China Turns To Islamic Finance To Drive Economic Initiative

In 2013, Chinese President Xi Jinping unveiled the Silk Road Economic Belt and the 21st-century Maritime Silk Road initiative now known as One Belt One Road, (OBOR) in order to actively develop connectivity and economic cooperation with countries mainly between China and Eurasia. The initiative aims to build a community of shared interests, destiny and responsibility with mutual political trust, economic integration and cultural inclusiveness. Initiating investment and developing economic trade communications with Islamic countries is one of important components of the OBOR strategy and this is detailed in the "Vision and Actions on jointly building the Silk Road Economic Belt and 21st-century Maritime Silk Road" published by the government on 28th March, 2015 ("Vision and Actions").

Compared to traditional financial products, Islamic finance has developed significantly due to its high flexibility of business, low risk, low debt requirements and the need to use real estate as collateral. In 2014, Sharia compliant financial institutions represented approximately 1% of total world assets, at around US$2 trillion. The latest study shows that, by 2020, the value of the global Islamic financial market will rise to US$3.25 trillion.

Financial integration is one of the key areas of cooperation set out in the Vision and Actions. The Chinese government emphasises that financial integration is a crucial element in the construction of the OBOR and has decided to speed up the incorporation and operation of the Silk Road fund. Proposals to strengthen the practical cooperation of China-ASEAN Interbank Association and to carry out multilateral financial cooperation in the form of syndicated loans and bank credit has also been completed. Qualified Chinese financial institutions and companies are encouraged to issue bonds in both Renminbi and foreign currencies outside China, and use the funds raised to invest in countries along the OBOR.

As background to the strategic execution of the OBOR, State Owned and private enterprises in China are also trying to make use of Islamic finance, as against traditional finance, to serve their own overseas development. Chinese banks are strengthening their cooperation with Muslim countries, and are busy developing their overseas business and outbound investment. Islamic finance is rapidly becoming an established channel for China to enlarge its overseas economic influence.

Issuing Islamic securities is an important mechanism for Chinese enterprises to raise funds and expand in Muslim countries. Although Islamic finance does not offer interest, there are still opportunities to ensure financial benefits and remuneration primarily through issuing Islamic securities (Sukuk). Investors who purchase such securities would not obtain interest as an income; however, they could be given remuneration in terms of investment gains.

It has been reported that a High Speed Rail project in China is considering using Islamic securities to raise a fund for almost 30 billion Chinese yuan (US$4.7billion). If successful, this would be one of the largest Islamic securities fund ever raised. 

In addition, Hainan Airlines Group is planning to raise US$150 million for ship purchasing, and this could be the first such deal to be approved by the Islamic finance authorities. Hainan is also planning to raise offshore Islamic securities. Some large banks in China have been raising their influence in the Gulf countries indeed, three of these banks issued traditional securities on NASDAQ Dubai, while others are in the planning stages. 

Country Garden, the Chinese mainland real estate agents announced their intention in October 2015 to issue Islamic medium-term notes with a nominal value of MYR1.5 billion (US$340million) through their wholly-owned subsidiary in Malaysia. This is the first case of the Chinese real estate sector raising funds offshore through Islamic finance mechanisms.

Apart from issuing Islamic securities, local Chinese government authorities and enterprises who need to raise funds will do so in Islamic countries with substantial oil capital, fundamental infrastructure and energy projects such as coal, chemicals, wind power and solar generation. These are in compliance with the investment preference of the Islamic finance system on projects with long term, low risk, steady income and the "Go Abroad" strategy of Islamic countries as part of their financial globalization. This has highlighted efforts through the promotion of local development of China to absorb foreign investment and maintain local stability.

However, we must also note that due to the characteristic of Islamic finance, and how it differs from traditional finance, there are numerous difficulties and challenges Chinese enterprises would have to face when using this structure. Unfamiliarity with the Islamic finance process is the prime issue for Chinese enterprises compared with traditional finance. Islamic finance, as a special financing system, has to follow the teachings of Islam, and as such certain areas are forbidden including the payment of interest, speculation, investments in alcohol and gambling, and both risk and interest share. In order to fully use Islamic finance, Chinese enterprises must learn the fundamental system and regulation that govern this financing mechanism and understand it business practices

Constraints on current policies and systems also have an impact on China's development of Islamic finance. In 2009, the Bank of Ningxia was approved as a trial centre for Islamic banking business, and is the first bank in China to do so. There was a further suggestion that Ningxia could be developed as a pilot region of financial cooperation between China and the Gulf states, becoming the Islamic finance centre of China, like Dubai in the Gulf and Kuala Lumpur in Malaysia, however, this has not yet been finalised by the government. One likely reason for this is the unique nature of Islamic finance which makes it very difficult to merge into the current financing management system in China. Under the OBOR, China is considering using Islamic finance as a breakthrough to initiate extensive business communication and project cooperation in many areas with Middle East and South East Asian countries. It is considering opening outbound Islamic financing institutions, and participating in the investment in these regions or developing enterprises which operate through Islamic financing products. This is not only safer for funds and better for comprehensive income, but also improves the long term benefits.

Following the initiation of the OBOR it is now developing the practical stages, and there will be a significant increase in the use of Islamic financing tools and investment in major construction projects. If the Chinese government could enhance its cooperation with Muslim countries through Islamic finance, that it will significantly progress the development of the Silk Road project.

