#117 October 2019 by CPI Financial

Dubai Technology and Media Free Zone Authority

ISSUE 117

ISSUE 117 TRACING THE INDUSTRY’S POSITIVE TRAJECTORY DR BELLO LAWAL DANBATTA, SECRETARY GENERAL, ISLAMIC FINANCIAL SERVICES BOARD (IFSB)

TRACING THE INDUSTRY’S POSITIVE TRAJECTORY Dr Bello Lawal Danbatta, Secretary General, Islamic Financial Services Board (IFSB)

A CPI Financial Publication

PLUS:

20 ISLAMIC BANKING: 24 HALAL BUSINESS: 40 SUKUK: Saudi fundamentals

Adapting to the needs of SMEs

Issuance rises for fourth straight year

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.

dib.ae

CONTENTS

ISSUE 117

REGULAR SECTIONS

EDITOR'S LETTER

Greetings, all

elcome to Islamic Business & Finance. This is the 117th issue of the longest-running Islamic finance magazine in the world. I hope you all are having a productive beginning to your autumn. We first would like to share with you an interview that has been in the works for a long timeâ&#x20AC;&#x201D;a comprehensive sit down with the head of the Islamic Financial Services Board, Dr Bello Lawal Danbatta. As the IFSB is one of the key cogs in the Islamic finance sector worldwide, we hope you enjoy this wide-ranging discussion. We also were able to sit down with one of the founders of Rain, the world's first Shari'ah-compliant cryptocurrency exchange. As we are constantly beating the drums for innovation in these pages, here is another great example of an innovative idea becoming a reality. Beyond that, there is plenty to peruse. I hope you enjoy digging into another great issue. Till next time,

NEWS + ANALYSIS

HALAL BUSINESS

24 Adapting to the needs of

News & Analysis

OPINION

Partnering with Indonesia

COVER INTERVIEW

12 Tracing the industry's positive trajectory

ISLAMIC BANKING

20 Saudi Arabia's Islamic

SMEs

TAKAFUL

28 Takaful will need to innovate to thrive

ISLAMIC TECH

30 Inside the world's first

Shari'ah-compliant crytpo exchange

banks buoyed by strong fundamentals

William Mullally www.islamicbusinessandfinance.net

Log on to www.islamicbusinessandfinance.com for news, polls, events, analysis, blogs, features, commentary and more.

ISSUE 117 | Islamic Business & Finance

P.O. Box 502491, Dubai Media City, UAE Tel: +971 4 391 4681 Fax: +971 4 390 9576 islamicbusinessandfinance.com

CONTENTS

ISSUE 117

FEATURES

CHAIRMAN

SALEH AL AKRABI CHIEF EXECUTIVE OFFICER

NIGEL RODRIGUES nigelr@cpifinancial.net Tel: +971 4 391 3722

CHIEF OPERATING OFFICER

SHERIF R. ELHUSSEINI sherif@cpifinancial.net Tel: +971 4 391 5419 EDITOR - ISLAMIC BUSINESS & FINANCE

WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718 EDITOR - BANKER MIDDLE EAST

NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726 NEWS EDITOR

KUDAKWASHE MUZORIWA kuda.muzoriwa@cpifinancial.net Tel: +971 4 391 3729 EDITORIAL

editorial@cpifinancial.net HEAD OF SALES

NAP ESTAMPADOR nap.estampador@cpifinancial.net Tel: +971 4 433 5320 ADVERTISING

sales@cpifinancial.net CHIEF DESIGNER

SENIOR DESIGNER

BUENAVENTURA R. JALUAG, JR. jun@cpifinancial.net Tel: +971 4 391 3719

FLORANTE MAGSAKAY florante@cpifinancial.net Tel: +971 4 391 3724

DIGITAL MANAGER

DEO ABEJUELA deo.abejuela@cpifinancial.net Tel: +971 4 391 3722 EVENTS MANAGER

SHAIK MANSOOR shaik.mansoor@cpifinancial.net Tel: +971 4 365 4538

EVENTS MARKETING MANAGER

CRIS BALATBAT cris.balatbat@cpifinancial.net Tel: +971 4 391 3725

SUKUK

36 The shape of things to come for GCC Sukuk

40 Sukuk on the rise for fourth consecutive year

EXPERT OPINION

46 The case for a 'Riba free' logo

for Halal businesses

EVENTS

50 Dates for your diary

CONFERENCE PRODUCER

HITESHWAR BHAKHRI hitesh.bhakhri@cpifinancial.net TEL: +971 4 433 5322

Fastest Growing Islamic Bank Winner

FINANCE MANAGER

UMANG HANJ umang.hanj@cpifinancial.net Tel: +971 4 391 3727 HR & OFFICE MANAGER

RIZZA INFANTE rizza@cpifinancial.net Tel: +971 4 391 4682

Get the next issue of Islamic Business & Finance before it is published. Full details at www.islamicbusinessandfinance.com

ADMINISTRATION & SUBSCRIPTIONS

ISSUE 117

CAROL BASA carol@cpifinancial.net Tel: +971 4 391 3709

Dubai Technology

and Media Free

Zone Authority

Dubai Technology and Media Free Zone Authority

ISSUE 115

ISSUE 116

ISSUE 115

ISSUE 116

ISSUE 117

enquiries@cpifinancial.net

Eng. Hani Salem Sonbol, CEO, International Islamic Trade Finance Corporation

UNLOCKING TAKAFUL’S GLOBAL POTENTIAL Abdulla Mohammed Al Awar, CEO, Dubai Islamic Economy Development Centre (DIEDC)

PLUS:

10 FOUNDER’S MESSAGE: A new journey

22 MALAYSIA:

How tech will transform Islamic finance’s future

38 SUKUK:

The need for sovereign guarantees

A CPI Financial Publication

PLUS:

LINKING GLOBAL VALUE CHAINS

UNLOCKING TAKAFUL’S GLOBAL POTENTIAL ABDULLA MOHAMMED AL AWAR, CEO, DUBAI ISLAMIC ECONOMY DEVELOPMENT CENTRE (DIEDC)

SERVICES BOARD (IFSB)

Islamic Financial a, Secretary General, Dr Bello Lawal Danbatt Services Board (IFSB)

LINKING GLOBAL VALUE CHAINS ENG. HANI SALEM SONBOL, CEO, INTERNATIONAL ISLAMIC TRADE FINANCE CORPORATION

ISLAMIC FINANCIAL

Islamic Business & Finance | ISSUE 117

TRACING ’S THE INDUSTRY TRAJECTORY IVE POSIT

SECRETARY GENERAL,

DR BELLO LAWAL DANBATTA,

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

@IBFMag on Twitter for stories as they're being told

POSITIVE TRAJECTORY

Printed by Al Ghurair Printing & Publishing – Dubai, UAE

TRACING THE INDUSTRY’S

PLUS:

18 DUBAI:

Islamic economy now 10% of GDP

22 MALAYSIA:

The next generation of Islamic finance

46 HALAL BUSINESS: Diversifying Saudi Arabia

SUKUK: for BUSINESS: 40 Issuance rises G: 24 HALAL to the needs straight year

20 ISLAMIC BANKIN tals Saudi fundamen

Adapting of SMEs

fourth

www.islamicbusinessandfinance.net

DDCAP Group’s award winning automated trade & post trade services platform. Connecting the global Islamic ﬁnancial market responsibly.

Supporting Clients’ Sharia’a and Business Focused Requirements across Treasury, Capital Markets, Asset Management, Retail Banking & Insurance Products

Full Straight Through Processing with Real Time Documentation

Responsible Asset & Commodity Inventory

Facilitator of the Islamic Dealing Adaptor powered by

24/7 Global Client Coverage

Optimum Input Eﬃciency, Customised Dashboards

Risk Mitigation, Governance & Financial Control Capability

www.ddcap.com

Part of the

NEWS & ANALYSIS

Dubai International Financial Centre (DIFC) marked a milestone, announcing it has registered more than 100 fintech firms in the Centre, including Islamic fintech firms.

The significant rise in the number of registered fintech firms establishing a presence at the Centre highlights our sustained efforts to transform the region’s financial technology ecosystem and drive sustainable economic growth. It is a reflection of our commitment to reinforcing Dubai’s position as one of the world’s top ten fintech hubs. We aim to continue this momentum and growth through our evolving regulatory environment and the quality of collaborators we bring into the DIFC, as our vision of driving the future of finance becomes a reality.” ARIF AMIRI, Chief Executive Officer of DIFC Authority

The Islamic Financial Services Board (IFSB) and Africa / Middle-East Regional Committee (AMERC) of IOSCO held a high-level seminar, themed ‘Development of Sukuk Markets in the Middle East and Africa: Growth Potential and Policy Considerations’, in Abu Dhabi at the end of September, hosted by the Securities and Commodities Authority UAE.

The Islamic finance industry is set to flourish further as the International Monetary Fund (IMF) approved a plan to incorporate Islamic finance into its financial sector assessments. GCC is expected to be one of the key drivers in the expansion of global Sukuk industry and SCA is very pleased to host this high-level seminar in the United Arab Emirates which is now gaining a prominent position as a regional and global hub for Sukuk issuance. The seminar comes in light of the Islamic Capital Market Strategy that SCA announced earlier. We look forward to welcoming all the delegates to this seminar to share their views and making it a learning experience for all.” DR OBAID SAIF HAMAD AL ZAABI, CEO, Securities and Commodities Authority, UAE

Islamic Business & Finance | ISSUE 117

www.islamicbusinessandfinance.net

Advertorial J E R SE Y

•

LO N D O N

•

D U B A I

•

M U M B A I

•

H O N G KO N G

•

SH A N GH A I

•

N E W YO R K

A Better Long-term Savings Platform for

International Employees

With a presence in the Gulf region spanning many years, Jersey has established itself as a leading jurisdiction for supporting the international wealth and succession planning of families in the region.

By Richard Nunn, Regional Head – East richard.nunn@jerseyfinance.je

This year, Jersey is looking to build on this reputation in a number of areas – including supporting the long-term savings needs of international employees working for firms across the Gulf region. The need for such solutions has been brought sharply into focus in recent times, with numerous studies showing that workers in the region are heavily dependent on gratuity payments to fund their retirement. Further, the provision of long-term savings schemes is anticipated to become mandatory for firms in the region in the near future. Jersey’s response is the International Savings Plan (ISP) product. Introduced in January this year, Jersey’s ISPs enable multinational companies to set up savings plans for their non-resident employees. With proven expertise, a robust regulatory framework and political and economic stability, Jersey is an ideal location for establishing such solutions. Acknowledging the current trend towards greater career mobility, the Jersey ISP offers an attractive degree of flexibility to meet the needs of both employer and employee, and has been designed to ensure employees have access to savings when they need it most. With employee savings plans set to become an increasingly important consideration for firms in the Gulf region in the coming years, Jersey is ready to support this trend and provide employees with a better platform for their future savings needs.

