South Africa's FNB to appoint new sharia board by year-end

* Sharia board resigned in July after disputes over role

* FNB Islamic division plans expansion in Africa, India

By Xola Potelwa

JOHANNESBURG, Aug 28 (Reuters) - South Africa's First National Bank (FNB) aims to appoint a new sharia board for its Islamic finance division by the end of 2012, after the previous board dealt a blow to the bank's effort in the sector by resigning a month ago.

"It's top priority for us. We are certainly aiming to have our final committee together towards the end of the year," Amman Muhammad, chief executive of FNB Islamic Finance, told Reuters late last week.

Muhammad joined FNB's Islamic finance division on July 1. The previous head, Ebrahim Patel, resigned after the bank conducted an investigation into "internal processes and practices of the businesses aligned to internal governance practice", according to Eric Enslin, head of client management at FNB Wealth, who declined to elaborate on the investigation.

FNB's sharia advisors quit after disagreements over the board's role when the new management took charge of the division, according to former board members.

A bank's sharia board supervises the institution's products and activities and certifies that they comply with Islamic principles.

FNB said its new sharia board would probably be made up of scholars from local and international Muslim communities, as its Islamic finance division would leverage the bank's presence in India and the rest of Africa to grow there.

A new sharia board for FNB, the retail arm of South Africa's second-biggest bank FirstRand, could help its business by increasing consumer confidence in its Islamic products.

"(When) members of the community have no method to get confirmation or comfort from the sharia board, that puts them on guard. They say, 'I'm not getting information from the sharia board, do I continue to deal with the bank?" said South African businessman and FNB client Abdur Moosa.

FNB says Islamic finance is currently not a "material contributor" to its bottom line, but that it intends the business to expand its contribution in future.

BOUNDARIES

Muslims make up only about 2 percent of South Africa's population but the country is looking to establish itself as a centre for Islamic finance in sub-Saharan Africa.

There are no national rules for Islamic finance in South Africa - banks are subject only to conventional banking laws - so the Islamic operations of institutions such as FNB, Al Baraka and Absa are under pressure to demonstrate to the public that their sharia boards are effective.

"Up until we get to a point where we start seeing a concerted regulatory change to the way Islamic banks operate in the country, and defined governance standards specifically around the functioning and the role of sharia boards, we ensure ourselves that through the boards we have, sharia compliance is always adhered to," Muhammad said.

The bank says it has learned a lesson from the recent incident and will draft clear rules and roles for its new sharia board, which will not include approving the appointments of senior personnel - a point of contention with the previous board, according to bank sources.

"In the absence of terms of reference, everybody (wonders) what's the role of the board," said Enslin.

"What is really key is to ensure that there's proper terms of reference and a constitution in place, which will (ensure) roles are quite clear, and their accountabilities."

Businessman Moosa, who has been a client of FNB Islamic Finance for nearly all eight years of the division's existence, said he had not entered new transactions with the bank since the last sharia board resigned.

( Reuters / 28 August 2012)

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UK: New legal set-up to pave way for syariah framework

Shying away from financial services that do not conform to their faith, British Muslims are now getting a new service to help them manage their finances in line with Islamic Shari`ah.

“Many of the traditional UK financial products involve receipt or payment of interest and as such are considered Haram (unlawful) for Muslims,” Shabab Gulfraz, financial consultant with Ummah Financial Planning, told Yorkshire Post on Tuesday, August 14.

“When looking at their financial arrangements, Muslims need also to consider how their money is invested and what drives the returns they are receiving.”

A new service financial service, called Ummah Financial Planning, has been launched by the accountants and business advisers Garbutt & Elliott in Yorkshire to help Muslims manage their finances in line with Shari`ah.

“There are very few specialist intermediaries in this market,” said Simon Holt, the managing director of Ummah Financial Planning.

“We want Ummah Financial Planning to go national, but initially the business will be based in Yorkshire.

“There are between two and three million Muslims in the UK, and around 25 to 30 percent of them live in West Yorkshire.”

Holt said the idea came after seeing that many Muslims could be steered away from financial services because of the absence of Shari`ah-compliant financial services.

“I worked alongside a Muslim scholar for nearly three years, supporting him in his work to bring more ethical financial products to Muslims in the UK and overseas,” Holt said.

“During this time, I realized that Muslims need specialist financial advice firms to be established which understand the culture, values and beliefs of the faith.

