Global Islamic Finance Magazine May by Business Media Group (UK)

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Islamic Investments Review

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The Growing Islamic Finance Industry in Bermuda

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Making Your Mark with Innovative Islamic Brand Management, part 1

Islamic Banks vs. Non-Islamic Banks Ethical Dimensions

P. 28

P. 62

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Contents;QWERTYUIIOPDFHJUIIOPDFHJJ News

9 Islamic Finance News islamic Finance 14 World Islamic Finance Investment Review, part 1

Over the last year, a number of sectors have proved a viable arena for investments within the Islamic finance and banking industry...

24 Selection of Top Islamic Bond Issuers 2007 - 2011 28 Making Your Mark with Innovative Islamic Brand Management, part 1

Islamic financial institutions are required to adhere to the principles of Shariah-compliant financing, and to ensure that the products and services they launch are branded and marketing in a manner that complies with Islamic finance...

62 Islamic Banks vs. Non-Islamic Banks Ethical Dimensions

Islamic banking and finance is one of the fastest growing segments of global financial industry. Currently, there are over 300 Islamic financial institutions (IFI) which are mainly concentrated in the Middle East and Southeast Asia, and gaining popularity in Europe and the United States as well. They provide Islamic products for an estimated 1.82 billion Muslims in 2009 (26.72% of the world’s population)...

Interview

36 Tapping into Shariah ETFs, interview with Saeid Hamedanchi, CEO of ShariahShares.inc

49 Interview with Belaid Abdessalam Jheengoor at PwC in Bermuda I lead the PwC Bermuda Islamic finance initiatives working closely with the PwC global network and Islamic finance leadership team.

55 ‘’Trade finance remains an untapped opportunity in Islamic Finance’’ interview with Dr Massoud Janekeh, Head of Islamic Capital Markets (ICM), Bank of London and the Middle East

Islamic Banking

43 The Growing Islamic Finance Industry in Bermuda

The Shariah ETF Bermuda is an increasingly popular choice for Shariah compliant investments and the Islamic finance and banking sector as a whole. The country has made Shariah compliant financing accessible as its laws permit the Islamic finance industry to operate freely within the country without any restrictions as is the case with other countries that often have to wait for legislation to pass before paving the way for Islamic finance and banking...

World Islamic Finance Review 58 Growth and Prospect of Sukuk in Islamic Finance, Part 2

The Malaysian Sukuk market has also grown to become more innovative and sophisticated to meet the diverse risk-return profiles and requirements of both issuers and investors. The proliferation of new types of instruments with extended maturity profiles have generated a diversified range of players, both local and foreign to participate in the market...

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May 2012

Market Review

26 Arab Banking Corporation (ABC) announces 13% increase in first quarter profit to US$54 million

Arab Banking Corporation today announced that its consolidated Group net profit for the first quarter of 2012 was US$54 million, 13% higher than the first quarter of last year...

34 Sukuk A Rising Sector for $88 Billion Construction in Qatar

Qatar’s lenders need international banks to help finance as much as $88bn of construction for the 2022 soccer World Cup as deposits in the energy-rich Persian Gulf emirate fail to keep pace with loan demand...

51 Multi Billion Dollar Sukuk on the Cards for Private Sector

Growing trade in Islamic bonds in the Gulf region this year could be driven further by increased private sector interest in sukuk on the back of strong activity by banks, the 51st ACI Financial Markets World Congress will be told in Dubai...

52 The Popularity of Islamic Finance Fund Industry

The popularity of Islamic finance fund industry is growing steadily as more conferences and awareness about Islamic funds are being promoted around the world...

54 Islamic Benchmark Standard Set for Hedging

The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association (ISDA) have launched the ISDA/IIFM Mubadalatul Arbaah (Profit Rate Swap) product standard to be used for Islamic hedging purposes…

61 Nigeria Islamic Finance Gets Support From IDB

Nigeria is a growing Islamic financial sector. Nigeria’s Vice President, Namadi Sambo said in Kartoun, Sudanthat the Islamic Development Bank (IDB) has set aside about $2 billion dollars (about N310 billion) to support the country’s developmental programme between 2012 and 2014...

70 India Islamic Finance Market Grows Steadily

72 The Growing Opportunities in Takaful

The Takaful sector is doing unprecedentedly well in spurring the Islamic finance industry forward. Maintaining growth with profitability remains key challenge for global Takaful industry, according to speakers at the 7th Annual World Takaful Conference in Dubai...

73 Morocco’s First Islamic Bank Launch in 2013

Foreign Islamic banks will be allowed to take up to 49 percent of Morocco’s first fully-fledged Islamic bank in 2013, as the country aims to become a regional financial hub, a government minister said on Monday...

74 Dow Jones Islamic Market Titans 100 Index Closed Down 0.83% in April The Dow Jones Islamic Market Titans 100 Index finished down 0.83% in April according to data compiled by Dow Jones Indexes. The index measures the performance of 100 of the world’s leading Shari’ahcompliant stocks.

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

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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 Muddassir Siddiqui, UAE Michael Grifferty,UAE Alberto Brugnoni, Italy Haissam Arabi, UAE Dr. Murat Ünal, Germany John Bates,United Kingdom

Abdul Aziz Al Ghurair, UAE Ahmad Mohamed Ali Al Madani, Saudi Arabia Badlisyah Abdul Ghani, Malaysia Prof. Nahed M. Tahe, Bahrain Mansoor Durrani, Saudi Arabia

Thomas A. Timberg, Indoensia Dennis Cox,United Kingdom Anouar Adham, United Kingdom Beebee Salma Sairally, Malaysia Mohamad Zaid Mohd Zin, Malaysia

Arti Sangar, UAE Dhafer Salih Alqahtani, Bahrain Rushdi Siddiqui, USA Shaher Abbas, United Kingdom

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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 Ichrak Bennani, UAE Muhammad Athar Khan, UAE

Ichrak Bennani, UAE Anees Razzak, United Kingdom Dian Kartika Rahajeng, United Kingdom

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Editorial Letter

„

This is the time that Islamic finance investment options can experience a significant growth. 2012 is a landmark year for the global Islamic finance industry. The sector has seen a real growth spurt recently, due to an unprecedented rate of development in new, specialised Islamic financial indexes, in addition to further general growth opportunities for investments around the world

The Islamic finance and banking industry is growing and preceding expectations attracting investors from across a global market. The breadth of new products and services delivered from the Islamic finance sector has given scope to investors worldwide wishing to tap into the lucrative sector. However, inevitably as with any financial sector there will challenges that need to be overcome in order to spur the industry forward.

indexes, in addition to further general growth opportunities for investments around the world.

A year ago, we knew that 2011 would grind along on the relatively flat tail of a square-root sign-shaped recovery. We expected there to be a continued tug-of-war between headline grabbing downside risks and the upside news of corporate earnings. The events that played out consistently confirmed our expectations. In 2012, we see this environment continuing. Volatility, due in many cases to sensational risk stories, will likely remain elevated through most of the year. Corporate earnings, particularly by U.S. companies, are set to slow after two years of outsized gains. Modest profit growth will likely balance the scales on the positive side. The sum of these two factors should result in positive, albeit modest, global share market returns in 2012 which are likely to spur profitability in the Islamic financial sector

In 2012 and later on there will be arising demand for safe assets, but fewer of them will be available, increasing the price for safety in global markets. In principle, investors evaluate all assets based on their intrinsic characteristics. In the absence of market distortions, asset prices tend to reflect their underlying features, including safety. However, factors external to asset markets including the required use of specific assets in prudential regulations, collateral practices, and central bank operations—may preclude markets from pricing assets efficiently, distorting the price of safety.

While this is the summary outlook globally, specific stories will certainly vary by region. Europe will continue to dominate negative financial headlines—and rightly so. A European recession seems inevitable but Europe’s leaders can still act to prevent financial collapse and a deeper downturn. It is therefore imperative for investors to recognise the importance of an efficient portfolio which caters to effectively highlight every detail about their portfolio management. Every basis point earned will be hard fought. We believe regional diversification will need to be firmly in place, as the economic centre of gravity will continue to shift eastward because of China and emerging markets. As traditional investments remain flat, alternatives will matter more than ever. This is the time that Islamic finance investment options can experience a significant growth. 2012 is a landmark year for the global Islamic finance industry. The sector has seen a real growth spurt recently, due to an unprecedented rate of development in new, specialised Islamic financial

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

8 Global Islamic Finance

May 2012

The most recent investment opportunity is the brain-child of Crescent Wealth and Thomson Reuters, who collaborated to create a specialised index which will give investors the means to build a fully–fledged, Shariah-compliant equities portfolio in Australia.

Before the onset of the global financial crisis, regulations, macroeconomic policies, and market practices had encouraged the under pricing of safety. The global financial crisis was preceded by considerable overrating, and hence mispricing, of safety. In retrospect, high credit ratings were applied too often, both for private and sovereign issuers, and they did not sufficiently differentiate across assets with different underlying qualities. The demand for safe assets is subject to considerable upward pressures and recent report of IMF shows that the supply of safe assets is likely not to satisfy such demands. This is the time for Islamic assets to expose themselves to more potential investors and highlight the various benefits it can bring to the competive financial industry. In this in depth issue of GIF we will review the investment opportunities around the world in the growing Islamic finance Sector.

Farhad Reyazat PhD in Risk Management Editor in Chief

News

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Islamic finance news Dubai Raises $1.25 billion in Islamic Sukuk Sale Dubai announced that it has raised $1.25 billion from the sale of two tranches of Islamic bonds and that the proceeds will be used for debt refinancing and general budgetary purposes. The five- and 10-year bonds, or Sukuk, were three and half times oversubscribed, a sign investor confidence in the economy is improving, a government statement said. The five-year $600 million bonds carry a yield of 4.9 percent while the $650 million 10-year bonds have a yield of 6.45 percent, the statement said. The sale generated a book order with more than 260 investors, including fund managers, insurance companies and banks, who bid for more than $4.5 billion. “We are very pleased at the positive market reception to the Sukuk offering,” Abdulrahman Al-Saleh, director general of Dubai’s finance department, said in the statement. The sale “demonstrates increased investor confidence in the strong long-term value proposition” of Dubai, he said. Foreign and local investors were “happy” with the steps taken by Dubai to counter the impact of the global financial crisis that hit hard in 2009, adding that the sale provides the emirate “enough liquidity” to manage its budget deficits and debt repayments. Dubai World, the Emirate’s largest group, rocked markets across the globe in late 2009 with its debt woes. It announced in March that it has signed a final agreement to restructure $14.7 billion of debt. In September 2010, Dubai successfully issued a $1.25 billion bond that was four times oversubscribed. Government-owned carrier Emirates raised $1 billion from the sale of five-year bonds on June 1. Dubai appears to have restored some confidence since its economic crisis, reaping the benefits of having steady economic growth backed by strong performance in trade and tourism. It has also remained stable amid uprisings across the Arab world. Noor Islamic Bank Raised $2bn worth of Debt Transactions in Turkey It has been reported that Noor Islamic Bank had made $2bn worth of debt transactions in Turkey since the beginning of 2011. The Dubai-based bank targets an

additional $1bn before the end of 2012, according to its chief executive officer. “There’s huge demand for financing in Turkey, mainly in the SME (small and medium enterprises) business. We’ve done $2 billion...and expect another $1 bn this year,” said Hussain Al Qemzi to Reuters. “The bank is very active in the Sukuk and structured finance syndications, mainly to financial institutions,” he added. The Investment Corporation of Dubai and Dubai Holding both own a 25% stake in Noor Islamic bank. The bank does not have a physical presence in Turkey, however, it might apply for a commercial banking license in the country later this year. The prospect of developing nascent Islamic finance market in Turkey seems increasingly attractive to many global and regional banks sensing new business opportunities. Earlier at the begining of April Noor Islamic together with Dubai’s Emirates NBD, National Bank of Abu Dhabi, ABC Islamic Bank and Standard Chartered arranged a $325m dual-currency syndicated Islamic loan for Turkish lender Asya Katilim Bankasi (Bank Asya). Noor Islamic also arranged a $350m dual currency, Islamic structured Murabaha syndicated financing facility for Turkey’s Albaraka Turk at the end of last year. Micro Takaful A New Innovative Product in the UAE It has been reported that Takaful or Islamic insurance companies are tapping into new markets such as Egypt and Jordan; Islamic finance is expected to receive a boost in North Africa from last year’s Arab Spring uprisings, which removed authoritarian governments that discouraged or neglected sharia-compliant business for political reasons. Ghassan Marrouche, chief executive of Takaful Emarat in the United Arab Emirates, said his company was expecting double-digit growth rates in coming years, supported by the launch of several new products including a capital-protected instrument and a “microtakaful” product focused on low-income earners. “We want to be positioned well in the UAE market before we move outside,” he said. “It is a very dynamic market.” Bahrain’s Solidarity has moved into Egypt and Jordan. A consortium of Doha-based institutions tapped the Pakistani market by launching

Pak-Qatar Takaful in 2006. Other firms have seen opportunities in markets such as Lebanon, which posted 102 per cent growth in takaful contributions during 2010, and Indonesia. A report by actuarial consultants Milliman forecasts strong growth for takaful in southeast Asia, suggesting it could become three times as large as the Middle East by 2015. Ernst & Young forecasts Saudi Arabia’s share of the global takaful market will drop to 44 per cent this year as newer markets grow faster, and the trend of new markets outpacing traditional ones could continue in coming years. Other companies are focusing on building size in their domestic markets, which could give them economies of scale. Meanwhile, growth of the takaful business is slowing, industry statistics show, and increasing pressure on the sector to boost efficiency, roll out new products and explore new markets. Takaful, which has its core markets in the Gulf and Southeast Asia, is one bellwether of consumer appetite for Islamic finance. But profitability has been hit by fierce competition and rapid growth of workforces at takaful providers in past years. Sukuk Market to Set New Record The Sukuk (Islamic bonds) market in the oil-rich Gulf and other countries is expected to exceed $100 billion this year to smash the record $85 billion achieved in 2011, Saudi Arabia’s largest bank said. Despite an expected rise in the six-nation Gulf Cooperation Council (GCC), Malaysia is projected to remain the world’s dominant Sukuk market this year, National Commercial Bank (NCB) said. In contrast, the bond market in the GCC, which controls over 40 per cent of the world’s proven oil wealth, bounced down in the first quarter of 2012 after recording a sharp rise in the fourth quarter of 2011. “Sukuk issuance this year appears on track for another all-time record with last year’s $85.4bn set to be comfortably exceeded even under the more cautious projects,” NCB said in its 25-page study on GCC equity markets. “In view of current trends it appears likely that aggregate issuance will clearly exceed $100bn this year. Market innovation looks set to continue.” The report noted that the 2012 May Global Islamic Finance

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News

Clean Energy Business Council of the Middle East and North Africa along with the Gulf Bond and Sukuk Association have launched a Green Sukuk Working Group with a view to better aligning the climate change and capital market development agendas in the region. In Saudi Arabia, the largest Arab economy, Sukuk issuance is expected to continue to grow markedly this year. Among the recurrent issuers, SABIC in December gained CMA approval for a Sukuk issuance of up to USD5bn, it said. In the UAE, the second largest Arab economy, Abu Dhabi’s Al Hilal bank is issuing a $500mn Sukuk this year, NCB said, noting that the unlisted bank is fully owned by the Abu Dhabi Investment Council. State-run Qatar Petroleum is understood to be considering a corporate Sukuk this year in a pioneering move by a regional national oil company, it said. This could potentially trigger issuance by other government-related entities, eg Industries Qatar, as a way of diversifying funding sources, it added. “As much GCC Sukuk issuance has rebounded impressively in recent months, Malaysia remains the undisputed leader in the sector, typically accounting for more than 70 per cent of the global total,” the report said. “This state of affairs has persisted in spite of the fact that, more generally, the GCC countries have generally established themselves as the second major global hub for Shariahcompliant financial solutions. Moreover, in purely GDP terms, Malaysia lags far behind the Gulf: just under $200mn as opposed to some $one trn for the Gulf countries taken together.” According to NCB, Malaysia’s population reached 28mn in 2011, whereas the GCC’s total is around 40mn. The discrepancy is particularly “striking” in view of the fact that the GCC economies are among the leading global spenders on infrastructure, which should in principle open important new opportunities for Shariah-compliant capital market development. “Nonetheless, GCC Sukuk issuance in 2011 totalled $19bn as opposed to $58.7bn in Malaysia. The corresponding figures in 1Q12 were around $30.7bn for Malaysia and nearly $ 8.6bn for the GCC.” Turning to bonds, the report said that after a bumper quarter closed an exceptionally volatile year in 2011, the first quarter of 2012 marked relative normalization for the GCC conventional bond markets with overall primary market activity roughly halving in value from 4Q11. Its figures showed total issuance in Q1 reached $5.9bn and involved eight corporate issuers and a total of 14 different issues. This compares to aggregate issuance of $11.9bn in 4Q11 (issues with tenors in 10 Global Islamic Finance

May 2012

excess of a year) and $9.4bn a year earlier in 1Q11, the report showed.”These figures were broadly consistent with the continued strength of emerging bond markets globally where overall issuance reached $464bn in the course of 2011 and $10bn in the first quarter of this year.” NCB said it expected growing refinancing requirements would likely to be a key driver of market activity during the year.”In particular, regional banks are likely to remain active in the bond markets during the year,” it said, adding that Commercial Bank of Qatar is meeting with investors having established a $5bn issuance programme in August. A number of Omani banks have, similarly, indicated interest in tapping the bond markets while in Saudi Arabia, Kingdom Holding is planning a maiden bond issue. The company currently has bank loans of some SR1.5bn. Among the regional utilities, Dubai’s Dewa has ruled out a near-term bond issue, although the company has Dh1.2bn syndication due this year, NCB said. Barwa Bank net profit up 882% to QR244mn It has been reported that Barwa Bank’s total assets increased by 143% to reach QR19bn in 2011, which was driven by a 354% growth in the financing portfolio (from QR2bn to 9bn). Customer deposits trebled from QR3bn to QR9bn in 2011. The Group undertook a number of consolidation initiatives designed to drive efficiency across its support and administrative functions, a contributor to effective cost-containment. Earnings-per-share increased to QR1.30 in 2011 from Dh15 the year before. Barwa Bank completed a “successful” capital increase at the end of 2011, which it said is a “vote of confidence” from shareholders. The offering comprised 109,130,900 new shares for subscription and was intended to raise QR1.7bn. The overall value of shares subscribed reached QR1.9bn, an over subscription of QR233mn with coverage of 113%. Book value per share increased to QR16.4 compared with QR15.2 in December 2010. This capital increase will enhance the Group’s position in the Qatari market and ensure that it can deliver on the commitment to development of the country’s economy. Barwa Group was among the first to benefit from the QCB ruling regarding the closure of the Islamic windows of conventional banks and announced the acquisition of IBQ’s Al Yusr Islamic retail banking operations in August, a move that added to the bank’s customer base and branch network and allowed Barwa Bank to close the year with a network of six branches, having start-

ed 2011 with only one. The transaction was later awarded ‘Qatar Deal of the Year’ by Islamic Finance News. During the year, Barwa Bank launched ‘Prestige Banking’, aimed at its more affluent customers to provide them with a tailored suite of services that reflect their requirements and lifestyle as well as a Private Banking proposition, targeted at high net worth individuals. Barwa Bank’s 2011 financial results were announced yesterday following a meeting of its Board of directors. Malaysia Launches RM2 Billion Islamic Funds for SME It has been reported that Deputy Prime Minister Tan Sri Muhyiddin Yassin launched a RM2 billion Shariah compliant financing fund for small and medium enterprises (SMEs). Muhyiddin said the loan scheme, announced by Prime Minister Datuk Seri Najib Tun Razak in the 2012 Budget, reflects the private sector’s seriousness in supporting the federal government’s efforts to promote economic growth. The scheme will be managed by 13 Islamic banking institutions with the federal government providing a two per cent rebate of the bank’s profits, he said when launching the scheme at Sekolah Menengah Kebangsaan Datuk Perdana. Also present were International Trade and Industry Minister Datuk Seri Mustapa Mohamed, Deputy Finance Minister Datuk Dr Awang Adek Hussin, SME Corporation chairman Datuk Dr Mohamed Al Amin Abdul Majid and the president of the Association of Islamic Banking Institutions of Malaysia (AIBIM). Over 15,000 people attended the event and Muhyiddin said Malaysia’s complete Islamic finance system, comprising takaful and Shariah-compliant stocks at Bursa Malaysia besides the international finance market in Labuan, plays an important role in the international money market. “All this we can achieve under the Barisan Nasional (BN) administration which has successfully introduced policies and a complete system to encourage and regulate the development of Islamic banking that many countries want to emulate,” he said. The federal government has also not neglected businesses in Kelantan as it has raised the competitiveness of their products and services by reducing the cost of doing business, he said.“The Malaysian Investment Development Authority (Mida) has approved incentives for three SME projects in Kelantan, with total domestic investment of RM6.2 million, that will create 116 jobs in the textile sector in Kelantan,” he said. He added that SME Corporation, under the Malaysian Industrial Development Finance Bhd, has approved RM42.97 million in loans from 71

News

Indonesia’s Sukuk Rising High over Rupiah Debts It has been reported that Indonesia’s Sukuk are climbing to a one-month high over dollar-denominated Sukuk on speculation a rising fuel-import bill will disrupt the economy and weaken the rupiah. The yield premium demanded on localcurrency 4.45 percent notes due February 2018 over 4 percent dollar securities due November 2018 reached 184 basis points

The Takaful industry-like many other growing industries- is facing a number of challenges. One of them is the limitation regarding Shariah-compliant investment for Takaful plan holders.

strategist at PT AM Capital in Jakarta, said in an April 18 interview. “The delay in the fuel subsidies reduction weighed on the rupiah because investors needed certainty.”The Rupiah moves forward as it had previously weakened 0.7 percent this year to 9,130 per dollar, the worst performance among Asia’s 10 most- traded currencies excluding the yen. Twelve-month non- deliverable forwards reached 9,555 per dollar, a 4.4 percent discount to the current price. The central bank said that it has intervened in the currency and bond markets to arrest declines. Indonesia’s global 4 percent dollar Sukuk has returned 0.5 percent from the end of February through April 18, compared with a loss of 2.8 percent for rupiah-denominated 4.45 percent Shariah-compliant bonds

applications from the state. Earlier, Muhyiddin visited the Siti Aishah market in Jelawat here and mingled with the 350 petty traders. He also announced an allocation of RM500,000 to repair the market, which was built during the rule of the previous BN administration.

Most investors in the Middle East are certainly looking for Islamic-compliant business in countries that aren’t majority Muslim.

when and if needed from the international market,” Chief Financial Officer Philippe Touchard said in Riyadh. “The $2 billion program might be used during different phasesover the next five years.” Islamic bond sales in Saudi Arabia, the world’s largest oil exporter, rose to a record $6.55 billion so far this year as the government’s spending plan encourages companies to raise funds to invest. The state-run General Authority of Civil Aviation sold 15 billion riyals ($4 billion) of Islamic bonds in January. Saudi Electricity Co. (SECO) raised a combined $1.75 billion from an issue of five- and 10-year sukuk, securities that pay returns on assets to comply Islam’s ban on interest.

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We needed a very reliable banking solution that could provide us with the means for next generation growth. With the successful implementation of the best-of-breed iMAL Islamic banking solution, we now have a robust platform that will grow and evolve with us and will help us manage efficiently our network operations, to provide the best services to our clients.

Ghassan Marrouche,

Chief Executive Officer, Takaful Emarat – Insurance (P.S.C), UAE

yesterday, the widest since March 19, data compiled by Bloomberg shows. Indonesia sold $2.5 billion of non-Islamic dollar bonds this week, with offers exceeding bids by 3.2 times, the Finance Ministry said. A 20 percent climb in global crude prices in the past six months threatens to widen the budget deficit of Indonesia, a net oil exporter until it left the Organization of Petroleum Exporting Countries in 2008. Lawmakers last month reportedly rejected a government plan to raise the price of subsidized fuel by 33 percent. Inflows into emerging-market local-currency debt are lagging behind those for dollar bonds for the first time in at least five years, according to EPFR Global, as the U.S. economy recovers and growth in developing-nations slows. “Looking at the currency risk, the dollar-denominated bonds are safer,” Janson Nasrial, a market 12 Global Islamic Finance

May 2012

Ashraf Bin Md Hashim,

Head of Consultancy, International Shariah Research Academy for Islamic Finance, Malaysia.

Naz Nawzad Bajger,

Director- head IT, Cihan Bank for Islamic Investment and Finance P.S.C, Iraq

due February 2018. Investors pumped $1.1 billion into emerging-market localcurrency debt funds in the six months through April 11, a 66 percent drop from the previous sixmonth period, according to data compiled by research firm EPFR. Worldwide sales of bonds that comply with Islam’s ban on interest reached $12 billion this year from $5.3 billion in the same period of 2011, according to data compiled by Bloomberg. Offerings totalled a record $36.3 billion last year.

Citigroup Inc. (C), Credit Agricole, Deutsche Bank AG (DBK) were appointed the lead arrangers of the program, Saudi Fransi said in its base prospectus posted on the London Stock Exchange. Saudi Fransi Capital, the investment banking unit of the bank, is the domestic financial adviser and co-arranger for the program in Saudi Arabia, Touchard said. Banque Saudi Fransi last sold bonds in 2010 when it raised $650 million from selling five-year debt.

Banque Saudi Fransi Launches $2 Billion Islamic Sukuk Program It has been reported that Banque Saudi Fransi, a Saudi Arabian lender part-owned by Credit Agricole SA (ACA), set up a $2 billion Islamic bond program as part of the Riyadh-based lender’s plans to diversify its sources of financing. “We are properly equipped to rise funding

The yield on the 4.25 percent notes fell to 2.72 percent today from a high of 4.28 percent in March 2010, according to prices compiled by Bloomberg. Banque Saudi Fransi (BSFR) reported a 10 percent increase in first-quarter profit to 789 million riyals, beating analysts’ estimates. The stock has advanced 15 percent this year compared with a 17 percent gain for the benchmark Tadawul

News

We do need more trained Shariah scholars, but it’s beginning to happen because of demand pressures.

