Pakistan: Government committed to nurturing Islamic finance

LAHORE: Federal Minister for Finance Mohammad Ishaq Dar said on Monday the government believed in the supremacy and utility of Islamic finance for inclusive development and socio-economic well-being of the masses. 

“We are fully committed and determined to nurture the Islamic finance industry on sound foundations”, he said while addressing the inauguration ceremony of second Global Forum on Islamic Finance at Lahore campus of COMSATS Institute of Information and Technology. 

Dar said a steering committee on promotion of Islamic banking had been formed with representation from all key stakeholders for formulating a comprehensive framework to address challenges and hurdles, which were adversely affecting the growth momentum of industry. 

The committee would also suggest a roadmap and timeframe for progression of various phases of the Islamic banking in the country, he said and added that the government had also formed a steering committee on Qarz-e-Hasna. 

“The government is, thus, fully committed to facilitate and nurture development of Islamic finance industry on sound footings through an enabling policy and regulatory environment,” he added.

Ishaq Dar said the efforts of this Forum in disseminating scholarship on Islamic economic system to cope with the current financial challenges were admirable. 

He hoped that the Centre of Islamic Finance would perform research, impart training and strengthen the syllabi of Islamic finance and, thus, play an instrumental role in bridging the gap between academia and industry.  

He said the Islamic finance industry constituted over 10 percent of the country’s financial system and maintained strong growth momentum, but it, however, was below the huge potential. 

“We are a country of over 180 million people, predominantly Muslims, with a significantly large population excluded from the financial system due to, among others, faith sensitivities of the masses; a large agricultural base which meets its financial services needs largely from informal players as only 20 percent of the farmers have access to the formal financial system; and just 5 to 6 percent of SMEs having access to bank financing,” added the minister.

He said the country’s banking system had taken the initiative to develop financial instruments, in keeping with the spirit of the Islamic economic system. 

He said Islam provided a complete code of conduct and gave solutions for all spheres of life. “Adherence to Shariah principles will not only help us in achieving financial system stability and broad-based welfare of the masses, but will also help us in pleasing Allah,” he added. 

(Daily Times / 11 March 2014)

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Malaysia: Islamic banking to achieve above 25% market share

KUALA LUMPUR: Islamic banking is expected to achieve a market share of more than 25% in terms of banking assets this year, said CEO of Standard Chartered Saadiq Bhd and global head of Standard Chartered's Islamic consumer banking,Wasim Saifi.

He said Malaysia's Islamic banking industry had grown twice as fast as its conventional counterpart with a compounded annual revenue growth of 22%. "Despite the challenging global environment, we are optimistic of double-digit growth in this sector. With the continuous double-digit growth momentum, and with the regulatory framework that Bank Negara has put in place, the target for Islamic assets is to make up 40% of Malaysia’s total financial market by 2020.

"This is easily achievable," Wasim said after the launch of Saadiq's branded Islamic banking windows, aimed at promoting Standard Chartered's Islamic product and services.

Saadiq's syariah-compliant products, currently offered at 10 dedicated Standard Chartered Saadiq branches, would now be made available at Standard Chartered Bank's conventional branches.

"For a start, the Islamic banking windows have been introduced in the Klang Valley, Seremban, Alor Setar, Johor Bahru, Butterworth, Kuching, Kuantan and Kota Kinabalu, and plans are underway to cover all 33 conventional branches over the next two years," he added.

(The Star Online / 11 March 214)

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Islamic finance: UK’s maiden sukuk comes over all coy

The UK’s maiden sovereign sukuk issue was announced with considerable fanfare in October, and appears to be making progress. But the UK Treasury is not in a rush, and market participants are beginning to wonder why there is a delay.

 Speaking at the Euromoney Islamic finance forum in London in February, Sajid Javid, MP, the financial secretary to the Treasury and a former Chase Manhattan and Deutsche Bank executive who is very much the public face of the UK government’s Islamic market ambitions, said the sukuk would now take place in the "next financial year" – that is, no earlier than April 5, and potentially not even this year. 

