Islamic finance market likely to grow in Pakistan

KARACHI: Pakistan’s Islamic finance market may continue to mature and expand in the years ahead given growing investment by the Islamic banking industry in federal government securities through ijara sukuk (Islamic bonds), said bankers.

Recent statistics issued by the State Bank of Pakistan (SBP) suggest Islamic banking institutions (IBIs) invested Rs266 billion in government securities during the third quarter of 2012 against Rs154 billion over the same period in the last fiscal year, showing a year-on-year growth of 73.2 percent.

Of a total of Rs266 billion investments, more than Rs47 billion were provided by the Islamic banks via ijara sukuk to the government for project financing.

Bankers said that if the government of Pakistan ijarah sukuk are to be issued in the usual manner, Islamic banking liquidity will be directed towards sovereign investments to earn risk-free and government-guaranteed profits. This is mainly due to the weak risk management of Islamic banks, as they are not willing to take risk-based exposure with better pricing. By definition, interest should not be charged or collected and profit and loss is equally shared between lender and borrower in Islamic finance.

They further said that despite excess liquidity in the Islamic banking industry, the focus is on taking risk-free exposure in sukuks or with other financial institutions.

Investing in low-yield, risk-free investments may also be considered the reason for less return on assets (ROA) of Islamic banking than the overall banking industry.

The latest SBP report on Islamic banking said that the financing by IBIs remained stagnant at Rs209 billion from July to September 2012.

President and CEO of Bank Islami, Hasan Aziz Bilgrami, said that credit demand by the private sector remained low in the quarter under review due to energy shortages and heightened security concerns that pushed up the cost of doing business.

“Deposits of Islamic banks were higher than the advances during the quarter,” he said.

“The clean up periods of seasonal financing of various industries (such as sugar, cotton and rice) were observed during the third quarter and therefore adjustment in financing in the Islamic banking segment is seen in the same period,” said Vice President, Head of Credit Islamic Banking Group, MCB, Haroon Siddiqui. “Due to fragile economic conditions and less than expected growth, one Islamic bank had to be merged with anther one,” he said.

The prospect of change in the financing trend of Islamic banks appears bleak. Nevertheless, Islamic financing growth will remain better than overall financing growth of the banking industry, he said.

“This pattern stands to improve after the confidence of foreign investors is restored and policies have been formulated to direct financing towards the private sector, with better earning opportunities,” he said.

“The major Islamic financing portion is expected to be continued with the corporate sector, as these are considered less risky propositions while financing, than SME, consumer and agriculture sectors,” said Siddiqui.

He said that further movement to other sectors with large shares like consumer, agriculture and SMEs is not possible in the short term even though the SBP has encouraged banks to finance the agriculture and SME sectors. However, with the decrease in overall discount rate in the last half year, it is expected that the share of consumer financing may be increased in coming years, subject to improvement in economic conditions.

“Limited availability of Islamic banking financing products (especially for short term) to cater to the needs of various trades, SMEs and agriculture-based customers may also be a reason for sluggish growth,” said Mubashar Bashir, a senior banker at a leading commercial bank.

“Availability of Islamic banking branches in major cities is another reason for the lack of financing in the agriculture and SME sectors, as 65 percent of branches of IBIs are operating in only seven large cities – and 43 percent of these branches are concentrated in Karachi and Lahore,” he added.

(The International News / 04 April 2013)

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Saudi Arabia sells share in Islamic finance body

Saudi Arabia’s central bank has sold its shareholding in the International Islamic Liquidity Management Corp (IILM), an unexpected blow to a body which aims to create a liquid cross-border market for Islamic financial instruments.

The decision was announced by the Kuala Lumpur-headquartered IILM late on Wednesday, in a statement which did not give a reason. IILM officials declined to comment, while officials from the Saudi central bank, the Saudi Arabian Monetary Agency (Sama), could not be reached for comment on Thursday, a holiday in their country.

