Showing posts with label Shariah. Show all posts
Showing posts with label Shariah. Show all posts

Tuesday, 30 December 2014

Russian Banks Warm to Shariah as Crisis Looms

Russian lenders are stepping up efforts to tap Islamic finance as international sanctions and a slump in oil prices push the world’s biggest energy exporter to the brink of a recession.
Vnesheconombank, Russia’s state development bank, is seeking advice from lenders in the Middle East on how to sell its first Islamic bonds, the RIA Novosti state-news service reported Dec. 16. Banks and companies are seeking Shariah financing after the nation’s currency weakened to an all-time low almost two weeks ago, according to the Russian Business Council in Dubai.
The increased efforts underscore how the highest overnight lending rate since at least 2006 and U.S.-led sanctions linked to the conflict in Ukraine are putting a squeeze on banks including Gazprombank and VTB Bank OJSC. Lawmakers rushed through legislation on Dec. 23 allowing the Deposit Insurance Agency to buy stakes in banks before they face bankruptcy proceedings to keep the system stable.
Banks and corporates “want to know how it works and how they can get into this market,” council Chairman Igor Egorov said in an interview at his Dubai office on Dec. 23. “They see an urgent need within one-to-two years, when the hunger for finance will be very acute because at the moment we still don’t see the full effect of sanctions.”

Attitude Shift

Adopting Islamic finance would mark sea change for the predominantly Russian Orthodox nation. Alexei Ulyukayev, who was first deputy chairman of the central bank until last year and is currently economy minister, said in 2011 the industry isn’t of “primary, secondary or even tertiary importance,” Gazeta.ru reported.
The central bank is now considering legislature for Islamic finance following requests from lenders, Governor Elvira Nabiullina said on Nov. 26.
Russia’s economy will probably contract next year and won’t see growth for four consecutive quarters, according to a Bloomberg survey of economists. The ruble declined almost 40 percent in 2014 as Brent crude headed for its biggest drop in six years. It’s the worst performance of about 170 currencies tracked by Bloomberg after Ukraine’s hryvnia. Brent rose 0.9 percent to $60.01 a barrel at 12:11 p.m. in Moscow.
The Bank of Russia increased the interest rate 6.5 percentage points to 17 percent on Dec. 16, which means Islamic banks can offer better deals than their conventional counterparts, according to the Association of Russian Banks.

Sensitive Issue

“There’s a strategic opportunity for Islamic finance to develop in Russia because given the 17 percent rate, clients won’t go to regular banks,” Sergey Grigoryan, head of analysis division at the association, said by phone from Moscow on Dec. 23. “The market is forcing the central bank to take a closer look at the current situation.”
While Muslims make up as much as 15 percent of the nation’s 142 million people, U.S. government data show, a limited understanding of Shariah finance’s principles may delay its development in Russia.
“It’s quite a sensitive area because many people don’t really understand it, or they may see it as a threat, something unknown,” Egorov said. “They don’t understand how business is related to religion.”

Cash Pool

That hasn’t stopped businessmen from exploring the industry. The heads of Russian banks and companies, including Vnesheconombank and Uralvagonzavod, discussed Islamic finance as part of a two-day meeting in Bahrain with their counterparts from the six-nation Gulf Cooperation Council this month, state-run news agency BNA reported Dec. 14.
“It’s now on the agenda,” Egorov said of Shariah-compliant banking. “There’s no reason why Russia should limit itself and not get funds through Islamic finance.”
(Bloomberg / 29 December 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Wednesday, 12 November 2014

