Global Islamic banking assets to exceed $3.4trn by 2018, says EY

Global Islamic banking assets with commercial banks are on course to exceed $3.4 trillion by 2018, fuelled by growing economic activity in core Islamic finance markets, according to specialists at Ernst and Young.

Its Global Islamic Banking Centre said across the six markets of Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey (QISMUT), the combined profits of Islamic banks broke the $10 billion mark for the first time at the end of 2013.

If the current growth rate continues, the Islamic banking profit pool across QISMUT markets is set to exceed $25 billion by 2018, a statement said.

Ashar Nazim, global Islamic finance leader at EY, said: "While the profit numbers for Islamic banks are impressive, they are still, on average, 15-19 percentage points lower than traditional banks in these markets.

"Regionalisation and operational transformation, which are currently underway in several leading Islamic banks, will help to close this gap."

EY said there is significant growth potential for the industry. There are an estimated 38 million customers who bank with Islamic retail banks globally, but only a small number of these customers have fully transitioned from a traditional to an Islamic banking relationship.

The average number of Islamic banking products per customer is just over two, whereas leading traditional banks have an average of five products per customer, EY added.

"Building consumer confidence through service excellence, especially when it comes to customers opening accounts and cross-selling can increase the market share of Islamic banks by 40% from these customers," said Ashar who added that another major opportunity for Islamic banks is to assist the SME sector with their cross-border business growth.

(Arabian Business.Com / 19 May 2014)

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IDB plans benchmark sukuk issue around May 2015

SARAJEVO: Islamic Development Bank (IDB) plans to issue a benchmark-sized Islamic bond or sukuk in around May next year, said the bank’s President Ahmad Mohamed Ali.

In February, IDB, which has a top-notch AAA rating, priced a $1.5 billion, five-year sukuk, its largest ever Islamic bond.

“The new issue will for sure be close to this year’s issue ... maybe a little more or a little less,” Ali said on the sidelines of an economic conference in the Bosnian capital Sarajevo.

“We are planning to go to the market every year but the amount will depend on different factors. We will inspect the needs of the bank and the conditions on the market,” Ali said.

He said that IDB was considering whether to guarantee Tunisia’s proposed 700 million dinar ($431.79 million) debut sukuk.

The Tunisian issue is aimed at helping the North African economy recover after being hit by the 2011 uprising.

The issue had been planned for April or May but Tunisia’s central bank governor has said it was complex and was likely to take longer.

“No decision has been taken yet,” said Ali. 

He added that IDB’s insurance arm, the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), is also debating whether to extend a sukuk insurance product to boost the credit rating of Tunisia’s sukuk.

ICIEC launched the insurance product last year, viewing that the insurance policy could help sovereign issuers tap into strong investor demand for investment-grade sukuk.

“It is a new product. This is just a proposal and it is still under consideration,” Ali said. 

But he said that IDB might consider subscribing to the Tunisian sukuk.

“If Tunisia did issue a sukuk, IDB will definitely consider participating in such an issue because it is our policy to support our member countries in issuing their sukuk,” Ali said.

(Arab News / 15 May 2014)

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Sukuk Templates Could End Delays Caused by Sharia Scholar Disagreements

The International Islamic Financial Market is working on common templates for structuring sukuk to reduce delays caused by disagreements between Shariah scholars.

The standards-setting body is drafting frameworks starting with leasing contracts known as Ijara, Chief Executive Officer Ijlal Ahmed Alvi said in a May 6 interview in Jakarta. Bahrain- based IIFM is responding to feedback from members including the Islamic Development Bank and the Malaysian and Saudi Arabian monetary authorities, he said.

Worldwide Islamic debt sales have grown by an average of 35 percent over the last five years, straining the ability of religious experts to approve offerings and highlighting the need for common global standards. Indonesia’s government plans to reduce sales of Ijara sukuk as some scholars say the structure the country uses isn’t fully Shariah-compliant, Vice Finance Minister Bambang Brodjonegoro said last month.

