#110 - September 2018 by CPI Financial

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ISSUE 110

ISSUE 110 TRANSFORMING MALAYSIA’S FURURE HOW TECH AND GOVERNANCE WILL ENSURE ISLAMIC FINANCE’S GROWTH

TRANSFORMING MALAYSIA’S FUTURE

HOW TECH AND GOVERNANCE WILL ENSURE ISLAMIC FINANCE’S GROWTH A CPI Financial Publication

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CONTENTS

ISSUE 110

REGULAR SECTIONS

EDITOR'S LETTER

Greetings all

elcome to Islamic Business & Finance. This is the 110th issue of the longest-running Islamic finance magazine in the world. I hope that you and your families had a wonderful Eid al-Adha. We hope you’re rested and ready to approach the rest of the year. The Islamic finance world has no borders. It stretches as far as one can imagine. My former colleague used to joke that the only place you couldn’t find Islamic finance was South America, and that is no longer true. London has long been an integral part of the Islamic financial world, but Islamic Business & Finance does not have the chance to venture there often enough to discuss issues with those that are experiencing them most closely. Luckily, we recently were able to sit down in London with Bank of London & the Middle East as well as one of the stars of the Halal tech scene, the CEO of Islamic GPS, an augmented reality app that I’m sure many of you are familiar with. Beyond that, there is plenty to peruse. I hope you enjoy digging into another great issue. Till next time,

OPINION

Cause for concern

NEWS + ANALYSIS

7 News & Analysis 10 THE LONG VIEW

Are you being served?

MALAYSIA

12 LAYING THE

GROUNDWORK FOR TAKAFUL’S FUTURE

MALAYSIA

18 ENSURING GOOD GOVERNANCE

SAUDI ARABIA

24 SUKUK ISSUANCE AND

William Mullally www.islamicbusinessandfinance.com

RATE RISE A BOON FOR KSA ISLAMIC ECONOMY

28 LONDON

28 BLME: CONNECTING LONDON TO THE MIDDLE EAST

34 LONDON'S TECH STAR 40 SADIQ KHAN

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CONTENTS

ISSUE 110

FEATURES

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SALEH AL AKRABI CHIEF EXECUTIVE OFFICER

TONY LONG tony.long@cpifinancial.net Tel: +971 4 391 4681

EDITOR - ISLAMIC BUSINESS & FINANCE

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ISLAMIC INVESTMENT

44 UNLOCKING ISLAMIC

FINANCE’S VALUE FOR INFRASTRUCTURE

EXPERT OPINION BUSINESS DEVELOPMENT MANAGERS

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50 WILL WE EVER SEE A

WORLD WITHOUT RIBA?

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FINANCE’S GROWTH

Islamic Business & Finance | ISSUE 110

A CPI Financial Publication

PUBLISHED BY CPI FINANCIAL FZ LLC REGISTERED AT DUBAI MEDIA CITY, DUBAI, UAE.

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Sukuk issuance boon for Saudi

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g the UK BLME: Connectin East to the Middle

S: 54 AWARD Business & th

Wesam Abdulaziz Baqer, Head of Corporate and Institutional Banking, Bahrain Islamic Bank speaks about the industry’s push towards innovation

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40 TECH:

Supporting Islamic fintech’s growth

56 SUKUK:

Dana Gas case resolution leaves questions

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A CPI Financial Publication

HOW TECH AND GOVERN

LEADING A RAPID EVOLUTION

John Iossifidis, CEO, Noor Bank on his vision for the institution’s future A CPI Financial Publication

ING TRANSFORM TURE IA’S FU GROWTH MALAYS ISLAMIC FINANCE’S ANCE WILL ENSURE

Becoming the Best Modern Islamic Bank

LEADING A RAPID EVOLUTION Wesam Abdulaziz Baqer, Head of Corporate and Institutional Banking, Bahrain Islamic Bank

BECOMING THE BEST MODERN ISLAMIC BANK John Iossifidis, CEO, Noor Bank on his vision for the institution’s future

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AND GOVERNANCE FURURE HOW TECH

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TRANSFORMING MALAYSIA’S

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18 TECH:

CEO of Bahrain FinTech Bay

38 SUKUK:

Examining Saudi Arabia’s Sukuk developments

46 TAKAFUL:

PruBSN covers Malaysia’s low-income households

22/04/2018 16:23

The 13 Islamic Finance Awards

omberg)

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For generations, the better way to bank. Over 40 years ago, Dubai Islamic Bank pioneered a way of banking that was truly better: Islamic banking. Since then, many generations of customers continue to enjoy world class products and services backed by the very latest in banking technology. For them as for you, this is still the better way to bank.

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OPINION

A cause for concern W

hat’s holding back Takaful in the GCC? It’s a question that has been on the minds of the Islamic finance community for a long time. As Islamic bank growth continues to outpace conventional, Sukuk issuance stays strong, Halal businesses expand and Islamic investment becoming a bigger topic at the world’s biggest private banks, Takaful’s net income in the GCC is trending in the wrong direction. According to S&P, income of listed companies in the GCC Islamic insurance sector nearly halved in 2017 to $375 million, from $674 million in 2016. This decline was mainly driven by weakness in the Saudi Arabian insurance sector’s results. In S&P’s view, “the Islamic insurance sector continues to face secular challenges around relatively concentrated and undifferentiated business models and high expense ratios that leave them susceptible to adverse event risk related to solvency, governance, and accountancy. That said, it is likely that medium-term growth prospects in the sector remain satisfactory given relatively low penetration levels, and we expect Islamic insurance to remain profitable overall in 2018; strengthening capital levels are also observed,” There are multiple reasons for why this is happening in the GCC. Challenges from VAT in the UAE, the difficulties of pricing medical coverage, and lower underwriting profits. At every conference, there are different reasons for why Takaful has not grown—some have suggested it has just not made consumers aware enough of what Takaful has to offer. If it is indeed a marketing and branding problem, that is something that should be prioritised immediately. S&P has a different suggestion: the market is oversaturated. “Despite the overall improvement in capital adequacy we still believe there are too many insurance companies in the GCC, and that many of these players lack the scale to operate successfully in overcrowded and highly competitive markets. It is likely that credit

Islamic Business & Finance | ISSUE 110

conditions in the sector may weaken over time, if total premium growth remains slow and insurers try to capture market share by further lowering their rates,” said S&P. Regulators can get involved to a degree, introducing more risk-based regulations, which could lead to a smaller number, but more successful, Islamic insurers in the GCC, as it is very possible that the smaller or weaker-capitalised Takaful operators would not be able to withstand such regulations. What matters most, now, is the long-term health of the industry. Though some volatility is normal, halving of net income is definitely cause for concern.

William Mullally

Editor

www.islamicbusinessandfinance.com

NEWS & ANALYSIS

Takaful operators in the MENA region have become too reliant on on Qard’ Hasan to meet deficits, according to a new report from A.M. Best. The need for the Qard can arise from a variety of market conditions, most of which conventional (re)insurers also encounter. These include deficits in the policyholders’ fund and non-payment of contributions, i.e., bad debt, as well as poor risk selection, inadequate pricing and weak investment management. In practice, however, deficits generally arise out of excessive management fees, a unique characteristic of the reTakaful model, and poor underwriting discipline.” - SALMAN SIDDIQUI, Associate Director, A.M. Best

AAOIFI standards are required by Islamic finance institutions in the UAE as of 1 September. Adoption of AAOIFI standards by the Central Bank of the UAE is a big encouragement. The UAE holds approximately 20 per cent share in the global Islamic banking market and this decision by the UAE regulator will play a significant role in the harmonisation of Islamic financial industry practices across the globe. This is also a testimony of the robustness of AAOIFI standards, which complement the modern finance and banking practices with the economic principles of Islam. AAOIFI welcomes and thanks the Central Bank of the UAE for recognising this. I am sure this will lead other jurisdictions around the globe to follow suit.”

Malaysia leads global Sukuk issuance in the first half of 2018, with an increase to $19.4 billion by end-June, a 38.7 per cent marketshare of all Sukuk issuance, according to RAM Ratings. RAM Ratings maintains its projected global sukuk issuance at $75 billion-$85 billion, based on the growth trends in Sukuk issuances from Malaysia, Indonesia, Bahrain, Kuwait and UAE in the first six months of 2018. Overall, the Sukuk market’s showing in 2018 will depend on the performance of the global economy and the state of investment recovery in key Islamic finance countries.” - RUSLENA RAMLI, Head of Islamic Finance, RAM Ratings

- AAOIFI’s board of trustees chairman SHAIKH EBRAHIM BIN KHALIFA AL KHALIFA

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ISSUE 110 | Islamic Business & Finance

Advertorial

Working with Middle East investors and their

With a strong and growing presence in the region, Jersey is increasingly providing a range of private wealth management services to GCC clients, as Geoff Cook, CEO of Jersey Finance, explains:

global ambitions For several decades Jersey firms have been building links with markets across the GCC, so that today Jersey provides a vital role in supporting family succession planning and facilitating global investment strategies on behalf of investors in the region.

In particular, a survey for that paper revealed that more than half (55%) of professionals working with family businesses in the GCC saw succession planning as the most critical issue for GCC families today.

These positive links have been developed thanks to the combined, forward thinking, efforts of Jersey’s regulator, government and finance industry, all of whom have visited the region for a number of years. For its part, Jersey Finance established an operation in the UAE more than six years ago to work together, more closely, with key stakeholders on the ground.

However, whilst HNWIs in the GCC clearly acknowledge the importance of succession planning - which can be extremely complex given the global nature of families and their businesses - there is still a reluctance to engage with third-party support and a tendency to default to deferring succession decisions – something that could prove costly in the long-run.

What has become clear is that, against a backdrop of shifting markets and a changing global political landscape, investors in the GCC continue to find genuine appeal in the expertise, substance and stability Jersey can offer as an international finance centre (IFC), as well as its range of tried-and-tested wealth products – not least its world-renowned trust, foundation and company vehicles and Shari’ah-compliant services. The indications are that investors in the GCC are increasingly likely to need this sort of specialist cross-border support in the future too. According to the Boston Consulting Group, private wealth in the GCC is set to reach $12 trillion by 2021, growing at a rate of 8.1% - compared to the global average of 6% (‘Global Wealth 2017: Transforming the Client Experience’).

According to the research, for example, there are real misconceptions around the issues and solutions available when it comes to wealth structuring. Over half (56%) of GCC-based advisers said that loss of control is the biggest misconception that GCC families have when it comes to wealth structuring, whilst 23% are concerned by the lack of transparency of structures. Although this offers some considerable challenges for wealth professionals in the region, it also highlights just how important it is for professionals with first-class experience in forwardthinking IFCs like Jersey, who are used to managing complex cross-border financial flows, to work with families and investors to bring clarity, build understanding and instil confidence.

Jersey is ready to support this trend, offering GCC investors a safe, neutral and attractive platform and enabling them to create a certain future by carrying out their increasingly sophisticated wealth planning and investment strategies.

Jersey is already focused on providing this critical support by working with advisers and investors in the region. Consequently, firms in Jersey are seeing an uptick in the number of private wealth vehicles being re-domiciled to Jersey from less advanced jurisdictions, as investors seek a high-quality trusted solution.

Fundamental Challenges

Flight to Quality

The need for this kind of specialist support was evidenced only last year in a white paper, published by Jersey Finance in conjunction with Hubbis, which identified some fundamental challenges HNW individuals in the GCC will face in the coming decades.