One member of the IILM executive board said he was unaware of the pull-out when contacted by Reuters yesterday. “You will have to ask Sama for their reasons,” the official said.

Saudi Arabia’s stake in the IILM was bought by the central banks of Qatar and Malaysia, bringing the number of the body’s shareholders down to ten and casting doubt on the timing of its first issue of sukuk (Islamic bonds). The IILM’s statement did not reveal the purchase price.

It was not clear whether Saudi Arabia’s pull-out was prompted by management frictions at the IILM — the body changed its chief executive late last year — or by deeper disagreements over policy.

A Dubai-based managing director of a European bank said the IILM was viewed by some critics as too Malaysia-centric, adding that some countries were in greater need of Islamic liquidity management tools than others, which could be a reason for the rift.

The IILM was founded in October 2010 to address one of the main weaknesses of the fast-growing Islamic finance industry: its shortage of liquid financial instruments that banks and other firms could use to manage their funds. Instruments must be structured to obey Islam’s ban on interest.

The body’s shareholders are the central banks of Indonesia, Kuwait, Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, Turkey and the United Arab Emirates, as well as the Islamic Development Bank Group, a Jeddah-based body. Iran is a founding member but not a shareholder of the IILM.

The body intends to issue short-term sukuk in reserve currencies that can be held and traded by Islamic investors around the world. It has not yet managed to make an issue, however.

Malaysia’s central bank governor said in late March that the IILM was in the “final stages” of issuing its maiden sukuk, and was identifying underlying assets for the issue. The likely value of the sukuk was between $300mn and $500mn.

Since its inception the IILM has had to grapple with the laws of the many jurisdictions to which it wishes to cater, its chief executive at the time, Mahmoud AbuShamma, told Reuters in early October last year. AbuShamma was hired in 2011 on a three-year contract from HSBC in Dubai.

A few weeks after the interview, AbuShamma was replaced by Rifaat Ahmed Abdel Karim, former secretary-general of the Malaysia-based Islamic Financial Services Board, a standard-setting body for the global industry.

The Dubai banker said Saudi Arabian banks had relatively little need for the IILM because in recent years they had managed to shift funds from cash into other asset classes. Over the past year, sukuk issuance within Saudi Arabia has increased, providing banks with a supply of domestic instruments.

Countries with smaller or less-developed Islamic capital markets are more likely to need instruments from the IILM, and may therefore be keener to push the project forward.

One such country is Qatar, which last month said it was starting quarterly issues of sovereign sukuk in its domestic market. Qatar’s central bank governor, Sheikh Abdullah bin Saud al-Thani, is current chairman of the IILM’s governing board.

(Gulf Times / 04 April 2013)

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Research Partnership Takes on Islamic Finance

A research partnership has been formed to create case studies for business school programs, spelling out the commercial implications of Islamic finance.

Deloitte’s Islamic Finance Knowledge Centre (IFKC), a think tank based in Bahrain, is partnering with INCEIF, the Global University of Islamic Finance in Malaysia, and the University of Reading’s Henley Business School in England, says IFKC Director Hatim El Tahir.

Islamic finance refers to banking activity that follows the principles of Islamic religious law, or sharia, which prohibits practices that are common in the rest of the world, including charging interest for loans. Instead of a standard mortgage, with the property as collateral, for example, a sharia-compliant bank would take ownership of the property and lease it back to the original owner.

El Tahir says the new research initiative will focus on four key areas: regulation and governance, risk management and internal controls, product strategies and marketing, and talent leadership programs.

The goal, he says, is operational excellence and viable business models for sharia-compliant businesses. Research on pricing strategies, for example, might focus on the challenge of matching prices offered by conventional banks within a sharia-compliant framework. Research on the insurance industry, a further area in which Islamic law requires changes to standard practices, might focus on improving Takaful (Islamic insurance) products and the potential for growth.