Experience

Regulation

Substance

More than 50 years at the forefront of global finance, with a wide range of products and services

Our strong and respected regulatory framework sets us apart from other IFCs

We’re proud that a whole range of major financial services firms are based here

For further information, please visit www.jerseyfinance.com/isps +44 (0) 1534 836000 youtube.com/jerseyfinance

jersey@jerseyfinance.je @jerseyfinance

www.jerseyfinance.je

linkedin.com/company/jersey-finance

JERSEY

FRANCE

OPINION

Partnering with Indonesia T

he statistics regarding Indonesia are oft-quoted—it’s the largest Muslim population of any country, with approximately 225 million Muslims. Indeed, only 20 per cent of the world’s Muslims live in all Arab countries—while 12.7 per cent live in Indonesia alone. It is no wonder, then, that Indonesia is where the most potential is seen for Islamic finance, especially with Malaysia, perhaps the most mature Islamic finance market, right next door. When I spoke to leaders in both Malaysia and Indonesia recently, however, it was clear that while collaboration was happening between the two, there were some mistakes made in the past, which get in the way of that collaboration reaching its potential. But indeed while the two nations are the most natural collaborators, and this partnership will be important, the whole Islamic finance community will have to reach out to Indonesia to work together. It is heartening, then, to see signs of this happening. Dubai Islamic Economy Development Centre (DIEDC) recently received a senior financial delegation from Indonesia that aimed to learn about the Islamic economy system in the UAE and explore opportunities for cooperation. The delegation comprised senior officials from Bank Indonesia, the central bank of the country, and the Indonesia Halal Lifestyle Center, as well as representatives of Indonesian organisations active within the Islamic economy sectors. “This meeting reflects the Centre’s keenness to broaden its network of international strategic partners with the aim of expanding the footprint of Islamic economy. Productive partnerships with other Islamic economy hubs will further strengthen Dubai’s status as a global capital of Islamic economy,” CEO Abdulla Mohammed Al Awar said. But it is not just Islamic finance that needs support—Indonesia is a cog in the Halal business community and the Halal industry.

Islamic Business & Finance | ISSUE 117

“As the most populous Muslim-majority country, Indonesia is a key market for the Halal industry. The delegates represent relevant entities with whom we can work in facilitating Islamic economy investment opportunities. We are confident today’s discussions will pave the way for greater collaboration and knowledge exchange to support our mutual goal of developing the Islamic economy,” said Al Awar. According to the State of the Global Islamic Economy Report commissioned by the Dubai Islamic Economy Development Centre and developed by Refinitiv & Dinar Standard, Muslims in Indonesia spent a total of $218.8 billion across the Islamic economy sectors in 2017. Indonesia’s ranking on the Global Islamic Economy Indicator, that offers a comprehensive picture of the countries best positioned across the same sectors, increased from 11th place to 10th place, overtaking Brunei. This jump was primarily driven by a rise in Indonesia’s Halal food ranking. Indonesia has a long way before it achieves its substantial potential, but as more developed markets aid it on its journey, and in turn learn from Indonesia as well, it is well on its way.

William Mullally

Editor

www.islamicbusinessandfinance.net

DIFC THE BEST OF BOTH WORLDS

IF ONLY there was a place where finance and culture existed seamlessly. IF ONLY there was a place that was the key to emerging markets. Where FinTech companies, venture capital firms and accelerator programmes thrive. IF ONLY there was a place that was internationally recognised and independently regulated. IF ONLY there was an established leading financial centre for the Middle East, Africa and South Asia. Where nearly 24,000 professionals and 2,100 of the worldâ&#x20AC;&#x2122;s top companies work and live. There is. DIFC.

For more information difc.ae @difc

AWARDS OVERVIEW ABOUT ISLAMIC BUSINESS & FINANCE

Fastest Growing Islamic Bank Winner

Winner Fastest Growing Islamic Bank

SUPPORTED BY

ORGANISED BY

Islamic Business & Finance, the authoritative voice of the global Islamic finance industry and the broader Islamic economy, has a worldwide circulation that spans every continent. Celebrating its 14th anniversary in 2019, Islamic Business & Finance is the oldest continuously published magazine covering the Islamic finance sector. It is published by CPI Financial—based in Dubai since 1999—offering a comprehensive portfolio of market-leading periodicals, products and services tailor-made for the banking and financial sector. As part of our mission, we have, since our inception, held the Islamic Business & Finance Awards in order to award the pioneers of the Islamic banking and broader financial sector. As the Islamic finance industry continues to grow and innovate, our awards programme will continue to recognise the pioneers in the Islamic finance landscape and laud their many achievements that are integral to the industry’s continued growth.

METHODOLOGY After each and every awards ceremony, together with feedback from the industry, throughout the year, we conduct our own research and look closely at what categories are most relevant in the current climate, new entrants that have impacted the industry, and most importantly, how we manage client expectations. We critically review our production and are always looking for improvement. As a result of our findings, we have identified 26 award categories that provide regional recognition to exceptional financial institutions across the wide spectrum of banking and finance. Institutions can nominate themselves in all relevant categories as deemed appropriate, provided the submission is sent in before the deadline, and in the required format. The judging panel comprises senior executives from ratings agencies, accountancy and auditing firms, together with members of the Islamic Business & Finance editorial team.

AWARD CATEGORIES TRAINING, RESEARCH & CONSULTANCY

SME BANKING

Best Training Institute

Best SME Bank

RATINGS

PRIVATE BANKING

Best Ratings Agency

 Best Islamic Wealth Management Proposition

TAKAFUL

PREMIUM BANKING

Best Takaful Operator

Best Premium Banking Institution

Best ReTakaful Operator

PERSONAL BANKING

TECHNOLOGY

Best Home Finance Institution

Best Fintech Company

ISLAMIC WINDOW

DIGITAL BANKING

Best Islamic Window

Best Digital Banking Proposition

LEADERS IN ISLAMIC BANKING & FINANCE

CORPORATE FUNCTIONS

Fastest Growing Islamic Bank

Best Advisory Service

Best Islamic Bank

 Best Human Capital Development Initiative

I slamic Banker of the Year (individual award)

Best Sustainability Initiative

 Outstanding Contribution to Islamic Finance (individual award)

RETAIL BANKING Best Retail Bank CORPORATE BANKING Best Corporate Bank

Lifetime Achievement (individual award) Award submissions will be critically evaluated and mutually analysed, utilising market knowledge, research and relevant company financial statements, before a shortlist is made. The winners will be chosen from this shortlist and announced at the awards ceremony. The evaluation period for all awards is typically based on a 12-month cycle.

INVESTMENT BANKING Best Investment Fund Best Investment Product Best Investment Bank Best Investor Relations ASSET MANAGEMENT

IB&F AWARDS DINNER/GALA

23rd October 2019 The Ritz-Carlton DIFC, Dubai, United Arab Emirates

Best Asset Manager Best REIT Manager Best Sukuk Arranger

For more information on the Awards Gala Dinner and to book tables, please kindly contact: ibfawards@cpifinancial.net

COVER INTERVIEW

TRACING THE INDUSTRY’S

POSITIVE TRAJECTORY DR BELLO LAWAL DANBATTA, SECRETARY GENERAL, IFSB SPEAKS EXCLUSIVELY TO ISLAMIC BUSINESS & FINANCE ABOUT THE CURRENT LANDSCAPE FOR THE ISLAMIC FINANCIAL SERVICES INDUSTRY

he Islamic finance industry has just recorded a 6.9 per cent growth rate to reach $2.19 trillion. To what would you attribute that level of growth at this point in Islamic finance’s maturity? In absolute monetary terms the Islamic financial services industry (IFSI) recorded a continuous improvement for a third straight year with its total worth estimated at about $2.19 trillion as of 2Q18, up from $2.05 trillion in 2Q17. In as much as I would not want to give a speculative figure, without a doubt the worth of the IFSI would have increased significantly by the time the next IFSB Stability Report is issued.

Islamic Business & Finance | ISSUE 117

We have to understand that there are three key segments in the IFSI: Islamic banking, Islamic Capital Market (ICM) and Takaful. Of these three, only Islamic banking recorded a marginal yearon-year growth rate of 0.9 per cent. The other two sectors, especially the ICM, recorded significant growth of 26.9 per cent and now accounts for about 27 per cent of the total worth of the IFSI. The Takaful segment, albeit accounting for a marginal 1.3 per cent of the total worth of the global IFSI, nonetheless recorded impressive 4.3 per cent yearon-year growth rate in 2017. That said, what I consider a softened momentum in growth rate of the IFSI with a relative decline of

DR BELLO LAWAL DANBATTA, Secretary General, IFSB

www.islamicbusinessandfinance.net

COVER INTERVIEW

www.islamicbusinessandfinance.net

ISSUE 117 | Islamic Business & Finance

COVER INTERVIEW

about 1.6 per cent from 8.5 per cent as at 2Q17 to 6.9 per cent as at 2Q18 could be attributed to a number of factors. I view some as global while others may be peculiar to the IFSI. For instance, there seems to be moderation in global economic growth, tightening international liquidity conditions as well as the continuing geopolitical and economic challenges arising from implementation of protectionist policies amongst the worldâ&#x20AC;&#x2122;s major economies and trading partners. Other reasons which may be peculiar include economic sanctions, regional economic and political impasse, and prolonged depreciation of the local currency in US dollar terms in some jurisdictions with a strong presence of Islamic finance, especially in the period of 2017 to 3Q18 etc. How long can that rate of growth be expected? In my view, based on the various analyses contained in the IFSB IFSI Stability Report 2019, the global IFSI is well placed to maintain and commendably improve on its positive growth trajectory by experiencing asset increases across all three of its main component markets in the years ahead. Why do you believe that the Islamic financial services industry is poised to maintain its positive growth trajectory? My expectation of a positive growth trajectory is hinged on a number of factors including: the rebound in prices of oil and other export commodities, as well as a notable improvement in the investment climate in most jurisdictions with a significant Islamic finance presence. In addition, the IFSB IFSI Stability Report 2019 also noted improved asset quality due to credit growth, and continued improvement in the resilience of the global Islamic banking sector recorded in 2018. I also expect a continuous and strong positive performance in the Islamic capital market sector due to the increasing number of sovereign and multilateral Sukuk issuances in key Islamic finance markets to support budgetary and development projects. While market share continued to grow in 19 countries, it declined in 11 others. Why is Islamic finance growing in some markets while declining in others? The market share in most jurisdictions that recorded continued growth could be linked to rebound in prices of the main export commodities especially oil, favourable economic climate, increased

Islamic Business & Finance | ISSUE 117

market penetration, and use of Sukuk issuances for eco-friendly capital expenditures. I want to also believe that increased use of technology to enhance operational efficiency, promote financial inclusion and to reduce operational overheads have also been instrumental to the positive outlook of the IFSI in some jurisdictions. I would rather view the decline recorded in some jurisdictions in relation to peculiar events during the immediate previous year. Most of these jurisdictions have significant presence of Islamic finance and are mainly those faced with either international or regional economic sanctions, regional or national

www.islamicbusinessandfinance.net

COVER INTERVIEW

Bank Negara Malaysia in Kuala Lumpur, where the Islamic Financial Services Board is located.

geo-political impasse, and depreciation of local currencies of in terms of USD resulting in lower reported performance. What should the leaders of Islamic institutions in those respective markets be focusing on? I would like to commend the achievements recorded in the IFSI in the various IFSB jurisdictions. As the IFSI continues to burgeon, and great opportunities are created, so also would new challenges emerge. Therefore, those at the helm of the affairs of Islamic institutions should focus on the new challenges posed by evolving

www.islamicbusinessandfinance.net

market structures due mainly to advancements in financial technology and changing demographics, increasing activities of the non-bank financial institutions, as well as increasing cyber risks among other operational issues. How much strength do you see in the Takaful space? Like I mentioned earlier, the share of global Takaful industry in the global IFSI worth remains marginal at 1.3 per cent. However, with over 306 Takaful institutions, including ReTakaful and Takaful windows, which now offer Takaful

ISSUE 117 | Islamic Business & Finance

COVER INTERVIEW

products in at least 45 countries globally, I consider the Takaful space will only get bigger by the day. In my view, the sector holds great promise to record a rapid growth especially when a trend analysis of its performance is considered. For instance, global Takaful contributions grew by 4.3 per cent (y-o-y and in nominal terms) in 2017 and with a six-year (2012–17) compound average growth rate of almost 6.9 per cent. What some of the statistics I reel out on Takaful point at is that generally, the overall outlook for the sector is positive. The markets remain profitable due to earnings from other sources, such as commission income from ReTakaful/reinsurers and investment income. Similar to what has been the trend in the past few years, I also expect the compulsory lines of business such as medical and motor to continue to drive the growth of the general business line. My view is based on the greater deployment of technology and other institution-specific factors such as innovative products that are technologydriven, as well as cost-effective distribution channels for personal lines (i.e. online, mobile or digital platforms). What do you feel needs to be improved in Takaful? In my opinion a lot needs to be done to improve to enhance the potential of global Takaful industry. From a regulatory perspective, the IFSB as a foremost global standard setting body for the IFSI has issued six standards and two working papers on Takaful. The IFSB is also presently working on two standards in relation to Takaful: Core Principles for Islamic Finance Regulation (Takaful Segment), and Disclosure to Promote Transparency and Market Discipline for Takaful and ReTakaful Undertaking. Furthermore, preparing for the implementation of new International Financial Reporting Standards for insurance contract (IFRS 17), stress testing, and measures to strengthen the professionalism of insurance and Takaful intermediaries is a step in the right direction. From an operational perspective, in my opinion there is a need to reinforce the complex risks and underwriting capacity of ReTakaful/reinsurance. This is without prejudice to the capacity of some Takaful operators with significant underwriting strength to develop tailor-made products and lesser dependence on facultative ReTakaful/reinsurance markets.

