The continued rise of Islamic finance in the UK

Despite the clear political will for the UK to become an Islamic finance hub, there are steep political challenges ahead.

At the ninth annual World Islamic Economic Forum in London on 29 October, David Cameron announced that he wants to see London standing shoulder-to-shoulder with Dubai and Kuala Lumpur as one of the great global centres of Islamic finance. In saying this, he declared that he intends Britain to become the first non-Muslim state to issue sukuk – Islamic bonds that are structured in such a way as they do not infringe upon Sharia law.

While the issue size is expected to be relatively modest – approximately £200m in the first instance – the announcement should rightfully be seen as a symbol of the square mile’s desire to capture a large share of the growing Islamic finance market. Few would dispute the wisdom of this move, for the growth of Islamic finance since the first sukuk was issued in Malaysia in 2000 has been very impressive.

The global Islamic economy, which includes the Islamic finance industry, is estimated to have a total value of $8 trillion. Sukuk have been used since their inception as a means for corporates and states to raise alternative financing. In light of the global crisis and liquidity squeeze, Islamic finance has grown exponentially. On this basis, it would be strange in a sense for London and other global financial centres not to try to gain some market share and we should expect announcements similar to that of Cameron’s from spokespeople in New York, Frankfurt, Paris, Hong Kong and Singapore.

The growth of Islamic finance is attributable to many different factors, but that growth would not have been possible without the development of the contemporary financing techniques or structures that underpin the industry. For this, sukuks today can be seen as a union between religious principles and modern financing techniques. One can understand the appeal of sukuk, particularly in light of the banking crisis that has gripped the Western world and beyond since 2008, for in some senses it can be seen as a more tangible investment than a conventional bond, because the sukuk owner has a stake in the underlying asset rather than a share of debt. So while a conventional bond holder essentially receives interest on a loan, the sukuk holder receives a share of profit derived from the commercial ventures of the business, rather than on interest (interest is strictly forbidden under Sharia law).

However, despite the clear political will for the UK to become an Islamic finance hub, there are undoubtedly challenges lying ahead. An obvious area of weakness is a lack of indigenous expertise in terms of awareness of the range of financial products on offer and the various structures that can be implemented to make finance initiatives Sharia-compliant. Although there are Islamic finance practices operating out of London, there is still a dearth of expertise. Furthermore, regulation standardising practices and giving confidence to borrowers will be required to grow the industry. However, these are not immutable, nor insurmountable, obstacles.

As uncertainty persists in certain parts of the global economy, it has created an opportunity for Islamic finance to continue to flourish and expand into new economies. The UK has put down a marker in aiming to be the first western nation to issue sukuk and such a move is to be welcomed by the markets and legal and financial services. If some of the challenges are removed then watch this space, for it would be a brave individual who discounts the possibility of further growth in this intriguing market. There are currently 50 sukuk listings on the London Stock Exchange – expect many more to come.

(News Statesman / 11 Dec 2013)

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

Malaysia: UDA to work with Bank Muamalat in developing RM1b wakaf land

PETALING JAYA (Nov 12, 2013): UDA Holdings Bhd will work with Bank Muamalat (M) Bhd to develop 40.47ha of wakaf land with a gross development value of RM1 billion.

The land, ready for development, is spread throughout the country and owned by the respective state Islamic Religious Councils.

Bank Muamalat will provide the end financing for UDA to develop the land.

UDA Holdings group managing director Ahmad Abu Bakar said implementation of development projects on the wakaf land will be based on the concept of Ijarah or leasing.

"Through this concept of Ijarah, ownership of the land to be developed remains with the state Islamic Religious Councils, and only its usage will be transferred," he told reporters after the signing of a memorandum of understanding for the development of the wakaf land between Bank Muamalat and UDA Holdings, here today.

"UDA's model and springboard for the development of wakaf land on a commercial basis using the Ijarah concept, is based on the success in developing the 3.94ha belonging to the Penang State Islamic Religious Council," Ahmad said.

He said the development of wakaf land is still being fine tuned and UDA had also received letters of offer to develop such land in Selangor.

To realise the development of wakaf land, UDA acting as the developer, will underwrite the development costs, while also being responsible for marketing the projects.

"Development of the wakaf land will help add value as well as generate optimum returns," Ahmad said.