Exim Bank Plans Sukuk as Shariah Assets Expand

The head of Malaysia’s state-owned trade financier said he plans to tap the global sukuk market for a second time, as Shariah-compliant assets look set to reach 40 percent of the bank’s total in 2015.
Export-Import Bank of Malaysia Bhd.’s assets that comply with religious tenets will rise to 2.4 billion ringgit ($718 million) this year, representing a 30 percent portion, from 2013’s 1.5 billion ringgit, Chief Executive Officer Adissadikin Ali said in an interview yesterday. The company is aiming to sell dollar-denominated Islamic bonds in the second half of next year, he said.
The state-owned entity became the world’s first trade financier to issue U.S. currency sukuk with its debut offering in February that helped plug a shortage of corporate Islamic dollar debt in Asia. The lender started providing Shariah-compliant loans in 2009 to support demand in an industry whose assets Bank Negara Malaysia projects will triple to $6.5 trillion worldwide by 2020.
“We are not short of business,” Adissadikin said in Kuala Lumpur. “Our plan is to grow by 30 percent every year and we have been beating the target consistently.”
The lender is expanding its Islamic finance business as part of Prime Minister Najib Razak’s drive to make the nation a global Shariah-compliant hub by 2020, Adissadikin said. Exim Bank met its full-year target of 5 billion ringgit for Islamic and conventional loans at the end of October and the figure may now climb to 6 billion ringgit this year, he predicts.

Pass Costs

The company’s planned sukuk will be its third in the international debt market and Exim Bank faces the prospect of higher yields as the Federal Reserve gears up to raise interest rates next year.
The bank will probably offer $200 million to $300 million of dollar sukuk with a maturity of five years or more sometime in the second half of 2015, Adissadikin said.
“Timing is not a priority as we can pass the cost to our clients,” he said.
Exim Bank sold $300 million of dollar Islamic notes due in 2019 at a coupon of 2.874 percent in February. The yield on the securities rose eight basis points, or 0.08 percentage point, to 2.55 percent today, according to data compiled by Bloomberg. The lender is rated A3, the fourth-lowest investment grade, by Moody’s Investors Service and A- by Fitch Ratings.
Average yields on global sukuk, which pay returns on assets to comply with the religion’s ban on interest, dropped 57 basis points this year to 2.85 percent, according to a Deutsche Bank AG Index. That’s down from 2014’s high of 3.44 percent on Jan. 2 and compares with the low of 2.77 percent in September.
Worldwide sales of the debt rose 10 percent to $38.8 billion in 2014 from a year earlier after reaching $43.1 billion in 2013 and an unprecedented $46.8 billion in 2012, data compiled by Bloomberg show.

Makes Sense

Exim Bank’s total banking assets may end the year around 8 billion ringgit, up from 5.3 billion ringgit in 2013, Adissadikin said. The company posted a net profit of 144.7 million ringgit last year, compared with 123.8 million ringgit in 2012, according to its annual report. Adissadikin declined to give an earnings forecast for 2014.
Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank Bhd., said it makes sense for Exim Bank to be offering Shariah-compliant financing given that it’s a significant part of the Malaysian economy.
“Exim Bank Malaysia acts as a strong ambassador for Islamic finance,” Badlisyah at the unit of CIMB Group Holdings Bhd., said in a phone interview in Kuala Lumpur yesterday. “The very fact that they issued a dollar sukuk this year and are able to offer wider solutions to their clients also allows them to stand out.”
(Bloomberg / 11 November 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Friday, 10 October 2014

Islamic banking industry: Oman sets up shariah supervisory board

DUBAI: 
Oman’s central bank has set up a shariah supervisory board to help oversee the sultanate’s Islamic banking industry, a centralised model that is increasingly being adopted across the global industry but remains a rarity in the Gulf.

Shariah boards are groups of scholars who rule on whether financial instruments and activities follow religious principles, such as bans on interest payments and pure monetary speculation.
Oman was the last nation in the six-member Gulf Cooperation Council to introduce Islamic finance, publishing rules for it in 2012. The introduction of a central shariah board could now speed up product development, limit costs for Islamic banks and facilitate issues of sukuk (Islamic bonds).
The central bank appointed five members to its shariah board, which will have direct oversight of Islamic banking institutions, similar to the approach taken by regulators in Malaysia, Pakistan, Morocco and Nigeria.
The five members were chosen from seven nominated candidates, the central bank said without naming them.
By contrast, most Gulf countries practice self-regulation of Islamic financial institutions, leaving shariah boards in each commercial bank to determine which products are permissible. Bahrain’s central bank has a shariah board that vets its own products.
The United Arab Emirates has said it plans to follow the centralised approach, backing this up with specific legislation, which could help reduce the risk of conflicting rulings from the shariah boards of various Islamic banks. It has not given a timetable for the legislation.
In Oman, two full-fledged Islamic banks have been established, Bank Nizwa and al izz Islamic, as well as several Islamic windows operated by conventional banks.
Sukuk issues are being considered by the government and banks but progress has been slow, with only real estate developer Tilal Development Co making a small sukuk issue last November.
Oman’s finance ministry plans to issue 200 million rials ($519.5 million) worth of sovereign sukuk early next year, the government’s first such issuance, the chief executive of Bank Nizwa said last month.
The Islamic unit of Bank Muscat, Oman’s largest lender plans a dual-currency sukuk deal worth around $300 million as part of a 500 million rial sukuk programme which the bank’s shareholders approved in March.