Islamic Business & Finance | ISSUE 117

How do you feel that Islamic financial instruments can address the current global issues and blend with the needs of socially responsible and ethical investment? For the sake of reiterating the obvious, I unequivocally state that the pertinence of Islamic finance towards achieving the 17 Sustainable Development Goals (SDGs) cannot be overemphasised. This is especially so when viewed within the context that the edifice of Islamic finance is built on the foundation of the higher objectives of the Shari’ah to remove hardship, promote justice, and protect public interest. A few examples that come to mind are, for instance, green Sukuk issuance as well as the Global Alliance for Vaccines and Immunizations (GAVI) Sukuk to fund immunisation programmes in the poor countries. The indispensability of Islamic finance instruments in this regard can be achieved by broadening access to the inherent value proposition that Islamic finance offers especially for improving financial inclusion and enhancing socio-economic development within the tenets of the higher objectives of Shari’ah as I mentioned earlier. From a prudential regulatory standardsetting point of view, I also consider developing requisite regulatory framework and offering innovative Islamic finance products and services as an imperative. This should, in my opinion, be in a manner that leverages on both Islamic social finance platforms such as Zakat and Waqf, as well as technological advancement to broaden outreach, without infringing on the value-based intermediation essentials of Islamic finance. What are your thoughts on the current Sukuk landscape? I would say that generally, the prospects for Sukuk in the near-term seem very bright. As the dominant sub-sector of the ICM segment, Sukuk would continue to remain so. This is due largely to increase prospects of sovereign and multilateral issuances in key Islamic finance markets as well as new markets such as United Kingdom and Kazakhstan respectively to support respective budgetary expenditure. Two examples of ongoing initiatives in key jurisdictions that come to my mind would include the launch of a primary dealers’ programme for sovereign Sukuk in Saudi Arabia in July 2018, as well as the commencement of Sukuk trading on

www.islamicbusinessandfinance.net

COVER INTERVIEW

Borsa İstanbul via the Committed Transactions Market (CTM) of Sukuk. I expect moderation in sovereign issuances, especially from the GCC on account of a positive rebound in the price of oil, but this would be compensated for by an expected continuous remarkable increase in corporate Sukuk issuance in most jurisdictions.

Sukuk issuance in Malaysia has been strong in 2019.

What have been IFSB’s key accomplishments, activities and initiatives in 2018 and 2019 since you joined? Since taking helm of IFSB on 29 January 2018, with strong commitment and guidance by the IFSB Council and the support of all IFSB members, several enhancements in the IFSB’s Strategic direction and governance has been made in line with its mandate to promote the stability and resilience of the Islamic Financial Services Industry through the issuance implementation of global prudential standards and initiatives that foster

www.islamicbusinessandfinance.net

knowledge sharing and cooperation. Last year, we came up with a new strategic focus paper that mapped out our resources, members expectation, strategies and the desired impact of the IFSB for the global Islamic Financial services industry. So, managing the IFSB and all its accomplishments are collective efforts of the IFSB members, the IFSB Council, the Executive and Technical committees of the IFSB, myself as the Secretary General and staff of the IFSB Secretariat. I will be glad to share with you some of our accomplishments. The IFSB has issued and launched three new standards namely the Key Elements in the Supervisory Review Process of Takaful/ ReTakaful Undertakings which focuses on the Islamic insurance segment, core principles for islamic finance regulation, which concentrate on Islamic capital market segment and the revised standard on disclosure to promote transparency and market discipline for institutions offering Islamic financial services focusing on the banking

ISSUE 117 | Islamic Business & Finance

COVER INTERVIEW

Slow Growth Will Continue… A $2.1 trillion industry with stagnating growth rate

Real GDP Growth of Selected IF Core Countries 15%

2,000

10%

1,500

1,000

-5%

500

Sukuk

Iran

Malaysia

GCC

20 20

2018

Funds

20 19

2017

Takaful

20 18

2016

20 17

2015

20 16

2014 Banking Assets

20 15

2013

20 14

-10%

20 13

Turkey

Source: S&P Global Ratings, IMF, IIF

# Expect the industry to continue to grow slowly due to its concentrated nature and the mild economic performance of core countries. # The sukuk market grew strongly in the first eight months of 2019 but there are some uncertainties. # Expect the industry to continue to grow slowly due to its concentrated nature and the mild economic SOURCE: S&P Global Ratings, IMF, performance ofIIFcore countries.

# The sukuk market grew strongly in the first eight months of 2019 but there are some uncertainties.

GCC Islamic Banks Lost Ground In 2018…

Islamic banks growth vs economic performance 14%

12%

4% 3%

10%

3% 8% 2% 6% 2% 4%

2013

2014

2015

2016

2017

2018

2019

2020

Islamic Banks Conventional Banks Average GDP Growth GCC countries

# #Growth Growthwas waslower lowerthan thanconventional conventionalbanks banks in 2018. in 2018. # Some banks were hit by the depreciation of the

#Turkish Some banks wereABG, hit by the Lira (KFH, etc.) of the Turkish Lira (KFH, #depreciation Lower growth for some Islamic banks in Qatar ABG, etc.) (consolidation) and the UAE (consolidation and # Lower growth for some Islamic specific factors) banks in Qatar (consolidation) and the # TheUAE growth difference was mere 1%, which explains (consolidation and aspecific factors) why we think that growth will realign in 2019-2020.

# The growth difference was a mere 1%, which explains why we think that growth will Expectations for 2019-2020 realign 2019-2020. # Mid in single digit growth rate for total assets due

to slight recovery of the economic growth in the

Expectations for(supported 2019-2020by spending on strategic GCC countries

# Mid single digit rate for in total assets initiatives and growth oil at $60/BBL 2019-2020). due to slight recovery of the economic growth in the GCC countries (supported by spending High Geopolitical that continueinto weight on on# strategic initiativesrisk and oil will at $60/BBL customer confidence and spending. 2019-2020). # High Geopolitical risk that will continue to weight on customer confidence and spending.

Source: S&P Global Ratings SOURCE: S&P Global Ratings

segment. The standard issuance is very critical in order for IFSB to promote the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing, international standards consistent with Shari’ah principles, and recommend these for adoption.

Islamic Business & Finance | ISSUE 117

Last year I signed MoUs with AIDI and AAOIFI for two separate joint standard development projects. We deployed the strategy to work more closely with other standard setting bodies for the purpose of synergy and elimination of duplications, because that is one of the best ways of remaining relevant and proactively delivering the desired impact.

www.islamicbusinessandfinance.net

COVER INTERVIEW

We have tried to devote the limited IFSB resources towards supporting and adding value to our members. Hence, I have given serious attention in building the capacity of IFSB members as way giving value for their membership. This is done through workshops, trainings, seminars, webinar and our e-learning platform. The IFSB has conducted 11 workshops in nine members countries in 2018 alone and eight has been completed as at 30 August 2019 in eight member countries including Ivory Coast, Kazakhstan, Kenya, Lebanon, Nigeria, Pakistan, Tunisia, Malaysia and United Arab Emirates, as well as two Workshops for Regulatory and Supervisory Authorities (RSAs) in Kuala Lumpur, Malaysia. We had our inaugural Capacity Building for Market Players (CBM) workshop which is tailored for IFSB’s observer members in Kuala Lumpur in order to increase the implementation of IFSB standards among member jurisdictions. This year we also introduce the e-workshop for wider global participation. In increasing the value in the IFSB membership and visibility, the IFSB had jointly organised the CBK-IFSB Conference with Central Bank of Kuwait (CBK) and collaborated with the International Islamic Liquidity Management Corporation (IILM) and the International Islamic Financial Market (IIFM) in organising a high-level seminar on Islamic capital markets (ICM) on fostering the economic development and strengthening financial sector resilience - the role of Islamic capital market instruments in Abu Dhabi, United Arab Emirates which is hosted by Abu Dhabi Global Market (ADGM). The IFSB has also jointly organised IFSB-Bank Indonesia Seminar and Workshop titled ‘Broadening Economic Frontiers and Reducing Income-Gaps through Inclusive Finance: The Islamic Finance Solution’ in Surabaya, Indonesia. The IFSB has also managed to publish a number of publications including the IFSB Summit 2017 Proceedings, the IFSI Stability Report 2018 and 2019, and IFSB working papers. Moving forward, as outlined in the IFSB Strategic Performance Plan 2019-2021, the IFSB has published three research papers on Consumer Protection in Takaful, Risk Sharing in Islamic Banking and Investigating Inter-sectoral Linkages in Islamic Financial Services Industry. Two exposure drafts on Guidance Note on Shari'ah Compliance; Lender of the Last Resort and Core Principles for Effective Islamic Insurance Systems has also been published by the IFSB.

www.islamicbusinessandfinance.net

It is important to also highlight that the Executive Board of IMF and World Bank has in May 2018 endorsed the IFSB standard namely the IFSB17 Core Principles for Islamic Banking Regulation: Banking Segment for their Financial Sector Assessment Program (FSAP) in jurisdictions with significant Islamic banking market share.

DR BELLO LAWAL DANBATTA, Secretary General, IFSB

What have you learned in your time being the Secretary General of the IFSB that you didn’t know before? The question seems general and I would also like to answer it in the same manner. Life itself is a learning process and as long as we live, we shall continue to learn, unlearn, and relearn. The IFSB has offered great personal, professional, social, cultural, and even religious learning opportunities that I shall for ever remain thankful to Allah SWT for.

ISSUE 117 | Islamic Business & Finance

ISLAMIC BANKING

Saudi Arabia’s Islamic banks buoyed by strong fundamentals

2019 PROMISES PROFITABILITY THAT WILL OFFSET THE YEAR’S CHALLENGES

Islamic Business & Finance | ISSUE 117

espite the slower pace of global growth, Saudi Arabia’s Islamic banking community remains strong. While 2019 will show smaller amounts of growth, 2018 was a profitable one for the industry, putting the Islamic finance industry in the Kingdom in a good position to continue its development. Profitability improved in 2018 at Saudi Islamic banks as these benefited from stronger growth opportunities but asset-quality challenges continued. Saudi Islamic banks remain well placed in the banking sector as they have the largest retail franchises,

www.islamicbusinessandfinance.net

ISLAMIC BANKING Saudi Islamic Banks’ 2018 Results Dashboard

anking Dominant; Asset Quality Weakened and Profitability Improved Banks

SAUDI ISLAMIC BANKS' 2018 RESULTS DASHBOARD Islamic Banking Dominant; Asset Quality Weakend and Profitability Improved

amic banks benefited from stronger d. Saudi Islamic banks remain well franchises, supporting a lower cost rgest Islamic banks’ financing base te alongside Islamic banks.