Whilst Jersey has earned a reputation for specialist private wealth work in markets across the GCC, this has expanded in recent years so that today there are in excess of 40 Jersey firms active in the region who are undertaking a broad range of investment and corporate as well as private wealth work.

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15/08/2018 09:08

KUWAIT

BAHRAIN

QATAR

UNITED ARAB EMIRATES

KINGDOM OF SAUDI ARABIA

For instance, Jersey is highly regarded for outbound commercial real estate investment, an increasingly attractive asset class for GCC investors, thanks to its stability and flexible structures for pooling capital and acquiring and selling such assets, focusing on the UK as well as Europe and the US. Additionally, GCC institutional investors, led by sovereign wealth funds (SWF), are looking more and more at opportunities in markets such as the UK, US and Europe and as a result, Jersey fund practitioners are seeing rising levels of capital from institutional investors - the world’s largest private equity fund, structured through Jersey, has a GCC SWF as a primary investor. Jersey’s proposition and expertise in alternative fund servicing, together with its ongoing seamless access to European markets and strong ties to the UK, lends itself well to this trend, with direct investment, co-investment, private equity and club investment deals all amongst the favoured investment strategies for GCC investors. Indeed, the jurisdiction has seen a number of major private equity and real estate fund launches involving GCC investors over the past twelve months. Evolving Relationship

OMAN

Jersey: 10 key strengths + 50 years’ experience in private wealth management + Deep ties to the GCC, with expertise in Islamic finance

+ Early adopter to the latest transparency standards + Glowing recommendations from the OECD, World Bank, IMF and MONEYVAL

+ A substantial network of top-level financial services professionals

+ An enviable community of support services, from legal to accounting

Jersey’s relationship with the GCC is evolving as Jersey seeks to provide a robust and attractive platform for investors to pursue their family wealth and outbound investment strategies. Whilst there is undoubtedly appetite amongst families to tackle succession planning to future-proof their complex family wealth and assets, it’s clear that investors are also increasingly turning to expert advisers for specialist support to put their capital to work in increasingly diverse markets and sectors.

+ Innovative products – from trusts to foundations, private trust companies and family offices

+ Stable location + Close ties to London + The perfect blend of the transparent and the confidential

Jersey offers welcome experience to meet this need, guiding investors through the complexities of their ambitions, and working with them to realise a positive future.

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15/08/2018 09:08

THE LONG VIEW

Are you being served? By TONY LONG, CEO, CPI Financial

TONY LONG

came across an article published in the South China Morning Post a few months ago about how China Merchants Bank have opened a branch in Shanghai ‘manned’ entirely by ‘smiling’ robots equipped with an array of facial recognition (FR), artificial intelligence (AI) and virtual reality (VR) capabilities. Beside the slightly surreal images in the article of people interacting with the robots, it really hit home to me just how close we are to these technologies combining to deliver the kind of services that many thousands of retail banking staff are already being replaced by. Now this may all be a clever PR stunt aimed to demonstrate how far we’ve come with these technologies, but just because we can do something, it doesn’t always mean we should. Which begs the question, if we are all being conditioned to selfserve through mobile banking apps and interface with virtual assistants, will we ever want to go back to interacting with a human substitute, either in Islamic banking or in many other industries? China Merchants Bank uses a bot on WeChat to handle 1.5m-2m queries a day, a workload equivalent to around 7,000 human staff, and many people are already saying that they would prefer to engage with a virtual assistant powered by AI than a human being. The trouble with humans is that they are, well, human. In a lot of retail industries, service levels tend to be at the lower end of most customers’ expectations, and many fail to even live up to those. Usually you have to look to the higher margin categories, where quality, luxury, prestige and exclusivity are priced in to find a level of service that

Islamic Business & Finance | ISSUE 110

is truly focused on customers’ needs and preferences, but even here, AI is making advances into the wealth management sector and other premium financial services in leaps and bounds. And whilst the tech industries that disrupt everything from shop assistants to asset managers will continue to attract talent in droves, we are only at the beginning of this fourth revolution and there is unlikely to be enough talent to go round, and we are already seeing advanced AI skills commanding huge salary premiums in the global technology market. The big challenge for the banking and financial services sector is how is it going to attract the kind of talent it needs to serve its future customers when the future for many roles is so uncertain?

The truth is that service remains king, but when everyone is delivering the same level of service, customer experience may well be the defining element of success. PwC’s recent UK Economic Outlook report confirmed what many in banking and financial services industry regard as inevitable, forecasting that between 2017 and 2033, AI will create 18 per cent more new jobs, but at the same time, displace 25 per cent of existing ones, resulting in a loss of 77,000 jobs in the UK financial and insurance services alone. The good news was that overall the displaced roles are expected to be matched by new ones, at 20 per cent on either side, but industries like manufacturing, wholesale and retail as well as transportation will be the hardest hit, along with financial services. The truth is that service remains king, but when everyone is delivering the same level of service, customer experience may well be the defining element of success.

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KIB Best Customer Acquisition 2018 Approved.pdf

CMY

8/15/18

2:17 PM

MALAYSIA

Laying the groundwork for Takafulâ&#x20AC;&#x2122;s future

(Muhd Imran Ismail/SHUTTERSTOCK)

ENCIK MARZUNISHAM, ASSISTANT GOVERNOR, BANK NEGARA MALAYSIA, WRITES ABOUT WHAT THE MALAYSIAN TAKAFUL MARKET MUST DO TO GAIN MARKET SHARE IN A DISRUPTIVE ENVIRONMENT

Islamic Business & Finance | ISSUE 110

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MALAYSIA

Regulation must be a key source of development for Takaful's future in Malaysia.

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he future seems to be a favourite theme at various forums nowadays. Today’s is no exception, and rightly so. In a time of rapid, successive change, it is crucial that we seek to understand the underlying currents shaping our future. Just as important is where we see ourselves in that same future. There is a quote from Soren Kierkegaard, a Danish philosopher, that offers a practical advice on this matter: “Life can only be understood backwards, but it must be lived forwards.” Therefore, while we contemplate the forces of change and challenges of today, this must be coupled by action and determination to change for tomorrow. We need to be prepared for the future. Otherwise, we may become irrelevant. While agents are a formidable force in the insurance and Takaful industry today, there is no certainty that this will be the case going forward. Already the industry has undergone substantial transformation in recent years. Products, distribution channels, customer sophistication, and risk types, all look vastly different from how they used to a decade ago. I have no doubt that this trend will accelerate moving forward. A key source of change are regulatory initiatives. While these are primarily intended to enable easier and cheaper access to products by a much wider market, it also means a lower degree of reliance on agents. Examples include the liberalisation of fire and motor tariffs, and the requirement under the LIFE Framework for companies to offer pure protection term products through direct and online channels since July 2017, and starting in July 2018, to extend this to pure protection critical illness and pure protection medical and health products. At the same time, the regulatory expectations on the conduct of agents have also intensified. It is the aim of Bank Negara Malaysia to continuously strengthen the professionalism of insurance and Takaful agents. This is not to speak of the impact of technology. In the case of agents and intermediaries more generally, the information revolution can be a particular source of anxiety. In an age of apps, aggregators and “Ask me anything” chatbots, suppliers and consumers are closer than ever before, potentially bypassing the agents or intermediaries altogether. With the emergence of fintech and insurtech, insurers in other countries are starting to experiment with chatbots capable of independently

ISSUE 110 | Islamic Business & Finance

MALAYSIA

maneuvering sales and servicing processes. Product aggregators are also fast growing in prominence. An Accenture survey revealed that aggregators account for 70 per cent of new business premiums in the UK private automobile insurance market. Indeed, two product aggregators platforms are already operating within Bank Negara Malaysia’s Regulatory Sandbox. The bank is reviewing the regulatory framework to enable the aggregators to operate by the end of this year. These are headwinds that the industry has to tackle head-on, and like it or not, they will further intensify. While we cannot stop these changes, we can certainly choose how we respond to it. With challenges are opportunities. These can only be reaped through a combination of traits, greater proactiveness, a willingness to adapt and clear strategic thinking. I do not doubt that this is much harder than it sounds, but I believe a good place to start would be focusing on three priorities. Allow me to elaborate on each in turn.

TECHNOLOGY THAT MATTERS The vision for the life insurance and family Takaful industry is to achieve a penetration rate of 75 per cent of the Malaysian population. Within this, the Takaful industry has set a 25 per cent target to be achieved by 2020. For this to happen, it is crucial that the industry gets to grips with the shift in market demographics, especially where interactions with technological platforms are concerned. It is imperative that agents embrace technology. A 2017 study by Bain & Company indicates that nearly 60 per cent of insurance customers in Malaysia are digitally active. This is not surprising given that 40-50 per cent of our workforce are made up of technology-savvy millennials. Any industry player seriously looking to achieve long-term sustainability will need to master the integration of technology within their operating models beyond just setting up websites or establishing a social media presence. Instead, consider the interesting reality that customers use multiple channels before deciding to purchase protection. In the United States, half of the insurance customers that responded to a survey preferred to purchase life insurance in person with agents or advisors, as compared to purchasing online. Similarly, in the same Bain & Company study from earlier, it was found that in-person interactions still generate higher loyalty scores than other channels in most European countries.

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The fact is that customers employ a mix of onand offline channels. Many of us already do this in other parts of our lives. We search for something online, then make the purchase at a bricks-andmortar outlet. And sometimes the other way round. The key takeaway here is that often, customers use digital channels to complement, not replace, traditional channels. This bodes well for agents going forward, but only if the right conditions are in place. Agents and Takaful operators need to work hand in hand to develop a comprehensive ecosystem catering to all segments of customers, whether online or off-line – or in marketing speak, an “omnichannel” approach. While it is imperative that Takaful operators seek to provide as seamless an experience as possible in terms of online content for consumers, this does not have to lead to the substitution of agents. On the contrary. Agents can in fact enrich the process by being trained and equipped with useful tools to guide and advise potential customers. Agents should also work with aggregators as a means to develop an online presence, in the same way real estate agents are featured on property websites. It is important to note, however, that technology is only a platform, a tool. Without strategy or purpose, the adoption of tech alone cannot spur change. What is needed to complement this is a fresh approach to business. This means broadening one’s horizons beyond given market conventions, and being courageous to compete in new, unexplored strategic areas.