“Islamic finance is growing at a good pace, but what we still need is unification,” said Alvi. “Having a unified set of standards would make the market more cost-effective and efficient.”

Disagreements among Shariah scholars resulted in Goldman Sachs Group Inc. delaying a debut sukuk in 2011. The offer, which had been approved by Ireland’s central bank, was postponed after the lender was criticized for not ensuring it would be traded at par value as required by Islamic law.

Mid-East View

Kuwait’s Investment Dar Co. contradicted its own scholars’ assessment after missing a payment on a Wakalah deposit held by Lebanon’s BLOM Development Bank SAL. Dar argued the financing breached Shariah principles because it “was taking deposits at interest,” according to a court document from December 2009.

All of the $13.9 billion of outstanding Indonesian government sukuk as of the end of 2013 used the Ijara structure, according to a March report by the Asian Development Bank. In Malaysia, only around 10 percent of the $163.5 billion of Islamic debt is Ijara-based, according to the report.

“Middle Eastern investors view that some sukuk issued in Southeast Asia doesn’t fully comply with their guidelines, limiting or restricting the number of potential investors,” Abas A. Jalil, chief executive officer at Amanah Capital Group Ltd., a consultancy in Kuala Lumpur, said in a May 9 interview. Common standards will “enable investors to make investment decisions in a more objective manner rather than based on the debatable perspectives of Shariah scholars,” he said.

Scholar Shortage

The templates may also help address an international shortage of scholars. The 20 most-active experts each advised 31 institutions on average and two counseled 85, according to a 2011 report by Funds@Work AG, a consulting company based near Frankfurt.

The central bank of Malaysia, the world’s largest sukuk market, has since 2010 forbidden scholars from sitting on more than one Shariah advisory board for each type of institution, meaning they can only advise one bank or pension fund for example. Most countries don’t impose limits.

Worldwide sales of debt that pay returns on assets to comply with Islam’s ban on interest increased 12 percent this year to $17.2 billion from the same point in 2013, data compiled by Bloomberg show. Shariah-compliant banking assets will double to $3.4 trillion by 2018 from last year, according to Ernst & Young LLP, which will fuel demand for more issuance.

“Enterprises with a global presence may be encouraged to explore sukuk issuance versus conventional if the standards are more widely accepted,” Raj Mohamad, managing director at Five Pillars Pte, a consulting company in Singapore, said in a May 9 interview. “Standardization can also result in cost reduction in terms of legal and documentation cost.

(Insurance Journal / 13 May 2014)

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IFSB eyes stronger implementation of Islamic finance standards

The Islamic Financial Services Board (IFSB) will release an updated 10-year industry roadmap next week as it places greater emphasis on the implementation of its standards with regulators around the globe.

Guidelines from Kuala Lumpur-based IFSB, one of the main standard-setting bodies for Islamic finance, are gaining prominence as the industry takes a greater share of the banking sector in some Muslim-majority countries and makes inroads in western markets.

The IFSB will release a Mid-Term Review (MTR) of the industry’s 10-year framework document on May 19, outlining benchmarks to monitor industry progress in a more focused way, IFSB secretary-general Jaseem Ahmed told Reuters.

The original framework, released in 2007 by the IFSB and the research arm of the Jeddah-based Islamic Development Bank , identified 16 recommendations for policymakers but did not spell out detailed metrics to track their progress.

“The MTR proposes a stronger implementation plan. This plan includes concrete initiatives – to be undertaken by a range of stakeholders – to bring the recommendations to life.”

Founded in 2002, the IFSB’s initial efforts have focused on winning a wide membership base, leaving implementation and enforcement to national regulators to decide, a decision driven in part by their diverse legal and regulatory backgrounds.

Now, however, the 184-member IFSB hopes to draw up more concrete steps for regulators while still leaving some flexibility given the wide range of industry development.

“A roadmap can be very helpful to national authorities, and the national industry, but in practice quite a few years of experience is needed before it becomes practical to develop an effective roadmap.”