Naturally, a sovereign has to be fairly studious and open in its appointment of advisers, and after review settled on HSBC and Linklaters. But with that done, why the sluggish pace? 

Cautious approach:

 In one sense, Javid is keeping history in mind in the cautious approach. "The market has long made the case for a sovereign sukuk issued by the UK government, and it is something the government has looked at doing in the past," he said. "Due to hurdles, it never quite took off." 

Sajid Javid, MP, the financial secretary to the Treasury and a former Chase Manhattan and Deutsche Bank executive Asked why it is still not under way, he said: "I actually think that, drawing on my own experiences, it’s not been that long. It is the first for the UK, the first sovereign sukuk by any western country, and it is very important that when the UK issues it has looked at everything in fine detail. It would be in no one’s interests if it was rushed unnecessarily and there’s a problem that could have been avoided." 

Javid also confirmed that, for the moment, the UK only intends to issue one sukuk. "We have said this is a one-off issuance, not a long-term programme, and its main purpose is not financing for the government," he said. "It is more to develop the UK as a financial centre."

 This attitude clearly makes some sense, since the £200 million ($334 million) issue, when it comes, will not make the slightest difference to the UK’s national coffers compared with the deep and liquid conventional gilt market. The sukuk, instead, will be a statement: about inclusiveness for the UK’s Muslim community; about London welcoming further investment from the Islamic world; and about the hopes London continues to harbour as a global centre for Islamic finance. There is an alternative view, muttered by bankers and lawyers. Just because the UK doesn’t need sukuk for its funding doesn’t mean it shouldn’t continue to build a curve, they say, and it seems a waste of effort and research to put all this preparation into a one-off. 

After all, the hope is that a UK sovereign issue will prompt other UK enterprises to launch sukuk, priced off whatever level the sovereign issue clears the market at. The more widely established the curve, the greater the opportunity there will be to encourage others to price against it. Back-chat There is also a certain amount of market back-chat about the appointment of HSBC to the advisory mandate so soon after the bank had closed down many of its Islamic finance businesses worldwide – including some of its presence in the UK.

 This objection was levelled at Mohammad Dawood, managing director of global capital financing at HSBC Middle East, by Harris Irfan, managing director of the European Islamic Investment Bank, at the same Islamic conference. Irfan asked: "Why should HSBC be rewarded by the British government with a high-profile Islamic mandate?" 

Dawood responded: "Yes, we have closed down businesses in the UK and in the Middle East," but he countered that HSBC has maintained its presence in the two key Islamic markets of Malaysia and Saudi Arabia. "Our selection was perhaps just a reflection of the experience that has been built up over a number of years. It was a transparent process." Market sniping notwithstanding, there are high hopes for the influence the sukuk could eventually have. "Without a shadow of a doubt, the UK issuance will have the largest impact" of the various non-Muslim jurisdictions believed to be planning a sukuk, said Arsalaan Ahmed, head of capital financing at Barwa Bank. "

The UK has shown all the areas that need to be looked at for a non-OIC [Organization of Islamic Cooperation] sovereign issue, and when it is done, the UK will be a case study on how to do it." He believes the "trickle-down effect will be good for investors", and notes that the fact that most Islamic cross-border contracts are structured under English law should work to the benefit of London as a financial centre.

(Euro Money / 10 March 2014)

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Global Finance names QIB Qatar’s ‘Safest Islamic Bank'

QIB has been recognised as the ‘Safest Islamic bank in Qatar’ in Global Finance’s first-ever list of the “Safest Islamic banks in the GCC” through a rigorous evaluation process that assessed the stability of the region’s banks.

QIB Group CEO Bassel Gamal said, “It’s great to see that all our efforts and achievements in 2013 are being recognised by a trusted financial magazine like Global Finance.

The bank “scored high” for its 2013 credit standing, which was rated (A) by Fitch and (A-) by Standard & Poor’s, he said.