(The Express Tribune / 09 October 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Thursday, 9 October 2014

Sharia Loans To Be Introduced For UK Students

A government consultation paper has revealed the development of student loans compliant with Sharia law.

Under Sharia law, Muslims are forbidden from taking out loans which accrue interest.
The Institute of Islamic Banking and Insurance states that ‘as a matter of faith, a Muslim cannot lend money to, or receive money from someone and expect to benefit – interest (known as riba) is not allowed. Riba also applies when borrowing money, as the lender profits from the applied interest. To comply with Shariah, any loan must be Qard (free of profit)’.

“It has been a bit of a challenge, particularly having to balance my studies, social life and a job to cover my expenses”

The Department for Business, Innovation & Skills is to develop an alternative finance model following four months of consultation and calls by national Muslim organisations.
It is hoped that the new system will improve the number of Muslim students deciding to go to university, as finances will no longer be a deterrent.

A second year student who has chosen to fund his own studies said: “It has of course been a bit of a challenge, particularly having to balance my studies, social life and a job to cover my expenses”.

The new Sharia compliant loan system will be welcomed by many. It will greatly increase access to further education”

They continued: “I’m fortunate to have a well-paying job with good hours to help me through but sadly this isn’t the case for everyone. The new Sharia compliant loan system will be welcomed by many. Apart from making life easier for otherwise self-funded students, it will greatly increase access to further education”.
Current student loans carry an interest rate at the Retail Price Index (RPI) plus 3% and repayments are based on salary once working.

The government has worked with Islamic finance experts to develop a system based on the Takaful structure which is already widely used in the Muslim community.

Students will receive loans from the Takaful fund and will pay it back interest free. The funds will then be loaned out to other students, based on a concept of mutual participation and guarantee.

“The government must now prioritise the introduction of a legislative vehicle to implement an alternative finance model”
Students will obtain finance from the fund by applying in a similar way to conventional student finance. They would agree to repay a Takaful contribution, which would be a charitable contribution for the benefit of other members.
The consultation received over 20,000 responses, with 93% claiming that interest-based loans conflicted with religious students’ beliefs and that a Sharia alternative was needed.

The Federation of Student Islamic Societies (FOSIS) welcomed the government’s declaration of support, with vice president of student affairs Ibrahim Ali saying: “Our view is that the government must now prioritise the introduction of a legislative vehicle to implement an alternative finance model.

“We will work with our partners in the run up to the general election to secure commitments from the main political parties to introduce the requisite legislation early in the new parliament.

(Impact / 06 October 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Monday, 18 August 2014

U.A.E. Margin Trade Crackdown Fans Shariah Push: Islamic Finance

Brokerages in the United Arab Emirates, where the market regulator last month vowed it may create new rules to control so-called margin trading, are increasingly offering Shariah-compliant versions of the service.
Mena Corp. Financial Services LLC, an Abu Dhabi-based investment firm, signed a 50 million-dirham ($13.6 million) accord last week with Dubai-based Aafaq-Islamic Finance Company to offer Shariah-compliant margin trading, where banks and brokers lend money to investors to trade. Al Safwa Islamic Financial Services was one of five firms accredited to provide margin trading this month, the Dubai Financial Market announced Aug. 5.
“You have more and more firms acquiring licenses,” Abu Dhabi-based Fathi Ben Grira, chief executive officer of Mena Corp., said by phone yesterday. “We’re pretty convinced there will be a strong appetite.” The deal with Aafaq may grow to as much as 350 million dirhams by year-end, he said.
The practice contributed to stock market volatility in the country this year that sent Dubai’s benchmark index from a bull market into a bear and back again in less than a month. The U.A.E. said it may amend the rules governing lending against shares after reviewing the price swings. Increased monitoring by the central bank and Securities & Commodities Authority is creating more clarity for investors and is fueling client demand, Grira said.