INTEGRATION

Over the last decade, the IFSB has issued 22 standards and guidelines and now plans to develop new standards for Islamic reinsurance (retakaful) and capital markets, said Ahmed ahead of the IFSB’s annual summit to be held in Mauritius next week.

“The greatest need is to bring takaful and capital markets to a state of comparability, from the regulatory perspective, with the banking sector. So these are two areas where we are gearing up for additional issues.”

A working group to study a standard for retakaful has now been launched and another working group will soon be set up to study a standard for capital markets, Ahmed said.

“This is an important initiative to facilitate the integration of Islamic finance into the global economy by bringing it within the global surveillance mechanism of the International Monetary Fund and the World Bank.”

In the past two years, the IFSB has issued separate guidelines on liquidity risk management, stress testing and capital adequacy, with further guidance in the pipeline.

The IFSB has now begun work on a technical note on stress testing and it has also conducted a study on liquidity issues to help shape a guidance note.

The latter would take up the challenges posed to Islamic banks by the liquidity coverage ratio and net stable funding ratio introduced by the Basel III framework, said Ahmed.

MARKETS

Islamic finance has its core markets in the Middle East and Southeast Asia, but its expansion into new jurisdictions has meant the IFSB is increasingly in touch with regulators in Africa, Asia and Europe.

“Implementation is picking up as the market grows. We see a clear pick up in implementation once the market becomes larger than 5 percent of the total of the respective financial sector.”

Countries like Senegal, Gambia, Nigeria and South Africa have taken steps to develop the industry, while detailed regulatory frameworks have emerged in others, said Ahmed.

“Oman and Kazakhstan are two examples of new markets in which policy-makers have benefited from the experiences of earlier jurisdictions.”

Over the past year, the IFSB has engaged with regulators in Nigeria, Sudan, Hong Kong, Bangladesh, Afghanistan and Libya; It held regional sessions at the Asian Development Bank and in Oman for the Gulf region. Its last European forum was hosted by Italy’s central bank.

“We are now preparing capacity and awareness building to be undertaken in Central Asia and in West Africa,” Ahmed said.

In March, South Korea’s central bank became a member of the IFSB, joining the likes of the central banks of Luxembourg and Japan and the monetary authorities of Hong Kong and Singapore.

(Business Day / 13 May 2014)

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Pakistan, DIB discuss sukuk

Pakistan’s Minister for Finance Muhammad Ishaq Dar held a meeting with officials from Dubai Islamic Bank (DIB) in Dubai where they discussed prospects of another sukuk issuance and hiring an advisor for transparent sukuk transaction.

Following the success of Euro Bond wherein Pakistan raised $2 billion from capital market recently, the minister said government intends to tap the sukuk market to increase its foreign exchange reserves.  The $2bn bond saw strong response and was oversubscribed with total bids amounting to $7 billion.

Dar told Bloomberg in an interview that Pakistan plans to sell $1 billion dollar-denominated sukuk which will be marketed at the end of the third or in the fourth quarter of 2014.

Dar said Pakistan government would soon release an advertisement in international and local press to hire financial advisor for sukuk transaction through a transparent and competitive process.

DIB Chief Executive Officer Adnan Chilwan and Pakistan minister discussed details about the sukuk market and the attractive prospects of investments through this Islamic finance instrument.  Chilwan said there is an appetite in the market for issuance of sukuk and the Pakistan government should access the market regularly.

The role of financial institutions such as DIB will significantly increase in coming years as Dubai aims to become global financial centre of Islamic finance.

Ishaq Dar also chaired a meeting with IMF delegates, which was attended by the senior officials of Ministry of Finance and State Bank of Pakistan to give an update on Pakistan’s economy.

Pakistan’s economic performance, the minister said, was on track and most of the policy actions, performance criteria and benchmarks have been met.

The growth during the first half of current financial year was 4.1% compared to 3.4% of H1 in the previous year.

