Is Islamic Finance ready for more standardization?

As new market participants enter the scene, Shariah banking continues to grow despite the threat of a global recession. But is the industry also progressing in terms of unity and transparency?

When bankers from East and West gathered in Manama at the 18th Annual World Islamic Banking Conference in November 2011, one topic was prevalent at nearly all discussion rounds: standardization.

But while Islamic Finance is expanding to new frontiers such as Uganda, France, Egypt, South Korea and Oman, the objective to make Shariah-compliant financial products more standardized appears more and more like a far-fetched daydream. 

Let's take France, with its legal environment based on the Napoleonic Code civil. The French jurisdiction differs greatly from British Common law or Case law, the predominant legal framework in England, the centre of Islamic finance in Europe. How shall a financial solution, let's say an Islamic trade financing based on Murabaha, be used by a London-residing bank if it was legalized in France? Calls for more standardization overlook the individual nature of national jurisdictions, which still exist even in the 27-member states European Union.

The Common law is also used in the Dubai International Financial Center (DIFC), one of the major Islamic banking hubs in the Middle East, while the jurisdiction in the UAEis based on a mix of the French Code Civil and Islamic law. "Both legal environments differ too much from each other," says Houram Houssani, Partner at the GCC's largest law firm Al Tamimi & Co. in Dubai. "This is why we think the DIFC will, legally, continue to exist as a state in the state within the UAE." 

At the same time, Qatar has implemented a strict separation between Islamic and conventional banking, banning Islamic windows at all conventional lenders in the country, a first in the industry.

Divergent views on Islamic Finance's future

Anecdotal evidence also shows that the leading market participants do not agree at all in the direction Islamic Finance shall take, as AMEinfo.com has learned when from interviewing experts at conferences. One Islamic Finance consultant based in Dubai blames some banks for not operating in an Islamic way at all but "running a Shariah-bank with a conventional window". Other professionals are outraged that some financial firms try to develop Islamic derivatives or even Islamic hedge funds despite the fact that Shariah bans interest, short-selling and speculation. 

In some cases, rules set by the Islamic Financial Services Board (IFSB), one of the most accepted international standard setting organizations, are even stricter than the guidelines for the conventional world. According to Rohit Verma, product management director at Oracle Financial Services, the IFSB "has stricter capital requirements than those proposed in Basel III, with tier 1 and total capital requirements currently standing at 8% and 12% respectively. The minimum common equity requirements for Basel III are set at 4.5% and total capital requirements have been set at 8% with a 2.5% buffer," Verma writes in an article published in New Horizon (Issue October - December 2012). Although Basel III does not distinguish between conventional and Islamic banks, the rules are primarily set for the conventional world, as the Shariah finance universe stands for 1% of the global economy. 

"Focus on a few things, not many things," is a favourite piece of advice from legendary investor Warren Buffet. Maybe it is time for Islamic finance to focus on its strengths, namely to provide a non-conventional, non-interest ethical way of banking and investing rather than trying to put the whole industry under one hat, labelled "standardization", a task which seems to be "Mission: Impossible" as more participants enter the scene. 

(AmeInfo.Com, 02 Jan2012)

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Mega Islamic bank may be launched in 2012

Islamic banks to subscribe $600mn while $400mn will be publicly raised

A long-awaited mega Islamic bank to be headquartered in Bahrain may be launched this year and $600 million of its $one billion capital will be contributed by Islamic banks in the Arab region, a senior banker has said.

The remaining capital will be subscribed by local sovereign wealth funds and other financial institutions and investors, said Adnan Youssef, chairman of the Beirut-based Union of Arab Banks (UAB).

Touted to be the world's largest Shariah-compliant unit, the bank idea was first floated in 2009 but was delayed many times because of the repercussions of the 2008 global fiscal distress, Gulf debt default problems, the European Union debt crisis and the political unrest sweeping the Middle East.

Youssef, also CEO of the Manama-based Al Baraka Banking Group, had first said the bank would have a capital of $10 billion and would be a joint venture between regional Islamic banks and other investors.

"This bank will have a paid up capital of $one billion, of which $600 million will be subscribed by Islamic banks in the region and the rest by other financial institutions, including SWFs," he told the UAB's magazine.

"In order for us to enter the market with this project, we must first get the $600 subscription, which we expect before the end of 2012.....the remaining shares will also be floated before the end of the year."

