December 2011 Global islamic Finance Magazine

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Islamic Finance December - January 2012

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Contents;QWERTYUIIOPDFHJUIIOPDFHJJ News

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9 Islamic Finance News Islamic Finance 14 The Ultimate Islamic Finance Review 2011In this edition of Global Islamic Finance magazine (GIF) we will be giving you the ultimate 2011 review of the Islamic finance industry.

GIF will give you a comprehensive analysis into the various lucrative sectors of the Islamic finance industry. We will be looking at the growing sectors of Sukuk, Takaful, Capital Markets, Retail and Investments…

32 Islamic Financial Product Innovation

The Islamic finance industry is a relatively new entrant to the world of finance because its operating principles differ from the conventional finance modes of operation traditionally practiced in the West. It operates in compliance with Islamic Shariah…

Interview 29 Business Sustainability: Supporting Islamic Finance with the long-term growth

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An interview with Tony Czarnecki the Managing Partner of Sustensis Ltd Tony Czarnecki is the Managing Partner and founder of Sustensis Ltd, a management consultancy set up in 1996 focusing on Business Sustainability. Sustensis developed a family of US-patent pending non-financial indices for selecting assets for long-term growth. In 1994 he participated in the RSA’s well-known “Tomorrow’s Company” Programme where he led the Inclusive Company Forum...

Islamic Banking 42 Can Islamic Banking Achieve Global Recognition in the Competitive financial market?

Throughout the years Islamic finance has provided the perfect alternative to conventional financing as many investors have recognised the benefits of having a ‘no interest’ policy which is one of the principles of Islamic finance. Interest is strictly forbidden and in addition investing in immoral industries or haram sectors such as alcohol, pork and gambling are also other sectors which are to be avoided…

World Islamic Finance Review

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48 Qatar World Cup 2022 Spurring Islamic Investment Opportunities

It is undeniable that the Qatar 2022 World Cup will benefit the Islamic finance and banking industry especially in the areas of infrastructure of Islamic products and services. It will showcase the growth of the Islamic finance industry, allowing businesses and entrepreneurs room for lucrative investments. In addition, many professionals on hand - ranging from Islamic scholars, through catering organisations, to the media - will be able to provide the most high-profile focus yet on Islamic business achievement and progression. This will further help to highlight the industry, and add to its blossoming success…

Islamic Finance Instruments 55 Demystifying the Evanescence of Saudi Corporate Sukuk Issuance

For any Sukuk issuance, be it Sovereign or quasi-sovereign, the cost of funding is relatively cheap due to the solid creditworthiness of the obligor. However, this is not the case with the less-savvy & low creditworthy corporate borrowers. Apparently, only in this part of the world, these borrowers are labelled ‘unbankable’ for some reason or another…

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Career

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58 Assessing MBA Programs in Islamic Banking and Finance

Type “Islamic finance” keyword in Google, and you’ll find around 7.39 million pages in around 0.12 second. Now, change the keyword into “Islamic finance education” and you’ll find around 14.8 million pages, more than double of the former, again in only 0.12 second…

Risk Management 65 Risk Management Framework in Islamic Banking, Part II

Unlike depositors of conventional banks, the contractual agreement between Islamic banks and investment account holders is based on the concept of sharing profit and loss, which makes investment account holders a unique class of quasi-liability holders: they are neither depositors nor equity holders…

Market Review 25 Islamic Banks Looking Towards Opportunities in Qatar

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Islamic banks in the UAE are seeing the market to be more ‘greener’ in Qatar in the light of the recent directive from the banking regulator in Qatar banning conventional banks from running Shariah windows...

26 Malaysia,s NCB Bank Wins the best Islamic Finance Deal for 2011

It has been reported that Malaysia’s NCB has achieved a new unprecedented edge that confirmed its leadership in the field of Islamic banking...

46 Takaful Market Set to Grow in South Africa and Beyond

The Takaful market in South Africa is set to grow to brighter heights especially since there are predominant signs that the mainstream banks in South Africa are taking Islamic finance as a serious niche market business is the acquisition of the local Islamic insurance company, Takafol SA, by Absa, one of the republic’s largest banking groups…

72 Kuwait Finance House Issues Corporate Sustainability Report

Kuwait Finance House (KFH) issued a new report concerning its efforts in the field of sustainable development, which focuses on economic growth, preservation of environment and natural resources, and social development…

74 Authority for Islamic Banking in Oman

In Oman the Global Islamic banking asset industry is estimated to be above $1 trillion in 2010 and is expected to grow at the rate of around 20 percent. The Central Bank of Oman (CBO) will establish a national authority for monitoring Islamic finance and banking sector, Hamood bin Sangour al Zadjali, CBO Executive President, said…

75 The Growing Sukuk Market of the Future

Sukuk is growing at an unprecedented rate and the Islamic finance industry is expected to reach to over $2 trillion dollars by the year of 2012. In 2004, only three Sukuks were issued in the UAE with an aggregate value of $1.165 billion…

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76 Event Review 78 Book Review 80 Events Calendar 82 Business Directory 84 Glossary 86 In the Next Issue

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Editor-in-Chief Farhad Reyazat PhD in Risk Management

International Editorial Board Prof Dr Khawaja Amjad Saeed, Principal of The University of the Punjab, Pakistan Prof Habib Ahmad, Sharjah Chair in Islamic Law and Finance in the School of Government and International Affairs at University of Durham, United Kingdom Prof Rodney Wilson, Professor in the School of Government and International Affairs at Durham University, United Kingdom Prof Humayon Dar, Chief Executive Officer at BMB Islamic UK, United Kingdom Prof Muhammed Shahid Ebrahim, Professor of Islamic Banking and Finance at the Bangor Business School, United Kingdom Prof Andrew White, Director of International Islamic Law & Finance Centre, Associate Professor of Law, Singapore Management University, Singapore Prof Simon Archer, ICMA Centre, Henley Business School, University of Reading, United Kingdom Hailey College of Banking & Finance, University of the Punjab Dr Majdi Ali Ghaith, King Saudi University Assistant Professor Business Administrator Department, Saudi Arabia Dr Abu Umar Faruq Ahmad, School of Law University of Western Sydney Australia, Australia Dr Julien Pelissier, Lecturer in Islamic economics’ law, France Dr Alberto Brunoni, Founder and Director of AASAIF, Italy Dr Aznan Hassan, Shariah scholar Bursa Malaysia, Malaysia

Dr Zukifli Hassan, PhD Research Scholar at University of Durham, United Kingdom Dr Mohammed Obaidullah, Economist at the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank, Saudi Arabia Dr Amal El-Kharouf, Head of Research and Consultancy Department at University of Jordan, Jordan Dr M.Kabir Hassan, Associate Professor and Associate Chair of the Department, University of New Orleans, USA Dr Abdelhafid Benamraoui, Westminster Business School, United Kingdom Dr M. Ishaq Bhatti, Faculty of Law and Management, La Trobe University, Australia Mughees Shaukat, PHD researcher and Assistant Researcher in INCEIF & ISRA, Malaysia Warren Edwards, CEO of Delphi Risk Management, United Kingdom John Sandwick, Islamic Wealth & Asset Management Independent Consultant, Switzerland Brian Kettel, Director at Islamic Banking and Finance Training, United Kingdom Salina Hj. Kassim, Department of Economics at International Islamic University Malaysia, Malaysia Kasim Randeree, Saïd Business School, University of Oxford, United Kingdom Abbas J. Ali, School of International Management Eberly college of Business, Indiana University of Pennsylvania, USA

Contributors Dr. Farhad Reyazat Tasnim Nazeer Edige Alpysbay Dr. Nidal Alsayyed Fazrihan Duriat Moinuddin Malim

Rahmatina A. Kasri Rhesa Yogaswara Muhammad Abulaban Rafi-uddin Shikoh Almir Colan Shaher Abbas

Mohamed Khnifer Tony Czarnecki Raj Madha George Sandars

Amy Thompson Nelly Ahmedova Ritika Banerjee Ajay Surti

Beata Jagorow Patricia Ke-Hsuan Tsai Tajah Brown

Bouhssine Ben Jadda, Morocco Auwalu Ado, Nigeria Abdulrahman Usman, Nigeria Adeeb Zaki, Pakistan Asim Hameed, Pakistan Muhammad Farrukh Saleem, Pakistan

Said Bunu, Qatar Farhaa Xha, Saudi Arabia Mirak Farook, Sri Lanka Kareem Hammour, UAE Muhammad Zeeshan, UAE Majd Ghanem, UAE

Dr. Fouad Al-Salem Umar Moghul Peter Bokma

Editing and Proofreading Colette Sensier

Carina Lewis

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Global Islamic Finance Magazine is celebrating Fourth Birthday

We are proud on reaching this crucial milestone. We are sure we will use learnings of the organisation during this period to reach even greater heights.

We would like to thank to all our Clients and Friends for their continuing support. We hope we will work together even more in 2012.

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Editorial Letter Goldman Sachs, in October, registered a $2 billion Islamic bond program. There is a growing frustration with the traditional theories of finance among institutional investors and bankers around the world. But is there any potential in Islamic finance which also benefits the conventional counterpart?

Many countries around the world are tapping into the lucrative opportunities of Islamic finance and banking. Many banks worldwide have even opened up Islamic windows which are doing increasingly well to cater for the demand of Shariah-compliant products and services. As you are in no doubt aware, Islamic finance imposes some pretty serious constraints on its denizens.

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We believe Islamic finance offers insights into how finance can be better grounded within the “real economy”, from which it has grown increasingly disconnected’’

For example, there’s a limitation on excessive speculation, there’s a limitation on leverage, there’s a limitation on selling things you don’t own.

There’s a limitation on charging interest, there’s a limitation on investing in firms that rely on interest revenue or that carry a lot of debt, there’s the requirement that income must be derived as profits from shared business risk and so on.

On the surface, then, you’d expect Islamic finance to be severely constrained. And, you’d be right.

But I’d argue that these constraints may offer opportunities for mainstream finance. In the world of intellectual property, the workarounds that people come up with to avoid infringing a patent are sometimes more sophisticated and valuable than the originally patented concept.

We might argue perhaps the constraints imposed on Islamic financiers will lead to creative innovations and products that ultimately improve finance generally. Why? Because the constraints listed actually sound reasonable. And, moreover, since Islamic finance is firmly rooted in capitalism (i.e., the profit motive and private ownership remain firmly intact), these constraints (and their workarounds) are compatible with non-Islamic finance as well.

We believe Islamic finance offers insights into how finance can be better grounded within the “real economy”, from which it has grown increasingly disconnected. For example, in nominal terms financial markets are four times as big as real markets. Why? Is it for the benefit of the in-

To write the letter to the editor, send an email to editor@globalislamicfinancemagazine.com.

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dustry? Or is the size of finance for the benefit of finance? Because every transaction has to have an asset earmarked with it, the Islamic financial sector cannot distance itself too far from the real sector. Perhaps that’s something worth exploring in the mainstream.

We argued in GIF that innovation must be at the forefront if Islamic finance wants to compete with its conventional counterpart, with the need to combine technology and financial management and banking becoming greater in recent years.

One cannot simply rely on the traditional form of visiting your local bank branch or insurance provider any longer – consumers and industry professionals are demanding more freedom and organisations operating within Islamic finance are recognising this. From mobile banking to internet transactions, Islamic finance just got a lot more accessible during the current year we have tried to highlight these new services which can benefit you in several occasions.

In this issue we will be giving you ‘The Ultimate Islamic Finance Review 2011’. GIF will give you a comprehensive analysis into the various lucrative sectors of the Islamic finance industry. We will be looking at the growing sectors of Sukuk, Takaful, capital markets, retail and investments.

In addition, we will also be looking at the latest innovative developments in the industry including the latest countries participating in the sector and the key products, organisation and influential leaders paving the way for the industry to further advance. GIF will also give you an exclusive insight into the world’s best Islamic financial institutions in 2011 and the leading personalities of the Islamic finance industry which are spearheading the industry forward.

Farhad Reyazat PhD in Risk Management Editor in Chief

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Islamic finance news Gulf Likely to Feel Reflex From-Zone Banks It is reported that the crisis hitting banks in the euro zone is expected to leave bruises on Gulf lenders as global credit gets tighter.

he said. “And they’re big enough that they’ll create systemic risks. “Banks exposed to the euro zone’s troubled peripheral nations, such as Greece and Spain, have experienced sharp swings in their market value in the past few days. This has been fuelled by a weakening global recovery and a growing sense that the euro zone cannot be saved from its debt woes.

Many regional banks will experience funding problems as the fallout from the European turmoil spreads across the world, even among banks that have avoided buying bonds from the likes of Greece, Spain and other troubled sovereigns.

BNP Paribas fell 5.4 percent, Societe General declined 6.6 percent and Deutsche Bank was down 1.9 percent, after precipitous declines.

“What’s most important are the indications for the funding markets,” said Jaap Meijer, a financial analyst at AlembicHC. “The UAE is the most vulnerable on the funding side.”

A number of banks named in a US lawsuit targeting sales of financial securities backed by subprime mortgages have also experienced sharp share price falls.

Lenders including National Bank of Abu Dhabi (NBAD), First Gulf Bank and Emirates NBD may experience greater difficulty because of higher capital needs compared with other Gulf lenders.

Royal Bank of Scotland, which was rescued by the UK government amid the global financial crisis, fell 12 percent. Benchmark interbank lending rates, known as Eibor, have remained at historically low levels even as liquidity becomes scarcer in the US. But analysts expect the rate charged by banks to lend to each other to start creeping upwards in the weeks ahead.

The increased need for capital was sending many local banks scrambling to bolster reserves, bankers said “Banks are already moving and gearing themselves for a very tough market,” said Sameh Al Qubaisi, the head of institutional and corporate coverage at NBAD’s financial markets group.

The expectation is for constrained lending not only from local banks, but big international rivals may also reduce lending as funding costs increase, Mr Al Qubaisi said.

Funding issues may be mitigated by the use of Islamic finance in the Gulf, which has left banks less at risk from the troubles in the euro zone, Mr Meijer said. However, local banks’ direct exposures to struggling European countries, such as Greece and Spain, may be dwarfed by exposures to big European banks such as BNP Paribas and Societe Generale, which lent heavily to many of the countries now facing default.

“The UAE banks will have very minimal direct exposures,” said one treasury official at a UAE bank, who asked not to be named. “But I won’t be surprised to find a lot of European banks have exposure to European names,”

The faltering pace of the global recovery as Europe’s banks encounter trouble may bring further challenges for Gulf States if oil prices fall.

Troubles at euro-zone banks may have a “modest impact” on corporate lending in the region, said Nick Levitt, the head of commercial banking at HSBC in the UAE. “But the critical issue is what impact the financial challenges will have on the price of oil,” he said, particularly if the price of oil dips below US$100 per barrel. Brent crude futures have fallen 12.4 percent since their peak in April to reach $111.02.

ADIB Launches Diversified Basket Note Abu Dhabi Islamic Bank ADIB, a top-tier Islamic financial services group, announced the launch of its 100% capital protected ‘ADIB Diversified Basket Note’ that provides an opportunity to small or large

investors to profit from the anticipated strengthening of prices of eight leading commodities.

The note offers an investment plan of three years in the equally weighted commodities of gold, oil, lead, nickel, aluminum, cotton, corn and sugar.

The Shari’a-compliant and Murabaha based ADIB Diversified Basket Note allows investors to lower their portfolio risk through diversifying into leading commodities and profit from their expected strength. Subscription will be on a first come first served basis and is open from September 10th 2011 until October 13th 2011, with the minimum subscription amount being only US$ 30,000.

The investor’s capital is protected 100% in case of negative performance of the commodities. The investment is non-transferable but liquidity is available after an initial one year lock in period.

Tirad Mahmoud, CEO, ADIB said “Commodities are expected to strengthen further. We are coming to the market with a well timed and safe investment opportunity that is expected to be well received by investors.

The fact that we are offering 100% capital protection indicates the confidence in commodities performance over the next three years”.

ADIB advises that Investment should be made of amounts that investors are absolutely certain they will not need until maturity date as capital protection is applicable only then.

Dow Jones Indexes to Launch Dow Jones Islamic Market Global Select Dividend Index It has been reported that Dow Jones Indexes will expand its Dow Jones Islamic Market Index series by launching the Dow Jones Islamic Market Global Select Dividend Index, a gauge that measures the stock performance of leading dividendpaying companies in developed countries that pass rules-based screens for Shari’ah compliance.

December - January 2012 Global Islamic Finance

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Measuring the performance of a 100 of the highest dividend-yielding stocks from the Dow Jones Islamic Market World Index, the index will serve as a benchmark and an underlying instrument for investment products such as mutual funds and Exchange-Traded Funds (ETFs).

“The Dow Jones Islamic Market Global Select Dividend Index is a unique barometer that addresses two market trends: increasing interest in dividend-paying companies and the growth of Shari’ah-compliant investments,” said Michael A. Petronella, president, Dow Jones Indexes.

“Given that Dow Jones Indexes has been a leader in benchmarking each of these areas for years, it should come as no surprise that we are the first to offer a dividend-focused index for those who seek to adhere to Islamic investment guidelines.”

On a related note, the Dow Jones Islamic Market Global Select Dividend Index has been licensed to IPM Informed Portfolio Management, a leading European systematic investment manager, to serve as a basis for its Shari’ah compliant investment vehicle.

Dow Jones Indexes, a leading global index provider, was a pioneer in Islamic market indexing, launching its first Shari’ah-compliant index in 1999. Today, Dow Jones Indexes offers thousands of Islamic market indexes, including regional, country and sector indexes, as well as more specialised measures.

A five-member independent Shari’ah Supervisory Board advises Dow Jones Indexes on the methodology of the Dow Jones Islamic Market Indexes.

In 2011 alone, Dow Jones Indexes has been named “Best Islamic Index Provider” by Islamic Business & Finance; “Islamic Index Provider of the Year in Asia” by Asia Asset Management; and “Best Shari’ah Compliant Index Provider of the Year” by Global Finance.

Dow Jones Indexes is also a leader in the dividend-index space: it was the first major index provider to offer a dividend-based index -- the Dow Jones U.S. Select Dividend Index. In addition to the Dow Jones U.S. Select Dividend Index, several other indexes in the Dow Jones Select Dividend Index family are licensed as the basis for ETFs. Eligible for the Dow Jones Islamic Market Global Select Dividend Index are developedmarket stocks within the Dow Jones Islamic Market World Index that pass screens for dividend quality and liquidity.

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CEO Confirms Saudi Satorp Refinery to Be Completed in 2013 It has been reported by the CEO of Saudi Aramco Total Refining & Petrochemical Co., known as Satorp, that it plans to complete building its refinery by the end of 2013, said Chief Executive Officer Fawwaz Nawwab.

“This is a very good project, a secure project,” Nawwab said in Riyadh after a meeting with potential investors. “The risk factor is very low and there is a lot of cash in the kingdom.”

A joint venture between Saudi Arabian Oil Co. and Total SA (FP) started offering today 3.75 billion riyals ($1 billion) of Islamic bonds to investors in the Arab world’s largest economy.

The Sukuk offering will help finance Satorp’s 400,000 barrel-a-day refinery and petrochemicals complex, which is being built at an estimated cost of $14 billion in Jubail on the Persian Gulf coast of Saudi Arabia.

“Sixty-eight percent of the refinery’s engineering, procurement and construction has been completed globally as of today,” Nawwab said.

Satorp’s Sukuk will mature about 14 years from the date of completion, and may have a semi-annual floating-rate coupon, according to Usman Sikandar, co-head Investment Banking at Calyon Saudi Fransi Ltd. The sale, to be completed on the 8th of October, will be the fourth Shariah-compliant issue from Saudi Arabia this year, bringing total Sukuk sales in the six-nation Gulf Cooperation Council to $4.7 billion, according to data compiled by Bloomberg.

Islamic Development Bank Offers Three Year Investment Plan to Tajikistan It has been reported that the Minister of Agriculture of Tajikistan (MoA) Qosim Qosimov met with Ramil Muharramov, Country Operations Manager (Tajikistan and Kyrgyzstan) at Islamic Development Bank Group (IDB), Asia-Plus reported referring to the press centre of the MoA.

quoted. Qosimov appreciated the Bank’s support for Tajikistan’s agrarian sector and noted that the Ministry of Agriculture has worked out more than 30 projects for a total amount of 90 million U.S. dollars to date.

He added that IDB could choose the highest priority projects.

Tajik minister noted that the Bank could render assistance through providing grants and preferential loans for purchase of agricultural machines and equipment on the basis of leasing, purchase of high-quality wheat and potato seeds, mineral fertilizers and pedigree cattle from the CIS nations, the source said.

The Islamic Development Bank is a multilateral development financing institution located in Jeddah, Saudi Arabia. It was founded by the first conference of Finance Ministers of the Organization of the Islamic Conference (OIC, now the Organization of Islamic Cooperation), convened on the 18th of December 1973. The bank officially began its activities on the 20th of October 20 1975.

The present membership of the Bank consists of 56 countries. The basic condition for membership is that the prospective member country should be a member of the Organization of Islamic Cooperation (OIC), pay its contribution to the capital of the Bank and be willing to accept such terms and conditions as may be decided upon by the IDB Board of Governors.

Meezan Bank to Finance Generator from 2012 Meezan Bank, the largest Islamic bank in Pakistan is launching a generator financing product in summer next year, in view of its growing demand amid increasing electricity outages, Muhammad Raza, Head of Consumer Banking, Meezan Bank, said.

“The energy shortfall is growing day by day,” he said. “The financing can help a lot in ensuring that people meet their needs, with the facility to pay in easy installments,” he said.

The IDB representative informed Qosimov of IDB-sponsored projects being implemented in Tajikistan’s agrarian sector. Muharramov noted that the IDB management intended to work out a three-year investment plan for Tajikistan.

The bank has already successfully launched laptop financing, he said. “While launching laptop financing, we kept in mind that although it was a small item, people wished to pay for it instalments.” Raza has been associated with Meezan Bank for the last nine years and has over 20 years’ banking experience.

In this connection, proposals of the ministry are needed because agriculture accounts for 70 percent of employment and around 30 percent of gross domestic product (GDP) of the country, the IDB representative was

When discussing about the growth of consumer banking, he said that overall consumer financing is on the decline for two main reasons. “One is that banks are not much inclined towards consumer financing and

December - January 2012

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“Recently, the bank launched awareness campaign about Car Ijarah,” he added.

About Non-Performing Finance (NPF), Raza said that if a bank managed its credit tactfully, there were slight chances of repayment issues. “It is a major strength of Meezan Bank that its NPF is very much under control,” he added.

New issues are likely to be pushed to the backburner, although Qatar may be an exception because Qatar’s bonds are highly rated. The sovereign bonds and quasi-sovereign bonds may escape global concerns and may still benefit from the flight to quality

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He said that the Islamic banking system does not offer cash financing. “There has to be an asset,” Raza added.

Islamic Agricultural Finance Spurs Ethical Economy It has been reported that the Centre of Islamic Banking and Economics, Islamic agricultural and rural finance can bring genuine green revolution to an economy.

In the wake of the current financial crisis coupled with the global food shortage the need for improving village economy through enhanced output has become a challenge for the planners and other stakeholders. The importance of livestock and allied sectors cannot be compromised for the agricultural

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the other is poor recovery of loans given in previous years. He said that Meezan Bank is aggressively pushing consumer products and disbursing mortgage financing. Meezan Bank is at the top of three Islamic banks which are aggressively pushing Car Ijarah (Islamic car financing). It has partnered with major manufacturers, including Indus, Toyota and Suzuki, he said.

The rule of law within the Shariah is generally seen by Muslims as a source of justice. And the rule of law brings stability and a stable regime is critical to justice and economic well being

Raj Madha,

Umar Moghul,

MENA Banking Analyst, Rasmala Investment Bank Ltd, Dubai

Asked about the mode of generator financing, he said it would be ‘musafama’ under which an Islamic bank buys products from manufacturers and sells them to customers on deferred payments.

About the product price, Raza said that if a bank sold something at too high a price, no one would buy it. He said that customers have knowledge about prevailing rates of a product in the market. “If a bank sells at market rate with value addition, the customers will be happy.”

Replying to a query about difference between conventional and Islamic financing, Raza said that the only idea of loan in Islam is that of Qarz-e-Hasna. “Islamic banks loan has to be something other than just debt.”

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International Finance and Corporate Attorney

growth. Islamic agricultural and rural finance can bring the genuine green revolution to an economy. As Islamic finance has made a lot of progressive research in agricultural finance bringing a number of pragmatic and useful choices which if implemented can bring revolutionary development to the economy.

This intention was declared by Muhammad Zubair Mughal Chief Executive Offier, AlHuda Centre of Islamic Banking and Economics (CIBE), while explaining the objectives of a specialised training workshop on Islamic agricultural and rural finance being organised

by AlHuda-CIBE on 28th and 29th of November 2011 in Islamabad. The workshop will be attended by officials from banks and financial institutions, agricultural research

December - January 2012

development and planning institutions having interest in Islamic finance.

He further emphasised the role of Islamic finance in Agriculture and Rural sector, that it can not only bring new avenues for business for Islamic financial institutions by using innovative products but also the farmers and agro based businesses can benefit from Shariah-compliant financing to develop their economy and thereby eliminate the poverty and agricultural funding limitations.

Especially the farmers with smaller units of land face difficulty, which can be solved by the planners through this mechanism Selected UAE banks Sue Property Defaulters

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Leaders need to embrace the unconventional, spirituality drive purpose of Islamic institutions and let those be the key driving forces that produce financial results, while maximizing returns to a higher calling

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Rafi-uddin Shikoh,

CEO and managing director, DinarStandard

Some conventional and Islamic banks in the UAE have started filing cases against mortgagors of foreclosed properties in order to recoup their losses.

“Banks (conventional and Islamic) have started to file cases to recover their losses from mortgagors if the losses are huge and they are certain that the mortgagor has assets that can be attached. Some of our clients have filed cases against the mortgagors,” Mazen Boustany, Head of Banking and Finance at Habib Al Mulla & Company.

Asked how many cases have been filed by Islamic mortgage providers here in Dubai to recover losses he said, “We are not aware of how many cases have been filed in Dubai.

In the firm, we are dealing with a few cases

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“It is very much increasing, due to the crisis affecting the real estate sector in the UAE,” he then said. Top legal firms estimated in April that nearly 200 foreclosure cases are being currently dealt by Dubai Courts and the numbers were likely to increase.

In May that Barclays, which had won the first foreclosure order in Dubai in 2010, became the first bank to successfully sell a property (villa in the Springs community) at a public auction for Dh1.22 million.

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Islamic finance is becoming an integral part of the global finance industry and has taken its roots in almost all of the Muslim countries but has also been under discussion and penetration in selective Western and Far Eastern jurisdictions

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Moinuddin Malim,

CEO, Mashreq Al Islami

company would not be allowed to repossess the plot directly, but rather to sell it through the public auction procedure,” he added.

Under Law No. 14 concerning mortgages in Dubai, upon default of a loan, the bank must give the borrower 30 days notice through the notary public before commencing execution proceedings.

The execution judge then reviews the case and may issue a debt judgment, which requires the property to be turned over to the DLD for auction. During this period, creditors have the right to administer mortgaged property and collect its yields and revenue until it is sold at public auction.

,,

for Islamic financial institutions.” Earlier this year, Boustany told this website that the crisis affecting the real estate sector in the UAE is leading to an increase in mortgage enforcement (foreclosure).

There has been growing pressure from investors for Oman to come in line with the rest of the region and allow Islamic finance

,,

Daud said, adding that before the Middle East took hold of the international Islamic finance, Malaysia should grab the chance to promote its Islamic finance sector globally.

Sharing views at the recent International Investor Islamic Finance Roundtable, he added that the Middle East had an inferiority complex towards the west previously but “that is slowing stripping away as they become more vocal about wanting things done the Shariah-compliant way”.

He also said that Malaysians, in turn, had an inferiority complex towards the Middle East when it came to Islamic financial services and products and therefore, were hesitant about venturing beyond local shores.

On the local Islamic finance milestones, Securities Commission Islamic Capital Markets executive director Zainal Izlan Zainal Abidin noted that growth had been fanned by more industry players achieving economies of scale and greater product innovation and development.

“Islamic finance has been growing rapidly (here) in the past two decades but there needs to be another growth driver (to sustain growth momentum). We believe having more Shariah-based approach, which means more risk sharing structure, will propel the growth,” he said.

George Sandars, Partner, SNR Denton, Oman

According to Boustany, under the UAE mortgage laws, even a Shariah-compliant lender is not allowed to directly acquire or repossess the mortgaged asset, but rather has to go through the courts to auction the mortgaged asset and satisfy itself with the sale of the proceeds, knowing that the lender may participate in such public auctions.

Opportunity to Expand Islamic Finance Offerings

“The concept is that the right of the financier is over the amounts it is owed and not over the asset itself.

“There is an opportunity now but the window is small,” International Investor country publisher Cory D’Abreo said, an observation seconded by the Global University of Islamic Finance (INCEIF) president and chief executive Daud Vicary Abdullah.

In Islamic finance and more specifically in Ijara Muntahiya Bil Tamleek financing, although the plot would be in the name of the Islamic mortgage company, however there would be a mention that it is for the account of the lessee on the title deed and thus the

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As international markets are perched precariously on the edge of a global financial abyss, a small window of opportunity has sprung up for Malaysia to spread its Islamic finance wings internationally.

“The pendulum of power is swinging towards the east and right now it is in the Middle East.

So they are beginning to flex their muscles,”

“The projection for the growth of Islamic capital market (ICM) in Malaysia is 10.6% per year for the next 10 years from the size of about RM1 trillion (valued last year). This would take the value of the Malaysian ICM to almost RM3 trillion,” he said, adding that this would encompass about 60% of the total local capital market.

Zainal added, “From the capital market perspective, we are looking at ways to drive expansion not just through product range but also specificities of the products like having more foreign currency issuance as well as funds in more varied sector funds to cater to a wider audience.”

Expansion of the Islamic finance sector is relatively straightforward, Islamic instruments are more resilient than their conventional counterpart. The survival of the global financial crisis if proof of this, they are likely to see a growth in demand from the increasingly wealthy Muslim and non-Muslim investors. With a range of Islamic profit-sharing and loan structures, the development of Sukuk there is now more easily tradable investment options for investors. The development of hydrocarbon resources in the Gulf region will continue to create liquidity in huge amounts. gif

December - January 2012 Global Islamic Finance 13

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Islamic Finance

THE ULTIMATE

2011

ISLAMIC FINANCE REVIEW

Author: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom Abstract: In this edition of Global Islamic Finance magazine (GIF) we will be giving you the ultimate 2011 review of the Islamic finance industry. GIF will give you a comprehensive analysis into the various lucrative sectors of the Islamic finance industry. We will be looking at the growing sectors of Sukuk, Takaful, Capital Markets, Retail and Investments.

In addition we will also be looking at the latest innovative developments in the industry including the latest countries to be participating in the sector and the key products, organisation and influential leaders paving the way for the industry to further advance. GIF will also give you an exclusive insight into the world’s best Islamic financial institutions in 2011 and the leading personalities of the Islamic finance industry which are spearheading the industry forward.

According to the Global Islamic Finance Report 2011, the Islamic finance industry is valued at $1.14 trillion and growing at a rate of 10%. The Global Islamic banking industry is predicted to reach $2 trillion in the next five to seven years. Many countries around the world are tapping into the lucrative opportunities of Islamic finance and banking. Many banks worldwide have even opened up Islamic windows which are doing increasingly well to cater for the demand of Shariah-compliant products and services. This comprehensive and detailed report is a must read for business professionals, entrepreneurs and executives wishing to gain more insight into the various opportunities that Islamic finance brings to the threshold. GIF presents the Ultimate Islamic Finance Review 2011 giving you the cutting edge latest review of the growing Islamic finance and banking sector.

Keywords: Islamic Finance, Islamic Banking, Takaful, Sukuk, Capital Markets, Shariah Compliancy, Retail, Investments, Opportunities, Leaders, Businesses

14 Global Islamic Finance

December - January 2012

Islamic Finance Reviewing the Scope for Capital Markets The Islamic financial industry comprises of the Islamic capital market which is an area that has grown to become an increasingly popular sector within the global financial market. Islamic capital markets have gained considerable interest as a viable and efficient alternative model of financial intermediation. The demand for investing in adherence to the principles of the Shariah on a global scale have been spearheading towards making the Islamic financial services industry a successful sector. This is also an indication of the increasing wealth and major capacity of investors who are both Muslim and non-Muslim, wishing to invest in new investment products that serve and meet their individual needs.

Islamic financial products also represent a class of investment products which may attract those looking for socially responsible investments or ethical investments. Ethical Shariah-compliant products must comply with the principles of the Shariah as outlined in figure 1.

The International Islamic Financial Market’s organisation (IIFM) is the global standardisation and regulatory body. This is the Islamic Capital & Money Market (ICMM) of the Islamic Financial Services Industry (IFSI). Its main focus lies in the standardisation of Islamic financial products, documentation and other structures.

The Islamic Capital Market (ICM) refers to the market where financial activities are carried out in adherence to the Shariah financial principles of Islam. The ICM represents a reflection of religious law in the capital market transactions where the financial market is free from prohibited activities such as gambling. Indeed, the pace of development in the Islamic financial market has gathered momentum with the formation of various international Islamic organisations to study and promote this alternative market.

The Islamic capital market operates as a market to the conventional capital market for capital seekers and providers. It has played a complementary role to the Islamic banking operations and systems in creating a well defined, comprehensive Islamic financial market especially in Islamic financial hubs such as Malaysia. Since the inception of Islamic finance, Malaysia has been a predominant Islamic financial hub and in 2011 the capital market is prospering.

Malaysia has pioneered many ‘firsts’ and the key milestones paving the way for Malaysia to be a leading ICM are outlined in figure 4.

The ICMs in 2011 have much scope worldwide especially since the Shariah-compliant Islamic finance industry is growing on a global scale. The total worldwide Muslim population is 1.5 billion, representing a significant 24% of total world population of 6.3 billion.

Shariah-compliant assets are growing over the last 20 years and are representing an estimated US$ 300 billion banking assets & approximately $400 billion Capital Market. figure 5 shows a world map of Islamic capital market by country.

The Islamic funds in global financial institutions is estimated to be at US$1.3 trillion while the Islamic financial market is estimated to be worth US$400 billion in size, with an annual growth rate of 12% - 15%.

In addition there are over 300 Islamic financial institutions currently operating in about 75 countries worldwide. Out of these IFI’s there is estimated to be more than 100 Islamic Equity funds managing assets in access of US$5.0 billion which is a staggering amount.

The estimated annual growth for the overall Islamic capital market is 15% to 20% annually which shows the scope for further progression. Global islamic Finance assets are predicted to increase 33% from their 2010 levels to $1.1 trillion by the end of 2012. The Middle East and North Africa will show signs of increase, with assetsrising $990 billion by 2015 from the $410 billion in 2010. The ICMs can further pave the way by implementing cross border trading with

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in OIC countries in order to further diversify and minimise risk and volatility. In addition progressive developments of information technology can further increase ICM and this is already taking place due to innovative software solutions such as Path Solutions and iMAL which provides the latest Islamic Shariah-compliant services to cater for the ICM monitoring and maintenance.

An improvement in transparency in the market needs to be implemented in order to attract an increased number of foreign investors. There also needs to be more standardisation on guidelines in Shariah compliancy in order for the ICM to further progress in the years to come. The potential of the Islamic finance capital market is huge as the ICM has the potential to reach several trillion USD by 2015. The GCC surplus may continue for the next 4 to 5 years mainly due to oil demands and price which will cause significant growth in the sector. The unprecedented demand from customers who are both Muslims and Non-Muslims, is increasing realise the benefits of the Shariah markets. Therefore there is much potential for the ICM. The Scope is bright for the Takaful Sector Takaful is becoming an increasingly popular Shariah-compliant alternative compared to the conventional methods of insurance. In 2011, it reached its successful peak with companies such as Takaful Re paving the way forward. Takaful means “guaranteeing each other” and is based on the principles of “Ta’awun” (mutual co-operation) and “Tabaru’a” (donation), where a group of Takaful participants (policyholders) agree between themselves to share the risk of a potential loss to any of them, by making a donation of all or part of their Takaful contribution (premium) to the Takaful Fund.

