Prospects of Islamic banking in Pakistan

LONDON: 

A hallmark of Islamic banking and finance in 2015 has been the resilience of Islamic retail banks in the Gulf Cooperation Council (GCC) countries in the wake of historically low oil prices.

The year has proven to be a testing period for the global Islamic financial services industry, with the gradual exit of the likes of Islamic Bank of Asia in Singapore and the visible diminishing enthusiasm in Islamic banking and finance of global banks.

Pakistan ranks third in Islamic finance awards

Furthermore, Islamic asset management industry has also been slow in attracting new players from the western world. While the likes of Amana Growth Fund managed by Saturna Capital and Shariah-compliant funds by Azzad Asset Management have continued to excel, new players like Arabesque Asset Management, despite having some of the most impressive investment philosophies and methodologies, have yet to make a mark.

SEDCO Capital is another success story. It has shown great commitment to offer Shariah compliant funds with social responsibility in the heart of its investment philosophy.

However, other socially responsible Shariah compliant funds have not been as successful as the ones mentioned. For example, F&C Responsible Shariah Global Equity Fund’s assets under management (AUM) have shrunk from over $50 million in 2014 to $4.5 million at the end of October 2015.

There is some anecdotal evidence that sensitive investors prefer dealing with fund managers who manage only Shariah compliant funds and portfolios. Conventional fund managers managing compliant funds are fast going out of favour of Islamic investors. With this backdrop, Islamic asset management industry is poised for growth in Pakistan, where Islamic financial institutions adhere to Shariah standards more religiously than in many other countries.

This is consistent with what has for long happened in Islamic retail banking, which is dominated by full-fledged Islamic banks. Conventional banks offering Islamic financial services through dedicated Islamic branches or Islamic windows only feature marginally in Islamic retail banking.

There are certain exceptions to this general observation.

The likes of ADCB in the UAE and Bank Alfalah in Pakistan operate vibrant Islamic windows and close sources suggest that these banks are preparing for full-fledged subsidiary Islamic banks.

MCB Bank in Pakistan has already received a licence for full-fledged subsidiary Islamic banks and is in fact preparing for its full launch in 2016. On December 16, 2015, the board of directors of MCB Bank Limited approved the sale of the bank’s entire Islamic banking operation to its wholly-owned subsidiary MCB Islamic Bank Limited (MCBIBL) for Rs7.946 billion. The bank’s extraordinary general meeting to approve the transaction is scheduled for 8 January 2016.

While the global Islamic financial services industry continued to grow, it is the second consecutive year of single digit growth – 7.3% in 2015 – as opposed to 9.3% in the previous year. In fact, Islamic banking and finance has grown with a declining rate since 2013 when it grew by only 12.3%, compared with the 2012’s growth of 20.2%.

In this context, predictions by some industry observers and consultancy firms of the estimated size of the industry to reach $3.5 trillion seem to be exaggerated.

The Global Islamic Finance Report (GIFR) 2015 predicted that Islamic financial assets would reach $5.3 trillion by the end of 2020. However, in expectation of further slowdown in the growth of Islamic financial assets in the wake of low oil prices, continued social disorder and political conflict in some of the key IBF markets, Edbiz Consulting, the publisher of the report, has decided to revise future size estimates.

Situation in Pakistan

In Pakistan, however, Islamic banking has continued to grow, with share of Islamic banking assets in the national banking sector having grown to 11%. The industry is poised for further growth, as the fundamentals are right.

The State Bank of Pakistan, which commissioned Edbiz Consulting to conduct a survey ‘Knowledge, attitude and practices of Islamic banking in Pakistan’ in 2014, has confirmed time and again that there is an overwhelming and evenly distributed demand in the urban and rural areas of the country for Islamic banking.

Pakistan slips in WEF competitiveness rankings

According to Edbiz Consulting, the demand for Islamic banking is as high as 95% among the households at the retail level. “Demand stands at 73% among the businessmen,” according to the SBP survey, which is based on 9,000 households nationwide and includes banked and non-banked customers, and 1,000 corporates.

(The Express Tribune / 28 December 2015)

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

Egypt takaful industry set for 20% growth in 2016

Islamic insurance has been gaining ground in Egypt as customers seek out sharia-compliant products.

The takaful industry in Egypt is expected to growth around 20% in 2016 as more players enter the market to meet robust demand for Islamic insurance products and services, the chairman of the country's insurance watchdog said.

Abdel-Raouf Kotb, chairman of the Insurance Federation of Egypt (IFE), said that growth has also been fueled by the introduction of new products to meet customer needs, such as insurance against risks from political violence as well as credit insurance, which had proven popular especially after local banks expanded their lending policies.