Jaseem Ahmed

Malaysia, SecretaryGeneral, Islamic Financial Services Board, Malaysia

recovery can be a massive challenge. Ahmad M. Khattab, VP Sales Growth Market, Vision Solution, said, “Virtualisation continues to drive cost out of deploying and running IT for financial organisations across the Middle East. However, protecting these environments and ensuring that workloads can be easily recovered is still a challenge. With multiple different platforms in place at most organisations, whether this is different virtualisation products or just physical and virtual servers together, organisations are looking at using one tool to protect their data, simplify their business continuity planning and make disaster recovery more affordable.” The uVRA includes pre-configured set-up for protection of Windows and Linux servers and can auto provision virtual machines at

Double-Take Availability supports recovery of virtual machine workloads to any platform including either another virtualisation solution such as VMware or Microsoft Hyper-V, physical server hardware or into a cloud environment. Aurangzeb Qadri, Assistant Manager, IT Infrastructure at Sharjah Islamic Bank, said, “Technology is running fast on the information highway, faster than ever before. MEFTEC provides us with the opportunity to keep pace with the latest and best in the

Vision Solutions Keeping Islamic Financial Institutions Secure It has been reported that Visions Solutions claims it is helping lead Islamic financial institutions in the GCC to protect their critical data by providing business continuity and disaster recovery solutions. At MEFTEC 2012 Vision Solutions is showcasing its universal Virtual Recovery Appliance (uVRA) solution, which includes the latest version of Double-Take Availability, which is designed to make recovery of virtual machines running on VMware virtual infrastructures easier for companies to carry out. As virtualisation gains traction in the Middle East, business continuity and data

recovery time for instant fail-over. By taking this appliance-based approach, companies can save on operating system, infrastructure and bandwidth costs as well as providing full protection for data and servers.

If you look at Islamic finance as a whole, volumes have been much lower in the past couple of years and only recovered recently reflecting global markets generally. One of the big misconceptions was that the Middle East would be immune from the financial crisis, but that’s not been the case as the region is very real-estate driven and derivatives activity has subsequently been hit by a general slowdown.

ties about Islamic finance in the secular republic as it seeks to tap a rich pool of investors flush with oil money. Finance Minister Mehmet Simsek told the press conference with Babacan on Tuesday that the government would also easetaxes on sukuk issues to encourage investment. “Turkey should participate in the sukuk issue market, and the Treasury’s sukuk issues will pave the way for those of the private sector,” Babacan said. “Strengthening the sukuk market is also important in making Istanbul a global finance center, and the sukuk certificates will be traded on the Istanbul Stock Exchange,” he added. Plans for a sovereign sukuk issue from an economy regarded as one of the most progressive and successful in the Muslim world

All Share Index and 20 percent increase for the Tadawul All Share Bank Index.

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Peter Werner,

Senior director, The International Swaps and Derivatives Association (ISDA), United Kingdom

market. This year also we are looking forward to see new launches and updates from Vision Solutions on their high-availability solutions.” In addition to Shajah Islamic Bank, Vision Solutions provides technology for a number of other banks and financial institutions in the Middle East, including Mawarid Finance and Bahrain Islamic Bank. Turkey Set for Sukuk Launch in 2012 It has been reported that the Turkish government will press ahead with its first issue of Islamic bonds this year and the planned sale should encourage private companies to do likewise and boost Istanbul’s role as a financial centre, Deputy Prime Minister Ali Babacan said. The government had said previously it could issue a sukuk in 2012, overcoming sensitivi-

Globally, funds and financial products worth around $1.5 trillion (Rs 75 lakh crore) are currently managed using Shariah investment principles. Shariah-compliant financial investing is still at a nascent stage. In India, though we have indices based on Shariah, there are very few products available right now. But this market is expected to grow around 20% in the coming years.

Shariq Nisar,

Director of operations and research, Taqwaa Advisory and Shariah Investment Solutions, India

signals intent on Turkey’s part to play a bigger role in Islamic finance. The size of the global sukuk market is estimated at more than $100 billion. Simsek told the news conference his ministry was working on easing taxes on the Treasury’s sukuk issue to make the bond more attractive for possible investors, as he said it already does with Eurobond issues. The two ministers did not elaborate on the size of the planned sukuk issue, but both reiterated that it will be held this year. “Market conditions will determine the amount of the issue, and the sukuk may be lira-, dollar- or euro denominated and will attract investors from both Turkey and abroad,” Babacan said. gif

2012 May Global Islamic Finance

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Islamic Finance

WORLD ISLAMIC FINANCE INVESTMENT REVIEW, PART I

Abstract: Following the success of the last GIF World Islamic Finance Review, we have decided to conduct another review for 2012, giving you a round-up of activity from 2011 to present, and an up-to-date insiderâ&#x20AC;&#x2122;s guide to investments around the world. The Islamic finance industry is currently growing at an unprecedented rate, and is expected to reach a value of more than USD2 trillion dollars by the end of 2012. Many countries around the world are tapping into this lucrative sector, creating a space for growing investment opportunities. The Islamic finance and banking industry has seen some major developments on a global scale, including the launch of many new innovative projects and ventures. Even conventional banks are opening up Islamic windows across the globe to cater for the demand for Shariahcompliant products and services, and these are doing increasingly well. The Islamic finance industryâ&#x20AC;&#x2122;s rapid growth shows a market which is steaming ahead. Popular commodities such as Sukuk (Islamic bonds) and Takaful (insurance) are creating abundant opportunities for both Muslim-majority and non-Muslim-majority countries across the globe. A wide variety of major Islamic financial hubs present various different investment methods, for both professional investors and for those more casual investors wishing to take advantage of this lucrative market. Key areas for wealth investment include the sectors of real estate, Sukuk, Takaful, Shariah-compliant equities, infrastructure, and energy and resources. In this review, GIF will look closely at opportunities for Shariah-compliant investments coming in from the key players in Islamic finance, and will investigate various methods of utilising your investments into profitable projects. In the first part of this review, we will look at the available forms of Shariah-compliant investments in a number of major regional hubs. Keywords: Islamic Finance, Investments, Shariah Compliancy, Sukuk, Indexes, Banking Shariah Compliant Investment Sectors 14 Global Islamic Finance

May 2012

Islamic Finance Over the last year, a number of sectors have proved a viable arena for investments within the Islamic finance and banking industry. These sectors are outlined in Figure 1: These lucrative sectors have paved the way for Islamic financial investments in a number of countries. However, there is also a wider range of different potential investments for an investor to tap into. 2012 The Year of Investment Opportunities 2012 is a landmark year for the global Islamic finance industry. The sector has seen a real growth spurt recently, due to an unprecedented rate of development in new, specialised Islamic financial indexes, in addition to further general growth opportunities for investments around the world. The most recent investment opportunity is the brain-child of Crescent Wealth and Thomson Reuters, who collaborated to create a specialised index which will give investors the means to build a fully–fledged, Shariahcompliant equities portfolio in Australia.

proposition to offshore investors. “There is a huge untapped potential to grow Islamiccompliant investment in Australia, coming from investors here and in Asia and the Middle East,” he says. Yassine adds that the index’s investment theme has broad appeal to conventional investors, particularly those with an ‘ultraethical’ investment strategy. He further says: “Investors will be attracted to the index’s weighting towards low levels of debt and leverage, low account receivables and the fact that companies which are compliant with Shariah principles invest a greater proportion of their funds back into the business, rather than letting it rest in cash or shortterm investments.” Figure 1: Lucrative Sectors for Investment in 2011-2012 Sukuk Takaful Real State Infrastructure

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lion by the end of 2011. The groundbreaking report which Kuwait Finance House (KFH) Research released in early 2012 shows that the most considerable assets are found in the markets of Saudi Arabia and Malaysia, which are the two major hubs for Islamic finance and banking. Despite the various challenging conditions triggered by the global economic crisis, significant growth is still prevalent, as can be seen in these funds. Assets controlled by Islamic investment funds are expected to grow further in 2012, compared to 2011, despite the challenges facing the global economy. In addition, an increase in oil prices is anticipated, giving a boost to the already lucrative oil industry. This will lead to an increase in the wealth of various Islamic hubs such as Saudi Arabia, which will lead to growth of the USD2 trillion+ industry. The total assets comprised within these funds have been estimated to have a value of around USD60 billion in 2011, an increase from USD58 billion in 2010. Over the same time period, the total number of Shariah-compliant funds has increased to 876 in 2011, up from 812 in 2010. These statistics show the various effects which the economic climate has had on the profitability of Islamic funds.

Innovative company Crescent Wealth states that: “The Thomson Reuters Crescent Wealth Energy and Resources Islamic Australian index is the only benchmarking tool of its kind used in the AustralDiagram by Tasnim Nazeer ian market, and a key step towards Islamic investment in Australia, which the investment manager expects to grow to as much as USD13 bilThe lion in funds under management total assets by 2019.” “Australian markets are stable, and have the attractive comprised within these growth fundamentals that Islamic funds have been estimated to investors are looking for in today’s have a value of around USD60 bilchallenging macro-environment,” says Rushdi Siddiqui, Thomson lion in 2011, an increase from USD58 Reuter’s global head of Islamic fibillion in 2010. Over the same time penance and OIC Countries.

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If we consider the regional distribution of Islamic funds, Saudi Arabia continues to remain the key market for Islamic investors, representing 42.4 percent of the industry’s value. Malaysia is also a wealthy Islamic hub, taking the second place with more than a quarter of the total assets, while 34 remaining countries contribute the rest. In terms of average riod, the total number of Shariah-compliassets per fund, the US comes The index raises awareness of out as the clear prominent winant funds has increased to 876 in 2011, the potential of the companies ner, with each fund managing up from 812 in 2010. These statistics listed on the Australian Securities USD516.9 million per fund. Saudi show the various effects which the Exchange for compliance with IsArabia and South Africa trail belamic investment principles. Its hind, with only USD102.6 million economic climate has had on the founders hope to spread to include and USD95.8 million, respectively, profitability of Islamic funds 143 securities on the index, which controlled per fund. However, the will have a combined market capiweighted average returns for each talisation of more than USD160 domicile show that among the top billion. The index excludes banks, ten jurisdictions, only the Malayconventional financial stocks and sian, South African, Pakistani and companies with high levels of debt Indonesian markets were profitor leverage. According to the Cresable in 2011, in terms of the total cent Wealth, Shariah-compliant financial assets held by funds. companies will be reviewed on a quarterly In addition, the newly launched index is set basis for adherence with standards set by to create ample investment opportunities Islamic investment funds are expected to the Accounting and Auditing Organisation for around the world for potential investors and increase generally. During 2011 the funds Islamic Financial Institutions (AAOIFI). businesspeople wishing to tap into the lucra- were targeted towards Saudi Arabia and tive Islamic financial sector. Across the globe, Malaysia, with each country taking 27.5 perTalal Yassine, managing director at Crescent funds within the global Islamic investment cent and 23.0 percent of the market share Wealth, says that the index will help to sell industry are set to make a robust growth in respectively. Meanwhile, funds managed Australian Islamic finance as an investment 2012, since their assets topped USD60 bil- under a global mandate accounted for 26.6 2012 May Global Islamic Finance

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Islamic Finance

Figure 2: Sectors for Islamic investments in Malaysia 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 16 Global Islamic Finance

May 2012

percent of market share. The vast majority of funds raised in Saudi Arabia and Malaysia are channelled locally. Though these countries make up a high percentage of the overall Islamic financial market, Islamic funds outside of these countries rarely target them for investment. Instead, countries such as the US hold equities and assets in the popular Middle East and North Africa (MENA) region. In terms of asset allocation, equities are the main asset class for these funds worldwide, accounting for almost half of all assets. Malaysia is the largest Islamic equity market for Islamic funds, with Saudi Arabia, the US, Ireland and Kuwait as the other major markets. Funds actively investing in the Islamic money market have increased over the years. This market accounted for 23.3 percent of the total Islamic financial market at the end of 2011, as investors sought safety among equity markets which remained volatile and uncertain during the ongoing global economic crisis. On the currency front, the Saudi riyal and Malaysian ringgit dominate the market, as a result of the large number of domestic funds in both regions. These currencies currently account for 37.7 percent and 25.8 percent of the market respectively. Funds managed in US dollars are increasing, and account for 20.3% of the total Islamic funds’ assets at the end of 2011; but although US dollar funds are the most numerous in the market, they still trail in terms of average asset size per fund. On average, US dollar funds have just USD36.2 million in assets, as compared to USD59.7 million for Malaysian ringgit funds and USD139.5 million for Saudi riyal funds. Despite the current challenges faced within the global economy, Islamic funds continue to grow, with the prospects for 2012 somewhat brighter than 2011. Wealth in Muslim countries continues to chart strong growth on the back of decent economic growth and higher oil prices, with a knock-on effect on demand for Shariah-compliant investments. The growing public awareness of Islamic wealth management products and services will help to attract more funds from investors, while the growing positive track record of Islamic funds assists their penetration into more developed financial markets and use by sophisticated investors. Despite the ongoing challenges in the global economy, we remain optimistic that Islamic equity markets will outperform 2011 returns, given a gradual recovery in key markets which will in turn improve investor sentiment. As Malaysia, alongside Saudi Arabia and other key markets, paves the way for Islamic financial investments, there are a number

Islamic Finance Debashis Dey, Partner, Head of Capital Markets, Middle East, Clifford Chance LLP

What is the most lucrative sector for Islamic investment? The wider acceptance of Islamic investment products across the globe now means that in many markets they compete alongside conventional investment products. We’ve not seen any great loss of appetite for Islamic investment; however, the opportunities for investment in recent years have been less. Globally the commodities sector remains vibrant as a source of hedging and relative liquidity against what remains a largely volatile global economy. Innovation in structures available for investment will also continue to happen as the sector grows. Last year Clifford Chance advised HSBC Bank Middle East Limited in connection with updating its US$5 billion sukuk issuance programme and a US$500,000,000 issuance under the Programme. This transaction was the very first sukuk to ever use the innovative structure of a Mudaraba and Wakala. This structure has now been replicated by many other financial institutions in the Middle East in relation to the establishment of their programmes. In addition, Clifford Chance advised Nakheel on their trade creditor sukuk, the first to exchange trade receivables for sukuk property and the first sukuk to contain a “tap” mechanism. Which sector of the Islamic finance do you personally feel will be successful in the upcoming years? As Dubai and other emirates as well as Saudi Arabia rebound from the financial crisis the most lucrative sectors in the next 12 months are likely to be infrastructure, telecommunications, insurance, logistics and travel. In the last few months Clifford Chance has been advising a number of Middle East issuers who are returning to the market. Outside of the Middle East we are seeing an increasing trend of South East Asian issuers to begin looking to do more international Islamic finance transactions e.g. Government of Malaysia, Government of Indonesia. The demand for funding projects in South East Asia is also high in particular in the Indonesian market, but more work needs to be done in order to facilitate international non-sovereign transactions to be executed. What do you personally feel are the major challenges faced by Islamic investors? Despite the economic rebound experienced in the Middle East, the ongoing Eurozone debt crisis coupled with expected lower contributions from the oil countries will continue to be the biggest macro challenge, since we expect these drivers will keep growth depressed for some time. Many Islamic investments were also in what has been an underperforming and relatively illiquid real estate sector. Against this backdrop liability management and restructuring of obligations within and among financial institutions and within portfolios will continue to be the major challenge faced by Islamic investors. But it is worth noting that Clifford Chance are at the forefront of helping Islamic investors adapt to these challenges by continuing to innovate across traditional asset classes in developing new structures.

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of opportunities available in sectors within the Malaysian Islamic investment arena. These are outlined in Figure2. With the 2012 launch of Crescent Wealth and Thomson Reuters’ new specialised index, investors will enjoy a wider range of alternatives, whether investing their money on the Bursa Malaysia exchange, or trying the new specialised index, which will have more scope for fully-fledged Islamic investments. In addition, many companies will wish to tap into the new opportunities presented to them, which have made 2012 a positive year for Islamic financial investments. The market has progressed considerably since 2011; a year which also saw many achievements in the investment sector which gave rise to similar opportunities.These opportunities have been highly visible in Asia and the Middle East. Europe has also developed the facilitation of Islamic finance and banking institutions, and Islamic financial windows within conventional banks, which could further help to introduce Islamic financial investments to a global platform. Many Asian countries - noticeably India - are slowly tapping into the world of Shariah-compliant investments. India recently launched its first ever Shariah-compliant Islamic financial institution, in the city of Kerala. The Al-Baraka came into action after the Kerala High Court dismissed a couple of writ petitions challenging the establishment of Islamic financial institutions within India’s secular system. Another key investment exhibited was the collaboration of the 2011 Bombay Stock Exchange and TASIS on the launch of a Shariahcompliant index, in order to promote Islamic finance in India. This is the first Shariah index created in India, which utilised the strict guidelines and local expertise of a domestic, India-based Shariah advisory board. The BSE TASIS Shariah 50 index lists the 50 largest and most liquid Shariah-compliant stocks within the BSE 500. TASIS employs a strict, proprietary screening process, utilising its knowledge of and local access to listed Indian companies in order to ensure that all stocks included within the index are strictly compliant with Islamic Shariah law. TASIS has adopted financial screening norms which are more conservative than those used by its peers, making the product ideal for Islamic investors seeking investments which are sure to adhere to the strict, conservative principles of full Shariah compliance. Madhu Kannan, managing director and chief executive of BSE, says: “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 create increased awareness on financial investments amongst the general population, and will help to enhance financial inclusion. The index will also build a base for licensing for the construction of Shariahcompliant financial products, including mutual funds, ETFs, and structured investment products.” (Z. Hassen). Australia is another country whose provision of Shariah-compliant investment opportunities is rapidly emerging. Australia is quickly launching into the Shariah-compliant investment arena by making the necessary changes in the law to accommodate the sector. Dick Warburton, chairman of the Board of Taxation appointed by the Australian federal government, has published a paper on the tax treatment of Islamic finance, banking and insurance products within the country. 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.” The new index will help Australia to build its equity portfolio for Islamic investment. It is set to further help the country to excel and to become an in2012 May Global Islamic Finance

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Islamic Finance Mohammed Naim Mohd Azad Din, Vice President, Asset Management , Sidra Capital, Saudi Arabia

What is the most lucrative sector for Islamic investment? All sectors could be lucrative sectors to invest in (ex non-Shariah compliant sectors). It depends on many such factors as the state of the overall economy, the opportunity to leverage at attractive spread, the entry price and others. Importantly, it also depends on the investors’ astuteness in sniffing opportunities. In the Middle East, however, real estate investments seem to be in the lead of the lucrative league table compared to other sectors. Nevertheless, this opinion may not be applicable to certain countries/ emirates which had suffered from real-estate burst notably Dubai. As for others, the growth in the sector is significantly suppressed by the Arab Spring i.e. political stability. To put my opinion into context, I see strong appetite to explore other types of alternative investments besides real-estate as opposed to the traditional securities investments of equities and bonds. Alternative investments seems to provide additional layer of comfort to investors when it comes to ownership as most of the investments will be asset-backed and the returns are much better predicted (sustainable) with lesser degree of volatility. Further, they could also become a suitable substitute to bond-like investment with steady payment of coupon based on incomeyielding strategies. Other types of alternative investments would include private equity, leasing and structured trade finance (commodities). Which sector of the Islamic finance do you personally feel will be successful in the upcoming years? What is happening in the global economy currently is forcing international corporations to expand beyond borders more rampantly for new markets. Many of them who are qualified technical partners would be even more receptive to investment opportunities in the Middle East though there has been such a trend over the last decade. The pattern augurs well to the Middle East long term infrastructure developments. Some of the sectors which are likely to strive include the education, healthcare, power generation and land infrastructure i.e. highways. However, they remain government-led initiatives instead of private sector-led initiatives. In Saudi Arabia, in 2012, a sovereign sukuk was issued by the General Authority of Civil Aviation (GACA) and followed by the Saudi Electric Company (SEC), not long after. These issuances provide significant lifeline to the sukuk sector, which saw a huge dip in the number of sukuk issuance in recent year. Whether this will be sustainable, I believe it will as long as they remain budget positive supported by sustainably high prices of oil. As an advocator of alternative investments, I remain optimistic that there is a huge untapped opportunity in the Alternative Islamic Investment Fund space in the region. This is in addition to real estate. Though some similar opportunities are currently available conventionally, very little of them are being provided in Islamic finance and those available Islamic finance are undoubtedly over-subscribed. Hence, continuing to develop Shariah compliant alternative investment funds would remain relevant as long as the gap remains unfilled by such similar offerings in the market. What do you personally feel are the major challenges faced by Islamic investors? One of the main challenges that I could think of is the difficulty to source suitable opportunities that match the investors’ investment profile. As you know, they do not often seek growth as some prefer capital protection, capital preservation and balance-growth. Further, it is also sometimes not easy to source Shariah compliant opportunities as we received proposals from all over the world. Screening these investments are frequently resource consuming. Thirdly, given the current market, sourcing leverage is also a challenge, more so for Shariah compliant leverage. Notwithstanding these, these challenges are addressable nonetheless.

18 Global Islamic Finance

May 2012

ternational hub for Islamic finance and banking, including lucrative investments currently in the pipeline. Yasser El-Ansary, tax counsel at the Institute of Chartered Accountants, says: “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 the conventional investments which have often left investors heavily in debt. If you are considering making an investment in any of the financial hubs listed in this two-part series, it is definitely worthwhile investigating your chosen sector thoroughly, in order to guarantee a profitable investment. Investments in Key Areas of Sukuk and Takaful for 2012 The lucrative Sukuk Islamic bonds and Takaful sector is ripe for a variety of investments in 2012. The emergence of a new ‘green’ scheme for Islamic bonds and investments in this area has recently emerged as a new investment model. “There are a significant and growing number of projects, for example in renewable energy in the Middle East, that are ideally suited to Sukuk investors,” said Aaron Bielenberg of the Clean Energy Business Council (CEBC), the PV Magazine reported on Tuesday, March 6. “This group will help investors to more easily identify Shariah-compliant, clean energy investment opportunities.” The new group was formed by Climate Bonds Initiative, the Clean Energy Business Council (CEBC) of the Middle East and North Africa, and the Gulf Bond and Sukuk Association. The group aims to seed new ideas around Shariah-compliant green energy projects, in order to open up opportunities for Islamic financial investments. Its aims to introduce those opportunities to potential investors, including discussing projects which would include investments in climate change and photovoltaic projects. By working with the CEBC, which represents the private sector of the clean energy industry across the Middle East, the initiative aims to channel diverse market expertise in order to develop best practices, and to promote the issuance of Islamic Sukuk bonds, an investment market which is seeing increasing growth. “We’re looking closely at a couple of prospective bond issuances,” says initiative chairman and co-founder Sean Kidney. “Green Sukuk is ideally suited for the financing of many of these investments,” says Nick Silver of the Climate Bonds Initiative. Nasser Saidi, chairman of the CEBC, agrees.”If you look at current projects across the region, and if a fraction of those were to be financed with green Sukuks, then you’re talking about USD10 to USD15 billion,” he said.”The time is right for a green Sukuk.” The growing Sukuk market reached USD111.9 billion during the eight years up to 2008 – a staggering profit - according to the International Islamic Financial Market. Bloomberg has released a report including data that shows global sales of Sukuk to have reached USD6.6 billion in 2012, an enormous increase from USD2 billion a year earlier. From a start almost three decades ago, the Islamic banking industry has seen substantial growth as it attracts the attention of investors and bankers across the world. A long list of international institutions Figure 3: $8 $7 $6 $5 $4 $3 $2 $1 $0

Global Takaful Market $bn

7.39 6.42 5.59 4.22

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2.42

2.78

3,19

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Islamic Finance Ehsan Zaheed, Director & CEO, Amana Takaful, Sri Lanka

What do you personally feel are the major challenges faced by Islamic investors? Formation of Islamic financial institutes - In the economic field, it was the biggest challenge for such Muslims to reform their financial institutions to bring them in harmony with the dictates of Shari‘ah. In an environment where the entire financial system was based on interest, it was a formidable task to structure the financial institutions on an interest free basis. The people not conversant with the principles of Shari‘ah and its economic philosophy sometimes believe that abolishing interest from the banks and financial institutions would make them charitable, rather than commercial, concerns which offer financial services without a return. Obviously, this is totally a wrong assumption. For commercial financing, the Islamic Shariah has a different set-up. The principle is that the person extending money to another person must decide whether he wishes to help the opposite party or he wants to share his profits. If he wants to help the borrower, he must rescind from any claim to any additional amount. His principal will be secured and guaranteed, but no return over and above the principal amount is legitimate. But if he is advancing money to share the profits earned by the other party, he can claim a stipulated proportion of profit actually earned by him, and must share his loss also, if he suffers a loss. The Shariah standards – its important that we have a minimum level of Shariah standards. Be it standardization or harmonization, its important that we have some kind of mechanism of accountability and transparency when it comes to Shariah standards and rulings. This would make it easy for the Islamic investor to invest in products and not face issues with their own Shariah bodies who do not accept the rulings of the Shariah councils be it in the same country or cross border. Lack of Shariah compliant investment options – very few available investment grade Shariah compliant investment options and the liquidity of the investments. Longer processes and documentation requirements for Islamic instruments; Lack of long term investments; The inability of matching long term liabilities with long term investments have been a great challenge for the Shariah conscious investors. Further the cost of the transactions too have been on the high side due to the initial structuring cost. Legal and regulatory issues - The regulatory aspects of Islamic financial transactions. In other words, on the one hand there is the legal question of whether the existing laws in a secular jurisdiction allow financial transactions to be governed by shari’ah principles. On the other hand, there is the regulatory question of whether Islamic institutions

require the same intensity and kind of prudential oversight as conventional institutions. What are the key aspects that investors should focus on when devising an Islamic market investment portfolio? An Islamic investment diversification is a concept that is based on shariah principals and consideration of a number of different factors associated with the process of investing. The process of investing would involve a close look at many factors to determine how to go about choosing the right investments for a particular purpose. The first key focus area in investment has to do with the goals for the investment portfolio. By determining how to diversify the portfolio while still balancing that diversification with the type of individual securities, the idea is to protect the investor from downturns in one market by providing for upswings in value with other holdings. This is key to the investment process for investors who have specific goals for the income generated by the portfolio. Higher the risk higher the return - Another important aspect of investment diversification has to do with evaluating investments based on the degree of risk and potential return. Here, the idea is to help the investor focus on options that carry an acceptable amount of risk while providing the greatest amount of return in a shariah complaint manner. Efficient market hypothesis - this concept holds that all information that is relevant to making the decision to hold, buy, or sell an option must be readily available to the investor in order for the market to be truly efficient. Since knowing the past history, the current status, and the potential future risks associated with any investment is key to being able to make wise choices, the investor should determine if this situation of an efficient market exists before deciding to get involved with a given investment. Goals and aims of the Shariah compliant investor, by taking into consideration the goals and aims of the investor, it is possible to build a portfolio that will help meet those goals. In order to wisely choose the right investments based on shariah principals, it is important to know all there is to know about the investment and the market in which it is traded. Examples for Islamic investment diversification: • • • • •

Shariah Compliant Stocks-White Listed Equity Sukuk (Islamic bonds) Shariah compliant exchange traded funds Islamic real estate investing trust Shariah compliant Unit trusts

What is your perspective on the future potential of the Islamic investment industry? Most conventional banks and financial institutions have turned to Islamic banking, This is a rapidly growing industry due to its prudent levels of risk management.