(The Sun Daily / 12 Nov 2013)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Malaysia: Syariah-compliant securities will attract more Middle East investors: PM

KUALA LUMPUR: Prime Minister Datuk Seri Najib Razak is confident the introduction of shariah-compliant securities will attract more investments from the Middle East.

"With the onslaught of a new wave of investments, more job opportunities will be created and this will indirectly make our economy stronger," he said in his latest Facebook posting.

 

Najib, who is also Finance Minister, said luring foreign investments into the country was Malaysia's top priority towards becoming a high-income status  country.

 

"Based on this aspiration, the Securities Commission has introduced revised Shariah-compliant securities in order for Malaysia to draw more investments from the Middle-East," he said.

 

The Securities Commission announced yesterday an updated list of Shariah-compliant securities approved by its Shariah Advisory Council (SAC), based on the revised screening

methodology announced on June 18, 2012.

 

Under the revised screening methodology, SAC will adopts a two-tier quantitative approach which applies the business activity and financial ratio benchmarks. 

 

The revision took into consideration the rapid development taking place in Malaysia's Islamic finance industry since the Shariah screening methodology was first introduced in 1995. 

 

The revision will potentially spur greater inflow of foreign Islamic funds into Malaysian Shariah-compliant equities, thus expanding the Islamic capital market’s global reach, as outlined in the Capital Market Masterplan 2.

 

The updated list, which took effect yesterday, will feature a total of 653 Shariah-compliant securities which constitute 71 per cent of the 914 listed securities on Bursa Malaysia. 

 

The list includes 16 newly classified Shariah-compliant securities and excludes 158 from the previous list issued in May. 

 

To facilitate transition under the revised screening methodology, investors are given six months from Nov 29, being the effective date of the list of Shariah-Compliant Securities, to dispose off securities that are excluded from the list.

 

During the six-months period, dividends received and capital gains realised from the disposal of such securities may be retained by investors, without the need to channel any portion of the dividends and capital gains to Baitulmal and/or charitable bodies.

(News Straits Times / 30 Nov 2013)

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

Interested in non interest?

Islamic Business & Finance talks to Dr. Bashir Aliyu Umar, Special Adviser to the Governor of the Central Bank of Nigeria , Non Interest Banking about the challenges facing Nigeria's nascent Islamic finance industry
Following the debut issuance of Sukuk in Nigeria by Osun State in September, we met with Dr. Bashir Aliyu Umar, Special Adviser to the Governor of the Central Bank of Nigeria , Non-Interest Banking, at the second annual Islamic Banking Summit Africa (IBSA 2013).

Dr. Umar began by outlining the steps the Central Bank of Nigeria has taken to establish a framework for Islamic finance in Nigeria. "There are a number of initiatives and it cuts across the regulatory authorities. The Central Bank has licensed a number of Islamic banks - one full-fledged, one window and another bank has gained approval in principle to operate an Islamic window. The Central Bank is putting a lot of money into training; it is partnering with, among others, the Islamic Research and Training Institute (an affiliate of the Islamic Development Bank Group). It has created a supportive environment by involving the legislators and judiciary in training. The members of the Federal High Court have the sole jurisdiction over banking cases, so it has done a number of training programmes to enlighten them on how non-interest banking operates, so that the judges will be aware of the challenges.

"The Central Bank has a strong initiative for liquidity management instruments and creating an interbank market for Islamic
financial institutions. It is also driving the quest for having a sovereign Sukuk issuance in Nigeria in order to create a benchmark for the corporates and the sub sovereigns that are interested in Sukuk issuance, which will deepen the market for Islamic capital market products for the banks to invest in, because they have excess liquidity and very limited money market instruments. In this respect it has brought a technical team and identified a number of national projects which are very viable for Sukuk issuance. It has presented a report to the fiscal authorities for consideration.

"The Central Bank has a view to diversifying Nigeria's source of funding away from the Eurozone to China and to the Islamic Sukuk market. These are part of the initiatives of the Central Bank. At the capital markets level, we've got guidelines for Islamic fund managers and the first Sukuk has been issued [by Osun State]. It's a modest one of about $63 million, but it was locally arranged and the uptake was very good; it was oversubscribed by more than 10 per cent and the originator took it all. Most of the banks, even the conventional banks, invested heavily in it - 50 per cent was taken by the banking sector.

