Biz leader calls for creation of Islamic banking department in Bangsamoro

A business leader from the Autonomous Region in Muslim Mindanao called for the creation of an Islamic banking department as one of the provisions of the proposed Bangsamoro Basic Law (BBL).

Speaking at the House public hearing Thursday at the Anda-Rizal convention center, ARMM business council chair Mitchell Manalocon said the agency should be created to adhere to Shariah laws on banking.

Manalocon said existing Amanah banks being run by cooperatives could help create a model that the proposed body could adopt as its own structure.

He added that the private sector should be encouraged to be more involved in crafting the banking policies of the proposed region.

He said the government that would lead the Bangsamoro should also build enough infrastructure to support halal certification across all parts of the food processing, from feeding the livestock in the case of meat to sending the food to the consumer.

Halal certification should be pushed across all levels of the supply chain, he said.

According to the House version of the draft BBL or HB 4994, within six months of the creation of the Bangsamoro Transition Authority, the Bangsamoro government would have to decide how to structure the ownership of Islamic bank Al-Amanah Islamic Investment Bank of the Philippines.

Section 30 of the bill states that the Bangsamoro government would determine its involvement in the ownership and management of the bank, as well as that of the Southern Philippines Development Authority.

The entity would also determine the mode of transfer of ownership.

These will be done through the Intergovernmental Fiscal Policy Board, a group composed of national and local government leaders and other sectors that determines the fiscal policies of the proposed Bangsamoro.

(Minda News / 12 December 2014)

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

The Basics of Islamic Finance

Trade Financing Matters welcomes this guest post by Gohar Jawahir Bilal, Managing Partner North Sea Capital, UK focusing on raising and structuring Asset Backed and Structured Trade Finance

I call Islamic finance “alternative finance” as its’ fundamental principles are based on Islamic law. What got my attention is that the fundamental rules of Islamic law prohibit taking /giving interest (usury). As a finance professional the first question that came to my mind was “if there is no interest, how does one make money?” This one question made me eventually quit my investment banking job in 1998. I chose to go to Harvard Law School as a Visiting Scholar to research Islamic law governing Islamic finance. Also the answers that I was getting for “how” and “why” were not satisfactory.

The Basics

Finance essentially revolves around three building blocks i.e. Money, Debt and Equity and these are fundamentally viewed differently in conventional (interest based) vs. Islamic (non interest base) finance.

Money

The conventional view is money is a tangible asset. You can loan money and charge interest. In Islamic finance money is only a “measure of value” (a benchmark or a yardstick). Rule 1: One can lend this yardstick but “cannot charge for lending the yardstick ” = Interest = disallowed.

Debt

Debt in conventional finance is of high importance. Regulations for banks are largely built around debt which can be sold at par, premium or discount. Under Islamic law, in finance debt can only emerge as a consequence of sale and that this debt cannot be sold, it can only be transferred at par (not at a discount or premium). Rule 2: In a sale transaction payer can defer payment for an agreed time. This becomes a debt (obligation) of the payer to the payee. Because asset sale price is agreed between buyer and seller at the time of sale, if the payment is deferred, the obligation (debt) is only this sale value. Hence when debt is transferred to another party it can only be at par.

Equity

Compared to conventional finance, equity or “ownership” is the absolute nucleus of Islamic Finance. Rule 3: The fundamental principle is “profit in a commercial transaction belongs to those that take the ownership risk”.

Interestingly one realizes that Islamic laws for finance fundamentally promote trade which can be of tangible or intangible assets as money is only a yardstick.

Tangible asset e.g. commodities

I own a bag of sugar worth $100. I can sell this to David for $120 = $100 (principal) + $20 (profit). He and I can agree that he pays this $120 in 30 days and becomes an obligation (debt) on David. Now Jane (3rd party) agrees that she’ll pay me $120. Hence David’s debt is transferred as he will now owe Jane the $120 (on a period that they will agree amongst them). As the $120 debt resulted only because the payment of sale value of sugar bag was deferred this value cannot change. Also, remember ownership of the sugar bag (asset) transferred from me to David, who can now sell it at any price. Another Rule emerges here is: what I do not possess, I cannot sell.

Intangible asset e.g. I own a car and “sell the use” = intangible asset of this car.

As most of us know this “sale of use” (intangible asset) of a car (tangible asset) is called lease or renting. Because I own the car, I call sell its “use” to David for any value say $100. David can agree to pay $100 in 30 days. Now Jane can pay me $100 and then David will owe Jane this amount. Note, the ownership of the tangible asset did not transfer from me – only ownership of its “use” transferred. Hence, after 30 days, I can sell this “use” for $200 to Brain. Because I own the asset, I can charge anything for its use.