COMPETE BETTER – AND MORE BROADLY To truly capture the market of the future, agents will need to sharpen their competitive edge. There are many ways to go about this, but I’d like to talk about two in particular: Doing what you already do better, and doing it for a much broader market. Akio Morita, the co-founder of Sony, once said about his company’s products, “We don’t ask consumers what they want… We focus on what they need, what they will want and make sure we’re there, ready.” I find this relevant to the role of agents today. Most people who need insurance and Takaful products may not have the time or access to information to even know that it’s there for them. Agents create that awareness. For many, their first contact with insurance would have been through an agentinitiated meeting. For this reason, customers tend to rely on agents to a large degree for information

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MALAYSIA

TAKING OFF Malaysian GDP growth picking up on the back of export recovery

8% 6 4 2

2010 2011 2012 2013 2014 2015 2016 2017 2018 Estimate Forecast NOTE: Year 2017 estimate is 5.2-5.7% yoy and 2018 forecast is 5.0-5.5% yoy SOURCE: Ministry of Finance Malaysia

to help them make the right decisions, quite often ones involving lifelong commitments. While competition will only intensifies moving forward, agents who will excel are those that are knowledgeable, diligent and trustworthy. However, findings from the bank’s recent supervisory reviews are rather disappointing – three in four agents were found to have failed to complete a comprehensive fact-finding process for more than 80 per cent of their customers. This may be a symptom of a productpushing mentality at the expense of customer welfare. The lack of objectivity increases the risk of unsuitable products being sold to customers, and could well permanently taint the industry’s reputation in the long-run. Things can, and must be done better. With the new Balanced Scorecard developed in consultation with the industry—including NAMLIFA (National Association of Malaysian Life Insurance and Family Takaful Advisers), the incentive structure has been improved so that agents work more effectively and objectively in the best interest of their customers. The Scorecard also reinforces our vision for agents to move towards higher value-add activities that involve advice, sales and customer support for more complex products. Another aspect that Takaful agents must recognise is that Takaful products embody universal value propositions that would appeal to all market segments, whether Muslim or not. One of the more distinct features of Takaful is the distribution of surplus to Takaful participants, reflecting the principles of solidarity, risk-sharing and

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mutuality among Takaful participants. The outcome of this are not just socially meaningful products, but also commercially competitive ones. Take a motor Takaful product as an example: In addition to the ‘No Claim Bonus’ feature that is common in conventional motor insurance, Takaful participants could receive additional financial benefits when the Takaful fund performs well through the sharing of surplus. Often, the advantages of the Takaful products are not sufficiently highlighted, potentially hampering the competitiveness of Takaful products. The key is to continuously espouse the value propositions of Takaful products. This is an aspect that agents could certainly help to address. The market potential for Takaful products is so much larger than what is realised today. Let me offer you two key information. As at end-2016, insurance and Takaful penetration in the B40 segment of working age stood at 30.3 per cent, compared with the overall penetration rate of 46.8 per cent. Second, the global Halal industry is worth US$2 trillion annually and Malaysia has a large and growing Halal industry. The question is to what extent the Takaful industry fulfills the insurance needs of the Halal businesses. Takaful agents can play a key role in reaching out to this broader market, particularly by understanding the Takaful products, and being able to explain them simply without diluting the distinct value propositions of Takaful. Part of this will require greater acumen and empathy on the part of agents for the diverse needs and preferences of customers from all walks of life.

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MALAYSIA

But it is also about developing long-term strategic value: By being well-versed in both fields, agents stand to position themselves as an authoritative voice in advising both Takaful operators and insurance firms in relation to the changing trends in the demands and needs of consumers and product features that would better cater to these.

EMBODY WHAT YOU SELL I’ve written at length about the tools and methods that can help sharpen the niche of Takaful agents as they enter a new, potentially disruptive phase in the industry’s development. But my final point

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makes a recourse back to unchanging core of this profession: In particular, the values embodied by Takaful. The very existence of this industry rests on the ultimate objective of attaining the wellbeing of mankind as called for in Islam. Takaful agents, being an essential part of this ecosystem, must embody their role as ‘wakeel’ of Takaful to the highest standards. Trust, honesty and fairness are values that I am sure everyone in this industry seeks to exemplify in all their dealings with customers. Agents will need to exercise greater care, skill and diligence in their dealing with customers.

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to remain relevant well into the future. There are plenty of formal programmes available to help agents progress in their technical competencies. There is also a whole host of open online courses which can be accessed anytime, anywhere, with the desire to learn is the only prerequisite. It is encouraging that various professional training courses are already being offered through NAMLIFA’s Financial and Life Practitioners Council, and that one of the programmes has been accredited by the Financial Accreditation Agency (FAA). Going forward, I hope that we will see more industry-driven standards and protocols that will assure customers that they can only expect consistent, top-notch quality service from their agents – putting to rest any public doubts that may have been caused by the few “bad apples” in the sector.

CONCLUSION

The central bank of Malaysia in Kuala Lumpur.

But rules and regulations are in themselves not sufficient to create a pool of agents trusted by customers: That would require all-round, holistic professionalism, an agent who is technically qualified, fully committed and uncompromising on ethical standards. To me, it is this integrity and calibre that will ultimately guarantee the continued success of agents into the next decade, more so than any other factor. Faced with a more demanding and complex business environment, agents must continuously develop and equip themselves with skills and knowledge that are relevant, and that will continue

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The three areas that I have described will require, at its core, a strong willingness to learn and adapt. The uncertainties of the future may appear to loom large over the horizon. But if we take the time to consider the lessons of our past and circumstances of our present, we are likely to be surprised by how much we already know of what we need and ought to do. In this regard, NAMLIFA is well-positioned to play a proactive role in facilitating ongoing, constructive dialogues on important industry issues that will certainly demand a concerted response by all parties. New skills and capabilities must be developed, processes need to be redesigned, and assumptions need to be revisited. Would the industry be better served were it to move away from the existing “tied agent” model? How should entry requirements and training offerings for agents evolve going forward? Should all agents be full-time agents? To what extent can, and should, insurance agents be allowed to sell Takaful products, and vice versa? These are just some of the questions that could potentially revolutionise the way agents do business. I’d like to conclude with another quote on the future, this time from Nelson Mandela, more than 150 years after Kierkegaard: “A bright future beckons. The onus is on us, through hard work, honesty and integrity, to reach for the stars.” I have every confidence that today’s agents have what it takes to thrive in the future, but the hard work of laying the necessary foundations must begin today.

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Ensuring good governance ZULKARNAIN MUHAMAD SORI, PHD, INCEIF, WRITES FOR IB&F ABOUT THE MALAYSIAN EXPERIENCE IN ENSURING SHARIâ&#x20AC;&#x2122;AH GOVERNANCE IN MALAYSIA

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he system of corporate control, effective and efficient governance that is consistent with Shari’ah guidance has been an important agenda for Islamic financial institutions (IFIs) since the existence of Islamic finance in Malaysia. This is especially important in light of rapid growth in Islamic finance industry not only in Malaysia but globally. The well-functioning Islamic finance industry can only be sustained if there is good corporate governance practice by IFIs that comply with the Shari’ah guidance. To this objective, the Islamic Financial Services Act 2013 has been enacted, where the law provides greater regulatory clarity and focus has also been put on Shari’ah compliant socially responsible investment. Even countries like Hong Kong, The Philippines, Singapore and UK have initiated regulatory reforms with the aim to build Islamic banking and capital markets. All these developments indicated that there is a dire need to make sure strong and well-functioning Shari’ah governance is in place to protect the interests of players and stakeholders of Islamic finance. Weak governance system would result in market failure and capital market dry up, and finally, the collapse of the whole financial system.

SHARI’AH BASED CORPORATE GOVERNANCE Islamic finance practices have been structured in a way to strictly follow the Shari’ah principles by observing its tenets, conditions and principles. Through this approach, business transactions of IFIs are expected to be consistent with Islamic teaching or Shari’ah compliant. Shari’ah governance is a governance system that ensures all activities and business transactions by IFIs are free from nonallowable elements such as Riba, gharar, maisir and other similar attributes. The major differences between conventional corporate governance and Shari’ah governance are that IFIs must undertake their activities only on the basis of Shari’ah law. Conventional corporate governance is different than Shari’ah corporate governance in the sense that the latter emphasise on fairness to all stakeholders through greater transparency and accountability that comply with Shari’ah principles. Literature on Shari’ah governance failed to clearly define the term, but The Islamic Financial Services Board (IFSB) Standard 3 defines corporate governance of IFIs as: “…a set relationship between a company’s management, its board of directors, its shareholders

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and other stakeholders which provides the structure through which the objectives of the company are set; and the means of attaining those objectives and monitoring performance are determined.” Therefore, the Shari’ah based corporate governance is more involved than conventional corporate governance, in the sense that board of directors, Shari’ah committee, depositors @ account holders, investors and regulators have direct interests in the IFIs’ business operations and performances. It is interesting to ascertain whether this is a true fact in practice, especially when the infrastructure the IFIs have to work with is all conventional.

ISSUE 1: DEFINITION OF SHARI’AH GOVERNANCE The ultimate objective of Shari’ah governance is to serve the purpose of establishing IFIs i.e. to upheld Islamic values that is guided by Islamic teachings and guidelines known as Shari’ah principles. In Shari’ah governance, Shari’ah compliance could bring strategic advantages to the IFIs, Islamic finance industry and to stakeholders who are committed to Shari’ah based banking and finance activities. Indeed, the Shari’ah compliance of items in both side of IFIs balance sheet i.e. deposits and financings start from designing the contract to marketing and implementation of the product. In a market survey conducted with 16 Islamic finance practitioners in Kuala Lumpur, Malaysia, all respondents believed that Shari’ah governance refers to the rules and regulation introduced by Bank Negara Malaysia to ensure all IFIs activities are consistent with Shari’ah principles while operating in a modern banking and finance setting. Shari’ah governance framework is adapted based on Malaysian conditions, which might not be applicable in other economies. The respondents reiterated that Shari’ah is the backbone of Islamic finance industry and the absence of Shari’ah principles in IFIs operations would justify the closure of Islamic finance industry. Having a Shari’ah governance framework is a boost to the industry because Shari’ah did not prescribe in detail every step of Islamic finance practices; it only provides general guidelines on how to conduct the operations.

ISSUE 2: THE IMPORTANCE OF SHARI’AH GOVERNANCE Respondents of the survey agreed that the mandate for Islamic banks and other relevant financial institutions is to operate their Islamic finance

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business within the context of Shari’ah rules and principles. Thus, the depositors, investment account holders, shareholders and other stakeholders put their trust in the financial institutions to ensure that their conduct and practices are within the label or brand of Islam or Shari’ah. Indeed, the Islamic branding or the Shari’ah branding will facilitate the preparation of the market towards Shari’ah compliance and will pull the various group of stakeholders together in support of the Islamic finance industry. However, there is a significant challenge to conduct Islamic finance business especially in the segment of Islamic finance entity that operates in conventional space. With the introduction of the Shari’ah governance framework, various mechanisms were introduced to ensure the process is properly performed in accordance to Shari’ah principles.

ISSUE 3: SHARI’AH GOVERNANCE FRAMEWORK 2010 It is generally agreed that the SGF is very comprehensive and the first of its kind being issued as a regulation in the world. However, there is concern on the different terms used in Malaysia as compared to the one used in the Middle East, where the Shari’ah Committee is called Shari’ah Board. In terms of the level of importance, Shari’ah Committee is placed slightly lower than the board of directors, board risk management control and board audit committee as in Figure 1 below. Yet, in the newly enacted IFSA 2013, the law basically has increased the responsibility of the Shari’ah Committee to be equivalent to the Board of Directors and the Senior Management. The penalties and liabilities for the Shari’ah Committee is also the same as those imposed on the Board of Director and Senior Management. Furthermore, it was argued that when the Shari’ah Committee only look after the Shari’ah resolution, their existence is not integrated to the overall operation of the bank and could be interpreted as a third party to IFIs. Indeed, the Shari’ah Committee plays a role in product approval, monitoring, trouble shooting and rectification. But, they are not decision makers. The Shari’ah Committee should also be represented in the Board of Audit Committee and Board of Risk Management Control because they have a hand in all of the functions. The appointment could be either as a member of the

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SHARI’AH GOVERNANCE FRAMEWORK MODEL FOR ISLAMIC FINANCIAL INSTITUTIONS

Shari'ah as overarching principle in Islamic finance

BOARD RISK MANAGEMENT COMMITTEE

BOARD Overall oversight on Shari'ah governance structure & Shari'ah compliance

SHARI'AH COMMITTEE Oversight accountability on Shari'ah related matters

BOARD AUDIT COMMITTEE

MANAGEMENT • Ensure executions of business & operations are in accordance with Shari'ah principles • Provide necessary support to the Shari'ah Committee

Shari'ah Risk Management Control Function Identity, measure, monitor, report & control Shari'ah noncompliance risk

Shari'ah Review Function Review business operations on regular basis to ensure Shari'ah compliance

Shari'ah Research Function Conduct in-depth Shari'ah research prior to submission to the Shari'ah Committee

Shari'ah Audit Function Provide independent assessment & objective assurance designed to value add & improve IIFI's compliance with Shari'ah

Shari'ah Compliance and Research Functions SOURCE: Bank Negara Malaysia (2010)

boards or as a permanent invitee. This way instead of having the Shari’ah Committee exists in isolation, they would be actively involved in deliberating recommendations, developing plans, observing financial reporting, conducting risk management and many significant decisions.

