Turkey has ‘long way’ to go for Islamic finance system

Turkey has made good progress in the Islamic finance system in the participation banking field, but there is a long way to go for Islamic insurance system (takaful) and Islamic capital markets, says Ashar Nazım, partner at Global Islamic Banking at Ernst&Young. 

There is a financial cycle to be completed in Islamic finance: a banking system (participation banks), which was already founded and growing in Turkey, Islamic insurance system (which they hoped would soon come to Turkey) and capital markets, Nazım said in an interview with the Hürriyet Daily News. 

“The participation banks’ volume was under $40 billion in 2012 but the Turkish government is aspiring to a 15 percent market share by 2023. [That means] an increase of five times in terms of participation bank assets, to more than $200 billion by 2023. It is an ambitious target that is achievable as well if certain steps are put in place,” Nazım said.

Three key priorities

“The challenge and opportunity for Turkey is to understand and define ‘How Turkey can be the intellectual capital of the Islamic Finance World.’ Because, the next phase of development will be about innovation,” he said, noting that there were three key priorities that should be completed in Turkey to develop the Islamic finance system. 

The first priority is regulation, said Nazım. “Regulatory clarity is extremely important. Because the investors like a predictable, well-articulated and distinct framework.”

There isn’t currently a special regulation for participation banks in Turkey, they are in compliance with the current banking regulations, which are obstacle against the sector’s growth, he said, adding that there were some countries that had exclusive regulations for participation banks. 

Because of a gap in regulations, there aren’t currently any takaful companies in Turkey, he said. Also, Turkey has sukuk as a capital market instrument but the capital markets have a broader meaning with a number of different instruments that don’t take place in the country, he noted.

The second priority is the supply side, he continued. “Establishing of institutions and making enough private and public sector financing of it and capital available for it: To achieve 2023 targets, between seven and 10 participation banks are needed. Also they should be created in 18-24 months. Any delay would mean slowdown in industry,” he said. Turkey needed to increase capitalization of participation banks 10-fold over 10 years, he added.

Moreover, creating new institutions on the banking side, Islamic insurance side and capital markets was necessary, and new companies in the sub-financial sectors insurance, like asset management, leasing, should be founded, he said. 

The final priority is creating talent, Nazım said. Human resources should be developed to enhance this sector, he said, adding that Islamic finance could be a great opportunity to create new employment. 

Turkey a prominent Islamic finance market

Nazım said there were six key markets for Islamic finance in the world: Qatar, Indonesia, Saudi Arabia, United Arab Emirates, Malaysia and Turkey. However, Nazım urged that the next 12-24 months would be critical for Turkey. 

“If Turkey establishes enough institutions which are handsomely capitalized in terms of financial capital and human capital, we’re going to see a very strong growth trajectory which can make Turkey one of the leading global centers for Islamic finance, particularly in capital markets, wealth management and trade finance. That’s why we said Turkey is in an ideal position between Europe, Central Asia and Middle East and very well connected,” he said.

According to Nazım, there are two main reasons differences to choose Islamic finance system: Islamic finance offers a more balanced distribution of risks and rewards. The second is that Islamic financial activities are much more closely linked to the real economic activities.

Meanwhile, the term “socially responsible finance” has been replacing Islamic finance because it is a broader definition as this sector doesn’t target only Islamic countries or Muslims. 

The World Islamic Banking Conference (WIBC) in Bahrain will be held between Dec. 3 and 5. As Ernst&Young is one of the major sponsors of this event, they will release their World Islamic Banking Competitiveness Report in December.

(Daily News / 25 Nov 2013)

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Dubai to benefit from global Islamic finance surge

Dubai: The big surge happening in the global Islamic finance sector is expected to benefit Dubai as it pitches to become a global Islamic financial hub, analysts said.

“Global Islamic Finance is expected to maintain its rapid pace of growth, strengthening itself as a real alternative to conventional finance,” said Stuart Anderson, Managing Director & Regional Head, Middle East at Standard & Poor’s.