Islamic and conventional banks in olesale trade sectors. However, the ng to sound performance of retail nk. The average coverage ratio of cularly due to high coverage at Al impairment charges (FICs) than e banking.

mained above conventional banks’. It anchises and a higher share of noncing.

s pronounced at Islamic banks due argest bank), which has the most tration is high, except at Al Rajhi, mic banks’ financings/deposits ratio ks’. Islamic banks benefit from the mme to help manage their liquidity.

growth. Nevertheless, Islamic banks f 17.9% at end-2018. This was 23bp ortions of retail banking assets, which also result in lower risk weightings.

commercial banks are fully sharia mpliant and conventional banking di Arabian Monetary Authority with The General Authority of Zakat and mparable to those of conventional

elatively muted. Capital buffers and on in asset quality.

shar Al Natoor obal Head of Islamic Finance shar.alnatoor@fitchratings.com 71 4 424 1242

Asset Quality

FICs/average gross financing

Impaired financing/gross financing (%) 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Conventional Banks

Islamic Banks

(%) 0.8

Conventional Banks

Islamic Banks

0.6 0.4 0.2 0.0

End-2016 End-2017 Source: Fitch Ratings, Fitch Solutions

End-2018

2016

Earnings & Profitability

Operating profit/risk-weighted assets

Net financing margin

(%) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

5 4 3 2 1 0

Conventional Banks

Islamic Banks

2016 2017 Source: Fitch Ratings, Fitch Solutions

2017

2018

Funding & Liquidity

(%)

Conventional Banks

Customers' deposits/total funding

(%)

Islamic Banks

Capital Ratios (%) 23 20 16 13 10

Conventional Banks CAR Islamic Banks CAR Conventional Banks FCC/RWA Islamic Banks FCC/RWA

End-2016 End-2017 Source: Fitch Ratings, Fitch Solutions

End-2018

Conventional Banks

2018

Islamic Banks

End-2016 End-2017 End-2018 Source: Fitch Ratings, Fitch Solutions

Islamic Banks

2016 2017 Source: Fitch Ratings, Fitch Solutions

Gross financing/customers' deposits Conventional Banks

2018

Source: Fitch Ratings, Fitch Solutions

End-2016 End-2017 Source: Fitch Ratings, Fitch Solutions

End-2018

Equity/assets (%) 18 16 14 12 10

Conventional Banks

End-2016

End-2017

Islamic Banks

End-2018

Source: Fitch Ratings, Fitch Solutions

For this report, NCB was considered an Islamic bank in the ratio calculations. supporting a lower cost of funding and better asset quality. Saudi Arabia has the largest Islamic banks’ financing base (78 per cent) of any country that allows commercial banks to operate alongside Islamic banks,” said Bashar Al Natoor, Head of Islamic Finance at Fitch Ratings. For 2019, financing growth will remain relatively muted. Capital buffers and profitability will remain sufficient to absorb a mild deterioration in asset quality, according to Natoor. “Impaired financing ratios jumped for both Islamic and conventional banks in 2018, particularly due to the

www.islamicbusinessandfinance.net

contracting, retail and retail/wholesale trade sectors. However, the deterioration was less pronounced in Islamic banks owing to sound performance of retail 4 September 2019 lending, particularly at Al Rajhi, the largest Saudi retail bank. The average coverage ratio of impaired financing remained higher in Islamic banks, particularly due to high coverage at Al Rajhi. Islamic banks now also have lower financing impairment charges than conventional banks due to their lower proportion of corporate banking,” said Natoor. The Islamic economy’s growth continues to outpace conventional worldwide, including in Suadi Arabia.

ISSUE 117 | Islamic Business & Finance

ISLAMIC BANKING

“The outperformance trend played out across major regions as Shariah-compliant benchmarks measuring U.S., Europe, Asia Pacific, and developed markets each continued to outperform conventional equity benchmarks by meaningful margins. Emerging markets and the Pan Arab region were exceptions, as Shariah-compliant benchmarks in these regions underperformed their conventional counterparts,” said John Welling, Associate Director at S&P Dow Jones Indices. It is no surprise then that the retail Islamic banking industry is also seeing growth in the Kingdom. “Islamic banks’ performance improved in 2018 and remained above conventional banks’. Performance benefits from a lower cost of funding, due to stronger retail franchises and a higher share of non-profitbearing deposits, and a higher proportion of retail financing,” says Natoor. “Reliance on deposit funding is less pronounced at Islamic banks due to the National Commercial Bank (NCB; the country’s largest bank), which has the most diversified funding profile of Saudi banks. Deposit concentration is high, except at Al Rajhi, which benefits from a granular retail deposit base. The Islamic banks’ financings/deposits ratio reduced slightly in 2018 and is now in line with conventional banks’. Islamic banks benefit from the Ministry of Finance’s Saudi riyal-denominated Sukuk programme to help manage their liquidity,” Natoor continued. Changes in Sukuk regulation and issuance has also aided Saudi Arabia’s Islamic finance market. “With exception of a few, including Malaysia, many countries lack such initiatives that lead to lowering the cost of borrowing on issuers. But things are changing in the GCC. In late 2017,Saudi Arabia issued a royal decree that public institutions and municipalities will henceforth be able to issue bonds and sukuk (with sovereign guarantee). The initiative by itself is a landmark as it has the potential to deepen and develop the Saudi debt capital market. Whether Saudi municipalities ready or not, that’s another question,” said Mohammed Khnifer, Senior Associate, Debt Capital Market at ICD. “In May 2019, Saudi Real Estate Refinance Co (SRC), modelled on U.S. mortgage finance firm Fannie Mae, informed the market that it became eligible for sovereign guarantees on its planned issues of sukuk. While there is no much details on the technicalities of such credit enhancement, one should be aware there are full guarantees (100 per cent of the principle) or partial,” Khnifer continued.

Islamic Business & Finance | ISSUE 117

Saudi Arabia’s Islamic banks, meanwhile, are well capitalised. “Capital ratios have decreased due to high financing growth. Nevertheless, Islamic banks are well capitalised, with an average Fitch Core Capital ratio of 17.9 per cent at end-2018. This was 23bp above conventional peers as Islamic banks have higher proportions of retail banking assets, which attract lower risk weightings. Lower off-balancesheet activities also result in lower risk weightings,” said Natoor. Four of Saudi Arabia’s 12 licensed commercial banks are fully Shari’ah compliant, with the others providing a mix of Shari’ah-compliant and conventional banking products and services. All banks are regulated by the Saudi Arabian Monetary Authority with the same disclosure requirements. Recent guidelines from The General Authority of Zakat and Tax for Shari’ah-compliant financial products are broadly comparable with those of conventional banks, ensuring similar rules for all banks.

BASHAR AL NATOOR, Head of Islamic Finance at Fitch Ratings

www.islamicbusinessandfinance.net

S U P P O R T E D BY

O R G A N I S E D BY

26 NOVEMBER 2019

The Ritz-Carlton, DIFC, Dubai, United Arab Emirates

SUBMIT YOUR NOMINATIONS NOW! Award Categories • Best Bank in the Middle East • Banker of the Year • Lifetime Achievement Award • Fastest Growing Bank • Best Retail Bank • Best Islamic Bank • Best Corporate Bank • Best Commercial Bank • Best SME Bank • Capital Market Transaction of the Year • Most Innovative Digital Banking Proposition • Best Insurance Provider • Best Takaful Provider • Best Investment Bank – Conventional • Best Investment Bank – Islamic • Best Private Bank

Join over 400 senior banking and finance officials from across the Middle East as we honor the outstanding institutions that shape the region’s financial landscape.

• Best Wealth Management Firm • Best Investment Management Firm • Best Private Equity Firm • Best Trade Finance Institution

Now in its 20 year, the Banker Middle East Industry Awards programme is recognised as the most prestigious banking accolade celebrating ﬁnancial excellence across the MENA region. It acknowledges pioneering developments, innovative banking solutions, and achievements in the ﬁnancial services industry. th

We encourage you to select your categories and submit your entries online by 3rd October 2019. You are welcome to submit multiple entries.

• Best Brokerage Solutions Provider • Best Law Firm – Banking & Finance • Best Law Firm – Private Equity • Best Research & Consultancy Firm • Best Ratings Agency • Best Islamic Ratings Agency • Best CSR Programme • Best Core Banking Service Provider • Best User-Experience Innovator • Best Cybersecurity Provider

To learn more about the Awards process, please email: awards@bankerme.net

• Best Payment Solutions Provider • Best Communications Infrastructure Provider

HALAL BUSINESS

Islamic Business & Finance | ISSUE 117

www.islamicbusinessandfinance.net

HALAL BUSINESS

(SHUTTERSTOCK)

Adapting to the needs of SMEs MUKUNDÂ BHATNAGAR, PARTNER, A. T. KEARNEY MIDDLE EAST SPEAKS WITH ISLAMIC BUSINESS & FINANCE ABOUT HOW ISLAMIC BANKS CAN BEST TAP THE SME MARKET

www.islamicbusinessandfinance.net

ISSUE 117 | Islamic Business & Finance

HALAL BUSINESS

o you see a lot of interest for Shari’ahcompliant products in the SME space?

Islamic banking penetration has been steadily increasing in the UAE and GCC over the last 10 years, growing faster than their conventional counterparts. This is largely driven by retail customers and corporate clients. For example, a recent Bloomberg study showed that Islamic products are getting more popular and clients are inclined to choose Islamic finance loans over conventional ones. A large part of SMEs in the UAE & GCC also prefer Shari’ahcompliant products. Based on our assessment, SME financing is a significant, multi-billion dirhams, new-to-bank opportunity for Islamic banks and conventional banks with Islamic windows. Banks have played a significant role improving both their capabilities in offering Islamic products and increasing their awareness as a safer and more responsible option. However, a lot more needs to be done specifically for the SMEs to increase the Islamic financing penetration.

What are the challenges and improvement opportunities for Islamic finance to SMEs? SME financing needs are different from retails and corporate segments due to several complexities related to ticket sizes, costs expectations/affordability, risk assessment, operational capabilities, legal framework, etc. For non-individual clients, Islamic banks have primarily focused on large corporates requiring Shari’ah-compliant products. Complexities related to risk assessment and legal enforceability of collaterals have discouraged them from focusing equally on the SME clients. Despite the rising acceptance and demand from SMEs for Islamic finance products, they feel discouraged by the limited offerings and higher costs of Shari’ah-compliant products in the market currently. Banks seem to have spotted this gap and are actively working on developing tailored products to suit the SME sector and bridging the existing gaps. To increase the penetration of Islamic financing for SME clients, a four-pronged approach needs to be implemented.

Does the regulatory environment need to be strengthened? The regulatory environment is an important factor that impacts Islamic banking. A well-developed regulatory framework results in clarity and enhances competition and innovation. Several countries in

Islamic Business & Finance | ISSUE 117

the GCC are in a transition phase and are yet to have a well-developed regulatory framework in place to regulate Islamic banking. The absence of strong steps to develop the landscape further would affect the prospects of the Islamic banking, especially when it comes to servicing the SMEs. UAE Central Bank has started to lay greater emphasis on SME finance based on its five-year strategic plan to achieve Vision 2021. The plan includes a focus on encouraging the banking sector to finance SMEs, while highlighting the legislative, regulatory, and supervisory environment for Islamic finance. Similarly, UAE’s Securities and Commodities Authority (SCA) has announced plans to launch a platform to finance SMEs, in collaboration with OECD and UAE Ministry of Economy. This along with the guarantee program for Emirate Development

MUKUND BHATNAGAR, Partner, A. T. Kearney Middle East

www.islamicbusinessandfinance.net

HALAL BUSINESS

Bank has put UAE ahead of its peers within the Islamic financing sector for SMEs.

