Syariah funding draws green projects

Financial products based on renewable energy and sustainable agriculture are emerging in Islamic finance as asset managers seek a crossover opportunity between ethical and syariah-compliant investing.

Islamic finance follows religious principles which forbid involvement in activities such as gambling, tobacco and alcohol, but the industry has only recently begun to stress themes of wider social responsibility, such as protecting the environment.

Last week, Malaysia announced guidelines for issuance of socially responsible sukuk (Islamic bonds), aimed at helping firms raise money for projects ranging from renewable energy to affordable housing.

In April, the Dubai Supreme Council of Energy, a government planning body, and the World Bank signed an agreement to develop funding for the emirate’s green investment programme, including “green” Islamic bonds.

Dubai aims to derive 5% of its energy from sustainable sources and retrofit buildings to reduce energy consumption.

Meanwhile, firms in Britain, Canada and Hong Kong are offering sharia-compliant investments in sustainable farming ventures, which may attract money from Islamic investors in the Gulf and southeast Asia as well as from local investors.

The reasoning is that green investment products can tap a wider range of demand if they are made syariah-compliant to appeal to Muslims.

At the same time, non-Muslims who might normally shy away from Islamic investments – because of concerns about pricing, complexity and lack of familiarity – may embrace them if they are green.

It is not yet clear how much success these efforts will have. In past years, Islamic mutual funds made forays into the market for socially responsible investments, but those efforts have struggled, partly because of limited distribution channels.

Fund houses from the Gulf and southeast Asia sought to distribute some of their Islamic funds to European investors using UCITS, a “common passport” for investment products, but they have had only mixed success, and a high-volume business has not developed.

The new crossover products are not mutual funds but instruments tailored specifically to invest in a certain type of asset in a specific country or region.

They combine Islamic screens – lists of criteria for syariah compliance – with other practices required by sustainable investment firms.

In June, Ontario-based AGInvest Properties developed a syariah-compliant investment product providing ownership of Canadian farmland, supervised by Bahrain-based advisory firm Shariyah Review Bureau (SRB).

The venture would buy prime agricultural land which the firm would manage to ensure sustainability through soil preservation, crop rotation and selection of farm operators, said Robbie Duncan, Dubai-based vice president of AGInvest.

The company, which currently manages C$70 million (RM203.47 million) worth of agricultural land, has begun marketing its syariah-compliant product to investors in the Gulf.

A Saudi firm has expressed interest in setting up a similar fund with AGInvest as adviser, said Duncan, without naming the Saudi firm.

“We have found that three main trends have promoted this agri-business: the need for a stable ethical investment, an investment which promotes and aids the betterment of a community, and the need for food security.”

It is the third agriculture-based investment screened by SRB since December, said Yasser Dahlawi, SRB’s chief executive.

“There are only finite amounts of agricultural resources available to the Islamic investor community,” Dahlawi said.

British-based SCS Farmland is offering a syariah-compliant investment programme for Argentinian farmland, while Hong-Kong based Treedom Group is offering Islamic investors an agarwood venture.

Success for all of these ventures is by no means guaranteed, and it is too early to say whether this form of crossover investing will have more success than the Islamic mutual funds previously marketed in Europe.

One environmentally friendly, syariah-compliant investment project in Britain failed to go through earlier this year.

British-based Islamic financial advisory firm Simply Sharia planned to raise £3 million (RM15.74 million) by the end of June to build a solar energy plant, using tax relief from the government’s Enterprise Investment Scheme to create a wakala funding structure.

But the project was unable to reach its funding target by the deadline, partly because as a syariah-compliant structure it could not use leverage like conventional financial products, which limited the returns that could be offered. The project was too small to be financed with sukuk.

“There was a performance differential between conventional solar EIS products (target return £1.15 per pound invested) and the syariah-compliant product (target return of £1.10 per pound invested),” said Anas Hassan, managing director of business finance at Simply Sharia.

“This differential was mainly due to the high level of debt in the structure of the conventional product, whereas the syariah-compliant version was a pure equity play.