The fund then will compensate the Participants for any loss. The Takaful funds are invested strictly in Halal activities under non-interest bearing conditions in order to The Islamic financial capital market runs admaximise the fund value. All Takaful conjacent to the conventional financial market tracts are managed by an appointed agent and provides the scope for investors to be who provides all the necessary marketing, given the opportunity operational facilities for an alternative inand administration revestment philosophy quired to service the Figure 1: Shariah Compliancy in Capital Markets that is rapidly gaining Takaful fund and the acceptance. The fact Takaful contracts. The that the Islamic finanvery first Takaful comTakaful Holders Pay Operator cial market does not pany called the Islamic for Takaful Service prohibit participation Insurance Company of from non-Muslims Sudan was established creates unlimited upin 1979. In 2011, there Takaful Operators Pay Premium is paid from Retakaful Firms receive side to the depth and are over 30 registered Premium Takaful Funds Premium Riba (usury), MaiTakaful companies sir (gambling) and worldwide writing TakaSources: Takaful Coop Gharar (ambiguity). ful directly and 10 more as Islamic windows or December - January 2012 Global Islamic Finance 15

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Islamic Finance

marketing agencies placing insurance risk with conventional and Takaful companies and the number continues to grow. In fact the number of Takaful companies is higher as all insurance companies in Sudan are deemed to operate in accordance to the Shariah principles. In addition, new Takaful companies have been established recently in Sri Lanka and Tunisia. At least four more Takaful companies are under formation in the Middle East in countries such as Kuwait, UAE and Egypt. Several other Takaful companies are being contemplated in various countries such as Pakistan, Australia and Lebanon. The countries of South Africa, Nigeria, and some of the former states of the Soviet Union are also contemplating tapping into the Takaful market.

In conventional insurance the risk is entirely transferred from the policyholder to the insurance company upon payment of a premium. In return for paying the premium the policyholder gets peace of mind and in the event of a valid claim, the claim is settled.

This brings elements of uncertainty and, in the view of Muslims, gambling, into the contract as one of the two parties will make a loss, especially the policyholder if no claim occurs.

Takaful is a structure and the first element appeared in the 7th century in which the risk is shared between all participants removing the elements of uncertainty and gambling from the contract. Takaful insurance follows the principles of Shariah and insurance and should only be covered under Halal methods of wealth management. By eliminating all of the elements prohibited by Shariah and structuring agreements in a compliant manner, Takaful provides a Shariah-compliant and ethical insurance solution that makes it appealing to Muslims and non-Muslims alike.

reinsurance. The recorded data for the insurance market during the first quarter of the year shows a slight increase of 1.8 percent in gross written premiums in the quarter up from BD55.7 million to BD56.7 million.

Growing Opportunities in Takaful Insurance Figure 6 shows the global Takaful market which has increased potentials for employees, students and professionals who want to tap into the Islamic insurance industry. The graph spans from the year of 2006 which shows that the market for Takaful was at $2.10 billion dollars however the demand for Takaful insurance has increased year by year and is expected to reach $7.39 billion dollars by 2015 if it maintains growth in the highly competitive financial insurance industry.

Many countries have various different global markets for Takaful. Malaysia has the largest market for Takaful premiums reaching 1,220 with Syria with the least market. Figure 7 shows the Takaful potential for 2015 in selected countries around the world to give you a better idea of the emerging Islamic insurance market.

It is estimated that the global Takaful premium could be in the region of US $7.4 billion in 15 years time in 2026, growing at nearly 20% per annum. This is not an unachievable task as the Malaysian Takaful sector is successfully growing at 60% annually and the Middle East at 10% annually. With a focused effort on part of the Takaful operators worldwide there can be the potential of a significant growth of 20% annually.

Sukuk A Global Success for Islamic Finance The Sukuk Islamic bonds sector is a global

success for the Islamic finance industry with it growing at subsequently fast rates it is a driving force for the progression of the Islamic finance industry. Many Muslims and NonMuslims find Sukuk the perfect alternative to conventional bonds. The Sukuk market has become an emerging sector during the years and after the global economic crisis the appeal for the market increased with many investors turning to utilise Sukuk Islamic bonds for their projects and investments.

In reviewing the rapid growth of Sukuk it is imperative to look at the development which aroused the emerging sector when it was in its infancy. Many countries around the world such as Qatar have made unprecedented developments in the Sukuk arena.

Qatar International Islamic Bank (QIIB) and HSBC issued US $700 million worth of Trust Certificates (Sukuk) which was due in the year 2010 and is now progressing in 2011.

The proceeds from this issuance were utilised to finance the construction and development of a major infrastructure project which was the Hamad Medical City located in Doha, Qatar. The certificates issued in 2003 were redeemable in 2010; hence, the period for the issue was seven years.

The joint lead managers for the issue were HSBC Bank and the Qatar International Islamic Bank, with the co-managers being the Abu Dhabi Islamic Bank, Gulf International Bank, Kuwait Finance House, Commerce International Merchant Bankers of Malaysia, the Islamic Development Bank and the Qatar Islamic Bank. Bahrain is another country which is making milestones in the Sukuk arena and holds many investment opportunities in 2011 for the facilitation of Sukuk Islamic bonds. Bahrain had an oversubscribed demand for the Sukuk market as Bahrain’s $750 million sovereign Sukuk issue attracted an order book of about $4 billion with a strong demand from the Middle East.

Figure 3: International Organisations The Takaful industry in Bahrain is said to be prospering in 2011 as people are favourThe initial size of the Sukuk offering was Islamic Financial Services Board (IFSB) ing Shariah-compliant methods of Islamic $500 million, but the issue was oversubinsurance. Takaful total contributions grew scribed by almost eight times. As a result, The International Islamic Financial Market by 16.5 percent to reach BD13.4 million the value of the Sukuk was raised to $750 (IIFM) ($35.6m) in the first quarter of the year commillion, a Central Bank of Bahrain statement pared with BD11.5 million for the same pesaid. “One of the major reasons behind this Accounting and Auditing Organisation Islamic riod last year, according to the Central Bank issue was to establish a yield curve benchFinancial Institutions (AAOIFI) of Bahrain (CBB). Traditional insurance still mark for longer-term Islamic securities,” said took the largest share of the market, down Sheikh Salman bin Isa Al Khalifa, executive Source: ICM Capital Market slightly at BD43.3 million in the first quarter director, banking operations, CBB. “This is compared to BD44 a testament to BahFigure 2: What the IIFM provides for Islamic Capital Markets million. The Takaful rain’s strong credit market in Bahrain consists of 27 domestic insurance companies and 11 branches of foreign insurance companies covering both direct insurance and

Financial Industry Financial Institutions Fund Managers Legal Firms Advisory Firms Accountants

16 Global Islamic Finance

December - January 2012

International Islamic Financial Markets

Regulatory Bodies

and the confidence which International markets place on the kingdom’s financial sector,” added Sheikh Salman. The GCC and the UAE have made several

Islamic Finance milestones throughout the years in the issuance of Sukuk and with the Islamic financial sector set to rise there is much scope for the countries to further develop Sukuk issuances. With correct implementation of legislation and regulatory bodies which support the Sukuk system the Sukuk issuances can be performed smoothly. Europe has also been making progressive developments in the Sukuk arena. The Sukuk market in Europe grew by a massive 75% to US $85 billion in total outstanding issues in the first half of 2007.

The US $24.5 billion of funds raised in the first half nearly surpassed the total amount of new issuance in 2006 of US $26.8 billion, according to the Islamic Finance Information Service, online media partner of the forum.

In early 2010, the UK House of Commons decided to adopt the Financial Services and Markets Act 2000 Order 2010. It is aimed at removing barriers and uncertainty in the regulation of alternative finance investment bonds (Sukuk) and which the Treasury stresses will reduce compliance and legal costs for these instruments, and facilitate the issuance of corporate Sukuk in the UK this made it more accessible to issue Sukuk.

in Europe. Many Non-Muslims and Muslims alike have embraced the Sukuk industry in Europe and are keen to further encourage the development and implementation of laws which accommodate and make it easy for investors to utilise Sukuk issuances. In 2010 the UAE holds a significant presence in the Sukuk market accounting for 20 percent of the total Global Sukuk market. Global Sukuk issuance totalled $19 billion last year and the UAE also recorded the second highest Islamic loan volume in the region after Saudi Arabia, the data released at the Reuters Islamic Banking and Finance Summit in Dubai.

America and Canada still have a way to go with Sukuk as in 2011 not much has been done to facilitate Islamic Sukuk bonds in comparison to the Middle East and UAE. America launched its very first debut Sukuk on the 16th of June 2006 which was the East Cameron Gas Sukuk which has been described as being the most innovative and interesting Sukuk to date.

Sukuk in Canada also flourished between the years of 2009 to 2010 and Siraj Capital Dubai which had also helped to issue America’s first Sukuk issuance had also been proactive in launching Canada’s debut Sukuk. One of Canada’s very first major Sukuk deals was quite recently issued in 2009 as Canada was quite late to tap into the Islamic financial market. On the 7th of July 2009 Siraj Capital Dubai announced the Bear Mountain Resort Sukuk at the London Su-

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kuk Summit. The Islamic financial sector and is rapidly emerging as a prominent financial sector in the mainstream. Sukuk issuances which are mainly made from successful Islamic financial hubs such as Malaysia and the UAE are slowly crossing the borders into the Western world and soon America and Canada can take a leading role in the issuances of lucrative Sukuk deals.

Islamic Retail Banking and Investment a Flourishing Sector The Islamic retail banking and investment is a flourishing sector for the Islamic finance industry and in 2011 there are new products and services entering the market. In the first-half of 2011, the UAE’s Islamic retail banks have been busy in the promotion of new products and services. In January 2011, Noor Islamic Bank opened its largest branch for Islamic insurances Noor Takaful which is excelling in the retail sector.

Ajman Bank has recently launched the Mahra Ladies Banking as “around a quarter of the UAE’s private wealth is controlled by women,” Maryam Al Shorafa, Head of Ajman Bank’s Ladies Banking, told AMEinfo. com. Dubai Bank, one of the smallest local banks in the UAE, has also just opened a new branch at Dubai’s prestigious Jumeira Road. People who drive down the road from the famous Jumeira Mosque to Burj Al Arab can’t miss the huge building near the “Miraj” Islamic Art Centre.

Germany and France are also making progressive developments in Sukuk Islamic bonds. Germany was the first country to issue Sukuk in Europe as in September 2004 Saxony-Anhalt became the first state government in Germany and Europe to issue a subAlso in June 2011 it was reported that, Dusovereign bond under Islamic bai Islamic Bank launched acprinciples. The €100 million bond cess to a new Shariah-compliant Figure 4: Malaysia Paving the Way for Islamic Capital Markets does not offer interest payments fund, the Prudential Shariah Op2011 to its investors and Germany portunities - Asia Pacific Equity The establishment of the first Islamic equity unit trust fund, Arab Malaysian abided by the Shariah princiFund. Abu Dhabi Islamic Bank Tabung Ittikal (1993) ples outlined for issuing the first (ADIB) offers 25% discounts on Sukuk. German banks such as online transactions for those The first full-fledged Islamic stockbroking company, BIMB Securities Sdn Deutsche Bank, Commerzbank who open an online brokerage Bhd (1994) and Dresdner Bank are already account, along with the chance The Securities Commission formed an Islamic Capital Market Unit which well involved in the sector albeit to win an iPad, which are all later evolved into a full-fledged department (1995). The Shariah Advisory in overseas markets. Deutsche exclusive retail banking promoCouncil (SAC) was later established (1996) Bank for instance has co-lead tions to attract both Muslims managed MTN issuances for the and Non-Muslim customers into The Minister of Finance launched the Capital Market Masterplan of which Jeddah-based Islamic Developthe Islamic retail banking sector.

13 recommendations were formulated, establishing Malaysia as an international centre for Islamic capital market activities (2001) ment Bank and pioneered the Many Islamic financial instituIslamic Equity Certificates with tions are tapping into the Islamic National Commercial Bank of wealth management sector. Abu Introduced the first global corporate Sukuk, The Guthrie Sukuk, this creSaudi Arabia a product which Dhabi Islamic Bank (ADIB) is one ated a paradigm shift in the international Islamic financial market (2001) the promoters claimed was the such example as in September first Islamic retail product with 2010 ADIB launched its specialIntroduced the first global sovereign Sukuk, The Malaysian Government universal marketing application ised wealth management servSukuk, which was more than twice over subscribed (2002) and capability. ices. In 2010 the Islamic retail sector needed more pushing as The Malaysian Government is actively promoting the Labuan International Overall the main issuers of Eureported by Ernst & Young howOffshore Financial Centre as a global centre for the ICM. ropean Sukuk in UK, France ever it is slowly picking up with A comprehensive tax incentive package for Islamic securities similar to and Germany exhibit potential the advancement of technology conventional securities was proposed under the Federal Budget 2004, and to further develop the Sukuk inand the Islamic banking indushas since been implemented. dustry and allow scope for more try. The Islamic Banking sector issuances to pave the way for Ishas progressed tremendously in Source: The Islamic Capital Market lamic finance as a major sector the last 25 years of its succesDecember - January 2012 Global Islamic Finance 17

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Islamic Finance sion as competition in the banking sector has further intensified due to globalisation and technological advancement. Shariah-compliant investments have continued to attract the attention of global investors and consumers wanting to utilise Islamic modes of financing.

In attempting to meet the demands of the growing Islamic financial sector the industry has to effectively implement conventional bank’s use of modern day technology through the use of mobile internet banking and other current software.

Figure 5: Islamic Capital Market Map

Many Islamic banks are choosing to offer Islamic financial products and services through mobile internet banking and it is becoming an increasingly popular method of handling transactions quickly and efficiently. Another key example of implemented mobile technology facilities in Islamic banks are Dubai Islamic Bank’s recent launch of Al Islami Mobile Banking. Al Islami mobile banking allows customers to check their statements on their mobile, carry out transactions, and check their Muruhaba accounts and investment accounts.

Percent Muslim 90-100 50-89 40-49 <1

Source: IIFM.net

Figure 6: Growing Opportunities for Takaful in the Future Global Takaful Market $bn $8 $7 $6 $5 $4 $3 $2 $1 $0

7.39 6.42 5.59 4.22 2.10

2.78

2.42

3,19

4.86

3.67

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Celent.com

Figure 7: Takaful Potential in the Year 2015 Takaful potential, year 2015 Takaful premium US $7.4bn Total insurance premium $1.1 trillion selected countries only Malaysia Indonesia Saudi Arabia

1220 1200 936

USA

853 480 467 260 192

Algeria Qatar Jordan China India Pakistan Oman Singapore

128 128 128 95 91 76 65 45

Lobanon Bahrain Tunisia Libya

37

Turkey Philippines Morocco Syria

33 30 20 18 14 12 11

200

We have allocated sufficient resources to let it spread its wings not only in the UAE but also globally. It is a step in the direction of making the bank a globally preferred Islamic finance solutions provider.”

Despite the global economic crisis the Islamic finance industry propelled forward and now in 2011 GDP for many of the regions in the Middle East is projected at 5 percent. In countries such as Qatar there GDP growth looks to be doubling. There are inevitably challenges which need to be overcome in facilitating a more stable economic framework and these challenges need to be tackled from government officials.

64

South Africa

Abu Dhabi and Dubai hold a whole host of opportunities for Islamic investments and both countries have seen an increased demand for investment projects from enthusiastic investors worldwide. In 2010 Abu Dhabi Islamic Bank launched an array of specialised wealth management services to cater for the demands of customers. Launching ADIB Wealth Management, Tirad Mahmoud, CEO of ADIB, said, “ADIB’s growth will be charted with the introduction of new services and wealth management is assigned to be a key service that will enrich clients’ portfolios and wealth management is central to our plans going forward.

The Middle East is home to several countries which have massive scope to further propel the Islamic finance industry into the estimated $2 trillion dollar sector. Currently the Islamic finance and banking investment sector is unprecedented in progressing forward and opening up opportunities worldwide. The impact of the previous world economic crisis on the Middle East, and in particular on the countries of the GCC had affected many key industries such as the real estate sector, credit constraints, and economic contraction. The reaction of governments of the GCC was to support financial institutions in the reforms of provisions to the liquidity financial market.

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Iran U&C Csd`pt UK Kuwait

In addition the Al Islami mobile service allows you to make payments and bank transfers as well as registering for additional internet channel services such as internet phone banking and E-statements which allow you to look at your bank statements via the mobile immediately. The United Arab Emirates is unprecedented in establishing a home for Islamic financial deals and investments both from regional and international investors wishing to tap into the Shariah-compliant market. There are many key investment sectors in Islamic finance to invest your money in which is shown in figure 9.

400

600

800

Source: Islamic Banking and Insurance 18 Global Islamic Finance

December - January 2012

1000

1200

The recent turmoil in the Middle East undoubtedly impacts the speed of growth for the Islamic finance industry. The oil prices which are currently rising in the Middle East are only helping to spur the economy forward and help to ease the turmoil tension financially in the region.

Islamic Finance

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Figure 8: Islamic Retail Banking Growth

Assets

Revenues

US$ Billions

US$ Billions

500

50

400

40

CAGR~22%

300 200

30 CAGR~28%

CAGR~44%

20

100 0

CAGR~20%

10 2003

2004

2005 2006

2007

2012e

0

2003

2004

2005 2006

2007

2012e

Source: Oliver Wyman Analysis

There are a number of investors who are keen to tap into the Islamic finance industry despite the political upheaval and with proper measures to facilitate a proper framework for Islamic finance investments the industry can further grow and prosper. The Middle East has been a long standing destination for the Islamic finance industry and has massive scope for investments and business deals across the various regions.

However the challenges of the lack of consistent regulatory guidelines in certain Middle Eastern countries and a limited market for new innovative instruments could hinder the growth of the industry in the Middle East.

If certain countries in the Middle East could implement ways to support the Islamic financial industry then the industry could further prosper and overcome the current challenges to continue to be a hub for Islamic financial investments and business throughout the world.

The future for ethical Shariah-compliant investments looks promising due to the many lucrative sectors of investment such as Sukuk, Takaful, Infrastructure and Energy and Resources, which have seen many high profile deals being made by key and avid investors across the world. The global Islamic financial market is spearheading and gaining popularity worldwide not only for its ethical principles but the opportunity it creates to have an alternative to conventional financing which uses interest. Due to the ethical principle of the prohibition of interest the Islamic financial industry provides reassurance of interest based debt that investors may prefer to use.

There are many benefits to making Shariahcompliant deals and there are many worthwhile sectors to investigate especially in the UAE where business is soaring. Malaysia is also another country that is spearheading the Islamic investment sector. In 2011

you can invest your wealth in an investment project through the Bursa Malaysia as the company is a single exchange group, designed to meet the growing demands of both foreign and local investors. Bursa Malaysia offers a holistic range of innovative Islamic Market products from equities, derivatives, commodities, to debt securities, across all sectors and industries.

Figure 10 shows the key investment opportunities in Malaysia in 2011. Many Asian countries such as India are slowly tapping into the Shariah-compliant investment world. India has recently launched its first ever Shariahcompliant Islamic financial institution in the Figure 9: Key Islamic Finance Investment Sectors 2011 Sukuk Takaful Real State Infrastructure Energy and Resources

city of Kerala. The Al-Baraka came into action once the Kerala High Court dismissed a couple of writ petitions which challenged the setting up of Islamic financial institution in a secular country like India.

Another key investment that India had exhibited was the collaboration of the 2011 Bombay Stock Exchange and TASIS which launched a Shariah-compliant index to promote Islamic finance in India. The Index is the first Shariah Index created in India utilising the strict guidelines and local expertise of a domestic, India-based Shariah advisory board.

The BSE TASIS Shariah 50 index consists of the 50 largest and most liquid Shariah-compliant stocks within the BSE 500. TASIS employs a strict, proprietary screening process utilising their knowledge of and local access to listed Indian companies to ensure that all stocks within the BSE TASIS Shariah 50 are strictly compliant with Islamic Shariah law.

TASIS has adopted financial screening norms that are more conservative than its peers, making the product ideal for Islamic investors seeking investments that adhere to the strict, conservative Shariah compliance norms. Madhu Kannan, MD & CEO, BSE, said, “The introduction of the BSE TASIS Shariah 50 Index will give Islamic and other socially responsible investors another means to access the Indian market and will help attract pools of capital to India from the Gulf, Europe, and Southeast Asia. This index will increase awareness on financial investments amongst the masses and help enhance financial inclusion.

The index will also build a base for licensing for the construction of Shariah-compliant financial products including mutual funds, ETFs, and structured products.” Australia is also another country, which is emerging in providing new Shariah-compliant investment opportunities. Australia is rapidly launching into the Shariah-compliant investment arena by making the necessary changes in the law to accommodate the sector. Dick Warburton, chairman of the federal governmentappointed Board of Taxation, is publishing a paper on the tax treatment of Islamic finance, banking and insurance products.

His Australian Financial Centre Forum report says “The greatest opportunity for Australia, in terms of accessing offshore capital pools to finance domestic investment needs as competitively as possible, would appear to be in the area of developing Shariah-compliant wholesale investment products.”Yasser December - January 2012 Global Islamic Finance 19

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Islamic Finance Shaher Abbas, Director, Shariah Compliance and Product Development

What ways ensure that Islamic financial institutions are free from forbidden activities?

Compliance with Shariah is the raison d’être of Islamic financial institutions. Therefore, the management of these institutions should ensure that the business is being carried out in a Shariah-compliant way all the time.

The best way to deal with this issue is to implement a comprehensive Shariah Compliance Governance Framework. The implementation of such framework should minimise the risk of Shariah-non compliance by creating control functions within all policies and procedures of the financial institution.

The Shariah Compliance Governance Framework should be seen as an integral part of the Corporate Governance Framework.

What are your thoughts on the future development of Islamic finance products and services?

The Islamic financial industry is still in its early years. The demand from the market is growing and the financial institutions will have to fulfil this growing demand by creating new products. Although there is a lot of talk regarding the standardisation of the agreements, I think it is still too early for this, and at this stage we should give the industry the option to grow organically and not to push it in a certain direction.

The best products will eventually prevail.

However, this has to be done by the market itself i.e. through the normal selection process created by the market mechanism. Institutions and consumers will decide on the best products including which are the most Shariah-compliant products. Nevertheless, at the moment we need more products to allow this selection process to take place.

What are your thoughts of the future of Islamic finance within your region?

I think the financial crisis in the Euro zone is still in its early stage and it might be accelerated very fast. With this in mind, I think Islamic finance can play a very important role in bringing stability to the regent and we might find that Islamic finance through the extra liquidity available in the Gulf region might be the most suitable form of financing (or the only form available) for European corporate as the crisis develop and more banks fall under pressure to meet the new capital requirements.

20 Global Islamic Finance

El-Ansary, tax counsel at the Institute of Chartered Accountants, said “Australia is well behind other advanced economies in setting up the right tax environment to attract some of the trillion-dollar-plus worldwide market for Islamic investment.”

The future looks promising for Islamic investments worldwide as many global investors are seeing the benefits of investing in a Shariah-compliant manner in comparison to conventional investing which has often left investors heavily in debt. If you are considering making an investment in the financial hubs listed then it is definitely worthwhile investigating your chosen sector and you can be guaranteed a profitable investment.

New Islamic Finance Products and Innovation Hitting the Market Many relatively new Islamic financial innovations and products have emerged to the market and are spurring ahead in recent years. One such sector is the Islamic Microfinance sector which is doing increasingly well in providing financial assistance to developing countries around the world and giving the opportunity for poorer nations to have a Shariah-compliant method of financing.

Islamic Microfinance is becoming an increasingly popular mechanism for alleviating poverty especially in developing countries around the world. Islamic Microfinance relies upon adherence to the principles of Islam and the Shariah as it is a socially responsible form of investing and only involves itself in projects such as Zakat which is charity based projects or economic projects to develop an individual country’s economy.

Islamic Microfinance gives the investor a chance to get involved in worthwhile projects which could essentially play a significant role in targeting poverty and alleviating it in many countries around the world. Islamic Microfinance primarily relies upon the provision of financial services to the poor or developing regions which are subject to certain conditions laid down by Islamic jurisprudence or “Shariah”. Another significant innovative sector which is doing well is the Islamic SME opportunities.

The Small and Medium Enterprise (SME) global market is a growing sector which is helping economies around the world to flourish.

Islamic investments in SMEs can further help to progress the sector forward and create various opportunities for countries around the world. SMEs in general contribute significantly to the growth of the economy and are the starting point of industrialisation in many economies around the world. Many Islamic banks such as Abu Dhabi Islamic Bank have tried to tap into the SME market offering innovative products and services. Saif Ali

December - January 2012

Al Shuraifi, an ADIB customer, said, “As an SME owner, I have been missing a practical solution like this that would help me manage my business better. Having access to extra liquidity is an important factor in managing my business successfully. Sometimes you have to cope with unplanned expenses and this can be challenging, particularly in the current economic environment.”

There have been many Islamic banks which are now offering innovative products and services for investments in the SME Sector.

ADIB is offering schemes for Shariah-compliant credit cards especially for SMEs to control their expenditures efficiently. In addition ADIB has created specific SME services for UAE nationals.

Another bank which has been offering key services for the SME sector which makes it easy for investors to tap in is BMI Bank in Bahrain. Jamal Al Hazeem, Chief Executive Officer of BMI Bank said, “Being a Bahraini bank, it is our responsibility to participate in and boost the local economic growth and consider the SME segment as a very crucial and increasingly important component in the country’s development and together with Tamkeen, we will now be able to make a significant difference.”

There have been countless other Islamic banks which have been opening up the scope for Islamic investment options for the SME sector and Ajman Bank and Standard Chartered Bank Saadiq have shown support in facilitating services to provide for the SME sector. There is much scope for an unprecedented growth in Islamic Project financing in the UAE especially since Islamic finance as an industry is attracting investors from all over the world. Islamic finance as an institution has become a globally renowned sector which caters for the demand of both Muslims and Non-Muslims.

In a predominant Muslim population of the UAE it holds the advantage for many numerous Islamic projects to be undertaken through the various Islamic financial instruments discussed in this article. If you are considering participating in an Islamic Project in the UAE then this article will give you the comprehensive information you need to know the vital components of instruments you can use including the type of insurance that you may want for your project such as Takaful insurance. There is also much scope for the development of Islamic Project financing especially deriving from the UAE which is seeing lucrative deals especially from the largest project finance deal in the Emirates Steel sector which is expected to see profitable returns for years to come. There is much scope for an unprecedented growth in Islamic Project financing

Islamic Finance Almir Colan, Lecturer, School of Economics & Finance, La Trobe University, Australia

What are your thoughts on the future development of Islamic finance products and services?

Product development is a strategic decision that comes from the understanding of what Islamic finance is, and what it could be. Increased demand in the majority of Muslim countries to manage affairs of society in line with Shariah principles is accompanied with the rest of the world’s call for ethical and socially responsible solutions to financial woes. To assert leadership and provide an alternative, the industry will have to do so by fostering new ideas and innovations. To inspire change, organisations will need to differentiate themselves by developing more genuine products with different characteristics that are aligned with the higher objectives of the Shariah. Industry leaders will have to do all that while resisting commercial pressure, which craves quick solutions presented in the form of, reverse engineered conventional products that render Islamic financial operations as mechanical and divorced from enterprise.

If we look at the organisation such as MCCA that provides Islamic financing in Australia for the last 22 years we see that around 70-80% of their profits comes from the products and services that were developed in the last 3-5 years.

However, same products will not be enough to ensure competitive advantage in the next 5 years and retain increasingly sophisticated and “option rich” customer base. Also, new products must find balance between equity and debt instruments as recommended by AAOIFI. A more active relationship is required in order to transform economy and connect capital owners with real entrepreneurial activities. My concern is that if the global trend with debt based structures continues, Islamic finance may be working against its ability to develop better and more dynamic products in the future. Real progress can only be achieved by visionary individuals and organisations that invest in research, education, and are truly committed to the Islamic finance cause. It is clear that those who embrace changes can anticipate new opportunities, a stronger customer base, wider knowledge and global brand recognition.

Takaful provides a Shariah-compliant and ethical insurance solution that makes it appealing to Muslims and non-Muslims alike. What is the current state of the Takaful industry in your region?

Despite the opportunities Takaful is virtually non-existent in Australia. One might think that thousands of potential customers who are conscious enough to choose Islamic finance would create incentives for the introduction of

Takaful products. In my opinion there are three elementary reasons for lack of action in this field. First is the practical reason which comes from lack of understanding and experience in setting up the actual model of operation. Second, until recently, was in terms of investing technical reserve for which there was no exclusive Shariah-compliant fund manager (which is not the case anymore). If housing industry is any example we can see that big players want to see demand and actual profits before they commit to developing any new contracts and do things differently. This phase requires smaller players to struggle to get public on board and show potential for growth. The third reason has to do with mistaken perception where insurance, that contains all possible prohibitions, is quietly “tolerated” unlike interest bearing banking products. However, as awareness increases there are positive signs that firms, who have worldwide exposure to Takaful and Re-Takaful, are increasingly conscious of the opportunities to set up presence in this region.

What are your thoughts of the future of Islamic finance within your region?

When you mention Australia, the first thing most people would have in their mind is kangaroo.

Second, it is located at the end of the world. In reality, this unique position may work in Australia’s favour. Close proximity to almost a billion Muslims in the Asia Pacific Region is creating conditions that can facilitate and replicate global success of Islamic finance within Australian context. The Board of Taxation recently issued a discussion paper as a way to introduce parity of tax treatment and level the playing field for Islamic finance products. The key reason is that the Middle East region represents a major source of offshore liquidity which, for a capital intensive Australian economy, is of the great interest.

As various banks increase direct and indirect dealings with Islamic finance institutions we see signs of progress. Currently, there are some wholesale and retail Islamic finance products, with Super (pension) and equity funds slowly making inroads. Leading the way is MCCA, established in 1989 as a small community cooperative, and now on the road to become the first Australian Islamic bank as it heads towards $1 Billion in Islamic financing by 2015. Furthermore, in the last few years we have also seen Kuwait Finance House move to Melbourne, Westpac’s commodity-trading facility (believed to be the first Islamic financing tool for institutions in Australia), Crescent Wealth launch of the first Shariah-compliant equity fund, ANZ’s investment in AmBank (now at almost 24 percent), NAB’s involvement in Sukuk, as well as intentions of HSBC Amanah to compete down under.

In light of this, it is not surprising to see ambitious statements by government officials that “Islamic financing is a crucial plank in the government’s strategy to make Australia a financial hub in the Asia Pacific region.”

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in the UAE especially since Islamic finance as an industry is attracting investors from all over the world. Islamic finance as an institution has become a globally renowned sector which caters for the demand of both Muslims and Non-Muslims. The future of Islamic Project financing looks bright for the UAE seeing lucrative deals especially from the largest project finance deal in the Emirates Steel sector which is expected to see profitable returns for years to come.

Another innovative Islamic financial product is the gold investment sector. An Islamic gold investment is becoming increasingly popular and is a new innovative wave of Shariah-compliant investing. Gold is a valuable source of investment as it is a scarce and limited resource. Gold can preserve your money and is often termed a real asset.

Another relatively new method of Islamic investments is in diamonds which have much scope to give the investor something unique and innovative to invest in.

Diamond Corp has made many Islamic investment incentives and opportunities for investments within the Diamond mining industry. The European Islamic Investment bank was reported to have increased its holding on mining company Diamond Corp which is based in South Africa. Robin Henshall, Head of Private Equity and Corporate Advisory at EIIB, “EIIB is delighted to have invested in Diamond Corp. We are impressed by the experienced management team and have confidence in the continuing development at Diamond Corp’s Lace kimberlite pipe, which is more than a year ahead of schedule. We look forward to underground mining commencing by the end of this year”.

Diamonds may provide the keen Shariahcompliant investor with a new and innovative form of investments. There are many diamond mine companies offering innovative investment opportunities for Shariahcompliant investors wishing to utilise Islamic investments and Islamic investment instruments.

As you can see the Islamic finance industry is providing many new innovative products and investments from gold to diamonds to the Islamic microfinance sector which is a growing field. The industry is successfully implementing strategies for vast improvements in offering new and innovative Shariah-compliant products to cater for the market. The Islamic finance industry can further prosper from this new innovative field of products and services and can offer something unique to potential investors, businesses and entrepreneurs.

December - January 2012 Global Islamic Finance 21

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Islamic Finance

Figure 10: Malaysian Investments in Islamic Finance SHARIAH COMPLIANT STOCKS 88% of the securities currently listed on Bursa Malaysia are Shariah compliant and represent twothirds of Malaysia’s market capitalisation. At Bursa Malaysia, choices are abundant as investors have access to an extensive selection of Shariah compliant stocks across diversified industries for broader and deeper investment portfolios.

ISLAMIC EQUITY INDICES Bursa Malaysia is the world’s only exchange with three comprehensive and transparent Shariah screening processes: FTSE Group, Yasaar Ltd and the SC’s Shariah Advisory Council (SAC). These screening processes that look at both qualitative and quantitative measures help us meet local requirements and align us with international standards. The FTSE Hijrah Shariah index (FBM Hijrah Shariah) and the FTSE Bursa Malaysia EMAS Shariah index (FBM EMAS Shariah) provide a broad benchmark for Shariah compliant investment. These indices are designed for investors who wish to invest in Shariah compliant stocks that are consistent with Shariah principles.

SUKUK (ISLAMIC BONDS) The Sukuk market has been the driver of growth for the Malaysian Islamic Market with many world’s first issues, cemented by sizable amount and innovative structures. Malaysia is one of the largest Sukuk issuance centres in the world and accounts for approximately two-thirds of the global Sukuk outstanding. Bursa Malaysia also provides a facilitative and progressive environment for Sukuk issuance by local and international issuers. Issuing Sukuk in Malaysia is cost-effective as International Issuers have the flexibility to issue either ringgit or non-ringgit denominated Sukuk using international documentation, based on UK or US laws and the choice of international credit rating agencies.

SHARIAH ETF ETF has been one of the most innovative investment vehicles over the last two decades. We are the first to list Islamic ETF in Asia. Unlike other conventional ETFs, Shariah ETF is an excellent alternative for investors seeking Shariah compliant investment instruments. The Dow Jones Islamic (DJIM) index tracks the largest blue chip listed Malaysian companies that comply with Shariah investment guidelines. With 88% of the securities listed on Bursa Malaysia being Shariah compliant, we are perfectly placed to create a variety of Islamic ETFs that are transparent and cost-effective, providing greater access for investors to diversify efficiently.

ISLAMIC REITs To keep pace with the ever-changing appetite of investors, Malaysia proactively provides innovative Islamic market products that best meet the market demand. Apart from being the first to introduce Islamic REITs guidelines, Bursa Malaysia is the world’s first plantation REITs and hospital REITs. Bursa Malaysia is the first jurisdiction in the global Islamic financial market, as well as the first market in the world, to list an Islamic REITs. These efforts have facilitated the creation of a new asset class for investors and fund managers to diversify investment sources and portfolios.

SHARIAH-BASED UNIT TRUST FUNDS For industry players who wish to invest in a diversified portfolio of Shariah compliant securities, we have for you the options of Islamic equity funds, Sukuk funds and other funds managed by competent and professional managers in accordance with the Shariah principles.

ISLAMIC STRUCTURED INVESTMENT PRODUCTS Malaysia’s wide range of Islamic products caters to various investment styles and meets specific risk profiles, attractive return requirements and high market expectations. Via the local and international brokers BM’s innovative Islamic structured investment products offer unique opportunities that allow for better risk management and provide investors with valuable portfolio diversification tools in a vibrant market environment.

OFFSHORE ISLAMIC MARKETS The Labuan International Financial Exchange (LFX), a web-based financial exchange, provides further impetus to the development of offshore Islamic Markets.

This wholly owned subsidiary of Bursa Malaysia is based in Labuan IOFC, a tax haven, and is regulated by the Labuan Financial Services Authority (Labuan FSA).

LFX offers listing and trading facilities for a wide range of financial and non-financial products, as well as Islamic financial products. The rules of LFX are designed to be liberal and cater to the listing of a variety of multi-currency securities and instruments while offering speedy approval processes and attractive tax benefits.

Source: Bursa Malaysia klse.com 22 Global Islamic Finance

December - January 2012

Emerging Countries in the Islamic Finance Industry 2011 There have been influxes of countries that are tapping into the Shariah-compliant Islamic finance industry. A relatively new player to join the industry was India with its government of Kerela trying to make progressive changes to facilitate Islamic finance in the country. Islamic finance in India is progressing with the population being more accepting of the Shariah-compliant methods of financing which could potentially enhance the economy of India.

The Bombay Stock Exchange in India launched an index for Islamic finance which was facilitated towards the end of 2010 and early 2011. The Tasis Shariah 50 was formed using guidelines from an Indian Shariah Islamic advisory board. The index is intended to be the basis for other Shariah-compliant financial products.

BSE Managing Director and Chief Executive Madhu Kannan said that the new index would attract Islamic and other “socially responsible investors both in India and overseas. All Muslim countries of the Middle East and Pakistan put together do not have as many listed Shariah-compliant stocks as are available on the BSE”.

Tasis Director of Research and Operations Shariq Nisar says, “This index will create increased awareness of financial investments among the masses and help enhance financial inclusion,” he said in a statement. Tasis, which is based in Mumbai and whose board members include Islamic scholars and legal experts, have screened companies included in the index.

“Before anyone can attract investors, we need to put in place institutional infrastructure, and having an index to track Shariah-compliant stock is important,” MH Khatkhatay, senior adviser to Tasis, told the Reuters news agency. Stocks will be reviewed every month to ensure they continue to meet the criteria - any which do not will be removed.