“The overall QIB 2013 financial results were very positive; it has increased business volumes across all market segments, which has a positive impact on QIB’s end of year financial results, solidifying its position as a leading bank in Qatar,” Gamal said. The ranking reflects QIB’s implementation of a “successful risk management policy” that strengthened all prudential ratios and built a strong foundation for future business expansion.

Gamal added that “QIB’s innovation and excellence in risk management meets all the rigorous safety standards and this, together with the bank’s commitment to providing excellence in banking services to all the clients, is what differentiates QIB.”According to Gamal, customer deposits saw a steep rise of 16.7% or QR50.4bn by the end of 2013 compared to QR43.1bn in 2012. “This enabled QIB to effectively support the constant growth of assets,” he stressed.

The “strong operating performance” in 2013 has enabled the bank to pursue a conservative impairment policy by allocating QR360mn towards improving the provision coverage on financial investments and financing activities compared to QR491mn in 2012. Gamal noted that QIB managed to raise the quality of its investment portfolio this year, where non-performing financing assets dropped 0.9% with provision coverage of 94% in 2013 compared to 1.6% with provision coverage of 63% in 2012.

For the first time, this year, Global Finance assessed banks that only offered Islamic products and have been rated by at least two reputable international agencies. A total of 25 Islamic banks currently operate in the Gulf, representing a third of all active commercial banks in the region.

Gamal said this recent accomplishment “is a result of our ongoing commitment to provide a seamless banking experience to our individual and corporate customers while at the same time ensure that we are applying a successful risk management strategy,” Gamal stressed.

(Gulf Times / 08 March 2014)

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History and values of Takaful Islamic Insurance

Due to the rapid progress in the field of international trade and commerce, insurance has globally come to play a vital and significant role in the day to day lives of the people.

It may be helpful to analyse the background of Takaful as we embark upon a discussion of the system itself.

The Takaful insurance system is based on the principles of Islam. Hence, the followers are required to explicitly believe in the Holy Qur’an and Sunnah.

The Holy Qur’an was revealed by God to Prophet Muhammed (PBUH) in stages for a period of 23 years. Chapter 26 – Verse 26 of the Holy Qur’an sets out the position that the Holy Qur’an contains proofs, evidences, lessons, signs, revelation, information containing what is lawful and unlawful things and sets out the boundaries of the Islamic religion that make things clear showing the right and straight path. In the opening chapter of the Holy Qur’an in verse 6 it reveals that the guidance is in two folds – namely; Taufiq, those that are totally from God Himself opening once heart to receive the same and Irshad through the teachings by the messenger of the God Prophet Muhammed (PBUH).

According to Chapter 2 – verse 2 this guidance leads to the attainment of the status of a Muttaqun.The efforts made to achieve the stage of Muttaqun would assist to avoid bad or evil deeds and to progress towards performing good deeds. The Holy Qur’an whilst defining what are “good deeds” points out In Chapter 18- verses 103 and 104, to the deeds which are performed according to the teaching embodied in the Holy Qur’an and the Sunnah. Therefore, in summary, a Muslim essentially is required to follow the principles laid down in the Holy Qur’an and the teachings of the Holy Prophet in connection with his personal day to day life or his interaction with his fellow human beings regardless of the faiths they are committed to follow in regard to business or commercial transactions entered into or, for that matter in any transaction related to his life. It is a fundamental and obligatory duty on the part of a Muslim to lead a life without infringing the rules of piety.

The teachings and life style of the Holy Prophet referred to as “Sunnah”. The way of life of a Muslim is based on the Shariah law; the two primary sources of shariah law are the Holy Qur’an and Sunnah.

Ancient Arab civilisation reveals that they were under the tribal system. The elders of the tribes maintained discipline among their own tribes. In Roman civilisation this system was called pater familia. The Tribal heads in order to maintain peace and harmony ensured that the inter relationship among Tribals would prevail. The tribal members for their living engaged in trade and hunting. There were occasions in which a member of one tribal unintentionally killed the other tribal. Therefore, in order to maintain uninterrupted peace and harmony among tribes, the parental relative, based on the principles “Law of Equality Punishment” mentioned in the Holy Qur’an, reached a mutual understanding. This is the origin of the doctrine of “Aqilah” payment of blood money. The Prophet in his judgement with regard to a complaint against a member of the Huzail Tribe reaffirmed the foundation of this doctrine. From this doctrine evolved Takaful Insurance.