The factor behind the growth is the rebound in industrial sector, which is backed by remarkable growth in large scale manufacturing sector due to better energy supply.

All indicators of the economy are on upward trajectory. The inflation has also been contained to single digit during the first ten months of the current fiscal year, Dar said.

(Emirates / 11 May 2014)

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Islamic banking: Challenges and solutions

What is the expected role to be played by Islamic banks and the many Islamic windows that have been opened by the commercial traditional banks operating in the Sultanate? What are the values expected to be added to the national economy in general and the private companies in particular from the introduction of Islamic banks?

We should bear in mind that Islamic banking is not just a new addition to the traditional banking or a competitor that offers the same products and services.

They are rather financial to provide ideal solution for those who have been waiting for long for banking products and services that are compatible with the tenets of Sharia.

In principle, Islamic banks act as financial brokers between the investors (depositors) and companies or individuals seeking finance solutions that are sharia compliant; sharing the profit/loss.

We should be aware that one of the most important principle of Islamic banking to ensure that while investing the available financial assets and resources they play an active role in achieving the social development; one of the basic aims behind the establishment of these banks.

They should also play their prospective role in developing the different communities and improving their standard of living.

While the basic aim is to make profits, Islamic banks , as it is the case with other banking and financial institution seek profits as this will help it to attract individual and institutional investors to deposit their funds with them.

The profits made by the Islamic banks are the outcomes of business and banking transactions. The profits will be later distributed onto depositors and shareholders at these Islamic banks and institutions.

The Islamic banks are thus institutions that seek profits as well as other social and human aims. Helping the Islamic banks to achieve their goals and missions is thus very important to ensure viability and competitiveness at the market.

In order to compete with traditional banks, Islamic banks should do their best to provide their customers with non-traditional and creative solutions.

They are not expected to replicate the products and services provided by traditional banking institutions. They should conduct through studies to identify the real needs of the people and seek the best way to meet such needs. They should be able to provide financing solutions for the different investment and commercial projects in a way different from the traditional commercial banks.

I can’t agree more with those who believe that the Islamic banks’ main aim is to develop economies and societies through providing feasible financial solutions that serve the interests of all stakeholders. Islamic banks promote the culture of saving among individuals and institutions.

The projects that are financed by Islamic banks should operate as per Islamic principle, reasonable returns that are fairly distributed (after deducting the costs) among depositors and shareholders.

The Islamic banks, beside the Sharia compliant finance and Takaful companies, are based on equal sharing of profits among investors (depositors) and shareholders (the owner of the bank), because the relation is based on sharing profits after deducts the administrative and other costs incurred to make this profit.

Islamic banking institutions in the world in general and GCC in particular face many challenges on the foremost of which is the inability to attract leaders and manpower specialised in Islamic banking. The market suffers from a sharp shortage in such specialities especially those specialised in developing financial products.

Islamic banks are therefore required to provide high quality and intensive training for their staff to make them more familiar with the principles and ethics of Islamic banking.

I believe that many services provided by Islamic banks are very similar to those provided by traditional commercial banks such as opening accounts, custody funds, letters of credit, transfer services, money exchange, investment, clearance and collection.

The role of Islamic banks will be felt by the society when they become capable of provide non-traditional and innovative banking and investment solutions.

They should promote a number of new and untraditional financial and investment tools that were not offered before by traditional banks. They are also required to devise a number of new plans and programs to keep pace with the changing needs of the market.

To address the challenges faced by Islamic banks in the Sultanate, Islamic banks and windows should

1. Enhance their ability to finance a large number of real estate, SMEs. They should finance the purchase of construction and technical equipment as well as plants but in a smoother and quicker way compared to traditional banks.

They should realise that the aims, guarantees and the way of sharing profits/loss are completely different form traditional banks; which seeks the best guarantees and the lowest risks.

2. Ensure that the commissions and fees collected for their services, such as financing the purchase of equipment or providing letters of credits, are fair and not exaggerated.