In addition to the Asian continent, the African continent in 2011 has seen substantial developments in trying to implement and facilitate Islamic finance to the threshold and offer its community a Shariah-compliant method of banking and finance services.

Nigeria, Gambia and South Africa have seen significant developments to facilitate Islamic finance which has been ongoing since early 2011. Following the implementation of Islamic finance and banking in Nigeria in 2011 the government of Nigeria has made the necessary accommodation in the law to cater for Islamic banking and financial products which

Islamic Finance are hoped to spur the economy forward. The Nigerian Stock exchange also welcomes Shariah compliance which will help to host a world of project financing deals especially in the infrastructure sector of Nigeria. The Managing Director of Lotus Capital Limited, Mrs. Hajara Adeola said that, “The strategic design of Islamic financial products have made it attractive to financing the economic developmental needs of any society” she also emphasised the benefits of Islamic finance and its contribution that it will make to the infrastructure sector of the Nigerian economy. As Nigeria has over 50 percent of Muslims that count for most of their population there is much scope for Shariah-compliant deals. Gambia however has made an increasingly specific contribution to the Islamic project finance sector.

specific regions of Gambia and improve their social well being thereby assisting in the reduction of poverty. Consequently it is hope that rural migration in Gambia to the GBA will be reduced. The Islamic Development Bank had reported to have given Gambia over $46 million to fund new developmental projects in the country.

The Islamic Development Bank signed four agreements with the Republic of Gambia.

The three projects included the lucrative funds of $16 million for developing the University of Gambia which is a worthwhile cause to education, a $17 million for infrastructure facilities, in addition to two trade operations worth up to $13 million.

Gambia undertook a rural electrification project, which was funded by the Islamic Development Bank. As Gambia has a predominant Muslim population it was inevitable that there would be scope for such infrastructural projects in the pipeline.

The two Islamic financing project agreements were signed by Dr. Ahmad Mohamed Ali, the Islamic Development Bank (IDB) President and Abdu Cooley, the IDB Governor for the Republic of Gambia who also signed the two trade financing agreements with Dr. Walid Al-Wehaib, CEO of the Islamic International Islamic Trade Corporation.

The Rural electrification project consisted of 6 power stations supported by 11kv transmission systems that it is hoped will form the basis for developing a national grid across Gambia. The implementation of the results from the project will aim to enhance the economic opportunities of the population in

The Islamic Development Bank have made significant contributions for Islamic project financing in Gambia and the total amount of financing has been estimated to be worth over $310 million including financing for various sectors. On the 25th of October 2010 the University of Gambia signed five agree-

Figure 11: Five Islamic Projects in Gambia Loan Agreement for the Financing of the Development of the University of the Gambia Project for $15.672 million; Loan Agreement for Financing the Gambia Community Based Infrastructure and Livelihood Improvement Project for $15.860 million; Technical Assistance Grant for Financing the Gambia Community Based Infrastructure and Livelihood Improvement Project for $400,000.00; Murabaha Agreement for the financing of electricity and water meters and other spare parts for the benefit of NAWEC amounting to $5 million; and Murabaha Agreement for the financing of heavy and light fuel products for the benefit of NAWEC totalling $8 million.

Figure 12: Worlds Best Islamic Financial Institutions 2011 Best Sukuk Bank

CIMB Islamic

Best Islamic Retail Bank

Jordan Islamic Bank

Best Islamic Investment Bank

Jadwa Investment

Best Takaful Provider

Salama-Islamic Arab Insurance

Best Asset Management Company

CIMB-Principal Islamic Asset Management

Best Shariah-Compliant Index Provider

Dow Jones Islamic Market Indexes

Best Islamic Project Finance Provider

SABB

Best Islamic Commodities Provider

Al Rajhi Bank

Best Islamic Real Estate Finance Provider

Kuwait Finance House

Best Islamic Fund Manager

Falcom Asset Management

Islamic Finance Deal of the Year

Maaden Aluminum, Saudi Arabia, $1.6 billion project financing.

Source: Global Finance Magazine

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ments with the Islamic Development Bank Group in Saudi Arabia for the facilitation of project funding for the university. The five agreements that were signed with IDB are stated in Figure 11.

Africa is home to more than 412 million Muslims and South Africa has much scope for Shariah-compliant project financing deals. The country’s finance minister Pravin Gordhan is also enthusiastic to make South Africa an Islamic finance hub. South Africa has one fully-fledged Islamic bank at the time of writing and the major four South African banks currently have existing Islamic finance offerings or are looking to establish an offering in the upcoming future. The only basic banking products include vehicle and asset financing are available. While investment products are limited, a number of Shariah investment funds are available in the South African market.

There has been a significant number of key infrastructure and industrial projects that had not been able to raise the sufficient funds in the difficult conditions of the last few years and are now coming back to the market. Islamic finance should continue to play a key role in the transactions for project financing in 2012. Islamic Product Finance should become more standardised in Africa in order for the development and facilitation of projects to further grow.

World’s Best Islamic Financial Institutions 2011 There have been many unprecedented Islamic financial organisations such as financial institutions and banks which have been announced and awarded the status of World’s best by Global Finance Magazine 2011. Some of the winners are stated in figure 12.

There are many Islamic banks which excelled in 2011 in the Islamic banking sector around the world from Asia, the Middle East, America and Europe. This information is pivotal in monitoring the overall success of the Islamic finance industry at large and the rise and scope for these financial institutions to further pave the way for the Islamic banking and finance industry.

Shariah-compliant finance is the fastestgrowing area of finance worldwide, with more than 300 financial institutions that are either fully Islamic or selling Islamic finance products, in addition to several hundred more Islamic investment banks and insurance companies, or takaful,” says Global Finance’s publisher Joseph D. Giarraputo.

“The winning banks were all noteworthy in their dedication to satisfying their customers’ needs in accordance with the rules of Islamic finance.”

December - January 2012 Global Islamic Finance 23

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Islamic Finance

Key Leading Personalities in Islamic Finance 2011 There are quite a few substantial key leading personalities that really shine out in the Islamic finance industry. One such leader is Governor Zeti Akhtar Aziz of Bank Negara Malaysia who has made countless unprecedented achievements in the Islamic Finance industry for years and is continuing her successful work in 2011.

In the field of Islamic finance Zeti’s contribution and leadership is outstanding as she is carrying on and adding to the work of her predecessors. Malaysia today has the most developed and systemic Islamic financial architecture in the world and this is influenced

by Governor Zeti’s key contributions to the sector.

The Malaysian model is now emulated in several Islamic Development Bank (IDB)member countries in the Middle East and Asia.

Under her watchful eye, Malaysia has achieved the target set by the Mahathir government of the Islamic banking sector reaching 20 percent of the total banking industry market share in 2010. The governor has played a leading role to develop Malaysia as a leading country for the origination, distribution and trading of Sukuk Islamic bonds and under the Malaysian International Islamic Financial Centre (MIFC) initiative.

Another influential personality in Islamic Finance 2011 is Tirad Mahmoud the CEO of Abu Dhabi Islamic Bank which is doing considerably well in spurring the Islamic banking sector in the Middle East. Tirad Mahmoud was appointed as CEO of ADIB back in 2008 and since then has been making progressive achievements in the success of the world renowned Islamic bank.

Dr Mohamed Nedal Achaar is another key personality in the Islamic finance industry as he is the Secretary General of the AAIOFI which is a predominant base for Shariah compliancy since the inception of Islamic finance really took off around the world.

There is room for more influential expertise to stand out and further help to progress the Islamic financial industry forward. Due to the rise in the outstanding achievements that the industry has made so far across the various sectors there needs to be more key speakers getting involved in promoting the industry forward.

There have already been many conferences, award ceremonies and events which have highlighted the potential for the Islamic finance industry and added to the prestige of the industry.

24 Global Islamic Finance

The Ultimate Islamic Financial Review Looking Ahead to the Future In this comprehensive ultimate Islamic finance review 2011 Global Islamic Finance Magazine has giving you a detailed insight into the various lucrative sectors of the industry. In addition we have looked at the success of the growing and highly successful areas of Sukuk Islamic bonds and Takaful Islamic insurance which is continuing to spur the industry forward. The Islamic Capital Markets sector is undoubtedly a growing field providing many opportunities for investments and growth of the industry which is continuing to flourish.

In 2011 some of the key challenges of the industry remain the same such as the need for standardisation and harmonisation which has been a predominant challenge since the inception of global Islamic finance. In order to harmonise the industry in creating standardised regulatory laws that all Islamic institutions can use to regulate Islamic banks we first have to agree on the laws. Evidence for what should be approved under the law of Shariah can be cited from the Quran as the main principles should be in accordance with Islam.

The problem arises where the principles and procedures for specifics are not so easily found and therefore have to be derived from the interpretations of the Shariah scholars.

Therefore the biggest challenge faced by the regulators of Islamic finance is harmonising and standardising these interpretations into a consistent and efficient regulatory framework that will ensure unimpeded Islamic financial intermediation. Malaysia has already recognised the need for a unified regulatory body and is aiming for harmonisation in the country. There have been efforts to try to standardise the Islamic financial banking industry as agencies have been developed and are flourishing in 2011 in order to help promote standardisation within the sector.

The formation of two main multilateral organisations which are the Accounting and Auditing Organisation for Islamic Financial Institutions and the Islamic Financial Services Board Islamic Financial Services Board help in creating specialised Islamic financial portals and in 2011 we could see further growth of the industry with the support of these influential organisations.

The Islamic financial sector has undergone successes and challenges following the global economic crisis which catapulted the Islamic finance industry into the spotlight.

However the industry has remained strong and excelled in many areas of Sukuk (Islamic Bonds), private equities, real estate amongst many other lucrative sectors

December - January 2012

which have seen a massive growth in recent years. The Islamic Banking industry is providing unprecedented unique services for both Muslims and Non-Muslims around the world and the future for Small and Medium Enterprises looks promising if they were to choose an Islamic financial institution. If you are an Islamic financial institution wishing to target the SMEs in attracting your services then proper marketing and promotion of the various ranges of options available to SMEs for support with funding can further help to spur growth and profits.

Not only have GIF discussed the potential for the various innovative sectors such as SME, Microfinance and more but we have also given you the comprehensive knowledge of the 2011 world’s best Islamic financial institutions which are set to spearhead the industry forward. The world’s best Islamic financial institutions 2011 range from Islamic financial banks across the world to institutions for Takaful and Sukuk.

We have also exhibited the key personalities that are being consistent in the Islamic finance industry such as Bank Negara Governor Zeti Akhtar Aziz who has made unprecedented achievements for the Islamic finance industry and implemented them in Malaysia to spearhead the Islamic financial industry forward as a major Islamic financial hub.

Many major leading Islamic financial hubs are building themselves up across the world to cater for the demand for Shariah-compliant products and services and the industry looks to grow to a major financial sector by 2015 sweeping the world over. There is a bright future for the scope of Islamic finance around the world from Malaysia to the Middle East many countries are excelling.

Countries are spearheading forward the Islamic finance and banking sector and creating a diverse method of implementing and facilitating Islamic banking and financial products.

In addition various countries around the world are tapping into the key investments that the Islamic financial and banking world has to offer and this detailed and qualitative review will put you in the know about every single aspect of the industry to give you the edge over the competitive financial global market.

Global Islamic Finance Magazine hopes that you would have found this detailed and quantitative Ultimate Islamic finance review 2011 one that you can look back on in years to come and see how far the industry has further grown and prospered. gif

Market Review

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Islamic Banks Looking Towards Opportunities in Qatar Source: GlobalIslamicFinanceMagazine.com

Islamic banks in the UAE are seeing the market to be more ‘greener’ in Qatar in the light of the recent directive from the banking regulator in Qatar banning conventional banks from running Shariah windows.

Sources told Banking & Business Review (BBR) that a few Islamic banks from the UAE are seriously weighing the option of applying for banking licence in Qatar where not many Islamic banks are operating currently, but at the same time the economy is said to be heading for big growth.

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According to a recent report by Gulf Investment House (GIH), Qatari banks will benefit from strong macroeconomic fundamentals of the economy and the high level of domestic spending. It said strong Government support to the banking sector would ensure low risk.

It is in this context, Islamic banks from other GCC countries, especially from the UAE, are eyeing this market, which has developed tremendous potential for growth in the coming decade.

“Any expansion overseas will likely occur through joint ventures and partnerships, with the bank seeking to capitalise on its Islamic credentials and expertise. The Qatari market is one such area in which the bank’s management believes that cautious expansion could be feasible as a result of the recent ruling in Qatar prohibiting conventional banks in the UAE from providing certain Islamic complained finance products and services,” the base prospectus stated.

Though Islamic banks have never publicly against Islamic subsidiaries and windows of conventional banks for taking away a portion of their business, there are many in the industry who strongly believes that eight fullfledged Islamic banks and several Islamic subsidiaries and numerous Islamic windows render the Islamic banking space of UAE indeed a crowded one

“We have a positive outlook for Islamic banks due to limited competition in a high growth banking segment (after the Qatar Central Bank move to close Islamic branches of conventional banks by year-end) and possible migration of Islamic loan portfolio of conventional banks by the year end. However, we believe that dampening in retail operations will impact credit growth for both Islamic and conventional banks in the short term,” the report mentioned further.

In February 2011 the Central Bank of Qatar issued circular instructing local conventional commercial banks to discontinue their Islamic operations by the end of 2011. The main provisions of this circular were as follows: Conventional commercial banks should not accept new Islamic deposits, and conventional banks, with immediate effect, and also, they are disallowed from extending new Islamic financing.

They should pay with accrued interest, the existing time deposits during the period until December 2011, while other deposits with maturity post December 2011 are to be segregated until their maturity date.

These institutions can convert their Islamic branches to conventional units by the end of the year, after informing Central Bank. According to GIH, this will be a positive move for established Islamic banks in Qatar. “Although the regulation will impact the current operations of commercial banks adversely, established Islamic banks - QIB and Masraf Al Rayan - will gain from this move. It is expected that not only will some amount of Islamic assets/liabilities will move to these banks by the end of the year but competition too will be reduced in the fast growing Islamic banking industry,” it said in its report.

In the UAE, many conventional banks now have Islamic banking subsidiaries, whereas most remaining lenders have Islamic windows from where Islamic products and services are rolled out.

“Islamic window allows our bank offer both options to our valued customers,” said Paul Trowbridge, UAB’s Chief Executive Officer, during a recent interview with BBR.

Though Islamic banks in the UAE have never publicly complained against Islamic subsidiaries and windows of conventional banks for taking away a portion of their business, there are many in the industry who strongly believes that eight full-fledged Islamic banks and several Islamic subsidiaries and numerous Islamic windows render the Islamic banking space of UAE indeed a crowded one.

“Dubai Bank which was established in as early as 2002 and later converted into an Islamic bank in 2007 is now facing the fate of takeover by the government after the bank has posted a loss for 2009. The shape of things for 2010 is yet to be made public by the management,” said financial controller of another Islamic bank. gif

December - January 2012 Global Islamic Finance 25

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Market Review

MALAYSIA’S NCB BANK WINS THE BEST ISLAMIC FINANCE DEAL FOR 2011 Source: GlobalIslamicFinanceMagazine.com

It has been reported that Malaysia’s NCB has achieved a new unprecedented edge that confirmed its leadership in the field of Islamic banking. NCB led the financing of a club deal that was recently declared in the Malaysian capital, Kuala Lumpur the winner of the “Best Islamic Finance Deal” from the Asset magazine, specialised in finance and banking.

the CEO added. Abu Alnasr explained that this deal came to confirm once again the leadership of NCB in providing huge finance solutions that are compliant with the Islamic law. He said that the Bank would continue to build on its achievements all the way to maintain its position as the regional leading financial services group.

This announcement came during the annual ceremony to honour the best Islamic financial institutions and distribute the “Asset Triple A Islamic Finance Awards 2011”.

“NCB is a major player in the development of the banking industry by continuing to provide innovative financial services and launching the solutions necessary to meet changing needs.” He added.

„

The bank received the Award for leading the Phase I financing of Ma’aden’s Aluminum complex.

The total Smelter Project Costs have been estimated at USD 5,010 MM and the total initial Rolling Mill Project costs USD 2,519 MM. Both projects have been financed through a mix of debt and equity.

NCB was the first bank in the world to launch a real estate fund compatible with the Islamic law and was the first Saudi bank to provide its customers with a wide range of financing funds that were compliant with the Islamic law

Being committed to the economic development of the Kingdom, NCB made the highest financial commitment to Phase I. Besides being the Documentation Bank for the Rolling Mill, NCB participated in the Islamic tranches with the highest aggregate allocation among almost two dozen banks in Phase-I financing. It is widely believed that the Islamic structures used for this financing will be considered as acceptable precedents in the future transactions.

The Annual “Triple A” awards are the most important awards granted in the financial services sector, due to the strict evaluation process used. These awards are offered in recognition of institutions and individuals who significantly contribute to the development of the financial services sector in Asia and the Middle East.

Abdulkareem Abu Alnasr, NCB’s CEO, said “We are pleased to receive this award that comes in recognition of the well stand of the NCB in the Islamic banking industry due to the excellent performance it has achieved in the development of Islamic banking in both corporate and retail sectors.” Abu Al26 Global Islamic Finance

nasr considered the winning of this award as a confirmation of NCB’s capability and outstanding performance in the management and delivery of funding programs that are consistent with the provisions of Islamic law. He pointed out that the award reaffirms the advanced position represented by NCB in the area of launching various Islamic finance products and services and highlights excellent reputation premium of the bank amongst the professionals in the financial and economic sectors.

“The enormous expansion that we have achieved in the corporate banking service sector had a significant effect in upgrading our performance in 2010. The bank’s participation in the financing of several major projects has the bank in the first place in the Middle East, according to the evaluation of the “DEAL LOGIC” specialised magazine.

The vast majority of the huge projects’ financing deals were compatible with the Islamic law, which we consider to be a major achievement and a source of pride for us”,

December - January 2012

He concluded by noting that Islamic finance products devised by NCB have been applied by many national and international banks and banking institutions, which placed the bank at the top of the list of banks, locally, regionally and internationally, in terms of diversity and innovation of Islamic banking products.

It is noteworthy that NCB was the first bank in the world to launch a real estate fund compatible with the Islamic law and was the first Saudi bank to provide its customers with a wide range of financing funds that were compliant with the Islamic law. As a result, NCB is today the largest asset manager complying with the Islamic law in Saudi Arabia and the manager largest of assets that are in compliance with the Islamic law in the world.

On his part, Dr. Mansoor Durrani, NCB Vice President and Head of project finance, who received the award, confirmed that selecting NCB to win the award was an indication of the high level of professionalism achieved by the bank in this field and its impressive record in the Islamic financial services and banking.

He pointed out that the award granted by a specialised and highly credible magazine has promoted NCB’s position at the top of the Saudi banking system. Such achievements qualify us to earn the trust of more customers at both national and regional levels. gif

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Interview

BUSINESS SUSTAINABILITY: Supporting Islamic Finance with the long-term growth

An interview with Tony Czarnecki the Managing Partner and founder of Sustensis Ltd

Tony Czarnecki is the Managing Partner and founder of Sustensis Ltd, a management consultancy set up in 1996 focusing on Business Sustainability. Sustensis developed a family of US-patent pending nonfinancial indices for selecting assets for long-term growth. In 1994 he participated in the RSA’s well-known “Tomorrow’s Company” Programme where he led the Inclusive Company Forum. He is the main author of Symbiosa Business Sustainability™ (SBS) method and lectured on the concepts of SBS at postgraduate courses at the University of London and Universities in Central Europe.

He is also a conference speaker. Tony has MSc degree in Economics and is a Fellow of the RSA.

28 Global Islamic Finance

December - January 2012

What are your thoughts on the prospects of Islamic finance in the current crisis?

There is an undeniable clash of interest between some groups of institutional investors and pension funds, whose objective is a reasonable and lower risk return in the long-term and companies being managed for a very short investment horizon and quick return.

Short-termism can be regarded as a one of the principles that are contradictory to building sustainable community, so important for Islamic countries. Therefore, I would suggest that investors adhering to the principles of the Islamic Finance, which implies a long-term investment horizon, are less likely to be negatively affected by the current crisis than those investing in other types of equities.

market. That might have been considered as one of the key causes of 2001 crisis. But crisis, when one takes a macroscopic view, points to short-termism as the core reason for its depth and spread. Short-termism in turn has in roots in the change of view by business leaders on what is a company for.

For those who derailed the world economy, companies have become commodities which they would trade as any other goods on stock exchanges. Sub-prime mortgages in general could be considered such a short-term commodity.

What, in your view, are the main reasons behind the current financial crisis?

Long-term they did not have any future because how could such a market deliver even low returns, when these mortgages were granted to extremely high risk borrowers? In the short-term, there was however a chance for those who approved of such practices, to boost turnover artificially and pocket the profits.

This crisis is not so much about companies’ productivity slowing down. Neither is it caused by the financial difficulties experienced by companies world-wide resulting from a sudden change of demand for their key products, or a dramatic fall in prices caused by very successful competitive products, which suddenly entered the

The long-term underlying problems must have been known for quite some time by the banks’ boards and non-executive directors, usually representing the largest shareholders. Those problems could be clearly inferred from the most basic Annual Reports’ statistics. So, why such practices were not stopped earlier e.g. at the banks’

Interview

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„

Non-financial criteria do not supersede the financial criteria in the asset selection process for the long-term investment. But they can play an important role in counterbalancing the assessment of the company’s financial performance

AGM? I believe that one of the key reasons was passive investment by institutional shareholders.

Can you explain how widespread is passive investment in Islamic finance?

Passive investment is quite a common practice among pension fund managers, one of the largest groups of institutional investors. These investors are widely known for their unwillingness to move their shares around. Passive long-term investors stick with what they know.

Partly for these reasons, FTSE100 index, in which most of these UK funds are invested, is no longer recognised as a true barometer of the British economy. From my own observation it looks as in the Islamic finance by and large the same attitude prevails as far as blue chip companies are concerned.

Once the equities for investment have been approved as complying with the Shariah law, investors tend to leave the assets in the hands of the company management, trusting they know better.

Passive investors receive Annual Reports, attend company briefings and AGMs but very rarely criticise at AGM’s the company’s decisions or ask detailed questions about

long-term consequences of chosen strategic direction and alternative options. Many of such investors use proxy voting and do not even attend the AGM meetings. Neither do they execute their financial muscle to intervene directly in the company’s style of management or long-term business direction. However, the most recent spread of shareholders’ activism stimulated by some large funds, e.g. Fidelity, shows that this trend is changing.

More active participation of institutional investors’ representatives at AGM seems to be the first step in affecting decisions related to the company’s growth, and in the context of Islamic finance, re-assuring investors that the Haaram and Riba principles are being properly applied. That means the preferred type of investment in Islamic finance should be hands-on investment, especially for long-term sustainable investment.

You said that the FTSE100 index is no longer recognised as a true barometer of the British economy. What do you think has taken its place and why?

One reason why FTSE100 is no longer reflecting properly the state of the British economy is the already mentioned passive investment, so common among FTSE100

stocks. The other is the fact that FTSE100 companies being large, do not change fast. They adapt much more slowly to the changes in the world economy. A much better indicator of the economic climate in Britain is the FTSE250 index. The shares in that index change hands more often and the share price is more closely linked to the real economy.

What advice resulting from the current crisis would you give to long-term investors?

I would have several fundamental recommendations: • •

•

•

Become an active, hands-on investor Be intimately familiar with the company’s overall business strategy and important products development and marketing campaigns to win new markets Make sure the growth assessment of the company in which you invest is linked as closely as possible to business fundamentals, rather than just financial indicators Avoid long-chained derivatives, which may be so far away from the real economy, that it would be almost impossible to assess long-term risks in such investments

December - January 2012 Global Islamic Finance 29

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Interview

What advice would you give to those wanting to invest in Islamic finance focusing on the long-term and those preferring short-termism?

I would not comment on the short-termism, because this is not what I would support in general, apart from some exceptional situations. My key advice for those wanting to invest in the Islamic finance in the longterm would be to change from passive to hands-on investment.

That does not mean constant interference in the way business is managed or in dayto-day business operations. It is rather about in-depth awareness and monitoring of what the company is planning to do, why it is going to do that, and what other options have been considered to achieve the same goal with different means.

Hands-on investors usually have a team of analysts that should be asking these questions. The point is that they concentrate mostly on monitoring their companies’ financial results.

That is certainly not good enough for longterm investors. The problem with measuring company’s performance with financial criteria is that such criteria point mainly to the company’s past performance, evidenced in the balanced sheet.

You stated that the problem with measuring company’s performance with financial criteria is that such criteria point mainly to the company’s past performance. What do you believe is the best way to measure an Islamic financial company’s performance?

The approach I would propose is to apply the principles of Business Sustainability.

According to this approach, the company’s focus should be on the long-term business survival as a whole entity through reciprocal relations with all stakeholders of the business.

Secondly, I would advocate that the measurement of the growth potential for the long-term investment should be based on non-financial criteria. Non-financial criteria, such as customer retention, better determine the company’s future growth because they look at the company’s potential strengths or weaknesses.

Non-financial criteria do not supersede the financial criteria in the asset selection process for the long-term investment.

But they can play an important role in 30 Global Islamic Finance

December - January 2012

counterbalancing the assessment of the company’s financial performance. In Islamic finance most of the criteria allowed or disallowed are of non-financial nature anyway, and thus can be grouped within a specific category of Social/ Ethical investment criteria.

It is possible to select such criteria that will not only be Haaram-allowed but will also significantly support long-term growth, serving the needs of all Islamic stakeholders. Such assets growth could be assessed with a higher probability because the underlying assets’ growth (i.e. the company’s growth) is based on real economic performance.

Many investment funds already consider some non-financial elements as part of their overall asset selection process.

However, such embedded non-financial analysis blurs the impact of non-financial criteria on business growth and makes consistent comparison with other potential investment targets nearly impossible.

in-depth sector comparisons and can ultimately point to alternative investment scenarios.

Comprehensive comparative reviews of a company’s strengths and weaknesses can identify more quickly and accurately investment targets such as potential partners for a merger or acquisition.

Depending on the investment strategy, this may include companies with a sustainable growth pattern. Alternatively, these could be companies that are currently performing poorly, but whose underlying nonfinancial indicators clearly point to likely performance improvement.

The key benefit of such analysis is that it will indicate more clearly than the financial assessments alone where the company should focus its attention to improve its long-term growth.

What key points would you give to an Islamic financial company wanting to improve its long-term growth?

Non-financial criteria based assessments also help companies’ boards to understand better the impact of inconsistencies in their policies, motivational factors as well as the overall transparency and sustainability of the long-term growth.

I believe it is important for an Islamic financial company engaged in long-term investment to use non-financial (extra-financial) criteria for asset selection and monitoring their performance in a completely separate process.

From a general investor’s perspective, such assessments may help him answer the question: is the company’s current growth likely to be sustainable and therefore, should I continue investing in this company.

The best way for selecting assets for longterm investments are specialist (very rare) non-financial indices such as Long-term Growth Value index or Long-term Growth Potential index (over 250 non-financial criteria, including 40 in Corporate Governance and in 30 Social Responsibility).

Finally, measuring company’s performance using non-financial criteria in a separate assessment process can also help investors find the company’s intrinsic value.

One of such examples could be AllianceBoots, acquired by the private equity fund KKR in 2007.

They differ fundamentally from more popular ethical/environmental indices such as EIRIS, DJSI or FTSE4good, because they cover the entire spectrum of the company’s activities, from Business Strategy, through to Business Operations. That is why they impact at least 50% of the company’s growth rather than about 5%, as in case of environmental/social indices.

The share price of AllianceBoots’ and its corresponding market capitalisation did not fully reflect the intrinsic value. The bidding investors, and the AllianceBoots Company itself, have only become fully aware of that intrinsic value during the acquisition process. The final result was that KKR had to pay 43% more than the company’s market value before the bidding process had started. gif

What are the benefits of having separate financial and non-financial analysis for asset selection?

A separate assessment and monitoring process, especially in long-term investment, using non-financial criteria allows

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Islamic Finance

ISLAMIC FINANCIAL PRODUCT INNOVATION Author: Dr. Fouad H Al-Salem, Department of Business Administration, Gulf University for Science and Technology, Kuwait

Abstract: This article outlines the financial product innovativeness of Islamic financial institutions. Views were gathered from practitioners and researchers within Islamic finance. Innovation levels of Islamic financial institutions are low due to the development of Islamic finance as a new activity. The major practical implication is the necessity of developing financial product innovativeness programs as a means for survival and growth.

The article demonstrates the value of Islamic financial product innovation within the wider context of product innovations Key words: Innovation, Islamic Products, Instruments, Investment Funds, Securitisation

32 Global Islamic Finance

December - January 2012

Islamic Finance The Islamic finance industry is a relatively new entrant to the world of finance because its operating principles differ from the conventional finance modes of operation traditionally practiced in the West. It operates in compliance with Islamic Shariah. This raises the need for developing appropriate financial instruments and services for that industry.

However, the question arises as to the product innovativeness of Islamic financial institutions, Islamic and Conventional Financial Products. Given the growth in demand for Islamic banking services and products amongst bank customers, there is a growing debate and differing viewpoints about their nature, and the extent to which they are different from products provided by conventional financial institutions. Some Islamic products are similar to those provided by conventional institutions, but others are different. Islamic banks must therefore develop products to achieve the goals of Shariah, and at the same time meet the economic needs of society. Critics of the concept of Islamic finance do not see any difference between Islamic and conventional economics, and if any exists, it is artificial in nature and not substantive in any way.

As a consequence, the majority of customers of Islamic products are convinced that Islamic products are similar to any other bank products, and hence, separating Islamic from non-Islamic operations would be unrealistic. It is noted that there is a widespread use of securitisation (tawreeq), “fictitious” Morabaha deals, and certain “fabricated” Sukuk, provided by some financial institutions as Islamic banking products and services. The reason for the prevalence of these practices is the engagement of conventional or “rabawiyya” banks in providing Islamic products in a way that does not distinguish between Islamic and conventional financial operations, and the control systems applied to it. The problem of specifying clearly what

some banks engaging in what they consider to be Islamic operations, when in actual fact, they are not Islamic.

They are a form of circumventing dealing in interest or “riba”, called by Islamic scholars “rabawiyya tricks”. Such products are closer to conventional products and are different from Islamic dealings that have been considered in compliance with Shariah by Islamic scholars. Hence, some current operations that are provided as Islamic in nature can be considered non-Islamic and are closer to conventional products.

Dr. Fouad Al-Salem studied at D.B.A George Washington University and also has experience in banking supervision and investment in a large international investment company. He has also been a board member of banks and investment companies in Europe and Kuwait. He is currently researching globalisation and the development of international financial centers.

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The major challenge facing the industry is the preservation of its excellence in providing services, expanding the scope of its financial activities, and exploiting in a beneficial way the developments in the financial markets.

Several developments resulting from globalisation, transparency, and capital movements were noted to have a major impact on the Islamic financial services industry, and present it with major challenges. The major challenge is developing products in compliance with Shariah. Since Islamic finance is a new activity, it is imperative that products and services are developed on a continuous basis. This focuses on the quality and diversity of products and services provided by Islamic financial institutions, and the major challenges that they face in that regard.

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One cannot rule out the presence of a partial or an incomplete similarity between Islamic and conventional products, because it is not a precondition that Shariah operations are completely or 100% different from conventional products

an Islamic product stands for is compounded by the interpretation by religious scholars (Olamas) of Shariah, and hence unclear rulings (Fatwas), and the resultant divergence from the consensus of Islamic scholars. This can lead to a questioning of Shariah certification and authentication of Islamic banking products.

One cannot rule out the presence of a partial or an incomplete similarity between Islamic and conventional products, because it is not a pre-condition that Shariah operations are completely or 100% different from conventional products. However, there is a clear difference between these products in form and substance, and the resultant outcomes. The unclarity or confusion over what is Islamic and what is not, is due to the practice by

Changing the names or titles or designations for such products does not alter the distinguishing nature and element of what is Islamic and what is not. This can result in the provision of banking services and products that are not Islamic in substance, where there is a true and genuine need to Islamise these operations. Such operations result in confusion for the customer of Islamic financial products, which will ultimately lead to the avoidance of Islamic products in a final form, if such operations continue to be practiced in the future. What are considered to be the most successful Islamic banking operations are short-term products, which differ from long term ones.

Most of these products are considered partly Islamic because they do not meet the requirements for being Islamic in full form.

The reason for such a situation is that Islamic banks operate in a dual banking system which is practiced in existing economic systems. Thus, they experience what can be considered conditions that are not natural, or alien to their mode of operation and functioning, which results in structural imperfections.

This situation will limit their professional achievements and does not result in products that are well-developed. This unusual or negative situation is not accommodated fully by the legal system because it does not give adequate recognition to Islamic financial operations. This situation directs some Islamic scholars to approve what they consider to be Islamic operations, while they are in fact very similar in form and substance to conventional or “rabawiyya” operations. The outcome is a blurring of the distinction or difference between Islamic and conventional financial products as far as bank customers are concerned.

In addition, conventional banks are taking the lead in providing Islamic banking operations, and promoting them in a manner that does not distinguish between them and conventional ones, this being done to serve their interests. Given the acceptance of the coexistence of the Islamic and conventional December - January 2012 Global Islamic Finance 33

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Islamic Finance Edige Alpysbay, Director, Kazakhstan Zakat Fund, Islamic Finance Consultant

Several developments resulting from globalisation, transparency and capital movements were noted to have a major impact on the Islamic financial services industry, and present it with major challenges. What do you believe are the major impact and challenges in Islamic finance?

The Islamic finance Industry is growing with good temps globally and I think one of the reasons for that is globalisation because innovations in any country are now implemented in the others as well. For example, in Kazakhstan, the passive research of Islamic finance has been started in early 2000’s.

But actively it has started to be discussed about accepting a special law only in 2008. An beside many other reasons, one of main arguments was that Islamic finance is expanding globally, and Kazakhstan as well, as a muslim majority country shall implement it.

I think many other countries have the same situation. But in my opinion, the problem of many initiatives in terms of the implementation of Islamic financials instruments in most cases, there is not a complex and systematic vision on the expectations. Why, for example, Kazakhstan has to implement Islamic finance from the government point of view, but in most cases, the main reason are to be able to attract a cash flow from Islamic capital markets.

But there are other incentives and all of these shall be considered as a complex system, and shall develop a strategy to target all the reasons. The other reasons include: •

•

To develop a legal infrastructure for Muslims to be involved in “halal” financial industry. Normally, this should be the main reason. There should be a demand from Muslim community. But 70 years of communist regime in this region has affected much the society itself. Even 70% of the population is Muslims, but not all of them are practicing Islam. And unfortunately most of them are not still conscious to raise demand for Islamic products. But there is a good trend in this direction.

To provide alternative financial instruments for local investors. It became more important, after the credit crunch. There is lack of financial instruments where people can invest. Most of them invested in houses and apartments (using mortgages) and

34 Global Islamic Finance

now they are still are trying to get up after that. Islamic financial instruments can be real alternative for local investors.

•

The other reason or expectation is that the Islamic economy itself is beneficial for the whole economy in a long-time period.

So, there should be undertaken deep and qualified researches on the Islamic economical system and apply these models in the economy. We shall not think only about setting up an Islamic bank or issue sovereign sukuk, but think about the complex and systematic development of the economy using Islamic principles.

In Kazakhstan there has been a law accepted, that is mostly oriented for Islamic banking and sovereign Sukuk. There are undertakings for Takaful law as well.

We have launched an Islamic bank and are waiting for the second bank, which is expected to be a retail Islamic bank. When we start to launch retail products and instruments it would be more effective and result in terms of letting people “taste” Islamic finance and to understand it, breaking all stereotypes.

But I believe Kazakhstan and CIS has a great potential for Islamic finance. If we consider the fact that historically this place was the center for Islamic knowledge and heritage and the number of conscious and practicing Muslims (more that 100 million in CIS region) is rising day by day, I think it is not only words.

How do institutions ensure that Islamic and non-Islamic products are kept separate?

Well, in Kazakhstan the law does not allow (as for now) the Islamic windows this means that Islamic banks are separated from traditional.

But I think the quality of society itself will control that because institutions providing Islamic products shall be interested in providing solid Islamic products and have good Shariah advisors.

It is directly affecting their image and the belief of the clients. So, if society is well educated, qualified, they can separate the qualified Islamic products very fast and the age of globalization and social networks will do its job.

Sukuk can be considered a development tool and not a financial instrument. Do you agree with this status and why?

If I speak about Kazakhstan, yes, I agree with the fact, that Sukuk (especially Sovereign sukuk) is a development tool. It is not for the project or industry, where money will be used, but also it is a development tool for the Islamic finance industry as well. It can serve as a benchmark and locomotive for other products and instruments.

December - January 2012

or “rabawiyya” systems in the finance field, some Islamic economists suggest that conventional banks must not be allowed to provide Islamic products in order to prevent the elimination of the distinct nature of Islamic financial products.