A Thomson Reuters report estimated the Global Islamic economy including food, consumer goods, pharmaceuticals, travel and media to be $1.62 trill in 2012 and projected to reach $2.5 trill by 2018. Islamic finance is more popular in Saudi Arabia, UAE, Qatar, Bahrain, Kuwait, Oman, Malaysia and Indonesia. While it is not main stream in the west, regulators in most developed countries are aware of this alternative finance. For example there are three FCA regulated Islamic Banks in the UK. Most popular Islamic products are Islamic bonds (called Sukuk) and an Islamic structure called “Commodity Murabaha” used for Islamic deposits and Islamic financing.

(Trade Financing Matters / 12 December 2014)

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

Private-sector moves keep Tunisia's Islamic finance hopes alive

Tunisia's Amen Bank launched two Islamic mutual funds this week while a leasing company prepares to convert into a full-fledged Islamic lender, welcome steps for the industry which has been waiting for the government to issue a debut Islamic bond.

Islamic finance was neglected before the country's 2011 "Arab Spring" revolution, with the new Islamist ruling party Ennahada pushing to develop the sector over the past three years.

Its defeat in October parliamentary elections shifted the balance of power to its main secular rival, the Nidaa Tounes party. Presidential candidates for the two parties will face-off in a second round of elections later this month.

A major Islamic sovereign bond proposed by the Ennahada party has yet to be seen, but private-sector efforts have been more successful in developing Islamic finance, which accounts for just 2.5 percent of the Tunisian financial sector.

Amen Bank, the country's second-largest private sector bank, launched two Islamic mutual funds this week, managed by Tunis-based United Gulf Financial Services-North Africa, a filing with the capital market regulator said.

In October, El Wifack Leasing said it had received central bank approval to become the country's third full-fledged Islamic bank, with 150 million dinars ($80 million) in capital, adding the firm would bring international shareholders to the venture.

Currently, there are two fully operational Islamic banks in Tunisia, Zitouna Bank and the Tunisian arm of Bahrain's Al Baraka Banking Group.

Last week, Bahraini Islamic investment firm Gulf Finance House signed an agreement with a French consortium to start work on the first phase of a $3 billion real estate project north of Tunisia's capital.

Earlier this year the private sector arm of the Islamic Development Bank teamed up with Tunisia's newly created sovereign wealth fund, Caisse de Depot de Tunisie, to set up a $30 million fund to support local businesses. 

(Reuters / 12 December 2014)

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

Sukuk sales unlikely to match 2012 record

GLOBAL Islamic bond sales look set to miss out on a record year after Malaysia’s sovereign wealth fund postponed what would have been this year’s biggest offering. The top underwriter is also cautious over the coming year.

Issuance to date is US$2.1 billion (RM7.3 billion) shy of the unprecedented US$46.8 billion in 2012 and more than last year’s US$43.1 billion total, data compiled by Bloomberg show.

1Malaysia Development Bhd (1MDB) on Monday put off a plan to sell the equivalent of US$2.4 billion of sukuk until the first half of next year, said two people with knowledge of the deal.

CIMB Group Holdings Bhd, this year’s leading Islamic debt arranger, predicts that it will be a challenge for sales to test new highs next year as the slump in crude oil prices may deter issuance. Much will depend on first-time entrants coming to the market after debut offerings from the United Kingdom, Luxembourg and Hong Kong this year, according to AmInvestment Bank Bhd.

“Sukuk sales this year are unlikely to surpass 2012’s levels,” Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank Bhd here, said by phone on Monday. “While we could still see strong interest from issuers to tap the sukuk market next year, sentiment has turned cautious because of the volatility in oil prices.”

Global issuance of sukuk is set for the worst quarter since the three months ended June 2013, with sales so far of US$7.8 billion. In the six-member Gulf Cooperation Council, which relies on oil revenues, offerings climbed to US$2.4 billion from last quarter’s US$750 million, even as Brent crude tumbled 43 per cent from its June high.

CIMB’s Badlisyah said it may take another six months for oil prices to stabilise and issuers in the Middle East may have to sell Islamic debt to raise funds. Malaysia, which is also a net exporter of the fuel, may see support for sukuk as the government undertakes projects linked to its US$444 billion development programme, he said.

1MDB is postponing the sukuk as it seeks a six-month extension from the nation’s energy commission to build a coal-fired plant south of the capital, said one of the people familiar with the matter.