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Islamic finance adheres to Islamic law or Shariah law, which prohibits investing in businesses that contradict the Islamic principles of fairness and justness — that means, principally, that they are forbidden to charge interest on money loaned to others. It gained favor in recent years because the turmoil in the conventional financial markets highlighted the precariousness of banking that is based on interest, rather than underlying assets and service, this is the process used in Islamic Finance. Islamic finance focuses on equity, trading, and leasing. Shariah law provides specific guidelines on how such products are structured and executed, most recently by the scholars who promulgate rulings through the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the world’s leading standard-setting body for Islamic finance. In terms of equity, a bank partners with a business by taking an equity share in all or part of the company, with profits and losses shared in proportion to ownership. An asset can only have one buyer or seller at any given time, unlike interest that allows cash to circulate and grow into enormous sums with a high-risk of defaulting. As seen in the housing market crash in the US and Europe. In the wake of a global financial crisis, Islamic finance has not only survived, it has grown, now totaling $1.2 trillion, approximately 1 percent of the global financial system. Islamic financial institutions now exist in more than 75 countries worldwide. Although mostly concentrated in the Middle East and Southeast Asia, its practice is spreading to Central Asia and Europe. Even Eastern Europe, China, Australia and the United States are teaching Islamic finance in academic institutes. It’s become globally recognized in order to see how it benefits the global economy, It’s not something that is done overnight, there’s a lot of training on part of the institutions to know how to apply the system. The financial crisis that came about has made most financial analysts and fund managers become prudent in the way they handle current investments. This sudden need to take care has been a constant when dealing with Islamic Finance. As Shariah principles need to be followed by the fund managers. This laws inherently eliminate risk and speculation and elements of uncertainty. This process of careful fund management and good specific products aimed at certain markets has brought about a certain growth in the market and would most certainly grow over time. This demand was not bought forward by the world Islamic community but also included the general public that was interested in Ethical finance due to fairness and other more desirable attributes. A simple example of this is how Islamic finance when dealing with Equity does not intend to make unethical short term gains and play into the game of speculation, in Islamic Finance it is made clear the operators of these funds are not allowed to take part in margin trading and short selling. The global recession has turned our attention to the shortcomings of interest-based finance, thus giving an opportunity for the Islamic Financial sector to develop and realize its true potential.

2012 May Global Islamic Finance

Islamic Finance Ahmed Muhammed Almanasreh, Ph.D., MBA, PMP, CPES, Managing Partner, Sanad Capital, Jordan

What do you personally feel are the major challenges faced by Islamic investors? Although Islamic finance is being growing steadily over the past decade or so, it is not unleashing its potential. There are a set of challenges faced by this industry. Regional instability is not being the most critical. Although this factor is not global in nature, it underlines the core Islamic finance region, i.e. GCC and MENA region at large. Instability is not bound to recent outcomes of Arab spring movement. This has been the destiny of the region for the past century due to reasons known for all. The global economic crisis adds another critical challenge. We have seen fund raising activities of Shariah compliant asset classes stagnating over the past few years. However, this was not as bad as that occurred with traditional investment domain. There is another set of encounters directly related to HR; the poor management qualities, lack of track record, and not competent Shariah panels. I had a chat recently with an UHNWI regarding hindering faced by one major VC firm in the GCC region and these HR factors were all highlighted as serious hindrance. He was linking continuity of his involvement in the firm upon board responding to his requests regarding these issues. I do find the following two issues of great impact as well. Having investor not acquainted with investment vehicles or asset class is annoying. The culture at the investment level is very interesting. One of the factors making investors shying away from certain strategic asset classes is long lock up period of investment. What are the key aspects that investors should focus on when devising an Islamic market investment portfolio? One basic aspect that should be considered in providing guidance/ consultation or making investment decision is Shariah compliance. Although initial screening is simple and straightforward, other detailed issues might be of complex nature. One issue in this regard is the no existence of standards. I would like here to praise Malaysian practice of paying serious attention to the standardization process. Strategy, if any, of investor is important. Decision should clearly pursue to meet requirement of client. The market size and growth potential are so critical that determine probability of success of investment. Most professionals now give more weight to these factors than given to quality of management. It is also important to highlight need for detailed due diligenceon suggested investment. Any disregard to a tiny issue might be catastrophic. We fall into this trap in one of our portfolio companies. We spent couple of years dealing with the consequences. What is your perspective on the future potential of the Islamic investment industry? It is obvious that Islamic finance\investment industry is of huge potential.Statistics found on leading reports like annualErnst & Young IFIR supports and verifies that.One very interesting outcome presented in the report is the size ofavailable pool of Shariah sensitive cash. Another important aspect of reports is different investor categories spanning mass affluent, HNWI, UHNWI, Takaful, Awqaf, SWF and pension funds. In simple terms, with most of oil reserve being in Muslim countries, and changes coming up through Arab spring, and having world economic crisis underlining ideological challenges in western financial/economic system, the Islamic finance will continue to boom. Which form will prevail, is yet to be seen. 20 Global Islamic Finance

May 2012

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Despite the current challenges faced within the global economy, Islamic funds continue to grow, with the prospects for 2012 somewhat brighter than 2011. Wealth in Muslim countries continues to chart strong growth on the back of decent economic growth and higher oil prices, with a knock-on effect on demand for Shariah-compliant investments

including Citigroup, HSBC and Deutsche Bank, are proactively moving into the Islamic banking business, sealing multiple investment opportunities. There are nearly 300 Islamic banks and financial institutions worldwide, and their assets are predicted to grow to USD1 trillion by 2013. These figures show enormous scope for investments within the sector. Takaful is another investment sector with a good chance of prospering in 2012, as outlined in Figure 3. The state of global Takaful markets varies enormously. Malaysia has the largest market for Takaful, with 1,220 premiums taken out, and the size of various regional markets fluctuate all the way down to Syria, which has the smallest market. Figure 3 shows the potential for greater Takaful take-up during 2015 in selected countries around the world, and should give a good illustration of the emerging Islamic insurance market. Reviewing the scope for Islamic Investments in 2012 The scope for Islamic investments in 2012 looks promising, considering the inception of a new Bursa Malaysia index on the horizon, and many other options for global investments arising across the world. The Islamic financial industry is set to propel forwards, reaching staggering profits. In addition, there are many avenues available for investors to trust with their funds, including many exciting new choices, as the many countries around the world tap into this lucrative sector and offer new areas to the industry. Useful locations for successful investments include Islamic financial hubs such as Malaysia and Saudi Arabia, which both have a prominent hold over the industry. Investors in countries such as Australia and Europe are also seeing more choices for investments, whether on the new Australian index, or via opportunities within specialised Islamic financial sectors such as Sukuk and Takaful. The industry has certainly grown over the last year, and there are many landmark developments on the way, with a wide variety of new products and services expected to emerge by 2013. The Islamic financial sector has seen both successes and challenges following the global economic crisis, which catapulted Islamic finance into the spotlight. However, the industry has remained strong. Areas of particular excellence include many areas of Sukuk (Islamic bonds), private equities, and real estate, amongst other lucrative sectors which have seen massive growth in recent years. The Islamic banking industry continues to provide unprecedented unique services for both Muslims and non-Muslims around the world. The future looks bright for small and medium enterprises which choose an Islamic financial institution for borrowing or investment. Many major leading Islamic financial hubs are emerging across the world, aiming to cater for the demand for Shariah-compliant products and services, and the industry looks set to sweep across the world to grow into a major financial sector by 2015. As we move through 2012, the need for standardisation is still a prevalent challenge. Malaysia has already recognised the need for a unified regulatory body and is aiming for harmonisation of Islamic financial standards in the country. Efforts towards standardising the Islamic financial

Islamic Finance Pierre Weimerskirch, Managing Partner, Luxembourg Investment Solutions S.A., Luxembourg

examples are alternative assets such as insurance-linked products, precious metals or PE/VC investments •

What do you personally feel are the major challenges faced by Islamic investors? Islamic investors face a number of challenges in today’s world: •

•

Islamic investors have today the choice of a broad range of Islamic products. However it is still lacking the depth and breadth of conventional products. This implies that Islamic investors do not dispose of the same efficient market portfoliosthey can chose from in terms of risk/return as conventional investors. In volatile times as today, investors are looking for the most efficient risk/ return products. In case of absence, Islamic investors are likely to invest into conventional products. Scale is important, but varying interpretations of Shariah have fragmented the market into local niches, making it difficult to target globally. In this respect, most of the Islamic investment funds lack the critical size and average costs are higher compared to conventional products. Products and services must be designed in line with potential investors expectations. Considering that the largest potential pool of investors for Islamic products are Islamic foundations and Takaful companies, these investors are potentially looking for more conservative products and superior client service. In order to raise capital from investors the asset manager has to have a good track record. The experience has to be gained in a well regulated and developed market and products are rolled out from there.

•

Diversification: The events over the last five years have shown that it is important to have a broadly diversified investment portfolio. This is not only true in terms of geographical diversification but also in terms of asset classes and currencies. More and more investors are looking to add uncorrelated assets to their investment portfolio. Uncorrelated assets:The strategy is based on building a portfolio of uncorrelated assets. Uncorrelated assets are asset classes that don’t necessarily move together. Good

Purchasing power protection: With regards to theflooding of the financial markets of abundant liquidity by the major central banks of the world to prevent a meltdown of the financial system, investors are seeking protection against purchasing power risk and inflation by investing a portion of their wealth into real assets. Over the last year, the demand for investments into core real estate in best locations in major cities have increased substantially.

•

What is your perspective on the potential of the Islamic investment industry? After years of strong growth, Islamic finance has lost its momentum. While the global Islamic financial industry has recently cracked the USD 1 trillion mark, Islamic finance has not found back to the strong pre-crisis growth rates of 15 – 20 percent per annum. Islamic finance is still a nascent industry. As every young company or industry it hasto overcome some major challenges in order to progress from one growth stage to the next.Understanding and meeting these challenges is important in order to reach the next growth stage.There are a number of challenges Islamic finance faces: •

What are key aspects that investors should focus when devising an Islamic market investment portfolio? In the current times, the focus of Islamic investors is very similar to those of conventional investors when devising an investment portfolio: •

Size and track record: Size of the investment fund and track record of the investment manager are other important factors to take into consideration. The challenge with Islamic funds is to invest in a fund which has a decent asset size or potential in order to have an acceptable total expense ratio. Today many Islamic funds do not have an economically efficient size. Another important factor is track record. A long term, consistent track record of a manager provides reference towards the likelihood of future success and thus to the likelihood of attracting investors’ money.

•

No global Islamic finance market:the Islamic finance market is mostly local at best regional. Islamic fund management is still a very local market. The Islamic fund industry is very scattered. Further to an Ernst&Young study 70 percent of the Islamic fund managers are below the threshold of USD 80 million assets under management which is believed to be the needed break-even point. In addition, different Shariah frameworks in Gulf Cooperation Council countriesand Malaysia hamper the development of a global Islamic finance market. Varying interpretation of Shariah law: Shariah law is open to interpretation and Shariah boards can havedifferent views on certain Shariah matters. In some occasions it may happen that opinions may deviate from previous decisions made by other Shariah scholars. This happened recently for Sukuk issues. A major catalyst for global acceptance and growth of Islamic finance is the standardization of Shariah law in order

•

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to avoid different interpretations and rulings inconsistencies. Malaysia introduced in January 2011 a Shariah Governance Framework for Islamic financial institutions at national level. A similar framework at international leveland publically available documentation of Fatwa rulings would further help aligning and standardizing the regulatory framework of the industry. Missing product authenticity: Most of the Islamic products seem to be a copy of conventional products adapted to the Shariah framework. This adaptation comes with some costs which put Islamic products at a performance disadvantage compared to its conventional look alike. The Islamic finance industry has to come up with genuine products that inherently meet standards and requirements of Shariah. Lack of adoption of Islamic products by certain type of customers: The sensitivity for Shariah products for certain type of investors is rather low. Ernst & Young estimates that the propensity to invest in Shariahcompliant products or assets ranges between 20 – 25 percent for High Net Worth Individual Investors and only 5 – 10 percent for Sovereign Wealth Funds from the Middle East. These investors hold however a substantial amount of wealth which is held today mostly in conventional products. Reasons may be for example the lack of specific Islamic products or investment opportunities or Shariah structuring costs being too high. As there is a strong linkage between Islamic finance and Social Responsible/ Ethical Investments, putting Islamic finance into this area could potentially increase the adoption of Islamic products by other type of investors. Regulatory hurdles: It is interesting to note that Shariah is often in conflict with local laws in Middle Eastern countries when it comes to the design of Islamic products. Rules and regulations are laid out for conventional products. The launch of Islamic products renders thus necessary a review of local laws and regulations as well as a new way of thinking for central bankers and regulators.

Several international financial centers like for example Luxembourg, Singapore or London can help Islamic finance in different ways to lay the grounds to reach the next growth stage. Luxembourg can for example help to create a critical mass in Europe by acting as a hub and permitting Islamic finance to leverage on the expertise of the financial center with regards to cross-border distribution of Islamic funds. However, in the end, the new catalyst for Islamic finance must come from Muslim countries.

2012 May Global Islamic Finance

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Islamic Finance Sohail Jaffer, Partner at FWU International Branch, Luxembourg

What is the most lucrative sector for Islamic investment? The fundamentals of Islamic finance are based on Shariah law and principles that prohibit investments in certain industries such as financial services, gambling, tobacco and weapons. The ethical and socially responsible nature of Islamic finance restricts the investment universe to certain activities and sectors that go through a specific screening to ensure that there will be no exposure to the proscribed industries under Shariah law. Hence, those activities or sectors are an exception to the list of lucrative sectors, everything else is promising. Given the fact that Islamic investment hasnâ&#x20AC;&#x2122;t opened itself for all economic sectors yet, both regionally and globally, I believe the attractiveness of a sector is also a function of its goal setting and opportunities on hand. For example, Qatar is going to host FIFA 2022 World Cup, which will trigger significant investments in infrastructure and real estate projects and spur demand for financial services including activities like capital rising and hence there will be opportunities for Islamic Finance to participate. Another high growth regional sector is tourism and the investments made in hotels, leisure and sports facilities, theme parks, museums and other cultural attractions. Within the BRIC economies, India is witnessing the restructuring of its aviation industry. So, the airlines sector in India is lucrative, because it requires capital and financial services. Generally speaking, health care, tourism, education, IT, renewable energy, aviation, shipping, railways, waste management, development of natural resources, real estate and infrastructure projects are key sectors to be watched over the next few years in connection with Islamic Finance. The industry has set itself a goal to quadruple its assets by 2020 few years ago. If we are looking to meet the goal, we need every sector to perform above expectations and eventually make itself lucrative, if it is not currently. Which sector of the Islamic finance do you personally feel will be successful in the upcoming years? In three decades, Islamic finance managed to become a trillion US dollar industry, spreading geographically beyond its borders and expanding its activities across diverse financial segments. Demand for Shariah compliant wealth management and private banking as well as takaful (the Islamic version of insurance) has increased significantly. The regional Islamic capital markets have grown in sophistication and Shariah compliant forms of product structuring, project financing, brokerage, asset management and venture capital services are becoming widely available.

22 Global Islamic Finance

May 2012

Within Islamic Finance, sukuk is already the most successful story as of now and I believe it will be even more successful in upcoming years. Countries are issuing sukuk (sovereign sukuk), companies are issuing sukuk (corporate sukuk), Islamic Financial Institutions are issuing sukuk and a few Western Banks are issuing sukuk. So, there is a huge amount of interest at the political level and senior leadership level of Institutions (both conventional and Islamic) in sukuk, which could potentially transform a present linear growth to an exponential growth in due course of time. Islamic finance is well poised to enhance its value proposition to SMEs and microfinance and extend its offerings across different customer segments especially in the high growth economies, emerging and frontier markets. Pension Funds is another area where Islamic Finance can make a distinct impact. People earn in a way that is Sharia compliant, people spend in a way that is Sharia compliant, therefore, post retirement, they also want their pension to be Shariah compliant. This should be an exciting space to watch. Retail banking, provided it improves the service levels, could also be an attractive area of growth. Relationship between banks and customers in the MENA region on an average is observed to last for five years. During the past few years the valuations of certain real estate in the MENA region is rising. Since prices have risen, asset valuations are recovering and there is a category of affluent Muslims in the region who so far have managed their assets themselves. However, due to the growing valuation of their assets, there is potentially a demand for professional asset managers. Therefore, Shariah compliant asset management should grow regionally and globally. What do you personally feel are the major challenges faced by Islamic Investors? The young Shariah compliant investment segment faces several key challenges, including but not limited to:

Restricted product menu due to insufficient focus on product innovation and market research. Customers need a solution according to their preference based on weightage associated with risk, return, liquidity, compliance of religious principles etc. and if none of the available products fits their requirements, there are chances of losing the opportunity. A shortage of appropriately qualified Shariah scholars to serve on Shariah Supervisory Boards (SSB) of the Islamic Financial Institutions. The lack of harmonization of Shariah interpretation with regard to financial products, and a lack of standardization for transaction structuring and processing. The current concentration of products, particularly around equities and real estate, and the lack of private equity options as well as the shortage in sukuk issuance in the Middle East, has also highlighted vulnerability in the existing product range. Mutual funds are also likely to be exposed to regulatory, political, legal, economic, and financial risk in cross-border investments. Efficient management of these risks is vital for keeping costs low and funds profitable.The Islamic fund industry is highly fragmented, and high management fees prevent the achievement of economies of scale. Proper controls must be established to ensure that investments have been done in line with Shariah principles and profits are made based on Islamic investing. Moreover, distribution channels must be expanded to reach out globally.

Besides, improved transparency, disclosures and corporate governance are the key to minimize challenges. Post global crisis, investors need to be assured about delivery of the promise made and avoiding unexpected surprises.

Islamic Finance Safdar Alam, CEO, Siyam Capital, London

What do you personally feel are the major challenges faced by Islamic investors? Essentially the major challenge is a lack of suitable options to build a diversified portfolio of assets, that spreads risk and return across suitable currencies, regional exposure, and asset classes. The issuers of investments have not really been very creative in delivering such solutions. We see many investments focusing on equities, or real estate. Real estate in itself is a good asset class with many different risk profiles available, however many of the solutions in the Islamic space have focused on high yield investments, and linked to developmental risk. These have largely been severely impacted in the current climate. We should be looking at defensive sub sectors of real estate, that deliver solid returns even in tough economic conditions, and focusing on geographies that have mature markets and this are less volatile. However these are crowded out by issuers offering high double digit returns, without investors really understanding the subsequent increase in risk they are taking on. A lot of this risk is delivered via leverage, which is utilised to deliver the higher returns. Islamic leverage is as dangerous as conventional leverage, yet the feeling is that because it is Islamic it seems to be OK. This is not a helpful approach. There are many asset classes that can suit Islamic investors, however many issuers are going for the safe options of equities and real estate, and notes offering returns linked to commodities, FX rates etc. Of course the problem with these is that the note investors do not actually buy the underlying asset, they are just buying exposure to that risk. These activities do nothing to support real investment in the real economy. Investors should have these options, and they should demand to have them. We see too many options revolving around debt and leverage and speculation. What are the key aspects that investors should focus on when devising an Islamic market investment portfolio? A lot of it is common sense, a typical portfolio should take into account the personal circumstances and wishes of the investor. In general terms, investors need to be clear in terms of what risk they are willing to take on, and seek investments that deliver them. Low risk can be obtained by investing in investment grade Sukuk (access to these investments however is another question; it is very difficult for retail investors to access Sukuk). However Sukuk remains a debt

product, and an Islamic investor is thus forced to buy a debt product to have access to low risk investments. We should be offering more than this, and finding real investments that deliver low risk and solid returns. We need to work harder to deliver such solutions. Then it seems investors have access to higher risk assets such as equities and real estate (development). There appears to be little in between, and that is a significant problem for investors. Also risk should be spread across major currencies, such as USD and GBP (EUR presents a different risk profile at the moment) and of course the investor’s local currency. Just buying an investment that delivers returns on the movements of these FX rates is not beneficial, as this easily leads to speculation rather than considered investment. it is much better for the industry to deliver real investments and assets in those currencies but of course that takes more work and more thought. Tenor is also crucial - investors should have access to short term liquid investments (again in Islamic finance these are largely debt instruments such as money markets and Sukuk) as well as longer term investments, which may also provide some liquidity. What is your perspective on the future potential of the Islamic investment industry? The investment industry is actually at the core of development. All funds that are invested ultimately are linked to individuals and people who provide these funds. Even banks providing debt finance require liabilities in the form of customer deposits, or their own bond issuance (subscribed by bond investors and funds that ultimately raise their funds from individuals). Corporates raising finance also rely on the public ultimately to buy their services and products and deliver the revenue stream to enable them to repay their debt. Everything is linked to spending and investing at an individual and public level. Of course this is clearly demonstrated when things go wrong, and tax payers are asked to bail out institutions, and governments are forced to cut public spending, and our pensions and jobs are impacted. That is why the investment sphere is absolutely crucial to the positive development of an economical model. We cannot develop a sustainable Islamic economy without a sustainable investment model. We cannot develop a sustainable investment model while we focus on debt, leverage, speculation, and little focus on the real economy, and that is the case today. The future has no limit, but only once we wake up and realise that solid and varied investment options are necessary to develop a strong and sustainable economic model. We need to focus less on high yield, debt, leverage, speculation, and focus more on value, and benefit, and the real economy.

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industry include many agencies which have been developed and have flourished during 2011.There is a bright future for the scope of Islamic finance around the world. From Malaysia to the Middle East, many countries are excelling. Various regions are working to develop the Islamic finance and banking sector, creating many diverse methods of implementing and facilitating Islamic banking and financial products in order to open up room for investments. In Part 1 of the Global Islamic Finance Investment Review, we have investigated the progress of the Islamic investment sector since 2011. In Part 2 we will take a look at these sectors in more detail, aiming to thoroughly discuss the various investment opportunities around the world in the lucrative sector of Islamic finance and banking. gif

References and Further Reading •

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• • • • • •

Tsanadis (2012) Islamic Index Launches on Australian stock market, article retrieved from: http://muslimvillage.com/ forums/topic/66264-new-australian-toolfor-islamic-investment/ Islamic investment funds to see robust growth in 2012 (2012), article retrieved from: http://www.indiansinkuwait.com/ ShowArticle.aspx?ID=15963&SECTION= 0#ixzz1pB874OYZ Bursa Malaysia Islamic Markets (2011), website and source article retrieved from: http://www.klse.com.my/website/bm/ products_and_services/islamic_capital_ market/ AME Info (2007) NCB Capital launches world>s first Shariah-compliant <Alahli Global Real Estate Fund>, retrieved from: http://www.ameinfo.com/140318.html AME Info (2009) Khalijia invest commence activities as Shariah-compliant investment company, retrieved from: http:// www.ameinfo.com/218533.html AME Info (2008) Shariah-compliant investments bode well for investors in the MENA region, say experts at HSBC Amanah seminar, retrieved from: http://www.ameinfo. com/146682.html Investing in Bahrain Financial Services (2011), article retrieved from: http://www. bahrain.com/financial-services.aspx Green Sukuk: Islamic finance institutions are increasingly investing in green energy projects (2012), article retrieved from: Middle-east-gets-green-sukuk (2012) on Islam.Net, retrieved from: http://www.onislam.net/english/news/ middle-east/456109-middle-east-getsgreen-sukuk.html Global Takaful Markets 2015 (2010), Celent, retrieved from: http://reports.celent.com/ PressReleases/20061129/Takaful.htm

2012 May Global Islamic Finance

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Islamic Finance

WORLD

Islamic Investments Review 2012 Saudi Arabia Issue

Instrument

US$ (mln)

Indonesia Iss

Managers

Issue

Instrument

US$ (mln)

Iss

Managers

Perusahaan Penerbit SBSN

Sukuk Ijarah

1000

Standard Chartered, HSBC, Citigroup

General Authority for Civil Aviation

Sukuk

4000

HSBC

Saudi Electricity

Sukuk

1,750

Deutsche Bank, HSBC

Islamic Development Bank

Sukuk Wakalah

750

Standard Chartered, Deutsche Bank, BNP Paribas, HSBC

Saudi International Petrochemical

Sukuk

480

Deutsche Bank, Riyad Bank

Saudi British Bank

Sukuk

400

HSBC

United Kingdom Issue

Instrument

US$ (mln)

Iss

Managers

HSBC Bank Middle East

Sukuk

500

HSBC

Issue

Instrument

US$ (mln)

Iss

Managers

Bahrain Turkey Issue

Instrument

US$ (mln)

Iss

Managers

Kingdom of Bahrain

Sukuk

750

Kuveyt Turk Katilim Bankasi

Sukuk

350

Standard Chartered, HSBC, KFH, Abu Dhabi Islamic Bank, Commerzbank Group

Standard Chartered, BNP Paribas, Citigroup

Gulf International Bank

sukuk

300

JPMorgan

24 Global Islamic Finance

May 2012

Islamic Finance

UAE Issue

Instrument

US$ (min)

gif

Malaysia Iss

Managers

Issue

Instrument

US$ (mln)