Successful products in Islamic banks were mostly successful in promoting the importance of applying Shariah principles in the economic and financial spheres. Islamic banks provided fully Islamic financial products such as Modaraba, Istisna, and Morabaha which are in full compliance with Shariah principles and guidelines. However, they failed in other products, such as in certain forms of Mosharaka that are based on trust (Amana), because it is difficult to accomplish it in practice. The absence of the method or tool to ascertain its presence is a fact which makes it difficult for Islamic banks to expand in providing it.

Need for Funds The Islamic finance industry initially started its operations in the form of Islamic banks in the 1970s and 1980s, when it had access to large pools of capital. At that time, it did not see the need for developing financial instruments to attract funds, and it managed instruments that were considered adequate and profitable. But in the 1990s, a large number of non-bank financial institutions were established in Kuwait, and the resultant strong competition for funds .The outcome facing Islamic financial institutions was the necessity to borrow funds from a limited capital supply base.

Islamic finance institutions have unique characteristics, especially from the intellectual aspects and in the method of dealing with society’s problems and hopes. Investment projects are considered a way of life, and a means to develop society’s capabilities, maximise production, and achieve development plans. This is shown in the variety and diversity of the forms of transactions employed in the various products and services provided by Islamic institutions. Islamic finance provides the basic building blocks that can be used to construct more complex instruments, thereby enhancing liquidity and offering risk management tools. Some examples include asset securitisation and swap transactions that conform to Islamic principles. Innovation is considered significant in the Islamic financial industry. The Islamic finance industry can develop financial instruments for low cost funding, which shows the capabilities of these institutions to develop and innovate.

Islamic Investment Funds and Securities In recent years, Islamic investment funds have prospered in the Gulf countries and Malaysia. Among the different categories

Islamic Finance Fazrihan Duriat, Shariah Compliance Executive , Maybank Several developments resulting from globalisation, transparency, and capital movements were noted to have a major impact on the Islamic financial services industry, and present it with major challenges. What do you believe are the major impact and challenges in Islamic finance?

All these developments will benefit Islamic finance both short-term and long-term. Globalisation and capital movements enable many Islamic banks to enhance cross border liquidity flows between countries and increase and diversify sources of funding. Increased transparency gives opportunity for Islamic banks to develop an effective risk management system. Eventually, everybody will be interested in the growth potential of Islamic finance as its basis is laid down on ethical values and socially responsible financial system and hence, it is a viable option for everyone irrespective of their race or religion. However, some challenges posed could be as follows: • •

• •

Availability of effective infrastructure and framework - to what extend can Shariah and the current prevailing legislation work together to allow Islamic banking to grow in the relevant countries?

Availability of all-rounded talents - shortage of experts from both Islamic and conventional banking and finance background will result in low productivity, slow pace of innovation and lost opportunities for the ummah.

Will these developments enable us to reach Maqasid As-Shariah?

If Islamic finance only helps the rich, is this a fair assessment?

Are these developments based real economic activities? One example is the launch of products based on organised tawarruq.

Such transaction is not widely accepted by scholars and it also incurs additional transaction costs.

Hence, I feel Islamic finance has a lot to improve on.

How do institutions ensure that Islamic and non-Islamic products are kept separate?

This issue arises mainly for a Financial Institution (FI) that offers both Islamic and conventional products. In summary, such FI has a dedicated Islamic banking team who has separate accounts for assets, liabilities, profit and loss, but operates within a conventional bank and they do not borrow funds from the conventional as part of their Shariah-compliant asset-liability management.

In the accounting aspect, as Islamic and conventional funds will eventually comingle within a same pool, the separation of Islamic from conventional products are done via creation of general ledger codes for easy identification.

At the operational level, such FIs have their own dedicated team of experts handling Islamic operations. When advertisement and promotion is concerned, FIs have enhanced their websites to ensure that the Islamic products are not bundled together with the conventional. Those are some of the things I can share.

Sukuk can be considered a development tool and not a financial instrument. Do you agree with this status and why?

Yes. I view Sukuk more like a development tool. Sukuk has been one of the most significant developments in Islamic capital markets. Sukuk connects global issuers with investors who want to diversify. In this way, funds raised through Sukuk can be allocated in great way to build topnotched billion-dollar projects. Sukuk issuance also has proven its worth as it stays resilient during recent economic downturns in global capital markets, as long as proper “Know-Your-Customer assessment” is done.

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are equity funds, real estate and property funds, Morabaha funds, commodity funds, and leasing funds. A range of Islamic instruments are also in use in several countries for financing specific government projects and for the procurement of goods and services. Launching Islamic funds may well be an effective way to compete with foreign and domestic conventional banks. The Islamic debt market-both foreign and domestic-has been the most rapidly growing segment of Islamic finance. In Malaysia, for example, Islamic securities accounted for 42% of total outstanding private debt securities by the end of 2004, and Islamic securities accounted for 25% of total outstanding bonds. Several financial instruments have been developed and are considered innovations in Islamic finance. CIMB Islamic’s Islamic profit rate swap (IPRS), a Shariah-compliant version of an interest rate swap, is considered an innovation in Islamic finance. It is not derived from the trading of exchange of interest rates but rather, from the trading of real assets.

Another development in the area of Islamic financial instruments is a new form of debt; Islamic Sukuk, in their diversity and capability to provide funds. These are Islamic bonds that act like regular bonds but comply with the rules of Shariah. Their risks are similar to those of bonds; they rely on the financial soundness of the issuer. Sukuk are an Islamic investment certificate, where each holder owns an undivided beneficial ownership interest in the underlying assets.

Consequently, Sukuk holders are entitled to share in the revenues generated by these assets as well as being entitled to share in the proceeds of their realisation. They can be considered a development tool and not a financial instrument.

An Ideal Solution Sukuk can be considered an ideal solution to the limited availability of Islamic finance instruments in local markets, where there is a concentration on Ijara, Morabaha, and Wakala Investment, in addition to securitisation which is considered controversial by religious figures. Islamic Sukuk can be an ideal solution in developing an integrated market of financial instruments of various risk levels to meet the needs of the investors. It will enhance the ability of the markets to grow, because its growth will not depend on the size of the institution and its ability to borrow, but on its ability to issue Sukuk resulting from securitising assets. Permitting institutions to issue Sukuk will improve their financial returns, growth prospects, and spread the risks resulting from the institutions borrowing from a larger number of investors: those that issue Sukuk, and not to let it be borne by banks. In other words, it will improve the credit rating of the institutions that issue the Sukuk and the banks that finance it.

Islamic banks issue Sukuk as a mechanism to mobilise savings, and their issuance can be diversified and expanded to benefit from the opportunities existing for these financial market instruments. However, the growth in the Sukuk instruments will only be accomplished when liquidity is provided to its bearers. The Sukuks will bolster the activities of Islamic banks as it is considered an acceptable instrument from the Shariah standpoint for investing liquid funds, achieving returns, and lowering risk.

Using Sukuk as a financial instrument of various capabilities is suitable for a wide variety of economic performance aspects on an international scale. Some of their main advantages are to increase the capital available to develop major economic projects, to control liquidity, to use funds in an optimum manner, and to increase the size of capital markets for investors. Several indices were developed to measure their performance in the financial marketplace. The Dow Jones Islamic Market (DJIM) Index, the Dow Jones Citigroup Sukuk Index, measure the performance of Sukuk. In Kuwait, the Al Madar Finance Company developed a Shariah-Compatible Index-Series; a series of twelve Shariah-compliant indexes for the Kuwait equity market.

December - January 2012 Global Islamic Finance 35

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Islamic Finance Dr. Nidal Alsayyed, CEO, Inayah Research & Consulting Sdn Bhd Several developments resulting from globalisation, transparency, and capital movements were noted to have a major impact on the Islamic financial services industry, and present it with major challenges. What do you believe are the major impact and challenges in Islamic finance?

The necessity and viability of cooperation among Islamic capital market players along with the necessary market innovation are among the major challenges facing the Islamic banking and finance industry.

The economic benefits of such symbiotic alliances cannot be overemphasised considering the increasing demand for harmonisation of best practices in the Muslim world. Such economic cooperation must be enhanced by realistic market innovations to ensure the Islamic financial services industry development among global parties.

It goes without doubt that the time has come for concerted efforts should be garnered to jointly contribute to the global economy, particular in recent times when all measures are being made to salvage the global economy from the recent credit plummet. With a total market capitalisation of USD 2.1 trillion and more than 4,900 companies in 2010, Islamic capital market products have a very high potential to contribute to the global economy through Shariah-based investment instruments.

How do institutions ensure that Islamic and non-Islamic products are kept separate?

There is no benefit in mere combining of traditional and Islamic transactions without the corresponding move towards the realisation of what is contained in such instruments. There should be effective steps to develop Shariah-based instruments in an independent environment; which can compete in the international financial markets.

Sukuk can be considered a development tool and not a financial instrument. Do you agree with this status and why?

It is crystal clear that the time is ripe for a more solidified development of Shariah-based Sukuk; which is fervently required to be very innovative in its approach towards product development. The general financial market move is towards the standardisation and harmonisation of best practices through international cooperation among international regulatory bodies.

AAOIFI as an umbrella under which the Islamic financial institutions operate should spearhead a modern approach towards the globalisation of Asset based/backed Sukuk based on AAOIFI Shariah-standards. This can be achieved through practical steps to develop Sukuk and move a step forward towards innovating new products to be able to compete at the global level and attract more investors.

Economic structures need to be developed while economic relations must be reinforced through organised market innovations. There should be a policy agenda for the development of Sukuk.

It is however important to protect the investors and operate transparent Islamic capital markets by providing for an effective legal framework for the regulation and functioning of the Sukuk markets. International standards should be taken into account while formulating policy agenda for innovative steps towards the introduction of new financial instruments. That is why Sukuk is a development tool rather than financial.

36 Global Islamic Finance

December - January 2012

Islamic Capital Markets The emergence of the Islamic capital markets has its roots in the Malaysian governmentâ&#x20AC;&#x2122;s inaugural Sukuk issue in 2002. Since 2002, the market has grown exponentially and the size of this market is estimated at about $8 billion. Another estimates it at $15 billion globally. The Sukuk market was originally the domain of sovereign issues. The governments of Malaysia, Qatar, Pakistan, Bahrain and the German State of Saxony-Anhalt (the first non-Islamic Sukuk issuer) have tapped this market. More recently, a number of corporates in the GCC have begun to tap the Sukuk market.

As the financial infrastructure and education in the region increases and the pool of assets that are suitable for securitisation develops, such as consumer finance assets, market participants are looking to structure non-collateralised, non-recourse, Shariah-compliant securitisation transactions. Sukuk have added value through establishing a new and vibrant secondary market, providing long term sources of funds, lessening the burden of managing liquid assets, and generating more attractive returns than bank deposits, and making it possible to use it as a mortgage when needed.

Sukuk can meet the financial requirements and needs of projects planned in the Gulf region in the next 5 years, at a size of 1 trillion dollars, with current financing at $800 billion. Kuwait Finance House participated as a lead manager and participant in several Sukuk issues amounting to $2.8 billion in large projects in Kuwait, the region and the whole world. Several Sukuk issues were made in many parts of the world.

An Islamic Pension Fund Another financial service innovation was introduced by HSBC, which became the first UK bank to offer a pension fund that is in compliance with the requirements of Shariah. The HSBC Life Amanah Pension Fund is the latest addition to a portfolio of products offered by HSBC Amanah Finance, the Groupâ&#x20AC;&#x2122;s global Islamic financial services division, which was established in 1998 to provide Islamic alternatives to conventional banking.

Securitisation Financial innovation has changed the business of banking. The most noticeable trend is the trend in the loan-making process is the movement toward securitisation and fee-based activities. Securitisation (Tawreeq) is a financing method adapted to comply with Islamic law.

Bankers, lawyers, and regulators are now investing considerable resources in the development of the Islamic capital markets. Particular focus is on the area where most market participants believe the next stage of development to be-the development of the Islamic securitisation market. The securitisation market has strong growth potential and is expected to grow at a considerable pace.

The purpose of securitisation services is to provide companies with a financial service that is off balance sheet at a lower cost than that provided by any other source in the market. This will ultimately lower the burdens on a companyâ&#x20AC;&#x2122;s balance sheet. Such a service will result in higher returns, and lower risks resulting from additional guarantees to the investor.

An example of securitisation opportunities in the Muslim world is in the Audi Arabian capital market which developed the Caravan I transaction, a Shariah-compliant vehicle finance securitisation. Another example is in the U.A.E where Barclays Bank arranged a securitisation issue that was backed by payments under real estate finance arrangements and long-term leases in respect of properties located on one of the Dubai Palm Developments. Other examples in securitisation were done in Qatar, Indonesia, and Malaysia.

Islamic Finance Islamic Shariah: Problems and Challenges Despite these innovations and developments in financial instruments, and the growth in demand for such instruments, there are still several major problems, different viewpoints, and challenges facing Islamic financial institutions. The question arises as to the nature of Islamic financial products and the extent to which they are different from products and services provided by conventional banks.

institutions due to the lack of standardised measures. The presence of â&#x20AC;&#x153;various tendenciesâ&#x20AC;? of the societies in which these banks operate, makes it imperative to develop a unified Shariah criteria and professional competence to maintain the unique position of Islamic banks.

Islam is not governed by a monolithic theology; there are four competing centers of Islamic jurisprudence, ruling on what is proper and what is not for Islamic finance. Their opinions can vary widely over such matters as to what constitutes interest (which is forbidden), and what constitutes profit (which is allowed). This can create uncertainty. The lack of uniformity among Islamic institutions as to the interpretation of Shariah on certain issues can hamper the structure of a project finance transaction.

A central issue is developing the operations of Islamic banks and financial institutions in compliance with Shariah. Operating according to Shariah is a promising and lucrative area; however, it is not served adequately. In addition, globalisation has a great impact on its spread. However, the challenge is to develop products in compliance with Shariah.

Shariah supervision played a major role in the development of Islamic banks and in- Appropriate Financial Instruments stitutions. Its role is pivotal in establishing One of the most prominent obstacles and banks and institutions and controlling their problems facing the Islamic financial inoperations by applying Islamic Shariah, sup- dustry is the inappropriateness of many porting the transformation of traditional traditional financial instruments when apbanks to Islamic institutions, and giving plying Shariah. For one thing, Islamic banks trust and credibility in the operation of these cannot manage liquidity at hand similar to institutions with their customers. Providing traditional banks investing in notes or govinnovative Islamic solutions for the financial ernment treasury securities. Also, it has no problems has as its basis an Islamic founda- Shariah alternative in the market and at the tion, starting from the financial need and developing an appro- Figure 1: Sukuk Issues priate solution to the funding.

There is also the issue of the absence of good governance (Al Hokm Al Rasheed) at any Islamic financial institution. It will impact the performance of the industry in a negative manner, and will ultimately make its survival impossible. Good governance occupies the most important place in the Islamic finance industry. In addition, developing products according to Shariah is burdensome and more difficult than the traditional ones. Development is not an easy task because Shariah committees need time to do their work. The larger financial institutions are advancing in developing Shariah committees. They also have the proper infrastructure, capabilities, experience and resources. All of these factors will permit the growth in developing their products.

Despite the fact that several countries passed laws pertaining to the Islamic finance industry, there are still organisational challenges facing these

right size. The above factors deprive Islamic banks from the financial instruments which the banks can use to manage the maturity gap at the lowest risk possible. Also, Islamic financial services are of a different nature and differ from those provided by traditional institutions either in transactions or activities that require approval of the Shariah committee. This is the main difference between the operations of traditional and Islamic institutions.

Designing Islamic instruments for monetary operations has proven conceptually difficult.

In countries with a dual banking system, the lack of non-interest-bearing securities has limited the scope of monetary management.

The liquid nature of bankâ&#x20AC;&#x2122;s liabilities, related to the predominance of deposits of shortterm maturities, predisposes the system to hold substantial liquid assets and excess reserves. This in turn, inhibits financial intermediation and market deepening. Islamic financial institutions are not innovative, and the development of financial products is low.

There is also the problem of the non-existence of indexes to measure performance.

Difficulties in defining rates of return on these instruments have also constrained the development of money and interbank markets. The markets for Islamic instruments and government securities remain shalIssue Size low and an organised interna$200 Million tional Islamic financial market is still nascent. The sector must $250 Million improve the range and sophistication of asset and liability $100 Million classes and develop new instruments and financial techniques $750 Million that would enable Islamic banks to diversify their balance sheets. $77 Million For any country to be providing $350 Million sophisticated financial services and risk management center, $ 800 Million the regulator will need to satisfy $800 Million an ever-growing appetite for new appetite for new products.

Issuer

Country

Lagoon City Sukuk (Corporate)

Kuwait

Government of Bahrain-BMA Issue No. 7

Bahrain

Commercial Real Estate Sukuk (Corporate)

Kuwait

DIB Sukuk Company

United Arab Emirates

Sukuk Brunei Inc.

Brunei

Sharjah Electricity and Water Authority Sukuk

United Arab Emirates

ADIB Sukuk

United Arab Emirates

SABIC Sukuk (Corporate)

Saudi Arabia

Sanctuary Building Sukuk

United Kingdom

Islamic Development Bank

International

$500 Million

Dubai Global Sukuk FZCO (Government)

United Arab Emirates

$1000 Million

Stichting Sachsen Anhalt Trust (Government)

Germany

$120 Million

Saxony-Anhalt State Properties

Germany

$120 Million

Malaysia Global Sukuk (Government)

Malaysia

$600 Million

Total of Sukuk 84

$261 Million

Total Sukuk Amount

$16,981.91 Million Source: Liquidity Management Center

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Risk of Rate of Return The risk of rate of return is a problem area facing Islamic financial institutions. The exposure of the balance sheets to the risk of rate of return, calls for Islamic solutions suitable for these instruments. The refusal to sell debt and investment guarantees is one of the major principles of Islamic banking activities. However, selling debt can be considered acceptable on condition that the sale does not result in dealing in interest.

The risk of the rate of return can

December - January 2012 Global Islamic Finance 37

Islamic Finance

be managed by a variety of instruments in conformance with Shariah, despite the fact that some of these instruments are under study to raise them up to a standard acceptable internationally in the management of the risk of return.

The Impact on Globalisation and International Banks The impact of the entry of international banks in providing Islamic services on Islamic banks in the region given their limited capital base is clear and evident. Certain aspects of the entry of international banks in local markets will be of a limited Islamic nature. This can be a positive situation given that is ascertained that Shariah is implemented by Fatwa committees.

The result will be the provision of highly developed products that are in compliance with Shariah, which in the end will be in the interest of the customer. An outcome will be to direct local Islamic banks to develop further, and to be more disciplined in complying with Shariah.

International banks treat Islamic financial products from a purely marketing perspective, providing the specifications approved by some Islamic scholars, and then marketing them in a framework that is in compliance with the legal requirements and conditions that they are subject to. Some international banks were able to compete with Islamic banks for several reasons; one being the latterâ&#x20AC;&#x2122;s small size. The differentiating point for Islamic banks, if they comply fully with Shariah, is in combining both the religious intentions and compliance with Shariah, a condition which cannot be met by conventional banks.

Although the size of Islamic banks is not small to the extent that their survival is threatened, and they are able to compete in many ways. However, the entry of international banks in the Islamic finance industry will lead to upgrading the service level and quality of local banks. The entry of foreign banks in the Islamic finance industry has two contrasting aspects. The positive aspect is the diffusion of knowledge on Islamic financing. However, the negative aspect is that these banks because of their educational background, might not improve the functioning of Islamic finance in an appreciable manner.

This will have a negative impact on the development of Islamic products in terms of compliance with Shariah. The WTO agreements are flexible enough to accommodate both conventional and Islamic systems. Islamic banks will only benefit from these agreements if Islamic banks are determined to maintain their gains by complying with Shari38 Global Islamic Finance

ah, otherwise, bank customers will seek the services of international banks. The future competition in banking will be intense, and institutions capable of complying with Shariah and developing further in banking.The issue of accepting dealing in bank interest (riba) is a controversial one.

The Sheikh Al Azhar in Egypt made a ruling (fatwa) that charging bank interest is not a violation of Shariah. However, such an issue must be decided by a consensus of Islamic scholars, and the consensus is that bank interest is a violation of Shariah. Some scholars at Al Azhar oppose the Fatwa from Iran that says that charging bank interest is not a violation of Shariah. The differences between the Islamic scholars on that issue have not been resolved.

Because customer needs and desires as well as competitive offerings are constantly changing, institutions need to innovate continually just to stay even with competition.

There is a need to develop a method for developing products and services in the industry since the basis of the Islamic finance industry is characterised by an investment nature, and not on providing credit facilities,

â&#x20AC;&#x17E;

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Sukuk can be considered an ideal solution to the limited availability of Islamic finance instruments in local markets, where there is a concentration on Ijara, Morabaha, and Wakala Investment, in addition to securitisation which is considered controversial by religious figures

or loans, and the existence of a strong connection between rates of return with the production cycle in the economy. A major characteristic of that industry is the connection and matching between sources and uses of funds, and the expanding scope of new services. This means that the firm needs to search perpetually for new improved products, services, and messages to target the customer with. The company that fails to innovate quickly falls behind.

The development of new products and processes is increasingly a focal point of competition. New insurance and financial products provide additional diversification opportunities to individual investors. Firms that get to market faster and more efficiently with products that are well matched to the needs and expectations of target customers create significant competitive advantage. However,

December - January 2012

firms that are slow to market with products that match neither customer expectations nor the products of their rivals are destined to see their market position erode and financial performance falter. Speed, efficiency, and quality are three imperatives in the development of new products. Also, the products and processes that a firm introduces must also meet the demand in the market for value, reliability, and distinctive performance.

Growth Platforms Innovation will lead to higher levels of competitive ability. There is a need to improve the efficiency and effectiveness of operations, through the better utilisation of resources and increasing the size of investments.

Changing regulatory requirements or social pressures create the opportunity to satisfy some unmet or latent customer need.

New product development is a necessity because companies grow by creating new growth platforms on which they could build families of products, services, and businesses. Possibilities for forming new growth platforms arise with forces of change. Islamic institutions, particularly in Bahrain, Malaysia, and Sudan have been gearing up for further expansion by continuing to develop, refine and market innovative financial instruments, on both the asset and liabilities sides.

In recent years, many new Islamic financial products have been developed and are increasingly used in financial market activities, including equity and bond trading and investment Islamic insurance and reinsurance (Takaful), Islamic syndicated lending, and investment in Islamic collective investment schemes and other wealth and asset management products.

The effective management of a developing financial industry is critical to ensure its future survival and profitability. Increasing competition in the product markets is becoming the norm for the Islamic banking and finance industry. There is a need to innovate and practice new ideas based on Islamic foundations, and at the same time, that are in harmony with the demands of modern markets.

The need to further develop financial products and services in compliance with Islamic Shariah is essential to the survival and growth of the Islamic finance industry. To compete, Islamic banks and financial institutions must continually improve their performance by innovating products and processes, and improve quality. gif

Islamic Finance References and Further Reading • •

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Al Tamimi and Company, Advocates and Legal Consultants, “Islamic Finance, U.A.E Legal Perspective”, www.tamimi.com.

Al Bahar, Adnan, CEO, Al Mostathmir Al Dawli, Presentation, 2nd Islamic Banking Conference, Al Qabas Newspaper, 18 April 2005.

Al Bahar, Bader, V.P.-Al Madar Finance and Investment, Interview, Al Qabas Newspaper, 10 July 2006.

Al Alaywi, Rashed, Islamic Economics Professor, Al Qaseem University, “Islamic Banking Products”, Al Qabas Newspaper, 1 September 2006.

Al Aloush, Mohammed, CEO Al Oula Investment Company, Interview, Al Qabas Newspaper, 10 April 2005.

Al Manea, Mohammed, Head of Investments, Kuwait Finance House, “Sukuk, A Promising Financial Instrument”, 3rd Islamic Banking Conference, Jeddah, Saudi Arabia, Al Qabas Newspaper, 1 May 2006.

Al Miraj, Rashed, Governor-Bahrain Monetary Agency, Statement, International Conference of Islamic Funds and Capital Markets, Manama, Bahrain,, Al Qabas Newspaper,, 8 May 2006.

Al Mobarak, Mansour, CEO-Rasameel for Financial Restructuring, Presentation, First Securitization Conference, Kuwait, Al Qabas Newspaper, 6 March 2007.

Al Musallam, Adnan, CEO-Investment Dar Company, Presentation, 3rd Islamic Banking Conference, Al Qabas Newspaper, 6 May 2006.

Al Muzaini, Yaqoob, CEO-Bubiyan Bank, Statement, Al Qabas Newspaper, 17 April 2005.

Al Saleh, Mostafa-CEO Adeem Company, Presentation, 3rd Islamic Banking Conference, Al Qabas Newspaper, 5 April 2006.

Al Tawari, Mohammed, President, Rasameel for Financial Restructuring, Presentation, 2nd Islamic banking Conference, 5 April 2006.

Al Yasseen, Bader Bazie, “Islamic Financial Operations”, Interview, Al Qabas Newspaper, 7 March 2007-05-18.

Ameen, Nabeel, CEO-Al Madar Finance and Investment Company, Presentation, Al Qabas Newspaper, 25 April 2005.

Anonymous, “Securitization Opportunities in the Moslem World”, International Financial Law Review, Vol. 24, Issue 7, July 2005.

Anonymous, “Global Stability Financial Report, The Influence of Credit-Derivative and Structured Markets on Financial Stability”, International Monetary Fund, Report, April 2006.

Anonymous, “Client Guide to Islamic Finance”, International Financial Law Review”, Vol, 23, Issue 5, May 2004, p. 45.

Anonymous, “Standard Chartered to Offer New Islamic Products”, Middle East Economic Digest, Vol. 51, Issue 10, 3 September 2007, p. 35.

Anonymous, “Islamic Financial Product of the Year: CIMB Islamic for Islamic Profit Rate Swap”, Euromoney, January 2006.

Anonymous, “Financial Modernization and Banking Theories”, Economic Letter, Federal Reserve Bank of San Francisco, No. 2001-37,December 21.

Bahrain Monetary Agency (www.bma.org).

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Baker, William, and James Sikula, “Market Orientation and the New Product Paradox”, Journal of Product Innovation Management, Vol. 22:483-502, 2005.

Bettzuge, Marc Oliver, and Thorstens Hens, “An Evolutionary Approach to Financial Innovation”, Review of Economic Studies, Vol. 68:493-522, 2001.

Boodai, Ayman, CEO-Bait Al Awraq Al Maliyya, Interview, Al Qabas Newspaper, 16 April 2006.

Box, Tamara, “Islamic Finance Turns to Securitization”, International Financial Law Review, Vol. 24, Issue No. 7, p. 21-24, July 2005.

Calvert, Laurent , Gonzalez-Eiras, Martin, and Sodini, Paolo, “Financial Innovation, Market Participation, and Asset Prices”, Journal of Financial and Quantitative Analysis, Vol. 39, No. 3, p. 431-459, September 2004.

Carlucci, Daniela, and Schiuma, Giovanni, “Knowledge Asset Value Spiral: Linking Knowledge Assets to Company’s Performance”, Knowledge and Process Management, Chichester: Vol. 13, Issue 1, p.35-46, Jan-March 2006.

Chiu, Shirley, and Robin Newberger, “Islamic Finance in the United States: A Small But Growing Industry”, Chicago Fed Letter, No. 214, Federal Reserve Bank of Chicago, May 2005.

De Belder, Richard, and Chris Ruder, “An Overview of Project Finance and Islamic Finance”, International Financial Law Review: Banking Yearbook, London, July 1999, p.

40-44.

El-Gamal, Mahmoud Amin, “Overview of Islamic Finance”, Occasional Paper No. 4, Office of International affairs, Department of the Treasury, August 2006.

El Qorchi, Mohammed, “Islamic Finance Gears Up”, Finance and Development, International Monetary Fund, Vol, 24, No. 4, December 2005.

Frame, Scott, and Lawrence White, “Empirical Studies of Financial Innovation: Lots of Talk, Little Action?” Journal of Economic Literature, Vol XLII. March 2004, p. 116-144.

George, Edward, “There is an Urgent Need to Understand the Precise Nature of Islamic Financial Services”, Financial World, July 2005, p.17.

Govindrajan, Vijay, and Chris Trimble, “Organization DNA for Strategic Innovation”, California Management Review, Vol. 47, Issue 3, Spring 2005, p. 47-76.

Hafeth, Omar, Islamic Banking Transactions Expert, “Islamic Banking Products”, Al Qabas Newspaper, 1 September 2006.

Hamwi, Bassel, and Aylward, Anthony, “Islamic Finance, A Growing International Market”, Thunderbird International Business Review, Vol. 41, Issue No. 4/5, July-October 1999, p. 407-420.

Hasanein, Fayyadth, Presentation, 2nd Islamic Banking Conference, Al Qabas Newspaper, 18 April 2005.

HSBC (Hsbc.com).

Hassoune, Annouare, “Islamic Banking: A Unique Differentiation Strategy for Gulf Financial Institutions”, Standard and Poors, 22 November 2004.

Iqbal, Zamir, “Financial Engineering in

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Islamic Finance”, Thunderbird International Business Review, Vol. 41, Issue 4-5,JulyOctober 1999,p. 541-559.

Iqbal, Zamir, and Hiroshi Tsubota, “Emerging Islamic Capital Markets”, World Bank.

Lane, Karen, “Non-Muslims Jump Into Sukuk:Expands Global Financing Ties”, Online Wall Street Journal, 14 November 2006.

Lauri, Donald, Doz, Yves, and Sheer, Claude, “Creating New Growth Platforms”, Harvard Business Review, Vol. 84, Issue 5, May 2006.

Martin, Josh, “Islamic Banking Raises Interest”, Management Review, Vol. 86, Issue 10, November 2006, p.25-29.

Mishaal, Abdul Bari, Financial ConsultantAl Mashoora for Shariah Studies, “Means and Methods to Develop Islamic Banks and Financial Institutions”, 2nd Islamic Banking Conference, 18 April 2006.

Moore, William, and Edgar Pessemier, Product Planning Management, Designing And Delivering Value, Mc-Graw-Hill, p. 11.

Munsung, Rhee, and Satish Mehra, “Aligning Operations, Marketing, and Competitive Strategies to Enhance Performance: An Empirical Test in the Retail Banking Industry”, Omega, Oxford, Vol. 34, Issue 5, October 2006, p. 505-515.

Obaidullah, Mohammed, “Ratings of Islamic Financial Institutions, Some Methodological Suggestions” Islamic Economics Research Center, King Abdul Azeez University, Jeddah, Saudi Arabia, 2005.

Rifaat, Abdul Kareem, Secretary General, Islamic Financial Services Board, Presentation, Al Qabas Newspaper, 29 March 2006.

Shiller, Robert, “Tools for Financial Innovation, Neoclassical versus Behavioral Finance”, Financial Review, Vol. 41, Issue 1, p. 1-8.

Sowaylem, Samy, Economic Expert, Islamic Development Bank, “Islamic Banking Products”, Al Qabas Newspaper, 1 September 2006.

Subramanian, Mohan, and Youndt, Mark, “The Influence of Intellectual Capital on the Types of Innovative Capabilities”, Academy of Management Journal, Vol. 48, Issue 3, June 2005, p. 450-463.

Tomlinson, Hugh, “Lending Credibility”, Middle East Economic Digest, 16-22 February 2007.

Wheatley, Martin, “Mapping Hong Kong’s Future”, International Financial Law Review, Vol. 24, issue 11, November 2005, p.

17-19.

Wheelwright, Steven and Clark Kim, Revolutionizing Product Development, The Free Press.

Yasseen, Mohammed, Investment ManagerAmlak Islamic Finance Co., Presentation, International Conference on Islamic Investment Funds, Al Qabas Newspaper, 10 June 2005.

Zaher, Tarek, and M Kabir Hassan, “A Comparative Literature Survey of Islamic Finance and Banking”, Financial Markets, Institutions, and Instruments, Vol. 10, Issue 4, Nov 2001, p. 155.

Zawya (zawya.com).

December - January 2012 Global Islamic Finance 39

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We believe that the World deserves a better future

Welcome to a sustainable and ethical banking Era Islamic Finance Services

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Islamic Banking

CAN ISLAMIC BANKING ACHIEVE GLOBAL RECOGNITION IN THE COMPETITIVE FINANCIAL MARKET? Author: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom

Abstract: Islamic banking which is based upon the principles of the Islamic Shariah is a fast growing financial sector which is taking the global market by storm. Many investors and business professionals are tapping into the industry which provides ethical opportunities for lucrative profits and investments. The Islamic finance industry as a whole is estimated to be worth just over $2 trillion dollars and this figure is expected to rise with further progression of the industry and innovative developments.

Keywords: Islamic Assets, Non-Muslims, Islamic Finance, Shariah Compliance

42 Global Islamic Finance

December - January 2012

Islamic Banking

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„

Both Muslims and non-Muslims who want to invest their money in ethical investments find that Islamic finance provides them with the means to do so in a highly beneficial way. A provider of Islamic finance in the UK has indicated that non-Muslims are becoming increasingly attracted to their alternative approach to banking

Islamic Banking a Rising Sector Throughout the years Islamic finance has provided the perfect alternative to conventional financing as many investors have recognised the benefits of having a ‘no interest’ policy which is one of the principles of Islamic finance. Interest is strictly forbidden and in addition investing in immoral industries or haram sectors such as alcohol, pork and gambling are also other sectors which are to be avoided. Many investors find more quality projects in compliance with the Shariah principles and find that there is more turnover such as in sectors which are flourishing like real estate and infrastructure.

The question remains as to whether Islamic finance can attract the global market and face the challenges and hurdles of attracting a non-Muslim market as well as a Muslim one. Many non-Muslims prefer Islamic finance and enjoy the alternative to conventional financing.

dinner, said in a speech that Islamic financial institutions had a major role to play in industrialisation.

Zeti said this could be seen from the efforts taken by financial centres in London, Hong Kong and Singapore in enhancing the development of Islamic finance. The internationalisation of Islamic finance had strengthened ties between Asia and the Middle East in trade and investments in recent years.

“The role of banks in the industrialisation of the developed countries of Europe and East Asia cannot be understated. There is no reason why Muslim banks and financial institutions cannot play the same role,” he said.

She added “Today, Islamic finance involving financial flows between the two regions has revived and revitalised these economic ties that generate mutually reinforcing growth prospects for both regions”.

Mahathir continues saying that given the lack of knowledge and initiative in the area of industrialisation among Muslims generally and Muslim investors specifically, Islamic banks must play “an even bigger and more aggressive role than the conventional banks”.

Zeti continues saying “It has also opened up and extended this potential to developed economies to forge stronger financial linkages with the growth regions of Asia and the Middle East.”

An important dimension to Islamic finance was not just its potential role and relevance in contributing to global financial stability but also it’s potential to support overall global economic growth. Former Prime Minister Tun Dr Mahathir Mohamad, who was at the

Figure 1 shows the global market share of Islamic Assets which showed that through the consecutive years from 19982002 the asset rate had risen consid- Figure 1: Growing Market Share of Islamic Assets erably. In recent years Islamic finance Slamic Assets Market Share of Islamic has continued to grow and prosper into (left scale) Assets (right scale) the mainstream subsidiaries of banks Mil. RM and other fully fledged Islamic financial 80,000 institutions.

70,000 60,000 50,000 40,000 30,000

Many other countries which have recently tapped into the Islamic banking sector such as Sri Lanka who do not have much of a Muslim population are already establishing ways in which to attract the non-Muslim market.

Islamic banks and finance institutions have recorded a huge growth in the last couple of years. The stakeholder’s interest has also increased.

% 10 8

Addressing the Sri Lanka Islamic Banking and Finance Conference MTI Consulting, Global CEO Hilmy Cader said all Islamic finance institutions should bring novel products and services to consumers while adhering to the Shariah principle.

Islamic Finance: Attracting the Global Market 6 Islamic finance has shown resilience Mahathir said most Islamic finance and sustainability in the market de- 20,000 and banks focus on Muslim customers 4 spite the challenging global financial 10,000 only and the prevailing system should 2 0 environment. This has developed a sigbe changed while initiating measures 2001 2002 2000 1998 1999 nificant interest in Islamic finance from to attract more non-Muslims into their non-Muslims and with proper market- Source: Bank Negara ventures. ing and effective analysis there could be scope for further devel- Figure 2 Sri Lanka is as a non-Islamic opments. Bank Negara Governor country to have legislation for Total debt divided Month average market Tan Sri Dr Zeti Akhtar Aziz said inthe Islamic banking sector. There by trailing 12 capitalisation cannot be terest in Islamic financing was no is sufficient flexibility for conven33% or more. longer restricted to Muslims but tional banks to make transacCash plus interest Bearing securities Month average market has spread to non-Muslims. tions and launch Islamic financial divided by trailing 12 capitalisation cannot products. Strategic marketing be 33% or more.

Speaking at the Malaysia Showcommunication to raise awareAccounts receivaMonth average market case Dinner in conjunction with ness of these products is conbles divided by 12 capitalisation cannot be the 7th Islamic Financial Services sidered as a vital requirement 33% or more.