“This is where the idea for Ummah Financial Planning came from.”

Muslim Needs

The new financial service was issued after months of consultations with the Muslim community.

“The Ummah team have spent time consulting with the community to seek their advice on how best to engage with Muslims and brought in a specialist Muslim consultant to lead this work for them,” said Gulfraz, the financial consultant with Ummah Financial Planning.

“Many ISA, PEP, unit trusts and pension funds invest money in a mix of different assets including equities (shares), property, gilts (loans to the Government), corporate bonds (loans to companies) and cash (gilts, corporate bonds and cash are all interest bearing).

“Although these funds are professionally managed by teams of investment managers whose aim is to maximize the returns and create profit; they are often Haram (unlawful) for Muslims as they generate some of their profits from interest or investment into un-Islamic activities,” he said.

Islam forbids Muslims from usury, receiving or paying interest on loans.

Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.

The launch of the new financial service in Britain was timed to coincide with the holy fasting month of Ramadan.

“Throughout this month, Muslims from all countries unite in a period of fasting and spiritual reflection,” Gulfraz said.

“All Muslims will spend time in this month reflecting on their individual faith and practices and reading from the Qur’an, with the aim of improving and strengthening themselves in accordance with the teachings of Islam.

“Ramadan is much more than just not eating and drinking. Muslims are called upon to use this month to re-evaluate their lives in light of Islamic guidance. Towards the end of this blessed month of Ramadan, Muslims are required to pay a fixed portion of their wealth to charity. When calculating the amount to pay, Muslims will take a detailed look at their financial arrangements.”

Britain is home to a Muslim minority of nearly 2.5 million.

Britain is the only country in the European Union to have Islamic banks. It is also developing its takaful market for Islamic insurance.

It also has a strong foothold in developing products such as commodity murabaha – Islam’s version of interbank short-term lending and syndicated loans.

(On Islam / 14 August 2012)

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Malaysia: Shariah focus for new fund

Bullish on the country’s economic resilience, CIMB Principal Asset Management Bhd (CIMB-Principal) has launched the CIMB Islamic Al-Azzam Equity Fund, a syariah-compliant equity fund which aims to achieve consistent capital growth over the medium to longterm period.

The open-ended fund will invest 70-98% of its net asset value in syariah-compliant Malaysian equities listed on Bursa Malaysia, made suitable for those seeking to have a portfolio of investments that adhere to syariah principles.

Deputy chief executive Munirah Khairuddin yesterday said: “We believe if we continue to invest in stocks with strong fundamentals that includes healthy cash flow, quality company balance sheets and strong dividend yields, the fund should be able to deliver consistent long-term capital gain.”

The fund investment focus will be on companies mainly in oil and gas, plantations and consumer discretionary sectors, she added.

With a minimum investment of RM500, even individual retail investors can have access to established companies such as Axiata, Tenaga Nasional Berhad, IOI Group and Digi, among others, said Munirah.

She said the fund managers believed these companies would exhibit above-average growth potentials relative to the industry peers despite a global slowdown.

Syariah-compliant unit trust funds continue to gain popularity even among non-Muslims, because the equity component of such funds can be less volatile and more defensive in nature, she added, as these elements help boost investors confidence when investing in the country.

“In recent months, markets have been receiving more funding for the Economic Transformation Programme and national budget programmes focused on economic growth,” she said, the country has attracted a fair bit of foreign funds, which seek a safe haven amidst current volatile Asian markets that has lifted Malaysia’s Price Earning Ratio premium contribution to the region to a high of 38%.

Additionally, the premium is also partly justified by the 11% higher Malaysian earnings per share growth contribution to the region.

The fund, with an approved fund size of 600 million units, is priced at 25 sen per unit during the initial offer period. It is distributed by CIMB Bank, CIMB Private Banking, CIMB Investment Bank Bhd – Retail Equities and CIMB Islamic Bank, with the initial offer period ending on Aug 21.

(The Malay Mail / 02 August 2012)

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Shariah Financing Helps US Muslims Achieve Home Ownership Dream

Khadijah Sahak, 59, sits in the family room of her neatly-kept townhouse in Sterling, Virginia. The Afghan news program broadcasting from her wall-mounted flat-screen television is discussing the Taliban. 

This leafy Washington suburb is a long way from the refugee camp in Pakistan where Khadijah’s family says they lived after leaving Kabul in 2002.

