Islamic banking industry: Oman sets up shariah supervisory board

DUBAI: 

Oman’s central bank has set up a shariah supervisory board to help oversee the sultanate’s Islamic banking industry, a centralised model that is increasingly being adopted across the global industry but remains a rarity in the Gulf.

Shariah boards are groups of scholars who rule on whether financial instruments and activities follow religious principles, such as bans on interest payments and pure monetary speculation.

Oman was the last nation in the six-member Gulf Cooperation Council to introduce Islamic finance, publishing rules for it in 2012. The introduction of a central shariah board could now speed up product development, limit costs for Islamic banks and facilitate issues of sukuk (Islamic bonds).

The central bank appointed five members to its shariah board, which will have direct oversight of Islamic banking institutions, similar to the approach taken by regulators in Malaysia, Pakistan, Morocco and Nigeria.

The five members were chosen from seven nominated candidates, the central bank said without naming them.

By contrast, most Gulf countries practice self-regulation of Islamic financial institutions, leaving shariah boards in each commercial bank to determine which products are permissible. Bahrain’s central bank has a shariah board that vets its own products.

The United Arab Emirates has said it plans to follow the centralised approach, backing this up with specific legislation, which could help reduce the risk of conflicting rulings from the shariah boards of various Islamic banks. It has not given a timetable for the legislation.

In Oman, two full-fledged Islamic banks have been established, Bank Nizwa and al izz Islamic, as well as several Islamic windows operated by conventional banks.

Sukuk issues are being considered by the government and banks but progress has been slow, with only real estate developer Tilal Development Co making a small sukuk issue last November.

Oman’s finance ministry plans to issue 200 million rials ($519.5 million) worth of sovereign sukuk early next year, the government’s first such issuance, the chief executive of Bank Nizwa said last month.

The Islamic unit of Bank Muscat, Oman’s largest lender plans a dual-currency sukuk deal worth around $300 million as part of a 500 million rial sukuk programme which the bank’s shareholders approved in March.

(The Express Tribune / 09 October 2014)

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Tiny Liechtenstein plans push into Islamic finance

The European principality of Liechtenstein is launching a drive to attract Islamic financial business, aiming to capitalise on its well-established wealth management industry.

Competition is increasing among financial centres around the world to capture a slice of Islamic finance, which is expanding beyond its traditional bases in southeast Asia and the Middle East.

Most efforts so far have focused on the booming market for sukuk (Islamic bonds); Luxembourg, Britain and Hong Kong, seeking to draw more issuance activity, have made debut issues of sovereign sukuk this year.

But Liechtenstein, a tiny Alpine state with a population of about 36,000, is concentrating instead on wealth management through a coordinated effort by the public and private sectors.

The financial regulator is exploring tax and legal amendments to facilitate sharia-compliant wealth management, including aspects of inheritance and corporation law, said Urs Philipp Roth-Cuony, chairman of the Financial Market Authority (FMA).

"It seems pretty much feasible to combine principles of Islamic finance with Western standards. London does it, Luxembourg does it, others do it - that should not be a stumbling block," Roth-Cuony said in an interview.

A conference in Liechtenstein on Oct. 28 will feature sharia scholars and industry bodies including the Malaysia-based Islamic Financial Services Board (IFSB) and the Bahrain-based International Islamic Financial Market.

The FMA may eventually join the IFSB, becoming only the second regulator in Europe to do so after Luxembourg.

"If we are successful in starting a process of building an Islamic financial market here, then of course the IFSB is the first place to go."

Islamic finance follows religious principles which shun activities such as gambling and outright monetary speculation.

Liechtenstein, known a decade ago for its banking secrecy laws which permitted some of the world's wealthy to avoid taxes, has since reformed its regulation and now markets itself as a centre of socially responsible investing.

As of December, there were 119 asset management firms in Liechtenstein which held 29.8 billion Swiss francs ($31.3 billion) in assets, a 26.6 percent increase from a year earlier.

Liechtenstein's biggest bank LGT, owned by the principality's royal family, has links to the Middle East through operations in Bahrain and Dubai.

Islamic finance could help to develop stronger or altogether new links, said Prince Michael von und zu Liechtenstein, a member of the royal family and chairman of Industrie- und Finanzkontor, a Vaduz-based wealth management firm.

"We hope that investors and businesses from the Middle East and the Asian region will recognise our efforts, which then would help to forge stronger relations."

A working group of policy makers and business associations will be set up to help direct Liechtenstein's Islamic finance push, said Dirk Zetzsche, professor of law at the University of Liechtenstein, which is co-hosting this month's conference with the FMA.