(Oman Daily Observer / 12 May 2014)

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To Share is to Care

Wealth is viewed as an amanah, or trust, from Allah. Elsa Febiola Aryanti reminds us what it’s all about.

Allah is the ultimate owner of all our worldly possessions. Everything that we have is essentially just a big loan from Allah who has trusted us to use it accordingly. The responsibility of how we earn and spend it falls upon us, and the accountability lies directly between us and the Almighty.

Islam is a religion of balance and it gives us clear guidance on how to earn, manage and spend our wealth. Islam also acknowledges the rights of individuals to use their wealth within the tenets of the Sharia, in which the obligation to share with the needy exists in the form of zakat.

By definition of the word, zakat means ‘grow,’ ‘develop,’ ‘fertile’ and ‘keep on adding,’ as stated in an Imam At-Tirmidzi hadith. Further, according to verse 103 of surah At-Taubah, zakat means to cleanse or to purify. Zakat is one of the principles of Islam, and it is obligatory for all Muslims who fulfil certain conditions, as stated below. Zakat is on the same level with other pillars of Islam like the salat, the hajj, and fasting.

Regulations about zakat—such as its objectives and rightful recipients—are clearly stated in the Qur’an and its hadiths. Socially-speaking, zakat is directly influenced by the welfare of society and it continues to develop according to its progress.

As stated earlier, zakat is mandatory for those who fulfil certain conditions. These conditions require that they be Muslim, have reached puberty (baligh), are able-bodied (aqil) and have, in their possession, an amount of wealth that has already passed the minimum amount of zakatable wealth (nisab).

There are two kinds of zakats: zakat nafs (self), also known as zakat fitrah, and zakat maal (wealth).

Zakat fitrah is paid in the form of a common staple food amounting to 2.5kg. Some examples of zakat fitrah food items are rice, flour, corn, dates and grains. The head of the family should pay for all its members. If he or she can afford it, zakat fitrah may also be paid on behalf of his or her servants.

The payment of zakat fitrah can be done from the very first day of Ramadhan. However, it is a Sunnah—or as practised by Prophet Muhammad (pbuh)—and therefore is encouraged to be paid on the eve of Eid, during the window of time from when the breaking of fast happens on the last day of Ramadhan, signalling the end of Ramadhan, to when the Eid prayers begin the very next morning. After that, any contribution is considered sadaqah, or charity.

The second form of zakat, zakat maal, is applied to a wide array of items, as long as they meet two requirements: they can be possessed, gathered or fully owned; and they benefit their owner. Examples of zakat maal items are houses, vehicles, land, farm animals, gold, silver and cash.

After the above two factors have been established for the zakat maal item, the following conditions are then checked against it:

• That the item was fully owned and gained according to the Sharia in the first place
• That the item has either increased in value (like with gold and property) or provided a source of income (like with rents)
• That the item passes the minimum amount of zakatable value, bearing the analogy of the equivalent of 85g of gold or 672g of silver (nisab)
• That the wealth owned exceeds the basic needs required
• That the owner is free from debt. If the owner owes any debt, the amount of debt should then be subtracted from the amount of his or her wealth to determine whether the residual wealth amount passes the minimum amount of zakatable wealth. If what is left does not pass the minimum amount of zakatable wealth, then he or she does not have to pay zakat maal
• That the item has been in possession for one full Islamic year of 354 days (haul)

Assets that are compulsory zakat maal items include trade merchandise, farm products or produce, mining produce, minerals, buried treasures, income from savings, investments and wages. There are different rates of zakat for each asset class, stated according to its specific circumstances.

In general, a zakat maal contribution is 2.5 per cent of the value of the accumulated wealth, investments and/or annual savings, when both the minimum value (nisab) and a period of one Islamic year are due.

The author is a fund manager at a reputable state-owned pension fund institution in Indonesia as well as a Sharia-based financial planner, writer and trainer. She also volunteers at a zakat organisation in Indonesia.

(Shariah Finance / 19 April 2014)

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