ISSUE 4: SHARI’AH RISK MANAGEMENT CONTROL FUNCTION In general, the size of IFIs plays an important role in determining whether IFIs would set up a Shari’ah Risk Management Control department. Or have dedicated staff from the group Risk Management division that looks into Shari’ah risk management. There is also a common practice where the Shari’ah risk management role is placed under the compliance function. There is also the issue of the different business models practiced depending the business volume or size of each IFI. A full fledge Islamic bank might have the capacity to establish

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a Shari’ah Risk Management department. A small size IFI or even an Islamic window of a conventional bank might depend on a risk management staff of the Group Risk Management department.

ISSUE 5: SHARI’AH REVIEW FUNCTION The Shari’ah review function relates to a review of IFIs’ Shari’ah compliance, where the Shari’ah review officer would visit branches or departments that offer Islamic finance products to assess their day-to-day activities or performance. The officer would examine the flow of operation and investigates on noncompliance incidence. The non-compliance detected at this level is different that the non-compliance found at auditing procedures, which is considered serious or critical finding. At the Shari’ah review level, any non-compliance findings would result in the respective branches or departments being asked to rectify the incidence through a process more of a consultative nature.

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ISSUE 6: SHARI’AH RESEARCH FUNCTION The Shari’ah research function is an important function in assisting the committee in seeking relevant information for them to debate and deliberate Shari’ah issues prior to deciding on relevant resolutions. Indeed, the function provides relevant information on particular Shari’ah issues that the Shari’ah Committee is currently considering. The Shari’ah research teamwould very much assist the Shari’ah committee in collecting and collating information. Indeed, if there is no Shari’ah research function, the Shari’ah committee needs to have full knowledge in various aspects of the IFIs business. Similarly, the Shari’ah research function would assist the Shari’ah committee in updating them on the industry updates. The Shari’ah research function would perform research on new products and principles to overcome issues relating to non-compliance risk.

ISSUE 7: SHARI’AH AUDIT FUNCTION In general, Shari’ah audit is expected to perform a value added service that examines operational activities, financial recording and reporting, and adequateness of policies and procedures of IFIs. Its function is more towards providing assurance services in the process of delivering their duties. As indicated earlier, the survey discovered that the size of IFIs will determine the structure of Shari’ah audit department, where the common practices for IFIs is to utilise their internal audit department to perform Shari’ah Audit function. There are instances where the function is performed by the group audit department through a dedicated officer. To be effective, the officer should come from an accounting background with an experience in auditing and exposure to Shari’ah issues either through attending training or work experience.

CONCLUSION The topic on corporate governance has been continuously discussed in the wake of never ending corporate scandals and crisis. The Malaysian government has put in place several initiatives to strengthen the practice of corporate governance in the country. In 2000, the Malaysian Code on Corporate Governance was introduced, and this was revised in 2007, 2012 and 2017 with the aim to strengthen the monitoring and other functions in the interest of shareholders. On the other hand, despite the fact

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that the Islamic finance industry has been around for some 40 years, it took some time for the framework for Shari’ah governance to come into being. The Shari’ah governance framework is an important mechanism to ensure that IFIs carry out their roles in accordance with Shari’ah principles in the interest of depositors, investment account holders, shareholders and stakeholders. The role played by the Shari’ah committee should however be enhanced by putting them in the other boards such as board of risk management control and board of audit committee. This approach will help the committee understand the mission of the institution, and the issues faced by the board and institution. This way, the committee will be able to make their decision in the context of business issues rather than purely Shari’ah theory. Additionally, regulators should consider changes to the structure of Shari’ah governance framework, where the Shari’ah Committee is placed at par with the other boards’ functions or place the committee higher than the other two boards due to their role in Shari’ah perspectives. The four functions namely Shari’ah risk management control, Shari’ah review, Shari’ah research and Shari’ah audit play a crucial role to support the Shari’ah committee in performing their duties by ensuring the IFIs activities are in compliance with the Shari’ah principles.

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SAUDI ARABIA

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SAUDI ARABIA

Sukuk issuance and rate rise a boon for KSA Islamic economy AFTER JULY’S COMPLETED SUKUK ISSUANCE AND JUNE’S INTEREST RATE RISE, ISLAMIC INVESTORS AND BANKS BOTH STAND TO BENEFIT

Capital markets in Saudi Arabia have had the eye of regional investors of late.

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n 26 July, the Saudi Arabian Ministry of Finance debt management office announced the completion of its first Sukuk issuance under the primary dealers programme. The programme had previously been established for the distribution of local government Sukuk securities. “This issuance, which totalled around SAR 3.5 billion, the equivalent of $925 million, is positive for the development of Islamic debt capital markets in Saudi Arabia because it broadens the investor base for government Sukuk securities in the primary market and supports liquidity in the secondary market,” said Jonathan Parrod, Associate Analyst at Moody’s Investor Service. The Saudi government has been a regular issuer of Islamic bonds since the Ministry of Finance

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established a Saudi riyal-denominated Sukuk programme last year. More than $20 billion of riyal-denominated Sukuk have been issued since July 2017, according to Moody’s. “However, this issuance is the first under the newly launched primary-dealer scheme and more than 20 investors from participating financial institutions and asset managers submitted bids through an electronic platform for both their own books and on behalf of investors. Previously, the Saudi Government typically relied on banks and institutional investors’ subscriptions to complete its tap issuances. In the new primary-dealer system, the Saudi debt management office appointed five local banks to act as primary dealers for local government securities, namely National Commercial Bank, Samba Financial Group, Saudi British Bank, Bank Al-Jazira and Alinma Bank,” said Parrod. Under this agreement, the appointed primary dealers purchase Sukuk sold at auction directly from the Government, and later place these securities in the secondary market for final investors, acting as market makers for government securities. “We expect the primary-dealers scheme will develop the local government Sukuk market, and more generally, debt capital markets in Saudi Arabia, which is one objective in the government’s Financial Sector Development programme under Vision 2030, its national plan to reform the economy. We expect the primary dealers will also help the Government build stable demand for Sukuk securities and foster a broader and more diversified investor base by facilitating public access to sovereign debt. In addition, primary dealers acting as market makers will play a key role in stimulating the secondary market trading activity and liquidity, ensuring efficient pricing of government securities on an ongoing basis. In April 2018, the Saudi Capital Market Authority, the government’s financial regulatory authority, announced the Saudi stock exchange listing of riyal-denominated government debt instruments, including both Sukuk and bonds totalling more than SAR 200 billion ($50 billion), in an effort to enhance the ease of trading these instruments in the secondary market,” said Parrod. Saudi Arabia has been the largest issuer of Sukuk by value among Gulf Cooperation Council countries since 2017, raising around $9.5 billion of Sukuk during the first seven months of 2018, and accounting for almost 55 per cent of the region’s total Sukuk issuance in that period.

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It has not been the private sector that has driven issuance, however The government has largely driven issuance, accounting for around 85 per cent of the Sukuk supply in the country since the beginning of the year, while corporate Sukuk activity has remained limited to a handful of issuers. “Going forward, we expect more issues and listings of government Sukuk, which, along with the introduction of the primary-dealers scheme, will help develop the secondary market and build a benchmark yield curve for local corporate issuers,” said Parrod. Investors are still quite interested in Sukuk, according to private banking giant UBS. “Our clients are expressing increasing interest in Middle Eastern assets as economic reforms and other factors open up local markets to international investors. Our coverage of key instruments such as equities, bonds, and Sukuk has steadily expanded to reflect demand, and will likely continue to do so in the years ahead,” said Michael Bolliger, Head of Emerging Market Asset Allocation, UBS Global Wealth Management Chief Investment Office. Investors are not the only ones in the Islamic economy that are benefiting from Saudi Arabia’s 2018 moves. Accoridng to Fitch Ratings, Saudi Arabia’s rising interest rates will be a big boon to banks. “The offsetting impact of higher funding costs will be less for Islamic banks than conventional banks - which will also get a boost - because they have a higher proportion of non-profit bearing deposits,” said Bashar Al Natoor, head of Islamic Finance for Fitch. Saudi Arabia’s central bank raised the official repo rate from two per cent at end-2017 to 2.25 per cent in March and 2.5 per cent in June. “We expect banking sector earnings to increase in 2018, although financing growth is likely to remain muted. We also expect Saudi banks’ capital buffers to remain strong and sufficient to absorb a potential mild deterioration in asset quality. Islamic banks continue to outperform conventional banks, helped by lower funding costs and a higher proportion of retail financing. Islamic banks, like conventional banks, have benefitted from improved liquidity conditions. Last year, the Ministry of Finance established a Saudi riyal-denominated Sukuk programme, which has been issuing regularly. This is a positive development to help Islamic banks manage their liquidity,” said Natoor.

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SAUDI ARABIA

The view from Riyadh, Saudi Arabia.

Saudi Arabia has the largest Islamic banks’ financing base (78 per cent) of any country that allows commercial banks to operate alongside Islamic banks. Four of Saudi Arabia’s 13 licenced commercial banks are fully Shari’ah compliant, while the other nine provide a mix of Shari’ahcompliant and conventional banking products and services. All banks are regulated by the Saudi Arabian Monetary Authority with the same disclosure requirements. “Saudi banks are predominantly deposit funded, with deposits representing about 90 per cent of funding at Islamic banks and about 94 per cent at conventional banks at end-2017. The largest bank, National Commercial Bank, considered an Islamic bank in our ratio calculations, has the most diversified funding profile of the Saudi banks we rate,” said Al Natoor. “Islamic banks are well capitalised, with an average Fitch Core Capital ratio of 18.6 per cent at end-2017. This was 70bp above conventional peers due to lower risk weightings on retail banking assets and lower off-balance-sheet activities. Capital ratios have increased in recent years due to lower financing growth and improved profitability,” he continued. Saudi Arabia’s emerging market status, set to kick in at the beginning of 2019, should continue the good news for the Islamic finance space in Saudi Arabia. “Thes announcement from MSCI, so close on the heels of KSA’s reclassification in the FTSE Russell Global Equity Index Series, marks the further integration of the Kingdom into global capital markets,” said Sarah Al Suhaimi, Chairperson of Tadawul.