The university is considering activities such as academic research into Islamic finance, he added. This would include studies of the cost efficiency and ethical orientation of the intermediary structures often used in Islamic finance.

(Reuters / 09 October 2014)

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Sharia Loans To Be Introduced For UK Students

A government consultation paper has revealed the development of student loans compliant with Sharia law.

Under Sharia law, Muslims are forbidden from taking out loans which accrue interest.

The Institute of Islamic Banking and Insurance states that ‘as a matter of faith, a Muslim cannot lend money to, or receive money from someone and expect to benefit – interest (known as riba) is not allowed. Riba also applies when borrowing money, as the lender profits from the applied interest. To comply with Shariah, any loan must be Qard (free of profit)’.

“It has been a bit of a challenge, particularly having to balance my studies, social life and a job to cover my expenses”

The Department for Business, Innovation & Skills is to develop an alternative finance model following four months of consultation and calls by national Muslim organisations.

It is hoped that the new system will improve the number of Muslim students deciding to go to university, as finances will no longer be a deterrent.

A second year student who has chosen to fund his own studies said: “It has of course been a bit of a challenge, particularly having to balance my studies, social life and a job to cover my expenses”.“

The new Sharia compliant loan system will be welcomed by many. It will greatly increase access to further education”

They continued: “I’m fortunate to have a well-paying job with good hours to help me through but sadly this isn’t the case for everyone. The new Sharia compliant loan system will be welcomed by many. Apart from making life easier for otherwise self-funded students, it will greatly increase access to further education”.

Current student loans carry an interest rate at the Retail Price Index (RPI) plus 3% and repayments are based on salary once working.

The government has worked with Islamic finance experts to develop a system based on the Takaful structure which is already widely used in the Muslim community.

Students will receive loans from the Takaful fund and will pay it back interest free. The funds will then be loaned out to other students, based on a concept of mutual participation and guarantee.

“The government must now prioritise the introduction of a legislative vehicle to implement an alternative finance model”

Students will obtain finance from the fund by applying in a similar way to conventional student finance. They would agree to repay a Takaful contribution, which would be a charitable contribution for the benefit of other members.

The consultation received over 20,000 responses, with 93% claiming that interest-based loans conflicted with religious students’ beliefs and that a Sharia alternative was needed.

The Federation of Student Islamic Societies (FOSIS) welcomed the government’s declaration of support, with vice president of student affairs Ibrahim Ali saying: “Our view is that the government must now prioritise the introduction of a legislative vehicle to implement an alternative finance model.

“We will work with our partners in the run up to the general election to secure commitments from the main political parties to introduce the requisite legislation early in the new parliament.

(Impact / 06 October 2014)

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Oman Sets Up Central Sharia Board To Boost Islamic Finance

Oman’s central bank has set up a sharia supervisory board to help oversee the sultanate’s Islamic banking industry, a centralised model that is increasingly being adopted across the global industry but remains a rarity in the Gulf.

Sharia boards are groups of scholars who rule on whether financial instruments and activities follow religious principles, such as bans on interest payments and pure monetary speculation.

Oman was the last nation in the six-member Gulf Cooperation Council to introduce Islamic finance, publishing rules for it in 2012. The introduction of a central sharia board could now speed up product development, limit costs for Islamic banks and facilitate issues of sukuk (Islamic bonds).

The central bank appointed five members to its sharia board, which will have direct oversight of Islamic banking institutions, similar to the approach taken by regulators in Malaysia, Pakistan, Morocco and Nigeria. The five members were chosen from seven nominated candidates, the central bank said without naming them.

By contrast, most Gulf countries practice self-regulation of Islamic financial institutions, leaving sharia boards in each commercial bank to determine which products are permissible. Bahrain’s central bank has a sharia board that vets its own products.

The United Arab Emirates has said it plans to follow the centralised approach, backing this up with specific legislation, which could help reduce the risk of conflicting rulings from the sharia boards of various Islamic banks. It has not given a timetable for the legislation.

In Oman, two full-fledged Islamic banks have been established, Bank Nizwa and al izz Islamic, as well as several Islamic windows operated by conventional banks.

Sukuk issues are being considered by the government and banks but progress has been slow, with only real estate developer Tilal Development Co making a small sukuk issue last November.

Oman’s finance minstry plans to issue OMR200 million ($519.5 million) worth of sovereign sukuk early next year, the government’s first such issuance, the chief executive of Bank Nizwa told Reuters last month.