"The micro insurance instrument is expected to be issued soon to insure the production tools of lower income segments against theft and fire. It also aims to bridge the micro enterprises funding gap in Egypt," Kotb told Zawya.

Takaful insurance companies accounted for 12% of Egypt's insurance market during the period from January to August 2015, compared with a share of 8.75% for the whole of 2014, according to a report issued by the Egyptian Financial Supervisory Authority ( EFSA ) last November.

EFSA said that premiums of new and existing life takaful insurance certificates rose 38.7% to USD 1 billion at the end of October 2015, compared with USD 900 million a year earlier. New and renewed issues of property insurance witnessed slight growth of 1.1% during the period to reach USD 639 million.

Kotb said the number of takaful companies in Egypt has risen to nine with the entry of Emirate Egyptian Takaful Life Insurance Co., a subsidiary of SALAMA (Islamic Arab Insurance Company), last year.

"Growth in the takaful insurance sector is due to the acceptance it enjoys from large segments of clients looking for products that comply with the rules of Shariah, as well as from the Islamic finance sector's expansion in Egypt."

"Premiums of takaful insurance on properties amounted to USD 62 million as of the end of June 2015, which represents about 15.4% of the total insurance premiums worth around USD 385 million during the same period," said Kotb, who is also managing director of Egyptian Saudi Insurance Home (ESIH).

MARKET EXPANSION

Kotb said the ESIH has been strengthening its financial position in anticipation of the market's expansion by raising its capital to EGP 120 million (USD 15.3 million) after a recent injection of EGP 20 million.

"The premiums of ESIH stood at EGP 190 million in 2015, registering an increase of 4% compared with the year before, which was EGP 182 million. The company is targeting a growth of 13% in its direct premiums in 2016, which amounts to EGP 215 million," he said.

ESIH's total investment portfolio grew 11.6% to EGP 432 million in 2015, up from EGP 387 million by the end of June 2014.

Established in 2003, ESIH is the first takaful insurance company in Egypt and is backed by Gulf Arab investors, with contributions from Saudi and Emirati investors in the company estimated at 86.5%.

According to the Egyptian Financial Supervisory Authority , overall investments of insurance companies and cooperative insurance societies amounted to USD 7 billion in 2015 distributed across various investment channels, namely fixed bank deposits (26.1%), treasury bonds and government securities (23.8%), securities for sale (18.2%) and loans against insurance documents (1.3%).

(Zawya / 05 January 2015)

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

Islamic finances face massive demand boom in Africa

Africa is expected to see a massive population boom, many of whom will grow up Islamic. As such, demand for Islamic products and services on the continent are expected to rise in the coming years. Financing projects through Islamic financial instruments has massive potential within the African region. One such instrument is sukuk, which is a form of bond between the issuer and issuee, whereby risks are shared, while no interest is charged on the issued amount. This is beneficial to projects that require long term financing.

The ‘Islamic economy’ refers to a wide range of commercial activities and geographies that span the world. Islamic derived Sharia-compliant bonds, halal food, travel and fashion all make up components of the wider global market that spans from Niger to the financial centres of Kuala Lumpur, which was valued at $3.6 trillion in 2013. The Islamic finance side of the equation was in 2014 valued at $1.8 trillion by BearingPoint, and is project to grow to $3 trillion by 2018.

Recent research by the Economist Intelligence Unit (EIU), a consultancy that provides business analysis for decision making, concerns itself with the value of Islamic financial propositions for both the Islamic and non-Islamic players in the Sub-Sahara African region. The EIU research report, titled ‘Mapping Africa’s Islamic economy’, was commissioned by the Dubai Chamber and used desk research and interviews with experts as its basis.

(Consultansy.UK / 04 January 2015)

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

RAM Ratings reaffirms AA3/Stable rating of BGSM Management’s Sukuk for 2016

"Despite heightened competition, Maxis’ restructuring efforts and new product offerings are beginning to bear some fruits in its last three financial quarters ending September 2015. Maxis has regained its leadership in terms of subscribers base in the beginning of this year with 35.2 per cent of the total 37 million mobile subscribers as at end-September 2015. Maxis is also the largest mobile operator by revenue and profitability, commanding 37.5 per cent of the total RM17.14 billion of total revenue registered by incumbents and 41.1 per cent of cumulative MYR 7.71 billion of operating profit before depreciation, interest and tax (OPBDIT) for 9M 2015. Further, Maxis maintained its sturdy cashflow-generating ability, underpinned by its strong profitability, with an OPBDIT margin of 48 per cent in 9M FY 2015 – the highest among local peers.