Limited Supply

Shares of Shariah-compliant companies globally advanced 5.2 percent this year through yesterday, according to the Dow Jones Islamic Market World Index. Dubai’s gauge jumped 42 percent in the period and is the best-performing index in dollar terms among more than 90 tracked by Bloomberg. Abu Dhabi’s measure added 17 percent.
Islamic margin trading allows investors, predominantly high-net-worth individuals, to borrow cash according to terms that adhere to the religion’s ban on interest to trade shares, Grira said.
“We’re giving interest-free loans, others offer Murabaha,” Sherif Zohdy, head of brokerage at Al Safwa said by phone from Sharjah yesterday. In a Murabaha contract, goods are bought and then resold with a pre-agreed mark-up to allow lenders to cater for customers who want to lock in payments in the future.
“I have lots of clients who need margin trading, but I cannot offer it,” Zohdy said. “Our capital is 130 million dirhams. Only banks can deal with margin trading on a big scale.”
Total margin accounts at Dubai Islamic Bank PJSC (DIB) rose almost 30 percent to 291.5 million dirhams in the second quarter from the end of last year, according to its latest financial statement.

New Rules

The benchmark DFM General Index soared into a bull market July 15, about three weeks after entering a bear rout fueled by speculation over the ownership structure at Arabtec Holding Co. (ARTC), the U.A.E.’s largest publicly traded construction company. Banks and brokerages exacerbated the selloff as they offloaded stocks to pay back some of the money that was borrowed to buy them.
Representatives of the SCA, the central bank and the country’s two main stock exchanges met to consider the volatility, and said they will make changes to lending regulations if necessary, the SCA said July 7.
Further regulation will help boost the total volume of Islamic margin trading, according to Mena Corp.’s Grira. “We’re for regulation,” he said. “The market has been hurt in the past.”
(Bloomberg / 18 August 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Friday, 8 August 2014

Shariah Study Lures Non Muslim Students in Asia: Islamic Finance

Demand for Islamic finance training from non-Muslims rose more than fourfold in the past seven years as students seek to enter an industry whose assets are set to double to $3.4 trillion by 2018.
Malaysia’s International Centre for Education in Islamic Finance had 2,000 people enrolled on its courses this year, of whom about 14 percent are from nations with small Muslim populations, its Chief Executive Officer Daud Vicary Abdullah said in Kuala Lumpur yesterday. That compares with 3 percent in 2007, he said.
While students from South Korea, Japan and the U.S. dominate the enlistees, those nations have yet to introduce Shariah-compliant legislation. The U.K. became the first western country to sell sukuk this year, while Hong Kong and South Africa also plan to debut in the market in 2014. Ernst & Young LLP forecasts Islamic lenders will have 70 million customers by 2018, up from 38 million last year.
“Islamic finance is becoming less and less of a niche,” Daud said in a phone interview. “The Koreans and the Japanese see this as a business proposition and given the potential, they can’t afford not to participate.”
Malaysia, Indonesia and the six-member Gulf Cooperation Council are the world’s main Shariah-compliant industry centers, with Hong Kong, Singapore and the U.K. all vying to become regional hubs since introducing Islamic finance laws.

Professionals Needed

Australia has considered employing such legislation since at least 2010, while plans in South Korea met with opposition from Christian groups. Japan has no rules of its own but allows subsidiaries of its lenders and insurers to offer Islamic financing overseas. The U.S. has no laws that permit the sale of sukuk although it does provide Shariah-compliant services.
Shariah law bans investment in companies involved in activities deemed as unethical such as gambling, prostitution and alcohol. Scholars are employed to vet products and services to ensure they comply with religious tenets, including a ban on interest payments.
The industry needs 1 million people with Islamic finance knowledge by 2020 as Shariah-compliant assets are set to reach $6.5 trillion by then, according to a November report from the MalaysiaInternational Islamic Financial Centre.