Board Summit, she said Islamic fiin the current context, Cader nance’s sustained and largely unsaid. Lack of global connectivity, interrupted expansion had drawn Source: Dow Jones Islamic Market Indexes lack of structured work flow and significant international interest. high cost of information search December - January 2012 Global Islamic Finance 43

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Islamic Banking

are the main challenges faced by Islamic finance and banking sector in the world.

There should be a proper human resources management strategy in every institution to manage skilled workers in the company and Islam finance should go to the strategy market to hit the highest point. Apart from that, connectivity, community, communication, co-operation are vital components to achieve set goals in every institution.

“Simplicity of branding is one of the most important factors, most companies spend a large amount of money to advertise their products and this leads to confusion among people as sometimes customers get confused when choosing main brands and subbrands,” he said.

Figure 3: Key drivers for enhancing efficiency and competitiveness of Islamic finance Financial engineering and innovation.

Global financial centres and their regulators support for Islamic finance industry.

Standard governance and prudential regulation and supervisory guidance which require tweaking regulations to properly identify and assign proper weights for new and different types of risks associated with the special and unique characteristic of Islamic finance business.

Development and adoption of simple and standard and cost effective legal frameworks for contracts associated with the new and hybrid products.

Flexible and practical application and enforcement of Shariah principles and injunctions and its acceptability by the public.

Source: Dr S. Akhtar

Figure 4: Development of dispute resolution mechanism for Shariah compliance matters as regulators will not be in a position to resolve these.

Proper implementation of evolving guidance of regulatory standards for special features without comprising international standards to which both Islamic and conventional banks are to be subject to.

Development of more interfaces between regulators – so far there seems to have been compliance. There is however need for better coordination between bank and non bank regulators and also for later to launch more initiatives to nurture the nonbank Islamic sector.

Source: Dr S. Akhtar 44 Global Islamic Finance

Both Muslims and non-Muslims who want to invest their money in ethical investments find that Islamic finance provides them with the means to do so in a highly beneficial way. A provider of Islamic finance in the UK has indicated that non-Muslims are becoming increasingly attracted to their alternative approach to banking.

According to Alburaq, around ten percent of total customers interested in their products are not Muslim. Instead, the firm claimed today, they are attracted to Islamic finance for its “ethical” aspects.

The alternative financial system, developed in the mid-20th century from precepts laid down by Shariah law, came about due to the difficulties some people of faith were having with using mainstream investment and savings products. This is because giving or receiving interest - known as Riba in Arabic - is strictly forbidden in Islam.

Moreover, Islamic financiers claim that the system’s investments also reflect the religion’s ethical concerns, by not putting money in to products, services or activities which

December - January 2012

are considered cruel or unjust. A spokesman for Alburaq commented “We do believe that there will be some interest from non-Muslims, maybe as high as ten percent, because as well as being Islamic we are also an ethical option that will appeal to anyone who has concerns about the way their money is being invested in conventional savings accounts or savings bonds. Our investment decisions are based on strict Islamic ethical criteria – which are, in some ways, much stricter than principles applied by non-Islamic ethical finance.”

Sustainability and Challenges to be overcome in Islamic Finance Sustainability comes originally from the sector of forestry, where long-term, inter-generational planning is required to plant and cut trees in an ongoing manner, so that future generations can do the same. This status of equilibrium requires substantial discipline not to forego the long term root of living for short-term gains. In portfolio management, sustainability considers – aside from financial criteria – social and environmental issues. It goes above and beyond socially responsible investing by considering positive

Islamic Banking Islamic finance has received overwhelming response from across the world as one discovers its ideological and practical richness and relevance. Growth in Islamic finance industry has however triggered a number of debates regarding the challenges this industry faces.

These debates essentially revolve around whether Islamic finance is progressing well and is it there to stay? Is Islamic finance going to be a niche market or does it have global appeal? What are the key drivers for enhancing the efficiency and competitiveness of Islamic finance industry which would in turn help broaden its appeal and in turn enhance its sustainability? There debates will be discussed in brief through the article.

Drivers for Enhancing Efficiency and Competitiveness Second driving factor would be global financial centres and their regulators support for Islamic finance industry. The current wave of interest in Islamic finance is fascinating and has helped attract global banks in Asia and Europe to use their skills to augment the application of Islamic finance principles.

As expected the approach and level of enthusiasm and pro-activism has varied in the western world.

screens and promoting investment in companies with best practices, rather than just screening out those with negative aspects, like harmful industries and bad practices for example child labour and land mines.

Islamic finance as an investment approach is based on the concepts of Islamic teachings. Since its modern origins in the 1970s, it has increasingly gained market share, especially in the Middle East. Islamic finance and sustainability approaches have a lot in common, but are not identical.

Currently, Islamic finance is dominated by negative criteria similar to the responsible investing movement; as such, the Dow Jones Islamic Market Index excludes the following primary businesses: alcohol, tobacco, pork-related products, financial services, defence/weapons and entertainment specific to the Islamic criteria is the exclusion of financial services and the application of the so-called Shariah tolerance criteria in regard to the financial ratios of the companies themselves. In the index methodology, they are defined in figure 2.

Islamic finance has to be recognised that evolutionary stage and its sustainability would depend critically on regulators work with Islamic Scholars to reach flexible and shared, if not unified, understandings on principle elements at an international level, despite differences in faiths and disciplines.

There are a number of faiths and disciplines across Muslim jurisdictions (for e.g. Syria and Pakistan are predominantly Hanafi School, Bahrain, Dubai and Abu Dhabi pursues Maliki School, Saudi Arabia and Qatar relies on Hanbali School). Rather than pursue harmonised views, each faith developing its own applications adds to the cost of transaction, introduces doubts on viability of Islamic finance given the split opinions, and confuses the public that basically relies on Scholars endorsement of products and business.

These differences along with different interpretations of Shariah Scholars at the boards or as advisors within the banks, if significant, further carry the risk of Shariah arbitrage which carries complications for regulators.

Reaching consensus and shared/harmonised guidance among Scholars of different beliefs and faiths and evolving more unified institutional mechanism for adoption of common Shariah standards and ensuring proper enforcement through effective internal controls for their compliance would let the industry grow and compete on level play-

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ing field. Flexible and simpler interpretation of the basic tenets at the level of Scholars would enhance public acceptability.

Looking towards the future of Islamic Banking Competitiveness of Islamic finance in the future would depend on how Government and regulators perceive and nurture future development of Islamic finance and address the issues highlighted above and develop institutional, regulatory and supervisory frameworks and their effective enforcement.

Standardisation and harmonisation is vital to the further development of the industry into a successful global financial sector. Figure 4 outlines the other challenges which need to be overcome in order to further develop the industry.

Islamic finance differs considerably from the capitalist global market and it is embedded with ethical principles from the Shariah that allow it to stay away from debts of interest and other forbidden sectors which could produce low quality investments.

Islamic finance allows investors to get the best from the projects in compliance with the Shariah and it also develops confidence in the banking industry that there is another highly ethical alternative to conventional financing. With proper regulation set in place and standardisation of the industry the Islamic banking sector can be sure to flourish in the upcoming years. gif

References and Further Reading: •

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IFC Review (2010) Islamic Finance Attracting Non Muslims, Retrieved from: http://www.ifcreview.com/viewarticle. aspx?articleId=1278&areaId=21 ABNA News Agency (2010), Islamic Finance Must Attract Non Muslims Retrieved from: http://abna.ir/data. asp?lang=3&Id=197168 Money (2008) Islamic Finance Attracting Ethical Investors, Retrieved from: http:// www.money.co.uk/ar ticle/1001214islamic-finance-is-attracting-ethical-investors.htm M. Gassner, Dow Jones Islamic Market Indexes (2008) Retrieved from: http:// www.islamicfinance.de/files/DJIMNL_Islamic%20finance%20sustainability.pdf Dr. S. Akhtar (2007) Islamic Finance– Growth, Competitiveness and Sustainability 14th: World Islamic Banking Conference Retrieved from: http://www.sbp. org.pk/about/speech/governors/ dr.shamshad/2007/Growth-Sustainability-9-10-Dec-07.pdf

December - January 2012 Global Islamic Finance 45

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Market Review

TAKAFUL MARKET SET TO GROW IN SOUTH AFRICA AND BEYOND The Takaful market in South Africa is set to grow to brighter heights especially since there are predominant signs that the mainstream banks in South Africa are taking Islamic finance as a serious niche market business is the acquisition of the local Islamic insurance company, Takafol SA, by Absa, one of the republic’s largest banking groups.

In a deal which could have implications for the reach of Takaful (Islamic insurance) beyond the borders of South Africa to southern, central, West and East Africa, Absa Insurance Company Limited (AIC), a wholly-owned subsidiary of Absa Financial Services Limited (AFS), bought the book of business of Takafol South Africa (Pty) Limited (Takafol SA), which is a subsidiary of the Hannover Reinsurance Group, a major global reinsurer, and which was established in 2003.

The Takaful premium market in South Africa is currently estimated at about 3 billion South African rands (about $420 million), which is very modest compared to the conventional insurance market. As such market penetration potential is huge because of the low base, especially in a country with a fast growing population of over 45 million of which only about 3 million are Muslim, but with a relatively largish affluent Muslim middle class.

Islamic banking has been around in South Africa since 1989, when Albaraka Bank South Africa, now a joint venture between the Saudi-owned Albaraka Banking Group and UK-based DCD London & Mutual Plc, was licensed by the Reserve Bank of South Africa, the central bank. Over the last decade or so, the mainstream banks in South Africa, where banking is a lucrative business 46 Global Islamic Finance

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Source: GlobalIslamicFinanceMagazine.com

because of some of the highest banking charges in the world, have started to show interest in offering Shariah-compliant products initially at home and now increasing in Sub-Saharan Africa as far as Nigeria and Tanzania.

They include First National Bank (FNB); ABSA, in which Barclays Bank Plc of the UK has a 55.5 percent stake; Nedbank and Standard Bank -- all of which have thriving Islamic banking windows and which have overtaken Albaraka Bank SA in terms of book business and branch reach. Albaraka Bank SA for instance has only 11 branches in the country, including the headquarters.

Not surprisingly, Albaraka Bank SA has an agreement in place with Standard Bank and Absa whereby its customers can deposit funds into their accounts via Absa or Standard Bank branches. Banks such as Absa and Standard Bank have clear strategies of growth and expansion beyond South Africa

product development and ensuring the rollout of such products into African markets.”

South African finance minister, Pravin Gordhan, introducing the Taxation Laws Amendment Bills 2010 in the National Assembly in Cape Town in August 2010, gave further insight into the government’s rationale for the tax changes relating to the Islamic financial products.

“South Africa is an ideal location for multinationals to base their regional operation for investments into sub Saharan Africa. South Africa offers world-class financial services, strong and clear financial regulatory architecture and world-class infrastructure ... Certain domestic tax anomalies, the exchange control regime and fierce competition from certain low tax countries, remain stumbling blocks to South Africa taking full advantage of the opportunities that are available.

An important area of innovation relates to the growing use of Islamic financing, which contains certain prohibitions in respect of finance, including prohibitions against interest, immoral substances and the lack of transparency in respect of investments. The issue is the tax system’s lack of recognition of Islamic finance, as it mainly focuses on traditional forms of finance. The proposed amendments will level the playing field in respect of certain Islamic financial products

An important area of innovation relates to the growing use of Islamic financing, which contains certain prohibitions in respect of finance, including prohibitions against interest, immoral substances and the lack of transparency in respect of investments

to sub-Saharan Africa, and Islamic banking and insurance are an attractive component of this offering especially in countries with large and affluent Muslim populations. At the same time banks offering Islamic financial products in the “rainbow republic” are encouraged by the increasingly proactive policy of the South African government of President Jacob Zuma, toward the facilitation of Islamic finance in the country under financial inclusion policy and other reasons.

The South African National Treasury has introduced tax neutrality measures for Mudaraba, Murabaha and Diminishing Musharaka products and emphasised that “the development of Islamic finance in South Africa is critical to the expansion of National Treasury’s strategy to position South Africa as a gateway into Africa. The Treasury envisages South Africa being a central hub for Islamic

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when undertaking savings and investments and when attempting to bank finance,” explained Gordhan. Standard Bank and Absa are spearheading this Islamic finance foray into the African continent. In July the Central Bank of Nigeria, for instance, gave approval to Stanbic IBTC Bank, the Nigerian subsidiary of Standard Bank, a license to set up an interest-free Islamic banking subsidiary subject to complying with the approval terms within six months. In Tanzania, Standard Bank has also launched a number of Islamic consumer finance products including Islamic mortgages, leasing, business account facilities and Takaful. Absa at the same time has an established and dedicated Absa Islamic banking brand and window. With the acquisition of Takaful SA, which is awaiting final approval from the banking and insurance regulator, Absa is keen to build an additional brand, Absa Takaful. gif

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World Islamic Finance Review

2022

WORLD CUP QATAR: Spurring Islamic Investment Opportunities Author: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom

How can the 2022 World Cup Qatar Benefit the Islamic finance industry?

It is undeniable that the 2022 World Cup Qatar will be of great benefit to the Islamic finance and banking industry, especially in the infrastructure of Islamic products and services. It will showcase the growth of the Islamic finance industry, allowing businesses and entrepreneurs room for lucrative investments. In addition, many professionals on hand - ranging from Islamic scholars, through catering organisations, to the media - will be able to provide the most high-profile focus yet on Islamic business achievement and progression.

This will further help to highlight the in48 Global Islamic Finance

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dustry, and add to its blossoming success. Emaad Mansoor, Chief Executive of Qatar’s Independent Islamic Investment Bank, said that, ‘The 2022 FIFA World Cup is a big win. The resulting investment will have a multiplier effect on several other industries and lead to increased diversification of Qatar’s hydro-carbon focussed economy. This coupled together with the three pillars of FIFA 2022 investment initiatives - stadiums, accommodation and infrastructure - have a projected value of US$3bn, US$12.4bn and US$44bn respectively.’ The value of the Islamic finance industry is already estimated at a value of over US$2 trillion and this figure

World Islamic Finance Review

Abstract: In this edition of Global Islamic Finance Magazine, we will discuss the positive opportunities that the 2022 World Cup Qatar will have to highlight, and spur on, the Islamic finance industry. The World Cup Qatar will certainly be an unrivalled global opportunity for the Islamic world to showcase the blossoming of Islamic finance, and Shariah-compliant commerce. The value of the Islamic finance industry is already expected to reach to over US$2 trillion worldwide, with many countries tapping into the sector’s lucrative investment opportunities. Qatar has been given a golden opportunity to showcase the varied opportunities for Shariah-compliant investments and businesses in the country. This can only help to further highlight and promote the Islamic finance and banking industry.

In addition, GIF will be looking at the various sectors of business in Qatar which have scope for Shariah-compliant investment opportunities. Qatar is already the Islamic financial hub of the Middle East, with unprecedented activity, and the country continually works hard to promote its status as an Islamic banking and financial centre by forming key partnerships with countries around the world. What can we expect from the 2022 World Cup Qatar in terms of business and finance? This question, along with many other investment insights, will be answered in this article. This article is a mustread for avid investors wanting to tap into the key opportunities that Qatar may offer.

The information here will also be beneficial for business professionals, and for those wanting to know more about this fast-growing sector.

Keywords: Qatar 2022 World Cup, Islamic Finance, Islamic Banking, Investments, Shariah Compliance, Commerce, Takaful, Sukuk, Opportunities, Infrastructure, Investors, Transport, Education, Finance, Business

is set to double in the near future. By the year 2022, experts are hoping that the Islamic finance industry with further maintain growth and excel within the sector. The welcome development of Qatar’s hosting of the World Cup is expected to be a driving force for the industry. So how can the 2022 World Cup Qatar benefit the Islamic finance industry as a whole? Figure 1 shows the many benefits to sectors which could prosper due to the publicity for Islamic finance offered by Qatar. As highlighted in Figure 1, there are countless opportunities for Qatar through the 200 countries which will be participating in global media coverage of the 2022 World

Cup. In addition, there is great scope for Qatar businesses to be promoted around the world, and for the Islamic financial sector to really take off. Qatar is at the heart of Islamic, finance with a predominant Muslim population, which enhances the scope for successful promotion of Shariah-compliant products and services. Qatar has a Muslim population of 77.5 % to date, and scope exists in the country for diversification of the Islamic financial sector, in order to further strengthen the industry. Entrepreneurs, investor and major companies will have the chance to tap into the ethical principles of Islamic banking and finance, and many individuals already

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embrace the Shariah-compliant methods for investments. There are many benefits to the fact that Qatar was awarded the 2022 FIFA World Cup, and the development is a potential big economic win for Islamic finance. Not only will it offer an opportunity to highlight the Islamic and finance sector, but the event will also attract the attention of global media across the various participating countries and around the world. There is scope for the economy to profit considerably. The World Cup also provides potential for profits within businesses, through the use of Islamic financial media sponsorship, advertising, marketing and other promotion of Islamic financial services.

In terms of infrastructure, Qatar has already established an outlined plan for the development of hotels and stadiums. This plan is outlined in Figure 2.

Qatar has made significant attempts to strengthen the Islamic financial economy across various different industries – including banking, technology, and engineering amongst many others - and these plans will further help the industry to grow economically. There are many popular ethical investment sectors which have proved profitable in the country of Qatar, and especially in the wealthy capital of Doha. These are outlined in Figure 3.

Out of all the sectors mentioned in Figure 3, the most profitable areas for investments in Qatar have been Sukuk, Takaful, Infrastructure and Real Estate. There will be more scope for investment in these sectors during Qatar’s 2022 World Cup. There is also scope for further development of the energy and resources field which has been developing rapidly in recent years. Qatar Islamic Bank (QIB) have also demonstrated a policy of emphasis on creating more investment deals, and have shown their support by funding more new projects. Qatar Islamic Bank have reportedly pledged to continue to help to fund more projects, both regionally and internationally. Chairman Shaikh Jasem Hamad Jabor Al Thani said that, ’QIB has strived to consolidate its participation in the national economy through its funding of macro-companies, in a new trend intended to further consolidate its leading role in financing national projects..’ QIB is Qatar’s second-largest lender by market value. In the first quarter the bank signed a memorandum of understanding (or an “MoU”) with South Korean broker Woori Investment & December - January 2012 Global Islamic Finance 49

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World Islamic Finance Review Figure 1: Benefits for Islamic Finance of the 2022 World Cup Qatar Offers an opportunity to highlight the Islamic finance industry.

Promotes the benefits of Shariah-compliant financing.

Securities, and has said that it plans to “have 30 domestic branches by the end of year, after adding four more to its existing network in 2010. ‘During this first quarter, Qatar Islamic Bank signed a memorandum of understanding with Woori Investment and Securities Inc. with the aim of facilitating mutual co-operation between the two parties in the search for suitable financial and investment opportunities in the Korean, Asian and Qatari markets,’ QIB said.

Attracts the attention of the global media to Islamic financial businesses.

Creates Islamic investment opportunities Highlights the potential of Qatar’s major sectors such as: Infrastructure; Construction; Transport; Education; Healthcare; Businesses and Finance; Development; Logistics.

Raises profitability and economic standards of earnings.

Potential for profits from businesses through sponsorship and trade.

Figure 2: Three Pillars of FIFA 2022 Investment Initiatives Announced by Government of Qatar Investment proposals will have a multiplier effect on several other industries, and will lead to an increased diversification of Qatar’s hydro-carbon focused economy.

Concentration of key event facilities and venues within a compact 60km radius.

Renovation of three stadiums and construction of nine new stadiums, across seven host cities.

Stadiums to be equipped with cooling systems using clean renewable energy resources, in order to achieve the first completely carbon-neutral World Cup. After conclusion of the 2022 FIFA World Cup, modular sections of Qatar’s stadiums will be used to construct 22 stadiums in developing countries around the world .

64 hotels for team base camps proposed, 54 of which to be constructed.

240 different accommodation properties proposed (90,000 rooms), mainly in the four star category.

100 properties existing, and 140 planned to be constructed (55,000rooms).

Four-line metro network (340 kilometers in length), including a line running from the New Doha International Airport to the centre of Doha.

Rail freight line between Ras Laffan port and Mesaieed port, via Doha, and then on to Saudi Arabia and Bahrain.

New port to be completed by 2014, with subsequent phases of construction due to be finished by 2030.

Development; New airport currently under construction (expected completion of the first phase in 2012, and of the second phase in 2017).

Construction of a new Qatar-Bahrain causeway, and other road network improvements.

Source: QFIB Source 50 Global Islamic Finance

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Infrastructure, Transport and Construction Opportunities in Qatar for the World Cup Between now and 2022, there will be many opportunities to facilitate the FIFA World Cup through the development of infrastructure in Qatar. As a company, FIFA is keen to ensure that there are adequate infrastructural developments of stadiums in Qatar in order to host the tournaments. It will be necessary to build a number of stadiums in Qatar in order for the infrastructure to work efficiently, and accommodation (such as hotels) for housing World Cup participants need to be built. Therefore, the ‘FIFA World Cup Sukuk’ programme series offers an ideal situation for financing . The initial cost estimates of the necessary infrastructural work is estimated at nearly US$50 billion (RM157.15 billion), and some of this will be financed in a Shariah-compliant way. This will add to the supply of Sukuk, which is enjoying unprecedented success, and will hopefully provide a secondary market liquidity.

Islamic institutions in Qatar, such as Qatar Islamic Bank or Mashraf Al Rayan, will naturally be considered as early leaders in financing for the 2022 World Cup. As part of the national agenda, Malaysia should encourage its Islamic banks to be active financing participants. There has been competitive bidding from investors and Islamic financial institutions for the opportunities to finance the stadiums, infrastructure and accommodation for participants, media and fans. This activity will further promote the potential for investment in Qatari infrastructure. It will also give the Islamic finance industry a chance to showcase ethical Islamic commodities, such as Sukuk and other investment mechanisms, which provide a truly beneficial and socially responsible way of investing.

The State of Qatar has many lucrative sectors and industries - including its renowned oil, gas, energy and infrastructure developments – which also offer the opportunity to utilise Islamic modes of investments and financing. Economists believe that the investment in infrastructure which Qatar will have to make as a result of winning the right to host the 2022 World Cup is likely to boost GDP growth.

Qatar already has the highest GDP growth rate in the Gulf, driven by heavy investment in projects to raise the country’s gas production and capacity to export it. The smallest country by far to ever host the FIFA tournament, Qatar is now building its infrastructure from scratch. The country is opening new roads and demolishing derelict neighbourhoods in capital Doha, in order to pave the way for developments. Projects include a US$25 billion metro and rail network, sections of which will be ready in time for the Cup, as public transport is currently non-existent.

A US$10 billion international airport is also being built in Doha, the first phase of which is set to commence in 2012. Other projects include a US$7 billion deep-water port and the US$4bn Qatar-Bahrain Causeway. Qatar also plans to spend US$20bn on building and expanding its roads. Projects planned for the Cup include the construction of nine new stadiums, and the refurbishment of three at a cost of US$4 billion. These are planned to be air-conditioned by solar power, in order to combat the desert heat. Officials have also pledged to create 90,000 new hotel rooms before 2022. Multi-billion dollar investment in port operations across the Middle East is again surging forward in the post-recession environment. In Qatar, maritime ports are undergoing significant expansion. National project spending in the Gulf state is expected to top US$100bn across infrastructure,

World Islamic Finance Review real estate and other energy and non-energy sectors over the next decade, according to research from the Investment Bank of Qatar. Driven largely by rising energy prices, the Gulf nation’s economic growth is partly due to Liquefied Natural Gas (LNG), with as much as one-third of all global reserves lying within Qatar’s sovereign territory. ‘Qatar’s expansion of its ports, particularly in Doha and Ras Laffan, is pushing ahead at a rapid rate, keeping pace with its overall programme of economic expansion,’ said Capt.

Feisal Saad, Manager of Ras Laffan Port, who will be speaking at the World Ports & Trade Summit next March.

Qatar also lays claim to the world’s largest LNG exporting facility, Ras Laffan Port, which will be exhibiting at the event. Having undergone significant expansion since it was first developed 15 years ago, the Port continues to grow in line with regional and global demand for LNG. According to the Qatar Chamber of Commerce and Industry, the facility will export 77 million tonnes of gas annually by the end of 2011, more than four times the capacity of its nearest competing port, Bintulu in Malaysia.

The Ras Laffan Masterplan intends to continue to develop the port to meet demand for the next 20 years and beyond, and has committed at least US$1.8bn to two major projects within the next two years. One of these projects, which was completed at the end of 2010, is a world-class dry dock and ship repair yard, for LNG vessels and others.

A ship building facility was completed at the same time. By 2012, the overall port facility will have the capacity to handle 5,000 ships a year.

Another of Qatar’s major new port projects is the US$4.5bn first phase of the New Doha Port, south of Al Wakra Township. Comprising general cargo terminals, container terminals and roll-on/roll-off berths along with an administration and customs complex, the port will cover an area of more than 20 square kilometres. With construction due to begin within the first half of 2011, the first phase of the project is expected to be completed by 2014.

Capt. Saad added that the steady post-recession revival of regional and international trade between the East and the West is resulting in increasing volumes of cargo routed in and out of the Gulf region. Following Qatar’s prize of the honour of hosting the FIFA World Cup in 2022, a number of “mega projects” will be launched in the next decade, and will require further investments in the country’s port infrastructure. This can only be good news for the trade and logistics companies in the Gulf region. ‘Having remained strong throughout the global economic downturn,

countries up and down the Gulf have continued to expand their port operations over the last two years, with growth continuing into 2011 and beyond,’ said Capt. Saad.

There is much scope for Islamic investment opportunities in Qatari infrastructure, and in the construction of buildings, accommodation and transport (including railways) to make the country accessible for participants, fans, investors, businesses and more when the 2022 World Cup comes around.

Qatar has pledged US$60 billion for infrastructure development in preparation for the World Cup, including a Metro system, nine new stadiums and three to be renovated, and more than 60,000 new hotel rooms.

There is also scope for Islamic investors to tap into the development of the stadiums; these opportunities are outlined in Figure 4.

This information is crucial for any investor wishing to enquire about getting involved in investments in any of these lucrative infrastructure stadium projects. It is particularly beneficial for investors wanting to tap into the infrastructural prospects that the 2022 Qatar World Cup can bring to the Islamic financial sector. The development of stadiums can bring enormous and lucrative economical profitability for any avid investor, who wants to be a part of a project which is truly worthwhile.

Investment Opportunities in Healthcare and Education in Qatar Due to the economic profitability of the 2022 World Cup in Qatar, many healthcare and educational projects are being funded

by Qatar Islamic Bank. It has been reported that out of 200 72 projects, at least 72 are being provided with funding due to the World Cup. Qatar’s healthcare facilities will take a step up as the World Cup approaches. There may be accidents occurring during the tournament, and participants will need the proper paramedic care and hospital facilities in the event of any emergency. Qatar First Investment Bank (QFIB) is expected to assist with funding and research into the development needs of the healthcare and education sectors in Qatar.

QFIB Chairman Abdullah bin Fahd bin Ghorab Al Marri commented that, ‘There will be tremendous opportunities for investors in the region as Qatar is poised for massive growth, not just in the obvious sectors of infrastructure, construction and development, but also in education, healthcare and telecommunications.’ Qatar will also focus on driving Islamic financial opportunities in the development of education. Education in Islamic finance will be promoted through reputable accounting companies, such as CIMA in

Peter Bokma, MBA, Freelance Senior Treasury Consultant, Logica Middle East & Africa Qatar What benefits will the Qatar World Cup 2022 bring to Islamic Finance?

Larger population influx and increased employment opportunities has a direct effect on Islamic financing. Consumers are increasingly seeking finance from the Islamic banks, and the construction boom, and the government preparation of 2022 adding strongly to whole sale Islamic financing opportunities for the Islamic local banks in Qatar.

It appears stronger focus on these opportunities are increasing. The US $40-50 billion spending on projects provides a strong growth basis for the years running up to 2022.

What investment opportunities do you believe are going to be the most profitable?

The very positive outlook for Qatar for the coming decade bodes well for the investment scene. In terms of best investment opportunities, one should expect the Islamic banks being one of the major beneficiaries of this success story. Judging carefully their respective involvement on the Islamic financing boom, purchasing shares for the long term may be the best strategy at hand for potential investors.

What are your thoughts on Qatar being a hydro-carbon focused economy?

With the 3rd largest reserves, Qatar will continue focusing on a hydro-carbon economy for decades to come. Recently it should be noted that they have added diversification by producing Gas-to-Liquids (GTLs) to their existing LNG supplies, whereby transport and cleaner energy advantages supports to this diversification move.

Qatar’s well understood focus on a hydro-carbon based economy is serving well and should not mean to be complacent. Any changes worldwide will have an effect on Qatar. Qatar should like any other country in the world, seek diversification.

Even though they have invested their funds wisely overseas as some form of diversification, locally this must be applied. For example Qatar’s desire for sporting events excellence has translated into the successful bid of 2022.

This prime example suggests that Qatar is a highly commendable nation willing to seek opportunities to be developed on local soil.

December - January 2012 Global Islamic Finance 51

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World Islamic Finance Review

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The 2022 World Cup Qatar is the most promising development in recent history for the country of Qatar, and it is an even more beneficial achievement for the Islamic finance and banking industry. Qatar is a predominant Islamic financial and banking hub, and with the potential opportunities offered by the 2022 FIFA World Cup Qatar, there is much room for success and a spur to new investments

Qatar, as education and training will crucial for investors who want to deal with investments in Qatar during the 2022 World Cup. Among professional qualifications, CIMA’s education and training will be showcased, as it is geared not only to accountants but also to the many diverse professionals who have an increasing need for a good working understanding of the principles and practice of Islamic finance.

The activities of the Qatar Foundation for Education, Science and Community Development are widespread, and the Foundation crucial to the understanding of opportunities in Islamic finance prior to Qatar’s 2022 World Cup. The Qatar Foundation is driven by a heavy focus on the development of human capital in Qatar and the Middle East in order to benefit the region, and the world.

‘The past teaches us that natural resources, whether pearls, oil or gas, cannot be relied upon,’ says Dr. Fathy Saoud, President of the Qatar Foundation.

pus in suburban Doha, and operates across three fields: education, research and development, and community development.

The Qatar Foundation’s three main focus areas allow for an excellent array of knowledge development, which in turn leads to world–class opportunities for learning, research, product commercialisation and entrepreneurial prospects. The work of the Foundation is particularly beneficial for the growth of the Islamic financial sector, as it further highlights key opportunities provided for through the diversification of education.

Qatar’s well-structured educational system is backed by endowments for research institutes operating in the fields of biomedicine, energy and environment; developments in computing; an R&D park; and a national research fund. All of these developments will enrich the Qatari education sector prior to the 2022 World Cup.

‘Qatar has therefore chosen to secure its future by becoming a knowledge economy and a cradle of innovation: based in the Middle East, but global in scope and impact.’ The Qatar Foundation is supporting the country ‘in its transition from a carbon economy to a knowledge economy, by unlocking human potential, building a platform for innovation, and fostering a culture of quality and excellence,’ Saoud explains. The Qatar Foundation is based at a 6,200-acre cam52 Global Islamic Finance

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Figure 3: Lucrative Investment Sectors in Qatar Sukuk Takaful Real Estate Infrastructure Islamic Banks Energy & Resources

Highlighting the Growing Sukuk and Takaful Sector in Qatar through the World Cup The Qatar 2022 World Cup has the potential to highlight the many benefits of the growing Sukuk sector of Islamic bonds, for Qatar’s Muslim and non-Muslim investors, entrepreneurs and business professionals. Qatar has major scope for Sukuk deals; in 2011, especially, the country was reported to have exhibited a positive outlook for stability. In that year, Qatar’s largest investment bank, QInvest, saw Islamic bond issuances stabilise to benefit movement.

It is important to consider the system of Sukuk, and its implementation in Qatar, in order to establish the situation for investments. The Sukuk system is outlined in Figure 5. The diversification of the State of Qatar’s funding sources shows promise for future issuances of Sukuk, which could attract a global market.

There will be countless opportunities for Sukuk Islamic bonds to be further promoted at the 2022 Qatar World Cup, as many investors, businesses and entrepreneurs may come to visit Qatar. In addition, global media exposure can further enhance and promote this lucrative sector. Qatar’s global Sukuk system relies upon investors, who utilise Sukuk via the issuer. Issuers can either lease land to the State of Qatar for a seven-year term, or sell in the event of dissolution. Alternatively, the issuer may give certificate proceeds to the seller in the State of Qatar.

World Islamic Finance Review to be tapped into by the next investor who comes along. If you are an avid investor or considering an investment opportunity, Qatari banks may be able to answer your questions and to provide you with a deal which will reap great profits. Qatar’s Islamic Takaful insurance sector also has significant prospects attached to the 2022 World Cup. Qatar has created global investment opportunities by joining with other financial establishments around the world to implement Takaful investments; a prime example being the joint company of PakQatar, which is a collaboration between Pakistan and Qatar Takaful insurance.

IGI Investment Bank recently signed a bancatakaful agreement with Pak-Qatar Family Takaful Limited, aiming to further strengthen its portfolio by adding Family (Life) Takaful Insurance to its insurance advisory services.

Under this agreement, clients will be able to secure their own and their family’s future in the Islamic way, through a whole host of Shariah-compliant Takaful Islamic insurance products offered by the Bank. IGI Investment Bank will therefore be able to cater successfully to all those clients seeking a Halal alternative to conventional insurance.

The Lessee in the State of Quarter may take up a lease rental, with an agreed price in the event of dissolution, allowing the issuer to give investors both periodic and dissolution distribution amounts. Sukuk is becoming an internationally recognised commodity, with many global countries around the world tapping into this profitable investment area.

With over 200 countries around the world participating in the Qatar 2022 FIFA World Cup, there will be scope to further promote Islamic commodities, such as Sukuk Islamic bonds, which have been experiencing unprecedented success in Qatar. The Sukuk investment arena sheds light onto a quickly growing, sector full of lucrative deals waiting

In August 2008, Qatar Islamic Bank made an effort to consolidate global Takaful operations. CEO of QIB, Salah Mohamed al-Jaidah said in a statement at the time that, ‘There is a broad scope for a very large Takaful firm with a global reach. Currently, big financial institutions do not provide Takaful products with greater depths.’ Qatari financial institutions are march forwards towards progress, with record profits and global ambitions. A recent IMF paper confirmed that ‘Qatar’s medium-term outlook is very favourable, with continued strong growth expected to be driven by the hydro-carbon sector, as well as by diversification to higher value-added petrochemical, finance and education services.’

The Future Looks Bright: Qatar 2022 World Cup Spurs the Economy Forward The Qatar 2022 World Cup can only further increase profitability within Islamic banking and finance, and help to further promote the sectors. Many investors from around the world will be particularly interested in Qatar’s infrastructure sector, as the country has countless opportunities for the development of stadiums, hotels and other accommodation, roads, healthcare provision, and much more. In this article, Global Islamic Finance has summarised the potential investments which could be made in the proposed stadiums for the 2022 Qatar World Cup. Investors may be keen to research into the proposed stadium projects.

In addition, entrepreneurs and business professionals may be interested in developing the hotel and accommodation sector across Qatar, which is considered to have future prospects of massive profitability and growth. Even after the World Cup, Qatar will be exposed to economic profits due to media exposure, and the growth of hotels and infrastructure which will be a massive economical boost for the tourist industry among others.

The 2022 Qatar World Cup will also provide the opportunity for businesses to showcase their Islamic financial products. In addition, Islamic banks will have the opportunity to provide funding and to promote Shariahcompliant services, so that investors and businesses can utilise Islamic finance commodities in developing their projects. Her Highness Sheikha Moza bint Nasser, Chairperson of the Qatar Foundation for Education, Science and Community Development, introduced this year’s special feature on the State of Qatar: ‘It is a great pleasure to speak on the heels of the dramatic accomplishments we’ve achieved to date in Qatar and the many more that are to come,’ she said. ‘

Figure 5: Qatar Sukuk System for Investments Investors

Certificate proceeds

Seller (State of Qatar)

Title to land parcel

Certificate proceeds Sources: Yasaar.org

Sukuks

Qatar Global Sukuk (Issuer)

Periodic and dissolution distribution amounts Lease rental and agreed price on a dissolution event

QGS leases land to State of Qatar for a seven year term and sells on a dissolution event

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Lessee (State of Qatar)

The World Cup 2022 bid win is not only a victory for sports in the region, but also for our economic diversification drive, our ongoing contributions to the global community and our commitment to promoting intercultural dialogue.’

There will also be many major opportunities within the real estate sector, due to the development of accommodation and housing in Qatar in order to accommodate the incoming population for the FIFA World Cup 2022. Qatari Diar is the Middle East’s most lucrative real estate investment company. With over 35 projects in over 20 countries around the world, and with US$60 billion

December - January 2012 Global Islamic Finance 53

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World Islamic Finance Review

worth of portfolio testimonials, the company is another major player which is set to benefit and to further spur Islamic finance.