With big banks and accounting firms now catering to those seeking sharia-compliant products and services, a number of business schools are incorporating Islamic finance into their programs. Geneva Business School offers a master’s in Islamic Finance, and Bangor Business School in London offers an MBA in Islamic Banking and Finance.

The partnership will create case studies for use in business schools and professional development education. “We wanted to develop cases that we can share with industry stakeholders around the world,” El Tahir says. “Hopefully this will be feeding back into the educational side.

(Bloomberg Business Week / 03 April 2013)

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Tunisia plans 1bn dinar sukuk

Tunisia is hoping that the country’s first government sukuk, or Islamic bond, scheduled for later this year could spur companies in the North African country to raise Islamic debt and boost its sharia-compliant finance industry.

The government is working alongside the Islamic Development Bank – the multilateral lender – to pave the way for a 1bn dinar ($700m) sukuk sale that would set a benchmark for companies seeking to tap the Islamic debt markets, Elyes Fakhfakh, finance minister, told the Financial Times.

North African countries including Egypt, Morocco and Tunisia are progressing with plans to stimulate Islamic finance and sell sharia-compliant debt as they seek new forms of funding in the wake of the Arab spring.

“It is for the global diversification of our financial debt and this is very interesting from a cost point of view,” Mr Fakhfakh said on the sidelines of an Arab finance ministers’ meeting in Dubai. He said the government would target 80 per cent external investors and 20 per cent domestic.

Governments have been keen to tap into Islamic finance partly because the cost of borrowing can be cheaper due to the high demand – a benefit Tunisia would like to see passed on to its companies.

Islamic debt of emerging market governments yielded 2.9 per cent on April 1, markedly lower than Middle East government conventional bonds which yielded 4.4 per cent, according to HSBC/Nasdaq Dubai indices.

The Islamic bonds of Gulf governments, which have led the way in Middle East sukuk sales, are also yielding slightly less than the conventional bonds, meaning the cost of borrowing is lower.

“If I was them I’d be thinking now’s the time to issue sukuk,” says Gabriele Sterne, senior economist at Exotix, the investment bank in London. “Because of all the money flooding around the Middle East, sukuk tend to price slightly tighter than eurobonds.”

Given the political volatility, if Tunisia does not get the timing right then it could face a situation like Egypt where spreads widen rapidly, increasing the cost of borrowing on international markets and making a sale more difficult, says Mr Sterne.

Since the start of the year, Tunisia’s credit default swaps – contracts to insure against the default on debt – have risen 37 basis points to 389, indicating an increased perception of risk. They trade at a similar level to Hungary, but are cheaper than the swaps of Egypt and Lebanon, indicating that investors view a Tunisian default as less likely.

Standard & Poor’s cut Tunisia’s credit rating in February, the third downgrade since the overthrow of Zine El Abidine Ben Ali in 2011. The country is now rated BB-, three levels below investment grade.

The lost of the investment-grade rating, slow economic growth and bank liquidity concerns may put investors off the government’s sukuk, meaning they will have to pay high borrowing costs, says Sebastien Henin, portfolio manager at The National Investor in Abu Dhabi.

“In this environment, to raise money, I think it could be tricky,” says Mr Henin, adding that strong broader demand for Middle East debt should secure the sale, albeit at a price.

The North African country, which ignited the Arab Spring, is also seeking a $1.7bn loan from the International Monetary Fund – a precautionary measure that might be taken if needed – which could help stabilise the economy and plans to issue US government-backed bonds.

The government expects economic growth to slow to 4 per cent this year compared with 3.6 per cent last year.

(Finance / 03 April 2013)

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Key GCC Islamic banking assets rise to $445bn

MANAMA: Islamic banking assets with commercial banks in the GCC reached $445 billion at the end of last year, up from $390bn in 2011, according to recent estimates by Ernst & Young's Global Islamic Banking Centre.

Reports indicate that in 2012, the Islamic banking industry in the GCC registered a 14 per cent year-on-year growth, which represents a slight deceleration in the average growth rate over the past five years of 19pc.

