Islamic finance in Africa in its infancy but underway

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

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

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

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

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

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

Regional Developments

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

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

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

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

Conclusion

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

(C P I Financial / 30 December 2015)

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IDX Recorded 53 Bond and Sukuk Emissions in 2015

TEMPO.CO, Jakarta - The Indonesia Stock Exchange (IDX) recorded a total of Rp 61.87 trillion (US$4.4 billion) in bond and sukuk emissions in 2015.

Data from the IDX, as quoted by Bisnis.com on Sunday, December 27, 2015, the stock authority recoded a total of 53 bond and sukuk emissions issued by 38 companies. Cumulatively speaking, a total of 103 companies issued as many as 281 bond and sukuk emissions at the IDX.

The outstanding nominal values currently stand at Rp 250.72 trillion (US$17.9 billion) and US$100 million.

“Meanwhile, there are a total of 92 series of state bonds (SBN) with a value of Rp 1,418.99 trillion (US$101.4 billion) and US$1.04 billion. In addition, the value of asset-backed security stands at Rp 2.45 trillion (US$175.7 million),” the IDX management said in a press release.

Over the last week, the IDX also recorded three bond emissions, namely Continuous Bond II worth Rp600 billion (US$42.9 million) issued by PT Tunas Mandiri on December 21, 2015; Continuous Bond I worth Rp 150 billion (US$10.7 million) issued by Bima Multi Finance; and Continuous Bond I worth Rp 600 billion (US$42.9 million) issued by Wahana Ottomitral Multiartha (WOM).

 (Tempo.CO / 30 December 2015)

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Realising a vision for Islamic finance

THE basic objective of Islam is to emancipate people from every kind of material and doctrinal slavery and uphold social justice.

In the economic field, and with particular regards to finance, Islam has also paid due attention to all the factors that restrict the freedom of action, and those that lead to material and intellectual bondage (Behechti & Bahonar, 1990).

In this regard, the Quran has formulated rules, including one that has been deemed as part of the vision of the Quran itself, and has become the main thrust of Islamic economics and finance — the prohibition of riba (usury).

This rule is clearly outlined in the Quran. The following verses prove that Islam is very serious when it comes to riba: “Those who swallow down usury cannot arise except as one whom Satan has prostrated by (his) touch does rise. That is because they say, trading is only like usury; and Allah has allowed trading and forbidden usury. Allah does not bless usury, and He causes charitable deeds to prosper, and Allah does not love any ungrateful sinner.”

To show that riba has very bad implications on human welfare, Allah has declared war against those who refuse to stop practising riba.

Verses 278 and 279 of Surah Al-Baqarah state: “O you who believe! Be careful of (your duty to) Allah and relinquish what remains (due) from usury, if you are believers. But if you do (it) not, then be apprised of war from Allah and His Apostle.”

In one of his hadith, the Prophet mentions: “The wrath of Allah is on the taker ofriba, its giver, its writer and its two witnesses.”

In regard to financial transactions, riba is defined as any contractual increment in a loan or debt due to a time element.

We know this today as interest (Kahf, 2006). To understand why riba violates the principles of property rights in Islam, we need to revisit the basic concept of debt.

According to Kahf, a debt is an inter-personal relation that is a liability on one party and an abstract asset to the other.

By its nature and in real life, a debt is not liable to increase or decrease; it is not able to produce increments because it has no intrinsic utility other than being an ingredient of wealth.

The amount of an increment in a debt is also assumptive; it depends on the conditions and externalities in the imaginary market that we create for debts.

Interest-based debt contracts have two major characteristics. First, they are instruments of risk shifting, risk shredding and risk transfer.

The second characteristic of interest-based contracts is that upon entering into such a contract, the creditor attains a property rights claim on the debtor, equivalent to the principal plus interest and whatever collateral may be involved, without losing the property rights claim to the money lent.

Therefore, it is very obvious that the practice of charging of riba is an act of injustice because it violates Islamic property rights principles.