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“It is the culmination of Tadawul’s ongoing efforts to work closely with Saudi regulatory authorities and leading emerging market investors to implement far-ranging reforms and market enhancements to strengthen the effectiveness of the Saudi capital market and foster an attractive investment climate for local and international investors. We are proud that these efforts have gained Saudi Arabia inclusion in the leading global indexes and benchmarks.” “Inclusion in the MSCI Emerging Market Index is an important milestone and further affirmation of the tremendous progress Tadawul has made in the past year in broadening investor access to the Saudi capital market, enhancing market efficiency and further aligning market practices with global best practices,” said Khalid Al Hussan, Chief Executive Officer of Tadawul. “Our work is never done, and additional market enhancements are in the pipeline as we continue to strengthen and grow investor confidence in the Saudi market.” In April, Tadawul announced that it would be listing and trading of debt instruments issued by the Government of the Kingdom of Saudi Arabia, including Sukuk, with a combined value of SAR $685 billion with maturity dates ranging from five to 10 years. "This listing represents another significant step in the development of the Saudi capital market. Listing Government debt instruments will deepen the Sukuk and bond markets, which in turn will further boost liquidity in the secondary market and enhance the attractiveness of debt instruments to both investors and issuers,” Khalid Al Hussan, CEO of Tadawul said.

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BLME

(phoelixDE/SHUTTERSTOCK)

Connecting London to the Middle East

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BLME

MARC NORDEN, DIRECTOR - HEAD OF INVESTMENT SOLUTIONS, BLME SPEAKS EXCLUSIVELY TO ISLAMIC BUSINESS & FINANCE FROM THEIR OFFICES ON THE BANK’S RENEWED FOCUS ON HNWIS, THE FUTURE OF ISLAMIC FUNDS, AND THE UK’S FUTURE

hat is your role within BLME?

I have worked at BLME for nine years and currently head up investment solutions. Prior to that I was head of asset management. The focus for investment solutions is supporting our wealth management business in finding investment opportunities for our GCC clients. We have found that this new strategy is what our clients are looking for rather than BLME developed incomes funds. In the past we offered a ‘Sukuk fund’ and an ‘Income fund’ which invested in Sukuk, Murabahah and Wakalah resulting in a lower risk and lower return than the pure Sukuk fund. We found that they performed well and did grow, but grew very slowly. So, rather than being a fund manufacturer, the Bank decided become more of a niche player focusing on the investment side where we could better support our clients.

Could you expound more upon BLME’s current focus?

A view up from the financial district in London, England.

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Our focus is very much on the high net worth market in the GCC and broader MENA region, including the Levant. We aspire to be the leading provider of Shari’ah-compliant wealth management services out of the UK into the Middle East. This region has always invested in the UK. BLME has built some good relationships bridging the UK and the GCC and broader Middle Eastern countries. We want to be their first port of call for fully Shari’ah-compliant banking and investments out of the UK. How do we do that? First we provide banking services and offer a full suite of real estate

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BLME

related services. Historically and continuing we see a lot of investment out of the Middle East into the UK real estate market. Our suite of services covers everything from beginning to end—if you’re looking for a property, whether residential or commercial, we are able to source real estate and real estate services working with partners or from our own team. We help investors find a property either as a summer home or an investment property, can do the financing, and offer mortgages, commercial finance, or development. We’ve built up a strong reputation in real estate finance. Then once you’ve bought the property, we can help manage it for you, and we can organise concierge services. From an investment point of view, we are starting with real estate, but we are looking to broaden our investment services. It is my responsibility to look for other investment opportunities to help clients diversify away from a reliance on real estate. We are looking at other opportunities at the moment. Beyond Wealth Management and investment solutions, over the past eleven years we have developed a strong commercial finance division. We provide lease and asset finance alongside trade finance. BLME also provides market leading savings products in the UK.

Could you tell me more about those opportunities? Our extensive experience in leasing and asset finance fits naturally into the Shari’ah world and provides potential opportunities from an investment perspective. BLME is looking at these opportunities, specifically considering assets in the transportation industry or equipment leasing. We hope to be able offer our clients some new compelling investment opportunities late 2018 and into 2019. Our aim is to help our clients maintain their wealth, consolidate and grow and support their investment strategies, particularly inter-generational wealth management.

Does Brexit factor into the decisions of your clients? Brexit is a definite consideration at the moment for all investors and financial institutions. I think it would be wrong for us to stick our heads into the sand and say that it isn’t—it is. Some clients are holding back investment decisions until they see greater clarity. However other clients see the uncertainty as an opportunity and continue to consider investment into the UK.

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All the economic evidence shows that the UK is in a state of flux which creates uncertainty. Hopefully the government will be able to sort out or negotiate an agreement with the European Union sooner rather than later. Once the direction of travel is known and investors and companies alike can all prepare accordingly Brexit continues to be a consideration, and it is a concern. However despite the scaremongering that goes on both sides of the debate the country is not going to collapse overnight. From BLME’s perspective, we do not face into Europe as our focus is the Middle East. To that degree

Visitors from the Middle East have always made London their prefered destination, and that connection continues past tourism.

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BLME

How has the bank performed? Last year we bought a retail warehouse which is leased to a well-known do-it-yourself company in Yorkshire. That investment is doing very well. Our clients who invested in that are getting about an eight per cent return. We are looking at another interesting opportunity at the moment. We do a lot of research and have a very strict due diligence process.

(Sharkshock/SHUTTERSTOCK)

What are your thoughts on how London fit in to the future of Islamic finance?

the impact on BLME is minimal. Clearly there will be some impact on the city, but the infrastructure and financial services industry is very well embedded. You might see some movement to other parts of Europe, but the whole structure and brains of our financial services, the legal support environment— it is all embedded. While we are not clear on the direction of travel I do not think the UK financial services industry is going to change suddenly. I would like to think that pragmatism will rule in the end and we will have a reasonably smooth transition, whatever direction that happens to be.

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London has done well at positioning itself as a global centre for Islamic finance. We’ve been very fortunate to have a lot of support from the Government, treasury, and various government departments. I think they realise how important Islamic finance is to the UK. Several years ago the UK Government issued a Sukuk and they announced that they will roll it upon expiry. We would have liked to have seen a larger issuance. It was GBP 200 million, and I think demand would have filled five to ten times that. The UK Sukuk was also important as it was a catalyst for Sukuk issuance from the likes of Luxembourg and Hong Kong. There is an element of tokenism with some Sukuk issuance but it shows willing and governmental support for a growth industry. The Sukuk market would benefit from more issuance on the corporate side as well. When we look at Sukuk issuance, we see the same names and the same governments over and over again, and not a lot out of Southeast Asia and the Middle East. We have not seen a lot of large established global corporations come into the Islamic capital markets. Sukuk issuance taps into the strong financial and capital market infrastructure. The great advantage that the UK has, is that there are a number of law firms and professional services that have not just experience in the particular asset type that we are looking at, but also from the Shari’ah angle as well, which is hugely beneficial. In order to continue to grow and mature it is imperative to the Islamic finance industry to come up with good quality products that compete with conventional alternatives. Several years ago, a number of players came into the market seeing an opportunity not because they had particularly strong convictions to be Shari’ah compliant but because they saw an opportunity from a commercial perspective. These organisations have fallen away

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because they were not able to grow assets. For those who provide Islamic finance because we believe in what we are doing and we believe that there is not just a client base but a right way to do things, the future will be good.

Lombard Odier just launched their Islamic fund. As BLME has operated Sukuk and fixed income funds in the past, do you think you would ever launch a fund-based on the Index? Strategically, it doesn’t fit with what we do and for the time being our focus is on other opportunities. Personally, as someone who has worked for many years in the industry and has previously managed index funds I am a strong proponent of Index funds if they are used properly as a part of an asset allocation strategy. I think the challenge for the industry is getting traction on Islamic funds. There are a lot of Islamic funds, equity funds in particular, but with very few exceptions, there is no scale in it. I do not know why that is but suspect that it is down to a lack of education and profile. Theoretically I have a slew of products that would be very good for the Islamic market, but from a commercial perspective they would not work without a prohibitive amount of investment. You

would expect, if the Muslim community were better aware and the funds offered returns equal to those of a conventional fund that the Muslim community would be supportive of the industry. Anyone who has a pension scheme has the opportunity to select how their pension is invested. I know there are people out there who have set up Islamic investment schemes for pension funds in the UK for example, but have struggled to get any momentum or traction behind it. There is a potential market but there is a lot more the industry can do to educate and raise the profile of Islamic funds.

Is that do-able? Does the Lombard Odier Islamic fund launch help signal that it is possible for others to follow suit? They are focused on the Middle Eastern market, and creating product for their high net worth clients. It is the sort of product that most investors would expect to have available. Lombard Odier will have developed this fund with their clients and target market in mind. If we are talking about Middle Eastern investors, without wanting to be too generalist about this, they know what they want from their investments and what asset classes they are comfortable with. For example, Middle Eastern investors generally like real estate, they like the tangibility of it. They like to be able to point to a building and say, that’s mine.

Why are Middle Eastern investors wary of funds? Prior to the credit crisis in 2008 you started to see more Middle Eastern investments into equities and financial institutions. Then, of course, everything blew up, and they retrenched after that. It has taken time for confidence in investing in markets to return, specifically those markets that they are less familiar with. Investors also exited asset classes and instruments they are not familiar with and as part of this you can see that there was in general wariness towards funds. This came about prior to the credit crunches, where a number of financial institutions in the Middle East packaged up balance sheet assets into investment products, which subsequently crashed. The same situation occurred in many regions and ended with investors not really knowing what was in those products. They knew they were buying a “fund” but they didn’t know what was in it. The assets in there blew up, and they lost x percentage

Islamic Business & Finance | ISSUE 110

MARC NORDEN

www.islamicbusinessandfinance.com

BLME

of their capital. In reality the issue was not with the fund but with the underlying asset. However confidence in funds is returning although not yet to pre-2008 levels, I think that will continue to improve over time. In each generation, people come from the Middle East to the UK and America to study, and become more familiar with the type of investment techniques available here.

I know there are people out there who have set up Islamic investment schemes for pension funds in the UK for example, but have struggled to get any momentum or traction behind it. There is a potential market but there is a lot more the industry can do to educate and raise the profile of Islamic funds. Outside of the Middle East, funds and Shari’ahcompliant investment vehicles in Southeast Asia have traction and are growing very quickly. In Malaysia and Indonesia, investment products are doing quite well, especially if you are a local manager. People tend to invest in local assets where they understand the market meaning the next step there is to try to internationalise and diversify those portfolios and we are starting to see signs of that. It will take time. The Middle East has always historically relied on the government to look after the population, but that is starting to change. In the coming years, we will see the public having to become more self reliant and that will increase the need for savings products, and then the potential for the Islamic fund market will rise.

How can the industry find that growth? One of the things that the whole industry needs to do is focus on technological and digital solutions and products. Islamic finance needs to keep pace or ideally outstrip the technological advances of the conventional finance market. If this can be achieved clients will probably not be able to tell, from a service and functionality perspective if they have a conventional or Islamic financial service or product. Whether that is the right thing is another

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part of the debate, as one of the challenges for the industry is whether it wants to be a clone of the conventional industry or to be totally different. The answer is probably somewhere betwixt and between as we should strive to maintain and develop an awareness of the ethical and moral distinctness of Islamic finance. For most of us our foremost thought is our security. Our security comes in two ways—our personal support network of friends and family, and our wealth. When it comes to securing our wealth, you do not want it to be jeopardised. Therefore, there is comfort in the devil you know. Islamic finance is still a reasonably new industry—it is only been going for 40 to 50 years but it has only taken off in the last 10 to 15 years. We need to build a lot of trust and we need to get people to break away from the comfort of conventional finance, which has obviously been established for hundreds of years. If we can build that trust and we do not have any blow ups the opportunity is there, but it is about getting people comfortable with it. As the assets start to increase and the industry starts to grow there will be more comfort, but it is a slow burn, and a lot slower than many people expected. Takaful, for example, doesn’t seem to be going anywhere. People want insurance but they are not sure about the mechanism and mutuality of it. It works in theory, but does it work in practise? Consumers ask themselves, am I going to risk it? You have to build a lot of trust.