Demand for Islamic banking soared after the 2008 crisis and default problems and this has prompted several banks to set up Shariah-compliant units. Some banks have expanded existing units while others plan to launch such services.

Islam bans interest, investing in prohibited sectors and stipulates that risk and reward be shared among all those in the business venture.

Saudi Arabian businessman Sheikh Saleh Kamel, who owns Al Baraka, is behind the plan to create a giant Islamic bank to be owned by many Shariah-compliant.

Saudi Arabia's Al-Rajhi group was the world's largest Islamic bank at the end of 2010, controlled $49.2 billion in assets, nearly a fifth of the combined assets of the Arab region's Islamic banks, according to UAB.

The Kuwait Finance House (KFH) came second by assets, which stood at $43.7 billion at the end of 2010 compared with $39 billion at the end of 2009.

Dubai Islamic Bank (DIB) was ranked third, with assets of about $24.5 billion, followed by Abu Dhabi Islamic Bank (ADIB), with around $20.5 billion.

Al-Baraka Group came fifth, with nearly $15.8 billion while Qatar Islamic Bank (QIB) controlled the sixth largest assets of $14.2 billion.

The report showed Al-Rajhi also had the largest capital of around $8.08 billion at the end of 2010. KFH came second with around $4.3 billion, followed by DIB with nearly $2.6 billion, QIB with $2.5 billion and ADIB with $2.2 billion.

(Emirates 24|7 2012)

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Qatar leads the Muslims world with per capita income of $79,000 followed by Brunei and UAE

Qatar leads the Muslims world with per capita income of $79,000 followed by Brunei at $51,600, said Bank Sarasin’s report titled “The path to corporate transformation – converting a company to Islam”.

The UAE residents are estimated to be third richest in the Muslim world with per capita income of $49,600 (Dh182, 000), according to the latest study on Islamic finance and wealth management.

According to International Monetary Fund’s estimate UAE’s per capita income was Dh178, 351 ($48,597) in 2011, making its residents the sixth-richest in the world.

“Personal income across the Muslim world varies substantially. With the Muslim world having as many disparate parts as a mosaic has tiles, market complexities present huge challenges. But many of these markets are simply too big to ignore. For example, there are an estimated 140 million Muslims in India, 40 million in China, 14-20 million in Russia, 10-13 million in the US and about 30 million in the European Union,” Bank Sarasin’s analysts said in the report.

Gulf Cooperation Council (GCC) countries dominate the top list with Kuwait, Bahrain, Oman and Saudi Arabia ranked fourth, fifth, sixth and seventh, respectively. Kuwait’s per capital stood at $48,900, Bahrain at $40,300, Oman at $25,600 and Saudi at $24,200, Bank Sarasin said.

According to the report, citizens of Bangladesh, Sudan and Pakistan have the lowest income among the Muslim countries. Per capital income in Bangladeshi was estimated at $1,700, Sudan at $2,300 and Pakistan at $2,500.

Calls for unified GCC regulations

The report also called for the GCC to take a leadership role by establishing standards for the registration of Islamic investment products with one regulator. This would allow asset managers to market products to clients across the Gulf without the lengthy and costly registration process now required since products must now comply with different regulations in Bahrain, Kuwait, Saudi Arabia, Qatar and the UAE.

The report also noted the leadership demonstrated by Malaysia, not only in terms of Islamic finance, but with regard to halal production.

(Emirates24HoursBusiness,24 Feb2012)

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Regional banks push for share of Islamic product marketplace

Foreign and local banks are intensifying their struggle for the for the region's high net worth clients by expanding their Islamic Wealth Management services.

In wealth management there is no such thing as an "invisible hand", which economist Adam Smith described as the growth-driving result of a free market economy in his "Inquiry into the Nature and Causes of the Wealth of Nations", published in 1776. In fact, private bankers must work hard to lure High net worth individuals (HNWI) and Ultra-HNWI (clients with over $1m and over $30m at their disposal).

Take Swiss private banks Sarasin and Clariden Leu. Although both financial institutions have been in the DIFC since 2005 and 2007 respectively, they opened representative offices in Abu Dhabi in late 2010. Their moves were obviously not a luxury, but a necessity. According to one private banker: "Emirati investors in Abu Dhabi do not spend much time talking to you if you do not run an office in the UAEcapital."