"With strong growth in Islamic finance in the region in the form of rising sukuk issuance, creation of innovative Islamic financing structures and increasing number of corporates and government related entities raising long-term funding through Islamic financing, Dubai can play a key role in building Islamic capital market infrastructure

Despite registering healthy volumes in 2013, the sector is seemingly struggling to match last year’s exceptional growth due to tougher market conditions. Worldwide year-to-date issuance dipped 25 per cent from last year to $77.4 billion, as of September 22, 2013. S&P believes 2013 sukuk issuance is on course to cross the $100 billion mark.

In the third quarter, the Gulf region witnessed a slowdown in issuance largely because of rising yields driven by the expectation that the US Fed would cut the bond buying programme. With the Fed deciding to postpone the tapering, the yields have flattened. “We expect more issuers from the region to tap the market as the yields are down while the supportive environment is boosting the prospects of sovereigns, government related entities, financial institutions and banks raising long term funding through sukuk,” said Karim Nassif, Associate Director, Infrastructure of S&P.

S&P analysts expect Africa with significant Muslim population will be the next frontier of sukuk expansion. “With most Sub-Saharan African countries running large fiscal and current account deficits, are currently financed conventional bonds. There is clearly an opportunity for Sukuk issuance,” said Nassif.

As global awareness of Islamic finance is gaining momentum, the Islamic financial market would benefit from a greater volume of sukuk to satisfy the needs of global investors, said Khalid Howladar, Senior Credit Officer, Islamic finance at Moody’s Investors Service. “If we take the total assets of Islamic banks globally, it is expected to be around $1.5 trillion, which is still under 1 per cent of total global financial assets,” said Howladar.

Global awareness

Although countries that are most likely to use this type of financing are from the Middle East and Asia, there is growing global awareness about Islamic instruments as an asset class and as financing tools.

Structural complexity and extensive legal documentation are the hurdles which face Islamic finance investors and inhibit the growth of this market segment. Despite such challenges, there is growing interest in Islamic financial instruments because they provide access to a new and growing liquidity pool for borrowers. As Islamic banks and institutions tend to be extremely liquid and supply of sukuk still remains limited, recent sukuk issuances have all been oversubscribed several fold.

There is significant demand from international investors for exposure to Gulf and Asian debt instruments. Whereas, Islamic principles encourage that investment should be restricted to asset backed financial instruments. The fusion of these two distinct markets renders Islamic instruments extremely complex.

Some of the recent innovations in the sector look promising — for instance the shortage of instruments to boost capital base or allocate excess liquidity into Sharia-compliant investment options. Such recent innovations include the use of hybrid sukuk by GCC banks to strengthen capital and the ‘International Islamic Liquidity Management (IILM) 2 SA’ vehicle set up by Malaysia-headquartered IILM Corporation to better manage short-term allocation of excess liquidity.

(Gulf.News.Con / 25 Nov 2013)

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Bangladesh: IFIC to become Islamic bank

IFIC Bank, a first generation conventional private commercial bank, has decided to become a full-fledged Islamic or Shariah-based bank.

“Our board recently approved the proposal. The government, being the bank’s majority shareholder, has also given clearance,” said Shah A Sarwar, managing director of the bank.

“We are now approaching the regulators for necessary permissions. We will then start the conversion process by appointing world-class consultants. But it is subject to approval from different regulators,” he said in an interview with The Daily Star.

“There is a strong demand from customers and shareholders,” said Sarwar.

In addition, non-Muslims can also take the service and that “is the beauty of the Shariah-based banking.”

Sarwar who joined the bank in December last year could not give a definite time on how long the conversion process would take.

“The conversion is not a day’s job. We have to change the computer systems and business processes and we have to run parallel for the time being.”

The globally-booming Islamic finance is making strides and gaining popularity in Bangladesh, with experts predicting that the Shariah-compliant industry will continue in steady steps to become the mainstream banking system in the Muslim-majority nation.

Bangladesh entered the Islamic banking system in 1983, with the establishment of Islami Bank Bangladesh Ltd.