The concept of Takaful derived from the Arabic word “Kafala” meaning guarantee, bail, warrant or an act of securing one’s need. Therefore, Takaful means joint guarantee, whereby a group of participants agree to mutually guarantee each other against a defined loss. Hence, the doctrine of Takaful embraces the element of mutual protection and shared responsibility. The Takaful system is basically a system of mutual protection and shared responsibility which contemplated a situation where a group of people agreed to cooperate among themselves to establish a common fund for the purpose of mutual indemnity. In this system, the participants mutually contribute to a common fund with the intention of providing mutual indemnity in a situation where peril or harm occurs to anyone of the participants. Hence, the system of Takaful is to mutually indemnify, provide solidarity and mutual assistance among participants who have agreed to share the losses to be paid out from a common fund which is called as Takaful fund. Thus, the Takaful system following the principles laid down in the Holy Qur’an in Chapter 5- Verse 2, to help one another who is in need of help; designed to help the participants who may be in need or in hardship owing the peril befallen on them. The teaching of the Prophet explains that if one removes a worldly hardship of the other, God will remove from him hardship.

In this back drop, in a “Takaful system” there is no reference to a ‘policy holder’ and instead the beneficiary is called as participant. The entity which collects the common fund (Takaful fund) and issues the policy is referred to as “Takaful operator”. The intention of this scheme is to share responsibility and indemnify the losses and not to solely make profits. In regard of the profits made by the Takaful Operator, the principles of the Islamic Shariah are to consider it as a surplus fund and to distribute the same in the proportionate manner among the participants.

According to Islam whether in prayers, payment of charity (Zakat), performing pilgrimage (Haj) in performance of good deeds or in any aspect of matter the intention of person plays a crucial role. Similarly, in the system of Takaful, it is important to have the intention (Ne’aa), the utmost sincerity and to possess the knowledge in regard to cooperative risk sharing and mutual assistance.

In terms of the principles of Islamic Takaful system, Shariah imposes strict prohibition in respect of the transactions that are influenced by “Gharar” (uncertainty), Riba (Usury) and Maysir(Gambling).

The jurists unanimously have expressed their opinion in regard to the reasons for prohibition of Gharar. They take the view that the existence of gharar may deny the bargaining power for the contracting parties. Their view is based on the fact that the contracting parties should be placed in the same position to agree on a contractual obligations and therefore they should be in a position to make informed decisions and hence he ought to adequately understand the consequences of the contract that they are entering into. The Holy Qur’an in chapter 4 – verse 29 expressly states amongst the trading parties mutual understanding should prevail and further states ‘eat not up your property amongst yourself in vanities’. The jurists whilst further elaborating have stated that gharar is such that the nature and consequences are hidden. Takaful explicitly recognises the principles that the parties to the agreement need to be in a level playing field.

Mysir (Gambling) in verse 90 – chapter 5 of the Holy Qur’an is strictly prohibited. As several religious and social groups are on a daily basis articulating objections to the evilness of gambling, it seems that further elaboration seems to be unnecessary.

In an Islamic Insurance or Takaful, the concept of donation (Tabaru) is very much in existence. The contracting parties agree to set aside a part of their contribution as a donation for fulfilling obligation of mutual help, used to pay claims submitted by the claimants.

Takaful system is very much based on moral values and ethics. The dealings are required to be conducted in an open, transparent manner, with honest intention (in good faith), truthfully and with fairness. The Holy Qur’anic verses strictly emphasis the importance of individual responsibility to safeguard the principles of social maintenance.

In a Takaful Islamic system also it is necessary to make sure the legal capacities of parties, to determine the insurable interest and the principles of Indemnity, payment of premium, mutual consent which included voluntary purification and specific time period of policy and underlying agreement. The difference is non- payment of premium as per the agreement will not invalidate the policy as the whole purpose of scheme is mutual assistance and whereby by give solace to member participant when he is in genuine difficulty will bestow blessing on the Takaful operator for kindness and understanding .