BLME’s 2018 so far: The BLME group has delivered a profit of GBP 7.1 million compared to GBP 1.5 million for the same period in 2017. The balance sheet remains stable at approximately GBP 1.1 billion. The cost income ratio before provisions reducing to 82 per cent compared to 93 per cent at the end of 2017. According to BLME, the group aims to maintain this ratio over the second half of 2018. BLME group has invested in operational improvements including enhanced documentation, digital solutions for specific products and where appropriate automated processes. Enhancements to its online application process in late 2017 resulted in an increase in retail deposits of 22 per cent compared to the first half of 2017. BLME Group has introduced a programme of client surveys, the results of which found that 100 per cent of its UK leasing clients who responded to its first customer survey indicated that they would recommend the bank.

ISSUE 110 | Islamic Business & Finance

HALAL BUSINESS

Londonâ&#x20AC;&#x2122;s Islamic tech star

IKBAL HUSSAIN, CHIEF EXECUTIVE OFFICER, ISLAMIC GPS, SHARES THE STORY OF HOW ISLAMIC GPS BECAME THE GO-TO GUIDE FOR MUSLIMS ALL AROUND THE WORLD TO FIND A PLACE TO PRAY AND ENGAGE MORE IN HALAL TRAVEL

Islamic Business & Finance | ISSUE 110

www.islamicbusinessandfinance.com

HALAL BUSINESS

IKBAL HUSSAIN

(I Wei Huang/SHUTTERSTOCK)

www.islamicbusinessandfinance.com

London

ell me the story of Islamic GPS.

Iâ&#x20AC;&#x2122;m a designer by background. I studied graphic design and traditional media. I worked for Samsung for five years doing research for them, and developed a business that learned from that journey. When I was travelling in 2012, I went to Turkey with my wife. There were a lot of apps growing at that timeâ&#x20AC;&#x201D;mobile technology was really improving. But in the Muslim market, the app world was very dark. There were not nearly enough apps there. For what was there, the design interface was underdeveloped, and there was a decided lack of content. I thought to myself that there should be an app that could help people find places to pray if they are travellers. I thought that it should be done with a wow factor, and that is where augmented reality entered the equation. I had been doing research on augmented reality, so I thought, let me try out this idea and see if it works.

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HALAL BUSINESS

In Turkey, there is a lot of amazing heritage that I was ashamed to not know better. I wanted to give people a way to do so. I came back and talked to people about it, but I had never done my own project app. I decided to try and see if I could. I didn’t research the market, but I knew that the Halal travel market would grow, and that technology would continue to go sky high. From there, I formed a group of people ,and we didn’t think about the business side—we just thought to make it and see how it worked. We spend a year of research looking into technology that was very new. Some of the apps that were there already were not very accurate. In 2015, we did a test at an event that we thought would be perfect, as our audience would be there—techies, travellers, everyone. The people there were amazed, they loved it. We had a lot of ideas, but we cut them down and thought, let’s make this about heritage and places to pray, and let’s make this a worldwide app. No matter where you are in the country, where you are in the world, you would be able to find a place. This is how we grew. We found research on heritage sites on Mecca, Medina, Jerusalem and more, and we targeted the market there. From there, we developed on the iPhone and saw a very high number of usage, and in 2016, we launched on both iPhone and Android. We made the app free, in order to see how the app would evolve, how people would use it, and get customer feedback. Every day, there is a new mosque added, and people have also used it to host their homes for prayer on Friday. It became a personal tool—people send us emails and we add them. We have about 100,000 downloads, and we spent no money towards marketing, it all came organically. We still haven’t taken investment yet, because we’re still looking for the right amount for how we can grow this market. The augmented reality (AR) is huge—about $30 billion by 2020. Six to eight months ago, Apple launched its own AR kit, after Pokémon Go became a worldwide phenomenon.

they can figure things out very quickly. Most of the app has been developed from user feedback. We first tried to create a perfect thing, but there is no such thing as a perfect thing.

How have you turned towards the business model since then? Now we have our business minds on it on how to sustain the app, and how we can generate revenue. Because it’s a travel app, we are focused on travel. We’ve been featured in numerous media platforms across the world, and from there we started getting hits through other countries that we hadn’t before. Every stage now in our business plan is about figuring out when and where we should ask for investment. It’s not about money, it’s about the right people and the right organisation. Money can blow away quickly, and we don’t cost too much as we developed it ourselves. There was no extra cost in hiring developers. The only thing we need money for is marketing and hiring more people internally.

Having come to Dubai to develop the Islamic economy. In London, how much do you feel as a Halal business that you are tapped into a Halal economy? Do you feel isolated, or is there a good environment here? It is a good environment now. In the last five years, it has evolved. For example, food places. Currently, we are near Brick Lane in London, and around here there are about four to five mosques, so this area has always been developed. Some are even not readily visible. But even in central London, Halal food is available more than ever. Five years back you could find maybe one or two places, but now there are about 20 to 30 steakhouses that are Halal, for example. Major brands are now Halal. Prices are premium, but they do get customers. It is a massive industry. There is no isolation—there is a huge potential.

Was Pokémon Go a boon for your app?

Are you able to work with Takaful, Islamic banks, or Shari’ah-compliant investors in London?

It was a great thing, because we no longer had to teach users how to use augmented reality. The group of people that were going to use the app were all of a sudden educated through that game. This is what we found. We were very concerned that people wouldn’t know how to use it, but the users are very clever—

Similar to food, before there were maybe one or two, and now there are many. There are not enough investors in the Islamic economy in London yet, however. There are a few, but they may not have enough experience. I worry about getting x amount of money and then run out of money. We want something that can sustain itself, and we want to

Islamic Business & Finance | ISSUE 110

A mosque near Islamic GPS headquarters in London.

www.islamicbusinessandfinance.com

(Victor Moussa/SHUTTERSTOCK)

HALAL BUSINESS

be able to give back to the Muslim community here. We want to be able to hire people and give them jobs.

How are you engaging with the Muslim community? From this app, we also developed a few different apps, and they also raised massive interest. One Saudi app from the holy sites found very high usage. From that, we have made a lot of connections, and we have people contributing from all of the world. We have made a network of friends for this project,

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and we hope that to be a stepping stone. We will be participating in an exhibit at the Tate Modern to show off our augmented reality. We want to establish ourselves locally strongly. I have been to a few countries, and all to these countries have different elements of the Islamic economy. Malaysia and Indonesia are where most of our downloads and usage are from. In London, users will use it during Ramadan, Hajj, or Friday prayer. We want to find a way to get people more engaged in other markets.

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HALAL BUSINESS

How have you received mentorship within the Muslim community? We have been taking advice from mentors, and we participated in the Islamic economy boot camp from the Global Islamic Economy Summit in Dubai, who helped train us how to fund, how to write a pitch, how to write a business plan, and how to make your idea simple and easy for people to understand and attract investors as well. Before it was like a zig zag, and now hopefully the journey is a straight road. We’re in a situation now where we need to take this to the next level. The market is there—we need to tap into it.

What’s the benefit to being based in London as opposed to being based in Kuala Lumpur or Dubai?

Where do you see financial growth coming from? There’s a lot of usage in Southeast Asia, but the users are not as financially stable. Other areas, people use it when they need it, but they also spend money. From there we can look at in app purchases, such as guide books, audiobooks, and more extra elements on the app where users can engage with different sorts of material and provide us with revenue as well. For example, a Hajj guide, or a Turkey guide, people are happy to spend GBP 20 or 30 because they need it. That is what we’re thinking about how to approach the future.

Istanbul, Turkey, where Islamic GPS was first ideated.

(vvoe/SHUTTERSTOCK)

I have been thinking to myself about moving to Dubai or Kuala Lumpur. London is a hub for start ups. Because of that, I thought to myself, let’s stay in London and see how it goes. In London, you see all types of people. It’s not just Muslims, there is a

very diverse community of designers and developers. If I go to another country, for me to adjust will take time. Say for example if we get investors from those places, and they want us to come on board, that is a different story, and then maybe we can focus the app around those markets, but for now London is the best place for us.

Islamic Business & Finance | ISSUE 110

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Islamic Business & Finance

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LONDON

Sadiq Khan: “London should be at the heart of Islamic finance”

Islamic Business & Finance | ISSUE 110

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LONDON

hile 2018 has brought many milestones to the Islamic finance world, one in particular was the Islamic Development Bank’s visit to the London Stock Exchange. London has long been an important part of Islamic finance. Its own Sukuk launch a few years ago was a pivotal moment in the growth of Sukuk, and helped guide others on the path towards their own Sukuk issuance. One issuance, however, was just the beginning. London would like to stay an integral part of Islamic finance. “Islamic finance is growing around the world. There is more and more demand for Islamic finance. As the financial capital of the world, it’s really important that we are for products that are in demand and London should be at the heart of Islamic finance,” said Mayor of London Sadiq Khan. The Islamic Development Bank is a leader of the Islamic financial community, one of the world’s largest multilateral development banks. The IsDB brings together 57-member countries across four continents, touching the lives of 1 in 5 of the world’s population, with an annual volume of operations above $10 billion and subscribed capital of $33 billion. “Sukuk are based on risk sharing contracts backed by real assets. We want to explore the great growth and investment opportunities that this product offers the whole finance industry, here in

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ISSUE 110 | Islamic Business & Finance

LONDON

the UK, and in our Member Countries and across the world,” HE Dr. Bandar Hajjar, President of the Islamic Development Bank, said. HE Hajjar echoed the statements of Mayor Khan. “I truly believe that Sukuk can change the world for the better for investors but also for the billions of people around the world who benefit from the growth that it drives. I want the UK to be at the heart of this movement,” said Hajjar. “Islamic capital markets are based on two main pillars—the first one is the Sukuk market, and the other is equity participation. It is very important that if we are to raise long term investment that we bring experts together to discuss the future of Islamic finance in general and the Sukuk market in particular,” he continued. Other leading figures in the financial world of London have also expressed their support for London’s Islamic finance future. “London, as the world’s leading international financial centre, is uniquely well-positioned to support growth in Islamic sector financing. Our world leading banking, insurance, legal and tech sectors are the strengths and ideal partners for the Islamic finance community, “ said Peter Estlin, Alderman for the World of Coleman Street. The IsDB has also made partnerships with educational institutions in London as well. This July, Queen Mary University of London (QMUL) announced a new partnership with the Islamic Development Bank which will co-fund fifty PhD students over the next five years. The scholarships, part of the IsDB’s Merit Scholarship Scheme for High Technology, will offer 10 PhD students per year the opportunity to conduct their doctoral studies in QMUL’s Faculty of Science and Engineering. The IsDB’s scheme is focused around empowering people for a sustainable future by driving innovation, partnerships, and making Islamic finance a part those value chains. Candidates from any of the Islamic Development Bank’s fifty-seven member countries will be eligible to apply for these QMUL-IsDB scholarships, which will provide full overseas tuition fees and allowances to meet living costs, health insurance, and airfares, as well as a dedicated research allowance, for up to three and a half years. The programme includes scholarships to QMUL’s Faculty of Science and Engineering, School of Biological and Chemical Sciences, School of Electronic, Engineering and Computer Science,

Islamic Business & Finance | ISSUE 110

School of Engineering and Materials Science, School of Mathematical Sciences and School of Physics and Astronomy. The IsDB also launched a $500 million fund supporting science, technology and innovation initiatives that will tackle development challenges around the globe. The Transform Fund will work in line with UN’s Sustainable Development Goals. Innovators, scientists, businesses, NGOs, Governments and academic institutions are eligible to apply. Transform will run in tandem with IsDB’s new online hub, ENGAGE, designed to connect innovators in developing communities with market opportunities and funding.