Iss

Managers

Projek Lebuhraya Usahasama

Sukuk

9,610

RHB Capital, CIMB Group, AmInvestment Bank, Maybank Investment Bank

Pengurusan Air SPV

Sukuk Murabahah

2,388

HSBC, CIMB Group, Maybank Investment Bank

Wakala Global Sukuk

Sukuk

2000

HSBC, CIMB Group, Citigroup, Maybank Investment Bank

Sarawak Energy

Sukuk

1,783

2 RHB Capital, AmInvestment Bank, Kenanga Investment Bank

Manjung Island Energy

Sukuk Ijarah

1,545

Lembaga Tabung Haji, CIMB Group

Tanjung Bin Energy Issuer

Sukuk

1,089

HSBC, OCBC, RHB Capital, DRBHICOM, CIMB Group, Affin Investment Bank, Maybank Investment Bank

Aman Sukuk

Sukuk Musharakah

812

Lembaga Tabung Haji, RHB Capital, CIMB Group, AmInvestment Bank, Maybank Investment Bank

First Gulf Bank

Sukuk Wakalah

650

Standard Chartered, HSBC, Citigroup

FGB Sukuk

Sukuk Wakalah

500

Standard Chartered, HSBC, National Bank of Abu Dhabi, Citigroup

EIB Sukuk

Sukuk

500

Standard Chartered, HSBC, RBS, National Bank of Abu Dhabi, Citigroup, Emirates NBD

Abu Dhabi Commercial Bank

Sukuk

500

Standard Chartered, JPMorgan, Abu Dhabi Commercial Bank

ADIB Sukuk

Sukuk

500

Standard Chartered, Nomura, HSBC, National Bank of Abu Dhabi, Abu Dhabi Islamic Bank, Citigroup

Sharjah Islamic Bank

Sukuk

400

Standard Chartered, HSBC

ANIH

Sukuk

786

CIMB Group, Maybank Investment Bank

MAF Sukuk

Sukuk Wakalah

400

Standard Chartered, HSBC, Dubai Islamic Bank, Abu Dhabi Islamic Bank

Syarikat Prasarana Negara

Sukuk Ijarah

667

CIMB Group, Maybank Investment Bank

Tamweel

Sukuk

300

Standard Chartered, Dubai Islamic Bank, Citigroup

DRB-HICOM

Sukuk

486

Maybank Investment Bank

Cagamas

Sukuk

393

CIMB Group, Maybank Investment Bank, RHB Capital, AmInvestment Bank

2012 May Global Islamic Finance

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Market Review

ARAB BANKING CORPORATION (ABC) announces 13% increase in first quarter profit to US$54 million

Mr. Hassan Juma, President & Chief Executive of ABC Arab Banking Corporation today announced that its consolidated Group net profit for the first quarter of 2012 was US$54 million, 13% higher than the first quarter of last year. Operating revenues rose to US$214 million, 9% growth over the first quarter of last year. Both interest and non-interest income contributed to the US$17 million increase in operating revenues. Operating expenses of US$99 million were at the same level as last year resulting in cost/income ratio improving to 46% from 50% last year. Net impairment provisions were US$15 million against US$7 million last year. Shareholders’ equity at 31 March 2012 stood at US$3,674 million compared to US$3,598 million at 2011 year-end. ABC group’s capital adequacy ratio at 23.3% was substantially above the regulatory minimum (12%) and comprised of predominantly Tier 1, which totalled 19.1%. Liquid assets to deposits ratio stood at 63% compared to 64% at 2011 year-end. 26 Global Islamic Finance

May 2012

ABC Group’s total assets stood at US$25.9 billion at the end of the first quarter compared to US$25 billion at 2011 year-end. Mr. Hassan Juma, President & Chief Executive of ABC, said, “This is the fourth year of sustained profit growth at ABC. There are still financial and economic headwinds in MENA and Eurozone countries and we continue to remain vigilant with strict risk and cost discipline in force. The strong start to the year following the excellent results of last year reflects the good performance by all ABC units in challenging environments.” ABC’s Chairman, Mr. Saddek El Kaber stated, “I am pleased at the first quarter result which sets the platform for the rest of the year. Given ABC’s track record in overcoming tough conditions, its geographic reach and strong financial position backed by steadfast shareholder support I have every confidence in ABC’s sustained growth going forward.” gif Mr. Saddek El Kaber, ABC’s Chairman

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Islamic Finance

MAKING YOUR MARK WITH INNOVATIVE Islamic Brand

Management, part 1 Author: Tasnim Nazeer, Global Islamic Finance Magazine’s Editorial Team, United Kingdom David Smith, Global Islamic Finance Magazine’s Editorial Team, United Kingdom Abstract: As part of Global Islamic Finance Magazine’s Islamic Brand Management Series, we will be looking at the best ways to market your products and services in a Shariah-compliant manner. The Islamic finance and banking industry is progressing rapidly, with its worth estimated to grow to a value of over USD2 trillion dollars by the end of 2012. In Part 1, we will be looking at the various products and services which can utilise Islamic brand management, in addition to the latest developments within this lucrative sector. The scope is high for potential opportunities which can unleash the power of brand management in the Islamic finance sector. Many companies are utilising branding strategies in order to enhance their portfolios, and to further spur success within the Islamic finance industry. Islamic banks and financial institutions around the world are opening up dedicated windows to cater for the rising demand for Shariah-compliant products and services. In addition, many Islamic hubs around the world are offering innovative services and products which are marketed in accordance to the principles of Islam. This marketing further helps to spur the industry forward, and nourishes new talent from potential candidates who wish to utilise their skills in this lucrative sector. This article is a must-read for any business professionals, investors and students who wish to learn more about the Islamic brand management sector. Keywords: Islamic Brand Management, Shariah Compliancy, Islamic Banking, Islamic Finance, Financial Instruments 28 Global Islamic Finance

May 2012

Islamic Finance Shariah-Compliant Islamic Branding Islamic financial institutions are required to adhere to the principles of Shariah-compliant financing, and to ensure that the products and services they launch are branded and marketing in a manner that complies with Islamic finance. This is a crucial process which can often be a difficult balancing act for Islamic financial institutions, as they struggle to effectively sell and market their products without compromising the principles set out by the Shariah law. Islamic financial experts, scholars and professionals know that Islamic financial investments are forbidden diversify into non-Halal investments, such as gambling, alcohol, or any other sector which is not considered to adhere to the principles of Islam. For this reason, Islamic banks and financial institutions must carefully select projects, investments and advertising which does not endorse any of the prohibited investments mentioned above. Conventional banks, however, may use these industries to endorse their products, and may obtain revenue partly or solely from non-Shariah-compliant avenues. Islamic finance follows the principles of Islam, and in order for the investment

to be Shariah-compliant, it should finance a â&#x20AC;&#x2DC;pureâ&#x20AC;&#x2122; and Halal project. Firstly, we will investigate the marketing structure for Shariahcompliant Islamic financial products, using examples of Halal investment products as outlined in Figure 1: Figure 1 shows the various Islamic brands by religion, origin, destination and other factors, with either a Muslim or non-Muslim desired target audience. Islamic brands which cater for an international, outbound market of both Muslims and non-Muslims have prospects of substantial growth, due to their introduction outside the traditional market. Islamic branding should be carried out in a Halal manner, without endorsing any item, idea or image which does not comply with the principles of Shariah-compliant financing. In addition, all branding should be done following the principles set out in Figure 2: As outlined in Figure 2, companies must adhere to a number of principles in order to successfully launch a Shariah-compliant product or service. Regulatory Approval of Islamic Products and Services In all almost all Islamic financial hubs, a

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Shariah board exists in order to ensure that Islamic financial transactions and projects are Shariah-compliant and abide by the rules of Islam. Each Islamic financial institution must ensure that it carries out Shariahcompliant models of business, which are consistent with the standards of the current Shariah law bodies such as the AAOIFI. The Role of the Shariah Advisory Board in Regulating Islamic Finance The Shariah advisory board of each country plays an important role in the Islamic financial industry, and is at the heart of any Islamic financial institution. The main responsibilities of the Shariah advisory board are outlined in Figure 3: As outlined in Figure 3, the Shariah advisory board is of great importance in reviewing which practices are deemed Shariah-compliant in relation to transactions and products. It also plays an extended role of participation within the involvement of Shariah reports for annual investors, in addition to developing new financial procedures and programmes. Therefore, the Shariah advisory board forms a pivotal presence within the scheme of any existing or newly-established Islamic financial institution, as the board has the

Figure 1: Outbound Islamic Markets Example: Islamic Finance and Hospitality Target Market: Non Muslims and Muslims Abroad Market Size: Rest of the World Market Potential: Substantial growth due to the introduction outside the traditional Muslim market Marketing Focus: Purity and humanity emphasised, not halal, in order not to raise religious sensitivities True Islamic Brands Example: Al Islami in UAE Target Market: Muslims Market Size: Same as inbound Market Potential: Same as inbound Marketing Focus: Emphasize halal and patriotism

Islamic Branding by Religion

Outbound IB

Inbound IB

Inbound Islamic Brands Example: Nestle and KFC Target Market: Muslims Market Size: 1.5- 1.8 Billion Consumers Market Potential: Substantial growth. The Muslim Population is the fastest growing in the world Marketing Focus: Halal and Reputed quality of international brands emphasized

True IB

Islamic Branding by Destination

Traditional IB

Islamic Branding by Destination

Traditional Islamic Brands Example: traditional local brands Target Market: Muslims Market Size: same as inbound Market Potential: same as inbound Marketing Focus: emphasize patriotism more than halal, although halal is assumed Source: Emerald Insight 2012 May Global Islamic Finance

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Islamic Finance

power to give the final judgement on which practices are deemed Shariah-compliant. However, circumstances often arises which show a dispute in the interpretation of which practices are deemed Shariah-compliant between scholars. These are times at which standardisation of regulations is needed, in order to adopt a more unified scheme of establishing Shariah compliancy. There are both advantages and disadvantages to referral of a case to a Shariah advisory board, as the challenge of interpretation hinders the smooth process of introducing Islamic financial products and services. For both investors and regulators, it is important to know that any Islamic branding will also be considered when launching a product, to ensure that it complies with the Shariah perspective of Islamic finance. Which Industries Are a Lucrative, Shariah-Compliant Way to Promote my Brand? A number of Shariah-compliant industries can aid in promoting an Islamic brand, as outlined in Figure 4. Figure 4 indicates the various Shariahcompliant industries which could potentially be used to endorse Islamic financial products within an appropriate framework as established by Shariah law. Many Islamic banks use Islamic branding through industries including those outlined in Figure 4. For instance, Islamic financial institutions have collaborated with leading mobile phone manufacturers such as Blackberry, Nokia and many more, in order to make Islamic financial services more accessible and appealing and to attract more customers globally. Sponsors of Islamic financial products, and Islamic forums and seminars such as the Euromoney Seminars and Global International Islamic forums, can effectively market Islamic banking products and services using branding services and advertising. Dedicated Islamic media, such as television stations and financial publications, are a Shariah-compliant way of getting a branding message across. Targeting Challenges and Risks of Marketing Shariah-Compliant Products Challenges to Overcome The Islamic financial industry still has a few challenges which need to be overcome, in order for companies to be successful in marketing and sponsoring Islamic financial products without compromising Shariah principles. Some of the main challenges which the 30 Global Islamic Finance

May 2012

Islamic financial industry needs to overcome are focussed around the need for standardisation of regulations, regarding the question of Shariah law adherence. Scholarly differences of opinion mean that it can often be a difficult task for an Islamic bank or financial company to try to introduce a new product to a non-Muslim market. If a standardised set of rules is created, confusion in the Islamic financial industry will be minimised, and financial institutions will be able to refer to a unified and effective system. In order to effectively regulate Islamic banks, several institutions have been set up in different countries in order to provide authoritative governance of Islamic banking methods. Such institutions include the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the International Islamic Rating Agency (IIRA) and the Islamic Financial Services Board (IFSB) (GIF Magazine). Figure 2: Key Principles Underlying Islamic Finance Prohibition of Riba

Prohibition of uncertainity

Prohibition of forbidden assets (e.g.alcohol, gambling)

Islamic Finance

There is a clear need for further diversification of more innovative products, to attract customers within a competitive market in line with conventional banks. An Islamic financial institution or subsidiary has to be cautious when introducing products to ensure that they are marketed within the framework of the Shariah law. In some countries there is a shortage of Islamic financial products, which makes them less accessible to a non-Shariah-compliant market. Duncan Smith, managing director and global head of Islamic finance at Arab Banking Corporation (ABC) in Bahrain, points out that many of the retail needs of the market are probably being met within the GCC and Malaysian regions at least. He does not see any shortage of products in those markets, although in Western markets such as the UK, it will take companies longer to introduce a wider range of Islamic consumer finance products - the Islamic mortgage products excepted. Nonetheless, while incremental change — consolidation and product refinement — will remain central in the market’s development over the short term, innovation will remain important (KPMG Analysis).

Profit sharing and Risk sharing

Existence an of underlying asset

Figure 3: Shariah Advisory Boards Key Responsibilities Ensurethat all products and services offered by an institution are Shariah-compliant Oversee and review potential new Islamic financial product offerings Make a judgement on the Shariah compliancy of cases referred to the board May oversee Shariah-compliant training programmes and schemes Develop new procedures and programmes in order to adapt to industry trends and customer expectations Participate in the preparation of annual investors’ reports on banks’ balance sheets, with sole reference to Shariah compliancy

Islamic financial institutions also face challenges in convincing the Muslim market that the Islamic financial products which they offer are truly Islamic, and comply fully with Shariah rulings. Many conventional banks which have set up Islamic banking subsidiaries, such as HSBC Amanah in the UK, find that more non-Muslims are included in their customer bases than Muslims themselves.

Amjid Ali, chief executive of HSBC Amanah in the UK, says in a statement that growth has been held back in part by the problem of convincing potential customers that products truly meet the demands of their faith. “Few people question Halal meat, but they don t necessarily accept Shariah-compliant products,” he says. (KPMG) One of the other challenges which many Islamic financial institutions find they have to counteract is the fact that Islamic financial products can often cost more for consumers than conventional products. This is one factor which may deter customers from using Shariah-compliant products. Mr Ali, from HSBC UK, says that: “Products cannot be imported wholesale from the Middle East division - they must be approved by an independent Shariah advisory board, pass regulatory tests and be adapted so that they fit on HSBC’s U.K. product platform. The

Islamic Finance cost of this process is inevitably passed on to clients. Most accept that there is a marginal cost for peace of mind,” he concludes. Once you have identified the challenges that your company or financial institution faces when marketing an Islamic financial product, you can begin to consider how to target your desired market. Ideas for Marketing your Islamic Brand There are various ways that you can market your Islamic brand effectively, and target your intended audience, through the use of key networking and building up your brand. These are outlined in Figure 5: In order to establish effective branding strategies within the highly competitive Islamic finance industry, the need for networking is crucial. Those who attend Islamic finance seminars get the opportunity to meet key industry players, whose approval of and awareness of your brand could unearth previously hidden opportunities. In addition, networking events help Islamic experts in the finance field to meet each other. If you attend one of these events, you could and set up a day for your financial institution to discuss and promote Islamic finance by using the first-hand experience with Islamic scholars and community leaders. Advertising is a key form of promotion, and Islamic financial professionals can choose Halal Islamic brands to better endorse their products or services. By utilising the full and prevalent range of Islamic media, you can target a Muslim market, and develop public awareness of Shariah compliancy, so that you can gain further access to your region’s non-Muslim market. Another effective branding method used by Islamic financial professionals is to attend Global Islamic Financial forums, where you can obtain sponsors and can promote your product or service effectively. Gaining sponsorship from accredited Islamic financial institutions can also give your product or service a more reliable image, and give potential buyers trust and confidence in your company. The overall key to branding within this market is to use networking to work your way to successful Islamic product promotion. Establishing sound contacts within the industry can further help your brand to excel. Developing Money Markets and Staying Ahead of the Competition Many key competitors - mainly mainstream financial banks and institutions - have effectively developed their branding scheme in

Rahim Ali, Institute of Islamic Banking and Insurance (IIBI), Researcher

What are the key factors that an Islamic financial institution or business has to take into account when marketing Islamic banking and finance products? Regardless of whether a financial institution is Islamic or not, it is always important to highlight what benefit the institution’s product offering that is not available elsewhere; as customers want to know what benefit there is in choosing one product over another. Often the benefit is viewed or promoted in financial terms; whereas the objective of Shariah is the attainment of benefit and protection of the people. Therefore, if Islamic banks are to be successful in promoting their products, they have to be able to demonstrate how the individual, or society, will genuinely benefit from its use. In addition, the nature of each financial institution will dictate its marketing requirements. Thus we find that with respect to wholesale banking, at the heart of the Islamic vision for an economic system is business participation and real trade. Therefore, Islamic wholesale banks can benefit from highlighting the participatory nature of their business dealings that requires profit and risk sharing. In fact, at a recent conference, a customer of the Islamic wholesale bank, QIB (UK), openly testified and praised the conduct of the bank for genuinely being concerned about the needs and welfare of his business. On the other hand, the concept of ethical banking appears to have worked well for the retail market. For example, Islamic Bank of Thailand, the only Islamic retail bank in Thailand, made continuous losses year-on-year until they changed their marketing strategy concentrating on the ethical dimension of their products. As a result, their business expanded and profits surged. This is a lesson that Islamic Bank of Britain, the only Islamic retail bank in the UK, could learn in order to change their fortunes as their strategy of marketing towards the minority Muslim population restricts their market share. How have marketing Islamic finance products evolved over the years and what effect has this had on industry exposure? Islamic finance was first introduced to customers through the notion of Shariah-compliance which was used to distinguish Islamic finance from competitors. Moreover, during the industry’s infancy, Islamic financial products were usually more expensive than similar conventional products due to having to comply with Shariah requirements; which in turn meant that in order to attract customers, financial institutions relied on customers who were willing to pay a premium

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for Shariah-compliance. As result the customer base remained very small and this marketing strategy was unsustainable in the long-run. However, as early as 1994, the late Mr Muazzam Ali, Founder of Institute of Islamic Banking and Insurance (IIBI), presented a paper on ‘Marketing Strategies for Islamic Banks’ in which he stressed that, “While a marketing strategy for Islamic banks must exploit their moral and ethical basis, they must also make every effort to make them at least as profitable, if not better, as the conventional banks so that they can offer good returns for their clients.” Thus, the industry participants actively lobbied to create a level playing field for Islamic financial products competing with conventional banking products and this has resulted in the lower costs that we see today. As the industry drives towards relative maturity, financial institutions offering Islamic financial services are now able to compete on price and other economic considerations in addition to promoting Shariah-compliance. This has supported their growth and allowed them to increase their market share. What are the advantages of using Shariah compliant marketing to promote Islamic finance products? If Shariah-compliant marketing refers to a process of approval/certification by a Shariah scholar with respect to promotional material, I think such a move may be fraught with danger if not implemented coherently and consistently. This will be difficult to achieve because there exists significant potential for marketing material to be regarded as misleading or exploitative which will consequently compromise the integrity and influence of Shariah-compliance certification. The finance industry is one in which a significant proportion of customers enter into contracts whilst being ignorant of many clauses they are made to agree to, and therefore, it is inevitable that cases of misleading marketing will arise. Given that Shariah compliance requires honesty and transparency as a must, any promotional material deemed as Shariah compliant which is subsequently regarded as providing confusing, ambiguous or even deceptive information will harm the integrity of the Shariah compliance certification process and the reputation of the industry. This is already evident within the Islamic finance industry itself whereby a number of dubious Shariah-compliant financial products have led groups to consider the entire industry as deceptive and a sham. This may be the reason why the overall uptake by the Muslim population is still a very small share of the total market size. Moreover, using Shariah compliant marketing would also discourage potential non-Muslims clients who will associate Shariah as having a religious connotation. Rather, marketing strategies for Islamic financial products would benefit from highlighting the social charitable benefits to society that are noticeable by all segments of society.

2012 May Global Islamic Finance

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Islamic Finance

order to attract clients. One beneficial strategy used by many is to tap into mainstream brands, allowing them to benefit from operating under the banner of reputable financial institutions. Many companies have found designing Islamic instruments for monetary operations to be conceptually difficult. In countries with a dual banking system, the lack of non-interest-bearing securities has limited the scope of money management. The liquid nature of banks’ liabilities, related to the predominance of deposits with short-term maturity, predisposes the system towards holding substantial liquid assets and excess reserves. In turn, this inhibits financial intermediation and a deepening of the market. The difficulty of defining rates of return on these instruments has also contributed to constrain the development of money and interbank markets.

Figure 4:

Motor Vehicle industry - cars

Electronic industry such as Mobile & Laptops

Food industry - Halal food & drink to sponsor

Islamic institution/ companies Islamic media such as Islamic Finance puplication 7 TV advertising on Islamic channels Diagram by Tasnim Nazeer

The development of these markets is indispensable for the conduct of monetary policy and for the deepening of the financial market. The inadequate development or absence of these markets in many countries constrains central bank intervention through indirect instruments, and has occasionally encouraged the use of direct controls on credit. The absence of well-organised, liquid interbank markets — which can accept banks’ overnight deposits and offer them lending options to cover short-term financial needs — has exacerbated the tendency of banks to concentrate on short-term assets. In order to progress within effective liquidity management, it is necessary to adopt a comprehensive approach to developing both money and securities markets. An efficient lender of last resort facility should also be established; suitable interbank instruments for active interbank trading or for monetary operations must be developed. Financial institutions must actively use se32 Global Islamic Finance

May 2012

curity techniques in order to manage the maturity and risk spectrum of assets and liabilities; and must make risk management and hedging instruments available, an action which presupposes the resolution of various legal, institutional, and accounting issues. (IMF.org) The Middle East and Malaysia are prime hubs for marketing Islamic financial products, and contain the key industry players to take an Islamic finance product to the forefront of the sector. Conducting a marketing

strategy, including liaison with professional financial consultancies, can help Islamic financial companies to organise their objectives and ensure that all desired targets are met. Successful advertising through Islamic banks, and major financial institutions which include Islamic financial subsidiaries, can gain you a reputable name by acting as a banner for your product, while also giving you the safety of association with a successful brand. In the next edition of this series on marketing Islamic financial products, Global Islamic Finance Magazine will discussing methods of attracting consumers and investors from your target market, building your brand, and ensuring that you stay well ahead of your competition. Islamic Branding the Key Way to Success Branding your product in a truly Shariah-compliant manner is the key way to spur success for your company or business, and to meet the needs of customers wishing to utilise Islamic financial products and services. Developing innovative strategies can help your business to grow continually from strength to strength, and ensure that you gain the necessary marketing skills to further progress. The highly competitive financial industry is buzzing with activity from all around the world, and the world’s primary hubs for Islamic finance, such as Malaysia, are spearheading the industry’s growth and further progress into the multi-million-dollar sectors. Commodities within the Sukuk and Takaful industry in particular are growing at an unprecedented rate around the world, creating an expanding space for investments contributing to the growth in innovative Islamic financial products. Conventional banks often use sponsorship from lucrative industries such as alcohol production, which are however inappropriate for Islamic financial products. However,

Islamic Finance some popular industries, such as motor vehicles, and state-of-theart electronics, are great ways to capture your target market.

Figure 5:

Whether a company is targeting a Muslim or non-Muslim market, everyone uses mobiles, laptops and other electronic products, which gives you sufficient scope to attract any market. The approval of Shariah-compliant products with certified Islamic Shariah boards can help to reassure Muslims that the products are fully appropriate for Islamic use, and adhere to the principles of the Shariah. Educating your target market on Islamic finance, and ensuring that the benefits are highlighted with comparisons to conventional banks, can do even more to capture both Muslim and nonMuslim markets. As outlined above, there are many ways in which you can promote your Islamic financial product without compromising the principles of the Shariah law. One of the most beneficial methods of gaining recognition from your target market is through discussion and international seminars. In addition, networking can be vital in establishing good relations

• Islamic Finance Seminars • Introduce and promote your Islamic Finance Product in a recognised seminar such as Euromoney or IIFA seminars

• Organise Meeting with leading Islamic Scholars 7 Community Leaders • Set up a day in your financial institution to discuss and promote Islamic Finance from first hand experience with leading scholars and community leaders.

• Advertisements from Islamic Media Groups/ Puplications/TV • Utilise the range of Islamic Media to target your Muslim Market and further educated them on what products are Shariah compliant.

• Global Islamic Finance International Forums • There are many Islamic Finance International Forums which you can get sponsorship from as well as promote your Islamic Financial product at the event.

• Gain sponsoreship from Islamic Certified Accreditors such as CIMA • If your Islamic Financial product is at a bank you could gain sponsors from accredited financial institutions such as CIMA

• Network your way to successful Islamic Financial Product Promotion • Networking is key in establishing good contacts who can help to successfully promote your Islamic

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with international leaders of the finance world, including those working in the conventional banking market, and who can further your scope to attract a new client base as a target market for your Islamic financial product. Once your customer base is well-informed about the Islamic financial product, and the benefits are clearly explained, it’s important to try to make the product accessible for them to use. Customers who do not fit restrictive financial criteria set out by some Islamic banks often have difficulty in gaining access to Shariah-compliant products. If the pricing of products can be reduced, or flexible payment plans can be arranged, the Islamic financial product may become more appealing and accessible. In this article, Global Islamic Finance Magazine has offered a comprehensive discussion of the best way to launch your products and services through Islamic branding in order to spur optimum success. In the second part of the Islamic branding and marketing series, GIF will investigate the best ways to market your Islamic financial product, both digitally and through other avenues. gif

References and Further Reading •

B Alserhan (2010) On Islamic branding: brands as good deeds, retrieved from: http://www.emeraldinsight.com/journals. htm?issn=1759-0833&volume=1&issue=2&articleid=1865394&show=html&PHPSESSID=r31n8k3b96pv5p9t36j90a9gf5

•

Archer, Simon, and Rifaat Abdel Karim, (2002) «Islamic Finance: Growth and Innovation,» (Euro Money Books: London).