Different stages of development

Islamic banking is likewise a necessity for any bank which aims to position itself strategically not only in Dubai, Doha and Riyadh but also in North Africa. Banks in post-revolutionary Egypt and Tunisia have taken steps to rival their peers in the Gulf region. But while the former states are more keen on developing Islamic retail banking in order to help SMEs to get on their feet, the GCC's Islamic finance industry is miles ahead. Wealth management in line with Shari'ah is considered the "missing link" between Islamic Corporate Banking and Islamic Retail Banking. 

Islamic Wealth management is mushrooming in the UAE. Barclays Bank Middle East has recently obtained a licence to operate an Islamic window within their branch in the DIFC. RBS Coutts, the private banking arm of the Royal Bank of Scotland announced last week that it has applied for a banking license to operate the DIFC and is aiming to hire 40 relationship managers by 2015.

"Basle" does not stand solely for regulation

According to Syrian-born Fares Mourad, Managing Director and Head of Islamic Finance at Swiss private bank Sarasin, which operates in the Gulf region in a joint venture with Alpen Capital: "Sarasin is currently the only private bank in Europe that offers customized solutions for cases which had been almost set under a taboo in the Islamic world, such as complex heritage cases or international real estate management and its related tax management." 

Gary Dugan, the Chief Investment Officer Private Banking at Emirates NBD, says that for Arab HNWI "there is no reason any more to fly out money to Switzerland, since Dubai has proven during the Arab Spring that it is a safe harbour within the Middle East". Dugan adds: "Our booking centres in Dubai, London and Singapore prove that we are well established in the world centres of Islamic Finance." 

But for conventional banks the scope has shrunk and expanded at the same time. While Qatar does not allow conventional banks to offer Islamic banking any more, Oman's Sultan Qaboos has allowed Islamic Finance in a decree earlier this year. Sarasin-Alpen acted fast to obtain a licence to offer Shari'ah-finance. But there is competition: HSBC Amanah, the UAE's local Falcon Private Bank in Abu Dhabi and Geneva-based Pictet also offer customised Shari'ah-compliant solutions. The pieces in the Islamic Wealth Management jigsaw are yet to be set. 

(AmeInfo.Com, 21 Feb2012)

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Philanthropy in Islam

PHILANTHROPY, in simple words, signifies acts done for the welfare of mankind. Every religion has philanthropic components to it. Islam is no exception; in fact, Islamic injunctions make acts of charity obligatory.

However, for many in the West, the concept of philanthropy is not a feature that is likely to be associated with Islam. Instead of kindness, compassion, mercy, generosity and love of mankind, ordinarily westerners tend to characterise Islam by such features as violence, terrorism, intolerance, authoritarianism, oppression of women, etc. There are two reasons for this grave misconception: their ignorance of the Quran and the traditions of the Prophet (PBUH); and the irresponsible attitude of certain Muslims. In fact, Islamic texts contain numerous injunctions to perform good deeds and to serve fellow humans.

The Quran says: “But righteous is the one who… gives away wealth, out of love for Him to the near of kin and the orphans and the needy and the wayfarer and to those who ask, and to set slaves free” (2:177). “So give to the near of kin his due, and to the needy and the wayfarer. This is best for those who desire Allah’s pleasure” (30:38).

Similarly, there are various sayings of the Prophet describing the significance of philanthropy: “You shall not enter Paradise until you have faith; and you cannot attain faith until you love one another. Have compassion on those who are on earth, and He who is in heaven will have compassion on you. God will show no compassion to him who has no compassion towards all human beings.”

“Doing justice between two persons is alms; and assisting a man upon his beast, and his baggage, is alms; and pure words, for which are rewards; and answering a questioner with mildness is alms; and every step which is made towards prayer is alms; and removing that which is inconvenience to man, such as stones and thorns, is alms.”

Philanthropy, in Islam, is of two kinds: obligatory and voluntary. Obligatory philanthropy consists of zakat and zakat-ul-fitr or fitrana; whereas, voluntary philanthropy includes the institutions of sadaqa and waqf.

Zakat is the share or portion of wealth that is obligatory upon a Muslim to give to fixed categories of beneficiaries, if the value of his assets is more than a specified limit. The beneficiaries of zakat are mentioned in the Quran: “(Zakat) charity is only for the poor, and the needy, and those employed to administer it, and those whose hearts are made to incline

(to truth), and (to free) the captives, and those in debt, and in the way of Allah and for the wayfarer” (9:60). In an Islamic state, the government is responsible for the collection and administration of zakat. Zakat-ul-fitr or fitrana is the charity which every Muslim, having a certain amount of wealth, pays at the end of the month of Ramazan. Zakat-ul-fitr is

mandatory on every Muslim not only on his own behalf, but also on behalf of all the persons he is in charge of.

