverty alleviation and equal wealth distribution. It should be a welcome addition to the impact investing landscape. Acumen Fund has already provided financing on a Musharakah (profit sharing) basis to one investee. Leveraging these Islamic modes of financing also has the potential to unlock large pools of capital from Muslim countries (where Islamic financial institutions and philanthropists are unable to make interest-based investments).

The success of Islamic finance and its acceptance with non-Muslims bodes well for the further development of socially responsible investing. Maintaining an ethical foundation while sharing risk between investor and entrepreneur will benefit all mankind, not just those of a particular faith.

(Ancumen Fund / 27 Feb 2013)

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

Dubai plans central Islamic finance regulatory board

Dubai plans to set up a central sharia board to oversee all Islamic financial products used in the emirate, and will encourage government-linked entities to issue and list sukuk on the local bourse, senior officials said on Wednesday.

The government announced last month that it wanted to become a global centre for Islamic finance and other businesses based on Islamic principles. But it will face tough competition from established centres such as London and Malaysia, where trading of sukuk (Islamic bonds) is much more active.

"We follow international standards of Islamic economies and will be the world's number one centre for Islamic finance," Dubai's ruler Sheikh Mohammed bin Rashid al-Maktoum, who is also prime minister of the United Arab Emirates, told reporters on Wednesday.

Eissa Kazim, secretary-general of the committee leading Dubai's Islamic economy initiative, said: "We will harmonise all standards, structures and regulations through having a unified sharia board at a government level to oversee the industry."

Sharia boards are groups of scholars which rule on whether financial instruments and activities are religiously permissible. Most major Islamic banks and finance firms around the world have them; the rulings of different boards are sometimes inconsistent and the scholars are sometimes open to suggestions of conflicts of interest.

A government-level sharia board could reduce such confusion over standards in Dubai's Islamic finance industry, helping it attract business. With the prominent exception of Malaysia, few countries have a central board and other Gulf countries have followed a loose, decentralised model of regulation.

Having products in Dubai approved by a single entity could help to harmonise their structures, make it easier to create and list them on the bourse, and boost their appeal to investors.

"Unifying the sharia board will limit discrepancies between different structures and will boost confidence in our local market," said Hussain Al Qemzi, chief executive of Noor Islamic Bank.

New issues of sukuk jumped to about US$121bn worldwide in 2012, according to Thomson Reuters data, from around US$85bn in 2011. Dubai's share of this was relatively small and most of the emirate's issuers have listed their bonds and sukuk overseas, taking secondary market liquidity with them.

Almost US$9.2bn worth of sukuk is listed on the Dubai market, but US$7.5bn of sukuk issued from Dubai is listed internationally and around US$1.5bn is unlisted, said Kazim, who is also Dubai Financial Market's chief executive.

If 50 percent of total bond issuance from Dubai is Islamic and listed on the local bourse, "Dubai can easily top the list of Islamic financial centres," said Kazim.

Most debt issuers in Dubai are government-related entities which will definitely consider listing their sukuk locally, he added.

Last month Dubai Financial Market, which runs the emirate's securities market, published draft standards for sukuk with a consultation period that closes this Thursday.

(Arabian Business.Com / 27 Feb 2013)

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