The other important feature is constituting a Shariah advisory council or committee to assist the Takaful operator to conduct operation as per the Shariah requirements.

In summary, piety , commitment to the scheme of mutual assistance, charity , mutual guarantee, cooperative risk-sharing and profit sharing is required to prevail during the primary level and as well as re-Takaful arrangement. The Holy Prophet underscored the importance of the mutual help and cooperation among human beings. He further highlighted the importance of the duty cast upon in the individuals to help and assist the fellow human beings who stand in need of such help.

The noteworthy factor in a Takaful system is that the primary insurer (Takaful Operator) in order to cover its losses is expected to make arrangements with a retakaful provider which conducts business in accordance with the Islamic Shariah. Accordingly, under the Islamic Shariah, an arrangement made with a company which issues reinsurance cover not adhering to Islamic Shariah is explicitly prohibited.

(The Sunday Times / 09 March 2014)

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Seeking sukuk success

When Fiona Woolf, Lord Mayor of London, visited the Arabian Gulf region in February, Islamic finance was top of her agenda.

Last year, British Prime Minister David Cameron said that he wanted the UK to be the first sovereign government outside the Islamic world to use sukuk, suggesting he believes it will be an increasingly important part of global finance.

The move reflects London’s effort to compete in the Islamic finance business, which is led by the Arab Gulf states and Malaysia.

The rise of sukuk is driven by customers who want investment and savings products compliant with Islamic law and principles (Shariah). Interest is strong in the Gulf Cooperation Council (GCC) member states and in growing economies such as Malaysia and Turkey. For those seeking finance, offering shariah-compliant debt offers access to the large pool of capital in oil-rich countries in the Middle East.

While Islamic principles are at least 1,400 years old, modern Islamic finance emerged after the oil price rise in the 1970s, which transferred wealth to the Gulf energy producers and led to the founding of large Islamic banks. The global market for Islamic financial services is estimated to have risen to $1.46tn in 2012, with corporate banking and sukuk products developing fast.

Sukuk in Arabic is the plural of sakk, a certificate showing ownership of the asset. The Ottoman Empire is believed to have first issued a sukuk in 1775, when it borrowed money against future income on tobacco customs levies.

Islamic law prohibits the payment of interest. Instead, those who invest in sukuk — for example, to help fund the building of an airport — gain a share in owning the asset and so are entitled to a share in the airport’s revenues. Once the sukuk is issued, it can be traded on local capital markets.

The need for large investment in infrastructure — roads, railways, ports and housing — offers opportunities, notably in Asia and emerging markets in general.

Since Malaysia began issuing sukuk in 2000, they have grown in importance, while they are also becoming popular in Saudi Arabia and the UAE, particularly Dubai. Recent entrants to the market include Kazakhstan, Egypt and Turkey, which could become a big market because of its need for infrastructure.

Like all financial services, Islamic finance needs an appropriate supervisory framework and legislation is often the first step towards opening a new market. Financial institutions also need to ensure they have sufficient shariah expertise and advice to develop appropriate products.

Three factors are driving the market’s growth. First, it is becoming part of normal retail and corporate banking in core Islamic countries, such as Saudi Arabia, where its share of the banking market has doubled in recent years to more than 50%. The current market dynamics in the Gulf are favourable.

Second, its growth appeals to other markets, particularly in the Muslim world, where borrowers are attracted by the prospect of cross-border flows from the Gulf countries.

The third driver is innovation. Two years ago, the sukuk market was limited and bonds were mostly restricted to five years or less. Now there are longer-term offers, perpetual bonds, and “hybrid capital” issues allowing a mix of debt and equity.

Since 2008, Malaysia has led global sukuk issues, followed by Saudi Arabia and the UAE. Dubai aims to become the global “capital of the Islamic economy” and also to expand in takaful (Islamic insurance).