State Sponsored

Rodney Wilson, who used to teach Shariah-compliant banking at Durham University in the U.K. and is now an Emeritus Professor, said he’s taught students from South Korea at Malaysia’s INCEIF and non-Muslim Europeans at the England-based institution.
“Islamic banking and finance is now accepted by mainstream bankers and finance professionals, who see it as an opportunity,” Wilson said in an Aug. 5 e-mail interview. “Sukuk are becoming more popular as the issuance in non-Muslim countries illustrates.”
Global offerings of Shariah-compliant bonds rose 27 percent in 2014 from a year earlier to $26.9 billion, data compiled by Bloomberg show. A decade ago, full-year issuance amounted to $5.6 billion. Malaysia, the world’s largest sukuk market, accounted for 69 percent of sales last year, followed by Saudi Arabia with 12 percent, the United Arab Emirates with 6 percent and Indonesia with 5 percent, Bank Negara Malaysia data show.
Many students from non-Muslim nations are sponsored by state agencies, such as their foreign and finance ministries, said Daud at Malaysia’s INCEIF, who is also on the steering committee of the Royal Award for Islamic Finance organized by Bank Negara and the country’s Securities Commission. More education is needed to clear up misperceptions about the Shariah-compliant industry that some people have, he said.

Better Awareness

Hong Kong plans to sell as much as $1 billion of sukuk in its debut offering this year, according to an e-mailed statement in April. Maybank Kim Eng Holdings Ltd. and law firm Clifford Chance LLP began training staff in the city in preparation for this and future sales.
Hong Kong, Japan, South Korea, the U.S. and U.K. were home to less than 0.4 percent of the 1.6 billion global Muslim population in 2010, according to the website of the Washington-based Pew Research Center. That compares with 1 percent in Malaysia, 12.7 percent in Indonesia and 1.6 percent in Saudi Arabia.
Luxembourg and South Africa are planning to sell Islamic bonds by year-end, Emad al Monayea, chief executive officer of Kuwait’s Liquidity Management House for Investment, said in an interview in London on June 18.
“The awareness is getting better,” Raj Mohamad, managing director at Five Pillars Pte, a consulting firm in Singapore, said in a phone interview yesterday. “Non-Muslim countries want to tap the liquidity available in Islamic finance and expand their offerings.”
(Bloomberg 07 August 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Wednesday, 14 May 2014

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

Monday, 28 April 2014

Egypt Shariah Loans Rise on Record Sugar Deal

Egypt’s biggest Islamic loan, signed yesterday by Al Nouran Sugar, is adding to evidence borrowers are turning to Shariah-compliant funding in a country that ousted its Islamist government less than a year ago.
The company signed a 1.5 billion Egyptian-pound ($215 million) loan to build a factory, according to Al Nouran’s Chief Executive Officer Ashraf Mahmoud. That topped Egyptian Steel’s 1.1 billion-pound facility, which was the North African country’s biggest Islamic loan when it was agreed six months ago, according to data compiled by Bloomberg.
Islamist President Mohamed Mursi was overthrown in an uprising in July, derailing plans for a debut sovereign sukuk sale from the most populous Arab state and stalling the development of its Shariah-compliant financial regime. Borrowers are using Islamic funding options to tap an industry growing at 17 percent a year and set to be valued at $2.7 trillion by 2017, according to PricewaterhouseCoopers.
“The perception of Egypt is changing with political risk coming down,” Montasser Khelifi, senior manager for global markets at Dubai-based Quantum Investment Bank Ltd., said by phone yesterday. “For Egyptian borrowers, it allows them to tap into Gulf Cooperation Council funds since there are some institutions here that only deal in Islamic financing.”