"There are guidelines on Sukuk but only for sub sovereign and corporate. We have guidelines in place for Takaful. Part of the initiative to have sovereign Sukuk issuance is that it's supporting the body that is supporting the debt management office. It is supporting the development of a framework for the issuance of sovereign Sukuk.

"We also have an Islamic index in the Nigerian Stock Exchange which is screening the securities that are Shari'ah-compliant and it has been quite successful and is among the initiatives of the capital market regulators to deepen the market in Nigeria."

What is the public perception of Islamic finance in Nigeria?

"Public perception is divided. There are a lot of misperceptions. There is a divide between Muslims and Christians. There have been issues where there has been mistrust and misgivings between the two communities. Whenever something new is introduced there is a lot of resistance. So there was a perception that Islamic finance wasn't about economics, it was just another religious agenda. But gradually the Central Bank did a lot of interaction with the media to explain the whole project. It is worth noting that this did not start with the present Governor who is a Muslim. Policies regarding non-interest banking in Nigeria date back to 1991. The initial draft for the regulations of Islamic banks was released by the previous Governor [Professor Charles Chukwuma Soludo] who is a Christian.

"A lot of the misperceptions have now gone away, and the Islamic banks have customers from across the [religious] divide. Negative attitudes tremendously slowed down [this process] so it has not been easy but a lot of it was based on ignorance and a lack of a very strong drive from the promoters to correct the misconceptions. The Central Bank cannot take charge of this, because it would be seen as a promoter when it is just a regulator, so there is a limit to what the Central Bank can do. Now with the licensing of the institutions, banks are doing a lot to correct the misperceptions and a lot of the negative attitude has gone away.

"Among Muslims, there is a kind of lukewarm attitude. There is a misunderstanding about the whole thing; they don't realise that it [Islamic finance] is a commercial product; that it has pricing and there was a misunderstanding that it was a free for all. When people heard about a loan without interest, they thought they could just walk into a bank and be given money for free! Because it is a profit-sharing investment, they thought banks would give them free money for their business if they shared the profits. A lot of the product information
was wrong.

"There have been a lot of problems. However, since the introduction of Islamic banking about three national conferences have been held on Islamic finance and a lot of training programmes led by independent training institutes have taken place - for both regulators and market players. All these events and programmes have helped to correct the misconceptions."

What are the main challenges aside from education?

"One of the main challenges is the corporate governance system in Nigeria. The macro environment has influenced the institutions; the problem of corruption is there, even in the private sector. This is one of the greatest challenges.

"There is also the challenge of liquidity management. There has not been a strong interbank market because we have too few institutions. Up to now, the handful of Islamic institutions has not started transactions between themselves, even though Islamic banks are trying to communicate some interbank arrangements with the conventional banks they have not worked. The Central Bank cannot alone provide instruments for the Islamic interbank market.

"The Central Bank is very restricted. It cannot engage in commodity trading, so we cannot do commodity Murahaba with the banks so that they can have placements with the Central Bank and the Central Bank can get a return. This is a very serious challenge. The Central Bank has created a product development committee that brings together the relevant department to continue developing liquidity management instruments for the institutions.

"We also have the challenge of Shari'ah compliance. We have identified our regulatory framework - a role for scholars with Shari'ah knowledge to work with the Central Bank to certify the compliance of products to Shari'ah principles. However, some scholars have a tendency to be lenient when they are close to the institution that has developed the product.

"They are also 'incapacitated' because they do not have knowledge of finance and some of them don't even have a working knowledge of the English language, yet the contract documents that they are supposed to look through and give pronouncements on are in English. When they don't have a working knowledge of the subject matter or the language you have a problem, but if you rely on university lecturers with degrees in Islamic studies institutions can be sceptical because they don't have a relationship with them, and they are not the ones they look to for religious guidance. This is another serious challenge. The Central Bank cannot address this kind of issue directly because it is a secular institution that has got no business to do with religion. Even though it (the Central Bank) has constituted an advisory council of scholars (FRACE) to advise on Shari'ah matters, challenges remain."