Reports also indicate that profitability now looks to be stabilising in major Islamic banking markets though Islamic banks have experienced a mixed recovery across markets.

With the global Islamic banking assets with commercial banks now surpassing the $1.5 trillion mark and estimates projecting the industry to hit $2trn by 2015, the global Islamic finance industry is undoubtedly one of the fastest growing components of the global financial system.

The Islamic banking industry is growing 50pc faster than overall banking sector in several core markets, according to Ernst & Young World Islamic Banking Competitiveness Report.

The report was launched last December at the 19th Annual World Islamic Banking Conference in Bahrain.

Given the current market conditions and the increasing demand for Islamic finance not only in the traditional markets of Middle East and Southeast Asia, but globally, the time is now perfect for the Islamic finance industry to further leverage its inherent strengths of being linked to real economic activities and play a key role in putting in place a holistic Islamic economic ecosystem.

It is against this background that the third Annual Middle East Islamic Finance and Investment Conference (MEIFIC 2013) will be held at the Dusit Thani Hotel in Dubai on April 17.

Co-located with the eighth Annual World Takaful Conference and held under the theme "Building the Islamic Economy: Strengthening Islamic Finance's Links to the Real Economy", MEIFIC 2013 is set to gather more than 250 regional and international Islamic finance leaders in a powerful dynamic platform.

A key highlight will be the high profile keynote debate that will focus discussions on boosting growth and the value of Islamic finance by strengthening linkages to the real economy and mainstreaming products.

The session, chaired by Thomson Reuters global head for Islamic capital markets Dr Sayd Farook, and featuring Dubai government's economic adviser Harun Kapetanovic, Mashreq Al Islami chief executive Moinuddin Malim, ADCB Islamic Banking head of Islamic Banking Amr Al Menhali, and QIB-UK head of asset management Anouar Adham, will assess new growth opportunities for Islamic finance and will analyse how institutions can scale-up to better meet the needs of the real economy.

(Gulf Daily News / 02 April 2013)

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MAS says it is committed to developing Islamic financial services in Singapore

SINGAPORE: Singapore's central bank said it remains committed to developing Islamic financial services in Singapore.

Commenting about the lapse of two tax incentives for Islamic finance recently, Assistant Managing Director of the Monetary Authority of Singapore (MAS), Ng Nam Sin, said this was "no reflection of MAS' continuing commitment to develop Islamic financial services in Singapore."

"Like all our tax incentives, they have a fixed tenure and in this case, of five years. It is useful to note that Islamic finance activities will continue to be incentivized alongside conventional finance activities under our other existing schemes," said Mr Ng.

But he pointed out that Singapore's proposition for Islamic finance must be broader than just tax advantage.

He said, "Singapore's success as an international financial sector stems from its high standards of regulation, deep and liquid capital market, the presence of international buy side players, and a critical mass of financial intermediaries with expertise to address a wide range of financing needs. It is these strengths that allow Singapore to support the growth of Islamic finance. "

Speaking at an event at Singapore Management University on Wednesday, Mr Ng said Singapore has seen many sukuk (Islamic bonds) issuances since 2001, with more expected in the pipeline. Other capital market instruments such as REITS and innovative investment funds have also seen good growth.

Meanwhile, banks from the region are contributing to the Islamic financial sector in Singapore. A growing cluster of banks from the Middle East region operating in Singapore has also started to offer Islamic financial services.

Given the strong growth potential for Islamic finance in Singapore, Mr Ng said MAS will provide an environment that is conducive for growth, support talent development and continue to refine its regulatory framework.  

(Channel News Asia / 03 April 2013)

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Investing the Islamic Way

Amazon.com is the type of stock that most growth managers have loved the past several years. It's enjoyed stable growth, and yet the company has regularly reimagined its business model to keep pace with new technologies and innovations. Over the last five years, the shares soared an average of 32.6% a year.