•

Rifaat Abdel Karim, Simon, 2007, “Islamic Finance: the Regulatory Challenge” (John Wiley & Sons: London)

•

The Role of the Shariah Advisory Board in Islamic Finance (2009) Q Finance, retrieved From: http://www.qfinance.com/capitalmarkets-checklists/the-role-of-the-shariah-advisery-board-in-islamic-finance

•

M. EL Qorchi, Islamic Finance and Development, Developing Money Markets (2005), http://www.imf.org/external/pubs/ft/ fandd/2005/12/qorchi.htm

•

S. Chawdery, Islamic Finance 101 (2004) Dinar Standard, retrieved from: http://www.dinarstandard.com/finance/finance_review100104.htm#murab

•

D.C Gargner, Training in Selling Financial Products (2000), retrieved from:

•

http://www.dcgtraining.com/pdf/Selling_Skills.pdf

2012 May Global Islamic Finance

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Market Review

SUKUK A RISING SECTOR for $88 Billion Construction in Qatar Source: GlobalIslamicFinanceMagazine.com

ended March 21 to 114.4, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The yield on the country’s 4.5 percent security maturing in January 2022 fell 29 basis points to 3.99 percent in the two months to April 2012. That outpaced the 20 basis-point drop through March 21 in the average yield for the HSBC/NASDAQ Dubai Middle East Conventional Sovereign US Dollar Bond Index. Qatar, which borders Saudi Arabia and has about the same area as the US state of Connecticut, was awarded the 2022 World Cup in December 2010, beating out the US, Australia, South Korea and Japan. The country, whose population of 1.8 million people is concentrated in Doha, pledged to build nine new stadiums, refurbish three others and construct training facilities. Qatar’s lenders need international banks to help finance as much as $88bn of construction for the 2022 soccer World Cup as deposits in the energy-rich Persian Gulf emirate fail to keep pace with loan demand. Local banks’ capacity to lend may be declining as a pickup in borrowing, particularly by state-owned enterprises, squeezes liquidity. The ratio of Qatari credit facilities to deposits soared to 112 percent in January from 91.8 percent six months earlier in July, according to Bloomberg calculations based on central bank data. The country with the third-largest natural gas reserves will need to fund stadiums planned for the world’s most watched sporting event, as well as hotels, roads, a bridge to Bahrain and a new city to house 200,000 people. Qatar Rail Co said it will 34 Global Islamic Finance

May 2012

tender as much as $14bn in tunnelling and station contracts next month, part of a planned $38bn rail system. “In terms of overall size and substance compared to the projects which are coming out, we have a limited scale,” Raghavan Seetharama, Doha Bank’s chief executive officer, said in an interview in Doha, the Qatari capital. “There could be the blend of international institutions as well as local banks when it comes to project finance.” Qatar’s bonds have been rising as perceptions of the nation’s credit quality improve. The cost to insure Qatari debt is the second lowest in the Middle East after Abu Dhabi, according to credit-default swap prices compiled by data provider CMA. The contracts dropped 33 basis points in the two months

A total of $9bn will be spent on sporting facilities alone for the event, the government’s planning board said in the October report. Qatar also pledged to complete projects that were already planned, including the 40km bridge to the neighboring island nation of Bahrain and the rail and metro system. Most of the work will be completed in seven years, Prime Minister Sheikh Hamad Bin Jasim Bin Jaber Al Thani said in December 2010. Local banks have anticipated the construction boom by raising capital to ensure they can grab their share of loans. Doha Bank sold $500m in bonds after meeting investors in March, while government-owned Qatar National Bank raised $1bn in a debt offering last month. Barwa Bank, an Islamic lender that is the country’s newest bank, completed a QR1.7bn rights issue earlier this year.

Market Review

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Al Khaliji, which created a contractor-finance division for the World Cup, and closely held International Bank of Qatar have both announced plans for bond sales of as much as $750m. Al Khaliji counts Qatari Diar Real Estate Investment Co., part of the sovereign wealth fund, as its biggest shareholder and International Bank of Qatar’s chairman is the prime minister. Masraf Al Rayan, Qatar’s second-biggest Islamic law- compliant lender, projects 20 percent lending growth this year, according to Chief Financial Officer Mohamed Salam Mursal. Total credit extended by Qatari banks surged 24 percent in the year to January, while money supply advanced 11 percent, central bank data show. “Liquidity conditions in Qatar tightened by quite a bit in the second half of last year,” said Nick Stadtmiller, the Dubai-based head of fixed-income research at Emirates NBD, the UAE’s biggest

„

‘’Local banks have anticipated the construction boom by raising capital to ensure they can grab their share of loans. Doha Bank sold $500m in bonds after meeting investors in March, while government-owned Qatar National Bank raised $1bn in a debt offering last month.

bank by assets. “Between July and November of last year, Qatari banks lost deposits and grew their loan portfolios, creating a double squeeze.” Last month, the central bank said it’s increasing risk- reserve requirements to preserve lenders’ stability. Banks must hold capital equal to 2.5 percent of their assets within two years, up from 1.5 percent. Qatar’s central bank is also issuing about QR4bn a month of treasury bills to banks to enhance their liquidity, the bank’s governor, Abdullah Saud Al Thani, said in a Bloomberg Television interview last month. Some government projects in Qatar, including a new airport and seaport, have been financed with the state’s own funds so far. That hasn’t been a problem given rising exports of liquefied natural gas, which made Qatar’s economy the fastest- growing in the world for the past two years, according to the International Monetary Fund. Last year, gross domestic product surged 15 percent, according to the government’s planning office. While the government says economic growth will slow this year, GDP is still forecast to increase 5 percent. Qatar’s oil and gas exports will average $83bn a year between 2011 and 2016, according to

a government report released last year. “They’re in the incredibly enviable position of not actually needing to borrow anything,” said Akber Khan, an asset management director at Al Rayan Investment in Doha. “The government could equity-fund their entire plans if they wished, but borrowing makes for a more efficient business model and enhances returns.” Qatar plans to invest $65bn in infrastructure between 2011 and 2016, according to Beltone Financial, a Cairo based investment bank. The country budgeted more than QR40bn ($11bn) for infrastructure for the 12 months ending March 31, and won’t cut this amount for the next fiscal year, Prime Minister Hamad Bin Jasim Bin Jaber Al Thani said January 23. “The volume of projects will lead to significant demand for trade finance products from our local and international customer base,” according to Simon Penney, the chief executive officer for the Middle East and Africa of Edinburgh-based Royal Bank of Scotland Group Plc. HSBC Holdings, based in London, lent money to the $10.3bn Barzan gas project last year and was a joint lead manager for Qatar’s $5bn sovereign bond offering, according to

Abdul Hakeem Mostafawi, who heads the bank’s operations in the emirate. “We will look into opportunities of project financing or funding” and may advise the government, Mostafawi said in an e-mail. Barclays, Bank of America Corp and Standard Chartered, which participated in a $7.2bn syndicated loan for Barzan last November, are also among the foreign banks that have financed Qatari ventures. “I don’t think there are any risks to finding funding for these projects,” said Perihan El-Husseini, an economist for Beltone, who authored a report on Qatar entitled “Money supply growth barely meets demand for credit,” released last month. “If they can’t find it domestically, they will probably find it from abroad.”

2012 May Global Islamic Finance

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Interview

TAPPINGINTO SHARIAH ETFS, interview with Saeid Hamedanchi, CEO of ShariahShares.inc

The Shariah ETF industry is growing steadily, and there is increasing scope for the progress of the Islamic finance industry in offering Shariah-compliant products and ETF services to a global platform. Mr Saeid Hamedanchi, CEO of ShariahShares.inc, tells GIF more about the Shariah-compliant ETF industry and this growing sector, in this exclusive interview. Mr Saeid Hamedanchi is the founder and CEO of ShariahShares Inc. Saeid has more than 25 yearsâ&#x20AC;&#x2122; experience in the business world, with the past 17 years spent working in the financial services industry both in the US and abroad. Prior to founding ShariahShares, Saeid worked as a senior investment officer at the Islamic Development Bank (IDB).

Saeid Hamedanchi, CEO of ShariahShares.inc Tell us more about your current role as founder and CEO of ShariahShares Inc? As a founder of ShariahShares, my responsibility is to create a vision and strategy for our firm. I am also responsible for execution of our strategy. I have put together a complete management team, who have strong expertise in the operations and marketing of exchange traded funds (ETF). Currently, my top priority is to identify venture investors who can provide venture financing for our firm, as we aim to become operational as an ETF sponsor. We are interested in speaking with investment banks and money managers globally. Indexation products for Shariah-compliant shares have not been widely developed in the Islamic finance industry. What are your views on this lack? The Islamic finance asset management industry has traditionally managed money using active strategies. The situation has been similar in the global conventional market. 36 Global Islamic Finance

May 2012

Indexing gained popularity in the conventional asset management industry during the 1970s. Vanguard was a pioneer in developing the passive asset management industry. However, there are very few index or passively managed mutual funds focusing on Shariah investments, either regionally or globally. Lack of education and knowledge on the part of investors has been a major factor acting against the popularity of the Shariahcompliant indexing industry. In the conventional asset management industry in the US and Europe, index managers spent a lot of resources (time and money) on educating institutional and retail investors on the benefits of a passive investment management strategy. This strategy has yielded great results, as indexing has become extremely popular. Today, index managers compete very effectively with active managers, in both institutional and retail markets. ShariahShares has the

opportunity to become the largest provider of passively managed ETFs in the Islamic finance industry, by offering high-quality ETFs at a competitive management fee. What is the scope for investors who want actively managed solutions, and how can companies incorporate this into their offerings? Asset allocation is an important factor in determining the risk and return of a portfolio. According to a study conducted by Gary Brinson, L. Randolph Hood and Gilbert Beebower (BHB) , asset allocation is the most important factor in determining the return of a portfolio rather than a security selection. Asset allocation accounts for 86% of the portfolio return. Investors working together with their advisors can design actively managed or tactical asset allocation programmes using Shariahcompliant ETFs, to invest in various asset classes.

Interview

As you have conducted extensive research around Shariah ETFs, what in your view are the main drivers for Shariah-compliant ETFs, both globally and in the US? The main drivers of the rapid growth of ETF industry have been as follows: A) Lower Total Expense Ratio (TER). Shariah ETFs have a lower TER than typical Shariah funds. The typical Shariah ETF charges 0.50%-0.60% in the European exchanges, whereas Shariah funds often charge in excess of 1%, according to EY Islamic Funds report. B) Speedy Execution: ETFs can be purchased and redeemed in the same day, whereas traditional mutual funds can be redeemed at market close. C) Greater Transparency: ETFs are much more transparent than mutual funds. ETFs are required to report their holding on a daily basis, whereas mutual funds report only on a semi-annual basis. D) ETFs are much more tax-efficient than mutual funds in the USA. This has been a major driver for the growth of the ETF industry. Some 70% of the assets under management in the ETF industry are located in the USA. The same driving factors will apply to the Shariah ETF industry. According to the EY Islamic Funds Report 2011, investors are demanding lower fees from their active managers, especially if they are not out-performing their respective benchmarks. It has been reported that ShariahShares Inc has received an exemptive relief order from the US Securities and Exchange Commission. What has this enabled you to do? The exemptive relief order enables an ETF sponsor to create a family of Exchange Traded Funds (active or passive) on the US Exchange. Our exemptive relief order allows us to create a family of passively managed ETFs, thereby creating a family of Shariahcompliant equity ETFs for investors.

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ShariahShares Inc is expected to offer the very first family of global Shariahcompliant ETFs. Could you tell us how you feel about this, and how you are going to achieve this? We are very excited to be the first family of Shariah-compliant ETFs globally. We are very bullish about this opportunity. In addition, there are no Shariah-compliant ETFs in the US market. We will be partnering with world class financial institutions and service providers, to help us deliver world-class ETFs at competitive Total Expense Ratio (TER) to our investors. It has been reported that you are already part of the New York Stock Exchange. Do you have any plans to join the London Stock Exchange, and if so, what will you be offering to London investors? To clarify, we are planning to launch our family of ETFs on the New York Stock Exchange and European Exchanges (Deutsche Bourse and the London Stock Exchange) as soon as we have secured our venture financing. Our European ETFs will be UCITS IV compliant. On the London Stock Exchange, we will be offering a family of Shariah-compliant ETFs, focusing on various regions including US equities as well as emerging markets. We will be creating ETFs which are in high demand by the investors. What is your view on the indexation products which you are currently working on, and which products need to be developed within the Islamic finance industry? The index providers have done a great job of creating a family of Shariah-compliant indexes. Wewill be working with the major index providers to develop our ETF product line. The index providers have created the following products: A) Global Equity Indexes (i.e., developed markets, emerging markets and frontier markets).

B) Regional and Single Country Equity Indexes (i.e., US, GCC). C) Sector Indexes (i.e., Technology, Health Care, Oil and Gas). D) Sukuk Index. E) Shariah-compliant REIT index. In addition, Shariah commodity indexes could be interesting to investors and industry participants. Can you describe the various investment products which you feel can benefit the Shariah-compliant shares industry? We believe that the Shariah-compliant asset management industry needs to develop more innovative investment management solutions and services for its clients. There are many areas in which new products can be created. The Shariah-compliant asset 2012 May Global Islamic Finance

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Interview

management industry is still underdeveloped, and more innovation and new product offerings are needed in the sector, both in the US and abroad. By using their structure of efficiency and transparency, ETFs can bring down the cost of investing for those investors seeking Shariah-compliant opportunities. Innovation has often been regarded as a neglected aspect of creating Shariah-compliant products. Has this becomes a challenge when trying to promote fresh new investments for investors? Shariah-compliant ETFs have received Fatwas from some major Shariah boards. Basically, an ETF is a basket of securities which are traded on an exchange. Since the basket is linked to an index and the index is indeed Shariah-compliant, then there are no issues with that. Shariah-compliant ETFs have had no challenges in securing Fatwa from Shariah boards and scholars. Which regions and countries do you feel have the highest scope for Shariah-compliant exchange traded funds, and how will you be targeting them? The worldwide Shariah mutual funds and ETF industry had assets under management worth USD58 billion at the end of 2010, according to the EY Islamic Funds Report 2011. The Islamic asset management industry is expected to grow by 25% per annum until the end of 2013, according to MayBank Report. The largest markets for Shariah-compliant funds and ETFs are in the Gulf Cooperation Council countries (GCC) and Malaysia. The largest global market for Shariah funds is the Kingdom of Saudi Arabia (KSA). ShariahShares estimates that USD16 Billion is currently invested in the Shariah-compliant mutual funds sector in KSA. The second-largest market for Shariah funds is Malaysia. The US market is another market we will be targeting. ShariahShares estimates that the Shariah-compliant mutual funds market in the US is worth approximately USD3.8 billion. It has seen a very rapid growth in the past five years. Shariah-compliant indexes have outperformed conventional indexes, and this has attracted socially responsible and ethical investors to the sector. We will be partnering with major financial institutions globally for distribution of our ETF offerings. How has your previous role, working at the Islamic Development Bank as senior investment officer, helped to achieve your accomplishments so far? During my tenure at the Islamic Development Bank in Jeddah, Saudi Arabia, I learned 38 Global Islamic Finance

May 2012

about Shariah-compliant asset management industry. The various areas I worked in included evaluating Shariah-compliant investments and investment managers in equities, Sukuk and Real Estate Investment Trusts. This experience, together with my previous professional and education, qualifies me to understand and develop products for the Shariah-compliant asset management industry. What do you personally feel is the state of the market for global Shariah-compliant ETFs? According to BlackRock, the Global Exchange Traded Products industry assets under management reached a value of USD1,720 billion at the end of February 2012. ETF industry assets were worth USD74 billion in 2000, and the industry has had an amazing growth rate of 28% per year since then. The real drivers of rapid growth in the ETF industry have been the lower total expense ratio which these funds provide, their greater transparency, instant execution, and greater tax efficiency. According to the Financial Research Corporation, ETF industry assets will grow by 23% per year until the end of 2014. Furthermore, it is expected that ETF assets under management will pass a value of USD2 trillion by the end of 2012. According to the latest E&Y Islamic Funds report, published in 2011, the Shariah funds industry had USD58 billion in assets under management at that time. The Islamic asset management industry is one of the fastest growing sectors in the financial services industry. MayBank expects that the sector will grow by 25% per year until the end of 2013. Currently, the Shariah-compliant ETF assets have a value of less than USD500 million. The Shariah-compliant ETF industry is massively underdeveloped, both in terms of product offering and in terms of assets under management. We expect that the Shariah ETF industry will comprise, at an absolute minimum, 10% of the Islamic funds industry during the next five years. This translates to a prediction of Shariah ETF assets under management reaching a value of at least USD10 billion. The ETF industry is bound for very rapid growth (20% per year at a minimum) for the next five years, according to various analysts. The Shariah assets management industry will see solid growth (20% per year at a minimum) as well, again according to various analysts. Shariah ETF products are really a hybrid of these two fast-growing sectors. Do you feel that only high-net-worth families can invest in Shariah-compliant ETFs,

and will there be opportunities for retail investors? Exchange Traded Funds appeal to all investors. In the US market, institutional investors comprise 50% of the total investors, with retail making up the other 50%. Retail investors can purchase ETF as easily as they can purchase stocks. So ETFs are for all investors, and not necessarily only institutions and high-net-worth families. Shariah-compliant ETFs will be used mostly by retail investors within the US market. In Europe, institutions comprise the largest portion of the total investors, in terms of assets under management and trading volume. Banks and pension plans are the major investors in the ETF products. The retail market comprises a small proportion of the European ETF market. What do you feel is the future for Shariahcompliant ETFs in the US market? Do you feel that there is global demand for Shariah-compliant ETFS? There are currently no Shariah-compliant ETFs in the US market. We believe that there is a large market in the US for Shariah-compliant ETFs. According to the Investment Company Institute, a US industry trade group, ETF and mutual fund investors have, on average, a higher income and education than the general population. The demographic of Muslims in the US is strong: I. It is estimated that there are between six and ten million Muslims in the US. US-resident Muslims are highly educated, especially south Asian Muslims from Pakistan and India. They work as engineers, doctors, financial analysts, and in other highly paid professions. Some 45% of immigrant Muslims report an income in excess of USD50,000 per year, and 19% report an income greater than USD100,000. ShariahShares estimates that the assets under management within Shariah-compliant funds in the USA are currently worth USD3.7 billion. We expect that Shariah ETFs will be able to compete effectively with Shariah mutual funds, since they are associated with many unique benefits. As I have discussed, we believe that there is an excellent market for Shariah ETFs globally. Here are some additional reasons for the growth of Shariah funds and ETFs: â&#x20AC;˘

The petrodollar boom in GCC countries has fuelled great interest in Shariah finance since 2003. GCC economies are booming. GCC will continue to be the largest market for Islamic funds, and so as long as oil and natural gas are sell-

Interview •

ing at attractive prices, Islamic funds should do well. Various surveys conducted in recent years have shown that Muslims are interested in investing in line with their faith. Investors are often seeking to save for retirement and for their children’s education. This is another potential area for the growth of Islamic funds.

As per the table below, the S&P 500 Shariah outperformed S&P 500 over the past three to five years. However, past performance is no indicator of future performance. •

How much involvement do Shariah scholars have when it comes to determining which shares are viable and Shariah-compliant? Shariah scholars are heavily involved in ensuring that any given index is indeed Shariah-compliant. They work closely with all of the index providers to screen prohibited securities from the index. The major Shariah index providers are: Dow Jones, FTSE, MSCI, Russell Jadwa and S&P. Shariah scholars determine which securities within the index are permissible, and review and update the index on a quarterly basis. The FTSE Shariah indexes are constructed in the following manner: I. Prohibited industries: 1. Alcohol, tobacco, pork and non-Halal foods. 2. Defence contractors, manufacturers or distributors of weapons. 3. Conventional financial services (banks, insurance companies). 4. Inappropriate entertainment (pornography, casinos and other forms of gambling). II. Asset-based debt screening ratios:

•

Lower risk (volatility): Shariah-compliant mutual funds and ETFs have exhibited lower volatility in the past five years, due to their lack of exposure to conventional financial services and highly leveraged companies, as required by the indexes. Shariah asset-based screens eliminate poorly performing companies prior to becoming highly leveraged, and sometimes go into financial distress. Shariah indexes remove highly leveraged companies before they face financial distress and bankruptcy. Enron and WorldCom were two companies eliminated from the Shariah indexes, due to their high debt levels, before their bankruptcies; however, they continued to be part of the conventional indexes. This is an especially important factor during periods of downturn and recession, as evidenced in the period between 2008 and 2009. Investing according to their faith and principles: Shariah ETFs enable Muslim and ethical investors to invest according to their faith and religious or social values.

Where do you see the future of ShariahShares Inc in ten years’ time? As a newly established firm and start-up, our top priority is to secure venture financing for ShariahShares. As soon as the venture financing is arranged, we will seek to launch our ETFs on various exchanges in Europe and North America.

5. Total debt/total assets cannot exceed 33%. 6. Cash plus accounts receivables /total assets cannot exceed 50%. 7. Cash plus interest-bearing assets /total assets cannot exceed 33%. 8. Total interest and non-compliant income/total revenue cannot exceed 5%. 9. Various index providers have different asset-based debt screening ratios. Dow Jones uses a trailing 24 months’ average market capitalisation in the denominator, rather than total assets. (For example, a total debt/trailing 24 months’ average market capitalisation.)

We are planning to partner with world-class financial institutions to deliver Shariah-compliant investment products and solutions to our investors. Our long-term goal is to be the leading provider of Shariah-compliant ETFs in the world.

What do you believe are the benefits to investors of choosing Shariah-compliant exchange traded funds? • Performance: Shariah-compliant ETFs and mutual funds have produced excess return compared to conventional indexes, for the past three to five years.

Investors seeking to act according to Shariah laws continuously compare the Shariah funds industry’s offerings with those of their conventional counterparts, in terms of fees, depth of offering, transparency and other features. Shariah funds must continuously develop products and services in order to

What products and services do you feel will be beneficial in developing Shariahcompliant share products? Innovative exchange traded funds and exchange traded commodities products, which offer value to investors, will be beneficial in developing Shariah-compliant share products.

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be able to compete with their conventional counterparts. Why do you think that the Islamic finance industry has been slow to introduce Shariah-compliant ETFs to a global market? Education is a major factor, as has been explained by various industry participants. However, more action is needed. We agree that education is lacking, and suggest that one reason for that is the lack of attention by the current ETF providers. After extensive research and analysis of the Shariah-compliant ETF market, we were surprised to discover that none has satisfied the demand. Deutsche Bank, iShares and other ETF sponsors control a few of the listed Shariah-based ETFs, but their assets under management are trivial compared to other ETF strategies. Most ETF firms have hundreds of ETFs listed, but it is clear their Shariah product sales efforts have either been lacking or ineffective - at least in comparison to the current most popular ETFs, such as those in the areas of emerging markets and in the gold trade. This has left the Islamic investment community badly catered for. One lesson learned from the growth of the US and European ETF markets is that education is a crucial catalyst, acting powerfully for AUM growth. In order to succeed, a consistent message was needed, delivered over a lengthy period of time. ETF sales forces used to visit many financial advisory offices, promoting not only the performance of their own specific products, but the concepts and values that the ETF structure could bring to the market. This process needs to be repeated for the Islamic finance community. Any final words regarding the scope for Shariah-compliant exchange traded funds on a global investment market? There are tremendous opportunities available within the Shariah-compliant ETF industry. The industry is young and underdeveloped globally. There are currently no Shariah-compliant ETFs in the US market. The ETF sector has seen huge growth over the past ten years, and growth is expected to continue into the future. The Shariah asset management industry is set for rapid growth according to MayBank, Eureka Hedge and others. Shariah ETFs are a hybrid of these two rapidly growing sectors. ShariahShares aims to become the leading global provider of the Shariah ETF family in the future. gif

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THE GROWING

ISLAMIC FINANCE INDUSTRY IN

Bermuda Author: Tasnim Nazeer, Global Islamic Finance Magazine Editorial Team, United Kingdom

Abstract: Bermuda is a growing hub for Islamic finance and banking investments and is a lucrative country for opportunities within the Islamic finance industry. The scope for the global Islamic finance industry is estimated to reach around $2 trillion dollars worldwide. The Sukuk and Takaful sectors of Islamic finance hold great prospects both in Bermuda and worldwide and many experts have encouraged Sukuk issuances in Bermuda due to its flexibility in accommodating laws to implement Islamic finance and banking in the country. There are many advantages of investing in Shariah compliant bonds and other Islamic financial investments in the country of Bermuda. With Bermuda’s locality being located amongst the Atlantic Ocean and located off the east of the United States there is ample opportunity to tap into the various Islamic financial ventures that are currently being exhibited within the country. This article is a must read for all business professionals, avid investors and industry professionals wishing to tap into the lucrative opportunities and learn more about the Islamic finance industry that is currently growing in Bermuda. Keywords: Bermuda, Islamic Finance, Islamic Banking, Business, Investments, Shariah Compliancy, Investors

Bermuda an Attractive Choice for Islamic Finance Opportunities Bermuda is an increasingly popular choice for Shariah compliant investments and the Islamic finance and banking sector as a whole. The country has made Shariah compliant financing accessible as its laws permit the Islamic finance industry to operate freely within the country without any restrictions as is the case with other countries that often have to wait for legislation to pass before paving the way for Islamic finance and banking. Bermuda’s effectively thriving and solid regulatory framework has allowed the country to become a trusted jurisdiction for Shariah compliant financing. Many investors are assured with Bermuda’s solid legislation which can be an excellent platform for structured finance transactions (such as Sukuk and wakala) and Shariah compliant funds (including musharaka). Bermuda has become one of the primary jurisdictions for Sukuk issuances backed by

Figure 1: Bermuda Third Largest GFP Per capita in the World Bermuda

$88. 747

$45.989

$35.165

World Average

$8.599

Information from: Business Bermuda

Figure 2: Lucrative Sector for Investments in Bermuda Sukuk Takaful Real state Infrastructure Energy & Resources

aircraft. Bermuda is also positioned to play a key role in the rapidly growing Islamic insurance, or takaful and retakaful sectors. The country of Bermuda has not only paved the way for Islamic finance through solid regulation and legislation which accommodates the industry but it is also a world renowned thriving offshore financial centre. Bermuda has the third largest GDP per capita in the world which is a major plus point for investors wishing to tap into the lucrative financial sectors in the country as outlined in Figure 1. Christopher Dye, corporate legal counsel for BCB Charter Corporate Services, said with regard to the scope in Bermuda that, “The international business advantages of Bermuda are well-known, including its long history of political and economic stability, its tax neutral regime with an absence of corporate taxes and exchange control for international business, its leading position in the reinsurance industry, its proximity to the major financial centres of the east coast of the United States, and its British common law tradition with final appeal to the United Kingdom. Perhaps above all, its ability to adapt traditional structures such as insurance companies and trusts with purpose-specific laws and regulations makes Bermuda anattractive jurisdiction for new financial structures, such as thoseused in Islamic financing.” The government in Bermuda have worked hard in order to create Bermuda’s thriving financial industry in the country as it has created an attractive jurisdiction which would be ideal for the Islamic finance industry and investors alike. Many other investors who