Sadaqa not only means charity in the form of money or food, but includes every act done for the benefit of fellow men. The Prophet said: “Every act of goodness is sadaqa”; and “there is a sadaqa due on every Muslim. If he cannot give because he has no money, let him work so he can support himself and give charity; if he is unable to work, then let him help someone

in need of his help; if he cannot do that, let him adjoin good; if he cannot do that, then he should not do evil or harm others: it will be written for him as a sadaqa.”

Waqf is the permanent dedication, by a Muslim, of any property for any purpose recognised by Islamic law as religious, pious or charitable. Waqf causes the transfer of ownership, of the thing dedicated, to God. But as God is above using or enjoying any property, its profits are reverted, devoted, or applied to the benefit of mankind.

Any property can be the subject of waqf. The validity of a waqf is determined by the possibility of everlasting benefit being derived from it by any form of dealing of which it is capable, or by converting it into something else. It is only where the subject matter is totally unfit for being turned into profitable use that its dedication fails.

The Islamic institution of waqf has a wider scope and purpose than that of a trust in the English law. The institution became so popular and important in Islamic countries that, in most of them, a special ministry was established to deal with the administration of waqf properties.

Islam lays great emphasis on supporting the destitute. The Quran and Sunnah declare in clear words that it is the responsibility of the wealthy to look after the deprived sections of society. Muslims are not only instructed to do good to fellow humans, but are also told to treat animals well and to protect the environment.

Though other religions too preach and encourage philanthropy, Islam takes a step further by making it compulsory in the form of zakat. Islam has made it the responsibility of the Islamic state to ensure that people perform this obligation. Thus, a non-payer of zakat not only incurs the displeasure of God, but can also be proceeded against by the state. In other words, philanthropy has been made a legal duty as well.

(by Syed Imad-ud-Din Asad: Dawn.Com: 25 Feb2012)

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Islamic banks need mergers to fill Western funding hole Read

LONDON: Small and medium-sized Islamic banks may need to merge if they want to become bigger regional players capable of filling the funding hole left by shrinking Western banks, the head of Islamic finance at Deutsche Bank, told Reuters.

"There are mismatch challenges," Salah Jaidah said on the sidelines of the Euromoney Islamic finance summit in London.

"Their size, their appetite for long term funding, their ability to finance at competitive pricing. I see this as a big challenge and not happening already now," he added.

Most Islamic banks in the Middle East and North African region hold less than $13 billion in assets. Conventional banks, by comparison, hold an average of $38 billion in assets, a report by Ernst and Young estimated.

In the past, said Jaidah, it was the international banks which led oil and gas development and infrastructure projects in the region because they had the balance sheet, pricing mechanisms and appetite for long term funding.

Whilst Islamic banks might not immediately be able to face the challenge, Jaidah believes that within time they will be able to reposition themselves.

"They might raise capital, might have more competitive prices and ultimately there might be some mergers between small-to-medium sized banks who want to become bigger players regionally."

The Gulf Cooperation Council area has over 100 Islamic banks, ranging from Al Rajhi Bank of Saudi Arabia with a $25 billion market cap to small unlisted lenders, a Deutsche Bank report published in November said.

Deutsche Bank selected a list of potential winners which included Al Rajhi -- the world's largest Islamic bank -- and Alinma bank in Saudia Arabia, AMMB Holdings in Malaysia and Bank Mandiri in Indonesia.

The idea of a so-called Isla

mic "mega-bank" has already been touted in the region by Bahrain-based Al Baraka banking group .

READY TO REPOSITION

Islamic finance prohibits the lending of money for interest and other activities such as speculation that violate religious principles.

Deutsche Bank, which first established a presence in the UAE in 1999, says that despite the current global economic turmoil there are still opportunities within the industry.

"With the changes taking place in MENA and our eagerness to reposition ourselves as a lead player within the industry, I expect that the portion of profit and earnings will be lucrative and will grow year after year," said Jaidah.

He sees encouraging signs from Oman, home to around 3 million Muslims, where the central bank last year reversed its secular stance on finance, allowing Islamic banks and subsidiaries to establish themselves in the country.