The Islamic finance industry is still far from realising its founding fathers’ vision of uplifting society through the concept of justice, social equity, brotherhood, charity and cooperation.

As a matter of fact, the Islamic banking and finance industry (IBF), which is deemed as the only manifestation of an Islamic alternative to mainstream economics, seems to have grown as part of the conventional financial sector (Zaman & Asutay, 2009).

Most Islamic economists highlight two major points about the IBF’s failure. First, they say the IBF is economically not feasible because it is more costly and less accessible to those in need.

In fact, very little of the large amounts of wealth associated with it has actually reached the most needy in Muslim societies. Instead, the funds circulate amongst large corporate interests in oil-rich states (Zaman & Asutay, 2009).

Second, they also criticise the process of reengineering financial products to make them Shariah-compliant, whereby only the actual validity of the fiqh(jurisprudence) is involved.

Some sceptics, such as El-Gamal (2006), have expressed unease at the fact that Shariah scholars who authenticate such contracts are themselves employed by the industry, while others, like Zaman & Asutay, have claimed that such contracts are designed to circumvent Shariah laws and so violate broader principles, ormaqasid, associated with the prohibition of riba.

The reason for the IBF’s failure is rooted in the proposed multi-dimensional andtawhidi development process.

This is because by solely relying on the prohibition of riba and at the same time operating on a conventional system framework, the Islamic finance industry – instead of growing as an establishment that promotes justice and equity – would only converge and become part of its mainstream counterpart.

As asserted by Zaman and Asutay, only an Islamic political economy can respond to this failure, not neutral Islamic finance or even Islamic economics.

For any system to be fully realised, it must have elements, such as a framework paradigm, a value system, foundational axioms, operational principles, specific methodologies and functional institutions.

As such, the actualisation and realisation of the objective of the Islamic finance industry depends to some extent on the identification, support and propagation of the specific indigenous institutions of Islam associated with the original vision underlined by the Quran.

Muhammad Hisyam Mohamad is a Fellow at Ikim’s Centre for Economics and Social Studies. The views expressed here are entirely his own.

(The Star Online / 29 December 2015)

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Malaysia: Samalaju Port’s $219m sukuk; Sasbadi’s $7.34m in private placement

Port operator Samalaju Industrial Port looks to raise $219.5 million through bonds while Sasbadi raises funds through private placement, in Malaysian corporate fundraising news over the week leading up to Christmas.

Samalaju Industrial Port seeks $219.5m funds via Islamic bond issuance

Samalaju Industrial Port Sdn Bhd is looking to raise up to MYR950 million ($219.5 million) via sukuk issuance to finance the construction of its 156 ha deep-sea Samalaju Port in Sarawak.

RAM Ratings said, Samalaju will be the operator of the MYR1.9 billion Samalaju Port upon its expected completion by the fourth quarter of financial year 2016, under a 40-year contract.

The construction of the port will also be financed with a government grant of MYR500 million, and an equity injection from Samalaju’s parent company Bintulu Port Holdings Bhd of MYR600 million.

The ratings agency has assigned an AA1(s)/stable rating to Samalaju’s proposed Sukuk Murabahah programme.

“In view of Bintulu Port’s solid relationship with the Malaysian government — given the latter’s shareholdings in Bintulu Port through various government agencies, the Sarawak government and Petronas (Petroliam Nasional Bhd) — the state is seen as having an incentive to provide the company with financial assistance, which includes subscribing to a portion of the proposed sukuk, if necessary,” the statement said.

Sasbadi to raise $7.34m through private placement

Sasbadi Holdings Bhd has proposed to undertake a private placement to raise up to MYR31.75 million ($7.34 million), to part finance future acquisition of publishing, education, education-related business(es) or intellectual property rights, to repay bank borrowings and for working capital.

Based on an indicative issue price of MYR2.50 per placement share, Sasbadi said, in a Bursa Malaysia filing, the proposed private placement will involve the issuance of up to 12.7 million new shares or 10 per cent of the issued share capital of Sasbadi. The issue price will be determined and announced later.