Since then, eight more full-fledged private Islamic banks and 23 Islamic banking branches of conventional banks have been established. Currently, Islamic banks hold 24 percent of total banking deposit and have around 10 percent of the total bank branches.

The combined share of Islamic banks (excluding Islamic banking branches/windows of conventional banks) is 16.85 percent in assets, 19.85 percent in investments (loans), 14.3 percent in equity and 17.1 percent in liabilities as of December 2012, according to the Financial Stability Report-2012.

International Finance Investment and Commerce Bank Ltd (IFIC Bank) was set up in 1976 as a joint venture between the government and sponsors in the private sector with the objective of working as a finance company within the country and setting up joint venture banks/financial institutions aboard.

In 1983, when the government allowed banks in the private sector, IFIC was converted into a full fledged commercial bank.

The government holds 32.75 percent of the bank, directors and sponsors 11.31 percent, institutions 33.91 percent, foreign investors 0.28 percent and the rest 21.75 percent is held by the general public, according to the DSE website.

(The Daily News / 21 Nov 2013)

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Libya aims to issue three Islamic bank licenses in 2014, says central bank

Libya hopes to have its first three dedicated Islamic banks operating next year to satisfy unmet demand for sharia-complaint financial services, a senior central bank official said on Wednesday.

Under former dictator Muammar Qaddafi, overthrown in 2011, the growth of Islamic banking was not encouraged and the entire financial system was kept undeveloped, as four state-controlled institutions dominated the industry.

Libya is now trying to build a modern financial system and has passed rules to cover Islamic finance, although political instability and a chaotic security situation are slowing its progress.

Authorities have decided to issue three Islamic banking licenses and the central bank has received five applications from local investors, which are currently being evaluated, said Abdulmajeed Almaguri, deputy director of the central bank’s banking supervision department.

He did not name the potential investors but said the evaluation process would be completed after four to five months.

“There is good demand for Islamic banking and we want a balance between conventional and Islamic banking,” Almaguri told Reuters on the sidelines of an Arab central bankers conference in Abu Dhabi.

Currently the 16 banks operating in Libya, including seven foreign banks, offer mainly conventional banking services with some providing interest-free Islamic banking through sharia-compliant windows, he said.

(Al Arabiya News / 20 Nov 2013)

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Malaysia: Maybank Posts Record Profit as Islamic Banking Income, Fees Grow

Malayan Banking Bhd. (MAY), Malaysia’s biggest lender, said third-quarter profit rose 16 percent, joining Public Bank Bhd. in posting record earnings as economic growth spurred credit demand.

Net income climbed to 1.75 billion ringgit ($545 million), or 20.05 sen per share, in the three months ended Sept. 30 from 1.5 billion ringgit, or 19.14 sen per share, a year earlier, the lender said in a stock exchange filing today. Fee income and Islamic banking boosted profit.

Maybank has been Malaysia’s top arranger of syndicated loans and number one underwriter for equity and rights offerings this year, according to data compiled by Bloomberg. It has helped manage some of the country’s biggest initial public offerings of the year, including share sales by UMW Oil & Gas Corp. and Westports Holdings Bhd.

“There continue to remain windows of opportunity in the different markets we serve,” Chief Executive Officer Abdul Farid Alias said in a separate e-mailed statement today. “Maybank’s three home markets consisting of Malaysia, Singapore and Indonesia, which contribute more than 90 percent of the group’s income and profit, are expected to record positive revenue growth.”

The lender benefitted from 5 percent growth in Southeast Asia’s third-largest economy last quarter, which spurred demand for credit.

Non-interest income rose 19 percent to 1.54 billion ringgit in the third quarter last year, Maybank said. Income from Islamic banking increased 29 percent to 734.9 million ringgit.

Interest Income

Shares of Maybank advanced 0.8 percent to 9.64 ringgit as of 3:26 p.m. in Kuala Lumpur after earnings were announced during the midday break. The stock has climbed 4.8 percent this year, trailing a 6.2 percent gain in the benchmark FTSE Bursa Malaysia KLCI Index.