Group CEO Mohammed Bin Ali Al Hedfa Diar said that, ‘Realising the vision of HH the Emir Sheikh Hamad Bin Khalifa Al Thani, our goal is to inspire social and economic progress, while capturing the beauty and essence of local tradition and culture. We look to capture the hearts and imaginations of the communities we enter by creating visionary beacons of friendship and prosperity. When we begin a project in a new region, we are entering into a commitment with the people of that region to leave a positive cultural, environmental and sustainable footprint behind.’

Al Hedfa added that, ‘Each project around the globe is meticulously planned to ensure that it respects local traditions, culture, ecosystems and architecture.’ Qatar’s stability in the growing Sukuk market may have undergone hurdles in the past; however, the country is proactively developing its Sukuk market, and is expected to improve.

Those Islamic finance sectors which have been implemented within the Qatari economy - including Shariah-compliant investment methods for infrastructure projects - will help to make the country a forerunner in the progress of new developments, and the growth of the emerging Islamic financial sector. Qatar has an increased potential for running in competition with other Islamic financial hubs, such as Malaysia and Saudi Arabia, which currently have a larger wealth of Shariah-compliant products and services. With the correct implementation of effective promotion of Islamic finance, and

diversification of the sector’s provisions, Qatar can expect to become a prominent hub for Islamic finance. Many countries have witnessed the potential of Qatar as a leading Islamic financial sector.

Rushdi Siddiqui, the New York-based Head of Global Islamic Finance at Thomson Reuters, said that ‘In today’s financial markets, we talk about billions and trillions, yet in Islamic finance we do not have large banks (billion-dollar paid-up capital), and funds are small, with an average size of about US$40 million (Dh146.9m). Beyond the cheer-leading, the industry needs to think outside the “mosque” for developments that generate foundational growth and have a cross-selling appeal to the non-Islamic community.’ This Figure 4: Potential Islamic Investments in the Proposed Stadiums Host City

Stadium Name

Al Daayen

Losail Iconic Stadium

Al Khor

Al Khor Stadium

Al Rayyan

Al Rayyan Stadium

Al Rayyan

Education City Stadium

Al Rayyan

El Gharafa Stadium

Al Rayyan

Khalifa International Stadium

Al Shamal

Al Shamal Stadium

Al Wakrah

Al Wakrah Stadium

Doha

Doha Port Stadium

Doha

Qatar University Stadium

Umm Sal

Umm Sal Stadium

statement reiterates the fact that there is much potential for non-Muslims to tap into the various investment opportunities Qatar holds; especially since a predominant -onMuslim community is expected to attend the 2022 World Cup. Therefore, education in Islamic financial commodities, investments and the Shariahcompliant finance system is crucial for any investor or business professional. The 2022 World Cup is one of the most promising developments in recent history for the country of Qatar, and it is even more of a beneficial achievement for the Islamic finance and banking industry.

Qatar is a dominant Islamic financial and banking hub, and the potential opportunities of the Qatar 2022 FIFA World Cup offer a good deal of room for success, and a spur to investors. In this article, Global Islamic Finance Magazine has given you a comprehensive insight into the potential of investment opportunities in Qatar in the run-up to the 2022 FIFA World Cup. GIF hopes that investors, business professionals and executives can benefit from this comprehensive analysis of the lucrative investments available in Qatar, in addition to students wishing to learn more about the proliferation of growth that this World Cup can bring to Islamic finance. There is much scope for the growth of Islamic finance as a result of the World Cup bid win, especially in Qatar, and it may be that the goal of a US$2 trillion market share for Islamic finance by 2012 could be well exceeded by the year 2022. gif

Source: Fifa.com

References and Further Reading •

• • • • • • •

J. Prosser (2011) Qatar 2022: first Islamic World Cup and a big win for Islamic finance? Retrieved from: http://community.cimaglobal.com/ blogs/john-prossers-blog/qatar-2022-first-islamic-world-cup-and-abig-win-islamic-finance R. Siddique (2010) Qatar the World Cup and Islamic Finance Retrieved from: http://www.btimes.com.my/Current_News/BTIMES/articles/ katta/Article/ AME Info (2006) $1bn Islamic Investment bank to set up under QFCRA, Retrieved from: http://www.ameinfo.com/80467.html Z. Jones, Qatar Islamic Bank to finance more projects (2010) Gulf News, Retrieved fromhttp://gulfnews.com/business/banking/qatarislamic-bank-to-finance-more-projects-1.613023 The Investment Authority (2011) QInvest CEO Sees Qatar Sukuk, Probably IPO’S in 2011 Retrieved from: http://theinvestmentauthority. com/banking/qinvest-ceo-sees-qatar-sukuk-possible-ipos-in-2011/ Lovells (2004) Islamic Finance, Shariah, Sukuk and Securitisation, Retrieved from: http://www.yasaar.org/pubs/20177%20Islamic%20 finance%20client%20note1.pdf AME Info (2010) Qatar First Investment Bank Highlights Qatar 2022 Investment Opportunities, Retrieved from: http://www.ameinfo. com/259841.html Qatar National Development Strategy (2010) Forbes Custom, Retrieved from: http://forbescustom.com/qatar/

54 Global Islamic Finance

December - January 2012

• •

• • • • •

Lovells (2004) Islamic Finance, Shariah, Sukuk and Securitisation, Retrieved from: http://www.yasaar.org/pubs/20177%20Islamic%20 finance%20client%20note1.pdf Qatar First Investment Bank Qatar 2022 Business Opportunities (2010) Retrieved from: http://www.qfib.com.qa/QFIB/Files/Presentations/Qatar%202022%20Presentation_Updated_Final_22MAR11. pdf Evaluation Report FIFA Qatar 2022 World Cup (2011) FIFA, Retrieved from: http://www.fifa.com/mm/document/tournament/ competition/01/33/74/56/b9qate.pdf The Investment Authority (2011) QInvest CEO Sees Qatar Sukuk, Probably IPO’S in 2011 Retrieved from: http://theinvestmentauthority. com/banking/qinvest-ceo-sees-qatar-sukuk-possible-ipos-in-2011/ Lovells (2004) Islamic Finance, Shariah, Sukuk and Securitisation, Retrieved from: http://www.yasaar.org/pubs/20177%20Islamic%20 finance%20client%20note1.pdf Insurance Daily (2010) Allianz Takaful Secures Qatar Authorisation, Retrieved from: http://www.insurancedaily.co.uk/2009/08/19/allianz-takaful-secures-qatar-authorisation/ Halal Journal (2009) IGI, Pak-Qatar Takaful sign MoU, Retrieved from: http://www.halaljournal.com/article/3900/igi,-pak-qatar-takafulsign-mou

Islamic Finance Instruments

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DEMYSTIFYING THE EVANESCENCE OF SAUDI CORPORATE SUKUK ISSUANCE Saudi bankers argue that the cost of funding is the main detriment for not seeing the flow of corporate Sukuk issuance, but Malaysia proves them wrong.

Abstract: Saudi Arabia, the black gold kingpin and the land of opportunities, has puzzled the Islamic finance industry for quite a while. We have been waiting for the ‘Sukuk’ giant that has not awakened for a decade now. In this article, we demystify the evanescence of Saudi corporate Sukuk issuance as well as putting forward for the Saudi banks a new proposition for the upcoming and unforeseen Sukuk generated fee-revenues.

Keywords: Saudi Arabia, Sukuk, Malaysia, Corporate, Islamic Finance

For any Sukuk issuance, be it Sovereign or quasi-sovereign, the cost of funding is relatively cheap due to the solid creditworthiness of the obligor.

Mohamed Khnifer, Sukuk Structurer & Strategist, Edcomm Group Banker’s Academy Mohammed Khnifer is regarded as part of a second generation of Islamic banking practitioners, who come with a solid academic background in Islamic finance. He is a Sukuk Structurer & Strategist as well as an External “Islamic Finance” Expert at the New York-based Edcomm Group Banker’s Academy. He holds a MSc. in Investment Banking & Islamic Finance from Reading University and is a Chartered Islamic Finance Professional (CIFP) from INCEIF. During the past 7 years, he became one of the most prolific and well-known researchers & media figures, specialising in Islamic finance today. Later this year, he is expected to earn his MBA in Islamic Banking & Finance after he won the Silver Scholarship Award from Bangor University.

However, this is not the case with the lesssavvy & low creditworthy corporate borrowers. Apparently, only in this part of the world, these borrowers are labeled ‘unbankable’ for some reason or another.

GCC bankers argue that cost of funding, interest rate associated with borrowing money, is to blame for not seeing a rise in the corporate issuance. How? For a set of reasons, there will be a default premium risk attached to their issuance, resulting in paying higher yields to the Sukukholders. Given the stronger local liquidity conditions and the fact that interest rate is at its lowest level, naturally the cost of funding for these borrowers will be lower if they turn to bank loans.

Abu Dhabi’s Tourism Development & Investment Company and Dolphin Energy, as well as privately owned Dubai-based Majid Al Futtaim Group, all shelved plans to sell bonds this summer and tapped banks for at least some of their unmet funding needs, according to FT. Now the Saudi bankers argue that because of these conditions, Sukuk issuance is not

appealing for those corporate borrowers. In other words, borrowers will opt for Sukuk when the interest rate rises. Only then the cost of funding of Sukuk would be attractive for them.

Even when that happens, the Saudi banks relatively not ready to acquire a share of this market. For some reason, Sukuk structuring and originating is anything but their concern.

If they do not act swiftly now, they will lose revenue for the Universal banks parking in Dubai and Bahrain. Below is my Sukuk proposition to tackle this issue.

Saudi: 10 years = 21 Corporate Issuance Figure 1 showcases a comparison for the corporate Sukuk issuance over the past 10 years between Saudi and Malaysia.

Over the past 10 years Malaysia has issued 952 corporate Sukuk (worth $ Billion 49,884), compared with Saudi which has issued 21 corporate Sukuk (worth $ Billion 14,210), according to Zawya Sukuk Monitor.

Remember that there is no comparison between the size of the Malaysia economy and the oil kingdom. With the Saudi government opening up the biggest Arab stock market and planning to spend $400 billion on its infrastructure, there are plenty of deals to chase in the Kingdom, which benefits from high oil prices.

December - January 2012 Global Islamic Finance 55

Islamic Finance Instruments

„

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There will be a default premium risk attached to their issuance, resulting in paying higher yields to the Sukuk-holders.

Given the stronger local liquidity conditions and the fact that interest rate is at its lowest level, naturally the cost of funding for these borrowers will be lower if they turn to bank loans

The Road Map of Recovery Having been able to issue only 21 corporate Sukuk in the past 10 years denotes that the Saudi banks have significantly miscalculated the importance of this niche market.

One should argue how a smaller economy country like Malaysia managed to steer up the corporate market and come up with 952 issuances over the same period. Below are key built points and some recommendations for the Saudi banking industry: 1. The Malaysian investment banks have successfully created demand for what seems to be unbankable market from the Saudi banks perspective. That is bringing to the market sub-investment grade issuance, creating what is better be known Sukuk’ junk’ market. In fact, one Malaysian bank is now specialising in this small size issuance which resulted in its climb to the world’s top five Sukuk arrangers.

2. The above data shows the spectacular unrealised and the miscalculation of the market potential for corporate Sukuk Saudi issuance. If the Saudi banks had the right Sukuk infrastructure, they would have expedited the awakening of the corporate issuance. Remember they have already lost revenues for Universal banks that would have been theirs.

followed by Samab Capital along side Saudi Hollandi Bank. Al-Rajhi has the potential to excel in this area, and certainly can do much better.

3. The current argument, by Saudi bankers, that it is “not economically viable’ to specialise in Sukuk originating & structuring; because one established investment bank has currently dominated the domestic market is not relatively true. We saw from the Malaysian example how the domestic banks created a junk Sukuk market out of this stiff competition for sovereign & quasi-sovereign Sukuk 4. It is not too late to start building up proper infrastructure for highly skilled Sukuk teams as the Saudi “corporate” Sukuk market is still in its infancy.

5. If we want to expedite the awakening of the Saudi ‘corporate’ Sukuk market, we need to: •

Despite the fact that any sovereign Sukuk issuance is being outsourced to Dubai or Bahrain, we have seen how HSBC Saudi Arabia managed to dominate the Sukuk market,

Educate corporate clients about the full potential of Sukuk in terms of capital structure. One of the ways of doing that is through (Islamic finance) Relationship Mangers who can bring mandates to the table. The current level of the Corporate Sukuk usage is quite low. For instance, when I was explaining an innovative ‘clustered’ Sukuk structure to a seasoned banker, his response was my thinking is ‘quite advanced’ for their Corporate clients.

• •

Need for proper regulatory Sukuk guidelines Need for legal infrastructure set in place, in particular about the ownership rights for foreigners.

6. During this transition process, many indigenous Islamic finance ‘GCC’ talents will fade away if they are not given the opportunity to be part of the Sukuk structuring teams which was & still a ‘restricted’ area for them.

This ‘impression’ was created by the first generation of GCC ‘Islamic’ bankers, who have saturated conventional type of banking, resulting in the creation of low track record of Sukuk structuring.

With the exception of probably Bahrain, we have not heard of any GCC Islamic Young bankers who have specialised or given the chance to be part of the Islamic Debt team.

If these talents do not have the support of their domestic banks, then we should not expect the Universal banks to do that in the first place.

Bottom Line Saudi banks are losing revenues that would have been earned if they have properly invested in setting up a ‘proactive’ and comprehensive Sukuk infrastructure.

As a result, Universal banks are leveraging on the above-mentioned calculated move by the Saudis. They need to act swiftly otherwise they will become the only bystanders when the Corporate Sukuk markets explode. gif

Figure 1: Saudi Arabia and Malaysia corporate Sukuk issuance Corporate Sukuk

Malaysia

Saudi Arabia

Size of issues ($ mil)

2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 1,613, 277, 3,677, 2,080, 5,715, 3,888, 15,793, 4,358, 2,368, 6,727,

Number of issues

31,

18,

Size of issues ($ mil)

26,

818,

Number of issues

1,

2,

25,

5,716, 5,

Source: Zawya Sukuk Monitor 56 Global Islamic Finance

84,

December - January 2012

4,

136, 1,873, 3,

3,

86,

86,

81,

2,260, 2,503

75,

190,

Jan 2011Aug 2011

Total

Pipeline

3,387

49,884

2,253

140

950

24

1,013

14,210

2,284

3

21

7

Scan with QR Application

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Career

ASSESSING MBA PROGRAMS IN ISLAMIC BANKING AND FINANCE

Author: Rahmatina A. Kasri, Department of Economics and Center for Islamic Economic and Businesss, Faculty of Economics and Business, University of Indonesia

Abstract: The development of Islamic Economics, Banking and Finance (IEBF) that fueled the emergence of IEBF education institutions has raised concern on the development and problems associated with effective IEBF education. The article, therefore, critically analyses the issues and highlights some practical implications from the empirical studies of notable MBA-IEBF and similar programs in Asia, Europe and Middle East. The understanding is expected to enrich perspective regarding how far the teaching and its curriculum are relevant to the real economy while in harmony with Islamic principles.

Keywords: Islamic Banking and Finance; Islamic Economics; Islamic Finance Education; Performance-importance analysis; Curriculum Development.

58 Global Islamic Finance

December - January 2012

Career

tend to neglects the main and ultimate objective of developing the discipline namely to achieve the maqasid al shariah (objective of Shari’ah.)

ISLAMIC FINANCE AND APPROACHES IN ITS EDUCATION Type “Islamic finance” keyword in Google, and you’ll find around 7.39 million pages in around 0.12 second. Now, change the keyword into “Islamic finance education” and you’ll find around 14.8 million pages, more than double of the former, again in only 0.12 second. This simple ‘trial’ might represent the growing interest on Islamic finance education across the globe, despite the fact that around 30 years ago the discipline was almost inexistent in most higher education institutions.

Islamic banking and finance, or generally known as Islamic finance, is perhaps one of the fastest growing industries in the world.

Total assets of the industry reached US$ 660 billion by end of 2007 and increased to US$ 1 trillion by 2010. The market is estimated to grow at over 30 percent annually since 2000 and is set for continued strong growth.

Moreover, the industry has appeared to be more resilient to the immediate effects of the international financial crisis and global economic downturn than its conventional counterparts.

Such development has fueled the need for professionals who are conversant with Islamic principles and conventional practices in finance. According to a research, Islamic finance industry needs to have 50,000 professionals in the next decade with the Gulf countries alone requires about 30,000 of them. However, a cursory review of the possible number of Islamic finance graduates produced by various institutions of higher learning does not exceed 1,000 per year.

This, observers conclude that there is serious shortage of such trained professionals.

This is where education institutions are considerably important. Master level programs, particularly Master of Business Administration (MBA) or Executive-MBA (EMBA) and Master of Art (MA) programs in similar areas, commonly known as Islamic Economics/ Banking/Finance (IEBF), are amongst the most popular programs offered by education institutions across the globe. New courses, degree programs, and educational institutions that specialise in Islamic finance are being launched in the Middle East, Europe, and Asia to meet this demand.

Despite the rapid development, many scholars criticise the current development of IEBF education institutions. A prominent scholar points out that most of the institutions focus on producing students according to the market requirements, or follow the commodification approach, instead of developing original ideas from Islamic perspective under the originality approach. Other scholar suggests that the present state of IEBF education

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Rahmatina A. Kasri, Department of Economics and Center for Islamic Economic and Businesss, Faculty of Economics and Business, University of Indonesia Rahmatina A. Kasri specialises in Islamic economics, banking and finance as well as international and development economics, with experience both in academic and practical fields. Currently, she is a PhD research student in Durham Islamic Finance Program (DIFP) at Durham University United Kingdom.

Figure 1: Classification of Courses No

Name of Classification

Definition

1

Conventional MBA/MA courses

Courses generally offered by conventional MBA/EMBA/MA

Comparative courses

Courses that have some Islamic economic content

3

Islamic economics, banking and finance courses

Courses related to Islamic economics, banking and finance

4

Islamic law (Fiqh) and Islamic law history (Usul fiqh) courses

Courses related to Fiqh and Usul Fiqh

Other Islamic courses

Courses related to other Islamic subjects (Qur’an and hadith study, etc)

Language

Courses like Arabic, etc

Thesis

Dissertation or research papers

2

5

6 7

In contrast, many students and practitioners feel dissatisfied because the existing education institutions give less emphasis on the practical aspects of theories they learn in class. In Pakistan, for instance, it is found that that the syllabi of IEBF courses cover almost all important topics/theories; yet usually no technicalities are discussed.

Thus, the teaching seems to assume that it is sufficient to introduce the basic concepts of IEBF for students to apply in practical lives. In education literature, such approach to curriculum development is known as the Surface Learning Approach. The opposite is the Deep Learning Approach, which emphasises a comprehensive understanding of a discipline and thereby teaches few subjects in detail. Yet, some education institutions try the ‘middle’, and perhaps ‘ideal’ way, by offering curriculum with comparative component within each economics, banking and finance subject under the so-called “Islamization of Knowledge” approach.

The common practices suggest that in general there are three types of education institutions based on their focus or approach in teaching and developing IEBF curriculum namely • focus on market requirement (commodification approach), • focus on original ideas (originality approach) and • focus on comparative ideas (comparative/integration approach).

Despite the difference, almost all of the learning institutions experience the same problems in teaching IEBF. Some of the most notable issues are non-standardised curriculum, insufficiency of resources (lecturers/human resources, textbook, journal articles for research, etc) and inappropriate exposure on the practical aspects of IEBF. The contrasting views and problems faced by the education institutions raise concerns on the current focus and problems in teaching IEBF as well as the factors behind such development. The appreciation and ‘assessment’ are also necessary to see how far the teaching and its curriculum are relevant to the actual working of economy, meet expectations of students and market while in harmony with the aspiration and objective of Islamic teaching. The understanding is also hoped to provide some practical insights into possible strategic management actions to be considered by IEBF education institutions. These are the main issues addressed in this article.

December - January 2012 Global Islamic Finance 59

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Career

Based on this perspective, the article is organised as follows. Section one introduces the topic and highlights current issues in developing IEBF education. Section two briefly discusses methodology to empirically compare, assess and identify challenges in the global IEBF education practices. In particular, implementation of various academic aspects (curriculum, resources, etc) in MBA/ EMBA/MA in IEBF offered by education institutions in Asia, Middle East and Europe are examined in the subsequent section. A specific case study of MBA-IEBF program is also conducted and analysed in section four to provide more insights into effective IEBF education that meet expectations of students/ market and in harmony with Islamic values.

Section five summarises and concludes the study.

they put on the discipline. For this purpose, the curriculum and syllabuses are obtained from the relevant online sources or from the course administrators. They are evaluated for each approach of curriculum development described earlier (commodification, originality and comparative/integration approach). We also conduct a specific survey to assess performance of IEBF education institution as well as satisfaction of their students by using a performance-importance analysis.

terial, learning methods, evaluations methods and role of research are also evaluated in a structured questionnaire. The questionnaire is divided into five parts namely 1. socio-demographic characteristics, 2. performance indicators, 3. perceived-importance indicators, 4. overall evaluation and 5. free-writing part.

There are 22 similar questions for section two and three respectively that cover various aspects of IEBF learning mainly found in literature. Additionally, free writing part is constructed to collect suggestions, especially for issues uncovered in the structured questions. For this survey, our samples are 30 final-year students of MBA in Islamic Banking and Finance program at International Islamic University of Malaysia (IIUM).

The survey is conducted from August to September 2007.

In simple term, the analysis compares performance of an institution/company with its user/consumer expectation, such that the gap between performance and expectations could be analysed and accordingly relevant strategic actions could be proposed. The analysis is developed based on the Perceptual Mapping Techniques that provides directions toward (corporate) strategic management and actions.

METHODOLOGY In this study, we survey and assess implementation of IEBF education at a global and specific level. For the worldwide survey, the samples include education institutions offering MBA/EMBA in Islamic Banking and Finance (IBF) and MA programs in Islamic Economics (IE) in prominent institutions in several Asia, Europe and Middle East countries. Meanwhile, for the specific case study, we survey the performance and satisfactions of MBA-IBF students at the International Islamic University of Malaysia. The surveys were conducted from August to September 2007 and used data from 2007/2008 education year.

SURVEY OF GLOBAL IEBF EDUCATION Figure 3 summarises our findings regarding the importance of IEBF contents in the 2007/2008 curriculum and syllabus of MBA/EMBA-IBF and MA-IE programs in International Islamic University of Malaysia (Management Centre, MC-IIUM, and Kuliyyah of Economics and Management Sciences, KENMS-IIUM), Loughborough University (LU) United Kingdom, Trisakti University (TU) Indonesia, University College Bahrain (UCB), International Islamic University of Pakistan (IIUP) and Dadabhoy University (DU) Pakistan.

As shown in the Performance-Importance Matrix illustrated in figure 2, each quadrant correlates with particular improvement method. For example, a component that falls under category one i.e. having high importance but low performance implies that improvement must be done with respect of this component. The results are expected to be inputs in designing appropriate and effective IEBF teaching in the future. The analysis is mainly applied to IEBF curriculum and syllabus. Nevertheless, other important variables or supporting education ‘facilities’ for IEBF education such as lecturer, course ma-

To assess the IEBF contents, we construct categories of curriculum that reflects the importance of IEBF contents. We modify the classification used by Haneef and Amin for the case of IIUM and calculate the shares of each category as a percentage of the degree’s total requirement. Seven categories are constructed based on the amended classification (see figure 1). By looking at the total share percentage of IEBF courses in the program, we attempt to analyse the curriculum in terms of how much emphasis

In general, the findings suggest that different institutions indeed follow different approaches in developing their curriculum due to various internal and external factors such as human resources, program age and institution/country specific factors. It is also notable that the institutions with lowest percentage share of IEBF content seem to follow the commodification approach, yet offering some specific IEBF courses to add value to their programs. While the approach and

Figure 2: A Performance-Importance Matrix I M P O R T A N C E

1. Concentrate Here

3. Keep Up The Good Work

2. Low Priority

4. Possible Over Provision Of Service

PERFORMANCE

Figure 3: Comparison of Worldwide Curriculum Structure Comparison of curriculum structure worldwide (2007) 83

80 70 60 50 40 30 20 10 0

68.87 50

50 40

40 40

33.33

68.75

66.67

60

55

30.43 25

25

20

20

16.67 6.67 6.67

5

0 Trisakti,Indonesia

loughborough,UK

Conventional courses (%)

16,67 16.67

18.75 8.33 8.33

0

IIU,Pakistan

Islamic Economic courses (%)

4.35 4.35

0

Dadabhoy,Pakistan

Kenms,IIUM (2),Malaysia

Fiqh and USL fiqh courses (%)

0 Kenms,IIUM (2),Malaysia

Kenms,IIUM (2),Malaysia

UCB,Bahrain

Comparative courses (%)

Source: MBA/EMBA and MA program in Islamic Economics, Banking and Finance 60 Global Islamic Finance

December - January 2012

6.25 6.25

0 Management,Center,IIUM, Malaysia

Career curriculum composition might have changed overtime, as there has been significant development in Islamic finance as well as the global financial industry after the 2008 and recent global financial crises, the differences should be appreciated as the institution’s way to develop themselves and support the evolving Islamic finance industry.

To get more insights from the results, figure 4 shows the share of IEBF courses in the MBA-IBF program at MC-IIUM. The results show that conventional courses dominate the curriculum (69 percent), meanwhile IEBF and fiqh courses make up around one quarter of the total curriculum in the program.

The comparative element is given in Comparative Business Ethics class which consists of only 6 percent of the total courses offered. These results are further discussed in the performance-importance analysis in the next section.

The IEBF courses offered by another school in IIUM, that is KENMS, are shown in figure 5. There are three options offered to the students based on the availability of research essay course, as noted in the figure, and the integration/comparative approach. The figures show that conventional courses make up 50-67 percent of the program, depending on the option undertaken. Meanwhile, the share percentage of comparative and IEBF components are 17-25 percent and 16-25 percent respectively. The fact that IIUM is an Islamic education institution which attempts to integrate conventional and Islamic knowledge and actively involves in the Islamisation of knowledge agenda is believed to be related to the curriculum composition.

Next, in Pakistan, it is observed that the content of IEBF curriculum in IIUP and DU is 40 percent and 31 percent respectively.

These imply a relatively high percentage of IEBF contents, although the corresponding share at IIUP is higher than that of the DU by around 9 percent (figure 6). Combining the IEBF components with fiqh components, almost half of IIUP curriculum contents reflect Islamic contents. This is somewhat indicating that IIUP tends to develop its curriculum based on the originality ideas.

Figure 7 compares the 2007/2008 IEBF curriculum in UK, Indonesia and Bahrain institutions respectively. It is shown that LU (UK) and TU (Indonesia) have a mix of IEBF and comparative courses, more than half of the total courses in the program, which largely surpasses the fiqh and Islamic economics courses at UCB (16 percent of the entire curriculum). This implies that the former tend to follow the Deep Learning Approach, or at least gear towards that approach, more than the UCB. Meanwhile, UCB adopts more of a Surface Learning Approach as well as the

Commodification Approach. Only 8 percent of their courses are IEBF courses during the education year. Cursory examination suggests that the institutions differ in their curriculum compositions due to at least three reasons: start of program (program ‘age’), human resources and institutional factors.

With respect to program age, it is noted that IEBF programs in Loughborough University and Trisakti University were started in late 1990s and 2003 respectively meanwhile the UCB program was started in 2006. Intuitively, the first comers would enjoy more benefit (and time, obviously) to develop their program as well as build their capacities and competencies based on both the market demand and Islamic aspirations. Not surprisingly that their programs and content/ curriculum are more well-established and accordingly they have more students than the latter.

Figure 4: Curriculum Analysis Fiqh 6%

Comprtv 6%

IEBF 19%

Conventional 69% Source: MBA-IBF at MC-IIUM (Malaysia)

The program age factor is closely related to the second factor, i.e. human resource availability, particularly lecturer provision. More established institutions usually have more time to prepare, ‘attract’ quality human resources and develop necessary networks.

Trisakti University in Indonesia, for instance, has successfully created academic partnerships with several prominent Islamic economists and scholars who mainly teach in Western universities to contribute to their curriculum and program development.

Similarly, IIUM and IIUP have many faculty staffs graduated from well-known Western Universities with experience of research both in the local/national and international institutions. The last factor seems to be strongly related to the approach of developing IEBF program and curriculum is institutional factor. In IIUM, for instance, the Islamisation of Knowledge agenda is believed to be the spirit behind the comparative/integrative approach that mixed Islamic and conventional input within IEBF courses. Furthermore, country specific factor may also play an important role in the development. The fact that Loughborough University is located in a Western country with strong ‘tradition’ of

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Muhammad Abulaban, MBA Graduate, International Islamic University, Malaysia

What are your thoughts on the education of Islamic banking and finance?

Although my specialisation is strategic management, I have selected two elective courses with my colleagues of MBA in Islamic banking during my master in the International Islamic University Malaysia. Courses were very interesting, lecturers were very good, presentations and projects were conducted in a challenging way.

The two courses were Fiqh almuamalat in Islamic Banking & Finance and Islamic Financial System & Environment. The class of Fiqh almuamalat was very crowded and some students were not having the spirit of Islamic banking which the lecturers tried to establish in our minds. However, in general we were feeling that we are learning something very unique and feeling that we can make a difference in the world’s financial system. Our mission will be shifting the economy of the world from loan-based economy to investment-based economy which can heal many of the world’s problems.

What internal and external factors result in institutions approaching education and development differently?

Internal factors result in the quality of the education, the lecturer selected the course material, the slides, the cost of the course, which was relatively good in the Graduate School of Management, International Islamic University in Malaysia. External factors are the relation between theory and practice especially for MBA students who are more concerned in the application of the theoretical part rather than the pure focus on theories. As you know MBA is not like MSC in terms of the approach of education because we are trained extensively to apply and get things done of what people in MSC and PHD come with rather than theories of Islamic banking.

What academic aspects do you believe are important in educating Islamic banking and finance?

Related to the previous question, one of the things that have to be improved is the bridge between university and market in terms of training and regular visits. There is a fact that Islamic banks in Malaysia do not welcome International MBA students to have internships with them because of the student visa status. It is very important for people in MBA in Islamic Banking to have the opportunity to see what is happening in the real world during their academic study.

December - January 2012 Global Islamic Finance 61

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Career Figure 5: Curriculum Analysis Option 1

Option 2

Comparative 25%

Option 3

Comparative 20%

Comparative 17% IEBF 16%

IEBF 20% IEBF 25%

Conventional 50%

Conventional 60%

Conventional 60%

Source: KENMS-IIUM (Malaysia)

teaching and research in conventional economics, for example, is presumably related to the high percentage of conventional and comparative economic courses taught in the institution.

Overall, the results suggest that different institutions follow different approaches in developing their curriculum due to various internal and external factors including human resources, program age, and institutional factors. Nevertheless, there might be other factors such as paradigm of the institution or education policy in a specific country which are harder to be recognised and thereby beyond the scope of this study. The differences should be appreciated as the organisation’s way to develop themselves and support the evolving Islamic finance industry.

the theoretical and practical aspect of IEBF as well as from appropriate textbooks and other relevant material, importance of research component deserve some elaborations. In many cases, most MBA students are reluctant to have (and do) research assignments.

Consequently, MBA programs normally respond by making it optional for the students.

At a glance, this seems to suit the MBA students who are mostly studying part-time and working in private sectors found in this study. However, our survey indicates that the students are actually keen on taking such option because they believe that it could enhance their knowledge and give value

ASSESMENT OF IEBF EDUCATION: A CASE STUDY Figure 8 compares the mean-performance and mean-importance of various aspects of IEBF education at MBA programs in Islamic Banking and Finance of Management Center IIUM. In terms of performance, three aspects provided satisfactorily are research (research-based assignment), elective courses and lecturers.

Meanwhile, three important academic aspects according to the student are lecturers, course materials and research. Note that while these results cannot be generalised to all IEBF education institutions and bound to the students surveyed in this study, it is hoped that the results could provide some insights into effective IEBF education that meet expectations of students (‘market’) and in harmony with the aspiration of Islamic teaching. The importance of three academic aspects mentioned above, i.e. lecturers, course materials, and research assignments, is quite intuitive. While most of these factors are self-explanatory, as students generally expect to learn from expert scholars with appropriate exposure on 62 Global Islamic Finance

December - January 2012

Figure 6: Curriculum Analysis IIU, Pakistan: Share of Islamic economics courses from curriculum (2007) Fiqh 5% Islamic economics 40%

Conventional 55%

Dadabhoy Comparetive Fiqh 4% 4% IEBF 31%

Conventional 61% Source: IIUP and Dadabhoy University (Pakistan)

added to them. In particular, we find that students who are working in conventional financial institutions are highly supported by their institutions to conduct research work in their work-related Islamic banking and finance areas. The companies presumably those having/planning to have Islamic banking units or dealing with (other) Islamic financial companies believe that such work could give them future benefits through the insights of their own employee.

They even provided access to data and other resources for their employees to do the research. Thus, the research also serves as a ‘tool’ for bridging the gap between the theory and actual practice of IEBF. Accordingly, the ‘reluctance’ to do research in business school seems to be moderate in studying a nascent discipline like Islamic banking and finance.

With regard to the performance aspect, three factors found to be satisfactorily provided by the program are research (research-based assignment), elective courses and lecturers. In contrast, curriculum content, evaluation method, course materials and teaching methods are the factors regarded as poorly provided by the program administrator.

While variables specific to the program or education institution are presumably the main drivers behind the results, they could give lessons learnt for other similar education institutions. Thereby, we will briefly explain the results and subsequently discuss general implications of the finding. The high satisfaction for the provision of research component is somewhat surprising, considering the previous findings that finance students mostly prefer to have more practical knowledge. However, in addition to the industry support factor explained above, further observation suggests that this might be related to motivation and previous background of the students. Almost 50 percent of the students are motivated to study IEBF

Career

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Figure 7: Curriculum Analysis Loughborough

Thesis 7% Comparative 7% Fiqh 6%

Comparative 17%

Fiqh 8% Islamic economic 8% Conventional 40%

IEBF 40%

IEBF 33%

UCB, Bahrain: Share of Islamic economics courses from curriculum (2007)

Terisakti

Conventional 50%

CV Total 83.33% Source: Loughborough University (UK), Trisakti University (Indonesia) and University College Bahrain (Bahrain)

for self interest learning purpose and almost 80 percent of them have economics/ economics related (business, management, etc) background. These could be the factors that motivate them to study hard and somewhat enjoy doing research in IEBF. The fact that they have relevant education background could also partially explain the result, as research in the areas might not be very difficult for them.

deed, in other case of a university in Tehran (Iran), the deficiencies lead to an extreme situation where the lecturers have to fly daily to various provinces for a full day of lectures, hence they are called as the ‘sermon-giving professors’. The high expectation is also found in relation to provision of appropriate course material, evaluation method and teaching method. With respect to the textbooks, the students suggest that specific textbooks were not used in learning the IEBF courses; a similar situation faced by most of IEBF learning institutions. This happens primarily because at that time there were no standardised IEBF textbooks available in

the market, hence the lecturers are ‘forced’ to rely on research works/journal articles in delivering the subject matter. Nevertheless, the aspect should not seem to be a big issue anymore nowadays since many IEBF books are available in the market. In addition to the books written in local languages, some of the IEBF books have been internationally published and distributed by well-known global publisher such as McGraw-Hill.

With respect to elective courses offered by the program, the satisfaction result is not surprising because the Centre regularly asks for the students’ recommendation before opening an elective course. In other word, it has successfully provided the stu- Figure 8: Performance–Importance Comparison dent and industry/market what they want to learn. It also concern on the lecturers No Aspects of Mean Mean quality, as reflected in the appointment Education Performance Importance of teaching staff who are mostly the best 1 Curriculum 3.23 4.21 lecturers in the university. Some promicontents nent and international IEBF scholars also 2 Additional/ contribute in the teaching there. Yet, at elective 3.93 3.88 that time, only few of them have approcourses priate practical exposure to the practice 3 Lecturer 3.90 4.48 of IEBF in the national and international 4 Learning level.

3.56 4.17

In relation to evaluation and teaching methods, the survey suggests that the students expect to learn many topics of IEBF and hence prefer evaluation from case studies rather than the ‘traditional’ type of exams.

