Islamic banking headway in North African banks still slow: Standard and Poor’s

Local banks in the North Africa region are still “slowly familiarizing” themselves with Islamic finance and sukuk markets as a creditable financing alternative, according to an report by international ratings agency Standard and Poor’s (S&P) published 18 February.

Following uprisings in Egypt and Tunisia, new governments are more inclined to cooperate with Gulf countries and have increased their interest in the development of Islamic finance “compared with previous regimes that turned more toward western powers and conventional banking,” S&P wrote.

With four Islamic banks, five takaful companies and twelve Islamic funds, Egypt’s Islamic banking assets total $11.6bn.

“We believe that Islamic finance in this region has yet to demonstrate its economic added value beyond enabling products abiding with Islamic law,” the report’s authors concluded. “Such added value could materialise through creating access to a new class of investors or customers or by offering Sharia-compliant [Islamic law] products at costs comparable with their conventional counterparts.”

Islamic banking remains unpopular in Egypt, according to a recent Gallup survey. Only 3% of adults use the service and only 49% have even heard of it.

The survey also predicted an increase in demand for both conventional and Islamic banking in the Middle East and North Africa, the region with the “largest share of unbanked adults worldwide”.

Takaful companies are cooperative insurance firms that abide by Islamic law. Members contribute a certain amount of money in order to guarantee each other against damages and losses.

(Daily News Egypt / 23 Feb 2014)

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UK’s growing role in Islamic finance discussed

Islamic Development Bank (IDB) President Ahmad Mohamed Ali and the UK Senior Minister of State for the Foreign & Commonwealth Office, Baroness Warsi of Dewsbury, view positively the fast growth of Islamic finance in the UK.

During a visit to the IDB headquarters in Jeddah, Baroness Warsi told the IDB president that significant progress has been achieved by the UK government in making London not only the center of Islamic finance in the Western world, but one of the great capitals of Islamic finance in the world, as announced by UK Prime Minister David Cameron at the World Islamic Economic Forum held in London in late 2013.

"I am pleased to inform you that the UK is close to issuing its first sovereign sukuk (Islamic bond) and work on the practicalities is currently being carried out by leading financial institutions appointed by the UK government to arrange this issue possibly by mid-2014," said the minister.

She thanked the IDB president for accepting to be a member of the Global Group on Islamic Finance and Investment being set up by the UK government. This group brings together central bank governors and CEOs of major Islamic banks from across the world to identify and address the critical factors that will drive the global Islamic finance market over the next five years.

Ali and the minister reiterated their commitment to the growing IDB-UK partnership in the area of development assistance, especially in fragile situations such as Palestine and Somalia and the economic empowerment of women through the work of the new Arab Women Enterprise Fund.

"We have a strong relationship with the UK Department for International Development, and we are very satisfied with this exemplary partnership," Ali told the minister. Ali and Baroness Warsi also agreed to explore potential partnership opportunities in the development of Awqaf (endowments), an area with tremendous growth potential.

(Arab News / 21 Feb 2013)

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Islamic finance education: What does it entail?

When we talk about finance, we are really talking about the way the finance is managed at the individual, corporate or public levels. However, when we add the adjective Islamic to finance, it gives a completely different picture.

Islamic finance as is being used, though not so widely, perhaps connotes all aspects of finance that is Islamic, including Islamic banking, Islamic capital market, Islamic insurance or takaful and Islamic wealth management. This usage is quite unique in the sense that one would have expected that Islamic finance means all finances that are Islamic. If this is the case, then it would connote Islamic personal finance, Islamic corporate finance and Islamic public finance. This is not true in terms of usage.

For example, Islamic public finance would imply that the main revenue should be based on zakah which is a wealth tax. It is only when the total collection of zakah does not cover the government expenditure that other forms of revenue sources would be introduced such as the direct and indirect taxes; tax on agricultural land (kharaj), poll tax (jiziah) or tax on the non-Muslims living in Muslim lands, etc. Similarly, Islamic corporate finance is basically corporate finance that is being conducted in accordance with Shariah, while Islamic personal finance is also conducted in accordance with Shariah.

The most important component of Islamic finance which distinguishes itself from conventional finance is the element of Shariah.

Without Shariah, there is clearly no Islamic finance because Shariah determines how the contracts, the mechanisms, the transactions, should be developed or designed. Shariah requirements in terms of the dos and don’ts are very clear, and leads to the correct contract and its consequences.