Bond issuance will likely taper off now as bankers and investors go on their year-end holidays, said Badlisyah.

Borrowers will face the prospect of higher interest rates next year as the United States Federal Reserve starts raising its benchmark rate for the first time since 2006.

(Bloomberg / 09 December 2014)

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

Islamic banking in PDP’s manifesto

After Peoples Democratic Party released its manifesto, I directly went to their website to download their ‘aspirational agenda’. By definition ‘manifesto’ is a document of aim and plan which gives hints about how a party views politics.

Though I will not discuss the whole document of fifty-eight pages, I will straight go to page thirteen (titled ‘diversifying personal finance options’). It was an awesome moment to grasp that one of the leading political party of J&K sees the role of non-banking financial companies can play in restructuring our economy by way of offering nationally accepted products which are sharia complaint-an important step towards developing sharia-complaint finance in the state.

Islamic banks in India do not function under banking regulations act; therefore we cannot have a full-fledged Islamic banking system. They are licensed under non-banking finance companies hence we can start some of the options by way of setting NBFCs. In 2013 RBI allowed a firm in Kerala to operate as a NBFC that follows Islamic principles known as Al Barakah financial services. Though being a matter of fact that unless and until full-fledged Islamic banks are permitted, an Islamic finance sector will find it hard to develop. But still we can hope that the initiative will pave its way towards the main area of focus.

The participation of sharia complaint NBFCs in J&Ks banking system will lead to further infrastructural development in state. In today’s world Islamic banking is gaining more importance in different parts of the world. If Islamic banking is opened in J&K it would benefit the state, as that money which is still lying in the banks, if invested in the Islamic bank would improve the economic conditions of the people. An interest free banking would help to improve the education and would help in more employment.

It should be well kept in mind that Islamic bank is not related to Muslims only it is related to all as the main focus of it is on social well-being and wealth generation activities in the society. The system of conventional banking which leads to debt crises, poor becomes poorer and the rich richer, inflation becomes rampant and the education turns out to be expensive, is equally criminal to all faiths.

There is also no doubt that no political party has converted 100% of their manifesto into reality. And in Kashmir the analysis of previous political manifestoes in terms of fulfilling them can even be ranked below average. Now it will be a test for the PDP, if coming to power will they match their ‘walk with talk’ in terms of setting of NBFCs based on sharia? But I personally welcome them for assigning one page in their manifesto for this people friendly initiative. And I hope if coming to power they will start their office with this work.

(Kashmir Reader / 11 December 2014)

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

Sukuk Record Scuppered as 1MDB Delays 2014 Sale: Islamic Finance

Badlisyah Abdul Ghani, Chief Executive Officer of CIMB Islamic Banking Bhd., said it may take another six months for oil prices to stabilize and issuers in the Middle East may have to sell Islamic debt to raise funds.

Global Islamic bond sales look set to miss out on a record year after Malaysia’s sovereign wealth fund postponed what would have been 2014’s biggest offering. The top underwriter is also cautious over the coming year.

Issuance to date is $2.1 billion shy of the unprecedented $46.8 billion in 2012 and more than last year’s $43.1 billion total, data compiled by Bloomberg show. 1Malaysia Development Bhd., which has come under criticism from opposition lawmakers because of its rising debt, put off a plan yesterday to sell the equivalent of $2.4 billion of sukuk until the first half of 2015, said two people with knowledge of the deal.

CIMB Group Holdings Bhd. (CIMB), this year’s leading Islamic debt arranger, predicts that it will be a challenge for sales to test new highs next year as the slump in crude oil prices may deter issuance. Much will depend on first-time entrants coming to the market after debut offerings from the U.K., Luxembourg and Hong Kong in 2014, according to AmInvestment Bank Bhd.

“Sukuk sales this year are unlikely to surpass 2012’s levels,” Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank Bhd. in Kuala Lumpur, said by phone yesterday. “While we could still see strong interest from issuers to tap the sukuk market next year, sentiment has turned cautious because of the volatility in oil prices.”

Quarter Slump

Global issuance of sukuk is set for the worst quarter since the three months ended June 2013, with sales so far of $7.8 billion. In the six-member Gulf Cooperation Council, which relies on oil revenues, offerings climbed to $2.4 billion from last quarter’s $750 million, even as Brent crude tumbled 43 percent from its June high.

CIMB’s Badlisyah said it may take another six months for oil prices to stabilize and issuers in the Middle East may have to sell Islamic debt to raise funds. Malaysia, which is also a net exporter of the fuel, may see support for sukuk as the government undertakes projects linked to its $444 billion development program, he said.