In particular, they expect to have around 40 percent of evaluation from case-study type of learning to enhance their knowledge.

method

Mean Importance

Aspects of learning that have not been provided satisfactorily by the institution i.e. curriculum content, evaluation method, course materials and teaching method are also the aspects criticised

by IEBF students elsewhere, especially in UK and Iran. This expectation is natural since students, either those already working in private financial institutions or (unemployed) fresh graduates students, expect to get good employment after graduation. In practice, however, theoretical aspects seem to be dominating the curriculum. Despite the facts that the faculty staffs designing the curriculum are perhaps amongst few scholars who are expert in the field, this is mainly due to the human resources and lack of practical exposure factors explained earlier. In-

5

Evaluation

3.28

4.05

6

Course material

3.55

4.35

7

Role of research

3.97

4.28

Figure 9: The Performance-Importance Analysis Matrix plot of mean importance vs mean importance 4.5 4.4 4.3 Curriculum contents 4.2 Evaluation 4.1

Lecturer

Course material Role of research Learning method

4.0 3.9 3.8

Additional/elective courses

3.2

3.3

3.4 3.5 3.6 3.7 Mean performances

3.8

3.9

4.0

This is consistent with the current teaching and evaluation method in major business schools and thereby should be of concern of every education institution offering IEBF and similar programs. This should also be a concern for IEBF scholars (book writers) and books publishers, which appeared to focus on theoretical aspects of IEBF in their publications.

The comparison allows us to compute the difference between performance and importance of various academic aspects of the MBA-IBF program. As illustrated in figure 9, there are four major aspects in which the performances are below the expectation of the students, namely curriculum content, course material, evaluation method and learning method.

Hence, the institution needs to improve its performance in these aspects. Additionally, performance of lecturers and provision of research work are already good and need to be maintained or, if possible, improved in the future. The opinion regarding the provision of elective courses is, however, shows somewhat ambiguous results. While overall

December - January 2012 Global Islamic Finance 63

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Career

the performance-importance matrix shows that the aspect is insignificant, the free writing part in our questionnaire suggests the opposite. Apparently, this could be related to the longer study duration associated with more courses/electives. Perhaps more empirical research needs to be done to see the significance of such relationship.

CONCLUDING REMARKS The growth in Islamic finance has fueled the need for professionals who are conversant with Islamic principles as well as conventional practices of banking and finance. Nevertheless, current development of Islamic Economics, Banking and Finance (IEBF) education has raised concern on the focus of IEBF-to meet ‘scientific’, ‘market’ or other requirement, the factors behind such development and the problems associated with effective running and functioning of the education. Understanding these issues is expected to give perspective regarding how far the teaching and its curriculum are relevant to the actual working of economy while in harmony with the aspiration and objective of Islamic teaching. Findings of such study is also hoped to provide practical insights

into possible strategic management actions to be considered by IEBF education institutions. Findings of the study highlight at least two important implications. First, it confirms different approaches in developing IEBF curriculum and teaching IEBF courses which should be appreciated as the institution’s way to develop themselves and support the evolving Islamic finance industry. The survey also suggests that most IEBF education institutions lean towards the Commodification Approach and the Surface-Learning Method driven by market demand, at least until 2007, due to various factors.

Some institutions appear to have a unique method, known as the Integrative approach, which is more comprehensive and in harmony with the Islamic economics aspiration; yet requires many competencies to be optimally implemented. Nevertheless, the approach and curriculum might have changed overtime as there has been significant development in Islamic finance as well as the global financial industry after the 2008 and recent global financial crises.

Second, the survey indicates that IEBF education institutions are expected to Figure 10: Distribution of Respondents provide good ‘infrastructure’ and supporting facilities in the learnDistributions of Respondents (n=30) Valid percent (%) ing process. In particular, the Gender Male 60.7 IEBF curriculum should provide appropriate exposure to indusFemale 39.3 try practice and current market Age group 20-25 28.6 trend while at the same time give 26-30 46.4 enough foundation of the Islamic 31-35 14.3 principles. The curriculum should be taught using interactive learnabove 35 10.7 ing and evaluation which involve Area of origin Asia 78.6 more case-studies.

Africa

Education background

Employment status

Education purpose

Enrollment status

10.7

Middle East

7.1

Others

3.6

Economics/business/accounting

78.6

Engineering

7.1

IT

7.1

Human Sciences/ Revealed Knowledge

3.6

Others

3.6

Government sector

0

Private sector

46.4

Self-employed

10.7

Not employed

42.9

Promotion/get employment

14.3

Professional degree

39.3

Self interest learning purpose

46.4

MBA/MMgt full time

75

MBA part time

25

64 Global Islamic Finance

December - January 2012

It is also important to support creation of good networking with financial institutions for the students to gain more practical insights as well as find more or better opportunities after graduation. Research-type work or assignments should also be encouraged, not only to give more value added to students but also to ‘bridge’ the gap between theory and practice of IEBF. All together, these efforts should be conducted consistently and persistently in teaching IEBF effectively within the aspiration of Islamic principles. gif For references and further reading please visit the Global Islamic Finance Magazine website

Rhesa Yogaswara, senior research executive of strategic business, QASA Strategic Consulting, Indonesia

What are your thoughts on the education of Islamic banking and finance?

In my opinion, not only the education of Islamic banking and finance, but also the islamic business is needed for everyone, especially for muslim/muslimah. Since, business activity is one of our daily routine, it must meet the Shariah rulings that has been stated in the Quran and Sunnah. Unfortunately, there are so many muslim/muslimah though that Shariah ruling implementation in business activities were perceived less important and less priority.

What internal and external factors result in institutions approaching education and development differently?

In terms of education and development approach, there are several reasons that have made the institution’s approach different.

Internally, the educational background of the lecturer which some of them graduated from Islamic Studies focus on fiqh business and economics, and some of them graduated from conventional business focus on Islamic Business. Externally, the institutions need to have a good relationship with companies across industries, and socialise that Islam can help their business (not only finance, but also marketing, operation, ethics, etc). Therefore, it will be expected that the “Islamic Way” can replace the “GE Way”, “Toyota Way”, etc.

What academic aspects do you believe are important in educating Islamic banking and finance?

The academic aspects that I believe, are important in educating Islamic banking and finance: • • •

Understand the fiqh economics and Shariah ruling Understand the business situation very well, based on the student’s specialities Work ethics

Risk Management

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RISK

MANAGEMENT framework in Islamic Banking: Basel II and III, challenges and implications in Islamic Banking, part II

Author: Dr. Farhad Reyazat, PhD in Risk Management, Editor in Chief, Global Islamic Finance Magazine, United Kingdom

Abstract: The time to fix the roof is when the sun is shining; Risk management has not been uppermost on the Islamic banking sector’s agenda in recent years. It is crucial for Islamic Banks (IBs) to have comprehensive risk management framework as there is growing realisation among IBs that sustainable growth critically depends on the development of a comprehensive risk management framework.

Islamic banks should be dusting their ladders off now. If Islamic banks are serious about playing a greater role in the financial system, they will need to get to grips with risks which may not currently be well understood or well managed. In this article a frame work for Risk management in Islamic Banks will be discussed firstly, then generic risk associated with banks and unique risks exposed to Islamic Banks will be categorised.

The contractual complexity of Islamic banking transactions which gives rise to awkward operational risks, and the uncertainties associated with Shariah compliance leave them exposed to a few risks including fiduciary and reputational these risks will be briefly reviewed. Although Basel II standards, does not account for the specific risks related to the nature of Islamic banks’ activities however the fundamental tenet of Islamic finance is that of fairness, and Islamic financial institutions at a most basic level are often structured towards fee-based revenues for services rendered and profit- and risk-sharing structures. Thus, in essence, Islamic financial institutions are closer in spirit to asset management companies than to conventional banking institutions, and the impact of their operations on the balance sheet is unique. These particularities highlight the unique characteristics of Islamic banks and raise serious concerns regarding the applicability of the Basel methodology to Islamic banks. Islamic banks’ activities differ in substance and in form from conventional banks’ operations and they thus face a different risk profile.

The article gets to grips with Basel II accord and share challenges on adopting Basel II in Islamic Banks Keywords: Capital Adequacy, Islamic Banks, Basel II, Internal Ratings, Basel III

December - January 2012 Global Islamic Finance 65

Risk Management

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Capital adequacy methodology for Islamic Banks Unlike depositors of conventional banks, the contractual agreement between Islamic banks and investment account holders is based on the concept of sharing profit and loss, which makes investment account holders a unique class of quasi-liability holders: they are neither depositors nor equity holders. Although they are not part of the bank’s capital, they are expected to absorb all losses on the investments made through their funds, unless there is evidence of negligence or misconduct on the part of the bank. The nature of intermediation and liabilities has serious implications for the determination of adequate capital for Islamic banks: •

•

•

•

•

Deposits taken on the basis of profitand loss-sharing agreements should not be subject to any capital requirements other than to cover liability for negligence and misconduct and winding-down expenses.

Investments funded by current accounts carry commercial banking risks and should be subject to adequate risk weights and capital allocation.

Restricted investment accounts on the liabilities side form a collection of heterogeneous investment funds resembling a fund of funds; therefore, financial institutions holding such funds should be subject to the same capital requirements as are applicable to fund managers.

The presence of displaced commercial risk and the practice of income smoothing have indirect implications for the Islamic bank’s capital adequacy, which a regulator may take into account when determining the CAR. Islamic banks acting as intermediary can face a moral hazard issue. Since, as agent, the bank is not liable for losses but shares the profits with the investment account holder, it may have an incentive to maximise the investments funded by the account holder and to attract more account holders than it has the capacity to handle. This can lead to investment decisions that are riskier than the investment account holder is willing to accept. Such “incentive misalignment” may lead to higher displaced commercial risk, which necessitates higher capital requirements.

Capital requirement standards have been developed for Islamic banks adapting conventional Basel approaches. In December 2006, the Islamic Financial Services Board issued a capital adequacy standard based on the Basel II standardised approach, with a similar approach to risk weights. While the modes of intermediation, financial instruments, and risks may differ between Islamic 66 Global Islamic Finance

and conventional financial institutions, the general approach is applicable to both types of financial intermediaries. A better-circumscribed economic capital can allow Islamic banks to manage their resources more efficiently, while providing comfort to their stakeholders.

A major difference between Islamic banks and conventional banks relates to investment account deposits. For Islamic banks, the expected losses would be borne by the income, and so the risk capital needed to meet unexpected losses may be less for Islamic banks than for conventional banks.

Theoretically, Islamic banks accept investment deposits that are risk sharing contracts.

The Islamic financial intermediary, as an agent (mudarib), would share profits with the depositor, but the depositor would bear losses that are the outcome of market conditions, but not of a mudarib’s misconduct.

Hence the risk-sharing feature of investment account deposits would reduce the overall risks for Islamic banks in principle. Under the circumstances, and going back to the murabahah contract, an Islamic bank would be expected to conduct business in such a way as to deal with expected losses, pricing its products and accumulating provisions accordingly.

The Islamic bank would identify economic capital to deal with unexpected losses that are due primarily to misconduct. Unanticipated adverse events that are beyond the reasonable anticipation of the bank would not be cushioned, as profit-sharing investment account “depositors” would share the losses attributable to the assets (or the proportion of assets) financed by their funds.

Risk Management framework in Islamic Banking: Basel II and III, challenges and implications in Islamic Banking part 2 will outline topics such as the standardised approach to classifying and measuring risk exposure for capital adequacy, adopting Basel II, the model-based and internal ratingbased approach and also discuss the Islamic Financial Services Board (IFSB) proposal.

Adopting Basel II Standards in Islamic Banks The Basel II accord aims to establish market discipline, with the main emphasis on risk-based capital adequacy. According to Basel II, some selected international banks will be allowed to use their own internal risk management systems. Other banks will continue to use standardised risk management systems with enhanced rating systems.

Adoption of external rating facilities and guidance for supervisory bodies in relation to external ratings are major components of

December - January 2012

the risk management process within the Basel II accord. However, the risks associated with specialised Islamic products and their unique nature, Islamic banks face a challenge in adopting international standards. It may be taken into consideration that some of the risk models may expose Islamic banks to other risks that are not apparent for conventional banks.

The methods that are developed for conventional banks should be amended and tailormade for Islamic banks and such procedures may require extensive input in terms of data availability. Because of the unique nature of their financial instruments, Islamic banks should keep profit and loss sharing accounts off the balance sheet. Conventional banks cannot do the same for time deposits. Such accounting treatment would expose Islamic banks to capital adequacy risk.

Adoption of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards provides a resolution for the issue by requiring Islamic banks to keep all deposits on the balance sheet, without differentiating between current accounts and profit and loss sharing accounts. The International Accounting Standards (IAS) does not have any accounting procedure to overcome this obstacle.

In countries where compliance with IAS is mandatory without any room for AAOIFI standards, there may be Islamic banks with profit and loss sharing accounts that are off the balance sheet. Besides risk-based capital adequacy, Basel II also emphasises risk management techniques, internal controls and external audits. While capital adequacy definitions are not changed with the new accord, new approaches are described for weighting assets: the standardised approach, the internal ratings-based approach and the model-based approach.

Standardised Approach Islamic banks are categorised as medium to small firms. Therefore, they may be required to comply with the standardised approach to classify and measure risk exposure for capital adequacy. Currently, the majority of the Islamic banks assess their credit risk by applying the standardised approach, in which capital weighing is based on ratings from external rating agencies such as Standard and Poor’s, Fitch Ratings or Moody’s. As Islamic banks move to more advanced approaches, they face the challenge of a lack of data from historical default cases. Quality data must be available to estimate the probability of default and loss given default. Islamic banks definitely need a pooled data system at the multinational level that would require a relaxation of some confidentiality rules imposed by associated regional banks.

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Risk Management

Clarification from the Islamic Financial Services Board on the nature of Islamic banking products and the associated risks under Basel II has helped in identifying proper risk mitigation strategies for Islamic banking.

Risk mitigants, including collateral, guarantees and derivate products, are recognised within the standardised approach with a wider range.

The effects of specific risk mitigants on overall risk measurement are defined in the accord, but this definition is not extended to Islamic financial instruments.

Transactions such as murabahah

and ijarah are structured similarly to conventional transactions.

The definition of collateral for partnerships such as mudarabah and musharakah are very troublesome for Basel II. At first look, these partnerships may require collateral neither for expected profits nor against principal investments. If a bank establishes a musharakah transaction, how could it be possible to ask for collateral and from whom the collateral will be collected? Is it legal in terms of Shariah to collateralise investments of musharakah or mudarabah partnerships? If little collateral is asked against managerial misconduct or none taken in, the transaction will be recorded as an equity partnership with no collateral.

Thus, under Basel II, collateral should be applied to equity participation and assets of the equity should be considered either as a deduction from the risk or as collateral for the outstanding risk.

The treatment of derivative products has also been expanded to include more products. Although there are no Islamic financial instruments defined as derivative products for Basel II purposes, parallel Salam may be used to hedge against risks arising from Salam contracts.

Internal Ratings-Based Approach Banks’ internal risk measurement systems are utilised for measuring credit risk. Risk weights and capital charges are generated by banks with the guidance of Basel II and regulatory bodies. The risk-weight calculations are derived from risk management techniques. The Internal Ratings Based (IRB) approach uses four quantitative areas of data:

The resulting reduced risk exposure is similar to that of credit derivatives that conventional banks utilise to hedge their credit risk.

The range of guarantors as collateral has been expanded to include certain companies with acceptable levels of external credit ratings. Islamic banks will benefit from such expansion in terms of credit extended to the real economy. As long as Islamic banks do not include fixed income securities to their credit portfolio, their percentage of loans within total assets should reflect this tendency. Special risk treatment for retail exDecember - January 2012

Islamic banks will benefit from reduced risk weights, because the available Islamic financial instruments make it possible for Islamic banks to work extensively with small and medium enterprises. Some of the Islamic financial instruments especially designed for this purpose include Istisna, Salam and Mudarabah.

Any special treatment in terms of reduced risk weights will benefit Islamic banks in two ways. First, it will allow Islamic banks to offer better conditions to customers. Second, Islamic banks will be encouraged to work more with small and medium enterprises and utilise more related products. This may result in product shift from dominant murabahah transactions within the credit portfolio to more equity-related products.

Parallel Salam contracts may not be derivate products, but the application of Salam is very much in line with the intent of derivatives.

In terms of credit definitions, however, Basel II will treat the two Salam transactions as two separate deals and double the risk. If parallel Salams are to be included within the Basel II expanded derivate treatment, banks would match two contracts and deduct the amount of parallel Salam from the original Salam contract.

68 Global Islamic Finance

posures is included within the standardised approach. The risk weights are reduced for most retail exposures. Credits extended to small and medium enterprises that meet the required criteria are included within this special treatment.

• • • •

Probability of Default (PD) is the probability that a borrower will default within a time period.

Loss Given Default (LGD) is the percentage of the risk exposure that will be loss in case of default.

Exposure At Default (EAD) is the amount of risk exposure at the time of default.

Maturity (M) is the days left for the risk exposure to end.

The capital requirement for specific risk exposure will be a function (ƒ) of PD, LGD, EAD and M. With the IRB approach, banks are permitted to alter the risk weight formula for small and medium enterprise borrowers. Such an alternative will be especially useful for Islamic banks, considering the relatively larger risk exposure of small and medium enterprises.

The advanced risk weight formula will allow for true reflection of risk in terms of small and medium enterprise size and annual sales figures. The disadvantage of categorising all small and medium enterprises into one single category is that the differences between small and medium enterprises are overlooked. With the IRB system, such differ-

Risk Management ences are reflected directly in risk measurements and therefore in calculation of capital. Allowing the bank to distinguish the risk weight will also allow for true risk estimation in terms of risks associated with Islamic financial instruments.

these should not be considered as revolving credits. The third category includes many credit types that are convenient for Islamic banks. For instance, project financing is categorised as specialised lending under other retail exposures.

It has always been a problem to distinguish the differences in risks between small and medium enterprises financing by conventional banks versus financing by Islamic banks.

Risk weights that are based on past experiences of Islamic banks will enable a better risk definition in terms of small and medium enterprises and related credit products.

Islamic banks may list instruments as specialised lending, including Salam and Istisna. While classification of such risk is still troublesome, Islamic banks should take the lead to describe risks associated with such credit relationships and establish a risk weight foundation. Equity participation is also handled differently under the IRB approach. Islamic financial instruments such as mudarabah and musharakah benefit from such special treatment. There are two different methods described for handling equity participation:

The IRB approach also provides extended coverage for risk mitigation techniques, including collateral and risk derivatives. Considering the absence of risk derivatives for Islamic banks, their treatment is not applicable, except to say that conventional banks gain advantage over Islamic banks.

On the other hand, regarding collateral, extended treatment will benefit Islamic banks a great deal. Perhaps Islamic banks will benefit more than conventional banks, as long as a different set of methods will be allowed by the supervisory bodies. It will be very important to have the cooperation of regulatory bodies to develop a set of risk measurement methods for Islamic banks that may prove to be much different than the methods for conventional banks.

Since the IRB approach includes many aspects of risk measurement to be conducted by banks themselves, the same should be applicable to Islamic banks as well. Islamic banks, together with Islamic banking standardisation authorities such as the AAOIFI and the Islamic Financial Services board (IFSB), should provide the necessary foundation to establish an IRB approach for Islamic banks.

In terms of retail exposures, the IRB approach includes an expanded treatment.

These credits are categorised under three headings: • • •

Collateralised by residential mortgages.

Qualifying revolving retail exposures.

Other retail exposures.

Different products of Islamic banks have different collateral structures. For instance, murabahah transactions may have residential mortgages that could be classified according to the first category. In terms of qualifying revolving retail exposures, Islamic banks cannot have revolving credits according to Shariah. Although some credit restructuring may be permitted, and in fact encouraged, if customers face payment problems,

• •

Banks can provide their own default probabilities for equity participations; and Banks can estimate the market value decrease of the equity participation. In either case, Islamic banks can take advantage of special treatment.

In fact, the IRB approach to equity participation may encourage Islamic banks to utilise more mudarabah and musharakah transactions. But in order to obtain supervisory approval to apply the IRB approach, Islamic banks will have to overcome obstacles in terms of size and risk management.

Model-Based Approach Under this system, credit risk is measured in terms of risk portfolios, with utilisation of specialised models. Through utilisation of pre-defined risk models with computerised systems, banks aim to implement standardised risk measurement procedures. Basel II aims to establish comparable risk measurement techniques between banks. However, banks need necessary infrastructure and model descriptions for a variety of risks.

To generate a standardised risk measurement system, Islamic banks will require extensive resources and enough experience in various types of risks to draw upon. In fact, a standardised Islamic banking risk measurement model would be a great achievement.

Challenges in adopting Capital adequacy models to Islamic Banks It is not easy to apply this model to Islamic banks. First, because Islamic banks can raise much of their funds through mudharaba accounts, it’s not easy to work out how much equity a bank has, nor who bears the risk – the account-holders or the bank itself.

Many Islamic banks have argued that the funds raised in this way should be seen as a form of equity because of the loss-bearing

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contracts on which they are based. However, the banks’ sensitivity to liquidity risk means that most would accept losses themselves rather than pass them on to their customers.

The second obstacle is the fact that Islamic banks’ risk profile may not be well reflected by the Basel II taxonomy – market, credit and operational risks are all measured according to the specific rules of Pillar I, but other risks which are important to Islamic banks, such as liquidity risk, concentration risk and fiduciary risk, are all approached more subjectively under Pillar II. Here, banks are required to articulate their approach to capital management and its allocation across businesses and risk types, subject to a regulatory review of the approach’s effectiveness – which in turn will determine the supervisory approach taken.

As things stand, there is broad consensus on the part of Islamic bank regulators on how these risks should be assessed for capital adequacy purposes. The Islamic Financial Standards Board (IFSB) has developed a framework based on Basel II which provides the industry with a strong platform for the development of new national regulatory capital frameworks.

Still, most national regulators will find this challenging to some degree. The banks themselves will find it hard to produce robust numbers, particularly for Pillar II risks.

Even more traditional risk types, like market and credit, come with thorny issues for the Islamic bank. Both require a wealth of historical data which the still-young Islamic sector simply does not have.

As an example, banks that want to use the more advanced approaches to credit risk in Basel II have to be able to calculate a default probability for each of its counterparties.

These calculations are based on years of data for other counterparties. In the absence of this kind of data, Islamic banks have been known to turn to conventional bank data as a proxy – but Islamic financial products do not have the same definition of default as a conventional product, making it difficult to apply this proxy information.

These issues could be even more acute for conventional banks that also offer Islamic banking, because their capital requirements will be set by a non-Islamic regulator which might not fully understand the complexities involved.

As noted above, national regulators are working to build on the Basel II guidance issued by the IFSB. Most are still assessing their implementation options. In theory, those options ought to be fairly limited – Basel II is supposed to be a uniform global regulatory December - January 2012 Global Islamic Finance 69

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Risk Management

standard which provides a level playing field for all banks within the framework, regardless of where they are domiciled. In practice, the credit crisis seems likely to produce so much regulatory change that regulatory capital standards may be in a state of flux for some years to come. It’s not inconceivable that – rather than being forced to play follow-the-leader regulators of Islamic banks could now help to set the agenda.

The profit and loss sharing shifts the risks in the institution to investment depositors to some extent. It also makes Islamic banks vulnerable to a range of risks, including those risks that are normally carried by equity investors because of the following features:

However, before Islamic banks get closer to adopting the more advanced features of Basel II, they need to ensure that a few major obstacles are overcome. Using advanced approaches for calculating and handling risk is currently difficult in some of the Islamic banks operating in the Middle East and Asian countries due to shortage of data. For example, detailed historical default data is required to calculate the probability of default and the potential loss given the estimates of default. However, this data is not easily available in most of the Islamic countries.

•

National Commercial Bank, Al-Rajhi Bank and a few other banks are working towards creating a national data pooling system for handling credit risk. Bahrain, Malaysia, Qatar and the UAE have developed national databases and banks in the Middle Eastern countries are working on collecting their own historical data.

Much more needs to be done to develop globally competitive databases for the Islamic banking sector. Furthermore, in order to combine data at a multinational level, the central banks of the Islamic countries need to give their banks the freedom to disclose information. This would require the cooperation of the central banks of all Islamic countries. Corporations of Islamic countries should adopt a similar policy of disclosing data on their exposures.

The idea of using a proxy database to start with is being worked upon to ensure that Islamic banks at least start using more advanced Basel II reporting and compliance.

Islamic banking presents unique risks to the financial system.

This is because of the profit and loss sharing method of financing and particular contractual features of Islamic financial products.

70 Global Islamic Finance

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•

•

The profit and loss sharing mechanism is very complex. It requires greater auditing of projects to guarantee proper governance and suitable valuation.

Profit and loss sharing cannot be made dependent on collateral or guarantees to decrease credit risk.

Product standardisation becomes more complex because of the multiplicity of potential financing methods, increased operational risk, and legal uncertainty in interpreting contracts.

Because of the absence of Shariahcompliant instruments such as treasury bills, it is difficult to manage asset and liability mismatches and hence, liquidity risks are significant.

Commodity inventories on Islamic bank balance sheets increase price and operational risks. Furthermore, due to contracts of Islamic banks with deferred delivery of products, considerable additional price risks arise.

In order to address the unique risks of Islamic banking, adequate capital and reserves are required. This also requires control of risks in an appropriate disclosure regime. Since information asymmetries are widely present in Islamic banking, there is a strong need for better rules and practices for accounting, governance, disclosure and auditing.

Furthermore, there is a need for the development of an infrastructure that facilitates liquidity management. Islamic financial institutions face a major challenge in analysing the risk characteristics of Islamic financial products and understanding how to treat these products under Basel II. Islamic banking bodies are working towards clarifying these issues.

Challenges of the Basel III System in Islamic Finance Despite the fact that Islamic finance holds global appeal in its provision of Shariah-compliant financial services for both Muslims and non-Muslims, the Basel III has so far often failed to make a distinction between conventional and Islamic finance. This is un-

December - January 2012

surprising, given that historically the members of the Basel committee members have largely been comprised of the governors of central banks and prudential supervisors from non-Muslim countries.

Emphasis has been placed on a greater collaboration between the Basel committee and Islamic standard and regulatory bodies such as the Islamic Financial Services Board (IFSB). The UK’s Financial Services Authority, Howard Davies said in a statement that, “It is hard to imagine, given the scale of Islamic finance today, that another capital accord can be developed without taking account of the particular needs of Islamic banks, as the Basel II accord was.”

In order to overcome the challenges when collaborating with the Islamic Financial board, the Basel committee issued a risk management and capital adequacy guidance notes for commodity Murahaba transactions. The Secretary of the Islamic Financial Board, Rifaat Ahmed Abdul Karim, had reportedly stated that the board would seek approval to amend capital adequacy standards as per the Basel III requirements, with the aim of encouraging a level playing field between Islamic financial institutions and conventional banks.

Even so, Hussain maintains, the prudential requirements of Basel III could prove an unnecessary restriction on the growth of Islamic finance. Others take a more sanguine view, pointing out that some aspects of Basel III already play to the strengths of Islamic banks in certain countries, such as Malaysia.

BNM says that the Basel III capital proposals emphasise the role of common equity — ordinary shares and reserves — as the strongest form of capital, a practice which the bank says is in line with those of Malaysian Islamic banks. The Central Bank of Malaysia estimated in June 2010 that more than 80% of the total capital of Malaysian Islamic banks was in the form of common equity.

The majority of Islamic banks in Malaysia already maintain capital levels well above the current regulatory minimum, BNM says, and the liquidity coverage ratio (LCR) under Basel III is conceptually similar to the liquidity framework adopted by Malaysian Islamic banks. However, the board says, the LCR

Risk Management

will require Islamic banks to hold more liquid assets for wholesale funding than they are required to under the existing liquidity framework.

“Typically, Islamic banks are deemed to be well capitalised compared to their conventional banking counterparts,” says Ramakrishnan of Oracle. He says that Islamic banks should look into the specific areas of liquidity risk management and stress testing espoused by the Basel III directive, and incorporate these into their own risk management and capital adequacy standards.

There has been a push for Islamic banks to further support the Basel III standards in order to improve their transparency and capital adequacy.

Shariah-compliant banks aspire to align their regulations with Basel III reforms, claimed the Secretary General of the Islamic Financial Services Board (IFSB), an association for regulators within Muslim countries.

It seems that Islamic Financial Services Board has gained approval from its council in December 2010 to commence amendments of the regulations according to Basel III. The process is expected to be completed around 2013.

“We are revising the standard of capital adequacy to look into the need for more capital and to investigate the form which that additional capital take” said Abdel Karim. He shared an opinion that this move will provide the Islamic financial services industry with a

level playing field on which to compete with conventional banks. Over 60 senior bankers from 30 leading Bahraini financial institutions met to receive a briefing on the new financial banking principles of Basel III. “Bankers are asking us about the relevance of Basel III in Bahrain, how the new rules will impact local banks’ capital position and what the implications are for risk management, finance or financial systems,” said Kohut, Head of Risk at KPMG Bahrain.

“The typical headline elements of Basel III regarding the new capital requirements, which are most relevant for European or American banks, appear to be of limited impact for local banks. However, there are still a number of less talked-about items, as well as some important indirect or second order effects of Basel III which regional banks should consider,” he said.

He added “Aside from the obvious need to improve capital and liquidity management, regional banks will need to consider, more than ever before, the question of whether their strategic, business and product specific decisions take sufficient account of the inherent uncertainties and opportunities caused by the increasing dynamic complexities of the financial markets.”

Islamic banks are governed by the regulatory body of the respective countries, and compliance with IFSB’s guidelines is voluntary. The Kuala Lumpur-based IFSB, whose

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members include various central banks, the International Monetary Fund (IMF), and lenders such as Kuwait Finance House and Sharjah Islamic Bank is one of two standardsetting bodies which issue guidelines on the Islamic banking, capital markets and insurance sectors. The other is the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in Bahrain, which issues guidelines on accounting standards and Islamic bond structures.

Abdel Karim said that the IFSB’s liquidity management corporation will provide a substitute for commodity Murabaha money market instruments, and help lenders manage their liquidity positions, by issuing shortterm Islamic finance instruments.

“This will hopefully give depth to the capital market,” he said. “Liquidity management hasn’t been addressed in a sufficiently concerted way. This is the first time that we have seen a number of regulatory authorities cooperating to address the issue.”

The provision of liquidity management tools is one of the key challenges to the emerging Islamic finance industry, with Islamic banks handicapped due to their limited product range. Due to the limited availability of highly rated Sukuk issues, Islamic banks often end up placing the reserve liquidity which central bank requirements require them to maintain with international conventional banks through commodity Murabaha. gif

References and Further Reading • • • • • • • • •

Kromschroder, B. and Luck, W 1998, “Grundsatze risikoorientierter Unternehmensuberwachung” Der Betrieb, Vol. 51, No. 32, pp.

1573-1576.KPMG 2003, Basel II – A Closer Look: Managing Economic Capital.

Luck, W. 1998, “Elementa eines Risiko-Management Systems”, Der Betrieb, Vol. 51, No. 1/2, pp. 8-14.

Noraini, Mohd Ariffin 2005, “Enhancing Transparency and Risk Reporting in Islamic Banks”, Unpublished doctoral dissertation, University of Surrey, School of Management.

Parrenas, J. C. 2005, Bank’s Risk Management Practices: A Survey of Four Asian Emerging Markets.

Pausenberger and Nassauer 2005, “Governing the Corporate Risk Management Function”, in Frenkel, M. Hommel, U. and Rudolf, M. 2005, “Risk Management: Challenge and Opportunity”, 2nd Edition, Springer.

Sundarajan, V. 2007, “Risk Characteristics of Islamic Products: Implications for Risk Measurement and Supervision” in Archer, S. and Karim, R. A. A. 2007, “Islamic Finance: The Regulatory Challenge”, John Wiley & Son (Asia) Pte Ltd. Abdul-Rahman, Yahia (2006) ‘Islamic instruments for managing liquidity’ International Journal of Islamic Financial Services Vol. 1 No.1.

Fisher, I. (I933) ‘The debt-deflation theory of great depressions,’ Econometrica (I), pp. 337-357.

Ghamidi, Javed A. (2007) Meezan. Lahore: Dar-ul-Ishraq.

December - January 2012 Global Islamic Finance 71

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Market Review

Kuwait Finance House Issues Corporate Sustainability Report Source: GlobalIslamicFinanceMagazine.com

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Kuwait Finance House KFH managed to combine profit and humanitar- development. KFH has (KFH) issued a new realso adopted the conian aspects in its products and services; thus cept of developing large port concerning its efforts in the field of susbenefitting its clients and providing an added land banks, which is tainable development, by its real estate value for the society in general, such as real estate and evident which focuses on ecoprojects which include nomic growth, preservaDurrat Al-Bahrain. KFH investment services tion of environment and managed to combine natural resources, and profit and humanitarian the foundation of KFH, which is to abide by social development. It is aspects in its products worth noting that KFH is considered to be Shariah, support initiatives, take part in so- and services; thus benefitting its clients and the first bank in Kuwait and the first Islamic cial and economic responsibilities in local providing an added value for the society in bank worldwide to issue such a report based societies; thus allowing KFH to play a pivotal general, such as real estate and investment on Global Reporting Initiative criteria. The role in the field of Islamic banking around services. report highlights other fields of information the world. mentioned in other reports, such as the KFH Regarding the economic development asAnnual Report and the Corporate Social Re- The report sheds light on KFH achievements pect, KFH is considered to be the largest sponsibility reports, the activities and busi- that include Al-Zour chalets for people with and most important Islamic bank in the nesses of KFH from a sustainable develop- disabilities in Kuwait, Ras Raya Harbour world, due to its accomplishments in many serving local fisherman in Bahrain, support- international markets; not to mention financment perspective. ing Pakistani flood relief via donation and ing many major strategic and developmenThe report shed light on the outstanding mobilisation of ground staff, awareness of tal projects around the globe. KFH offers success that KFH has achieved in the devel- healthcare issues, including Diabetes and support in the fields of education, health, opment of societies and their civilisations, Smoking, installation of Green Energy Roof- youths, and the local and Islamic societies; protecting the environment, overcoming pov- ing System at medical facilities in Kuwait, thus assisting in overcoming poverty and erty, supporting social and voluntary work, compliance with Green Building Rating Sys- building the society. awareness campaigns, and encouraging en- tem for new construction, compliance with The Montreal Protocol on ozone depleting It is worth noting that the term “sustainvironment friendly initiatives. substances, addressing group Carbon Foot able” development refers to economic, enThe report that will be available soon on Print through energy conservation, award vironmental, and social development, which kfh.com for the public has highlighted in for outstanding achievements in Energy meets the requirements of the present time its introduction the assertion of KFH’s CEO Savings by the State of Kuwait, and the es- without affecting the potential of future genMohammed Al-Omar that KFH is taking gi- tablishment of a Corporate Social Sustain- erations. However, the main challenge facant steps in the field of sustainable develop- ability group to promote sustainability. The ing this kind of development is overcoming ment, in order to improve lives, which is evi- report underscores KFH’s accomplishments poverty, in addition to relying reasonably on dent by KFH’s presence in three continents. in Bahrain, Turkey, and Malaysia, in addition natural resources, such as water, food, shelHe stressed that KFH’s main strategic prin- to the accomplishments of its subsidiaries, ter, services, income, means of communicaciples are clear and has not changed since such as Al-Salam International Hospital, tions, and advanced technology. gif ITS and ALAFCO in the field of sustainable 72 Global Islamic Finance

December - January 2012

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Market Review

Authority for Islamic Banking in Oman Source: GlobalIslamicFinanceMagazine.com

In Oman the Global Islamic banking asset industry is estimated to be above $1 trillion in 2010 and is expected to grow at the rate of around 20 percent.

the need for robust Shariah governance (Islamic laws outlined in the Holy Quran) framework as a foundation to achieve the objectives.

The Central Bank of Oman (CBO) will establish a national authority for monitoring Islamic finance and banking sector, Hamood bin Sangour al Zadjali, CBO Executive President, said.

In his keynote speech, Dr Omar Mustafa al Sharif, a renowned international trainer and expert on Islamic finance, said Islamic banking is growing the world over because there is a huge demand for it from people of all faiths and beliefs.

This authority (National Shariah Board) will be responsible for regulating Islamic finance and banking institutions, the told the Observer, after his speech at a workshop on “Islamic Finance and Banking,” organised

by Horwath Mak Ghazali LLC.

In response to a query, the CBO chief said all Islamic banks will be required to invest their deposits in Oman only. The CBO has so far granted licences to Bank Nizwa and Al Izz International Bank to operate as fully Shariah-compliant institutions.

These local banks will be up and running by early 2012 in partnership with their foreign partners, he added.

Until May this year, Oman was the only GCC country where Islamic finance did not exist.

Following the Royal Decree issued by His Majesty Sultan Qaboos in May this year to establish an Islamic financial services sector, almost every bank in Oman is considering launching an Islamic window in addition to the two full-fledged Islamic banks being

74 Global Islamic Finance

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Al Zadjali said the CBO has issued some directives for this sector and work on a complete legal framework of rules and regulations are currently under way. According to these directives, all Islamic finance and banking organisations will be required to set up Shariah Boards to ensure that their products and services are in accordance with the principles enshrined in the Holy Quran.

Among the many attractive features of the interest-free Islamic banking is that it does not involve buying and selling of debt, rules out speculative activities and is based on ethical investments.