Since Shariah itself is very wide, selectiveness is needed so the most relevant aspect of Shariah is being exposed to the students of Islamic finance. The starting point has to be “Usul Al- Fiqh” which embodies the study of the sources of Islamic law and the methodology for its development. The second most important aspect of Shariah that is relevant to Islamic finance has to be laws of contracts, and this is for two reasons. Firstly, in any Islamic transaction, it is always a form of contract between two or more parties, hence, it is imperative for students to understand the different types of contracts for ease in applying such contracts in the correct context.

Secondly, it is becoming clearer that products based on a simple contract are no longer meeting the commercial objectives of such products that combine a few contracts in a more sophisticated fashion being promoted by the scholars from time to time.

While these two aspects of Shariah form the main body of Shariah knowledge in Islamic finance, it is imperative for the students to appreciate the various Shariah issues that are begining to emerge in the market. If the list of issues discussed in class cover a wide range of topics, then it would certainly help the students to identify the real issues that seem to occur and sometimes blur the market.

Then there is the technical knowledge, the first of which is that of finance itself, which covers the basic theories of finance such as the riskreturn trade-off, annuity and arbitrage pricing theory. These theories can become very useful in the course of evaluating certain parametric changes in the commercial environment.

The second part of the technical knowledge in finance covers banking, insurance, capital market and wealth management. Specifically, we should be touching on Islamic banking, Islamic insurance, Islamic capital market and Islamic wealth management, which are interrelated and in addition, it helps to make the student knowledgeable all round.

Development of Islamic Finance Programmes

The best practice especially in the banking industry is to recruit staff from various backgrounds, including staffs whose disciplines are not related to economics and finance as they can be engineers, medical doctors, quantity surveyors and lawyers, but can easily learn the tasks in banking. I know a statistician who was given a chance to work in an Islamic bank. Eventually he became one of the most efficient senior staff of the bank. We also know of engineers and lawyers who do extremely well in the banking industry. Learning from such experience would be proper practice for students of Islamic finance to come from various academic backgrounds, enriching the discussions in class with different views from different perspectives.

I, for one, strongly believe that the students would do extremely well if the professor shows tremendous patience in nurturing them inside and outside classroom. I read of a story of a sociology professor who wanted to know whether the young children of about 10 years old, in a particular slum area in US would make it in life or not. He sent two hundred of his MBA students to the slum area and selected two hundred children to find out if they would make it in life. Based on the environment, the way they dressed, the materials they wear, etc, the two hundred MBA students had only one answer: These children will never make it in life.

Twenty-five years later, another sociology professor who happened to read the report sent two hundred of his Masters students to the same slum area to find out from the same two hundred children. They found that out of two hundred children, only one hundred eighty three were around, seventeen having either moved out of the area or have passed away. The Masters students found that the rest of the children who were about 35 years old had actually succeeded in life, becoming engineers, lawyers, doctors, teachers, corporate executives.

They then asked how come they were so successful. The answer was, “there was a teacher” who happened to be an old lady of about seventy years old. When she was asked how come those children had achieved tremendous success, she answered with a broad smile on her face, “I LOVE THEM ALL”.

I strongly believe that the approach to be adopted in nurturing students whoever they are is to show them respect and confidence we have in them, the dedication and commitment we give them to really make them successful in life. It is not just the quality of students that we have but more importantly what our real intention is when teaching them.

Some Challenges

Having a very comprehensive programme with high quality curriculum and content is very essential to produce the talents we need in any field. Of course we also need quality students with the positive attitude to learn. Above all, we need the right approach to coach, train and educate the students in the most effective way.

One of the major challenges in producing the right type of talent in Islamic finance is to provide them with the right input so that they will be able to manage and handle all situations that they face in the industry. This is a major challenge because Islamic finance as a subject or discipline of study is still very new, without standard texts for all the subjects that we teach.

Most of the time, we use texts that are not complete and hence have either to use many texts or to be added with our own materials.

This poses a problem of standardisation or harmonisation, especially with regards to Shariah, principles or concepts and products.

We know that there are conflicting views on Shariah matters between jurisdictions. Hence, we do get products that are acceptable in one market but rejected in other markets. Even these differences are not considered as major issues, which can be explained, thus, mitigating such conflicts.

There is yet a bigger challenge where some scholars simply feel that the current practice of Islamic banking and finance are not Shariahcompliant because the beneficiaries do not include the poor and the have-nots. They prefer to take the view that the benefits of Islamic banks today which directly benefit the rich and the bankable only have ignored one of the objectives of “Maqasid Shariah” that is meant to bring about benefits to all and sundry. Such a view simply denies the benefits that Islamic finance as practiced today has brought about to society. Those who adopted this view do not have the alternative system that could resolve the problem of those poor and not bankable. The challenge then is how to ensure that there is financial inclusion. One possible answer is Islamic microfinance.