Net interest income, or revenue from borrowers after deducting interest paid to depositors, gained 1.1 percent to 2.38 billion ringgit in the third quarter, Maybank said. Allowances for losses on loans more than tripled to 280.3 million ringgit, it said.

(Bloomberg / 21 Nov 2013)

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Unlocking Opportunities in Islamic Finance

With the recent statement by the UK Prime Minister, Mr. David Cameron, to make London the global hub of Islamic finance, Obinna Chima writes that the financial system may be entering a new era

The pallid state of infrastructure in Nigeria remains a major source of concern to everybody in the country. According to the African Development Bank (AfDB), Nigeria has an infrastructure deficit of $360 billion.

The inadequate physical infrastructure in the country has been identified as one of the major constraints to sustained and broad-based strong economic growth. 

Addressing these challenges will require a substantially larger annual level of investment in infrastructure, a significant increase in annual allocations for routine and periodic maintenance to ensure reliable infrastructure services, and increased attention to the institutional arrangements that support the infrastructure network of the country and the related services.

A report by the AfDB also indicated that if Nigeria’s infrastructure are given a facelift, it could boost the country’s gross domestic product (GDP) growth by about four per cent. Some of the sectors that require attention in the country include power, road, rail, information and communications technology (ICT) and transportation.

However, access to finance, to fund the development of most of these critical sectors has remained a challenge.

With Nigeria’s total debt stock at N8.32 trillion as at September 30, 2013, analysts have warned that the growing domestic debt might result to a debt crisis if not checked. Others have advised the government to look for cheaper alternatives to finance infrastructure development. One of the cheaper alternatives today is Islamic finance, which is interest free.

While regular bonds are essentially debts to be repaid at a future date, with Islamic bonds, that is not the case.

In essence, Islamic finance can be described as finance under Islamic law. Islamic finance being an emerging sector of the overall economic system is rapidly expanding and is now considered to be worth over $1.2 trillion globally. The Islamic model uses money as a measuring tool for value and not as an asset in itself, so income is not received from money as this is seen as exploitative and usurious. Investment vehicles through the Islamic finance structure are based on shared business risk.

The growth of Islamic finance globally also means there is an increasing demand for new ways of identifying Islamic-compliant business activities. Presently, the London Stock Exchange is working on the creation of new indices. This means the creation of a new way of identifying Islamic finance opportunities - a world-leading Islamic market index.

Lessons from London
Speaking at the recently-concluded World Islamic Economic Forum, the Prime Minister of the United Kingdom, Mr. David Cameron, expressed his desire for London to be one of the greatest capital of Islamic finance.According to Cameron, steps had already been taken to open up London for more Islamic financing activities.

“Already London is the biggest centre for Islamic finance outside the Islamic world. But today our ambition is to go further still. I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world.
“And we are already taking big steps to open up the City of London to more Islamic finance. Today, we have more banks compliant with the principles of Islamic finance than any other Western country.

“We have over 25 law firms supplying services in Islamic finance and 16 universities or business schools offering MBAs or similar qualifications in Islamic finance, including the new programme for senior executives announced by Cambridge University last week,” he explained.

He pointed out the move was to attract more investment into London. The UK prime minister noted Islamic finance was growing 50 per cent faster than traditional banking, adding that global Islamic investment was set to grow to £1.3 trillion by 2014. As a result of this, he expressed his preparedness to make sure that a big proportion of that investment would be in Britain. He revealed that some of the infrastructure in Britain were developed through Islamic finance.

Cameron added: “Britain is a country ready to welcome your investment, a country that values your friendship and a country which will never exclude anyone because of their race, religion, colour or creed. But if investing in London is good for you, then opening up London to your investment is just as vital for our own success here in Britain.

“We are backing our businesses, seeking new markets and banging the drum for Britain to show we are a first class destination for trade and investment. Islamic investment is already fundamental to our success.”