The Islamic unit of Bank Muscat, Oman’s largest lender, plans a dual-currency sukuk deal worth around $300 million as part of a OMR500 million sukuk programme which the bank’s shareholders approved in March.

(Gulf Business / 09 October 2014)

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Portfolios:Azzad Asset Management Likes Non-Conventional Sukuk

Sukuk, Islamic equivalent bonds, are in and of themselves beyond the boundaries of many portfolio managers of advanced economies even in the most flexible mandates, but in the Islamic finance world, it's the non-Islamic sukuk issuers that are non-conventional, and this is where Azzad Asset Management sees value.

"Currently we see value in some of the non-conventional issuers," said Ihab Salib, the lead portfolio manager for the firm's sukuk fund, the Azzad Wise Capital Fund (WISEX).

"As maiden issuers in the market, they need to price the sukuk generously so as to tempt investors," he commented.

South Africa's September issuance was a case in point.

The 2020 South African government sukuk offers a 20 basis point pick up in return relative to the conventional debt of the same maturity, he argued.

South Africa was the latest non-Muslim country to grace the ranks of sukuk issuers with a $500 million June 2020 sukuk issuance in September.

Particularly noticeable was the UK government debut in June with a GBP200 million July 2019 sukuk issuance, which, like South Africa, was largely oversubscribed, with orders totaling about GBP2.3 billion, according to the UK Treasury. The profit rate of 2.036% was "in line with the yield on gilts of similar maturity," the UK government said.

Just as importantly, "allocations have been made to a wide range of investors including sovereign wealth funds, central banks and domestic and international financial institutions," it added.

Illustrating the growing worldwide interest in tapping the pools of Muslim wealth, investors were not only from the Middle East, but also from other centers for Islamic finance, notably Asia and Britain.

Likewise, the investor base for the South African issuance went beyond the Middle East and Asia, which still took the lion's share with 59%. The transaction was indeed allocated to European investors (25%), U.S. investors (8%), the remaining balance being distributed to "the rest of the world."

In September, Hong Kong also issued its inaugural sukuk, with 11% distributed to fund managers, 56% to banks and private banks, 30% to sovereign wealth funds, central banks and supranationals, and 3% to insurance companies.

On the corporate side, Goldman Sachs also tapped the sukuk market in September.

Going forward, "although 2014 has been a slow year for sukuk issuance, we are quite positive on future issuance from both sovereign and corporate issuers," Azzad Asset Management's Salib said.

"Over the next year we expect to see more non-conventional issuers tap the sukuk market for funds, as the market offers issuers a large and stable capital pool," he continued, a development he would welcome as an investor.

Sukuk are financial certificates representing ownership in real assets as well as the right to the cash flows they generate and to the proceeds from the sale of the assets. As such, they comply with Islam's prohibition on charging or paying interest. Traditional bondholders, on the other hand, own debt.

In addition to non-conventional issuers, Salib sees "some value in the Dubai complex" despite the spread tightening since the beginning of the year, especially the hospitality and retail sectors.

More generally, from a fundamental standpoint, the Gulf Cooperation Council, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, "offers the market the greatest support," Salib commented.

"Being a low population, hydrocarbon rich region whose governments run fiscal and current account surpluses, the economic backdrop is extremely conducive," Salib said, who also pointed out the solid balance sheets of individual issuers, many of them government owned.

Yet, sukuk are not entirely insulated from interest rate risk.

And as the Federal Reserve is preparing to hike rates, most likely next year, with potential implications worldwide, Azzad Asset Management is trying to limit its interest rate risk "by staying in fairly short-dated securities."

"Of course the sukuk market does not live in isolation to the rest of the fixed income markets, and the next cycle of increasing rates will prove a challenging headwind to demand," Salib said. "However the unique nature of the market along with its stability should see positive demand mechanics continue."

Yet, the market is quite illiquid relative to the traditional bond market despite a growing demand and supply and a broadening of the investor base in the sukuk market.

"Typically sukuk are bought and held right through to maturity by the investor base, and although a good thing in terms of price action, this can make it quite challenging when attempting to trade securities," he said.

(Deutsche Borse Group / 06 October 2014)

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Pakistan: State Bank of Pakistan Launches KAP Study Report On Islamic Banking

Karachi—State Bank of Pakistan (SBP) launched the survey-based report titled “ Knowledge, Attitude and Practices of Islamic Banking in Pakistan.” SBP Governor Ashraf Mahmood Wathra formally launched the report here at SBP’s main building at a ceremony which was also attended by bank presidents and senior industry representatives, Shariah scholars, reputed members of academia, officials of United Kingdom’s Department for International Development (DFID), World Bank and other reputed national and international organizations. 