Conclusion

Although Islamic finance is growing at a faster rate than conventional finance, which under the present circumstances is unstoppable, the biggest challenge is acute shortage of human talents who have very high technical knowledge and at the same time have excellent Shariah knowledge. We have also observed many qualifications in Islamic finance that have been introduced to the market that do not provide the right level, quality and scope of the subject. We need to find ways of attracting students to the right programmes so that the objective of bringing Islamic finance to the next level can be effectively achieved.

(The Malaysian Reserve / 17 Feb 2014)

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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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India takes key step toward full-fledged Islamic banks

THIRUVANANTHAPURAM: India is planning to set up a body to fine-tune and promote Islamic finance before issuing license to start full-fledged banking operations, according to one of the country's senior ministers.

“The formation of the entity is an important step forward. We need to set a framework for rules for different financial products to be offered by these banks or through the Islamic banking windows,” said Rahman Khan, India's minister for minority affairs.

He was talking to Arab News on the sidelines of the international seminar on Interfaith Harmony and Tolerance in Kuala Lumpur organized by the International Islamic University Malaysia (IIUM) in association with Kerala-based Ma'din Academy recently.

“We will introduce a financial product like Tabung Haji which would be a great relief to those who want to undertake the pilgrimage,” said the minister, who has aggressively been pursuing the idea ahead of the general elections two months away.

Tabung Haji, Malaysia’s Haj management system, provides an opportunity for Haj aspirants to systematically invest money that grows and allows the depositor to undertake the pilgrimage to the holy cities of Makkah on its maturity.

The money is reinvested in Shariah-compliant vehicles that give reasonable returns.

“It mainly goes into infrastructure funding. We build roads, bridges and other basic infrastructure using this fund. There are big office complexes and housing projects that it has funded,” said Rajah Mohammed Abdullah, chairman and chief executive officer of the Muslim World Biz, which holds global summit on Islamic finance here every year.

Last year, India's central bank, Reserve Bank of India, decided to give license to non-banking financial companies to offer Shariah-compliant products and Cheraman Financial Services Limited (CFSL), launched by Kerala with the support of prominent expatriate entrepreneurs in the Gulf, was first to get the RBI license.

Khan wrote to the RBI Governor, Raghuram Rajan, saying it was the duty of the State to facilitate every citizen to practice and follow their religion under the Constitution and the governor, while accepting his view, wanted certain amendments to the laws concerned. Khan has urged the ruling party leadership to expedite the process before the elections.

“This is a great development everybody was looking forward. It'll help India attract a lot of foreign and domestic investments in infrastructure development and other core areas,” said Siddeek Ahmed, one of the directors of the CFSL.

India needs huge investments to put its economy back on track and to give the much-needed push to its ambitious infrastructure development plans. The Islamic finance is estimated to be a US$2.1 trillion industry by the end of this year and it is seen as a small but decisive step towards opening up the sector to interest-free banking.

“I personally hope that the proposed Haj fund will ultimately lead to the undesirable practice of government offering subsidy to Hajj pilgrims,” said Ahmed, who heads the Saudi-based ITL-Eram group.

“Cheraman did not to set up such a fund because we found the government funding was not desirable as its sources of income include liquor and gambling”.

Nonresident Indian billionaires based in the Gulf, P Mohammed Ali, PNC Menon and CK Menon, are among other directors of the NBFC that follows Islamic principles in which the state government holds 26 percent equity.

It was not allowed to accept deposits from the public or offer retail banking services, which needs amendments in Indian laws, making it inaccessible to ordinary citizens who want to make small investments.

In fact, Raghuram Rajan, the chairman of the RBI, was serious about banking sector reforms that would pave the way for full-fledged Islamic banks and Islamic banking counters at commercial banks like in many other countries, especially in Europe.

In 2008, a high-level committee on financial sector reforms headed by Rajan recommended interest-free finance and banking in the “interest of inclusive and innovative growth” and suggested taking measures “to permit the delivery of interest-free finance on a larger scale, including through the banking system”.

Islamic banking and finance is now present in over 75 countries including Australia, France, the UK, Hong Kong, Singapore, Luxembourg, South Africa, Sri Lanka and Malaysia, which claims to be its capital.

In India, there are a lot of Muslims who did not claim interest on deposits or give them in charity and, according to a 2009 study there are unclaimed interest worth Rs50bn lying in Kerala banks alone.

Cheraman, named after the king who is believed to have built India’s first mosque in the Kerala town of Kodungallur, plans to offer leasing and equity-finance products under Islamic principles to begin with.