London is targeting cross-border flows, helped by its scale as a financial centre and its legal system which is recognised internationally. Sukuk issues on the London Stock Exchange have raised more than $49bn.

For some, using sukuk is a matter of principle, for others the question is being pragmatic; they will do so if the terms are better than for a conventional bond. During the global downturn in 2008, sukuk issues hit a low. But they have recovered strongly, rising from $19.5bn in 2008 to $42.8bn in 2013. Issuance since 2008 is to $196.8bn.

Looking forward, the Islamic Economy is developing quickly. From finance to entertainment, to food, fashion and family travel, the growth of an economy that adheres to faith-based values is growing in importance. Taken together, the world’s Islamic economies currently represent more than $8tn in GDP with a large (1.6bn), young population (average age 24) growing at twice the rate of the global population. As consumption drives increased trade and economic links between these countries and the Islamic economy grows, new opportunities will require financing.

Greater availability of sukuk offers more choice to companies and investors and allows issuers to offer products tailored to specific needs. This has underpinned the growth of the market both inside and outside its core countries.

(Gulf Times / 04 March 2014)

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Islamic finance has gained confidence in Maldives

Islamic finance has gained confidence in the Maldives with increased awareness among the public of its role in eliminatingRiba (interest), according to Deputy Islamic Minister Dr Aishath Muneeza.

Writing in the Islamic Finance News website, Dr Muneeza stated that Islamic finance has been “spreading like wildfire” since the introduction of Islamic banking and capital market services in 2011.

“Demand for Islamic finance is evident and has proved that there is inherent demand for Islamic finance as the Maldives is a country with a 100% Muslim population. It is hoped that in the upcoming years the Maldives can be used as a global case study to prove the success of Islamic finance,” she wrote.

Under Islamic Shariah, any risk-free or guaranteed rate of return on a loan or investment is considered riba, which is prohibited in Islam.

In her article, Dr Muneeza explained that the first form of Islamic finance introduced in the country was Takaful in 2003, which involves mutual protection of assets and property and joint risk-sharing.

Conventional insurance is also prohibited in Islam because of forbidden elements such as Riba.

Following the wider introduction of Islamic finance in 2011, Dr Muneeza observed that it is now “considered as an integral part in the development of nation”.

The previous year meanwhile saw the introduction of “new innovative Islamic finance instruments” by both the government and private corporations, she noted.

In 2013, the government signed the first sovereign private Sukuk – an asset-backed bond which is structured in accordance with Shariah for trade in the market – deal in addition to the central bank issuing the first Islamic treasury bill.

Moreover, she added, four pieces of regulation governing Sukuk, Islamic securities, Shariah advisors, and the capital market Shariah advisory council were introduced last year.

The government-owned Housing Development Corporation also issued the first corporate Sukuk while the first Islamic hire-purchase product was unveiled by a private company, she noted.

In addition, the government formed the Maldives Hajj Corporation – of which Dr Muneeza is the chairwoman – as a pilgrimage fund and issued Halal certificates for fish products.

The Maldives Transport and Contracting Company (MTCC) hired a Sukuk advisor for real estate projects commencing this year, she added.

“Furthermore, regulatory consents have been given to the Islamic banking window of Bank of Maldives and the Takaful window of Allied Insurance Maldives to start their operations. Some products of these companies have been given consent by the Maldives Monetary Authority,” she wrote.

The government also planned to form “a national-level technical committee to monitor and supervise sovereign Islamic finance issues,” she revealed.

“Definitely, 2013 is a super duper hit year for the growth of Islamic finance industry,” Dr Muneeza suggested.

Developments expected in 2014 meanwhile included the inauguration of “Islamic windows” by the Bank of Maldives and Allied Insurance. The government anticipated that “a large number of customers will switch from conventional banking to Islamic banking when this takes place.”

Islamic fund management would also be introduced this year while the government had plans to “introduce an Islamic finance centre that will not only provide offshore Islamic financial services, but this centre will act as the Islamic finance hub for the whole South Asia region.

(Minivan News / 06 News 2014)

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