Among the many attractive features of the interestfree Islamic banking is that it does not involve buying and selling of debt, rules out speculative activities and is based on ethical investments

launched. They are keen to tap the unfulfilled demand for Islamic banking. Oman, say experts, holds out an Islamic finance and banking market of not less than $8 billion. The CBO chief said global Shariah-compliant assets are estimated to have crossed $1 trillion in 2010 and are expected to grow at the rate of around 20 percent. More than 600 Islamic financial institutions now operate in more than 75 countries. He stressed

December - January 2012

This in turn helps higher rate of return, lower risk exposure, and better risk management compared to conventional banking.

Interest and speculation-free Islamic financial model is attracting everyone’s attention not only for the huge business prospects but also for the solid stability that it provides.

The two-day workshop (September 20-21) is aimed at making awareness on Islamic banking and its way of operating. In his speech, Davis Kallukaran, Managing Partner, Horwath Mak Ghazali, said Islamic banking has gained broader acceptance in a major international financial market and there are ongoing research and studies on its merit as a viable alternative financial system in the world.

While Islamic banking has tremendous potential for Oman, the level of success will depend on the industry’s investment in research and in developing the talent pool. At stake is the credibility of the system. Customers would want to see progress towards a holistic alternate financial system, even if it has to be step by step process. gif

Market Review

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The Growing Sukuk Market of the Future Source: GlobalIslamicFinanceMagazine.com

Sukuk is growing at an unprecedented rate and the Islamic finance industry is expected to reach to over $2 trillion dollars by the year of 2012. In 2004, only three Sukuks were issued in the UAE with an aggregate value of $1.165 billion.

and insurance sector growing in the UAE but there is an increasing demand for investment to take place in accordance with Islamic religious principles. Also, non-Islamic investors have been keen to invest in Sukuks so as to benefit from the gains of diversification away from conventional lending.

Two years later, the number of Sukuk issues had increased to seven and the value grew eightfold to $8.755 billion. The height of the Sukuk market was certainly 2007 with eleven issues and a value of $10.8 billion.

In particular, investors have been attracted by the knowledge that there is an underlying asset, which is backing a Sukuk issue and hence the lower risk.

The demand dynamics for Sukuks has led to two very important developments.

To date, there has been a distinct absence of Sukuk issues by inter-government agencies or organisations such as the World Bank or the IMF. Some inter-governmental organisations have discussed the possibility of issuing Sukuks however their plans are very much at an early stage of development.

The sector is serviced by more than 300 financial institutions across approximately 75 countries. One area in which the growth has been rather dramatic is the Sukuk market. In the last decade or so, the Sukuk market has been an important source of funds for corporations and governments alike.

For instance, at the height of the Sukuk market in 2007, Gulf countries raised $18.7 billion or 55 percent of their financing through the issuance of Sukuks. Although, the international financial crisis has had a significant impact on the issuance of Sukuks it is nevertheless expected to be short term.

The exceptionally high level of wealth, huge reserves and excess liquidity within the Gulf region are expected to be important in the

â&#x20AC;&#x17E;

Islamic finance is one of the recent segments in global financial services with a history dating to the mid 1970s. Despite this, the sector has grown remarkably fast and with assets under management growing to more than $700 billion.

One area in which the growth has been rather dramatic is the Sukuk market. In the last decade or so, the Sukuk market has been an important source of funds for corporations and governments alike

development and future expansion of the Sukuk market. In addition to this, there is an overwhelming need by governments in the Gulf region to invest in public sector infrastructure projects as well as to diversify away from the hydrocarbon sector. The regional Sukuk market is also expected to receive a further impetus with the increased role of Gulf based pension funds and insurance companies. Not only is the pension

First there has been a greater standardisation of Islamic financial instruments especially in relation to Sukuk contracts and secondly, financial institutions have sought to examine more innovative structuring of Sukuks that better meet the specific requirements of investors.

The latter has been especially important in attracting new entrants to the market, and this has led to increase in demand for Sukuks. The Sukuk market is certainly an important segment of Islamic finance and its role is expected to grow in the near future.

One region, which has capitalised on the strength of the Sukuk market, is the UAE. The issuance of Sukuks in the UAE over the last seven years shows their relative importance.

In 2004, only three Sukuks were issued in the UAE with an aggregate value of $1.165 billion. Two years later, the number of Sukuk issues had increased to seven and the value grew eight-fold to $8.755 billion. The height of the Sukuk market was certainly 2007 with eleven issues with a value of $10.8 billion. gif

December - January 2012 Global Islamic Finance 75

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Event Review

World Islamic Banking Conference the world’s largest gather of industry leaders Author: Tajah Brown, Global Islamic Finance Magazine Editorial Team, United Kingdom

The 18th Annual World Islamic Banking Conference (WIBC 2011) opened its doors to leaders within the Islamic finance Industry.

The theme of the 2011 conference was ‘competing for global growth’ focusing on topics such as expanding the internationalisation of the industry, accessing new markets, creating new products and improving cross-boarder transactions. More than 1,200 industry leaders, senior decision makers and key regulators will gathered to shape the future of the Islamic banking industry. With the partnership of the Central Bank of Bahrain and support from the Economic Development Board of Bahrain, the conference took place at the Gulf International Convention Centre, Gulf Hotel from the 21st to 23rd of November 2011.

More than 60 partners, exhibitors and sponsors attended the prestigious conference covering all market areas globally. Delegates from over 50 countries attended and discussed strategies for managing the challenges of industry globalisation and ensuring stronger international opportunities for

Islamic banking and finance. WIBC 2011 was inaugurated by H.E. Rasheed Mohammed Al Maraj, Governor of the Central Bank of Bahrain. The session covered topics such as regulatory frameworks to accelerate the international development of Islamic finance.

David McLean, Managing Director of the World Islamic Banking Conference revealed the launch of the annual conference saying,

“Islamic finance is no longer a niche market and is rapidly becoming an important component of the mainstream financial system. As various jurisdictions seek to intensify efforts in developing their respective Islamic banking and finance markets, it is vital to strengthen the global framework for greater collaboration between these geographies that will facilitate significant cross-border activities and deal flow.”

Event Review

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H.E. Rasheed Mohammed Al Maraj announced the Central Bank of Bahrain’s partnership with WIBC 2011 saying, “the growing internationalisation of Islamic finance reflects its ability to be competitive and respond to the complex needs of businesses globally. As the industry’s geographic footprint expands, it is becoming increasingly vital to develop appropriate global frameworks and overcome the challenges of globalisation faced

by Islamic finance. We believe that the World Islamic Banking Conference will play a meaningful role in facilitating dialogues to prepare the international Islamic finance industry to ‘Compete for Global Growth’”.

The Industry Leaders’ Power debate was moderated by Ashar Nazim, Partner, Assurance and Advisory Business services, Ernst & Young. It was the main Islamic finance is no longer a niche marpart of the WIBC 2011 ket and is rapidly becoming an important with CEOs and decisionmakers participating. component of the mainstream financial The debate included system. As various jurisdictions seek to intensify leaders in the industry efforts in developing their respective Islamic banksuch as Toby O’Connor, ing and finance markets, it is vital to strengthen CEO of the Islamic Bank of Asia, Asad A Ahmed, the global framework for greater collaboration beCEO of Gulf African tween these geographies that will facilitate signifiBank, Syed Abdull Aziz cant cross-border activities and deal flow Jailani Bin Syed Kechik, CEO of OCBC Al-Amin Bank Berhad, Tirad Global Growth: Preparing for the Asian CenMahmoud, CEO of Abu Dhabi Islamic Bank tury’ which take place on the last day of the and Dr Salah Addeen A Qadar Saeed, Genevent. Dr. Jamil El-Jaroudi, CEO of Elaf Bank eral Manager, Credit & Risk Management at supported the WIBC 2011 saying, “as a gold Bahrain Islamic Bank. The keynote was adstrategic partner of the 18th Annual WIBC, dressed by Prof. Kishore Mahbubani, Dean we welcome you to the Kingdom of Bahrain, and Professor , Public Policy at the Lee Kuan to be part of the discussions that will define Yew School of Public Policy on ‘Competing for the next stage of evolution for the global Is-

lamic finance industry.” The long awaited World Islamic Banking Competitiveness Report 2011/2012 was launched at the WIBC 2011 in an exclusive session on the 22nd of November 2011. The report outlined the key trends and successful strategies used by Islamic banks and also covered issues such as the projection of 100 new Islamic banks by 2020 and local currency Sukuks in the spotlight.

A panel of international experts also gathered at the Country Focus Roundtable to discuss the how well Islamic banks can explore international opportunities in the high growth markets within Islamic finance. The Country Focus Roundtable covered opportunities in countries such as Luxembourg, United Kingdom, Bahrain and Singapore. gif

Islamic Finance Ltd. Islamic Finance Ltd offers a comprehensive range of Islamic finance solutions to help expedite your international business, trade and risk mitigation.

Islamic Finance Ltd is committed to providing its business customers with a range of innovative Islamic banking solutions. We do our best to arrange a wide range of financing that you can be certain your finance is structured in full accordance with Shariah requirements.

Visit our website for more information: www. ukislamicfinance.co.uk

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Book

Business News

Review

Shariah Compliant Hedge Funds:

Is the concept an oxymoron or a realistic possibility?

Part of Article Collection, individual article/ £4.99 Amidst the controversial outlook displayed by conventional hedge funds, there arises the concerns and concept of establishing Shariah-complaint hedge funds. While some schools of thought believe Islamic fiqa allows Shariah-compliant moderation of hedge funds, others believe that it is a mere oxymoron and completely an unacceptable form of financial transaction.

The article unfolds the ongoing controversies, compares the conventional hedge fund strategies and evaluates them on the Shariah scale, reveals the key challenges and requirements for Shariah-compliant hedge funds and shares the recent developments in the field of Shariah finance.

Order Number: 2011g179

Identifying and Mitigating Moral Hazard

Problems in Murabahah Financing: Theoretical Approach Part of Article Collection, individual article/ £4.99

Murabahah is a dominant financing instrument occupied by MME in Indonesian Islamic banking industry. However, price volatility of the good being financed opens a chance for MME to gain profit by pretending to be default (moral hazard).

Assessment on conditions triggering such moral hazard and probability of client to take risk of pretending to be default are being analysed. Finally, Islamic banks can mitigate it through appropriate bank’s investigation and charging some cost as well as penalty.

Order Number: 2011g180

Unleash the Power of Internal Marketing in your Islamic Financial Institution Part of Article Collection, individual article/ £4.99

Global Islamic Finance Magazine is going to show you the key ways to unleash the power of internal marketing in your Islamic financial institution.

Effective internal marketing can help to spur growth in your business and also aid in further promoting the growing Islamic financial and banking industry. Global Islamic Finance Magazine will discuss the various different ways that internal marketing can be implemented in your Islamic Financial institution.

This article will give you a thorough insight into the internal marketing industry and would be beneficial to professionals, students and anyone wishing to know the key to unleashing the power of marketing. We will be discussing marketing in the consensus of Shariah compliancy adhering to the principles of Islam in order to ensure that all promotion of the institution is done in a Halal way.

Order Number: 2011g181

Global Growth, Opportunities and Challenges in the Sukuk Market

by Sohail Jaffer Euromoney Trading Inc, 1st edition/ £148.75 This innovative new book is essential to understand how the world economy and therefore population whether through governments or corporations can benefit from Islamic bonds. It investigates and reviews the key market changes and developments in the Sukuk market.

This book goes further than any of the general books on Sukuk that are available. It looks at how the Sukuk market has evolved and where it is now, but most importantly it looks at regulation of the industry, defaulting Sukuk and the implications. This valuable reference tool supplements general Sukuk books and is essential for those involved with Sukuk and who are looking to learn about how it has changed and what it means for them. The book covers: an overview of Sukuk and latest trends; the various roles of Sukuk in the economy; Sukuk Structuring and Distribution; Sukuk listing on international stock exchanges; Rating and accounting of Sukuk; the future of Sukuk. Sohail Jaffer, editor of many best-selling titles published by Euromoney Books, has invited leading seasoned practitioners to contribute their knowledge and experience. You will find the overall book a useful mine of information to guide you through the Islamic capital markets’ intricacies.

ISBN-10: 1843747596 ISBN-13: 978-1843747598

An Introduction to Islamic Finance: Theory and Practice

by Zamir Iqbal, Abbas Mirakhor John Wiley & Sons, 2nd edition/ £28.98

Islamic finance has experienced remarkable growth over the last three decades and the global demand for financial products and services that comply with economic and financial principles of Islam is increasing day by day. For newcomers to this burgeoning market, An Introduction to Islamic Finance: Theory and Practice offers an excellent overview of the principal concepts from two leading scholars in Islamic finance.

This book explains the fundamental principles and functions of an economic, banking and financial system based on principles derived from the basic sources of Islam. Rules constituting the institutional scaffolding of such a system—property rights principles, sanctity of contracts and the requirement of faithfulness to terms and conditions of contracts, trust and trustworthiness, risk sharing, and prohibition of interest–rate based debt contracts among others—are discussed with relation to the economic behaviour of individuals, society and state.

ISBN-10: 0470828080 ISBN-13: 978-0470828083

78 Global Islamic Finance

December - January 2012

Looking for a Job in Islamic Banking?: Dip into the Global Islamic Finance Magazine Article Collection Bored of of your your bank? bank? Facing Facingredundancy? redundancy?Looking Lookingfor fora change change of of directed? IfIf you career direction? you work work in in banking banking and and you’re you’re looking looking for for aa fresh challenge, Islamic banking may be for you. you. The The Global Global Islamic Islamic Finance Magazine Magazine Article ArticleCollection CollectionDecember December 2009-December 2009-June 2010 is 2011 is out and features many to articles to help yourbanking Islamic out now andnow features many articles help get your get Islamic bankingstarted. career started.

Eachisarticle is available to buy separately career Each article available to buy separately so you so you and to match to find the formula willupopen up can mixcan andmix match find the formula that willthat open Islamic Islamic banking banking to you. to you.

The banking sector took a heavy blow during the financial crisis and is still recovering. There were many redundancies and they’re still not many vacancies. It’s no longer a guarantee that you’ll land a new job in the conventional banking industry even if you have all the credentials. Islamic banking, in comparison, is an up and coming alternative form of ethical finance. This exciting new industry is in real need of genuine talent and there are numerous vacancies and opportunities to choose from.

Global Islamic Finance Magazine Collection features several articles that bring you up to speed on Islamic banking and give you all the information you need to break into the industry. Articles that are essential for any future Islamic banker include:

• •

• • •

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‘Islamic Banking-Differences, Growth and Future Challenges’: Find out what Islamic banking is, what it’s achieved and where it’s heading.

‘The Rise of Islamic Bank of Britain-Interview with Steven Amos’: Gain a fascinating insight into the UK’s most famous standalone Islamic bank through this interview with its Head of Marketing.

‘An Introduction to Risk Management in Islamic Banking’: Learn why risk management is as vital to Islamic banking as it is to conventional banking.

‘What is Basel II?: What it means for Islamic Banking. Part I’: Get to grips with the most iconic symbol of banking regulation and how it affects Islamic banking.

‘The Suitability of HSBC Bank Mauritius as a Test Case for Shariah-compliant Banking Services on the Island’: Discover through this case study how Islamic banking is breaking into brand new markets.

‘The British Bankers Association Seminar: From Amanah to Iijhara’: A candid look at one of Britain’s biggest banking events from the Islamic finance perspective.

All of these articles are available to order NOW for just £4.99 each! Get them delivered straight to your inbox in PDF format or, for the extra charge of just £10.00, we will send you a CD with all your ordered articles on it!

www.globalislamicfinancemagazine.com/article-collection See catalogue at http://www.yudu.com/item/details/171412/I

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Event

Event Calendar December

January 2012

Commodities Week Middle East 5th – 7th December 2011 Dubai, UAE

International Conference on Business & Finance [ICBF] 2012

Scalable Business Models For Islamic Microfinance

Campus for Finance - Research Conference 2012

6th Quality Conference in the Middle East

International Conference on Islamization in Modern Science and Scientification of Islamic Studies 19th – 21st December 2011 Selangor, Malaysia

6th- 7th January 2012 India

11th – 12th January Vallendar Germany

30th January – 1st February 2012 Istanbul, Turkey

30th- 2nd January Dubai, UAE

Academy of International Business MENA Chapter Conference 13th – 15th January Dubai, UAE

3rd Global Islamic Marketing Conference (GIMC): Putting Ethics Back into Business 16th – 18th January Dhabi, UAE

February

March

FONDS - Switzerland’s Financial Exhibition 2012

7th Caspian International Conference and Showcase

11th Annual Islamic Finance Summit

International Management Accounting Conference

2nd- 3rd February Zurich, Switzerland

21 February 2012 - 22 February 2012 London, United Kingdom

13th -14th March Baku Azerbaijan

26th – 27th March Malaysia

For more information and full events details, please visit www.globalislamicfinancemagazine.com/events

Where excellence is

a tradition

Professional Accountants Group is a UK provider of accounting and business services for small and medium companies. Our aim is to assist and support our customers, whether they are just making first steps in the business environment or are well established entities in their environment. Professional and reliable service ensures the highest quality standards in order to help your business run smoothly and without unnecessary hassle.

www.pagroupltd.co.uk

Glossary Business Directory

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Business Directory Banks European Islamic Investment Bank

Arab Banking Corporation

Bank of London and Middle East

Contact person/ department: Keith McLeod Address: European Office 131 Finsbury Pavement London EC2A 1NT England Telephone: +44 20 78479900 Fax: +44 20 78479901 E-mail: reception@eiib.co.uk Website: www.eiib.co.uk

Contact person/ department: Nadia Mehdid Address: Station House, Station Court, Rawtenstall Rossendale BB4 6AJ, UK Telephone: +44 1706237900 Fax: +44 1706237909 E-mail: nadia.mehdid@arabbanking.com Website: www.arabbanking.co

Contact person/ department: Michelle Arnold Address: Sherborne House 119 Cannon Street London, EC4N 5AT United Kingdom Telephone: +44 20 7618 0000 Fax: +44 20 7618 0001 E-mail: Michelle.Arnold@blme.com Website: www.blme.com

Description: EIIB seeks to service a market for Sharia’a compliant investment banking services in Europe, the Middle East and Asia that it believes has been under-exploited by conventional and Islamic banks, and by non-banking institutions. EIIB intends to become a major participant in the market for Islamic securities, treasury and investment products, which is currently experiencing rapid growth.

Description: Arab Banking Corporation, popularly known as ABC, is an international Universal bank headquartered in Manama, Kingdom of Bahrain.

Our network spreads over 21 countries in the MENA and GCC, Europe, the Americas and Asia. ABC is a leading regional bank in Trade Finance & Forfaiting, Treasury, Project & Structured Finance, Syndications, Corporate & Institutional Banking as well as Islamic Banking. We also provide Retail Banking services in the MENA region

Description: Bank of London and The Middle East plc (BLME) is a fully Sharia’a compliant wholesale bank in the heart of the City of London. BLME is managed by a quality team bringing together a combination of highly experienced international financiers and leading experts in Islamic finance. The majority of our Corporate Banking client base is located mainly in the UK, US and Europe.

ABN AMRO Bank N.V.

Dubai Islamic Bank PSJ

Al Baraka Islamic Investment Bank

(ABN AMRO Bank N.V. is an authorised agent of The Royal Bank of Scotland plc.)

Contact person: Abbas Yousafzai - Head of Islamic Banking Address: Khalid Bin Waleed Road, PO Box 2567, Dubai, UAE Telephone: +971 4 506 2260 Fax: +971 4 506 2028 E-mail: Abbas.Yousafzai@rbs.com Website: www.rbsbank.ae

Address: P.O.Box 1080 Dubai United Arab Emirates Telephone: + 9714 2953000 Fax: +971 4 295 411 E-mail: contactus@alislami.co.ae Website: www.alislami.ae/en/

Al Baraka Tower , P.O. Box 1882 Manama , Bahrain Telephone: + 973 250 363 Fax: + 973 274 364 E-mail: baraka@batelco.com.bh Website: www.albaraka.com

Description: RBS within its Retail Banking Unit offers its clients competitive Islamic Banking Solutions. They have one of the largest options for Islamic Wealth Management Products and are also a distributor of the Takaful Product developed by Aman (Dubai Islamic Insurance & Re-Insurance Company). They are presently engaged in launching a full Retail Banking proposition with a Shariah Based Credit Card and Liability Accounts in 2010.

Description: Dubai Islamic Bank has the unique distinction of being the world’s first fully-fledged Islamic bank, a pioneering institution that has combined the best of traditional Islamic values with the technology and innovation that characterise the best of modern banking. Since its formation in 1975, Dubai Islamic Bank has established itself as the undisputed leader in its field, setting the standards for others to follow as the trend towards Islamic banking gathers momentum in the Arab world and internationally.

Description: Al Baraka Banking Group offers retail, corporate and investment banking and treasury services strictly in accordance with the principles of the Shari’a. The authorized capital of ABG is US$1.5 billion, while the total equity amounts to about US$1.52 billion. The Group has a wide geographical presence in the form of banking Units and representative offices in twelve countries, which in turn provide their services through 300 branches.

Accountancy firms Abbas Accounting

Baker Tilly MKM

HLB HAMT Chartered Accountants

Address: ABBAS ACCOUNTING P.O.Box : 78142 Dubai, U.A.E Telephone: +971 4 2820300 Fax: +971 4 2820322 E-mail: info@abbasaccounting.com Website: www.abbasaccounting.com

Address: Epico “Safar” Building Liwa Street Abu Dhabi United Arab Emirates Telephone: +97 1506226719 Fax: +971 26226088 E-mail: sumchart@eim.ae Website: www.bakertillymkm.com

Address: 106, Al Nayali Building Abuhail Road, P.O. Box: 32665 Dubai - United Arab Emirates Telephone: +97142627147 Fax: +971 4 2627148 E-mail: dubai@hlbhamt.com Website: www.hlbhamt.com/

Description: sad Abbas & Co is an audit and accounting consultancy firm in Dubai, United Arab Emirates. Services rendered by the firm include statutory, external and internal audit, accounting and financial management consultancy, accounting and finance outsourcing, project evaluation, feasibility studies and allied services. The firm is led by a team of qualified and widely experienced professionals dedicated to practice of the profession in the highest standards and committed to providing the best services to the clients.

Morison Menon

BDO International

Address: 204 Tower- A, Gulf Towers, Oud Metha, P. O. Box 55535, Dubai, UAE Telephone: +971 4 33 66 990 Fax: +971 4 33 66 992 E-mail: dubai@morisonmenon.com Website: www.morisonmenon.com/

Address: BDO - London 55 Baker Street London W1U 7EU Telephone: +44 207 486 5888 Fax: +44 0207 487 3686 E-mail: j.polin@bdo.co.uk Website: www.bdo.uk.com/

Description: Morison Menon Group is a group of firms offering professional advisory services in Financial Audit, Compliance and Accounting, Consulting (Business Plan, Company setup and business incorporation, Financial Consulting, Property Consulting, HR Solutions, BPO, IT and Web Solutions) since the year 1994. Headquartered in Dubai,UAE armed with a license to operate in DIFC, Dubai. The group has offices in Abu Dhabi, Jebel Ali, Sharjah and Ras Al Khaimah apart from overseas operations in Oman, Qatar, Bahrain, Iran and India. Morison Menon currently is a team of over 150 Professionals.

82 Global Islamic Finance

Description: We offer a wide range of service including auditing, accounting, consultancy, financial-management, profit-enhancement, feasibility studies, company-secretarial, offshore-company registration, and trademark-registration.

You will receive a prompt response to every question or request. We serve our clients as a partner in order to help them make the best possible decisions for their business.

December - January 2012

Description: BDO is an award-winning, UK Member Firm of BDO International, the world’s fifth largest accountancy network with more than 1,000 offices in over 100 countries, including affiliates. We specialise in helping businesses, whether start-ups or multinationals, to achieve their goals. Through our own professional expertise and by working directly with organisations, we’ve developed a robust understanding of the factors that govern business growth.

Our objective is to use this to help our clients maximise their potential.

Description: We have a full range of accounts and audit services to meet your business needs. A professional firm with regional focus and having global representation, HLB Hamt, Chartered Public Accountants spectrum of services cover all aspects of doing business in the UAE and the GCC countries. While based in the UAE, we offer comprehensive services for doing business in the Middle East including all the Free Trade Zones, right from company formation.

Barber Harrison and Platt Address: 2 Rutland Park Sheffield S10 2PD Telephone: +44 114 266 7171 Fax: +44 114 2669846 E-mail: info@bhp.co.uk Website: www.bhp.co.uk Description: Barber Harrison & Platt is committed to building professional relationships founded on the personal responsibility of a partner for a client’s affairs. As a Top 60 firm and the largest independent firm of chartered accountants in South Yorkshire and Derbyshire our continued success owes much to our dynamic approach and ability to fulfil client demands. This requires the highest level of commitment and performance. Barber Harrison & Platt provide advice to plc’s, private companies, partnerships, sole traders, individuals and trusts. The close working relationship we enjoy with clients provides a deep insight into a far wider range of business situations and problems than are traditionally associated with accountancy.

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Law firms Norton Rose (Middle East) LLP Contact person/department: Neil D. Miller, Partner Address: 4th Floor, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, UAE PO Box 103747 Telephone: +971 (0)4 369 6300 Fax: +971 (0)4 369 6350 Email: neil.d.miller@nortonrose.com Website: www.nortonrose.com Description: We offer a full business law service and work in teams that cut across national and jurisdictional boundaries. In everything we work on, we provide expert advice, innovation and a commercial outlook. Our practice areas cover banking and Islamic finance, construction, corporate finance, dispute resolution, PPP, project finance, real estate

Allen & Overy Contact person/ department: Michael Duncan Address: Bishops Square Allen & Overy LLP One Bishops Square London E1 6AD United Kingdom Telephone: +44 20 3088 4197 E-mail: michael.duncan@allenovery.com Website: www.allenovery.com Description: Allen & Overy is one of a small group of truly international and integrated law firms with approximately 5,000 staff, including over 450 partners, working in 31 major centres worldwide. Allen & Overy also operates in regions where we do not have an office via our network of International Desks.

Lawrence Graham LLP (LG) Contact person/ department: James Foster, head of LG’s Dubai office Address: PO Box 33090 8th Floor Convention Tower Zabeel Road Dubai, UAE Telephone: +971 4 329 2420 Fax: +971 4 329 2430 E-mail: dubaioffice@lg-legal.com Website: www.lg-legal.com Description: LG is a firm of business lawyers, advising clients around the world. The opening of the firm’s Dubai office at the end of 2007 and the Moscow office earlier this year cemented its global growth and focus on clients internationally.

King and Spalding

Clifford Chance Contact person/ department: Anna Ward Address: 10 Upper Bank Street Canary Wharf London E14 5JJ Telephone: +44 20 7006 1000 E-mail: info@cliffordchance.com Website: www.cliffordchance.com Description: Clifford Chance is one of the world’s leading law firms, helping clients achieve their goals by combining the highest global standards with local expertise. The firm has unrivalled scale and depth of legal resources across the three key markets of the Americas, Asia and Europe and focuses on the core areas of commercial activity. Clifford Chance lawyers advise internationally and domestically.

Trowers & Hamlins

Contact person/ department: Jawad l Ali Address: 125 Old Broad Street London EN EC2N 1AR Telephone: +44 2075517500 Fax: +44 2075517575 E-mail: jali@kslaw.com Website: www.kslaw.com

Contact person/ department: Nicholas Edmondes Address: Sceptre Court 40 Tower Hill London EC3N 4DX Telephone: +44 20 7423 8000 Fax: +44 20 7423 8000 E-mail: nedmondes@trowers.com Website: www.trowers.com

Description: King & Spalding has provided the highest quality legal services to its clients for over a century. Today, with more than 800 lawyers and offices in Abu Dhabi, Atlanta, Austin, Charlotte, Dubai, Frankfurt, Houston, London, New York, Paris, Riyadh (affiliated office), San Francisco, Silicon Valley and Washington, D.C.

Description: We believe lawyers exist to serve their clients - not vice versa. We also believe that every task we undertake on your behalf is unique.We expect to be judged on results, on the added value we provide, the quality of our service, and our cost-effectiveness. These attributes have led to us being voted Law Firm of the Year 2007 by the Lawyer.

Advisory and Consultancy firms AR Business Consultants Chartered Certified Accountants Tel: + 44 (0) 208 776 9500 Fax: + 44(0) 208 778 8966 Regent House Business Centre Suite No: 209 291 Kirkdale London SE26 4QD U.K. Web: www.arconsultants.co.uk Description: Saving tax & building business. We providing a personalised service to business owners and individuals. For help with any of your accountancy and tax needs, please give us a call. All initial consultations are free of charge.

Dubai International Financial Centre (DIFC) Address: The Gate, Level 14 P.O. Box 74777, Dubai, UAE Telephone: +971 4 362 2222 Fax: +971 4 362 2333 E-mail: info@difc.ae Website: www.difc.ae Description: DIFC Authority establishes and develops a suitable Quality Management System that is the foundation of the ‚Service Excellence’ strategic theme, focusing on DIFC’s journey towards achieving its vision ‚To shape tomorrow’s financial map as a global gateway for capital and investment.DIFC Authority is committed to meeting and exceeding customer’s expectations in providing consistent and competitive high quality services, through continuously improving the effectiveness of the Quality Managements System as per ISO 9001. This is carried out in compliance with DIFC Law and applicable statutory and regulatory requirements.

Chahine Capital Group Contact person/ department: Andrew Pell Address: 43, Avenue Monterey Luxembourg, L-2163 Telephone: +44 20 7 1270001 +352 260 955 Fax: +44 20 7127 4611 E-mail: Andrew.pell@chahinecapital.com Website: www.chahinecapital.com Description: Specialists in quantitative equity investment strategies. Digital Stars Europe (Bloomberg: BILDSCELX) available as Chahine Islamic Stars Europe, with Fatwa from Sharia board headed by Dr Elgari. Bespoke investment strategies under mandate and client branded funds also available.

Qatar Financial Centre Address: P.O. Box : 23245, Doha Telephone: +974 496 7777 Fax: +974 496 7676 E-mail: info@qfc.com.qa Website: www.qfc.com.qa Description: Qatar is one of the world’s fastest growing economies, and the wealthiest country in the world measured by GDP per capita. The Qatar Financial Centre (QFC) lies at the heart of this small but dynamic country’s ambitious investment and development strategy.By attracting many of the world’s leading financial institutions to establish operations in Qatar, the QFC is supporting both the development of Qatar’s economy. The QFC Authority is committed to maintaining the highest international standards in its operations and activities.

We welcome firms who will contribute to the development and success of Qatar’s financial sector and we will support them in achieving success.

Overseas Trade Finance Ltd Address: Bilton Tower London W1h 7LE Telephone: + 207 859 8201 Fax: +44 845 862 1220 E-mail: info@otfonline.co.uk Website: www.otfonline.co.uk Description: Specialises in sourcing trade finance, and arrange funding for export transactions on behalf of exporters, and international trade finance professionals world wide. Company arrange the finance for Trade related business and forfeiting. Specialise also in arranging non-recourse discounting of domestic and export receivables, based on the purchase of Bills of Exchange, Promissory Notes and invoices. Overseas Trade Finance is dealing with Trade Finance related business and Forfeiting

Malaysia International Islamic Financial Centre (MIFC) Address: MIFC Secretariat Bank Negara Malaysia Jalan Dato’ Onn 50480 Kuala Lumpur Malaysia Telephone: +603 2692 3481 Fax: +603 2692 6024 E-mail: mifc@bnm.gov.my Website: www.mifc.com/ Description: In August 2006, the Malaysia International Islamic Financial Centre (MIFC) initiative was launched to promote Malaysia as a major hub for international Islamic finance. The MIFC initiative comprises a community network of financial and market regulatory bodies, Government ministries and agencies, financial institutions, human capital development institutions and professional services companies that are participating in the field of Islamic finance. Malaysia has also the distinction of being the world’s first country to have a full-fledged Islamic financial system operating in parallel to the conventional banking system.

If you would like to list your company in Financial Directory, please send your order to marketing@gifmagazine.co.uk. Claim your 25% discount by giving the following discount code: X10G01. Please note that only limited space is available in the directory.

December - January 2012 Global Islamic Finance 83

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Prosperitus Capital Partners Contact person/department: Kamran H. Khan Co-Managing Partner Address: Berkeley Square House London W1J 6BD Telephone: +44 207 193 5755 Mobile: +44 7943 866 552 E-mail: kamran.khan@prosperituspartners.com They are the first of their kind to launch a private equity fund. Their ideal drive and focus is centred on Sharia complaint funding and connecting the markets in the west to the markets in the Middle East. They are doing this by translating the message of Islamic Finance. Prospertious business approach is connected to both innovation and management of the individual asset classes. They intend to foster operations in the Middle East, North Africa. Porsperitus, also have a parallel conventional platform.

Commander Fund Asset Management Ltd Contact person/department: Mark Randall Address: 4 Creed Court 5 Ludgate Hill London EC4M 7AA Telephone: +44 (0) 20 7246 9940 Fax: +44 (0) 20 7246 9944 E-mail: mark.randall@commanderfund.co.uk Website: www.commanderfund.co.uk Commander fund is primarily a conventional based asset management and operations corporation. Yet, in recent years they have been working on pioneering the closes thing to a Sharia compliant Hedge fund. They are also promoting the Middle East and developing a strong client base and market presence there.

Capitala Contact Person. Department : Patricia Assaad Address: Al Moroor Street PO Box 30398 Email: patricia.assaad@capitala.ae Telephone: +971 2 412 1111 Fax: +971 2 412 1222 Description: Capitala are the masterminds behind some of the most beautiful and nubile real estate development in the Middle East. They are focused on striking the balance between community cohesion and good business decision making. There main project Arzanah, is a US$6 billion development on Abu Dhabi island.

Located in the Zayed Grand Mosque District

Islamic Finance Glossary B Capital

Broadly, all the money and other property of a corporation or other enterprise used in transacting its business.

Capitalisation

Long-term debt, preferred stock and net worth. The loan capital of a community development loan fund; includes that which has been borrowed from and is repayable to third parties as well as that which is earned or owned by the loan fund (i.e. “permanent capital”).

Capital Markets

A financial market where debt or equity securities are traded by institutions and individuals; the market for trading long-term debt instruments (those that mature in more than one year). Also used in a more general context to refer to the market for stocks, bonds, derivatives and other investments. A capital market is made up of three major parts: (1) stock market, (2) bond market, and (3) money market. It also works as an exchange for trading existing claims on capital in the form of shares. T he generic term for markets used to raise longer term funds from various investors.

As opposed to money markets where short-term securities are traded, capital markets are more specifically understood as the markets for medium- to long-term financial products such as shares and bonds.

Capital market instruments include fixed-income instruments such as index-linked bonds, asset backed securities, mortgage backed securities and related products.

Capital market instruments include fixed-income instruments such as index-linked bonds, asset backed securities, mortgage backed securities and related products.

Cash Flow Financing

Short-term loan providing additional cash to cover cash shortfalls in anticipation of revenue, such as the payment(s) of receivables.

Collateral

Assets pledged to secure the repayment of a loan.

Commodity Murabaha

See Murabaha, commodity

Commutative

Relating to, involving, or characterised by substitution, interchange, or exchange. Legal term in which one in which each of the contracting parties gives and, receives an equivalent.

The contract of sale is of this kind. The seller gives the thing sold, and receives the price, which is the equivalent. The buyer gives the price and receives the thing sold, which is the equivalent.

Cost-plus Financing

See Murabaha.

Covenant

An agreement or promise to do or not to do a particular thing; to enter into a formal agreement; a promise incidental to a deed or contract. The following are functional objectives guiding most covenants: full disclosure of information, preservation of net worth, maintenance of asset quality, maintenance of adequate cash flow, control of growth, control of management, assurance of legal existence and concept of going concern, provision for lender profit or program goals.

Current Asset

Assets that will normally be turned into cash within a year.

Current Liability

Liability that will normally be repaid within a year.

Current Ratio

Current assets divided by current liabilities -- a measure of liquidity. Generally, the higher the ratio, the greater the “cushion” between current obligations and a firm’s ability to meet them.

84 Global Islamic Finance

December - January 2012

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20 Most Influential People in the Islamic Finance Industry Global Islamic Finance magazine reveals the 20 most influential people in the Islamic finance industry. The Islamic financial industry may be seen as small compared to the global financial system but the industry is growing rapidly. Islamic finance is playing a significant role within the financial system and the influential people make this happen. There have been Islamic financial developments in product innovation, institutions and the spreading of awareness not just in Muslim dominated countries. The key factors researched in order to decide on the 20 most influential people in Islamic finance are the person’s position and role in the industry, the qualifications gained, awards won or nominated for, exposure in the media, number of appearances and the impact made on the industry. The influential people selected have made an impact all around the world in countries such as the UAE, Bahrain, Malaysia, Saudi Arabia and the Dubai.

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The Leading Islamic Finance Hubs of the World Choice of Law and Islamic Finance part 2 Risk Management: Islamic Financial Policies Islamic Banking and Its Potential Impact Introduction of Islamic Banking in Zimbabwe: Problems and Challenges

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