“We like the house very much,” she says in Dari, adjusting the white headscarf draped loosely around her face. “We are very comfortable here. We are at peace.”

It is a peace Khadijah thought she could never enjoy in the United States.

 

When her grown son, Nabi, offered to help his parents buy a home, Khadijah and her husband refused to live in a house bought with a traditional mortgage.

As practicing Muslims, they believe demanding or paying interest on money - like the kind paid on a home loan - is prohibited by strict Islamic practice.

“Everyone in my family was, in one way or another, against the idea of conventional mortgages,” says Nabi.  

A piece of the American Dream

Then he heard about the Michigan-based Ijara Loans, one of a handful of Islamic financing companies in the United States. They've tapped into a niche market of devout Muslim-American homebuyers by offering “Sharia compliant” home purchasing contracts which do not include actual interest.

“That day they got really excited, when they learned that they were able to still buy a house and not compromise their religious values,” Nabi says of his parents.

When the Sahak family bought the Sterling townhouse in 2010, they joined about 10,000 other Muslim-Americans who've purchased homes in the past 10 years using Sharia-compliant financial transactions.

Guidance Residential, based in Reston, Virginia, is the largest company in the United States which offers Sharia financing. At its spacious headquarters, phone operators manage calls from customers mostly in a mix of English and Arabic.

Spokesman Hussam Qutub says the company has processed $2.3 billion in Islamic home financing transactions since it launched in 2002.

“Relief that it does exist is definitely the feeling among the majority of the people who contact us,” Qutub says. “We are in a sense impacting the ownership rates of Muslim-Americans in a positive way.”

'Sharia' financing

Instead of charging interests on a monetary loan, Islamic finance companies generally offer homebuyers a sale, rent or partnership contract on the home.

In the sale model, the Islamic bank purchases the home, immediately sells it to its customer at a mark-up and the customer pays the bank in installments, according to Georgetown University law professor Babback Sabahi, who lectures widely on Islamic financing.

In the rent model, the Islamic bank purchases the home and rents it to the customer in a rent-to-own type agreement.

In the partnership model, says Sabahi, both the Islamic bank and customer purchase the home together. The customer gradually purchases the bank’s share of the home while also paying a fee for occupying the house.

“In order to be done right,” says Sabahi, “the bank needs to truly purchase the asset, own it and then transfer this ownership to its customers. And a trade - as opposed to lending in the conventional sense of the word - is what Sharia signs off on and approves.”

The arrangement works for devout Muslim-American homebuyers because Islam does allow making profit on a trade transaction or the sale of a commodity - in this case the house. The buyers never feel they are paying interest on money.  

“We feel we’ve only scratched the service here…with this niche market.” says Qutub of Guidance Residential. “There [are] still plenty of consumers out there of the Muslim faith that don’t even know this option is available.”

Keeping the faith 

Sharia financing in the U.S. has accounted for less than $3 billion in home sales over the past 10 years - a small fraction of the total U.S housing market. But Islamic finance companies are making the American dream of home ownership come true for more and more practicing Muslims, like the Sahaks.

“If I can live in America and feel that I own a home that is completely in line with my Islamic system,” says Nabi, “then I guess the pleasure of living in that house would be tenfold.”

“We were very happy that we found an Islamic bank,” Khadijah chimes in. “We didn’t like the other banks. If we want to buy another house it will be from an Islamic bank and I tell my friends that, too. We are more comfortable like this.”

(Voice Of America / 25 June 2012)

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Malaysia: SC lists 825 Shariah-compliant securities

KUALA LUMPUR (May 24, 2012): The Securities Commission (SC) today released an updated list of syariah-compliant securities approved by its Syariah Advisory Council.

In a statement today, the SC said the updated list, which would take effect on May 25 2012, featured a total of 825 syariah-compliant securities.

"These counters constitute 89% of the total 930 listed securities on Bursa Malaysia," it said.

The regulator said the list included five newly-classified syariah-compliant securities and none was excluded from the previous list issued in November 2011.

"The securities are China Stationery Ltd, EITA Resources Bhd, Fraser & Neave Holdings Bhd, Lingui Development Bhd and SapuraKencana Petroleum Bhd," it said.

It said syariah-compliant securities were well-represented in all sectors of industry.

The SC said the full list, which was updated twice a year, was now available on its website atwww.sc.com.my.