2012 May Global Islamic Finance

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Islamic Banking Figure 3: Why Choose Bermuda for Shariah Compliant Investments? Bermuda has longstanding and solid regulatory standards which makes a perfect platform for Shariah compliant investments Bermuda is a world leading financial centre promoting transparency and cooperation which is perfect for Islamic finance Bermuda is the prime jurisdictions for Sukuk issuances especially in aircraft financing Bermuda holds attractive opportunities in Takaful and Retakaful sectors Bermuda has Tax neutrality compliant with Shariah financing principles Bermuda is in the prime location amongst major western financial hubs such as the United States Bermuda has a solid portfolio of trusts and a wealth of partnerships around the world

come from various other Islamic financial hubs such as the UAE are already investing in the opportunities that Bermuda holds. There is a variety of sectors one could venture into in Bermuda as outlined in Figure 2. Figure 2 identifies the sectors of Islamic finance that you could invest in Bermuda and see lucrative profits from as Bermuda has a thriving Sukuk and Takaful sector with laws that accommodate Sukuk issuances and pave the way for Islamic insurance. In addition Bermuda’s infrastructure and real estate sector is thriving and it has extensive human capital and resources which could lead to bigger and better opportunities for investors in a safe and secure environment such as Bermuda. Why should an Investor Choose Bermudafor Islamic Finance Opportunities? There are countless reasons why an investor should choose Bermuda for a potential investment and GIF will outline in Figure 3 some of the main reasons why you should consider Bermuda for your next project, venture or investment in the Islamic finance and banking industry. Bermuda Supporting the Islamic Finance Sector Sukuk Sukuk Islamic bonds are seeing an unprecedented growth in Bermuda and it is becoming an avenue of Islamic finance that is spurring success. Bermuda has implemented ways to securely accommodate and satisfy investor needs in Sukuk drawn from securitization transactions and recent Sukuk. The recent Sukuk issuances indicate that rating agencies are satisfied with the corporate laws of Bermuda which have made Sukuk highly accessible and favourable within the country. It 44 Global Islamic Finance

May 2012

is also a well placed location for Sukuk when assigning ratings to transactions involving issuers in Bermuda.During the structuring process of Sukuk in Bermuda investors were aware that there are several countries to choose from which various different tax regimes have and the tax-efficiency of the underlying vehicle is imperative in the use of special purpose vehicles (SPVs). Bermuda therefore is a location which can give the investor security in making Sukuk issuances as it is one of the world’s leaders in the provision of offshore SPVs. In addition Bermuda benefits from a long history as an offshore jurisdiction used in financial transactions involving US companies. It is also reported that when GE Capital tapped the Sukuk market in 2009 with a $500m Sukuk,the SPV holding the assets wasa Bermuda exempt limited liabilityCompany which saw lucrative returns. In addition to the ability to form tax-efficient SPVs, Bermuda has built into its regulatory environment the ability to facilitate offshore listings effectively and cater for the avid investor, whether it is the primary or secondary source for Sukuk. The listing requirements of the Bermuda Stock Exchange require a local paying agent and approved company for clearing and settlement and it is important to note this when thinking of making a Sukuk issuance in the country. Bermuda is currently pursuing efforts to become the first Western hub for Islamic finance as it is in a favourable tax domicile. Business Bermuda CEO Cheryl Packwood and Apex Fund Services’ Peter Hughes said that “The island was actively seeking to tap into the trillion dollar industry”. Ms Packwood said that the “continual growth of Islamic finance and stronger ties with Bahrain

and Malaysia led to a focus on developing existing Bermuda legislation more than 18 months ago”. “We now have strong links in Bahrain and there is a commonality of wanting to create a niche jurisdiction for Shariah compliancy, that is closer to the US time zone,” she said. “We are also focusing on Kuala Lumpur in Malaysia, as it has an enormous Sukuk market. The process for getting this off the ground may be slow but we have the Bermuda Monetary Authority and the Bermuda Stock Exchange behind us.” Bermuda’s popularity as a domicile for Sukuk issuers is increasing from the time of the GE Sukuk which was the first ever Sukuk to be issued by a Fortune 500 com-

Islamic Banking Cheryl Packwood, Chief Executive Officer of Business Bermuda

What investment opportunities do you currently find significant? What interests us in Bermuda are the opportunities that are being created as the Islamic finance industry continues to grow internationally. Whether it is in fund management, insurance, re-insurance or sukuk, as Islamic finance becomes a worldwide industry, international domiciles like Bermuda can play a role in helping to ensure that this development of these structures is transparent, well-regulated and cost-efficient. Why Bermuda has all the ingredients necessary to be an offshore leader in capital markets? We have a strong track record in providing a cost-efficient domicile with the infrastructure and human resources that institutions need to be successful. As the world places a greater focus than ever on transparency and quality of regulation, our long-term focus on these values places us in a strong position. What does the future hold for business in Bermuda? The international markets where Islamic finance is strongest – such as the Middle East, Asia and Africa – are all continuing to expand at a time when the US and Europe have seen their economies slow. As these emerging markets continue to drive global economic expansion, we in Bermuda are excited about the role we will play as an off-shore domicile as international Shariah-compliant funds, insurance and sukuk look to help finance this growth.

pany. The GE Sukuk was acclaimed as the “Sukuk Deal of the Year” for 2009 by Islamic Finance News as well as “Deal of the Year” for 2009 by Airfinance Journal which further highlighted Bermuda’s scope for Sukuk investments. Bermuda is the primary jurisdiction for Sukuk issuances especially those that are backed by aircraft, due to its leading position as the offshore domicile of choice for aircraft registration and finance. In addition Bermuda has taken an important move towards positioning itself effectively as the offshore jurisdiction of preferred choice for Islamic finance investments in the Middle East after entering into a double taxation agreement with Bahrain. Due to Bermuda’s impressive environment for Sukuk issuances it makes it the perfect investors abode for lucrative investment opportunities within the country and globally. Figure 4 shows the key benefits of using Bermuda SPVs for structuring Sukuk and other Shariah-compliant structured products. Takaful and Retakaful Bermuda is centred as the perfect location for Takaful and Retakaful opportunities in the Islamic finance sector and is working progressively to ensure that these two sectors are successfully implemented and used within the country. Bermuda has made significant contributions to the Takaful and Retakaful sectors and are specialising in these areas of Islamic finance within the country. Bermuda has already earned its place as the largest offshorereinsurance and insurancedomicile in the world which provides investors and business professionals with the ultimate platform to tap into the Shariah compliant Takaful insurance sector. The law in Bermuda has made it easy for structured Takaful products such as Mudarabah, Wakala and hybrid models of Takaful which can be structured under Bermudan law quite easily. The easy jurisdiction in Bermuda has made it the prime location especially for Takaful. According to Christopher Dye, corporate legal counsel for BCB Charter Corporate Services : “Bermuda special purpose vehicles (SPVs) are used for a wide range of transactions including; insurance, investment and asset leasing. One example of tailor made Bermuda legislation for SPVs is the special purpose insurance license. “Special purpose insurers, which fully fund their liabilities in a manner approved by the Bermuda Monetary Authority (BMA), can obtain a special purpose license which exempts them from certain regulatory requirements of other insurers.” Bermuda is centred in the world’s top three destinations for offshore insurance and

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reinsurance and has the necessary infrastructure already in place to support Takaful and retakaful providers. The advantages of Takaful in Bermuda is that is has the frameworks in place for all forms of accounting, auditing and legal fund administration expertise which make it attractive to insurers worldwide. The incorporation of Takaful and retakaful providers helps to offer more to customers and closes the gap in the market. As Bermuda has an attractive strategic location, it can give Takaful and retakaful providers a higher advantage in supporting their efforts to market to the US and Europe, where insurance penetration rates are considered higher in comparison to other parts of the world where Takaful is still in its infancy. In addition to the company formation requirements, a local insurance manager is required and Bermuda is centred with the advantage that it has representation from several global firms which offer internal and international resources, including ones from the successful GCC market, which can facilitate the unique needs of Takaful and retakaful providers in Bermuda. Bermuda’s thriving Takaful sector is one that is admired by many Islamic finance hubs around the world and is a prime location for the emergence of Takaful and Retakaful providers who want to set up business opportunities in Bermuda. Islamic Investment Funds in Bermuda Sector of Islamic investment funds in Bermuda is growing in popularity and is managed under the Investment Funds Act. Islamic investment in Bermuda is based on a well-tested legal and regulatory environment founded on English law, a regime that is commonly the legal system of choice for Islamic financial products. This gives the investor better scope for making Shariah compliant investments in the country and he potential to get lucrative profits. Under the regulations of Bermuda Islamic funds it is considered that an Islamic fund can adopt a secondary name in Arabic with the approval of the Registrar ofCompanies. This is highly advantageous for the investors as Bermudahas an edge over other offshore jurisdictions because investment managers planning on launching an Islamic fund can call upon a stream of local fund managers and administrators. The solid jurisdiction and regulatory environment that is principles-based in Bermuda and works in favour of Islamic funds will help any investor in investing in Shariah compliant funds in the country. Andreas Jobst, Bermuda Monetary Authority (BMA)explained 2012 May Global Islamic Finance

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Paula Cox, JP, MP and Jeremy Cox, CEO of the Bermuda Monetary Authority, Greg Wojciechowski, President and CEO of the Bermuda Stock Exchange, Cheryl Packwood, CEO of Business Bermuda and Richard Hay, Partner of Stikeman Elliot London.

Business Bermuda concludes successful Bermuda Financial Services Conference in London A business and trade delegation, led by Business Bermuda concluded a successful Annual Bermuda Financial Services Conference on Tuesday, 24 April 2012 at the Mandarin Oriental Hotel in London. Bermuda’s key government members and industry leaders spoke at the London event which was attended by more than 260 leading lawyers, accountants and financial services executives and supported by Global Islamic Finance Magazine. The conference commenced with a breakfast panel on Insurance and Reinsurance with panellists including David Cash, CEO of Endurance, Janita Burke, Partner at Appleby, Charles Collis, Director at Conyers Dill & Pearman and Tim Leggett, Partner at Ernst & Young. The panel observed that the Insurance and Reinsurance industries are experiencing strong trading with new customers in emerging markets, whose economies continue to develop despite the slowdown in Western markets. The breakfast was followed by an offshore pre-conference summit and panel discussion on Bermuda and offshore jurisdictions featuring: the Governor of Bermuda, Sir Richard Gozney, the Premier of Bermuda and Minister of Finance, The Honourable 46 Global Islamic Finance

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During the offshore pre-conference summit, the Premier and Minister of Finance, The Honourable Paula Cox spoke about Bermuda’s continued progress in making Bermuda a credible and competitive jurisdiction. Premier Cox referred to the Tax Information Exchange Agreements (TIEAs) signed recently including the latest agreement signed with Italy and Malaysia on Monday 23 April, the enactment of Bermuda’s Amendment Act during 2011, the importance of credibility and Bermuda’s commitment to achieving Solvency II equivalence. Premier of Bermuda and Minister of Finance, The Honourable Paula A. Cox, commented: “Bermuda continues to update and improve its regulatory framework to withstand critical inspection, all with one thing in mind; credibility. Our investment in our regulatory infrastructure reinforces our global reputation and our appeal as a jurisdiction in which to do business.” The newly-appointed Minister of Business Development & Tourism, The Honourable Wayne L. Furbert, JP, MP, delivered this year’s luncheon keynote speech. The Minster highlighted the benefits of doing business in Bermuda, outlining the state of Bermuda’s economy and emphasizing Bermuda’s standing vis-à-vis other jurisdictions. He also highlighted Bermuda’s existing twin economic pillars: International Business and Tourism and his thoughts on the opportunities for financial services businesses on the island. Minister of Business Development and Tourism, The Honourable Wayne Furbert said:

“This year’s conference has been a resounding success, especially the calibre of attendees Bermuda has engaged with and the Bermudan businesses that have participated. The London visit has provided Bermuda with an improved insight into investor sentiment and demonstrated the need for Bermuda to promote itself aggressively internationally in order to increase its profile in the international business arena.” In a packed and fast-paced itinerary, the breakfast and pre-conference summit sessions were followed by sessions discussing: Islamic Finance, Convergence, Trusts, Hedge Funds and Private Equity and Investments, Private Wealth, Capital Markets and Asset Financing before the event concluded with a drinks reception. At the conference the Governor explained that his presence was almost unnecessary, due to the extent of Bermuda’s autonomy in financial matters. No other overseas territory has the freedom to borrow US$500 million in the capital markets of London and Bermuda. Concluding the event, Cheryl Packwood, Chief Executive Officer of Business Bermuda, commented: “This year’s event gives me the opportunity to highlight to London delegates the significant progress Bermuda has made in the twelve months since our last Conference here. In that time, we have updated and improved our company law and applied for Solvency II equivalence. We have also increased our number of Tax Information Exchange Agreements, signed around the world, to 34, including the most recent agreements with Italy and Malaysia. “We continue to strengthen and deepen our relationships with international financial centres and remain focused on creating an attractive business environment built around a robust and sophisticated regulatory framework.”

Islamic Banking

that: “Specific Shariah compliance requirements and restrictions can be incorporated into a fund’s offering memorandum.” In addition, Jobst said: “The BMA could incorporate compliance with codified Shariah standards, such as AAOIFI, in the regulatory standards applied upon authorization and supervision upon inception.” Bermuda is located geographically close to the US, which facilitates trading in these markets and can further help to spur growth in the Islamic investment funds sector.

er transparency and regulatory oversight, whilst maintaining an efficient and entrepreneurial environment that allows funds and fund managers to succeed in the competitive fund industry. Bermuda’s offers ample choice and flexibility to Islamic investment fund promoters who can confidently structure, manage and administer such funds in Bermuda. This advantage arouses innovative investment products, such as Sukuk funds and ETFs, to the global market which can hold lucrative returns.

In addition, the proximity which Bermuda has to investors in the US offshore funds or even in GCC-based family offices trusts can be the prime factor for choosing Bermuda as the investor haven. Bermuda can also be a prime location for investors as it can raise funds from investors who are currently invested in the multitude of Bermuda-domiciled conventional funds as they can tap into the Shariah compliant funds that Bermuda has to offer.

Another advantage of Islamic investment funds in Bermuda is that there are no impediments to authorising Shariah compliant funds under the current framework. Shariah-compliant funds are similar in their set up to conventional funds and compliance with Islamic financial principles can be viewed very much Shariah-compliant innovative investment funds and global investment fund platforms established with a “socially responsible” investment ethos. The same principles and requirements under the Bermuda Investment Fund Act apply to Shariahcompliant funds. There are currently no restrictions in the investment objectives under the Bermuda’s Companies Act and Investment Fund Act which make investing in Bermuda a perfect choice especially for Shariah compliant investments.

Islamic investment fund structures which are commonly used in the investment fund industry can be created and utilized in Bermuda. Common structures are shown in Figure 4 which include. Shariah-compliant Islamic investment fund sponsors can also benefit from the presence in Bermuda as there are worldclass asset management firms, fund administrators and other professionals at their convenience. Investment funds can be listed on the Bermuda Stock Exchange (BSX), and Bermuda umbrella funds can be created as SACs. Bermuda boasts a wealth of expertise in the area of mutual funds, hedge funds, private equity funds and real estate funds. Bermuda is home to hundreds of fund managers, nearly two thousand funds are officially registered and there are thousands more that are administered by its world class fundadministration professionals. The country recognises and addresses the ever changing needs of investors, including calls for great-

Bermuda Islamic Banking, Wealth Management and Trusts Islamic Banking in Bermuda is booming with the industry spurring the Islamic banking sector forward as Bermuda has the right legislation and jurisdictions which can accommodate Shariah compliant banking successfully. For individuals in Bermuda looking for Islamic banking products and services Christopher Dye, corporate legal counsel for BCB Charter Corporate Services, said that “Bermuda Commercial Bank offers vehicles and structures that can be tailored for Shariah compliant financing. Bermuda’s excellent reputation as both a stable and well-regulated jurisdiction and a flexible in-

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Figure 4: Key Benefits for Using Bermuda SPV’s Sukuk Bermuda offers SPVs that are tax efficient, based under common law principles, where the rights of all parties are clearly understood, recognized and consistently applied. The GE Capital Sukuk is proof that Bermuda’s laws are tried and tested by rating agencies, regulators and investors globally for Sukuk structures. Bermuda-based SPVs and trusts vehicles are suitable for financing structures for the acquisition of global portfolios of assets. There are no restrictions in the ‘objects’ of a company under Bermuda company law. An entity may apply the principles of Islamic finance to its business dealings to achieve its objects. Bermuda companies may adopt a secondary name in non-roman script such as Arabic with the approval of the Registrar of Companies. Bermuda’s private trust company legislation is attractive for Islamic finance structures. A private trust company is a company with trustee powers which is not required to be licensed under Bermuda trust legislation, provided that by the terms of its memorandum of association it is empowered to act as trustee of only a limited number of identifiable trusts. Financiers/institutions benefit from effective structuring of Shariah compliant structured products through a combination of Bermuda SPVs and trusts, for example to create ‘off balance sheet’ or ‘bankruptcy remoteness’ structures. There is no exchange control for non-resident undertakings and no restriction on repatriation of funds. There is no stamp duty on any instrument affecting or relating to international businesses in Bermuda. This is a key consideration for global Sukuk issuances. Source: PWC

Figure 5: Exempted companies; Segregated account companies; Exempted partnerships; and Unit trusts. Source: PWC 2012 May Global Islamic Finance

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Islamic Banking

ternational business environment make it attractiveto clients seeking to ensure that their assets are treated according to the rules they establish. “In this way, Bermuda’s business framework, which is well-known for being conducive to asset protection and tax efficiency, can be equally useful to ensure Shariah compliance.” As Dye highlighted Bermuda clearly exhibits: “its ability to adapt traditional structures such as insurance companies and trusts with purpose-specific laws and regulations” and this “makes Bermuda an attractive jurisdiction for new financial structures, such as those used in Islamic financing.” In addition in terms of wealth management and trusts Bermuda offers various types of trust structures which can be personalised to accommodate varying personal estate planning objectives. Bermuda trusts have the ability to offer a Shariah compliant taxefficient global solution whereby assets are legally entrusted to a politically stable environment. This is also accompanied with higher level of protection and confidentiality which is increasingly attractive to investors. Bermuda also offers a foundation which is a corporate alternative to the creation of a trust. Apart from catering to assist with family estate planning matters, Bermuda trust or foundation can be anexcellent charitable structure for Islamic instrumentssuch as Waqf. Bermuda has a wealth of professionals and service providers including trust administrators, lawyers and accountants who have the expertise in dealing with complex structured products for investment services and daytoday administration. Bermuda also benefits from the existence of the world’s top investment management firms, as well as large independent hedge fund and private equity fund managers. Asset managers can also start their operations in Bermuda because it offers one of the world’s highest standards of living and low taxes together in a prestigious international financial centre perfect for managers, investors and entrepreneurs wishing to tap into the sector. Bermuda offers investment opportunities for, pension funds, sovereign wealth funds, financial institutions, Waqf and endowments. Bermuda’s major banking groups and other wealth management firms offer innovative advisory investment services, and make their services readily available to discuss a wide range of investment drivers from around the world, including bonds, equities, derivatives, structured products, mutual funds, and hedge funds in a Shariah compliant way to guide you with your choices.

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A Wealth of Business and Investment Opportunities in Bermuda for Islamic Finance Bermuda holds a wealth of business and investment opportunities for the avid investor, business professional, and entrepreneur or asset manager wishing to tap into the Shariah compliant financing industry. As Islamic finance is so readily embraced in Bermuda with a solid jurisdiction and regulatory framework leading the way the investor has everything in place for lucrative investment opportunities within Bermuda. Bermuda exudes political stability which is a reassurance to investors and it also has built up recognition and respect as a world renowned financial abode for business and financing. Bermuda has unrivalled talent from the best of professionals in business and trade to oversee in every stage of planning the investment or project to actually implementing and going through with your investment needs. In addition Bermuda’s successful infrastructure and excellent use of resources give it an edge over other competitor Islamic financial hubs. This is due to the fact that Bermuda has excellent resources in IT, professional business services and aircraft and transport. The economic stability is Bermuda is unrivalled by any other country and it has surpassed the US and UK in its continuing economic growth and development which the country boasts. The standard of living in Bermuda is extremely high and many investors choose the countryas the perfect abode for investments and business opportunities as investors can even move into the country as the standard of living is so high. The benefits of Bermuda’s tax neutrality is one that investors wishing to tap into the Shariah compliant financing market will enjoy as it gives the opportunity to take advantage if the attractive tax structuring and speed of offering it quickly to the market. In addition Bermuda is located in a prime spot for investments as it is neighbouring huge financial countries such as the United States which can create ample opportunities for the avid investor. In addition Bermuda has modern corporate and trust laws which are attractive for Islamic finance structures. The strong growth in the Islamic finance and banking industry offers a number of opportunities for investors and many jurisdictions but Bermuda has scope to further advance with their solid regulatory framework. Bermuda also welcomes Islamic investment schemes to register on their shores and offer a stable environment for Islamic investment funds, projects, financing and banking in a Shariah compliant manner. But for any investor, choosing a jurisdiction can be

a complex and difficult decision although Bermuda has made it an easy choice for offering the serious investor a great landscape for Islamic financial investments with lucrative profitability and returns. The growth in the Islamic finance industry has led to its success almost reaching over $2 trillion dollars worldwide however there are still many jurisdictions where the existing regulations and tax laws are ill-adapted to Islamic finance. Bermuda is a country that has had longstanding respect for its regulatory framework and laws that accommodate Islamic finance straight away so investors do not have to wait around or fear that they are investing in an unstable environment. GIF has explored the various opportunities that Bermuda has to offer and it is now your chance to further investigate what lies ahead for you in Islamic finance investments in the lucrative country of Bermuda. gif References and Further Reading • • •

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Business Bermuda Brochure pdf File (2012) Business Bermuda, Retrieved from: www. businessbermuda.org P. Cox (2011) Special Report Bermuda pdf, The Islamic Globe, Retrieved from The Islamic Globe L Brinded (2012) Bermuda Looks to Position Itself as Western Shariah Compliant Hub, Euromoney, Retrieved from :http:// www.euromoney.com/Article/2963201/ Bermuda-looks-to-pioneer-Western-Shariah-compliant-hub.html Evergreen Life Limited (2012) Business Bermuda, Retrieved from www.businessbermuda.org Meeting Market Challenges (2010) Conyers and Pearman, Retrieved from: http://www.conyersdill.com/ publicationfiles/149_10_05_31_Meeting_ Market_Challenges_IFN.pdf Islamic Finance in Bermuda (2011) PWC, Retrieved from: http://www.pwc.com/bm/ en/assets/document/pwc_bda_islamic_finance_v2.pdf Bermuda’s Islamic Finance Initiative (2012) Ber News, Retrieved from: http://bernews. com/2012/01/bermudas-islamic-financeinitiative/ Bermuda Islamic Finance Assets See Potential Growth (2012) Global Islamic Finance Magazine, Retrieved from :http:// www.globali s lami cfi nancemagaz i ne. com/?com=articles_list&aid=1349 Bermuda to be first Western centre for Islamic finance in favourable tax domicile (2012) Islamic Finance Expert, Retrieved from: http://ifinanceexpert.wordpress.com/ tag/bermuda-islamic-finance/ Choosing an Islamic Investment Jurisdiction: Bermuda as a Primary Case Study (2012) Eureka Hedge, Retrieved from: http://www. eurekahedge.com/news/11_oct_alternative_investment_funds-IFN_Choosing_an_ Islamic_Investment_Jurisdiction_Bermuda_as_a_Primary_Case_Study.asp

Interview

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INTERVIEW WITH

Belaid Abdessalam Jheengoor at PwC in Bermuda

Could you tell us more about your role and responsibilities as Director with PwC Bermuda in the Asset Management Practice and Chairman of the Bermuda Government Islamic Finance Task Force? I lead the PwC Bermuda Islamic finance initiatives working closely with the PwC global network and Islamic finance leadership team. My duties involve providing strong political support to the government of Bermuda and have aided with policies that were announced in the Budget 2011, Throne Speech in 2011 and the Budget 2012. The taskforce which was set up by the Ministry of Business Development comprises of representatives from the independent regulator, Ministry of Business Development and private sector. My role involves focusing on business development initiatives in Bermuda.

Belaid Abdessalam Jheengoor

Bermuda is a growing hub for Islamic finance did the government have to accommodate any laws for Shariah compliant asset management ,as this is often the case with many countries wishing to tap into the Islamic finance market? The Feasibility study commissioned by the Ministry of Finance in 2010 did not identify any major legislative or regulatory impediments to introducing Islamic financial product offerings in Bermuda Bermuda’s practical regulatory framework, which incorporates common law principles, enables effective legal and financial structuring, and innovation, to accommodate Islamic finance. Bermuda’s tax neutrality is a competitive advantage over its onshore competitors,

as more innovative and complex Islamic financial products are developed by the global market. Bermuda offers promoters the advantages of effective tax structuring and speed to market for retakaful and takaful services, Shariah compliant funds and Sukuk. What is the scope for investors wishing to tap into asset classes such as Shariah compliant hedge funds, ETF’s and equities? Bermuda is one of the world’s leading jurisdictions for the asset management industry and offers a highly flexible environment, with a wide variety of available fund structures, overseen by risk-based regulation. We have built a reputation as a sophisticated financial hub delivering on the qualities so critical to building effective global business structures. The pool of service providers, spanning boutique fund administrators to global law and accounting firms, work together to provide service providers with a highly personalised service in a well-controlled, stable environment. There have been a number of guidance notes which have been issued by BMA regarding the benefits of Shariah compliant funds in Bermuda. Such benefits include no legal restriction on the asset type, concentration or strategy and this means greater flexibility in approach, i.e. easy to structure Shariah-compliant funds and determine asset allocation strategies. In addition a Bermuda partnership can elect to have a separate legal personality, should this be required and unlike some jurisdictions, no local auditor sign-off is required for Bermuda investment funds. Another ben-

2012 May Global Islamic Finance

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Interview

efit includes no exchange control for non-resident undertakings and no restriction on repatriation of funds. Umbrella or multi-class funds can be created as Segregated Accounts Companies which is highly advantageous. Lastly new fund applications or material changes can usually be processed expeditiously through the BMA which matches or exceed fund domicile’s speed to market.

management is a key challenge which remains underdeveloped in many jurisdictions. In addition legal framework which is incomplete or untested is another major challenge for countries wishing to tap into the Islamic finance industry. The lack of harmonized contracts and standardisation needs to be further developed in addition to insufficient expertise (at the supervisory and industry levels) relative to the industry‘s growth in addition to a standardised Shariah governance.