(The Rakyat Post / 02 September 2014)

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

Malaysia: Syariah-compatible law needed for Islamic finance transactions

KUALA LUMPUR (Feb 19, 2014): Malaysia should have Syariah-compatible law in the documentation of Islamic finance transaction to settle disputes arising from such transaction, said former chief justice Tun Abdul Hamid Mohamad.

He believed the country should move in fast because there were many factors in its favour, as compared to other countries, which among others was that Malaysia, in the eyes of the world, was an Islamic country.

"Internationally, it is seen as a model Islamic country. It is only natural for Malaysia to want to be the hub for Islamic finance," he said in his keynote address at the Learning Conference Islamic Banking and Finance here today.

Abdul Hamid said, since the beginning and up till now, countries had focused on producing Syariah-compliant products, "but there is one area (Islamic finance transaction) which no country had done to produce Syariah-compatible law for the implementation of those products and settlement of disputes arising from them.

"We know that the English law is applicable but is not completely Syariah-compatible, and we know that English lawyers and judges are not trained in Syariah. We know that most of the judges are, at least, indifferent towards Syariah," he added.

Abdul Hamid also noted that judges must educate themselves for adequate knowledge of Islamic finance and Syariah to handle or deal with those cases.

"They should start to read on the subject. Besides, the judiciary too, should conduct courses, at least to selected judges, on the subject."

Meanwhile, Abdul Hamid said lawyers should not only be thinking of representing defaulting customers in debt collection suits but should also think of cross-border contracts involving multi-national companies in Islamic finance transactions. 

(The Sun Daily / 19 Feb 2014)

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

Malaysia: Boost for syariah home financing, Govt gives 20% stamp duties discount

KUALA LUMPUR: Islamic home financing in Malaysia may beat last year’s record in 2014, as the Government provides tax incentives to get more people to use syariah-compliant borrowing, according to CIMB Group Holdings Bhd.

Mortgages that comply with the ban on interest climbed 30% in 2013 to an unprecedented RM61.9bil (US$18.7bil), Bank Negara data showed. Conventional home financing grew 10% to RM271bil, the same pace as 2012, even after the Government introduced property curbs to rein in speculation.

The Government is giving a 20% discount on stamp duties for mortgages that comply with religious tenets as it seeks to boost Islamic banking assets to 40% of the total by 2020 from 24%. The Government started holding monthly roadshows last year to create greater awareness of such financing principles, as it strives to enhance the nation’s status as a global syariah hub.

“There’s still strong potential for Islamic financing,” Badlisyah Abdul Ghani, chief executive officer (CEO) at CIMB Islamic Bank Bhd, a unit of CIMB Group, said in a phone interview in Kuala Lumpur on Wednesday. “The roadshows and the incentives are helping syariah mortgage growth.”

Malaysia is also trying to boost such mortgages by offering to waive stamp duties for the refinancing of existing home loans that don’t conform to syariah principles. Syariah-compliant property borrowings had risen an average 31% per annum over the past five years to account for 19% of the total RM333bil market in 2013, central bank data showed.

Syariah home loans differ from their conventional counterparts in that a bank typically buys the property on behalf of the customer and rents it back at a mark-up to avoid interest payments. Some of the more popular options include contracts such as Ijarah, Murabaha and Tawarruq.

The central bank cut the maximum duration on all mortgages to 35 years from 45 years in July to rein in household debt, which had risen an average 12% per annum since 2008. In October, the Government increased property gains taxes and imposed curbs on foreign ownership.

The nation’s Islamic banking assets had more than doubled to RM543bil in the past five years, according to October figures issued by the Treasury. Sales of syariah-compliant bonds, or sukuk, rose 69% in 2014 from the year-earlier period to RM5.9bil, data compiled by Bloomberg showed. Issuance totalled RM49bil last year after reaching a record RM95.8bil in 2012.

The Bloomberg-Aibim Bursa Malaysia Corporate Sukuk Index of ringgit-denominated debt fell 0.9% this year to 104.155 as of Feb 4, almost erasing last quarter’s 1.1% gain.