Nicholas Kaiser, co-manager of the $2.2 billion Amana Growth Fund (AMAGX), was also a big fan of Amazon (AMZN). The retail pioneer had been a staple of his fund for years.

But last November, Kaiser decided to sell it all. What prompted Kaiser to call it quits was Amazon's expansion into a new business line that could actually help its stock price rise even more: beer and wine. That violated a core requirement of the Amana fund: its investments must be consistent with Islamic principles.

"We hated to sell that one," Kaiser concedes. "We'd owned it for about a decade, and it's one that we had done very well with."

RESTRICTED UNIVERSE

At first blush, Amana Growth looks much like any other large-cap growth fund. Its top holdings are sprinkled with high-quality growth names: Google, Oracle, Apple, IBM. But financial services are conspicuously absent. So, too, are some retailers like Amazon, Walmart and Target, because they violate the fund's mandate to avoid businesses that derive more than 5% of sales from alcohol, pornography, gambling or pork - activities and foods that are haram, or forbidden.

"Yes, it does restrict our universe in many ways," Kaiser acknowledges. "The good thing is that we probably know our companies quite well, and we try to make sure they're not doing something they shouldn't be."

In 1984, when Kaiser ran a midsize investment management firm in Indianapolis, he was approached by an Islamic investing club to put the group's money to work in accordance with the principles of Shariah, the Islamic moral code. Two years later, he launched the Amana Income Fund (AMANX) and, in 1994, the Growth Fund. His current firm - Bellingham, Wash.-based Saturna Capital Management, of which he is chairman - also manages the Amana Developing World Fund (AMDWX). Going by the last names of his investors, Kaiser estimates that only about 12% of his shareholders are Muslim.

In picking stocks, Kaiser is guided by a six-member advisory committee of academics and businesspeople. In addition to outright bans on certain types of activities, they have mandated that Kaiser avoid leverage, thereby bypassing any stocks whose debt-to-market-cap ratio exceeds 30%. The result is a portfolio of high-quality names with large piles of cash.

"We're very much focused on technology because this sector doesn't have a lot of debt," Kaiser says about the fund's 42% allocation to the sector. If the cash is a by-product of some other business and not an attempt to make profit, it passes muster.

FINANCIAL SECTOR

Investing the Islamic way seems to be working for Kaiser, an Episcopalian. For the 10 years ended Feb. 28, Amana was up 12.5% a year on an annualized basis, according to Morningstar; that puts it in the top 2% of large growth funds. For the last five years, the fund is up 5.6%, besting 68% of its competitors. Avoiding financial stocks helped Amana Growth avoid the brunt of the financial crisis.

While the cautious approach to balance sheet strength wins approval from Muslims, the strategy can sometimes falter. As financials have rallied, the fund has suffered. Over the last 12 months, it's up 6.8%, while the S&P 500 is up 13.5%. "The companies that have done well when we're printing money like crazy are financials and highly levered companies, and those are the ones we don't have," Kaiser says.

Amana also doesn't trade much, holding its stocks around five years on average. "We're not supposed to gamble with the fund," Kaiser says. "It's OK to invest for the long term, though."

As a result of the low turnover and other strategies, Amana Growth gets high marks for tax efficiency. Morningstar assigns a tax cost ratio of 0.03% to the fund over the last 10 years, meaning that 0.03% of the fund's performance goes to taxes. That places it in the top 2% of the category.

TECH JUGGERNAUTS

As with many other growth funds, Amana's top holding is Apple (AAPL). It's not hard to see why. Kaiser has been a strong supporter of the stock for a dozen years, as the company moved away from desktop computers into category-crushing mobile devices.

For years, Apple dominated the mobile device industry it helped create, with earnings soaring quarter after quarter. But the stock's recent plunge - a drop of roughly 37% since its September high - has many wondering whether the company's best days are behind it.

(Financial Planning / 01 April 2013)

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