There might also be new geographic openings in North Africa, following the upheaval in the region and countries such as Turkey where the government plans its first-ever issue of Islamic bonds this year.

Globally, Islamic bond issuance rose to $23.3 billion last year from $13.9 billion in 2010, according to Thomson Reuters data.

On the corporate front, Deutsche Bank, which has advised on deals including Saudi Aramco Total Refining and Petrochemical Company's (SATORP) $1 billion sukuk also sees more non-Islamic corporates tapping Islamic finance.

"Now more than ever we see a growing demand from conventional corporates for sharia structures," said Jaidah.

Dubai shopping mall developer Majid Al Futtaim, which is the sole franchisee for Carrefour in the Gulf, hopes to raise between $350 million and $500 million from its debut sukuk offering.

Emirates airlines said it is looking at the Islamic finance market to fund aircraft deliveries as international banks back out of plane deals. Goldman Sachs is also planning a $2 billion sukuk.

Dana Gas has appointed Deutsche Bank to advise on its $920 million convertible sukuk, three sources told Reuters in January, in a move to address investor concern over how it will repay the Islamic bond.

Jaidah would not comment on the deal.

Deutsche Bank estimated in a report in November that Islamic finance would almost double to $1.8 trillion in assets by 2016 as stagnant conventional lending pushed companies to seek alternative financing methods. 

(Editing by David Cowell)

(TheDailyStar, 23 Feb2012)

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Islamic banking set to triumph in Oman

MUSCAT — Adnan Ahmed Yusuf, Chief Executive Officer of Al Baraka Banking Group and Chairman of the Union of Arab Banks, said that the Islamic banking in the Sultanate will spread and will achieve more than 20 per cent of the domestic banking during the next five years.

Adnan Yusuf revealed in an interview with Oman Economic the interest of ABG to enter the Islamic banking sector in the Sultanate but due to factors related to the policy of the group towards the form of ownership, Al Baraka Group is currently considering the possibility of managing a bank in the Sultanate or engaging in Islamic finance if the new banking laws permit so.

Adnan Yusuf said that the Sultanate’s late entry to the field of Islamic banking is a positive factor, as the experience of Islamic banking has reached a state of maturity and the Omani market will benefit from the experiences of other countries that preceded it in this area.

He believed that the conditions of the Arab banking sector, whether Islamic or the traditional one are in good condition as they are not conflicting with what is happening in the international markets. The European countries, despite the crisis they are currently facing, they will be able to get out of the bottleneck, although it takes time to achieve this.

“For the ABG, we are currently available in 15 countries and we have our own policy in the form of ownership. We have our own way of practicing business as it is a must that the bank that we are collaborating with carries the name of the group and that the administration is in the hands of the group and we have the majority stake in the bank’s capital,” he said.

“We have the desire to assume the management of banks, as we have extensive experience in Islamic banking. We now have 450 branches in various parts of the world in 15 countries and 10,000 employees work in these branches in a volume business of $18 billion. We have the option of managing a bank in the Sultanate, but this is not the only option we have, we have another proposals. We now await the new laws, which are about to be issued in the Sultanate after allowing to practice Islamic banking for the first time and we’ll see whether these laws will allow us to exist across the Islamic finance companies,” he said.

“In general, all the options are on the table for us and for the past six or seven years, we have made studies of the Central Bank of Oman and the views of business on the Islamic banking, therefore our relationship is very old and good in the Omani market,” he said.

“I expect the success of this activity in the Sultanate, as it is known that the Omani people are conservatives and always have the desire of having Islamic banks in the country. I think the mistakes and risks will be less as there is the necessary expertise. It can request expertise in Islamic products and can find them easily, especially as some neighbouring countries to the Sultanate such as the UAE has gained much experience in Islamic banking,” he added. Expectations points out that the rate of growth of the global economy in the current year will reach about 3.4 per cent, and this calls for a kind of optimism despite the presence of many of the negative warnings.

What the world needs now is to restore confidence in the ability of the international financial system to take corrective actions sufficient to remove the fears of investors and to stimulate consumer for spending incentives to attract the owners of cash reserves to invest in the infrastructure of the developed economies.

This will help economies in trouble and will make them work to streamline their programmes that have been developed to solve debt and budget deficits.

(OmanDailyObserver, 24 Feb2012)

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