"Given that the cellular telephony sector is saturated, with a mobile penetration rate of 144.8 per cent (end-June 2015), local telcos are expected to face continuous decelerating subscriber growth, increasing price competition and heavier spending on capex that could further compress their margins. Nonetheless, the mobile-broadband segment still has ample room for growth, in line with the current voice-to-data shift underscored by still-low household and population broadband penetration rates of 70.2 per cent and 68.3 per cent respectively.

"While Maxis had lifted its performance and market position in 2015, the sustainability of such progress remains to be seen, in view of the heightened competition in the sector. Going forward, Maxis will continue to prioritise capex which could reduce dividend payouts. We envisage BGSM Management (at group level) to register strong funds from operations debt coverage of 0.23-0.27 times between 2016 and 2018."

(C P I Financial / 03 January 2015)

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

RAM Ratings reaffirms AAA(fg) rating of Mydin’s Sukuk

Excluding the financial guarantee, Mydin Holdings’ stand-alone credit profile reflects its weak financial profile and the loss-making positions of its KR1M, SAM’s Groceria and mall segments. The Group is also exposed to execution and construction risks in relation to its aggressive expansion, and the competitive environment of the local mass grocery retail sector.

On the other hand, Mydin Holdings credit profile is supported by its position as one of the largest locally owned grocery retailers, and as the only prominent player across all retail formats (i.e. hypermarket, emporium, mini-market). The Group has built an extensive presence, mainly in Peninsular Malaysia, with 272 outlets as at end-October 2015. The Group has also established a strong following among its targeted low-to-middle-income customers and carved a niche among Muslim consumers, by offering fully halal products and an array of goods manufactured by local players not typically carried by its foreign-owned competitors.

Notably, Mydin Holdings’ pre-tax profit doubled to MYR 29.37 million for FY Mar 2015 after a weak showing in the previous year (FY Mar 2014: MYR 14.40 million), driven by the better showing of its emporiums, mini markets and KR1M. The improvement of its mini-market and emporium segments were due the closure of unprofitable outlets, reduction in operating expenses following cost cutting efforts as well as better stock replenishment after rectifying its logistics and warehousing issues. Meanwhile, losses from KR1M narrowed, supported by subsidies. However, we note that the Group’s new mall and its venture into the premium-retail segment (via SAM’s Groceria) recorded increased losses in FY Mar 2015 amid poor performance of its new outlets.

In line with its expansion plans, Mydin Holdings’ borrowings had increased year-on-year from MYR 566.97 million to MYR 729.15 million as at end-FY Mar 2015. Correspondingly, its gearing ratio weakened to 1.47 times from 1.16 times. Including its operating lease commitments, Mydin Holdings’ adjusted gearing ratio stood at 2.60 times as at end-March 2015.

Looking ahead, Mydin Holdings remained focus on expanding in the hypermarket segment. “Factoring the required borrowings to fund its expansion, Mydin Holdings’ adjusted gearing is expected to stay elevated at about 2.5-2.8 times over the next few years,” says Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. We remain concerned on the associated long gestation period for its new hypermarkets and the potential negative impact on its financial profile. “Mydin Holdings’ funds from operations debt cover is envisaged to stay depressed at around 0.1 times due to additional debt to fund expansion,” adds Lim.

(C P I Financial / 03 January 2016)

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

WGC draft on gold standard for Islamic finance

The World Gold Council is exploring the creation of a Shariah Standard on Gold, which will provide guidance from the Shariah perspective on the usage of gold in financial and investment transactions for Islamic financial institutions and participants.

The Standard also aims to increase transparency and harmonisation regarding the use of gold in various market practices. A draft of the Standard has been prepared for the Council by Amanie Advisors, a DIFC-based consultancy and training agency specializing in Islamic finance.

As the Islamic financial services market grows in size and importance, so does the need for a greater understanding of the intricate matters of Islamic financial services and the application of Shariah guidance. The Islamic financial services industry is also witnessing greater implementation of internationally recognised and standardised Islamic finnce guidance.

The World Gold Council is calling for interested parties active in Islamic financial services to submit their responses to the development of a Shariah Standard on Gold. The council says that it is vital for organisations active in Islamic financial services to play a role in the development of the Standard.

The council wants to create a Standard that meets the requirements of all active participants in the market. The Standard will enable organisations to work more efficiently in creating Shariah compliant gold products, it will enhance access to gold in the Islamic world and it will help to address the liquidity management issues currently facing the industry.