About Mr Du, Baozhong

Mr. Du is a senior legal counsel in the Beijing office of Yingke Law Firm. After graduating from China University of Political Science and Law with a master degree, he had been working for the Department of Treaty and Law in China's Ministry of Commerce for 13 years, and was engaged in legal consulting work in a large-scaled state-owned enterprise. Mr. Du, as the delegation member of Chinese Government, has participated in the working group meetings held by the Commission on International Trade of the United Nations several times, and addressed as the Chinese representative on meetings of OECD and APEC. He is specialized in foreign direct investment, outbound investment, international trade, private equity, venture capital, mergers and acquisitions, foreign-related arbitration, labor law, etc.

About Ms. Li, Xuan

Ms. Li is working as a trainee in the International Legal Affairs Department of the Beijing office of Yingke Law Firm, and also acts as the coordinator of Yingke Brussels Office. After graduating from Dalian Maritime University with a bachelor degree in Maritime Law, and a LLM Maritime Law degree at Bentham House, Faculty of Laws, University College London. She used to work in-house in an international shipping company, responsible for marine insurance and admiralty laws. While working in the UK, she served as the assistant analyst for hedge funds at Thomson Reuters London. Her specialisations are maritime law, international trade law and international arbitration.

(Zawya / 09 June 2016)

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

Karama, Takaful, and social justice

Last week I had the pleasure of participating in the conference organised by the Ministry of Social Solidarity to mark one year on the beginning of the Karama and Takaful social programs.

Both programs provide direct cash assistance to the poor, Karama to elderly and disabled people who cannot work and Takaful to the poorest families.

During the meeting, the ministry announced that the two programs now cover three million people in the ten neediest governorates, most of them in Upper Egypt, and work was underway to extend the programs to other eligible beneficiaries in the remaining governorates.

I have been a zealous supporter of these programs since the idea was first proposed in 2008 under then Minister of Social Solidarity Ali El-Meseilhi, who also championed it, but political conditions were then unfavorable and inadequate attention was paid to social issues.

The idea rose and fell in the priorities of successive governments and parliaments, until the government of Ibrahim Mehleb finally made it a reality. Having actually implemented the programs over the last two years, the Ministry of Social Solidarity deserves fulsome praise, since implementation is ultimately the biggest challenge and the true measure of success.

The programs are significant because they diverge from conventional pension schemes and proceed from a fundamentally different understanding: that social justice can be realised by providing a comprehensive umbrella of social protection based on redrawing the poverty map in Egypt, examining wealth and income data, building a comprehensive database of all cash, in-kind, and service support received by citizens, and then using this to draft a plan to deliver subsidies to those who need them and limit waste and corruption in social spending.

This new approach distinguishes the Takaful and Karama programs from their predecessors, making for a more targeted, fairer provision of social protection and giving future decision makers an instrument for the application of other social policies.

There are two important dimensions of this type of targeted program. First, direct cash support is not necessarily an alternative to the in-kind subsidies provided for years in Egypt. It is instead a complementary mechanism allowing cash assistance to go where it is needed.

Second, the principle of targeted subsidies for the poor, whether cash or in-kind, means accepting the periodic review and assessment of recipients’ circumstances, and excluding them if their conditions improve or the grounds for their eligibility no longer apply.

Otherwise, the protection umbrella would continue to expand, ultimately again bringing in people who need no support.

The shift from comprehensive support that makes no distinction between rich and poor, needy and non-needy, lies at the core of a much-needed change. The sad truth is that over the last two decades, the exponential increase in social spending to cover all forms of comprehensive subsidies—which now account for 25 percent of public spending—has not been matched by reductions in the poverty rate. On the contrary, poverty has continued to grow.

This trend cannot be corrected without moving from the concept of comprehensive social protection to targeted spending for poverty and the poor.

But the Karama and Takaful programs are a significant beginning, not the end of the road. Several challenges have yet to be addressed.

First, the programs require ongoing follow-up, revision, and review to remedy implementation problems. In addition, these programs cannot be funded in perpetuity by loans and foreign grants.

The state must devote adequate resources from the public budget to ensure their sustainability without being at the mercy of shifts in political tides and international relations—the programs are a fundamental right, not a nonessential handout.

Moreover, in the longer term, we should not stop with these two programs. A social protection network must be based on sound, standardised data on all pension and support programs, up-to-date, accurate poverty maps, integrated social spending, and the provision of jobs.

I’m pleased that the Ministry of Social Solidarity declared its intention to incrementally build on this system, including by reviving the school meal project—a major pillar of the program that requires a more in-depth look.

However, the greatest challenge is for the state to recognise the importance of popular and community oversight of social protection programs. No matter how hard-working and sincere officials are and regardless of the many regulatory systems, records, and instruments they devise, these programs will inevitably stumble and be corrupted and diverted from their goal if they are not subject to the oversight of parliament, civil society, parties, and associations that represent stakeholders.

Community oversight does not interfere with or obstruct the work of official agencies; it is a necessary, positive contribution and a realisation of every citizen’s right to know how the state is spending its resources and whether it is meeting its declared objectives.

(Ahram Onine / 11 Jun 2016)

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