It has already started funding startup companies and infrastructure projects and floated the Rs 2.5bn Cheraman Fund, a private equity fund with a minimum of Rs10 million set by Securities and Exchange Board of India (SEBI) per investor.

It also has a subsidiary Cheraman Infrastructure for “channelizing ethical investments for developing world class industrial, social and residential infrastructure” in Kerala.

This business vertical focuses on infrastructure development activities through Build Operate and Transfer (BOT) and other related modes.

The company targets development of industrial and knowledge parks, standard design modules, logistics parks, special economic zones, electronic parks, roads and urban transportation, social infrastructure like hospitals and educational institutions, housing and shopping malls.

(Arab News / 18 Feb 2014)

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AIG Lured to Malaysia by Growing Takaful Market

American International Group Inc. is plotting its entry into Malaysia’s Islamic insurance market, lured by the country’s economic expansion and an industry that has grown more than fivefold in less than a decade.

The insurer, the world’s largest before being bailed out by the U.S. government in 2008, will start a Shariah-compliant reinsurance business by June and may eventually offer a fuller range of services, Antony Lee, chief executive officer at AIG’s Malaysian unit, said in a Feb. 11 interview in Kuala Lumpur. Rising affluence in the Southeast Asian nation will spur increased demand, he said.

Malaysia accounted for 11 percent of the $20 billion of Islamic insurance, or takaful, contributions in 2013, a Feb. 13 report from the Malaysia International Islamic Financial Center shows. New business will increasingly come from outside the Middle East, said Hatim El-Tahir, director of the Islamic finance group at Deloitte & Touche in Bahrain. New York-based AIG follows Munich Re and Swiss Re AG into the retakaful market in Malaysia, whose economy has had only three quarters of economic growth below 5 percent in the last four years.

“In line with the continuing expansion of the takaful business, the demand for retakaful is expected to expand between 15 percent and 20 percent on an annual basis,” Bahrain-based El-Tahir said in a Feb. 15 e-mail interview. “The geographical concentration in terms of global contribution is expected to shift from the Gulf Cooperation Council countries to the Asia- Pacific region by 2015.”

Mutual Assistance

The GCC consists of Saudi Arabia, United Arab Emirates, Kuwait, Bahrain, Qatar and Oman.

AIG’s Malaysian unit, which was set up in 1953 and has 14 offices, currently offers non-Islamic coverage for property, electronic equipment, medical and personal accidents, according to its website. The company’s venture into retakaful will help it assess the potential of the Shariah-compliant insurance market, according to Lee.

“There’s a whole segment of the market, which is the rural areas, that really is where there’s a much lower penetration rate,” he said. “As you get rural people moving into the cities, the affluence starts coming into it.”

Islamic insurance is based on the Koranic principle of mutual assistance. Policy holders contribute a sum of money to a common pool managed by the company, which is used to pay for claims and any excess is returned to customers. Retakaful is insurance for takaful companies and consists of Shariah insurers contributing to a fund managed by the retakaful operator, who’s paid a management fee.

Growth Rates

Malaysia has 11 takaful companies and the market recorded a compound annual growth rate of 18.7 percent in the four years through 2012, the MIFC estimated in its report. The nation has four Islamic reinsurers, according to the central bank’s website.

Global takaful contributions reached $24.3 billion last year from $4.7 billion in 2005, according to a separate estimate in the World Islamic Insurance Directory 2013 published by Takaful Re and the Middle East Insurance Review. Takaful still accounts for just 1.13 percent of the world’s Shariah-compliant financial assets, according to the MIFC report. A growing Islamic insurance industry will support demand for sales of sukuk, which have increased 0.7 percent to $3.9 billion this year.

The Bloomberg Takaful Index, which tracks the share prices of Islamic insurance companies worldwide, has fallen 1.3 percent this year, following a decline of 3.8 percent in 2013.

A key challenge for retakaful companies is their limited ability to compete with their larger non-Islamic counterparts for business that requires a bigger balance sheet, Munich Re Retakaful Chief Executive Officer Mohamed Rafick Khan Abdul Rahman said in a Feb. 14 interview in Kuala Lumpur.

‘Limited Capacity’

“There is limited capacity to insure things like airplanes and ships,” he said. “Conventional insurance has been in the market for the last 400 years. Retakaful is 15 to 25 years old. So we are pretty young, relatively speaking.”

AIG is cutting about 3 percent of its global employees after divesting units to help repay the $182.3 billion bailout in 2008, according to a Feb. 13 statement. Chief Executive Officer Robert Benmosche said last year the insurer is considering shifting some jobs to lower-cost locations including Malaysia and the Philippines.