1Malaysia Development is postponing the sukuk as it seeks a six-month extension from the nation’s energy commission to build a coal-fired plant south of the capital, said one of the people familiar with the matter. The state-owned firm, which has been criticized by three opposition lawmakers over its debt, had planned to sell notes due in five to 23 years in November. A company official declined to comment when contacted by phone yesterday.

Bond issuance will likely taper off now as bankers and investors go on their year-end holidays, said Badlisyah.

Rate Outlook

Borrowers will face the prospect of higher interest rates in 2015 as the Federal Reserve starts raising its benchmark rate for the first time since 2006. The median estimate in a Bloomberg survey is for Malaysia’s central bank to keep its rate at 3.25 percent at least until the final quarter next year.

Average yields on global sukuk have climbed 11 basis points, or 0.11 percentage point, to 2.87 percent from an 18-month low on Nov. 28, according to a Deutsche Bank AG index. That’s the highest level since Oct. 10 and reduces the decline this year to 55 basis points.

“While issuance is subject to prevailing market conditions, the sukuk market next year is expected to continue on a similar trajectory path as 2014,” Leon Koay, managing director and country head of financial markets at Standard Chartered Bank Malaysia Bhd., part of the fourth-largest Islamic debt arranger, said in a Dec. 5 e-mail. “There may be issuers who will opportunistically tap the sukuk and bond markets.”

Malaysia Dominates

HSBC Holdings Plc is the second-biggest arranger of Shariah-compliant notes this year behind CIMB. Malini Saudranrajan, media relations manager at HSBC Bank Malaysia Bhd., wasn't immediately able to give comment on the 2015 outlook in response to a Dec. 2 e-mail.

In Malaysia, the world’s biggest sukuk market, offerings may surpass this year’s level in 2015, supported by Prime Minister Najib Razak’s infrastructure spending, according to AmInvestment Bank.

Sales in the Southeast nation have climbed 48 percent in 2014 to 55.2 billion ringgit from a year earlier, data compiled by Bloomberg show. Islamic bond offerings from the GCC, which includes the United Arab Emirates, Saudi Arabia and Bahrain, fell 28 percent to $14.8 billion.

“The uncertainty over the oil price and interest rates are factors that could affect sukuk sales next year,” Mohd. Effendi Abdullah, head of Islamic markets at AmInvestment, said in a phone interview yesterday. “Most of the issuance will still come from Malaysia and some from the Middle East.

(Bloomberg / 06 December 2014)

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

Sukuk for vaccine fund ushers Islamic finance into ethical sphere

The latest entrant into Islamic finance is leading the industry in the new direction of socially responsible investment - which could even include the fight against Ebola.

Last week an immunisation programme secured a $500 million issuance of Islamic bonds, or sukuk, in the largest debut issue ever by a global non-profit organisation, under a broader trend to use bond markets to fund development and humanitarian projects.

The sukuk from the International Finance Facility for Immunisation Co (IFFIm), for which the World Bank acts as treasury manager, is a break from the predominantly commercial nature of most Islamic finance transactions.

The deal is part of World Bank efforts to adapt sukuk for use in a variety of ethical pursuits, including advising the Dubai government on a funding strategy for the emirate's green investment programme.

IFFIm, backed by nine sovereign donors including Britain and France, will use the proceeds of its sukuk to finance projects for the Global Alliance for Vaccines and Immunisation (GAVI) and is open to using the format again.

"It's a natural market for us. These kind of socially responsible investments are very much aligned with the core principles of Islamic finance," IFFIm Board Chair Rene Karsenti told Reuters.

The sukuk helped IFFIm diversify its investor base and secure competitive pricing, but also helped raise the profile of GAVI activities among Muslim-majority countries.

The sukuk could encourage other non-profits to consider this funding tool, while Gulf countries could be inclined to become GAVI donors themselves, said Paris-based Karsenti, who is also president of the International Capital Market Association.

Founded in 2000, GAVI has financed immunisation efforts in 73 countries, with half of its investment directed to 33 Muslim-majority countries, including Yemen, Mali and Indonesia.

"Sukuk is not new but what is new here is that it is associated with a socially responsible vehicle. We hope we can lead the way for other similar institutions to use the market."

Islamic finance follows religious principles which forbid involvement in businesses connected with gambling, tobacco or alcohol, but has only recently begun to explore wider social responsibility.

Future sukuk from IFFIm could help reinforce that change by financing other high-profile immunisation efforts, and GAVI is actively in discussions over taking a role in fighting Ebola when a vaccine becomes available, Karsenti said.

(Reuters / 05 December 2014)

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