What do Islamic banks need to work on? Shari’ah-compliant financing products offered by Islamic banks are plagued by excessive documentation and act as a barrier. These require significant simplification and adaptation to suit the needs of the SMEs. To be able to achieve this, the banks would have to develop a deep expertise in the SME sectors, sub-sectors and their unique business practices. These would include a better understanding of financial information, collaterals, ownership structures and customer relations of SMEs. Islamic banks currently

Shari’ah-compliant financing products offered by Islamic banks are plagued by excessive documentation and act as a barrier. These require significant simplification and adaptation to suit the needs of the SMEs. To be able to achieve this, the banks would have to develop a deep expertise in the SME sectors, sub-sectors and their unique business practices. – MUKUND BHATNAGAR, Partner, A. T. Kearney Middle East

lack these capabilities, and therefore, are unable to adequately lend to the SMEs. Depending on one bank to another, this leads to inadequate processes, lack of SME-specific products (especially Islamic products), untrained staff, etc. The cumulative result of this is lower penetration of Islamic financing and that too at a higher cost to the SMEs.

How does the SME sector need to be improved in turn? Islamic banks could play an active role in building the capabilities of SMEs to manage their businesses

www.islamicbusinessandfinance.net

more effectively. This would help in improving the efficiency of their operations, financial reporting, and operations. Government and other private stakeholders should also build capabilities to train SMEs as this would increase their overall viability in the long run and make them more palatable for Islamic financing. A critical benefit of this would be greater transparency into the SME sector and the risks associated with financing them. Additional, transparency with respect to the value addition to economy, employment generation and operational scope of these SMEs would also help significantly in supporting greater Islamic financing for them. Think tanks and research departments within public and private sector entities should look to fill this gap in the near future. The benefits of greater transparency are evident from the SME manufacturing sector today. It is for these reasons that this sector is seen as an attractive segment for Islamic financing (e.g. visibility into its capital intensity, export potential and the ability to valueadd to the economy). The trade and commerce sector, which comprises wholesale and retail establishments, is also a viable sector for Islamic financing for this same reason. Strengthening the services and depth/quality of data offered by the credit bureau with adequate information on SMEs is a significant area of improvement. The problem presents a significant opportunity to develop an exhaustive credit performance related database on SMEs, which would plug information gaps and lead to increased supply of Islamic finance to the SME sector. Setting up of a comprehensive Asset Registry for SMEs would also help improving the quality and range of collaterals Islamic banks can use as a security. SME financing remains a challenge is most countries in the GCC, and the solutions remain largely elusive. Several of these challenges are common across conventional and Islamic banks. The rising awareness and demand for Islamic banking products from SMEs, and a more responsible and ethical approach to financing adopted by them, puts a lot of focus on Islamic banks playing a leading role in expanding the financing penetration for SMEs. They would need support from Regulators, Government entities and Private players to build a robust ecosystem for SME financing in the future, especially Islamic Financing. If successful, local and regional Islamic banks could be role models for the growth of Islamic financing for SMEs worldwide.

ISSUE 117 | Islamic Business & Finance

TAKAFUL

Takaful will need to innovate to thrive THE 2019 WORLD TAKAFUL FORUM IN ISTANBUL, TURKEY WAS A RALLYING CRY FOR THE INDUSTRY

he consensus remains that Takaful is in dire need of innovation. At the 2019 edition of the World Takaful Forum, held in Istanbul, Turkey, the refrain rang again and again that while there are success stories across the world, the broader Takaful industry is far from moving forward to where its potential lies, especially with respect to ReTakaful. “Takaful is neglected area of the Islamic finance industry with merely two per cent contribution. The Takaful industry in dire need to develop new and innovative products to penetrate in the market. Alongside with the innovative product development the distribution mechanism should be addressed by focusing its outreach through bancaTakaful and MicroTakaful etc. Moreover, ReTakaful products should be developed to strengthen the Takaful industry in global financial markets,” said Muhammad Zubair Mughal, CEO, AlHuda Centre of Islamic Banking and Economics (CIBE). Mughal also touched upon the need for localisation, specifying that Takaful products of one country/region should not be implemented in another country/region. The bases and indicators of one country would be different in term of GDP,

Islamic Business & Finance | ISSUE 117

religious sensitivity, regulation framework etc. with the other country while the development of Takaful products. The social, economic and religion dynamics could also be different. So, Takaful products should be designed keeping in view the country/region dynamics and indicators mentioned above for the successful implementation, said Mughal. Mughal also welcomed all insurance industry including commissions, regulators, central banks, banking sectors, Takaful, composite, general, life, re-Takaful, reinsurance, brokers and actuaries to come up in order to offer a resolution for the sake of sustainable financial solution. “Takaful is the only solution to the poverty of the world. The Takaful industry is an emerging trend in the emerging financial world and there is a great room for numerous Takaful, re-Takaful, actuaries, brokers and IT solution providers and many others to explore the untapped market under one umbrella,” said Mughal. Other speakers included Dr Hakan Berooglu, Mahmood Al Reefy, Muhammad Albaha, Mohamed Saeed Elmutasim, Enver Avdic, Dr Levent Sumer, Mehmet Siddik Yurtcicek, Halil Kolbasi, Yusuf Dinc and others.

www.islamicbusinessandfinance.net

Supported by

Organised by

Silver Sponsors

Exhibitors

Providing you with actionable investment advice

SAVE THE DATE 19 November 2019

Mina Aâ&#x20AC;&#x2122;Salam, Madinat Jumeirah Dubai, United Arab Emirates

250+

HNWIs in Attendance

25+ Industry-leading speakers

#WealthArabia

www.wealtharabiasummit.net FOR MORE INFORMATION,

email us at events@cpifinancial.net or call us on +971 4 365 4538

ISLAMIC TECH

Inside the world’s first Shari’ahcompliant crypto exchange

(Useacoin/SHUTTERSTOCK)

YEHIA BADAWY, CO-FOUNDER OF RAIN, THE MIDDLE EAST’S FIRST REGULATED CRYPTOCURRENCY EXCHANGE, SPEAKS TO ISLAMIC BUSINESS & FINANCE

Islamic Business & Finance | ISSUE 117

www.islamicbusinessandfinance.net

ISLAMIC TECH

hat ’s the sentiment for cryptocurrency at the moment? When you started this journey, the conversation around cryptocurrency was very different than it is today, with many highs and lows in between. How do you think the ups and downs have helped cryptocurrency mature to the point that it’s at today? I think we are at a turning point. In its first wave, pre-2017, there were a few boom and bust cycles within this space, and it was largely due to a few people understanding how this works, and then others who are just trying to make a quick profit without understanding the fundamentals. This was accentuated in 2017 when the bitcoin price, and, consequently, all the other cryptocurrencies, appreciated rapidly in price. This drew in an uninformed crowd that was really just in there to make a quick buck. Some of these didn’t even understand what they were doing by buying this thing. Following that, there was a sharp decline in price. Bitcoin went down from almost $20,000 all the way down to around $4000. During that time, a lot of people lost money, and confidence. There were a lot of bad actors in the space. Certain companies and entities were using the words bitcoin, etherum, and any other to mask whatever scheme they had centered around crypto, but it was in the end some sort of scam. Unfortunately, attaching those scams to cryptocurrencies themselves caused a lot of reputational damage to this technology. We what we refer to in the industry colloquially as the ‘cryptowinter’. During that time, spanning late 2017 until early 2019, a lot of projects within the community were coming to fruition. People hit the restart button. I like to draw parallels to the start-up bubble in the late 1990s and early 2000s in Silicon Valley. People saw a lot of exciting companies, they were throwing money at them, they didn’t really understand what these companies were doing. If you look at the venture capital space now, and how people do

www.islamicbusinessandfinance.net

ISSUE 117 | Islamic Business & Finance

ISLAMIC TECH

investments, there are agreed upon norms and traditions, things to be done and specifically legal frameworks and how to operate that have made that landscape much more mature. I would say the same thing is happening in the cryptocurrency space. Now that people saw the sharp rise and decline in price, they understand this is not something that you get into without informing yourself about it. That’s what we’re finding—people are becoming more careful, and they are interested in reading more, and understanding this technology. That’s great for us—we’re always pro-education and we sponsor meet-up groups and sessions where we go on the ground in different city to educate people and make usre that whoever is thinking about it has the right resources to go about it. To be honest, we’re breaking a lot of records. Every year, we’re seeing more volume, and more interest. Whether on the retail side of the institutional side, things are looking very good. It’s partially driven by the increase and stability in price, but also greater interest and greater education. One thing that’s really helped us is being regulated by the central bank. This gives people the confidence that they’re dealing with a company that is under a certain amount of supervision and that they’re safe in dealing with us.

Do you see any key differences in the investors in the Gulf than you do in other markets, in terms of savviness, or approach? I would say there are more similarities than there are different. What we see in investors in this region is really on par with those that exist globally. I have a banking background. I used to work at a bank in Kuwait, and I was on the institutional desk dealing with institutional clients in Europe and the US that were interested in capital markets in the region. With that background, and then dealing with regional investors in my current role, I see a lot of similarities, and the same principles being applied. The only difference is the need for more relationship building, and more face to face meetings and conversations. That’s something we love to do. This aspect of business, which is part of our heritage in how we do business in the region, has spilled over into this space as well in the people that we’ve met.

How did Rain develop from the initial concept? The four cofounders of the company met online in 2016. Our goal was to create a regulated cryptocurrency

Islamic Business & Finance | ISSUE 117

YEHIA BADAWY, Co-Founder of Rain

exchange in the region. Our region was the only one without a regulated exchange. You had exchanges that were regulated in North America like Coinbase or Latin America, or even in Korea and Japan. In Europe you had Bitstamp. We were the only one left that didn’t have a regulated and licensed exchange. We believe that cryptocurrencies are game-changing innovation, but they do need the right platform to operate on. Part of that is building an ecosystem where people understand what are risks and rewards of dealing with this new innovation, and also how companies should organise themselves. To do that, we have to speak to regulators in the region, and get to the point where we’re agreeing this is something that should be regulated, and this is something that’s overall good for the economy. To do that, we went to several central banks in the region, and they listened to us, but they weren’t really interested in this. It was too early for some of them. We happened to get a meeting with the Central Bank of Bahrain ( in early 2017, and during that meeting we discussed what bitcoin is and why it’s important that the Central Bank of Bahrain should consider regulating cryptocurrencies, and then we expressed interest in developing the conversation further with the Central Bank of Bahrain. The conversation went really well—it ran on for more than it was planned and there were more people

www.islamicbusinessandfinance.net

ISLAMIC TECH

Bahrain Fintech Bay in Manama, Bahrain

in attendance due to their interest. Ever since then we’ve been in close collaboration with the Central Bank of Bahrain. During the same year, they told us about the regulatory sandbox programme which commenced in November 2017. We were the first cryptocurrency company to enter the sandbox and the second company overall. We stayed in the sandbox from officially operating in December of 2017 all the way up to our graduation from the sandbox in February of 2019. During this time, we were serving a limited set of users as per the rules and regulations of the Central Bank for the regulatory sandbox. We were also developing our product further—developing our website and mobile apps for Android and iOS. We were able to assist a limited set of users in conducting transactions and offering them support. In February 2019, the Central Bank of Bahrain launched the crypto-asset regulation module, and they were the first Central Bank in the GCC to do that in the GCC. The final form of the regulation was in line with global standards and what we expected to see, and we were very happy with that. Then we immediately began the application process to acquire the license, which we did throughout this year, and then in August of 2019 we received the license from the Central Bank of Bahrain. We were live and serving users since 2017, but now post-sandbox we have no limit on the users we can serve and the transaction sizes. We have seen some healthy growth since acquiring the license.

www.islamicbusinessandfinance.net

Why was Shari’ah-compliance importance for the exchange? For us, we understand the context and the region. I come from a banking background and I understand that Shari’ah compliance and Islamic finance are a cornerstone of the economy in the region. One thing that’s importance for us to do is to bring an international and global technology into the region with an institutional standard, but also to understand the context we’re operating within. During our conversations with institutional clients and family offices, they’re especially interested in understanding whether becoming Shari’ah-compliant was a part of our plan. While this was always a part of our plan, we didn’t know, until we’d had those conversations, that it would be a requirement as early as it was. We went about canvasing the landscape and finding the best partner to work with and we settled on Shari’ah Bureau who had already worked on this specific technology with another company in the region. We were very lucky to have that done quickly and become the first Shari’ah-compliant cryptocurrency platform worldwide. We had inquiries of people asking how this impacts them, but overall we just got positive comments from our client base.