The education book publisher Sasbadi said the placement shares shall be priced at not more than 10 per cent to the five-day volume weighted average market price of Sasbadi, but not lower than the par value of Sasbadi shares of MYR0.50 each.

“The board of directors is of the view that the proposed private placement is the most appropriate avenue of fund raising as it enables Sasbadi to raise funds to partly pare down its borrowings, which would give rise to interest savings of MYR500,000 per year,” the group said in the announcement.

It also noted that it would be able to raise additional funds without incurring interest expenses or service principal repayments compared with conventional bank borrowings or the issuance of debt securities.

“This would allow Sasbadi to preserve cash flow for reinvestment and/or operational purposes,” it added.

The group is also proposing a share split involving the subdivision of every one existing share of 50 sen each in Sasbadi into two shares of 25 sen each on an entitlement date to be determined and announced later, to enhance the stock’s marketability and trading liquidity.

(Deal Street Asia / 25 December 2015)

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Demand for Islamic finance gaining ground in Mideast

Islamic finance is gaining popularity in key markets, including the personal loan sector, and there has been a marked increase in the amount of UAE residents choosing an Islamic finance loan over a conventional loan

Compareit4me group has noticed an increase of 53 per cent of consumers searching for Islamic finance products.

The increase in popularity is across the board and research by Morgan McKinley found a surge in the global value of Islamic banking assets is forecasted for the next few years. Figures are predicted to reach $6.5 trillion by 2020, a huge leap compared to of $150 billion in the mid-1990s.

In the UAE alone, total Islamic banking assets accrued in 2013 was $95 billion (compared to $83 billion in 2012), and it is showing no signs of slowing down, with the Dubai Chamber of Commerce and Industry predicting that the annual growth rate will reach 17 per cent until 2018.

The increase has been with all consumers, with a recent study from Bloomberg concluding that in the UAE, Islamic finance has also gained popularity among non-Muslim expats.

The sector is still growing at an incredible rate; in some markets it is growing up to 50 per cent faster than traditional banking and it looks to be a trend that's set to continue. This is predominantly thanks to an impressive increase in competition, product development and better customer value.

For a while Islamic banks slipped behind conventional banking in terms of educating customers about what they offer, how they are different and why they are an appealing alternative - but they have stepped up. Now the awareness is much greater, the products available are much wider and these efforts are paying off, as the spikes on compareit4me.com, a Middle East finance comparison website, indicate.

While UAE Islamic banks including ADIB, Emirates Islamic, Dubai Islamic and ADNIF are continuing to offer competitive products, with flat rates on loans as low as 2.36 per cent, non-Islamic banks are also increasingly offering attractive Shariah-compliant products. Commercial Bank of Dubai and Noor are offering flat rates as low as 2.75 per cent, in comparison to other banks that are offering up to seven percent.

The research by compareit4me.com found that 74 per cent of consumers are looking for personal loans and credit cards; nine per cent for home loans; five per cent for auto loans; and 12 per cent for other products, such as different types of bank accounts and business loans.

Jon Richards, chief executive officer of compareit4me.com, said: "Once they might not have been, but now Islamic finance products are most definitely viewed side by side with conventional bank products. Given the trends we've seen on the site, we've become aware that most users are blind to the fact a certain product is Islamic, they just simply want a good rate. Therefore, the main attraction for customers seeking new banking products is the transparent fees and rates which come with the Shariah offerings."

(Khaleej Times / 25 December 2015)

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Tax Season Canada poised to be hub of Islamic finance

Islamic banking is being touted as the next big thing for Canada's financial services sector, but experts say it's up to the new federal government to demonstrate that it welcomes Shariah-compliant investments.

"It's absolutely fundamental that the Canadian government signal that, in fact, it is open to Islamic finance," says Walid Hejazi, an associate professor at the University of Toronto's Rotman School of Management.

They could do so either by issuing sukuk – Islamic bonds – or by making a public statement, Hejazi says, noting that the previous government was on record as saying it welcomed such investments.