I truly believe that Sukuk can change the world for the better for investors but also for the billions of people around the world who benefit from the growth that it drives. I want the UK to be at the heart of this movement” HE DR. BANDAR HAJJAR, President of the Islamic Development Bank The UK's Islamic investment space has seen development on the individual side in 2018 as well. Wahed Invest, a US-based company, has launched the first digital halal-focused ethical investing platform in the United Kingdom. Wahed recently closed a $7 million investment round from Cue Ball Capital and BECO Capital, based in the Middle East. Wahed, which launched in the US in 2015, allows people in the UK as of this year to invest in Halal entities on what it calls an easy-to-use investing platform overseen by an ethical review board. “We know that practicing Muslims believe in a complete approach to embracing Halal values but until recently, have lacked the ability to easily incorporate investing into their ethical practices,” said Junaid Wahedna, CEO, Wahed. “With the addition of 401k and IRA rollovers to our investing platform, Wahed is taking the next step toward being the preeminent, full-service Halal-focused investing platform for the Islamic community, giving Muslims the opportunity to confidently and ethically invest in their futures," Wahedna continued.

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02/09/2018 15:24

INFRASTRUCTURE INVESTMENT

(Urban Cinematography/SHUTTERSTOCK)

Unlocking Islamic financeâ&#x20AC;&#x2122;s value for infrastructure

Islamic Business & Finance | ISSUE 110

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INFRASTRUCTURE INVESTMENT

DR OSMAN BABIKER AHMED, LEAD ECONOMIST, IRTI-IDB GROUP, WRITES ABOUT HOW THE UNâ&#x20AC;&#x2122;S SUSTAINABLE DEVELOPMENT GOALS CAN BE A PERFECT PARTNER TO UNLOCK THE POTENTIAL OF ISLAMIC FINANCE

emarkable progress was made globally in translating the MDGs into reality with a huge reduction in the levels of life-threatening poverty over 2000-2015. Most regions of the world experienced poverty reduction during this period. Nonetheless, poverty reduction was very slow in some regions such as Sub Saharan Africa and Asia. Income inequality has also very narrowly declined across countries but increased in many countries. The progress on other MDGs in relation to education and health has not been fully seen. Worldwide environmental issues need serious attention alongside other development objectives. Because of these reasons, the world, through the UN, adopted a new set of development objectives: the Sustainable Development Goalsâ&#x20AC;&#x201D;SDGs. SDGs are a new round of global goals to follow the 15-year MDGs period. The range of SDGs is more generic than the MDGs, focusing on economic and environmental sustainability issues including inclusive growth, industrialisation, job creation, and climate change [Shirazi (2016)]. Besides, SDGs reframe development as a universal project and SDGs are comprehensive and indivisible with a great deal of interaction among them (Ahem, Rami [2017]). In reality, the implementation of SDGs needs a set of preconditions, including financial resources, sovereign leadership commitment, partnership, effective institutions, good governance, physical infrastructure, human capital, technology, social inclusion and effective policies. The infrastructure finance is estimated at around $ 3-4 trillion annually until 2030. All

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ISSUE 110 | Islamic Business & Finance

INFRASTRUCTURE INVESTMENT

development finance available does not exceed $ 300 billion â&#x20AC;&#x201C; only 10 per cent of the need, according to the WB and IsDB Report 2017. The challenge is how to promote a financial system with the right institutions and governance that incentivizes a redirection of some of this investment toward sustainable development. Therefore, both private and public financing from domestic and international sources are necessary, and both need to be effectively exploited. The Addis Ababa Actionable Agenda calls for resource mobilisation, of public and private capital, at local and global levels. The UN states that innovative financing initiatives will be required at all levels, especially the private sector, to secure funding for the SDGs and achieve the global sustainable aspirations of societies. Studies have revealed that access to finance has a strong correlation with poverty reduction, economic growth and development and overall social welfare. Given that, how can Islamic finance help and contribute to achieve this ultimate goal of poverty reduction by providing funds for infrastructure projects? Islamic finance has been accepted as a workable mechanism of dealing with poverty alleviation and augmenting inclusive economic development. It encourages economic activities and entrepreneurship, ensures financial and social stability, and addresses financial inclusion and supports comprehensive human development, which are all relevant to sustainable development. Islamic finance can also offer new ways of addressing both small and medium projects on one side, and mega infrastructure and publicprivate partnership (PPP) projects on the other side. The global need for infrastructure is huge. It extends across all regions, giving rise to a massive deficit in infrastructure investment. Given the global infrastructure financing deficit, $2.5 trillion annually, Islamic finance can mobilise resources for mega projects and equally for SME and micro enterprises. Different Islamic financial instruments can provide flexible tailored-funding for specific small-sized or mega projects. Examples of modes for financing are Sukuk, Ijarah, installment sale, Istisnah and equity. Many of the Organisation of Islamic Cooperation (OIC) member countries are on a drive to entice private capital to finance their infrastructure projects. Islamic finance can provide a complementary source of financing to these efforts.

Islamic Business & Finance | ISSUE 110

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INFRASTRUCTURE INVESTMENT

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ISSUE 110 | Islamic Business & Finance

INFRASTRUCTURE INVESTMENT

In view of that, and to bring in more Islamic finance, the state of affairs must be set for infrastructure projects to attain a much larger share of total investment. This can be done if the preparedness of developing countries for infrastructure projects can be upgraded, and additional sources of finance, such as Islamic finance, can be put in order for the infrastructure projects. The evidence from a number of OIC member countries (Pakistan, Djibouti, Turkey, Saudi Arabia, Jordan, and Malaysia) illustrates the flexibility of Islamic finance in putting together Shariâ&#x20AC;&#x2122;ahcompliant solutions across different countries and sectors. These cases span power, airports, sea ports, health care, and roads. It should be noted that these countries vary greatly in terms of their (i) macroeconomic environments, (ii) readiness to support infrastructure projects, and (iii) institutional maturity vis-Ă -vis Islamic finance. The asset-backed feature of Islamic finance modalities and their emphasis on shared risks make them naturally appropriate for infrastructure projects. A wide diversity of Islamic finance structures exists to provide sufficient flexibility to practitioners in selecting appropriate financing modalities. The success of infrastructure projects in using Islamic finance has inspired project benefactors (equity investors) in countries such as Bangladesh, Djibouti, Indonesia, Kazakhstan, Malaysia, Mali, Morocco, Nigeria, Pakistan, Saudi Arabia, Turkey, and Uzbekistan to continue to pursue Islamic finance, along with conventional finance, in undertaking yet to come infrastructure projects. The Islamic Development Bank Group (IsDBG) has been a pioneer in offering Islamic finance for infrastructure projects. In addition, other multilateral development banks and international financial institutions, including the IFC and MIGA of the World Bank, and the Asian Development Bank, have started positioning Islamic finance instruments to support infrastructure projects, thus providing much-needed assurance to fund providers. For each transaction that takes place, innovations in the structures used contribute to the body of knowledge and experience, and prepare the way for future dealings. Yet Islamic financing is not consistently used in infrastructure projects. More knowledge about Islamic finance is required by countries seeking infrastructure finance and techniques to facilitate the practice of Islamic finance instruments in order to mobilise private investment in infrastructure projects. Assuming that many stakeholders,

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including project promoters and commercial banks, have a rather modest understanding of the application of Islamic finance to infrastructure projects, there is a substantial opportunity for awareness and knowledge building in this space. In conclusion, and in terms of financing infrastructure projects, Islamic finance is among the workable alternatives to fund development based on SDGs. The two basic principles behind Islamic finance are the sharing of profit and loss and, significantly, the prohibition of the collection and payment of interest.

More knowledge about Islamic finance is required by countries seeking infrastructure finance and techniques to facilitate the practice of Islamic finance instruments in order to mobilise private investment in infrastructure projects.

Theorists, practitioners and regulators recognise the ethical, multi-channel and diverse dimensions of Islamic finance, as well as its link to the real economy. In terms of the diversity of application, the use of Islamic finance extends to a range of economic subsectors (international trade, housing, education and health, food and water security, infrastructure and energy, agriculture and rural communities). While each sector has its own peculiarities, Islamic finance has suitable ways to address them. Moreover, tradable securities (Sukuk, shares, Waqf certificates, etc.) originate from these mechanisms. Islamic finance is possible and provided through a multitude of channels, including through public, private and voluntary sectors for a wide range of goods and services (food and water security, housing, energy and infrastructure, education and health, trade) to further economic development.

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EXPERT OPINION

Islamic Business & Finance | ISSUE 110

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EXPERT OPINION

Will we ever see a world without Riba? DR AISHATH MUNEEZA, ASSOCIATE PROFESSOR, INCEIF, WRITES FOR ISLAMIC BUSINESS & FINANCE ABOUT WHY THERE IS HESITATION TO MOVE ONâ&#x20AC;&#x201D; AND WHY PERHAPS IT IS TIME TO DO SO

e live in a world where the majority of us are so used to only one way when it comes to economics and finance, which is the conventional or Riba-based system. Ask the man-in-the-street what denotes Riba, and he would be hard-pressed to provide the answer. The general education school syllabuses do not consist information of what is Riba and what is not Riba from a practical perspective or modules related to Islamic finance. So, it is difficult for a common man to distinguish what Riba is in our economic and financial systems. They have put their faith in a Ribawi system for many generations that doing the opposite of their usual practice is unthinkable to them. Unless the mindset changes, Riba will remain as part our economic and financial systems.