The deadline for feedback has been extended to 31st January 2016 due to requests for more time from industry participants. An Arabic version of the Standard will be available shortly, the council said on its website.

(Menafn.Com / 03 January 2016)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic finance in Africa in its infancy but underway

Islamic finance has historically been dominant in Malaysia and the Gulf Cooperation Council (GCC). However, over the last year, Islamic finance has expanded its footprint throughout the Middle East, Indonesia, the United Kingdom, Luxembourg and Hong Kong. In recent months, several countries in North Africa and some Sub-Saharan African countries are already planning Sukuk debuts, including Cote d’Ivoire, Tunisia, Egypt, Nigeria and Kenya. This follows first-time issues by Senegal and South Africa. Islamic finance activities include Islamic banking, Sukuk issuance, Takaful (insurance) and microfinance. Despite this growth, Africa still has milestones to reach before it can establish itself as a major player in Islamic Finance. Why? Significant challenges revolve around the lack of a concrete regulatory framework.

African countries are working to develop their legislative and regulatory frameworks to encourage the growth of Islamic institutions and activities to accommodate Islamic finance further. Earlier this year, the G20 group of nations' decision to examine the use of Sukuk to finance infrastructure investment could, in time, bolster the size of the Sukuk market, including Africa.

Significant challenges lie ahead, notably, in establishing a legal structure and legislation that are acceptable to governments, investors and the Sukuk's Shari’ah boards. In Africa, there are no comprehensive Islamic banking laws, save for finite initiatives in a small number of countries.

These challenges will likely lead to a longer time frame of Islamic finance implementation and higher costs as opposed to more conventional forms of funding, at least until a standardised framework is established. However, several important trends will provide the necessary impetus for the development of Islamic finance in Africa. This includes growing government support for Islamic finance, increasing acceptance of Sukuk and Islamic finance more broadly and large investment and financing requirements in Africa.

Other bodies are also taking steps that could help, namely the Islamic Development Bank (IDB) and the Islamic Corporation for the Development of the Private Sector (ICD) that provide technical assistance and credit guarantees to member countries that want to fund infrastructure projects. In addition, the International Monetary Fund has created a working group to build and develop expertise in Sukuk.

Furthermore, Islamic finance could enable African sovereigns to broaden their investor base, providing some diversification away from traditional Eurobond investors and local market participants. As African governments tap the Islamic finance market, it is anticipated that other issuers such as state-owned companies and African banks could, in time, benefit from this additional source of funding.

Regional Developments

In Senegal, the Republic has successfully launched a XOF 100 billion Sukuk (approximately $170 million. Source: Zawya). This Sukuk represents a new era in the use of Islamic financing instruments in public policies. Dakar is aiming to position itself as the continent’s hub for Islamic finance. Various activities are being held including training and seminars for senior executives in the finance, investment and pilot projects in the Islamic finance industry.

Over the last few years, South Africa has introduced Islamic compliant financial structures. After the issuance of the inaugural South African sovereign Sukuk during 2014, the country’s National Treasury instituted further amendments to the National Taxation Act that saw them widen the definition of Sukuk. Moreover, the Amendment Act of 2010 recognised arrangements such as diminishing Musharakah, Murabahah and Mudarabah as credible alternatives to their conventional financing agreements, which enable banks to offer Shari’ah compliant products.

West Africa’s Cote d’Ivoire has set in motion its plans to conduct a roadshow for the first tranche of its debut Sukuk program in the fourth quarter of this year. Bruno Kone, Minister of Post, Information and Communication Technologies of Cote d’Ivoire since June 2011, reported that the government intends to issue Sukuk before the end of the year. In April 2015, the Republic mandated the ICD as lead manager for its inaugural Sukuk program worth XOF 300 billion (approximately $510 million), which will be issued over the 2015-20 period in two equal (Source: Reuters). In East Africa, the government of Uganda has approved the Financial Institutions (Amendment) Bill 2015, paving the way for Islamic banking and finance in the country. The country is said to be seeing interest from both foreign and local financial institutions to offer Shari’ah compliant services to the nation.

The Kenyan government has an ongoing partnership with the Qatari government to try and develop capacity and also develop appropriate legal and regulatory framework to make it possible for the rollout of a Sukuk for the Kenyan Government, which is expected to be in the near future.

Conclusion

Islamic finance is very much in its infancy in Africa. While the potential is important due in part to demographic factors and the need to broaden the source of funds required to support Africa’s large infrastructure deficit, Islamic finance is constrained by the absence of a suitable legal and regulatory framework in many countries. However, important Initiatives are underway to generate momentum for Islamic financial products.

(C P I Financial / 30 December 2015)

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