(The Sun Daily / 24 May 2012)

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Malaysia: Bursa Suq Al-Sila offers palm olein trading

The world's first end-to-end Syariah-compliant commodity trading platform, Bursa Suq Al-Sila' (BSAS), has added RBD Palm Olein as a new commodity offering.

In a statement today, Bursa Malaysia said this would provide more diverse product offerings for clients trading on the BSAS platform.

"The inclusion of RBD Palm Olein complements BSAS's existing commodities, namely Crude Palm Oil and Plastic Resin," it said.

The stock exchange said trading in the new commodity began on April 17 and RM75 million worth of trades have been recorded as of April 23.

"We foresee this move to further boost trading volume and meet the demand for larger offerings particularly from clients in the Middle East.

"This will also increase the visibility of crude palm oil, the star crop in this region, and allow for greater participation from commodity players and refiners," Bursa Malaysia chief executive officer Datuk Tajuddin Atan said.

The daily average trading value on BSAS currently stands at RM1.5 billion, a three-fold increase compared to 2010, he added. 

(Business Times / 25 April 2012)

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The coming of age of Islamic structured products in Malaysia

Malaysia’s structured products market is benefiting from the development of a liquid Islamic capital market.

Islamic finance is coming of age. Today, for the first time, Islamic structurers in Malaysia and the Middle East are starting to create new financial products and infrastructure from scratch – developments that do not simply wrap their conventional counterparts in a Shar’iah structure but which are Islamic from start to finish.

Already this year, in its effort to develop a wholesale Islamic capital market, Malaysia’s Syariah Advisory Council has approved a Shar’iah-compliant commodity exchange and it has also given the go-ahead for securities borrowing and lending, which will support the creation and redemption of Islamic exchange-traded funds, or ETFs. The first Islamic ETF was launched in January this year.

A broad universe of Shar’iah-compliant underlyings is particularly significant for the structured products market, and most of all for equities structurers. Shar’iah-compliant underlyings often have no volatility market, which makes it difficult for providers to manage their risks, and they are typically illiquid, expensive and difficult to access.

Fixed-income structurers have an easier time of it. The increasing popularity of Islamic bonds has given them more to work with and, in fact, sukuk issuance is now starting to spread outside the Islamic world as borrowers learn to appreciate their value as a way to access new markets. A German state recently issued a sukuk and the UK is also considering one.

But the conventional structured products market in Asia is overwhelmingly dominated by equity and this is where the greatest development in Islamic products is focused.

It has taken a long time to get to this stage. Norfadelizan Abdul Rahman, the head of product development at Bursa Malaysia, describes the evolution of Islamic finance this way: adoption, conversion and, today, genuine architecture. “In the past, most Shar’iah product innovations were focused on adoptions – the study of conventional products and their Shar’iah justifications for use in the Islamic space,” he said at a recent forum on Shar’iah structured products in Kuala Lumpur.

The adoption phase led to the approval in Malaysia of warrants, crude palm oil futures and preference shares, starting in the mid-1990s. This process also allowed 85% of all companies listed on the stock exchange to be approved as Islamic stocks.

The next level of development involved taking conventional products that were not suitable under Shar’iah law and coming up with ways of converting or replicating them. Back in 1998, Islamic financiers created Shar’iah-compliant stock index futures and, more recently, Islamic real estate investment trusts and ETFs.

The global economic slowdown has affected Islamic markets as well, but Malaysian investors in general have not shared the bad experiences of structured product investors in Hong Kong and Singapore.

“Malaysia is protected in a sense, given the regulatory structure,” says Angeline Ong, head of structured products at Citi in Malaysia. “Malaysia has been sheltered from cases like the Lehman minibonds and so on – most of our products are quite conservative in nature and principal-protected by banks in Malaysia.”

However, some investors in equity and commodity products are expecting zero returns, so they are experiencing something of what the clients in Singapore and Hong Kong are going through, but to a much lesser extent.

Malaysian investors buy structured products in a variety of forms. Direct investment in derivatives-based products has only been allowed since 2005 and is still restricted to rich investors. The minimum investment size is either M$250,000 ($70,300) or M$100,000, though the lower figure is only for so-called qualified high-net-worth individuals.

“The first generation of Malaysian structured products will mature in the first half of next year, so it will be interesting to see the final performance of such products and how this will impact the market and investor sentiments,” says Aida Mastura, head of investor sales at Citi Malaysia.