Caption caption

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The business community also hesitates to embrace a Riba-free system due to their lack of understanding of what a truly Riba-free system has to offer. The prefix Islam attached to finance creates fear in the mind of some. There are those who believe Islamic finance is religiously motivated to create segmentation among the population based on religion rather than serving mankind

ISSUE 110 | Islamic Business & Finance

EXPERT OPINION

using ethical principles of financing. Their mind is set on the fundamental philosophy of makingmoney-out-of-money by transferring all the risks to the customers or debtors by way of simple interest and compound interest. Therefore, they could not comprehend the risk sharing nature of Islamic finance that is based on sale or lease of an underlying asset or creating an equity relationship between the parties with the common view of generating profit from a real economic activity. So how long will it be before the Islamic financial system is fully embraced by the masses, regardless of religious background? It depends from jurisdiction to jurisdiction. The legal system plays a major role in that a legal inhibition slows down the growth of Islamic financial system. However, at the end of the day, it is the demand that will eliminate this barrier and all the other encumbrance preventing the growth of the industry. So, the most simplistic answer for this question is that Islamic financial system can get out from the experimental era only with the political will and support from the respective governments and concerned stakeholders. Malaysia is the best proof of what a strong political will and a well-laid infrastructure could do to boost the Islamic finance industry. Islamic finance has passed the experimental era in the country with the full support from the government and stakeholders and is now considered as the cranium of Islamic finance industry in the world. It must be said though that one formula may not work as well for everyone. Respective countries also need to formulate their own strategic agendas to develop and sustain Islamic finance in their jurisdictions. Collectively, the individual efforts of the respective governments will impact the global Islamic finance industry. That said, awareness and lack of the right talent pool is the biggest hurdle facing the growth of Islamic finance today. Universities such as INCEIF could assist is resolving these issues. We need to develop professionals who understand 360 degrees of Islamic finance. It is high time that we realise for Islamic finance industry to sustain and grow, it needs more than Shari’ah scholars. We need professionals from multi disciplines equipped with Islamic finance knowledge. Lawyers, businessmen and accountants also do require Islamic finance knowledge. The classical belief that only Shari’ah scholars are required for Islamic finance industry

Islamic Business & Finance | ISSUE 110

needs to be eliminated. The industry needs skilled talent from a wide range of disciplines that could learn from a well-rounded curriculum developed from a strong collaboration between the academia and industry. Above all, everyone—irrespective of their faith convictions—must be able to appreciate that Islamic finance provides benefit to all mankind. The principles of Islamic finance are beneficial to all as it negates evil to all. The system of bai’ or trading provides benefit to all participating in it without overexploiting each other. Furthermore, the Shari’ah governance principles adhered by Islamic financial institutions make it attractive from a governance perspective boosting the

Islamic finance has passed the experimental era in the country with the full support from the government and stakeholders and is now considered as the cranium of Islamic finance industry in the world.

confidence of customers with infinite trust. From an ethical perspective, in these days of Green or responsible finance, now more than ever, the proponents of this way of life should find Islamic finance attractive. The quality of products and services offered by Islamic financial institutions also plays a vital role in this. For example, the terms and conditions of Islamic finance products should be more favorable to the customers and at the same time it is more profitable. Not having compound interest feature itself, is a factor that should steer people of other beliefs than Islam towards Islamic financial products.

www.islamicbusinessandfinance.com

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AWARDS

Announcing the 13th annual Islamic Business & Finance Awards

THE INDUSTRY’S MOST RESPECTED AWARDS PROGRAMME RETURNS TO DUBAI THIS DECEMBER, WITH THIS YEAR’S CATEGORIES ANNOUNCED BELOW

he 13th annual Islamic Business & Finance Awards is fast approaching. On 6 December, some 200 Islamic bankers and financiers from across the Middle East and Africa are set to gather at the Godolphin Ballroom at Emirates Towers Hotel in Dubai. Professionals from across the Islamic economy will cast their votes across the more than 30 voted-for categories in an online poll to be held at www.islamicbusinessandfinance.com and www. cpifinancial.net. Last year, nearly 9,000 votes were cast across 37 voted-for categories. The top award will be based on analysis of audited financial statements set to be published in the annual Islamic Business & Finance supplement Leaders in Islamic Finance, to be released in conjunction with the Awards. The supplement details exemplary performance across all categories, including the greatest change in assets across all banks in the industry. Last year, the top Award of Best Islamic Bank went to Dubai Islamic Bank, who in 2017 entered the ‘billion dollar profit club’, making it among the top four institutions in the UAE, both conventional and Islamic. The Islamic Business & Finance Awards programme, supported by the Dubai International Financial Centre, is committed to finding and rewarding excellence from across the Islamic economies of the Middle East and Africa, with a sister Awards held each year in Southeast Asia. It is designed to highlight, encourage and reward the exceptional performance and growth of the international Islamic business and finance community.

Islamic Business & Finance | ISSUE 110

“This year’s Awards marks more than a dozen years since CPI Financial and its groundbreaking publication Islamic Business & Finance have honoured the top institutions and individuals in the Islamic finance Industry. The industry is at a pivotal point in its development, which has thus far been extraordinary. Technology and product innovation are needed now more than ever, and we are proud to be able to honour those that are pushing the industry forward when it is most vital,” said Tony Long, Chief Executive Officer, CPI Financial, the publisher of Islamic Business & Finance Magazine.

www.islamicbusinessandfinance.com

AWARDS

2018 Categories for Islamic Business & Finance Middle East and Africa Awards: Best Corporate Advisory Best CSR in Islamic Banking - KSA Best CSR in Islamic Banking - Kuwait Best CSR in Islamic Banking - Syria Best CSR in Islamic Banking - UAE Best Customer Happiness Best Development Bank Best Digital Bank Best Digital Bank - UAE Best Human Resources in Banking - KSA Best Investment Bank Best Islamic Asset Manager Best Islamic Bank - Africa Best Islamic Bank Best Islamic Banking Solutions and Products Best Islamic Corporate Bank Best Islamic Finance Company Best Islamic Fintech Company Best Islamic Home Finance Best Islamic Investment Fund Best Islamic Retail Bank - Egypt Best Islamic Retail Bank Best Islamic SME Bank - Egypt Best Islamic Trade Finance Best Islamic Window - Oman Best Islamic Window - UAE Best REIT Manager Best ReTakaful Operator Best Savings Product - Oman Best Shariâ&#x20AC;&#x2122;ah Compliant Fund Best Sukuk Arranger Best Training Institute Banker of the Year Excellence in Global Islamic Finance Best Social Responsiblity Programme â&#x20AC;&#x201C; KSA

www.islamicbusinessandfinance.com

ISSUE 110 | Islamic Business & Finance

AWARDS

The Islamic Business & Finance Southeast Asia Awards returning to Kuala Lumpur AFTER A SUCCESSFUL FIRST EVENT, THE INDUSTRY’S PREMIERE AWARDS PROGRAMME WILL BE HELD ON 4 DECEMBER

he Islamic Business & Finance Southeast Asia Awards will hold its second annual gala dinner on 4 December. The InterContinental Kuala Lumpur, Malaysia is set to be the host of the esteemed event, scheduled to be attended by over 100 Islamic bankers and financiers from around the region. The Awards follows Islamic Business & Finance’s more than decade long tradition of honouring the best of the Islamic finance industry. With Awards chosen by professionals working in the Islamic finance industry across Southeast Asia, the event offers the Islamic economies key figures the the chance to recognise each other’s achievements in an exclusive event. Last year, a total of nearly 7,000 votes were cast across 26 voted-for categories in an online poll held on www.cpifinancial.net. Voting for this year’s Awards is set to open soon. Last year, an expert panel named Tan Sri Dato’ Sri Dr. Teh Hong Piow, Chairman, Public Bank Group winner of the Lifetime Achievement Award Malaysia. Hong Piow began his banking career 67 years ago in 1950. He established Public Bank in 1966, finding great success in the last 50 years. He is due to relinquish the position of Chairman in 2019, capping off an illustrious career. The Islamic Business & Finance Awards programme, also held each year in Dubai, is supported by the Dubai International Financial Centre. The Awards encourage and reward the exceptional performance and growth of the international Islamic business and finance community.

Islamic Business & Finance | ISSUE 110

www.islamicbusinessandfinance.com

AWARDS

“Islamic Business & Finance is proud to return to Kuala Lumpur to turn the spotlight to Southeast Asia exemplary performers and innovators once again. Southeast Asia’s Islamic finance industry has been astounding to watch grow, and its contributions and achievements have helped the global Islamic economy develop at a rapid pace to what it is today. Though it has been a tricky climate to navigate, we look forward to honouring those who continue to contribute substantive progress to this important industry. As this programme is based on the votes cast by industry professionals, it is an opportunity for the Southeast Asian Islamic finance world to name the very best performers and thinkers operating today,” said Tony Long, Chief Executive Officer of CPI Financial, publisher of Islamic Business & Finance.

The categories for the 2018 Islamic Business & Finance Southeast Asia Awards: Best Islamic Bank Best Commercial Bank - Malaysia Best Syariah Advisory Service Best Commercial Bank - Indonesia Best Sustainability Best Advertising Campaign Best Corporate Bank Best Investment Bank Best Sukuk Arranger Best Islamic Fintech Company Best Takaful Operator - Malaysia Best BancaTakaful Operator Best Training Institute - Malaysia Best Islamic Retail Banking Product Most Innovative Islamic Banking Product Best Retail Bank - Malaysia Best Investment Product Best ReTakaful Operator Best Family Takaful Best Ratings Agency Best SME Bank Best Asset Manager Best Takaful Operator - Indonesia Best General Takaful Best Law Firm

www.islamicbusinessandfinance.com

ISSUE 110 | Islamic Business & Finance

DATES FOR YOUR DIARY

4 December 2018

26-27 September 2018 (clicksahead/SHUTTERSTOCK)

CIBAFI - UAB FORUM: UN DEVELOPMENT GOALS AND ISLAMIC FINANCE: A FOCUS ON AFRICA

THE ISLAMIC BUSINESS & FINANCE SOUTHEAST ASIA AWARDS

Following a first successful joint forum in September 2016 in Tunisia, CIBAFI and UAB are coming together again to discuss the potential of Islamic finance in Africa, with a special focus on its Sub Saharan region. With the United Nations working actively on development goals in Africa, CIBAFI and UAB have centered the discussion around that pursuit, as well as raising awareness of the competitiveness of Islamic financial institutions in the African region.

The Islamic Business & Finance Awards have been the premiere Awards program in the industry since their inception over a decade ago. Focusing on Southeast Asian institutions contribution to the Islamic economy, the Southeast Awards continue that longstanding tradition, now in their second year. The ceremony promises to once again be an essential part of the calendar for professionals across Southeast Asia.

VENUE: Khartoum, Sudan www.cibafi.org

VENUE: Kuala Lumpur, Malaysia www.cpifinancial.net

6 December 2018

30-31 October 2018 (evenfh/SHUTTERSTOCK)

GLOBAL ISLAMIC ECONOMY SUMMIT 2018

The Global Islamic Economy Summit (GIES) is a GCC forum centering on the Islamic economy. It brings together world-class experts in critical industry sectors that span geographic regions and cultural boundaries to directly address the greatest challenges and opportunities in the Islamic economy. Organised by Dubai Chamber of Commerce & Industry and Dubai Islamic Economy Development Centre, and with Thomson Reuters as a strategic partner, GIES 2018 will be held under the patronage of H.H. Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai. VENUE: Madinat Jumeirah, Dubai, UAE www.GIESummit.com

Islamic Business & Finance | ISSUE 110

THE 12TH ANNUAL ISLAMIC BUSINESS & FINANCE AWARDS

For over a decade, CPI Financial has been gathering the industryâ&#x20AC;&#x2122;s leaders to honor the best of the best in the field. This December, Islamic Business & Finance looks forward to welcoming the leaders from across the industry to Dubai in order to continue this time-honored tradition. As always, it will be the must attend event of the season VENUE: Dubai, UAE www.cpifinancial.net

www.islamicbusinessandfinance.com

Islamic Business & Finance

SOUTHEAST ASIA AWARDS 2018

Save The Date for Kuala Lumpur!

4tthh December Dece em em 2018 InterContinental InterC Cont nt Kuala Ku uala Lumpur Lu Malaysia Malay ay For more information please contact CPI Financialâ&#x20AC;&#x2122;s events team Tel: +971 4 391 4682 or Email: events@cpifinancial.net For more information formation please contact CPI Financialâ&#x20AC;&#x2122;s events team Tel: +971 4 391 4682 or Email: events@cpifinancial.net

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