He said further: “But we're not going to sit here and rest on our laurels. We know there is much more to do for London to reach its full potential as a great world centre of Islamic finance.

“This government wants Britain to become the first sovereign outside the Islamic world to issue an Islamic bond. So the Treasury is working on the practicalities of issuing a bond-like sukuk worth around £200 million and we very much welcome the involvement of industry in developing this initiative which we hope to launch as early as next year.”

Prospect in Nigeria
The use of Islamic finance in Africa could grow further as several north and sub-Saharan African countries including Morocco, Tunisia, South Africa and Kenya are laying the legal groundwork to be able to issue sukuk, an Islamic finance bond.

In Nigeria, Osun State recently floated the country’s first Islamic bond, taking a major step towards developing an Islamic finance industry in the country. Analysts said the Nigerian Sharia-compliant bond issued by Osun State while relatively small at $62 million, signalled the start of a trend.

Also, the Islamic Development Bank is also lending $150 million through Sharia-compliant facilities for the new Lekki port in Lagos.

To the Governor of the Central Bank of Nigeria (CBN), Mallam Sanusi Lamido Sanusi, Islamic finance products also have the capacity for ensuring financial inclusion of significant segment of the population.

Sanusi stated that when properly harnessed, Islamic finance could contribute significantly in turning Nigeria into a major international financial centre.

The CBN governor explained: “Islamic finance has shown its potential in achieving financial inclusion in many economies by bringing in large under bank populations, especially Muslims into the urbanised financial sector.

“We have so far registered Jaiz bank, and we have given a licence to Stanbic IBTC Bank to operate some window.

“We have given an approval in principle to Sterling Bank to operate an Islamic window and a microfinance bank that has applied for Islamic banking licence.

“This is in addition to the work being done by National Insurance Commission to promote Takaful, an Islamic insurance product.”

Sanusi said many Islamic financial markets had established their presence in all the major financial centres and were playing key roles in deepening the financial markets with products across the globe.

“In the face of the growing interconnectedness of the global financial system and its integration, it is thus unrealistic for any existing or aspiring financial centre to be oblivious of this development.

“Prime Minister David Cameron announced his government’s plan to make London a capital for Islamic finance to the Western world. He said it would stand alongside Dubai and Kuala Lumpur as one of the great capital of Islamic finance. The UK is embarking on this plan, despite the fact that it is a non-Islamic country,” Sanusi argued.

(This Day Live / 20 Nov 2013)

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85pc Islamic finance initiatives go to skill building

About 85 per cent of educational and awareness initiatives on Islamic finance are potentially contributing towards skill building for the industry, said a research report.

The Global Islamic Finance Education (GIFE) 2013 also pointed out that only 15 per cent initiatives in education and knowledge dissemination are potentially facilitating research and development.

The report on Global Islamic Finance Education and human capital development in Islamic finance industry was released by Yurizk, a leading provider of information in Islamic finance education.
 
“GIFE 2013 is a wake up call for all the stakeholders of emerging Islamic finance industry,” said Muath Mubarak, head of finance and corporate strategy of First Global Group.

Human capital development is a critical challenge for Islamic finance industry and previously there was no comprehensive study that addresses the major issues and at the same time backs the insight with collective data, he said.

GIFE 2013 has bridged that gap of information and brought critical insight into the challenges facing Islamic Finance industry in human resources development and the industry’s long term sustainability, said Mubarak.

The report found that there are 742 institutions globally that are involved in education and knowledge dissemination in Islamic Finance.

The top countries by the number of Islamic finance education and knowledge service providers are Pakistan, Malaysia, United Kingdom, US and UAE, it said.

UK leads Islamic finance education in Europe with 53 per cent of the total Islamic finance education and knowledge services providers, while the UAE leads in the Mena region with 30 per cent of the providers in the region.

The research report highlighted key challenges that are affecting Islamic finance education and the industry’s growth and long term sustainability concerns. It also contains views and opinions of industry thought leaders, academic scholars, practitioners on various issues of Islamic finance education. 

(Trade Arabia / 21 Nov 2013)

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