The SBP Governor encouraged the industry to focus on research and development to develop innovative financial solutions that could meet needs of growing clientele of Islamic banking industry. He emphasized that while Islamic banking industry had established its foot prints in international and local market, the industry should not be complacent and stride towards bringing it closer to the key objectives of Islamic economic system: transparency, social justice and equitable distribution of wealth. He formally launched the KAP report and appreciated the efforts of SBP’s Islamic Banking Department and EdBiz Consulting Limited for successful completion of the project and thanked DFID for financing the study. A detailed presentation on the survey findings was delivered.

The first known initiative of its kind, the study has quantified the demand for Islamic banking in the country both for retail and corporate customers and has also identified demand supply gaps. The survey has a nation-wide representation of 9,000 households (banked and non-banked) and 1,000 corporates. According to the survey, there is an overwhelming demand for Islamic banking in the country that is evenly distributed amongst rural and urban areas, varied income strata and education levels. The analysis pent-up demand for Islamic banking is higher amongst retail (95 %) than businesses (73%). The study indicates that individuals in rural areas or in low-income brackets have relatively limited access to financial services. 

This highlights a huge opportunity for Islamic microfinance in rural areas. The study recommends that the role of Shariah scholars needs to be further enhanced and made more public in promoting Islamic banking and finance. Lack of general awareness about Islamic banking has emerged as one of the key challenges confronted by the industry. The study indicates that rural markets, SME, agriculture and microfinance sectors have got huge financing needs and are potential markets for Islamic banking. It can also be inferred from findings of the study that Islamic banks are desired to significantly improve their investments in expanding their outreach to 2nd and 3rd tier cities both to improve their visibility across the country and also to increase their interaction with local businesses and trading communities.

According to survey findings, given the supply-demand gaps, there is huge potential for further development of Islamic banking in Pakistan. SBP Deputy Governor Saeed Ahmad in his closing remarks informed the participants of measures taken by the central bank to address the keys challenges facing the Islamic banking industry. Mentioning the resolve and commitment of the Government of Pakistan for promoting Islamic banking in the country on sound foundations the Deputy Governor shared with the audience progress of the National Steering Committee on Islamic Finance.

(Pakistan Observer / 05 October 2014)

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ZAKAT takes lead, distributes cattle feed

Srinagar, Oct 5: A Non-Government Organization Zakat Foundation has taken a lead in flood hit areas of south Kashmir by providing cattle feed and stocks of hay to owners of these animals.

 A spokesman of Zakat Foundation in a statement here said: When unprecedented and devastating floods hit the Valley thousands of cattle heads were washed away by it. People of south Kashmir not only lost their stored grain and standing crops but also cattle and poultry. The condition of cattle and sheep, that survived flood, is painful and agonising. The cattle heads having escaped fury of catastrophic flood are fast falling a prey to starvation. With not even a straw of grass left in submerged areas and stocks of hay, wheat bran and rice bran washed away, most of the cattle are emaciated and inching towards death. 

ZAKAT took lead in providing relief to the starving cattle. The Trust distributed truck loads of cattle feed and fodder amongst farmers of some of the affected areas. Trust proposes to organise such relief in other flood affected villages, where cattle feed, wheat bran, rice bran and fodder would be distributed amongst the affected people.”

 The spokesman said ZAKAT is also engaged in providing relief to flood affected people of south Kashmir. It has till date distributed 50,000 Kgs Rice, 6,000 Kgs Wheat Flour, 25,000 Lit.  Mineral Water, 2,500 Kgs Pulses, Truck load of vegetables and blankets and bedding amongst the flood victims. In health sector it has organised Free Medical Camps at Namblabal Pampore, Patalbagh, Hatiwara, Drangbal and Sub District Hospital, Pampore and provided free medicine to the patients, who visited the camps. It has distributed medicine including Insulin, antibiotics and 1,00,000 Chlorine tablets directly and through local hospitals amongst affected people. 

 Trust intends to organise such camps at Kakapora, Lelhar, Hajibal, Mohanvij, Reshipora, Banderpora, Goripora, Wandakpora, Dangerpora, Barsoo, Awantipora, Padgampora, Larkipora, and other flood affected areas, the spokesman added.

(Greater Kashmir Srinagar / 05 October 2014)
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