Which sectors are the most profitable for Shariah compliant hedge funds both in Bermuda and worldwide? Some of the most profitable Shariah compliant funds are in the sectors of trade finance, Shariah-compliant private equity and venture capital. Globally there are significant opportunities to penetrate the untapped market of Islamic Microfinance. Bermuda’s fund legislation provides opportunities to set up microfinance private equity “fund of funds” in Bermuda to capture growth in emerging markets, and invest in microfinance private equity/venture capital funds. How important is Standardisation for the progression of Islamic finance? Standardization is a big challenge. A lack of standard financial contracts and products across the various institutions within the same country, as well as across jurisdictions is a problem. The standards for Islamic institutions operations continue to be fragmented, notwithstanding international initiatives that have been taken by the AAOIFI and the IFSB to create general industry standards.

What are your future plans for PwC in terms of promoting the Islamic finance industry? I will continue to support to the Bermuda Government and private sector and work with the PwC Islamic finance global leadership as thought leadership s we can build product development and services. In addition I will be a prominent promoter of Islamic finance in the media writing and speaking on the industry issues.

scholars to try to work together to develop standards and practices which are more acceptable at the global level.

While full harmonization might not be possible given the nature of the industry, mutual recognition of financial standards and products across jurisdictions would help limit this problem.

Where do you see the Islamic asset management sector heading in the next few years? I can see that the Islamic asset management sector will develop innovative strategies without compromising Shariah-compliancy. The future also looks positive for commendable work being carried out by the IIFM/ISDA to develop Master Hedging Agreements and future developments promising to allow Shariah-compliant innovative investment strategies. My preference is private equity as there is a close relationship between Islamic tenets of investments and PEFs. Both are participatory in nature, this lead to the sharing of risks and rewards, and investment in the real economy, taking a long-term view on investments with an exit plan, and aligning the interest of the stakeholders.

It would also reduce transaction costs, help implement an efficient regulatory oversight, enhance the process of compliance, and contribute to confidence and industry growth.

Shariah-compliant PEFs focus on acquiring majority stakes in privately held Shariahcompliantcompanies and projects. One significant difference is profit and loss sharing and manager remuneration determination.

Given the diversity of rulings of the various Shariah advisory boards from various jurisdictions, it is important for the Shariah

What do you personally feel are the key challenges that the Islamic finance industry faces? Infrastructure and tools for liquidity risk

Local accounting standards used in the Islamic banking sector often consist of a mixture of IFRS, AAOIFI and other specific standards, complicating the operations of Islamic institutions. Similarly, IFSB standards are not fully implemented in many countries.

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It has been reported that Bermuda is well positioned to deliver private equity funds what is your view on this and what makes Bermuda an attractive option for investors? A Shariah-compliant private equity/venture capital, real estate or global infrastructure fund is typically structured as a limited partnership. Bermuda’s limited partnership rules accommodate both the Mudharaba and Musharaka structures. The Bermuda partnership acts do not attempt to regulate the affairs of a partnership to any great extent, and rather, leaves parties free to tailor their partnership agreement to their specific requirements. The specific requirements of either structure can easily be incorporated into the partnership agreement. Bermuda structures are also suitable parallel vehicles to accommodate both Muslim and non-Muslim investors. The global Islamic finance assets have already reached to $1.3 trillion what can you say about the future of Shariah compliant assets? The Islamic finance asset sector can only further grow in profitability. However it needs to continuously focus on the fundamental values underpinning Islamic finance, which are integrity, trust, transparency and fairness. gif

Market Review market was Majid al Futtaim Group’s US$400 million sukuk sale in February. MAF’s sukuk issuance may open the market to other purely privately owned regional companies.” Stadtmiller said the growth in sukuk sales in the Gulf region in recent months stems from high demand for the current limited supply of Islamic bonds, while many financial institutions with good liquidity are looking to put money into new investment channels.

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ographies.” During the ACI Congress, Stadtmiller will take part in a panel discussion on sukuk trading with Rupesh Hindocha, Head of Credit Trading MEA at Standard Chartered Bank, Yaser Abushaban, Director of Asset Management at Emirates Investment Bank and Chavan Bhogaita, Head of Markets Strategy, National Bank of Abu Dhabi. The event will begin on Friday, when Brad Bourland, Chief Economist and Head Prop Investments of Jadwa Investments, Farah Foustok, CEO, ING Investment Management and Said Hirsh, Middle East Economist of Capital Economics, will take part in what is expected to be a lively debate on the state of the financial markets industry in the wake of the Arab Spring. The 51st ACI Financial Markets World Congress is hosted by the UAE Financial Markets Association, which was established in December 2011 and is an affiliation of the Association Cambiste Internationale (ACI), the global umbrella body of the national financial markets associations around the world.

“Malaysia is the oldest and largest market for sukuk, but the GCC sukuk market has grown considerably in recent years,” he said. “By selling sukuk, issuers can reach a wider audience of investors, including Islamic institutions that are Founded in Paris in 1955, the ACI has more required to invest in assets than 20,000 members in 80 countries, makthat do not pay interest.” ing it the largest international association in Stadtmiller said the ACI the wholesale financial markets industry. Financial Markets World “Dubai is a place that cannot be ignored Congress, at the Dubai In- in today’s finance industry,” said Manfred ternational Convention and Wiebogen, ACI President. “Reflecting on the Exhibition Centre, is creat- changed environment in today’s financial ing an important platform markets, it is very significant that the ACI has to focus on the “large and come to the GCC region for the first time. We growing business” of Is- look forward to making a valued contribution lamic finance. “Estimates to this rising hub between the East (Asia) put the total amount of Shariah-compliant and the West (Europe and US).” The ACI Fiassets at Islamic financial institutions at nancial Markets World Congress is supportUS$1 trillion and the global sukuk market at ed by the UAE Central Bank, Official Banking US$180 billion,” he said. “The ACI World Congress “Many Islamic institutions, particuoffers an opportunity for larly in the Middle East and Southinvestors from around the world to learn about the east Asia, have ample liquidity and are lookinstruments and players ing to deploy money into new investments. in this important segment Sukuk are a relatively new product, and curof the global financial marrently supply of sukuk is small compared to kets.

MULTI BILLION DOLLAR SUKUK ON THE CARDS FOR PRIVATE SECTOR

Nick Stadtmiiller, Head of Fixed Income Research at Emirates NBD, said over US$6 billion of sukuk have been sold by GCC entities so far in 2012 compared to issuance of US$7.3bn for all in 2011, with the UAE’s Majid Al Futtaim Group paving the way for more private sector involvement in Islamic finance through a recent sukuk sale. With Islamic financial institutions currently holding Shariah-compliant assets worth an estimated US$1 trillion, he said the global sukuk market was valued at US$180 billion. “Regional banks have been especially active in tapping the sukuk market in recent months,” said Stadtmiller, who will be among a team of experts analysing the intricacies of sukuk trading at the ACI Financial Markets World Congress, taking place from 23 - 24 March under the patronage of H.H. Sheikh Hamdan bin Rashid Al Maktoum, Deputy Ruler of Dubai and Minister of Finance. “Another interesting development in the sukuk

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the potential demand for these assets.

“Many Islamic institutions, particularly in the Middle East and Southeast Asia, have ample liquidity and are looking to deploy money into new investments. Sukuk are a relatively new product, and currently supply of sukuk is small compared to the potential demand for these assets.’’ “The supply-demand imbalance in the sukuk market means that issuers can place sukuk among a wide investor base and attract competitive pricing on sales. The investor base for sukuk is more concentrated in the Middle East and Southeast Asia. Sukuk offer regional issuers an avenue to diversify their sources of funding away from Europe and into new ge-

Partner EmiratesNBD, Gold Sponsor UBS, Silver Sponsor National Bank of Fujairah, Strategic Partner Dubai International Financial Centre (DIFC) and Official Media Partner, Bloomberg. Other sponsors include 360t, 4CAST, ACI Indonesia, ADS Securities, BNP Paribas, Citi, Commerz Bank, Copp Clarke, DDCAP Ltd, Deal Hub, Deutsche Bank, DJ FX Trader, Gain GTX, ICA, ICAP, INTL FCStone, J.P. Morgan, Master Capital Group, MICEXRTS Group, Saxo Bank, SEB, Standard Bank, Thomson Reuters and Wall Street. gif

2012 May Global Islamic Finance

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Market Review

THE POPULARITY OF ISLAMIC FINANCE FUND INDUSTRY Source: GlobalIslamicFinanceMagazine.com

An International Conference on Islamic Funds and Investment opened in Pakistan Karachi which was participated by a large number of investors from UAE, USA, UK, Canada, Malaysia and Qatar. The topics covered on first day of the Conference were, Investment opportunities for Islamic Funds, Shariah status and Mechanism of Islamic Investments and Funds with global trends, Standardization and Brokerage and exchange rules and the Islamic Exchange Indices. The two days have been allocated for training workshops on the allied topics on Islamic Investments, Marketing and Shariah guidelines. A large number of well-known Shariah Scholars and Islamic finance professionals including Majid Siddique Dawood, CEO, Yassar Ltd. UK; Mr. Asif Arif Commissioner, Securities and Exchange Commission of Pakistan; Mr. Saleem Ullah, Director, Islamic Banking State Bank of Pakistan; Omar Farooq Kalair, CEO, Um Financial Group, Canada; Shamshad Nabi, CEO, MUFAP; Prof Dr. Aurangzeb, HOD, Business Administration Department, Dadabhoy Institute Of Higher Education, Karachi; Mohammad Shoaib, CFA; Nadeem Naqvi, MD, Karachi Stock Exchange Limited, Pakistan; Kavilash Chawla, MD, Nur Global Strategies, Chicago, U.S.A; Ms. Tara Uzra Dawood, Chief Executive Officer, Dawood Capital Management Ltd, Pakistan; Dr. Zubair Usmani Shariah Advisor MCB Bank Limited, Pakistan; Syed Tariq Ali, Executive Director, Pathway Global LLC, UAE; Mufti Muhammad Najeeb Khan, Shariah Advisor, Habib Metropolitan Bank Limited, Pakistan; Qazi Abdul Samad, Shariah Advisor, 52 Global Islamic Finance

May 2012

The Bank of Khyber, Pakistan and Azeem Iqbal Pirani Regional Manager FWU Group. Islamic finance is making healthy growth in Pakistan which now stands over 1000 Islamic banking branches from 5 Islamic Banks and 13 Conventional Banks with Islamic finance operations. In addition, we have good support from 5 Takaful Companies, Mudarabah Companies, 20 Islamic Microfinance Institutions, over 29 Sukuk issues and 15 Asset Management Companies have launched their Islamic Funds, which have made promi-

Cayman Island 59, Bahrain 46, Luxemburg 29, Dubai 16, Singapore 11 are the prominent players in the world. Mr Zubair Added that Islamic Funds industry is growing with other aspects of Islamic Finance including Mudarabah and Takaful businesses. Some of these funds are the leading funds in Asian markets as well, which is a matter of honor for Pakistan and can be taken as the source of further development in this sector. He further added that from the bright prospects for Islamic Funds other allied sectors

â&#x20AC;&#x17E;

The popularity of Islamic finance fund industry is growing steadily as more conferences and awareness about Islamic funds are being promoted around the world.

Islamic finance is making healthy growth in Pakistan which now stands over 1000 Islamic banking branches from 5 Islamic Banks and 13 Conventional Banks with Islamic finance operations. In addition, we have good support from 5 Takaful Companies, Mudarabah Companies, 20 Islamic Microfinance Institutions, over 29 Sukuk issues and 15 Asset Management Companies have launched their Islamic Funds, which have made prominent role of Pakistan in the global Islamic finance canvas

nent role of Pakistan in the global Islamic finance canvas. The organizer of this International Conference and CEO, AlHUda-CIBE, Mr Zubair Mughal while declaring the objectives behind this conference, highlighted the valuable contribution by Pakistanis in research, shariah and skilled professionals bringing strong alternative in a difficult financial situation faced by the world. Mr Zubair added that Islamic funds are rapidly gaining popularity in US$1.3 Trillion worth of global Islamic finance market gaining 6.1% share from over 650 funds spread all over the world, of which the highest 230 is in Saudi Arabia while Malaysia has 172,

like brokerage houses; stock market indices etc will also gain momentum. The hosts and organizers of the Conference AlHuda Center of Islamic Banking and Economics are organizing it with the technical support of UBL Asset Management limited and the support of other Dawood Capital Management Ltd, FWU, Burj Bank Ltd, Dadabhoy Institute of Higher Education, Diyanah Financial Services, Khyber Bank Ltd, ABL Asset Management Ltd, Habib Metropolitan Bank and Babib Mudarabah to make the Conference successful. gif

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Market Review

ISLAMIC BENCHMARK STANDARD

SET FOR HEDGING Source: GlobalIslamicFinanceMagazine.com

The MA Agreement is a mechanism structured to allow bilateral exchange of profit streams from fixed rate to floating rate or vice-versa. The documentation provides product schedules based on two separate structures for transacting MA to mitigate cash flow risk.

The Mubadalatul Arbaah (MA) standard follows on from the ISDA/IIFM Tahawwut (Hedging) Master Agreement and provides the industry with a framework for Islamic risk mitigation.

The MA standard documentation has been developed under the guidance and approval of the IIFM Sharia Advisory Panel, in co-ordination with the external legal counsel Clifford Chance as well as market participants globally.

The launch of the Tahawwut Master Agreement as the template for Shariahcompliant risk management was officially announced by Central Bank of Bahrain (CBB) in March 2010. “Islamic Financial Institutions (IFIs) have largely shown resilience in the current difficult financial environment and some are even going through an expansion phase,” IIFM chairman and CBB executive director of banking supervision Khalid Hamad said. “However, due to the inter-linkages with the global financial system, the balance sheet of IFIs are exposed to fluctuation in foreign currency rates and also cash flow mismatches due to fixed and floating reference rates. “IIFM recognises the importance of this critical segment at an early stage and undertook the challenge of developing global 54 Global Islamic Finance

May 2012

Islamic hedging standards in collaboration with ISDA. “I am confident that such joint efforts will continue in the future for the benefit of the industry,” he said.“ISDA is pleased to continue its partnership with the IIFM as part of its own on-going efforts and commitment to building safe and efficient OTC hedging markets, across both global and Islamic financial markets” said ISDA chief executive Robert G Pickel. “The ISDA/IIFM Tahawwut Master Agreement was a major milestone in the development of risk management in Islamic finance and the development of the ISDA/IIFM confirmation templates for Islamic Profit Rate Swaps is a natural step in the evolution and development of the market,” he said.

“The MA Standard has given to the industry access to a robust and well developed product documentation under the Tahawwut Master Agreement to manage cash flow risk for various Islamic Capital Market instruments such as sukuk which has seen increasing number of fixed profit rate issuances in the last few years and as the sukuk market grows, the need for hedging will also increase,” said IIFM chief executive Ijlal A Alvi. “IIFM has taken a lead in preparing Islamic financial product and documentation standards for specific areas of the industry to provide best practices and clarity for sound business activities,” said IIFM Sharia head Dr Ahmad Rufai. gif

Interview

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TRADE FINANCE REMAINS AN UNTAPPED OPPORTUNITY IN ISLAMIC FINANCE interview with Dr Massoud Janekeh, Head of Islamic Capital Markets (ICM), Bank of London and the Middle East

Massoud began his career in the chemical industry where he spent 10 years as an engineer with global products and investments at ICI/Zeneca, before moving to strategy consultancy with AT Kearney and Integrum. In 2004 Massoud moved to financial services sector with BDIC and European American Capital prior to joining BLME in April 2007 as Director of Corporate Banking. In 2010 Massoud was appointed as Director and Head of Islamic Capital Markets, to expand BLME’s financing services to Islamic financial institution. Massoud has a DPhil in Chemical Engineering and MBA from University of Oxford. Here in Global Islamic Finance, Massoud is sharing his views on capital markets and what the future holds for Islamic finance.

Dr Massoud Janekeh

Can you tell us more about your role as Head of Capital Markets at the Bank of London? I serve BLME’s clients when their financing needs exceed BLME’s limits, by providing them with access to other investors in Islamic finance such as Islamic Financial Institutions or institutional investors. In 2011 BLME created an Islamic capital markets desk can you tell us more about that?

The ICM desk is active in syndications and corporate finance transactions. We look to offer our partner banks investment opportunities in our specialised sectors of Real Estate, Transportation, Energy and Healthcare, and seek to participate in investments arranged by partner banks. What products and services do the Islamic capital markets desk offer for corporations and Sukuk issuers? ICM team is experienced in structuring 2012 May Global Islamic Finance

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Interview

transactions to meet our clients’ financing needs. We combine our understanding of Shariah compliant products with UK tax structure and financing rules to offer our clients and investors products that work. How vital is capital market for the Islamic finance and banking industry? Capital markets play a critical role in developing the institutional investor base for Islamic finance and with it bring access to new sources of capital to grow the industry. Islamic finance continues to be dominated by the Islamic banks and due to shortage of Shariah compliant assets for banks to invest in this is likely to continue to be the case for some time. The real impact of Capital markets emerge when it plays its traditional role in dis-intermediating banks and in bringing new sources of capital to the market. The success of Islamic Capital markets therefore should be measured by the success of its fund management industry that provides Islamic investors with suitable Shariah compliant investment products that contributes to their pensions and helps their economic growth. How do you think Islamic finance is progressing in the trade finance sector? In my opinion Trade finance remains an untapped opportunity in Islamic Finance. From a product perspective, the murabaha contract is a good fit with financing trade, its short term nature (majority of contracts are less than one year) helps with the need for liquidity in the sector and the significant inter OIC trade can offer a captive market for developing the business. Yet Islamic trade finance accounts for less than 5% of the banking assets. I think part of the problem is lack of connectivity between the Islamic banks. International trade Finance offers a significant opportunity to connect Islamic Banks together. Cross border trade relies on banks working together in accepting each other’s risk. The progress amongst Islamic banks has been slow because majority of the business continues to flow to conventional banks, so customer does not see the benefit of Islamic finance if his L/C ends up as a negotiable paper in the conventional market. We must encourage Islamic banks to have trade finance flow between one another if we are to untap the huge opportunity in Islamic trade finance. Prior to your role as Head of Capital Markets you were Head of Trade Finance tell us more about your role within the trade finance sector? In its formative years BLME focused its trade and business finance activities in the UK domestic corporate market and my job was to 56 Global Islamic Finance

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develop BLME’s trade finance offer for Supply Chain financing and Asset Based Lending products. We continue to offer these products to our clients and additionally we have broadened our offer to trade services that includes documentary credit for international trade. How are capital markets in the Islamic finance industry progressing in 2012? I believe the financial crisis and instability in the Middle East were important tests for the Islamic Capital markets which demonstrated despite its embryonic stage it has the resilience and demand to help it bloom again. In some countries such as UAE and Malaysia issuers have an equal choice in using the conventional or Islamic capital markets, which is an important signal for the maturity of the market. Judging by the growth in the volume of sukuk issuance and the return of windows as MLAs in large ticket financing transactions such as HSBC, SCB and Deutsche Bank, I would say the progress is impressive and reminiscent of the pre-crisis days. What do you feel the future holds for Islamic finance and banking? I see significant head space in the growth of Shariah compliant finance, which is unlikely to plateau within the next ten years. The key macro drivers for growth are significant surpluses in the GCC markets and growth prospects of developing economies such as

Malaysia and Turkey, not to mention the potential demand from Africa. The key sectoral driver will be the ambitions of the larger Islamic banks and their plan to extend their operations beyond their local markets. Majority of income of the top Islamic banks come from their domestic market. Over the next ten years I hope to see more on the internationalisation strategies of these banks and a significant shift in investment for growth in new markets. Can you tell us more about the £11.5 million Murabahah financing deal with Boubyan bank? I am not sure which deal this question specifically refers to. We have done a number of transactions in association with Boubyan Bank, most recently was our participation in syndicated Murabaha for Boubyan Petrochemical. Istisna vs. Murabahah has been debated within the industry what do you feel is the better contract? Istisna is a variation of Murabaha contract that is well suited to financing construction. The parties can agree to use alternative structures for financing including forward lease and Murabaha. gif

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World Islamic Finance Review

GROWTH AND PROSPECT OF SUKUK

IN ISLAMIC FINANCE Author: Mohamad Zaid Mohd Zin, Centre for Islamic Thought and Understanding, University Technology Mara, Malaysia

58 Global Islamic Finance

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World Islamic Finance Review RESULTS AND DISCUSSION

operation with the objective of contributing towards greater international financial and economic integration. No doubt, sukuk (Islamic bond) proved that it is among the most successful Islamic financial product in the industry and be one of the fastest-growing sectors in the global financial landscape.

Sukuk Market in Malaysia The Malaysian Sukuk market has also grown to become more innovative and sophisticated to meet the diverse risk-return profiles and requirements of both issuers and investors. The proliferation of new types of instruments with extended maturity profiles have generated a diversified range of players, both local and foreign to participate in the market. This was facilitated by the liberalisation of the market in 2005 to allow for issuance of debt securities by foreign corporations and multilateral agencies in ringgit denominated papers. In 2007, this was extended to foreign currency denominated issuances. Indeed, this has attracted many foreign corporations, multinational corporations and multilateral agencies to raise funds and invest in issuances and origination out of Malaysia, hence enhancing the Malaysian market, and strengthening Malaysia’s inter-linkages with other international financial markets. The development of the Sukuk market in Malaysia has accompanied the transformation of the Malaysian economy that has now become more diversified and private sector driven. The market, initially dominated by the Government debt securities, now reflects the growing demand for the long term financing requirements of the private sector. The corporate sector now raises 58% of their financing requirements through the debt securities and Sukuk market compared to about 33% ten years ago. The presence of a deep and liquid debt securities and Sukuk market thus contributes towards the stability of the financial system. Global Sukuk industry experienced impressive growth over ten years ago in Malaysia and is now the focus in the development of Islamic financial system rapidly. Size of the global Sukuk market, including Sukuk denominated in local currency, has increased from USD336 million (RM1.3 billion) in 2000 to an estimated USD82 billion (or RM281 billion) at the end of 2007, with average annual growth rate of 40%. However, the total Sukuk issuance for 2007 is only worth USD47 billion (or RM161 billion), an increase of 73% of the total issued in 2006. Although the performance is not as estimated because of the economic crisis, but the flow of Sukuk issuance seen more positively and surviving. Sukuk also almost unique because it not only offered to Muslim investors but also to other conventional investors. According to sources IFIS, in 2010 shows that the global Sukuk reached US47.77 billion, an increase of 50% compared with the year 2009, which

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Differences between Conventional Bond and Sukuk The most prominent characteristics of conventional bonds may be summarized as follows: - Sukuk and their contemporary applications. •

Bonds do not represent ownership on the part of the bond holders in the commercial or industrial enterprises for which the bonds were issued. Rather, they document the interest-bearing debt owed to the holders of the bonds by the issuer, the owner of the enterprise.

•

Regular interest payments are made to the bond holders. The amount of interest is determined as a percentage of the capital and not as a percentage of actual profits. Sometimes the interest is fixed, while oftentimes in bonds with longer tenors the rate of interest is allowed to float.

•

Bonds guarantee the return of principal when redeemed at maturity, regardless of whether the enterprise was profitable or otherwise.

Mohamad Zaid Mohd Zin, Mara University of Technology, Malaysia Mohamad Zaid Mohd Zin is a lecturer at Centre for Islamic Thought and Understanding, Mara University of Technology, Malaysia. He received his B.S degree in Syariah From Al Azhar University, Cairo, Egypt (1999) and Master Degree in Islamic Studies (Syariah) from Malaysia National University (2005). His research interests in Islamic finance are in the areas Syariah issues and Sukuk. He is a member of International Economics Development and Research Center (IEDRC) and joined over 10 International Conference as a presenter at Malaysia, Indonesia, Singapore and Dubai. Currently, he is a PhD student at Malaysia National University under Faculty of Islamic Studies.

only reached US31.93 billion in the global market. As expected, Malaysia continued to dominate the issuance of Sukuk in 2010 and became the leading position in the global Sukuk market, with 65% of total outstanding Sukuk and 75% of primary issuance of Sukuk as at December 2010. Malaysia is the world’s largest sukuk market with a number of Malaysia’s sukuk issues by 68.9%, or USD62 billion (or RM213 billion) of total global outstanding at the end of 2007. Number of corporate sukuk in Malaysia more than RM30 billion in 2007. Malaysia will not only lead the development of the sukuk market in terms of total sukuk issuance, even in terms of the introduction of innovative sukuk structures and competitive to attract more investors. Moving forward, Malaysia will continue its efforts in strengthening the international linkages in the global Islamic financial system through collaborative partnerships and co-

The issuer of such bonds is not required to return more than the principal and the agreed amount of interest. Whatever profits may have been earned by the enterprise accrue entirely and exclusively to the issuer. So the bond holders have no right to seek a share in the profits beyond the interest. However, the main difference between Sukuk with conventional bond is a claim of conventional bond investors on the future flow of money to the party that issued the bond. The contract between the investor and the issuer is a contract of debtors and creditors. For example, an investor subscribed for bonds worth about RM 1000 and each year will be given the benefit of RM 100 if the 10% interest rate until maturity. Upon maturity of the bond investors will be given the benefit of it and paid the price of the bond proceeds of RM 1000. In other word, for the Sukuk, the method of calculating profit is similar to conventional bonds, but in the Sukuk contracts, claims an investor rather than on cash flow alone, but claims the benefit of an investor is an asset used by the funds generated through Sukuk financing. In the 2012 May Global Islamic Finance

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World Islamic Finance Review

Sukuk contracts, the money generated from the Sukuk will be used to purchase an asset. Then Sukuk certificate holders have claims on the benefits generated by the asset is the investor. For example, if investors subscribe to RM 1000 with an agreement rate of 10% profit margin, the investor will receive RM 100 and RM 1100 per year at maturity.

conveyance of title in real estate or property transactions (which would be required in the context of an Ijara wa iktinaa, or sale-leaseback structure), that the sale contract and the resulting title transfer be recorded in a real estate register and that a transfer of title fee or tax be paid.