“Islamic mortgages complement conventional ones,” Syed Abdull Aziz Jailani Syed Kechik, CEO at OCBC Al-Amin Bank Bhd, the Islamic unit of Oversea-Chinese Banking Corp, said in a Feb 4 e-mail interview. “One of the draws can be said to be the efforts by the Government and central bank to boost the market through incentives related to taxes.”

Last year’s curbs failed to prevent Malaysia’s House Price Index from climbing 1.4% to a record 194 in the three months ended September, the 19th straight quarterly advance, according to data from the Finance Ministry.

Mortgage demand might also pick up this year, particularly in the first half, as property investors sought to guard against a potential acceleration in inflation, CIMB’s Badlisyah said.

Consumer prices climbed 3.2% in December from a year earlier, the biggest gain since November 2011, an official report showed on Jan 22. Costs may increase further after Tenaga Nasional Bhd raised electricity tariffs on Jan 1.

“The products that have been put out in the market have been very well-received both by Muslims and non-Muslims,” Baiza Bain, managing director at Amanie Advisors Sdn Bhd, a Kuala Lumpur-based Islamic finance consultancy, said in a phone interview on Wednesday. “Islamic finance is still very nascent compared to conventional finance. It definitely needs incentives to push the assets toward the right level.

(The Star Online / 07 Feb 2014)

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

New rules for syariah banking soon

KUALA LUMPUR: Syariah standardisation to ensure stronger financial stability will improve by 2015, thanks to efforts by standard-setting bodies to provide stricter guidelines for the better running of Islamic banking and finance sectors, an industry expert said.

The need to ensure the capability of the financial system to withstand economic and financial shocks are the core objectives of such financial stability, International Islamic Finance Market (IIFM) CEO Ijlal Ahmed Alvi said in an interview with The

Malaysian Reserve.

“A clear standardisation and regularisation is needed, in order for Islamic banking and finance to stay competitive,” said Ijlal.

Ijlal said credit support agreement and cross currency swaps are among the key aspects to be addressed as soon as possible.

“In the next two years we can expect at least four to five new standards in Islamic finance of which the currency side is one of them.

“We are currently working on the currency side, drafting standards and clauses related. It is half-way done,” he said.

Ijlal said for example Islamic banks’ retail product offerings tend to be usually fixed rate murabaha-based pro-ducts to customers, while the corporate customers are offered facilities based on floating benchmarks.

“Thus from the banks’ point of view there is a liquidity mismatch with Islamic deposits being much shorter tenure (3-6 months) compared with Islamic investments of longer maturity, and also fixed versus floating rate exposure.

“Corporate clients also require a more sophisticated product set to manage their own risk-positions through the banks.

“Therefore, Islamic banks require Islamic tools to manage interest rate risk and foreign-exchange (FX) risk. Hence the development of the profit rate swap and the Islamic forward FX contract,” Ijlal said.

Ijlal said there are a number of financial institutions that offer Syariah-compliant hedging solutions for the mentioned risks, however, the standardisation of the documentation is still not complete compared to conventional contracts which has resulted in syariah-compliant hedging remaining unattractively priced as compared to conventional hedging products.

Besides, he said there is an urgent need for a regulatory, supervisory and Syariah framework to be put in place across all markets in order for the sector to realise its fullest potential.

“Stronger standards for corporate governance, transparency, disclosure , accountability , market discipline, risk management and customer protection are crucial to increase market penetration and confidence,” he said.

Moreover, over-reliance on murabaha also needs to be addressed, Ijlal said.

“This is a big challenge indeed. We have to work to create an alternative to murabaha. We are in an evolving nature and this is something that needs to be addressed which involves quite a number of contractual obligations,” he added.

Murabaha is one of the most common modes used by Islamic banks. It refers to a sale where the seller discloses the cost of the commodity and amount of profit charged.

The mechanism of Murabaha is that the bank purchases the commodity as per requisition of the client and sells to him on a cost-plus-profit basis.

“Going forward, Islamic real estate investment trust (REIT) is another product that we are looking at in coming years.

“At the moment IIFM have only a few in Malaysia, Singapore and Dubai. We are looking to expand it further,” he said.

(Free And Independent News / 20 Jan 2014)

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