Regular investors cannot buy structured products directly. Instead, they must buy them through structured deposits, which have a minimum investment amount of M$100,000, or through funds, which have been allowed to invest in structured products only since May 2006.

Structured deposits, which the securities commission prefers to call floating-rate negotiable instruments of deposit, are the biggest part of the market by far, making up about two-thirds of the total.

Risk sharing

Islamic structures are sometimes criticised as mere financial jiggery pokery – a clever dodge that lets Muslim investors achieve the exact same results as conventional investors. There are certainly some structures and products in the market that deserve such criticism, but Ahmad Chaudry, an Islamic finance specialist at Royal Bank of Scotland, argues that Islamic finance techniques can also offer very different solutions to conventional finance, which can appeal to Muslims and non-Muslims alike.

Islamic mortgages are a good example, he says. With a regular home loan, the would-be homeowner borrows money from a bank, invests it in a property and pays back the loan over time, plus interest. “The only circumstance under which the bank cares about the value of your property is if you default,” says Chaudry. “In Islamic finance, the bank buys the property with you – you share the risk.”

In this type of Islamic mortgage, the investor might buy 10% of the property, while the bank buys the rest. The investor reclaims equity stakes from the bank over time and also pays rent on the bank’s stake. Most important, the investor buys this equity at the prevailing market values, which means the bank is taking risk on changes in the value of the property over time. “This is something we don’t see in conventional finance,” says Chaudry. “The sharing of risk is something that is extremely central to Islamic finance.”

There are of course some contradictions that still vex conservative Islamic scholars and non-Muslim sceptics alike. If risk-sharing really is at the centre of Islamic finance, we might expect Islamic financial institutions to act more like venture capital firms than banks. But they do not – and for good (though not Islamic) reason. A banking system built on equity investing would be far too unstable, and so in practice, Islamic banks end up taking a very similar degree of risk as Western banks.

One of the key techniques to achieving this is the practice of benchmarking. In the mortgage Chaudry describes, for example, there is no Shar’iah-compliant way of determining the rent to be paid so it is simply benchmarked to interest rates, which is apparently acceptable to the Islamic scholars who sign off on these structures.

These sleights of hand are particularly important for creating halal equity structures because Shar’iah rules specify that the profit earned in a transaction must be agreed by both parties at the outset. This is clearly impossible in a product linked to the returns from an equity underlying, so Islamic structurers have come up with two techniques to solve the problem.

The first is an agreement known as a murabahah – or two agreements, to beaccurate. In a typical one-year trade, the first agreement runs for 364 days, in which the bank promises to pay back the investor’s money at par. Then, if the underlying index has appreciated during that time, the bank enters into a one-day agreement, promising to pay the investor the value of the index rise during those 364 days. This is the most common structure in Malaysian equity-linked products.

In the Middle East, Islamic structurers often rely on a form of benchmarking that is wrapped in an agreement called a wa’ad, whereby the bank promises to buy a portfolio of Shar’iah-compliant equities from the investor, plus a profit that is benchmarked to a conventional call option.

Even though these structures look very similar to their conventional cousins, they still present unique challenges for structurers. Shar’iah-compliant products are more expensive because there are more fees built into the structure – such as the cost of the extra legal work and the cost of getting scholarly sign-offs – and bid-offer spreads are much bigger on Shar’iah-compliant underlyings.

But one of the biggest problems is volatility. “You find with Islamic stocks that volatility is quite high, which means that to offer products with an Islamic underlying I need to be able to manage my risk,” says Chaudry. “But there is no volatility market.”

RBS’s solution is to manage the underlying at a fixed level of volatility by adjusting the exposure to it – for example, the investor is 100% exposed to the underlying when it is trading at the target volatility level and reduces his exposure when it is higher.

As the products and techniques on offer are becoming more sophisticated, so too are Malaysia’s investors, but, even so, the structured product market is still in its infancy. The country’s savings rate is 36% of its gross national product and even higher in the Islamic market.

“Islamic banks have too much cash and not enough assets to buy into,” says Lee Kok Kwan, head of treasury at CIMB. “There is always a lot of liquidity on the deposit side.”

This is one of the principal motivations for Malaysia to develop its Islamic capital market – to provide a way for all these deposits sitting in Islamic banks to find a productive use in the economy. The creation of new Islamic underlyings and a greater diversity of products should certainly help in that effort.

(FinanceAsia magazine/Nov 2008) 

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