"If there is a risk that a change in government is going to change its view on that kind of investment, that spooks investors," he said. "So the government must be clear to say . . . 'We're open to Islamic finance, we welcome it,"' Islamic finance – which bans interest payments and investments in gambling, pornography, weapons, alcohol, tobacco and pork – is a fast-growing niche in the financial services industry.

A study released earlier this month by the Toronto Financial Services Alliance and Thomson Reuters says Canada has a number of advantages – including a growing Muslim population, a stable banking system and a favourable regulatory environment – that make it well positioned to become a North American hub for Islamic banking.

"Islamic finance is one of the fastest growing kinds of finance in the world," said Janet Ecker, president and CEO of the TFSA.

"There are opportunities here which should be explored. Toronto is an international financial centre. ... This is another way to keep our reputation and our capabilities growing."

Hejazi says the Islamic ban on interest doesn't mean consumers borrow money for free – it just requires loans to be structured more like partnerships between financial institutions and borrowers.

"The whole idea or the concept is to avoid people becoming buried in debt because, back in the days of the Prophet, ... when people weren't able to pay their debt they were enslaved or exploited," he said.

In the case of commercial loans, that means both the bank and the borrower must have a vested interest in the success of the underlying business.

"If the underlying business does well, they share in the profit," Hejazi says. "If it does poorly, they share in the losses. That's the fundamental difference; this idea of shared risks, and nobody can have a guaranteed return."

The report commissioned by TFSA says there are a number of opportunities for Islamic banking to expand in Canada. Some Muslim Canadians desire Shariah-compliant solutions to their personal finance needs, including mortgages, insurance and investment opportunities.

The Canadian government could also issue sukuk, or Islamic bonds, which are structured in such a way that they generate returns without the use of interest payments, to help fund its planned infrastructure spending, according to the report.

"The new federal government has an opportunity to demonstrate Canada's openness to foreign investment from markets in the Middle East and Southeast Asia by encouraging investments either in a conventional or an Islamic-compliant manner," said Jeffrey Graham, partner and the head of the financial services regulatory group at Borden Ladner Gervais LLP.

"Other governments who have been seeking to do the same thing have issued sovereign sukuks, or Islamic bonds, to help promote their financial sectors."

However, a spokesman for the Department of Finance appeared to throw cold water that idea, saying in an email that "there continues to be very strong demand for regular 'plain vanilla' Government of Canada securities."

Meanwhile, one of the obstacles to the growth of Islamic finance in Canada is the lack of what Hejazi calls "human capital."

"We need to have people across the country that understand Islamic finance, which we don't have," said Hejazi, who teaches a course onIslamic finance, now in its fifth year, at Rotman. Last year the course was full, with 40 students on the waiting list.

"I get so many e-mails from people downtown, from the banks, the accounting firms, consulting firms, saying 'Could I sit in on your class?"' says Hejazi. "There's a lot of interest. People really want to learn more."

(CBC.News Business / 23 December 2015)

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Zakat Foundation of America tours project sites

Mr Kemal Ali Berru, Programme Director of Zakat Foundation of America, a Chicago-based Islamic charity organisation, has toured some of its project sites in Ghana.

Mr Berru told journalists that the local office of the Foundation is in Kumasi, working in the areas of education, health, livelihood empowerment and humanitarian assistance in the Brong-Ahafo, Northern and Upper East Regions.

Mr Selia Alhassan, the Country Representative, disclosed that the organisation is currently implementing a livelihood programme at Jugboi in the Bole District in the Northern Region, where it had set up a cassava processing plant to help women farmers to process the crop to earn a living.

The Foundation has also established two other vocational training centres in Kumasi and Bole equipping beneficiaries with machines to be self-employed.

Mr Salia also spoke about other interventions of the Foundation, which includes the provision of medical supplies to four hospitals and 32 water wells across Bole, Bawku and Binduri.

He said the interventions are helping to transform lives, and pledged to improve on them to touch more lives.

Mr Birru expressed gratitude to all partners, including the district assemblies, for their collaboration to ensure the delivery of the projects.

(Ghana Web / 20 December 2015)

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