Muslim Majority

Banque Misr, along with the local units of Lebanon’s Bank Audi and Abu Dhabi Islamic Bank (ADIB) were the lead arrangers for Al Nouran’s 8.5 year deal. The loan was priced at 4.25 percent more than the Egyptian “mid-corridor” rate, which is half way between the overnight deposit and lending rates and currently stands at 8.75 percent, Mahmoud said. Egyptian government bonds due April 2022 are yielding about 15 percent, according to data compiled by Bloomberg.
The company also agreed a $30 million mezzanine facility, or debt that’s convertible to equity in case of default, from the Islamic Corporation for Development of the Private Sector, a unit of Jeddah, Saudi Arabia-based Islamic Development Bank, according to Mahmoud.
“We saw that ICD is a AAA rated institution with a firm commitment to invest in Egypt,” Mahmoud said by phone yesterday. “They were the first on board and we had no problem with Islamic financing so it made sense to accommodate them.”
Egypt’s share of the estimated $1.7 trillion in current global Islamic banking assets remains negligible. There are three fully Shariah-compliant banks in Egypt with combined assets of about 80 billion pounds, according to data compiled by Bloomberg, or less than 5 percent of the country’s total banking assets. The country announced a plan to issue Sukuk during the one-year presidency of Mohamed Mursi, before the military seized power.
Thirteen Egypt-based banks took part in Al Nouran’s financing for the plant, which will be built in the Sharkiya province of the Nile Delta and produce 500,000 tons of sugar annually. ICD and Kuwait-based Arab Fund for Economic and Social Development also bought $25 million equity stakes each, Mahmoud said.
“We may be seeing a landmark deal that opens the door for other corporates to consider this kind of financing,” Khelifi said.
(Bloomberg / 28 April 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Tuesday, 4 June 2013

Bringing benefit to mankind by staying true to Shariah in Islamic banking


Last week, Shariah scholars from across Asean congregated in Singapore for the annual “Muzakarah Cendekiawan Shariah Nusantara” organised by the Malaysia-based International Shariah Research Academy for Islamic Finance.

This wonderful annual event brings regional industry players, Shariah scholars and regulators together to exchange views on the practical applications of Shariah in the Islamic financial market.

I thought I should pay homage to the muzakarah in my column by discussing this year’s talking points centred on fees and charges chargeable in Islamic finance. I will focus the discussion here on the most important issue that keeps every industry player awake at night, which is the charging of an Islamic bank’s financial costs to customers.

Currently, any cost that is considered to be financial in nature is not accepted as real or actual cost of the bank, and therefore has not been allowed to be charged to customers by many learned Shariah experts.

It has been said that financial cost in the form of the forced unwinding of hedging and funding arrangements arising from the early termination or default of a fixed rate financing is not an actual cost because many see it as an opportunity loss rather than an actual loss to the bank.

Many make the assumption that every non-consummated fixed rate Islamic financing contract is replaceable with an equivalent transaction immediately. Many say that the hedge is something that the bank has to do anyway as part of prudent business undertaking, so it should not claim from customers. Many forget that the bank had to enter the hedging because the customers demanded an affordable fixed rate, long-term Islamic financing. Without the hedging, the cost of the financing to the customer would be more expensive.

Worse, many seem to have forgotten that Islamic banks do not give loans like conventional banks. An Islamic bank gives financing but it is done by way of a real trade contract. If the trade contract is unreal then it would not have attracted double stamp duty, real property gains tax or other relevant tax to the extent that the Islamic bank requires tax neutrality be provided under law by the government in every tax jurisdiction.

This blinked view of the situation caused many Islamic banks to absorb the losses suffered due to the inability to charge a break funding fee.

I guess this is the true problem statement. This makes Islamic banks totally inefficient and disadvantaged compared to conventional riba-based bank. Globally, this is one reason why Islamic banks’ return on equity is, on average, inferior to conventional banks’ with a few exceptions like Al-Rajhi Bank in Saudi Arabia and CIMB Islamic Bank Bhd in Malaysia.

Islamic banks are licensed to do banking business. Some Islamic banks in Asean do carry a universal banking licence but most are just licensed to do traditional regulated banking activities such as taking deposits and providing financing to customers.

Under such approved activities, the full set of banking business requirements have to be fulfilled by Islamic banks for them to fulfill their obligations under the licence. Any intervention that interrupts this would be detrimental to Islamic banks and causes many to fail the fundamental objective to facilitate financial inclusion and effective distribution of wealth.