How does it affect the offering exactly? It is just technical or are there substantive differences? Our certificate deals with both client-facing and

ISSUE 117 | Islamic Business & Finance

ISLAMIC TECH

operational facets of our business. The certificate is for providing the services. While the Shari’ah Review Bureau screened the assets on the platform, they also did an audit on the service itself on the system of buying, selling, and storing cryptocurrencies, and they found that the measures that we implemented are in line with Shari’ah guidelines.

What kind of support did you get from the Bahrain Fintech Bay? How integral was it to your success? None of the founders are from Bahrain, two of us are from the US, one is from Saudi Arabia and I am originally Egyptian. Bahrain was new to us, and when we first met with the Central Bank, we quickly found an ecosystem of entities that’s really helping us grow, thrive, and succeed. The Bahrain Fintech Bay was a key partner—they were instrumental in getting us the right introductions to people and helping us in conversations with the Central Bank. Regulators are focused on getting things done right, but it sometimes takes time for things to move forward. What Bahrain Fintech Bay did was facilitate conversations, make sure our voices were heard, make introductions on the policy ide but also get us plugged in in the community, and we’re grateful for that.

How much are you tapped into the broader Halal economy? Are you tapped into the rest of the Islamic world? We would hope that we are, because we are about building infrastructure. It’s similar to ISPs in the early days f the internet. What we’re doing is setting up the foundation for people to be able to buy and sell cryptocurrencies in a way that’s regulated and more economical. Part of that is building the right infrastructure for the industry itself, and the Halal economy can only build upon that with more Shari’ahcompliant products and initial coin offerings.

What are your next steps? The future is very exciting. The ecosystem here in Bahrain is wonderful, and we’re glad to be based here in Manama. We are hoping to expand our physical presence throughout the region. We are already serving clients in the GCC and broader Middle East region, but we want to make sure we’re achieving regulatory redundancy, and we’re already in conversations with different regulators in the GCC to replicate this relationship we have

Islamic Business & Finance | ISSUE 117

with the Central Bank of Bahrain, and with these other regulators. That’s the best thing to do—you have to meet with the regulators. They have to get to know you and trust you and understand that we both want the same thing, and we’re just looking at it from different angles. We’re also planning to launch an exchange service by the end of this year. We’re now operating on a brokerage model, where clients buy from us and sell to us, but later in the year we’ll enable an exchange service so that clients can buy from each other and sell to each other, basically creating a marketplace. We believe that an exchange product and service is something that had to come later on because we were aware of the liquidity that existed in the market at the time that we launched. It seemed like having a brokerage and then seeding this liquidity and then coming up with the exchange would be the better order of things. That’s something we’re excited to do. We’re growing our institutional offering to be more targeted. We’ve seen a lot of interest in the pat year from institutional clients, and we’re excited to develop those conversations.

Live trading in Manama, Bahrain

www.islamicbusinessandfinance.net

Photo credit: Bloomberg

The Islamic economy in your inbox

www.islamicbusinessandfinance.net

SUKUK

Islamic Business & Finance | ISSUE 117

www.islamicbusinessandfinance.net

SUKUK

The shape of things to come for GCC Sukuk MOHAMMED KHNIFER, SENIOR ASSOCIATE, DEBT CAPITAL MARKETS AT ISLAMIC CORPORATION FOR THE DEVELOPMENT OF THE PRIVATE SECTOR (ICD), WRITES FOR ISLAMIC BUSINESS & FINANCE ABOUT THE POSITIVE DEVELOPMENTS FOR THE MIDDLE EAST REGION’S SUKUK MARKET

Simon Dawson/BLOOMBERG

y the time everyone read this in October 2019, government bonds and Sukuk issued by Saudi Arabia and four other Gulf states will have joined, or are about to join, JP Morgan’s emerging markets (EM) bond indexes. Their inclusion was a gradual one. It started on 31 January and it will be completed by 30 September. By now, these states should have realised more than their original weightage in the index (i.e. to be accounted more than 11.4 per cent of the benchmark, a big change in one year). This is due to the fact that these states have issued more debt this year than expected, based on the early figures measuring their weightage in the index released early this year.

www.islamicbusinessandfinance.net

LESS VOLATILITY The move was expected to have attracted a total of around $30 billion of new foreign investment into their debt. What is important, however, is that such credit, within emerging markets, is gradually being appreciated by international investors. For

ISSUE 117 | Islamic Business & Finance

SUKUK

Further, the 30 years US Treasury yields have been seen traded below two per cent. This credit phenomena will drive prices of the 30 years (investment grade) GCC bonds into historical high levels. We are talking about bids around 116 for Saudi Government at some point in July! This is due to the

TOTAL RETURN SINCE 1987 (US$) 2400 2200 2000 1800 1600 1400

G7 INDEX EM (EMERGING MARKETS) EUROPE USA

1200 1000 800 600 400 200 0 Dec 31,1987

Dec 31,1982

Dec 31,1997

Dec 31,2002

Dec 31,2007

Dec 31,2012

SOURCE: MSCI

It seems there is a spillover from negative euro yields and this is not a bad thing for highly rated GCC credits. â&#x20AC;&#x201C; MOHAMMED KHNIFER

DOWNHILL FROM HERE? Fed officials lowered their benchmark rate for the first timesince 2008

fact that yields are between 5 to 5.25 per cent. There is a correlation between UST yields and the spreads of GCC sovereigns as they both being used in the pricing mechanism of the debt instruments.

EURO DENOMINATED BONDS AND SUKUK It seems there is a spillover from negative euro yields and this is not a bad thing for highly rated GCC credits. It was reported that some investors, namely euro-focused investors, are offloading their euro negative yields holdings and are heading to attractive high-grade yields. This additional demand will prove positive to Investment grade GCC credits who have issued euro-denominated debt.

SOURCE: Federal Reserve

example, we have seen that after the Argentina poll results in August, vulnerable credits have suffered a short-lived sell-off in EM, while higher-rated ones appeared unaffected (e.g. GCC).While such credits have sustained geopolitical pressure in the region, the premium over EM peers are still there.

THE LOWER UST YIELDS, THE HIGHER GCC CREDITS The second factor that will boost GCC debt to outperform is the interest rate cut by the US Federal Reserve in July. This is an attractive rate environment for issuers as well as those who have issued debt in 2018 as such securities are probably is being traded at premium in the secondary market.

Islamic Business & Finance | ISSUE 117

MOHAMMED KHNIFER Mohammed Khnifer can be reached at mkhnifer@isdb.org and on Twitter @mkhnifer.Â

www.islamicbusinessandfinance.net

SUKUK

Sukuk seeing growth for fourth straight year WITH POSITIVE SENTIMENT COMING FROM TRADITIONALLY STRONG MARKETS AS WELL AS NEW ONES ON THE HORIZON, SUKUK ISSUANCE IS AT THE TOP END OF ESTIMATES FOR 2019

ukuk is headed towards its fourth consecutive annual increase in issuance, following a strong first half of the year in both Saudi Arabia and Malaysia. “We expect total Sukuk issuance of around $130 billion in 2019, at the top end of the $120-$130 billion range we projected at the beginning of the year, and up from $123 billion in 2018. Our full-year expectation reflects robust issuance of $87 billion during the first half of 2019, spread across short and long-term instruments. We expect secondhalf volumes to moderate to around $43 billion, as strong issuance in the first six months has reduced sovereign and corporate funding needs. However, we expect government and corporate entities in Malaysia and the Gulf Cooperation Council (GCC) countries, particularly Saudi Arabia, to continue issuing regularly,” said Nitish Bhojnagarwala, VP-Sr Credit Officer at Moody’s. Issuance in the first half of the year rose strongly, according to Moody’s. Total issuance in the first six months of 2019 rose to $87 billion, up 37 per cent compared with the same period last year, driven by increased activity in Saudi Arabia and Malaysia. Total southeast Asian issuance rose 41 per cent, spread across both short and long term Sukuk, while GCC volumes rose nine per cent. Sovereigns and government-related entities remained the largest issuers by value. Issuance in Turkey rose rapidly from a low base, following the start of trading in Islamic lease certificates on the Istanbul stock exchange in

Islamic Business & Finance | ISSUE 117

August 2018, said Moody’s. Malaysia’s RAM Ratings calculated slightly differently, but has also revised its expectations for the year. As at end-June 2019, global Sukuk issuance had reached $72.7 billion according to RAM, which exceeded the lower range of RAM Ratings’ full-year projection of $70 billion to $80 billion for 2019. As such, RAM revised its full-year expectation to $80 billion to $90 billion. This is based on the Bank Negara Malaysia’s (BNM) better-than-expected issuance of Islamic securities, the Indonesian government’s commitment to supporting its Islamic finance agenda, as well as its role in raising awareness of sustainable and responsible investments (SRI), expectations that the GCC’s public sector Sukuk issuance will provide a sustainable baseline and potentially account for a higher proportion of its funding mix, said RAM. In both estimates, for the second half of the year, issuance will moderate. “We expect volumes to fall back to around $43 billion in the second half of 2019, as some issuers typically front load their annual funding activities. Higher oil prices, which support GCC government revenues, could also weigh on sovereign issuance in the region. However, the launch in July 2018 of a primary dealers programme for government Sukuk in Saudi Arabia, remains a supportive factor,” said Bhojnagarwala. “New entrants and green Sukuk could stimulate issuance. We expect some African sovereigns to

www.islamicbusinessandfinance.net

SUKUK

WIMBOH SANTOSO, Chairman of the OJK (Indonesiaâ&#x20AC;&#x2122;s Financial Services Authority), who has supported the growth of Islamic finance in the nation, including increased Sukuk issuance.