Financial Regulation Advisory Council of Experts (FRACE

The Central Bank of Nigeria , established the FRACE as part of its framework for the regulation and supervision of institutions offering non-interest (Shari'ah-compliant) financial services in January 2013. The Council's duties may extend beyond advising the Central Bank, offering its expertise to other regulatory agencies in the Nigerian financial sector in regard to Islamic financial services if they choose to refer to it matters falling under the FRACE's area of expertise.

The initial members of the FRACE whose appointment is on a part-time basis are: Sheikh Sheriff Ibrahim Saleh (Chairman); Sheikh Adam Idoko; Dr. Ibrahim Jalo; Dr. Abdulrazaq Alaro; Dr. Bashir Aliyu Umar; Dr. Mohammad Akram Laldin (Executive Director, International Shariah Research Academy of Bank Negara Malaysia); Dr. Ahmad Ali Abdallah (Secretary-General, Shari'ah Supervisory Board of the Central Bank of Sudan).

In a paper published in December 2010, the Central Bank stipulated that all non-interest financial institutions in Nigeria are required to establish a Shari'ah Advisory Committee to be approved by the Central Bank.

Committee members must be individuals, not companies or bodies, and should at a minimum, have an academic qualification or possess necessary knowledge, expertise or experience in Shari'ah with particular specialisation in the field of Islamic transactions/commercial jurisprudence (Fiqh al Mua'amalat). The Central Bank added that it is 'highly desirable' for the committee member to have:

(Zawya / 09 Dec 2013)

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

Islamic banking way forward says Falak consulting report

Following last week’s World Islamic Banking Conference (WIBC) in Manama, Bahrain, a report published today by Falak Consulting’s Research Department (FCRD) has highlighted that Islamic Banking could be the more economically viable and sustainable model of financing going forward.

The report looks at the financial crisis of 2009 where conventional banks witnessed far greater levels of exposure in comparison to their Islamic banking counterparts and recognizes the overall potential Islamic banking and finance is able to offer the existing market.

With discussions at this year’s WIBC event highlighting similar themes including looking at “Business in the Middle East and the Role of Islamic Finance”, or “New Strategic Approaches to Revitalize Global Growth”, the potential for Islamic banking is certainly there. The FCRD report highlights recent statistics which indicate that Islamic banking is currently the fastest growing segment in the international financial system with an estimated asset size of $1.1 trillion in 2011, representing 80.9 per cent of Islamic Finance assets and 1 per cent of total banking assets worldwide. Building on the same, the report goes on to establish a risk and return framework for “a healthy and transparent growth of the Islamic financial architecture” in the region.

Commenting in light of the WIBC event and the published FCRD report, Suhail Ghazi Algosaibi, Co-Founder and Chairman of Falak Consulting, said, “The 2009 financial crisis has taught us a number of things, the first being that conventional banks and current models are not invincible. It has also opened our eyes to the need to consider other options of banking that are safer, sustainable and viable, which at this point Islamic banking could potentially offer. As a result, we are now witnessing a growing number of global conventional banks exploring this potential as well as increased discussions around the future and way forward for Islamic Finance and Banking, as seen last week at the 20th WIBC  event in Bahrain.”

At present there are a number of global retail banks introducing Islamic banking options including Lloyd’s Bank, HSBC, Standard Chartered and the Islamic Bank of Britain. In Bahrain alone, there are over 26 Islamic banks currently in operation making up a total of $26.2 billion in assets, as of August 2013, according to the Central Bank of Bahrain.

(C.P.I Financial / 09 Dec 2013)

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

Saudi Arabia takes a bigger share of global Islamic assets

JEDDAH - Global Islamic banking assets with commercial banks are expected to reach $1.72 trillion in 2013, according to EY's latest World Islamic Banking Competitiveness Report 2013-14 launched recently at the World Islamic Banking Conference in Manama. In 2012, global Islamic banking assets with commercial banks reached $1.54 trillion.

The report revealed that six rapid-growth markets including Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey (QISMUT) represented 78 percent of the international Islamic banking assets with commercial banks, excluding Iran. This includes both pure-play Islamic banks and windows of conventional banks. There is also increased demand on established and new reference centers including Bahrain and Malaysia to provide leadership for the next phase of industry's development.