Generally, financial costs are real costs of the Islamic banks in doing their function as the mobilisers of funds. Real costs in Islamic banking business can be easily equated with the real costs under non-financial businesses. Although Islamic banking business is purportedly a financial business in nature, it does carry the same financial costs as any normal trade that is non-financial in nature.

An exporter of goods may enter into a hedging contract to mitigate the risk of the sale arising from currency risk, funding risk and so on, in the event of cancellation, early payment or default of the sale contract and to provide best pricing for the buyer. They may also enter a specific funding arrangement just because of the specific purchase by the buyer.

Based on fair trade practice and a willing buyer, willing seller basis, the exporter could charge a break fee to discourage or to incentivise the buyer not to cancel, early pay or default the contract. There is no known Shariah reason to prohibit this, even from an ethics’ perspective.

Financial costs such as break funding costs caused by the unwinding of risk management tool for the trade entered by an Islamic bank are similarly very real under banking business.

Without it, customers will never get access to affordable financial solutions, which is the hallmark of banking as a public good.

We must always remember that Islamic banking with its two-part fund mobilisation system has long been approved as activities consistent with Shariah by many qualified Shariah scholars globally. As long as there is no contradiction with clear express prohibitions in the Quran and legitimate Hadith, any activity under the Islamic banking practice that is a prerequisite business requirement, should not be disallowed and continue to be disallowed.

I believe one cannot invite someone for dinner and then say he can eat the food but cannot drink, or worse, he can chew the food but cannot swallow. Such invitation is incomplete. The same incompleteness exists when allowing a licensed Islamic bank to do Islamic banking business but not allowing it to charge the consequential financial cost it has to incur to make it affordable to the customers.

Having said all of the above, many would still have difficulty accepting the need to allow an Islamic bank to charge financial cost. However, going back to basics, what right does anyone have to deny a seller of goods (in this case Islamic banks) the ability to get the full selling price that has been contracted with the buyer (ie the bank’s customer) if all conditions are met? The answer here is none. I would even go as far as saying it compromises the very basic principle of Muamalat. Of course this does not preclude the bank from giving rebate or discount.

An Islamic bank has the absolute right to the full sale price of a trade contract so the discussion on break funding cost rightly is superfluous in the first instance. However, we are forced to discuss it because people have accused Islamic banks of doing interest-based lending business.

We should never lose the plot of what Islamic banking business is all about. People need to stop this misplaced accusation against Islamic banks when fundamentally it is not and cannot do so under Shariah.

A forced lifting of the veil in the underlying transactions to supposedly expose the purported characteristics of the Islamic banking instruments will only defeat the very purpose of the original application of Shariah principle to provide traditional banking services to principally alleviate poverty among the two billion Muslims globally. If murabahah transaction is stripped off from murabahah financing for example, what is left is the outright lending with the charging of interest, which is unlawful under Shariah.

The net effect might be the same, but financing or monetisation using proper Shariah trade structure is very different from conventional riba-based financing. The former, which is trade, is encouraged under Shariah, while the latter, which is riba, is clearly prohibited.

The confusion between the two is already foreseen in the Quran.

All in all, Islamic banks undertake trade as approved banking activities under financial regulation allowing its customers to own, say a house or a car on fixed term and deferred payment basis. Islamic banks do have flexi rate financing but the issue of financial cost charges is not relevant. The financial cost arising from any hedging or funding arrangement entered to allow an Islamic bank to sell a house or a car on an affordable, fixed-term basis is typically built into the financial obligations of the customer under the underlying Shariah based contracts.

I sincerely hope my hoopla here on the issue of chargeable fees and charges in Islamic finance helps elicit a deeper thought process and brings us back to the reality of the issue. There are many things that we do not know and not sure of but if we stay true to Shariah, we will not lose sight of the ultimate objective of Shariah, which is to bring benefit to all mankind and prevent them from harm.

In the end, not allowing the charges of financial cost within the sale price under a sales contract entered by an Islamic bank with a customer brings more harm to society than good.

Just remember that Shariah has always given the right to the full sale price to a seller of goods to start with but some of us in the context of Islamic banking business seem adamant to change the rule of sale, that has stood for millennia, to the detriment of the Islamic finance industry.



(The Malaysian Reserve / 03 Jun 2013)

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

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