www.islamicbusinessandfinance.net

ISSUE 117 | Islamic Business & Finance

SUKUK

enter the market, with Egypt setting up a Shariah supervisory committee in April 2019, to oversee Sukuk issuance. While the green Sukuk market is in its infancy, we expect issuance to accelerate as efforts to combat climate change gain traction, building on initial green Sukuk transactions in Malaysia and Indonesia.” While growth is continuing, Sukuk is set to grow at a slower rate than 2018, according to Moody’s. “We expect global Sukuk issuance to increase by six per cent to $130 billion in 2019. Although this would fall short of the eight per cent expansion achieved in 2018, it is consistent with our expectation of strong long-term growth for the sector. Sukuk issuance is on course to complete its fourth consecutive year of expansion. Governments across the core Islamic finance markets (GCC, Malaysia and Indonesia) continue to shift their funding mix towards a combination of Islamic and conventional instruments, supporting long term growth in Sukuk volumes. The change reflects these countries’ cultural affinity with Islamic finance, and their governments’ desire to promote Shariah-compliant banking. Rising demand for Sukuk from domestic Islamic banks, and central bank issuance in the core Islamic finance markets, are also supportive,” said Bhojnagarwala. Sukuk sentiment for global investors has also risen in light of the Dana Gas ruling in 2017, which set many investors’ minds at ease, according to Moody’s. “We expect product innovation to help overcome some of the structural constraints that have historically held back the development of Sukuk markets. The Sukuk sector has also benefited from the English High Court’s ruling in favour of Sukuk investors in the Dana Gas case in November 2017. The ruling was credit positive for the Islamic finance industry because it added certainty regarding the legal enforceability of Sukuk particularly in English law,” said Bhojnagarwala. In the GCC, bond and Sukuk issuance surged by $32 billion in the first quarter 2019, lifting outstanding debt in the region to $478 billion. Meanwhile, yields in the GCC trended lower, supported by rising oil prices which have benefitted fiscal consolidation efforts across the region, according to research published by the National Bank of Kuwait (NBK). A sharp rise in regional debt issuance, led by the sovereigns of Saudi Arabia and a neighboring country, was driven by low borrowing costs, good credit ratings, and a strong appetite for regional bonds among international investors. Regional

Islamic Business & Finance | ISSUE 117

yields are expected to remain low, while issuance is forecast to increase on 2018’s levels. Global and regional yields trended down in the first quarter 2019, driven by expected global economic slowdown, dovish signals on monetary policy, low inflation, and a sharp recovery in oil prices from December 2018 lows. Falls were led by Bahrain and Oman, despite continued pressure on fiscal positions. A fall in Bahrain sovereign yields was sparked by the provision of a $10 billion support package by neighboring countries last year of which it recently received, in tandem with a series of fiscal reforms. Oman yields also fell sharply, supported by the promise of fiscal reforms including the introduction of VAT, according to NBK. “All GCC sovereigns now have stable outlooks and most have investment grade ratings. International demand for GCC sovereigns is expected to receive a large boost in 2019 as a result of inclusion of five GCC sovereigns (excluding Oman) in the JP Morgan Emerging Markets Bond Index (EMBI). The region could receive as much as $30 billion in fund inflows, with most being allocated to larger debt markets such as Saudi Arabia,” said Dr Saade Chami, NBK Group Chief Economist. Saudi Arabia accounted for a little under half the wider GCC region’s first half issuance, with volumes of $12.8 billion, up from $11 billion in the same period of 2018, according to Moody’s. The Saudi government accounted for around 75 per cent of this, with corporate activity limited two non-financial corporates. The Saudi government launched its inaugural $9 billion Sukuk transaction in April 2017 to help finance its budget deficit. Total Saudi government issuance over 2018 and H1 2019 combined was around $28 billion. Issuance declined marginally in the other GCC countries (UAE, Oman, Bahrain and Kuwait), to a combined $10.8 billion from $11.3 billion in H1 2018. “In the GCC region, a recovery in oil prices since mid-2017 has boosted revenues and reduced the gross financing requirements of the oil-exporting countries relative to 2016 and 2017, weighing on sovereign Sukuk issuance. However, we expect borrowing requirements for the GCC sovereigns will likely be higher in 2019 when compared to 2018, due to our expectation of a lower average oil prices. Even so, we expect GCC sovereigns to continue diversifying their funding mix in favour of Sukuk instruments in order to develop their Islamic debt markets,” said Bhojnagarwala.

www.islamicbusinessandfinance.net

SUKUK

MOHAMMED MAAIT, Egypt’s finance minister, who has laid the groundwork for Egypt’s future Sukuk issuance.

“The launch in July 2018 of a primary dealers’ programme for government Sukuk in Saudi Arabia, remains a supportive factor for GCC issuance, as it will likely stimulate demand for Islamic debt securities. Under the programme, local banks buy newly-issued Sukuk from the government and act as market-makers, quoting bid and offer prices to other investors. The Saudi government completed its first local Sukuk transaction under the programme in July 2018, and had issued $14.9 billion through it by end-June 2019,” he continued. During the first half of 2019, total issuance of longterm Sukuk, defined as those with maturity greater than 1 year, increased by 20 per cent year on year, led by Turkey (380 per cent), Indonesia (+22 per cent), Malaysia (+21 per cent) and Saudi Arabia (+16 per cent). Overall, long term issuances accounted for 60 per cent of the global supply of Sukuk, according to Moody’s research.

www.islamicbusinessandfinance.net

Sukuk issuance in southeast Asia also showed strong growth momentum in the first half of 2019 Volumes in Malaysia increased by 23 per cent to $36 billion, making the country the world’s leading issuer, with a 41 per cent share of the total The increase reflected a surge in local currency issuance by financial institutions, as well as a rise in the volume of short-term Islamic Treasury bills issued by Malaysia’s central bank, Bank Negara Malaysia. The Malaysian sovereign is increasingly using domestic Islamic instruments to fund its budget deficit. The government and public sector entities remained the largest domestic issuers, with $23 billion of Sukuk issued during the first six months of 2019, up 22 per cent from the same period in 2018. “Going into the second half of the year Malaysia is to retain its pole position as the Sukuk market leader in 2019, underpinned by solid support from

ISSUE 117 | Islamic Business & Finance

SUKUK

the Government, BNM and the private sector,” said Ruslena Ramli, Head of Islamic Finance, RAM Ratings. As at end-June 2019, the gross issuance value of the Malaysian Sukuk market had surpassed RAM’s projection of MYR 100 billion to MYR 120 billion for the entire year. The 38.3 per cent surge to MYR 136.9 billion, which had been MYR 99 billion at end-June 2018, was primarily driven by a 61.1 per cent spike in BNM’s issuance of Islamic securities to MYR 14.5 billion , followed by the corporate sector with MYR 65.1 billion, up 55.5 per cent including an MYR 27.6 billion one-off issuance from Urusharta Jamaah Sdn Bhd, an SPV set up by the Ministry of Finance, and government issues, which were up 9.9 per cent to MYR 39.0 billion. “Given the dearth of high-quality liquid assets (HQLA) for Islamic financial institutions (IFIs) vis-à-vis complying with BNM’s liquidity coverage ratio (LCR), we anticipate BNM’s issuance of Interbank Islamic Bills to accelerate further this year. Nevertheless, its future performance will be subject to market demand and liquidity, which appear promising at the moment,” said Ramli. Meanwhile, there have been regulator y developments in Malaysia and Indonesia, to position themselves at the forefront of ASEAN’s SRI industry. “The common values between SRI and Sukuk have played a part in the promotion of sukuk to finance SRI-related initiatives. As green and SRI sukuk gain momentum in these two countries, we envisage some ripple effects for other core sukuk markets in the coming years vis-à-vis driving the SRI agenda. The upbeat prospects of the SRI Sukuk segment is likely to have a tremendous multiplier effect on the staging of the next phase of growth for global Sukuk,” said Ramli. Bhojnagarwala agrees that the two markets are integral.

“Malaysia and Indonesia will remain key issuers as both governments continue to promote their Islamic finance sectors. We expect Malaysia will continue to dominate global Sukuk issuance volumes both in the long and short-term markets, with issuances remaining mostly denominated in local currency. In Indonesia, the government will remain the country’s most active issuer through regular drawdowns under its Sukuk MTN programme. Bank Indonesia, the country’s central bank, has started issuing short-term Sukuk in local currency as well,” said Bhojnagarwala. Indonesia has made a concerted effort to encourage its Islamic finance community, led by regulatory figures such as Wimboh Santoso, chairman of Indonesia’s Financial Services Authority, who also serves as chariman of the Sharia Economic Community. The OJK, the Indonesian name for the authority, has continually made pushes for increases in all Islamic financial participation, including Sukuk. Santoso has also made overtures for an increase in fintech, serving a broader Islamic financial strategy. “Fintech is a strategic opportunity for sharia finances to expand their market segment,” Santoso said. In Turkey, Sukuk issuance grew rapidly, albeit from a very low base, followed by the start in August 2018 of trading in Islamic lease certificates on Borsa Istanbul, the country’s stock exchange, according to Moody’s. Total volume rose to $7.9 billion in H1 2019 from just $1.9 billion in the same period last year. This was primarily driven by $5.9 billion of government issuance, up sharply from $800 million a year earlier, financial institutions placed a further $1.9 billion during the period, mostly in local currency. “In Turkey, we expect the trading of Islamic lease certificates on Borsa Istanbul to encourage further

GLOBAL SUKUK ISSUANCE GREW STRONGLY IN H1 2019 Sukuk issuance in $ billion Sovereigns & Supranationals

Corporates

FIs

<1Yr Sukuk

Estimated Issuance for H2019 2

160 140

120 100 80 60 40 20 -

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Others

H2019 1

SOURCE: Thomson Reuters Eikon, Bloomberg, IFIS and Moody's Investors Service

Islamic Business & Finance | ISSUE 117

www.islamicbusinessandfinance.net

SUKUK

GOVERNMENTS AND SHORT TERM PAPER FROVE AN INCREASE IN ISSUANCE DURING H1 2019 Sukuk issuance in H1 2019 ($ billion) Sovereigns

MALAYSIA CONTINUES TO DOMINATE THE SUKUK MARKET Sukuk issuance by country (%) total sukuk issuance in H2019

Corporates

FIs

< 1 Yr Sukuk

60.0

Others 13%

50.0

UAE 4%

$ Billion

40.0

Malaysia 41%

Turkey 9%

30.0 20.0 10.0 -

Indonesia 18% H2018

H2019

GCC GCC

H2018

H2019

Asia SoutheastSoutheast Asia

H2018 Turkey

H2019

Saudi Arabia 15%

Turkey

SOURCE: Thomson Reuters Eikon

issuance by banks and corporates keen to diversify their funding base. This will ensure a supply of investment assets to Turkish Islamic banks, whose share of the Turkish banking market we expect to grow,” said Bhojnagarwala. New entrants to the Sukuk market could help make up for slower issuance growth in the GCC region, according to Moody’s. Egypt’s Financial Regulatory Authority (FRA) announced in April 2019 that it would establish an independent Shari’ah Supervisory Committee (SSC) to oversee Sukuk issuance. “This demonstrates Egypt’s commitment to expanding the Islamic finance market in the country. The newly formed SSC will have nine members, and will be tasked with approving Sukuk issuance, and overseeing broader sector developments. We expect the SSC to act as the Shariah advisor to the government, which may issue its first Sukuk in 2019,” said Bhojnagarwala. “We also expect Africa’s contribution to global Sukuk issuance to increase as more sovereigns there seek to diversify their funding base. In addition to Egypt, Algeria, Morocco and Sudan have expressed interest, and we expect at least $1 billion of Sukuk issuance in Africa during 2019 and 2020.” In 2017, both the federal government of Nigeria and pan-African development bank Africa Finance Corporation came to the market with inaugural Sukuk issuances of $280 million and $150 million, respectively. Other African government issuers include Mali, which has placed $285 million, while the Cote d’Ivoire and South Africa have both placed

www.islamicbusinessandfinance.net

around $500 million, the largest Sukuk transactions in Africa to date. “We continue to expect an acceleration of green Sukuk issuance in Malaysia and Indonesia as both countries seek to attract private capital to low-carbon and climate-resilient infrastructure projects. The green Sukuk market is still in its infancy, with only a handful of issuances taking place since Malaysia’s Tadau Energy (Edra Power) placed the world’s first green Sukuk in 2017,” said Bhojnagarwala. As of March 2019, green Sukuk accounted for less than one per cent of green bonds and Sukuk combined. The most recent green Sukuk transaction was a $750 million issuance from the Government of Indonesia in February 2019. The Indonesian government also placed the world’s first sovereign green Sukuk, a $1.25 billion five-year instrument, in February 2018. The proceeds were used to finance green projects such as renewable energy, sustainable transport, waste management and green buildings. The Malaysian and Indonesian precedents could encourage other issuers to enter the green Sukuk market, in particular GCC governments, which aim to diversify their economies away from the oil industry. Many supranational organisations in the Middle East and North Africa (MENA) region, including the Islamic Development Bank and Islamic Corporation for the Development of the private sector may also explore ways of diversifying their investment portfolios into the renewable energy sector, contributing further to the growth of the green Sukuk market.