Malaysia’s economy is forecast to expand 5 percent in 2014, after growing 4.7 percent last year, according to the median estimate of economists surveyed by Bloomberg. The government has a $444 billion 10-year plan to build roads, ports and power plants to elevate the country to developed-nation status by 2020.

Penetration Rates

Insurance premiums and contributions amount to 5 percent of Malaysia’s gross domestic product, according to the MIFC report. That compares with 10.1 percent and 11.5 percent in the more developed Asian economies of Japan and Hong Kong.

“Recent forecasts estimate that the takaful market will grow by over 10 percent a year for the next five to 10 years,” Marcel Papp, head of retakaful at Kuala Lumpur-based Swiss Re Retakaful, the Shariah-compliant unit of the world’s second- biggest reinsurer, said in a Feb 17 e-mail interview. “This in turn should help to grow the retakaful market by a similar percentage.

(Insurance Journal / 18 Feb 2014)

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Islamic banking gaining momentum across the world: SBP deputy chairman

Islamabad: Deputy Governor of the State Bank of Pakistan Saeed Ahmad has said that Islamic banking is getting momentum not only in Pakistan but across the world. 

He was addressing the inaugural session of two-day International Conference on Islamic Business (ICIB 2014) in which speakers discussed various aspects of Islamic business and finance. 

Organised by Riphah Center of Islamic Business, a constituent institute of Riphah International University in collaboration with International Islamic University Islamabad (IIUI) & the State Bank of Pakistan (SBP) is being attended by world renowned Islamic scholars and economists from across the globe.

The theme of the conference is “Equity, Venture Capital, Corporate Governance and Institutional Development for Equity Investments: Prospects and Practices from Islamic Perspective”.

The Deputy Governor of State Bank of Pakistan Saeed Ahmad was the chief guest at the inaugural session of the conference while Prof Datuk Syed Othman Al Habshi from Malaysia and Prof. Khurshid Ahmad, Chairman, Institute of Policy Studies Islamabad were the Keynote speakers on the occasion.

Deputy Governor of the State Bank of Pakistan Saeed Ahmad also said that the State Bank as a regulator in banking is playing an important role in projecting Islamic banking and finance in the country. The government has established a committee for the purpose and prominent bankers and Islamic scholars are its members. The Deputy Governor himself is head of this committee. The committee is working with full swing to prepare guidelines for Islamic banking and finance as per teachings of Quran and Sunnah.

He lauded the efforts of Riphah International University for organising series of such conferences giving an opportunity to researchers and scholars to discuss the Islamic banking and finance in depth. 

This is the 3rd International Conference on Islamic Business organised by Riphah International University. Earlier two conferences were held in February 2011 and February 2012.

The President of Islamic International University Islamabad Dr Ahmad Yousif A Al-Draiweesh, in his address in Arabic, expressed the confidence that the conference will be much helpful in projecting Islamic business and finance. 

It will provide a platform for dialogue and discussions between researches, policymakers, corporate leaders, business managers, practitioners of Islamic banking and finance.

Prof Khurshid Ahmad, in his key-note address, spoke on the risk and equity based investments and financing and explained how the Islamic business and finance could help to resolve the global economic problems. 

He said the economic crises in 2008-09 could not be handled by the western system of finance and the people have to suffer because of this debacle. He said the institutions practicing finance under shariah not only provided the solutions of the problems faced by the world economy but also provided a clear path to meet such challenges in future.

Prof Datuk Syed Othman Al-Habshi, in his speech, said Islamic banking so far is moving in right direction and has crossed a number of milestones over the period of last four decades. He hoped this conference will help in formulating the strategies to meet the challenges being faced by Islamic finance.

Earlier, the Pro-Chancellor of Riphah International University Hassan Muhammad Khan, in his remarks, said by organizing such conferences of international level Riphah University intends to provide a platform for discussing the vital issue of development of the Islamic business, banking and finance so as to create awareness about shariah complaint businesses. The Vice Chancellor of Riphah International University Prof. Dr. Anis Ahmed, in his welcomed address, said this event is designed not just for creating awareness about shariah conforming business principles but its major objective is to enhance talent and understanding of the practitioners and researchers on problems faced by the financial managers and the investors.

The conference held four working sessions on the opening day today on various subjects relating to the Islamic business and finance. These included equity, investments, trust and institution building for promoting Islamic finance and corporate governance of Islamic institutions. There will be four working sessions on Tuesday (today) besides the concluding session at 5pm at Quaid-e-Azam Auditorium Faisal Mosque campus in Islamabad. 

(Daily Times / 11 Feb 2014)

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