Gordon Bennie, Partner and MENA Financial Services Leader at EY, said: "We believe that the future success of Islamic banks will be measured less by the growth of assets and more by the quality of this growth. Impact made through responsible banking, inclusive growth and alignment with the broader halal asset class will be the defining features. Also, trade patterns are shifting decisively in favor of rapid growth markets and QISMUT will be the major beneficiaries. Banks with strong connectivity across key markets and sectors are set to gain."

QISMUT is home to 17 of the top 20 Islamic banks and the global Islamic banking standard setting bodies. QISMUT holds the largest pool of financial and intellectual capital of the industry that will drive the next wave of development across existing and new markets.

Ashar Nazim, Partner, Global Islamic Banking Center at EY, said: "Bahrain and the six rapid-growth markets are systemically important to the future globalization of the Islamic banking industry. We expect Islamic banking to grow at a CAGR of 19.7 percent across QISMUT to reach $1.6 trillion by 2018 compared to $567 billion in 2012."

According to the report, Islamic banks today serve approximately 38 million customers globally, two third of whom reside in QISMUT. However, few Islamic banks are able to fully apply customer insights to innovate. Going forward, emphasis on customer excellence will be the key differentiator that will separate successful Islamic banks from others.

"Islamic finance markets are far from being homogenous as each market is at a different stage of maturity and profitability varies significantly compared to conventional banking. For 2012, the average ROE of the 20 leading Islamic banks was 12.6 percent compared to 15 percent for its conventional peers," added Ashar.

The reports revealed that many banks are currently in the process of replacing or upgrading their core banking system. Capital planning in view of Basel 3 and IFSB guidelines is already influencing the preferred business mix and more Islamic banks believe that the collaborations between mobile providers and banks will further accelerate the adoption of mobile banking beyond payments to more complex savings and financing products.

The biggest challenges for Islamic banks are how to become a mainstream form of banking in their home markets, diversification to build regional brands, and taking a more socially responsible approach to differentiate themselves from conventional banks. The growth of the industry is expected to remain moderate going into 2014, as several leading Islamic banks contemplate large-scale operational transformation. 

"Driving such a broad change program - combining cost improvement with revenue growth - requires exceptional leadership capabilities and significant management capacity. Moving forward, customer and technology will be among the top transformation themes for the global Islamic banking industry," he noted.

(Zawya / 08 Dec 2013)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic banking expected to 40% of Malaysia’s financial sector by 2020

Islamic financial business is at the heart of the Tun Razak Exchange (TRX) project, with some experts calculating that Sharia-compliant transactions could account for up to half of the business that will go through the new centre when it is complete.

Dato’ Azmar Talib, the chief executive of 1 Malaysia Development Berhad (1MDB), the real estate business overseeing the project, says Islamic banking comprises about a quarter of Malaysia’s domestic financial market in terms of assets and financing, but this is expected to reach 40 per cent by 2020, when TRX will be well developed.

“We intend to use Malaysia’s strengths, particularly in Islamic finance, to provide the infrastructure that will enable innovation, attract skilled talents and promote ease of doing business in the sector,” he says.

Others are even more positive about Kuala Lumpur’s potential in the global race to build the leading Islamic financial market. Many analysts believe the competition will come down to a three-way pull between KL, Dubai and London.

Malaysia has longevity on its side, and a developed domestic market. About 60 per cent of primary market sukuk (Islamic bond) issuance was in KL in the first half of this year.

Mohammad Daud Bakar, the chairman of the Sharia Advisory Council of Malaysia’s central bank, says the country has advantages in Islamic finance, such as a developed pensions funds industry, takaful (insurance) and long-term project finance.

“We have established private Islamic ratings agencies that vet the sukuk, and we are the only country with a Sharia-compliant equivalent of the American mortgage firms like Freddie Mae,” Mr Bakar says.

But despite the strength of the domestic industry, Malaysia faces some challenges in the international market. “Around 90 per cent of our issuance is in local currency, so we don’t trade in London. Malaysia has never issued any global sukuk. London uses hard currency, and has deep pockets of dollar reserves, which we do not,” he adds.

“But I believe the UAE will be a leader in this market in the future. It has dollar reserves and will be in a position to take business from London.”

Mr Bakar also points to the potential of the Saudi market. “It is booming because of all the infrastructure that needs to be financed there. It’s a booming market and will probably overtake KL in terms of value of issuance, if not volume,” he says.

(The National / 07 Dec 2013)

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