ISSUE 117 | Islamic Business & Finance

( Edmund Benedik/SHUTTERSTOCK)

EXPERT OPINION

The case for a ‘Riba free’ logo for Halal businesses DR AISHATH MUNEEZA. ASSOCIATE PROFESSOR, INCEIF, MAKES THE ARGUMENT THAT A RIBA-FREE LOGO WILL BE A PRACTICAL MECHANISM TO BRIDGE THE GAP BETWEEN HALAL LITERACY AND ISLAMIC FINANCE LITERACY

Islamic Business & Finance | ISSUE 117

www.islamicbusinessandfinance.net

EXPERT OPINION

alal and Haram is a concept which every Muslim must adhere to in all their daily affairs. Halal and Haram are not terminologies relevant only for food or consumable items. In Shari’ah, the concept of Halal and Haram is also to be applied in Muamalat or commercial matters. In short, all affairs of human must be based on doing what is Halal or permissible and abstaining from what is Haram or forbidden. According to Thomson Reuters’ State of the Global Islamic Economy 2018/19 report, there are 1.8 billion Muslims in the world whose spending was estimated to be $2 trillion in 2017. In addition to Muslims, who made up a quarter of the world population, there are people of other faiths and backgrounds who also subscribed to the principles upheld by Shari’ah such as humane treatment of fellow mankind, animals and the environment. Therefore, there is a big market for Halal goods and services. Halal literacy is generally taken to mean the ability to differentiate what is permissible and forbidden, while Islamic finance literacy is defined as the ability of a person to manage financial matters based on Islamic financial principles. In an ideal situation, it is imperative to have a direct nexus between Halal literacy and Islamic finance literacy. This is because, Islamic finance is a component of Halal and these two cannot be detached from one another. Definitely the convergence between Halal and Islamic finance is required to ensure Muslims could avail themselves to Halal financing. It is Haram to start a business using money received from conventional financing mode or sustain and expand the business using conventional financing modes or provide goods and services to customers of a business using conventional financing modes. Riba is a prohibited element is all business transactions and any person doing a Halal business activity should ensure that Riba is not involved in the transaction; whether it is the primary activity or the secondary activity of the business. To further illustrate this, an often-quoted example is how Halal could it be for an Islamic slaughtering business to slaughter animals bought using conventional financing mode such as a conventional bank loan which is tainted with Riba. In this instance, of course, as long as the slaughtering of animals are conducted as prescribed in Shari’ah, one could claim that the meat is Haram. However, the source of the business activity is derived from a Riba tainted finance source, and will affect the

www.islamicbusinessandfinance.net

barakah (blessing) of the business. The Thayyiban or purity of the business activity can be affected. The Shari’ah compliant way or the Halal way of conducting the business in this case would be to obtain an Islamic financing facility that is free from Riba. However, it has been observed that in reality, Islamic finance literacy in relation to Halal businesses are absent in the market. As such, a proactive role is required to check whether a Halal business activity could be Riba tainted. Halal certification bodies must look into this aspect as part of their Halal certification process while consumers must play their part in verifying this when buying goods and services marketed as Halal. There have been cases where companies whose core businesses are deemed Halal were considered non- Shari’ah compliant by Shari’ah screening committees. This happened when it was found that their borrowings and placements of deposits included investment activities made via conventional financing. Consequently, there is need for the convergence of Halal literacy and Islamic finance literacy. They complement each other to the extent that some people believe that the right way of describing this is by stating that Halal and Islamic finance shall marry. This analogy might be too dramatic, but the point is Halal businesses cannot survive without Islamic finance as it is essential for every Halal business to be Riba free. The ideal situation is to converge these two concepts and at the heart of every Halal businesses is Islamic finance (as illustrated below). However, the probing question one may ask could be; are Islamic financial institutions ready to provide financing for Halal businesses? In other words, can the Islamic financial institutions meet the demand of the consumers? This is a practical and a valid question that definitely needs deliberation as the global Islamic finance industry is a mere 43 years old (Parker, 2018). If we presume that only Islamic financial institutions can provide Islamic financing, then definitely the Islamic financial institutions in different parts of the world might not be able to cater for it. The total global asset of Islamic banking is estimated to be at $3.6 trillion and according to IMF there are more than sixty jurisdictions in the world that offer Islamic banking (Parker, 2018). However, the point that must be kept in mind is that Islamic finance is much wider than Islamic banking today as it has other components such as Takaful, Islamic capital market and Islamic wealth management

ISSUE 117 | Islamic Business & Finance

EXPERT OPINION

too. One may structure Islamic financial products according to the needs. For example, if there is an investor for a business who is willing to provide a loan with interest; there is the possibility of structuring an Islamic finance mode to Islamize the conventional transaction. Islamic finance has room for flexibility and there is room to use innovation in this. Likewise, the financing services such as conventional hire purchase products offered to customers by the Halal businesses could be Islamised too by changing it to a Shari’ah compliant hire purchase product. Furthermore, the investments made by these businesses must also be Shari’ah compliant; meaning if investing in shares, the shares must be Shari’ahscreened. This means no conventional financial products such as bonds or treasury instruments. Instead, either Sukuk or Islamic treasury instruments must be considered. Riba must be avoided at every step of the process. In order to bridge the gap between Halal literacy and Islamic finance literacy, the cooperation from all stakeholders are required and they need to play their respective roles. The following diagram summarises this. For consumers’ ease of mind, Halal label for goods and services must include the Riba-free criteria. Similar to the “not-tested on animals” or “cruelty free” logos, we should promote the use of “Riba-free” logo. There is need to introduce a mechanism for the customers to be informed of the use of Islamic financing by the businesses in a convenient manner by introducing Riba-free stamp or logo which will fall within the ambit of “Thayyiban” and by virtue of this mechanism, the barakah for the business can grow. An integrated Halal financing or Islamic financing should be considered as an add-on to Halal certification process of businesses. A Riba-free logo will inform Muslim consumers and investors on the Shari’ah-compliant aspect of financing used by the business. A standard on the issuance of Riba-free logo needs to be introduced, and the general yardstick should follow at least the five rules below: Will deposit all its money with Islamic banks Will get all financing facilities from Islamic banks or via Islamic financing modes Will do all its investments in Shari’ah compliant instruments All financing assistance given to the customers shall be Shari’ah compliant

Islamic Business & Finance | ISSUE 117

www.islamicbusinessandfinance.net

EXPERT OPINION

Islamic finance Halal business

â&#x20AC;˘ Halal food, halal travel, modest fashion, halal media & recreation, halal pharmaceuticals, halal cosmetics

Halal economy

www.islamicbusinessandfinance.net

Additionally, must ensure that the company gives Zakat and engage in Sadaqah and waqf activities to assist poor and needy It is hoped that the proposed Riba-free logo will be a practical mechanism to bridge the gap between Halal literacy and Islamic finance literacy. The classical notion of restricting Halal to consumables needs to be changed. Islamic finance is part of the Halal ecosystem and therefore, must be embraced whole-heartedly by Halal businesses to achieve Thayyiban and Barakah in the business. The responsibility to check the Halal and Haram factor lies with individuals. However, the information about Halal and Haram could be provided by a collective group of people who form institutions that determine the certification. It is Allah SW who gives everything we receive in this world and we must be responsible in using them. In Quran, it is stated that: â&#x20AC;&#x153;Do you not see that Allah has subjected to your (use) all things in the heavens and on earth, and has made His bounties flow to you in exceeding measure, (Both) seen and unseen? Yet there are among men those who dispute about Allah, without knowledge and without guidance, and without a Book to enlighten them!â&#x20AC;? (Quran, 31:20).

ISSUE 117 | Islamic Business & Finance

EVENTS

12-14 November 2019

8–9 October 2019 (Hannamariah/SHUTTERSTOCK)

HALAL EXPO CANADA 2019

As a gateway to North American’s growing Halal market, Halal Expo Canada 2019 will gather the highest quality products of the Halal industry, creating a meeting point for Halal buyers and suppliers between east and west. From food and beverage to pharmaceuticals and cosmetics, from finance to ecommerce and logistics to tourism and more, a wide spectrum of the Halal industry will gather under one roof providing traders and buyers with a platform to conduct business, network, share market insights. VENUE: The International Center – Hall 4, Toronto, Canada http://halalexpocanada.com/index.html

23 October 2019

(Creativa Images/SHUTTERSTOCK)

THE IFSB SUMMIT

The IFSB Summit seeks to connect the three prongs of inclusiveness, technological innovation and sustainability as a significant medium through which the global sustainable development objectives can be achieved and to steer the global financial ecosystem towards a new frontier of mainstreaming Islamic finance services. It brings together esteemed delegates to explore current developments and the future outlook of the industry in charting the new frontier of Islamic finance and to address key challenges in order to be ahead of the curve in this digital era. VENUE: Jakarta, Indonesia IFSBindonesia2019.com

26 November 2019

Best Bank in

the Middle Ea

WINNER

THE 14TH ANNUAL ISLAMIC BUSINESS nk ing Islamic Ba Fastest Grow & FINANCE AWARDS Winner

For over a decade, CPI Financial has been gathering the industry’s leaders to honour the best of the best in the field. This fall, 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: The Ritz-Carlton DIFC, Dubai, UAE www.islamicbusinessandfinance.net

Islamic Business & Finance | ISSUE 117

BANKER MIDDLE EAST INDUSTRY AWARDS 2019

For over 20 years, Banker Middle East has been serving the banking and finance community in the region. As the longest running GCCbased banking publication, and as part of our integral role in the region's banking sector, we benchmark, recognise, and actively encourage excellence within institutions. The 2019 Awards will give due recognition to outstanding institutions that have shaped and continue to shape the financial landscape. VENUE: The Ritz-Carlton DIFC, Dubai, UAE http://bankerme.net

www.islamicbusinessandfinance.net

�DDCAP p _....... Grou TM

London• Dubai (DIFC) • Kuala Lumpur Formed in 1998 and established for over 20 years Intermediary services & systems solutions to connect the global Islamic financial market responsibly DD&Co Limited Sharia'a Compliant Markets Asset Commodity Facilitation

DDGI Limited

Direct Investments & Strategic Partnerships

ETHOS AFP™

Award Winning Automated Trade and Post Trade Services Platform

DDCAP Group's award winning automated trade & post trade services platform Connecting t�e global Islamic · financial . · · market responsibly

Observer member of:

Signatory of

.:!PRI

Principles for Responsible Investment

Respecting your values

Partnering you in your success NBF Islamic, a suite of uniquely designed banking solutions guided by the principles of Shariâ&#x20AC;&#x2122;a law to meet the requirements of modern life. Place your trust in National Bank of Fujairah, the award-winning local bank that is not only dedicated to partnering you in your personal or business goals, but also committed to honouring your traditions. NBF Islamic. Modern banking inspired by traditional values.

Call 8008NBF(623)

to start our partnership nbfislamic.ae