The creation of many innovations and initiatives have also contributed to the advancement of Islamic financial system. However, the challenges can be overcome by increased effort in every cooperation, increase understanding of the Shariah concern, mutual respect and collaboration practices.

Year

Problems such as lack of uniformity in pro- Conclusion The Sukuk has been structured which the cedures that had applied the principles of Sukuk now has become the strongest segissue is not the exchange of money with Shariah, the lack of professional qualifica- ment in Islamic finance. It is involved in the the certificate alone but is based on the tions (lawyers, scholars and academics) are international market and generates signifiexchange of assets that have been cant cross-border flow of funds as approved with a few scales, which may be achieved beyond domesGlobal total issued Sukuk for 2010 funding will enable investors to retic markets. Along with hard work, ceive profits from the transaction. growth and balanced development 47,77 2010 Another aspect that distinguishes agenda, all countries have the potenbetween Sukuk and conventional tial to expand the role of Islamic fibonds is in a situation where the nance is increasing in contributing to 31,93 2009 Sukuk bond issuer can not repay the debt global growth and financial stability. and interest to investors / creditors 16,22 2008 investors will lose all the investment Investment Sukuk are the ideal inas the bond contract is usually no vestment for investors requiring a guarantee that the assets can be fixed investment return with low risk 10 20 30 40 50 60 secured to recover the principal inand the Shariah Compliant. Sukuk Amount (US billion) vestment. also should be issued for new comSource: Islamic Finance Information Services – IFIS mercial and industrial ventures. If In the Sukuk, not Sukuk are not in they are issued for established busithe contract there must be assurnesses, then the Sukuk must ensure ance that the money raised from investors experienced in both conventional and Shari- that Sukuk holders have complete ownerwas used to buy a property in which inves- ah standards and lack of awareness among ship in real assets. tors profit comes from the benefits of the as- employers and apparently the manager of set. If a bad situation occurs, investors can the Sukuk are also difficult to implement. As Islamic finance can also be used to estabstill claim some of their investment assets a proactive measure, ethical standards of in- lish a stronger financial flows of the entire to be secured by collateral to the contract spection in accordance with Shariah should border to contribute to the common agenda Sukuk. be taken. of improving growth and development agenda to achieve self-sustained global aspiraChallenges in Sukuk Market Prospects for the development of Islamic tions, balanced and growth, and long-lasting There are various forms of tax to be account- finance should contain a balanced develop- economic development. Sukuk instruments ed for. For example, in the ECG Sukuk, which ment of the Shariah and integrated market has become an attractive new asset class was backed by oil and gas assets in the Gulf by the prospect of a unique Islamic finance. investors as a form of competitive businessof Mexico, the structure utilised a funding In addition, the products and services must es, thus proving the importance of Islamic arrangement that was heavily driven by US also not limited to Muslim’s market only. finance in strengthening financial cooperatax considerations. Legislation in some ju- But, also emphasizes acceptance and appli- tion is increasingly real. gif risdictions requires, in connection with the cations globally. References and Further Reading • • • • • • • •

Mushtak Parker, (2010) “Malaysian promotes Islamic finance at international event”, Arab News, 25 October 2010, published. Mohammad, Shamsiah, Mohd Fadhly Md Yusoff, and Abdul Aziz Al Qassar, (2009), “Ground Rules for Sukuk Issuance” in Sukuk: Islamic Capital Market Series, Malaysia: Sweet & Maxwell Asia. Simmons and Simmons Company, website: http://www.simmonssimmons.com/index.cfm?fuseaction=service_industry.display_ left&page=3243&hsf=sukuk (accessed on 2nd February 2011 ) Wikipedia, the Free Encyclopedia, website: http://en.wikipedia.org/wiki/Sukuk (accessed on 4th February 2011) Zeti Akhtar Aziz ,Tan Sri Dato’ Sri Dr. , Governor of Central Bank of Malaysia, Quarterly Bulletin, First Quarter 2010, website: http:// www.bnm.gov.my/files/publication/qb/2010/Q1/bm_p6.pdf Governor of Central Bank of Malaysia, (2007) “ The Global Islamic Financial Services Industry”, May 14, website http://www.bis.org/ review/r070515b.pdf (accessed on 6th February 2011) Malaysian International Islamic Financial Centre (2010), “Welcoming Remarks”, website: http://award.mifc.com/index.php?ch=ifa_ winner&pg=ifa_winner_recog&ac=446 Hilton Convention Centre, Istanbul, Turkey,(2009)“ Islamic Finance and Global Financial Stability “, 5 October, website: http://www. bnm.gov.my/index.php?ch=62&pg=66&ac=345&lang=bm

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Market Review reinforce social cohesion and mainstreaming cross cutting issues. He said, “it is on record that Africa is the only region in the world that is off-track in achieving most of the targets set in the Millennium Development Goals particularly in the areas of the mainstream inclusive growth, provision of basic services (infrastructure, water, sanitation, education and hospitals) and reversion of the spread of diseases, tackling of poverty, job creation and security.

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tion Agenda which he said drew inspiration from our vision 20:2020. He noted that the SPDA-I which covers the period 2008-2012, made appreciable impact on poverty reduction and promotion of sustainable economic growth while also supporting regional integration in African member countries. Nothing that it was encouraging to note that so far the Bank has committed about $8 billion under the program, while SPDA-II, the envisaged successor is to span another five years (2013-2017).He advised that in developing the SPDA-II, it was important to draw lessons and best practices from SPDA-I while also benchmarking similar programmes by other development finance organisations. The Vice President highlighted the experiences of Nigeria in setting up the Nigeria Trust Fund (NTF) at the ADB and the journey so far and urged SPDA, as a special programme, to endeavour to develop its peculiar procedures as well as make concerted efforts to draw up country specific sectoral priorities.

“African countries “In drawing up SPDA-II therefore, there is the cannot do all these need to know what worked and what did not things alone; they work under SPDA-I; what impact was made, need help and as- how many people have been lifted out of povsistance from devel- erty, and in which sectors has it made the opment partners. most significant difference in member counThe prospect of this tries? Was SPDA-I able to mobilise enough veritable source resources from external sources? What went of support is fast wrong and what can be done to improve on becoming less reli- the resource mobilisation from other donors able, no thanks to and development partners? What are the the failure so far, to comprehensively resolve Key Performance Indicators for the amount the high incidence of debts and deficits in of resources leveraged from other sources Japan, United State of America and some for SPDA-I?” European Union member countries.’’ “The unpalatable fallout of this sudden shock is the declin“African countries cannot do all these ing flow of grants and Forthings alone; they need help and aseign Direct Investments to the continent of Africa.” “To sistance from development partners. address this gap therefore, The prospect of this veritable source of suphe said, African countries were left no option than port is fast becoming less reliable, no thanks to embark on far-reaching to the failure so far, to comprehensively reeconomic transformation solve the high incidence of debts and deficits policies designed to promote private sector driven in Japan, United State of America and some growth, strengthen regional European Union member countries. integration, facilitate crossborder trade and harness economies of scale.” In his welcome remarks, IDB President, Dr. The Vice President also challenged IDB, Af- Ali, noted that Vice President Sambo’s presrican Development Bank (ADB) and other ence at the forum was an indication of the Multi-lateral Development Agencies to be attention Nigeria paid to IDB’s initiatives, more creative in their interventions towards saying that IDB was determined to step up ensuring that the continent was put back on efforts to remove obstacles to development track to achieving the MDGs; noting that Ni- and eliminate poverty in its member coungeria was in the second year of its Medium tries, even as he stressed that development Term (2011-2015) Development Strategy was a collective effort. gif (MTDs), he stressed that the MTDs spelled out the key milestones of the Transforma-

NIGERIA ISLAMIC FINANCE GETS SUPPORT FROM IDB

In his keynote address titled “African Development Experience: What Successful Experiences to Replicate and Scale up,” during the special meeting of African Governors Forum on the Special Programme for the Development of Africa (SPDA) on Monday, Sambo observed that on the political and social fronts, the African continent was still evolving and reeling from some complex and multi-dimensional challenges especially how to eradicate poverty and provide decent and better lives and opportunities for the teeming population across the continent. SPDA is an initiative of IDB for the acceleration of development objectives in African member countries. The Federal Government under the Goodluck Jonathan administration’s developmental programme set target to accelerate and sustain economic growth; improve and modernize infrastructure; strengthen human capital stock and enhance access to social services; improve governance and increase competitiveness;

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2012 May Global Islamic Finance

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Islamic Finance

ISLAMIC BANKS VS. NON-ISLAMIC BANKS ETHICAL DIMENSIONS Author: Dr. Kassim Dakhlallah, Assistant Professor of Finance, University of Dubai Dr. Hela Miniaoui, Faculty of Finance and Accounting, University of Wollongong, Dubai

Abstract: Islamic banks have become an international phenomenon as one of the worldâ&#x20AC;&#x2122;s fastest-growing financial sectors. It has been estimated that since 2007 the growth rate of Islamic finance products has reached 30%. In addition, Islamic financial institutions are becoming substantial players in the global banking and financial market. Therefore, it is essential to define them to understand why they are different; how they started; and how they entered the international banking market. Islamic banks can be used to meet the challenges of this competitive environment, especially since they offer new resources and products. In this article, we will introduce to the main sources of Islamic finance principles that are the foundation for Islamic banking practices. It is essential, however, to outline the main beliefs upon which these principles are established. The classification of Islamic banking contracts like Musharaka, Mudaraba, Murabaha. The formation and the different structure of an Islamic financial institution and the challenge to corporate governance are of great importance to the conduct of Islamic banking. The need for regulation in the context of Islamic banking and the main risks associated with the different financial products will be discussed. Keywords: Islamic Banks, Ethics, Adverse Selection, Moral Hazard

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Islamic Finance

slamic banking and finance is one of the fastest growing segments of global financial industry. Currently, there are over 300 Islamic financial institutions (IFI) which are mainly concentrated in the Middle East and Southeast Asia, and gaining popularity in Europe and the United States as well. They provide Islamic products for an estimated 1.82 billion Muslims in 2009 (26.72% of the worldâ&#x20AC;&#x2122;s population). Even if the sizes of Islamic financial institutions are relatively small compared to international standards, it has to be noted that the prospects for growth and expansion in non-Muslim countries are strong. IFI have experienced a steady growth during the last decade thanks to strong economic development in their host countries. The top 500 Islamic banks enjoyed an increase in their assets by 28.6% in 2009 ($822 billion) from US$639 billion in 2008 and the value of Shariah-compliant bonds was $100 billion in 2009. The share of issuance of Sukuk notes represents about 10% of the global Islamic finance industry. In addition, it is broadly known that Islamic Banks (IBs), the main part of the Islamic Financial System (IFS), performs better, during the crisis, than Conventional Banks (CBs). One key difference is that the formers donâ&#x20AC;&#x2122;t allow investing in and financing the kind of instruments that have adversely affected their conventional competitors and triggered the global financial crisis. These instruments include mainly derivatives and toxic assets. In this article, we will explore the logic of Islamic finance from the pillars of Shariah. We will investigate the ethical dimension that dominates the relationship among bankers, depositors and investors. We will compare the nature of that relationship to that of the nature of the dominant players in western banks. In fact, when we compare Islamic banks to non Islamic, we are not comparing one financial institution to another as many analysts like to put it. We are rather comparing two different natures. It is the nature of the west alongside the nature of the east. Ethical vs. unethical are key differences. Greed, exploitation and abuses are the

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ture of the depositors, the bankers, and the investors, and because of the direct involvement of all the parties in the transaction. No one has any direct or indirect interest in exploiting one another, and if they do, they all fail. In addition, Islamic banks do not finance risky investments, or intangible assets, and they equate the interest of the society to that of the investor.

Dr Kassim Dakhlallah, Assistant Professor of Finance, University of Dubai Dr. Kassim Dakhlallah earned PhD in Economics from Claremont Graduate University in California. Currently, he works as an Assistant Professor of Economics and Finance at the American University of Dubai. His research interests are in the field of International Finance and Islamic Banking.

dominant factors in most financial transactions that take place under the conventional banking system. So long commissions are received and interests are paid and the collaterals are in place, banks will lend. Reckless investors, on the other hand, knowing the borrowed money is not theirs will borrow to the max. Depositors who care most about the high interest they receive, will keep on depositing regardless of the behaviour of the bankers. Thus, a good recipe for a crisis. They all contribute to it and they all suffer from it. While under Islamic finance, we notice that greed, exploitation, abuses are at minimum. Reasons are attributed to the religious na-

Furthermore, the formation and the different structure of an IFI and the challenge to corporate governance are of great importance to the conduct of Islamic banking. The need for regulation in the context of Islamic banking and the main risks associated with the different financial products will be discussed. Concepts related to corporate governance (Asymmetric information, Moral hazard, and Adverse selection) will be analysed as well. The articleâ&#x20AC;&#x2122;s challenge will be to recognise the strengths that helped IBs performance as well as their weaknesses in order to identify the main Islamic financial products that protect IFS from the crisis. This article will provide operational recommendations for financial policy makers since it will determine how the IFS could be structured to withstand future global economic and financial crisis. The article is organised as follows. Section 1 presents the background of Islamic banking. Section 2 discusses the relationship between depositors, intermediaries and investors. Section 3 describes and analyses performance of IBs and CBs and the last section concludes the article. Background on Islamic Banking Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss (PLS) and the prohibition of Riba (usury). Many studies have discussed in depth about the rationale behind the prohibition of interest and the importance of PLS in Islamic banking. Indeed, all commercial transactions and contracts must be free from elements of 2012 May Global Islamic Finance

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Riba (interest), Gharar (uncertainty), Maisir (gambling) and non-Halal (prohibited activities). Principal Islamic financing modes used in Islamic banking are presented as follows:

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Qard al Hassan Good (Benevolent beneficience) Loan: These are zero-return loans that the Quran exhorts Muslims to make to ‘those who need them’. Banks are allowed to charge the borrowers a service fee to cover the administrative expenses of handling the loan, provided that the fee is not related to the amount or maturity of the loan. This is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor.

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Bay as-salām ou Bay as-salaf Istisna’Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship. The buyer pays the seller the full negotiated price of a product that the seller promises to deliver at a future date. This mode only applies to products whose quality and quantity can be fully specified at the time the contract is made. Usually, it applies to agricultural or manufactured products.

Profit Sharing modes: •

Mudāraba Trustee Finance Contract: Mudāraba is an arrangement or agreement between the bank, or a capital provider, and an entrepreneur, whereby the entrepreneur can mobilise the funds of the former for its business activity. Three conditions need to be met:

1. The bank should not reduce credit risk by requesting collateral to this purpose: it bears entirely and exclusively the financial risk. Collateral may be requested to help reduce moral hazard, e.g. to prevent entrepreneur from running away 2. The rate of profit has to be determined strictly as an agreed percentage (between the bank and the entrepreneur). 3. The entrepreneur has the absolute freedom to manage the business. • Mushāraka: Equity Participation Contract: Musharaka means partnership. It involves you placing your capital with another person and both sharing the risk and reward. The difference between Musharaka arrangements and normal banking is that you can set any kind of profit sharing ratio, but losses must be proportionate to the amount invested. Musharaka means partnership. It involves you placing your capital with another person and both sharing the risk and reward. The difference between Musharaka arrangements and normal banking is that you can set any kind of profit sharing ratio, but losses must be proportionate to the amount invested. • Muzaar’ah: Traditional counterpart of the Mudaraba contract in farming. The harvest is shared between the bank and the entrepreneur. The bank may provide funds or land. • Musaqat: Traditional counterpart of the Musharaka contract in orchard keeping. The harvest is shared among the partners based on their respective contributions. •

Musaka: Islamic Bonds is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed-income, interestbearing bonds are not permissible in Islam. Hence, Sukuk are securities that

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Dr Hela Miniaoui, Faculty of finance and Accounting, University of Wollongong, Dubai Dr. Hela Miniaoui is an Assistant Professor in the Faculty of Finance and Accounting at the University of Wollongong in Dubai (UOWD) since January 2009, where she teaches in the undergraduate and postgraduate programs. She is currently also the Program Director for the Bachelor of Commerce-Finance and Accountancy. Her areas of expertise are Money & Banking, Islamic Finance, International Finance, and Macroeconomics. She is a member of The Middle East Economic Association and of Master Conference-International Conference. Dr. Hela has been serving as a member of the Organizing Committee for International conferences (MEEA, 2009 and ICTBM, 2012). She is also an active researcher and has published many papers in refereed journals. She has also presented frequently at international conferences.

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comply with the Islamic law and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets. Non Profit and Loss Sharing Modes They are used in cases where PLS modes cannot be implemented, for example for cases of small scale borrowers or for consumption loans.

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Ijāra ou ijāra wa iktinā Leasing Lease Purchase: A contract under which an Islamic bank provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank that at the end of the lease period, the ownership in the asset would be transferred to the lessee pursuant to a sale or gift contract. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease. Banks add a certain pourcentage to the purchase price and/or additional costs associated with these transactions as a profit margin, and the purchased assets serves as a guarantee. Murābaha Cost Plus: This concept

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Islamic Finance refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement.

Islamic banks are very similar to their conventional competitors in terms of the legal formation procedures. Generally, banks are mainly structured as companies or corporations, two terms that are used to describe organisations that are associated with the aim of carrying out business for gain. The formation process of Islamic banking companies is similar to that of conventional banks, except that the shareholders of Islamic banks will demand that their banking company refrain from many transactions, such as those relating to trading in alcohol and tobacco production. In the case of Islamic banking companies, however, the basis of the institution requires the presence of a special board: the Sharia Supervisory Board (SSB). This body has been defined as ‘the main vehicle to evaluate, approve contract documents and supervise all operations of the bank in conformity with its objectives and ultimately with principles of Islamic law’. Accordingly, the board consists of scholars in Islamic laws who have a background in economics and finance. The role of this board is totally different from the role of the board of directors, although the two boards, in one way or another, collaborate to run the company. Members of the SSB ensure that the transactions carried out by the institution comply with the principles of Islamic finance. Relationships between depositors, investors and bankers As has been noted, Islamic economic theory is highly driven by certain ethical issues. Most of the prohibitions stated in the main textual sources have a moral dimension, such as the prohibition of interest. The other injunctions offered by Islamic economic theory also rely on the ethical commitment of individuals: voluntary charitable giving, for example, is not imposed by any of the textual sources of the Islamic law; rather, it is based on the individual’s own commitment to certain moral aims and objectives. Further, the key principles of Islamic economic theory (justice, equality and fairness) are based on certain values such as consideration of the needs of other individuals, not taking advantage of those who are in difficulty, and selflessness. It must be noted that the individuals’ commitment to the ethical aspect of Islamic economic theory is based

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on its religious genesis. The individuals’ beliefs in the rewards granted and punishments meted out in this world and the next, and in the pleasure or displeasure of God, have a key role in maintaining the individuals’ commitment to these principles. All the involved parties in any financial transactions under the umbrella of the Islamic finance have no interest in exploiting one another. Cooperation is a key to the success because if the transaction fails, they all fail. Yet, it is still important to maintain and guarantee discipline and for that the Shariah supervisory board was created. Furthermore, Islamic intermediation is asset-based and centers on risk sharing. This eliminates and reduces the probability of defaults by bond issuers. In fact, concepts of asymmetric information, moral hazard, and adverse selection went a long way in explaining a large number of capital market phenomena as well as behaviour of capital market participants. The main concepts related to asymmetric information are explained. Adverse selection Adverse selection, anti-selection, or negative selection is a term used in economics, insurance, statistics, and risk management. It refers to a market process in which “bad” results occur when buyers and sellers have asymmetric information (i.e. access to different information): the “bad” products or customers are more likely to be selected. Adverse selection problems arise before the contract is signed because the bank has less information on the project than the client (borrower). Mishkin, adverse selection is an asymmetric information problem that transpires before the transaction occurs, when parties who are the most likely to produce an undesirable (adverse) outcome for a financial contract are most likely to try to enter the contract and thus be selected.

ing would be more effective and adverse selection less probable with universal banking. In summary, banking theory indicates that Islamic banks should operate as universal banks, and when they do, they would be exposed to lower levels of moral hazard and adverse selection.

Financial transactions do expose Islamic banks to principal-agent problem when the bank enters into the contract as rab almal (principal) and the user of funds is the agent. Adverse selection problems arise before the contract is signed because the bank has less information on the project than the entrepreneur (information concerning the characteristics of a venture).

Adverse selection is one of asymmetric information problems arise in a situation where one party has extra information that others don’t. It creates the other party to have a failure judgment in making a decision. In the case of Shariah banks, adverse selection is a situation where bad debtors have more information about their business proposal future condition. Although in the beginning of business proposal they already have loss calculation on the business, they still propose the business to Shariah banks, because the risk will be shared between the banks and the debtors.

According to Ali, the bank would be exposed to adverse selection when it fails to choose the finance applicants who are most likely to perform. Obviously, adverse selection can be avoided by careful screening of finance seekers. When a bank provides equity and debt finance simultaneously, it will have more access to information than in a situation when only debt finance is provided. It could, therefore, be concluded that screen-

For Morris and Shin, some participants in financial markets have either private information or better expertise in evaluating new financial instruments and markets. This gives rise to adverse selection. In Akerlof and the classical adverse selection models that followed, there is market unravelling with equally informed traders on both sides of the market. We are concerned with situations where, on both sides of the market,

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monitored because of high information cost by the provider of capital (the principal). But the point is that such information costs will become too high in a profit-only system to insure against risk (as the premium will be too high). Ways and means must, therefore, be found to minimise such costs. Adverse selection problems arise before the contract is signed because the bank has less information on the project than the entrepreneur (information concerning the characteristics of a venture). The moral hazard problem occurs at postinvestment stage because of the ‘hidden’ action motivated by self-interest of the entrepreneurs which is unknown to the bankers (information concerning the true characteristics of an individual entrepreneur are concealed from the bankers).

some traders are informed and some are not informed. This then translates into a coordination problem among uninformed traders. The coordination problem among uninformed traders plays an explicit or implicit role in a wide variety of finance models. For Al-Jarhi, the bank would be exposed to adverse selection when it fails to choose the finance applicants who are most likely to perform. Obviously, adverse selection can be avoided by careful screening of finance applicants. When a bank provides equity and debt finance simultaneously, it will have more access to information than when only debt finance is provided. We can therefore conclude that screening would be more effective and adverse selection less probable with universal banking. Banking theory would indicate that banks would be relatively more exposed to adverse selection during economic upturns and to moral hazard during downturns. By allowing entrepreneurs to choose between interest and profit and loss sharing, conventional banks create an adverse selection problem for the Islamic banks: entrepreneurs with below-average profit expectations prefer profit and loss sharing in order to minimise their losses in the likely event of failure, while those with above-average expectations prefer interest in order to max-

imise their gains in the likely event of success. The upshot is that the Islamic banks receive a disproportionately large share of the bad risks”. Moral Hazard Abdul Rahman distinguished between ex ante and ex post moral hazard problems. Ex ante moral hazard problems arise from the fact that financial institution cannot effectively monitor borrowers and therefore cannot write a credible contract that enforces prudent behavior. Ex post Moral hazard problems arise as it is assumed that the financial institution cannot observe such returns and thus borrowers have incentives to pretend that their returns are low or default on their debt obligations.

Performance of Islamic Banks vs. Conventional Banks The financial liberalisation and deregulation have created new challenges and new realities for IBs; the globalisation effect has also put these institutions in cutthroat competition with traditional financial institutions in well developed financial markets. On the other hand, the recent global crisis has renewed the focus on the relationship between both Islamic and conventional banks and financial stability. As Islamic banking has become a phenomenon, economists have started to study the benefit of financial transactions that are free of interest. The idea of prohibiting interest now has a new, economic dimension, as a result of which, religion is no longer the only reason for eliminating interest from business transactions. In theory, many economic advantages to interest-free banks have been suggested. In 1995, the International Association of Islamic Banks (IAIB) described three profound advantages, as follows. •

The involvement of the bank in business will improve the efficiency of capital allocation. The bank will be more concerned about the productivity of a project in which it shares losses and profits. A better allocation of the available funds can be achieved. In contrast, in the case of interest-based banks, the banks earn a fixed rate of interest; there is therefore no incentive to give priority to those ventures that have the highest profit potential.

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The socio-economic aspect of Islamic banking can help to create more job opportunities, because the feasibility and productivity of a project are the only criteria on which an Islamic bank will base its financing decision. Consequently,

Akerlof and Romer further elaborate on the moral hazard, arguing that banks may use fraudulent lending practices (such as insider lending) to “loot” banks. In this case bank managers extract value out of the banks even if this leads to insolvency. The moral hazard phenomenon, noted in the text, is by no means specific to Islamic banking; it exists in all situations, quite common in a capitalist system, where de centralised decision-making is the rule, and where there are incentives for economic agents (the agency), whose activities cannot be perfectly

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many small productive projects can take place in the market, creating many new job opportunities. In contrast, the interest-based system is ‘security-oriented’ rather than ‘growth-oriented’. This attitude deprives many potential entrepreneurs of the opportunity to get the required funding, because they lack sufficient security to satisfy the banks’ criteria of creditworthiness. •

In the profit-sharing system, the supply of money is not allowed to overstep the supply of goods and services. In any case in which the enterprise suffers losses, any capital that is to be repaid to the bank will be diminished by the amount of the loss. This eventually curbs inflationary pressure within the economy.

Moreover, some economists have been more specific in discussing the economic benefits of the Islamic banking system. Their argument relates particularly to developing economies: theoretically, the level of moral hazard within any economy will be reduced where immoral and unethical conduct is eliminated by Islamic banking principles; further, the absence of the limitations normally imposed by the debt leads to an improvement in profits, which eventually encourages an increased level of investment. All of these conditions, in theory, are therefore ideal for the growth of a developing economy. Additionally, some economists have argued that the financial services market constantly needs new products. The products that have historically fuelled the development of the market have now become ‘commodities’, which means that they have become increasingly low profit, if not unprofitable. The industry therefore needs to reinvent itself in order to continue to prosper in the which, in one way or another, offers a new set of different financial products. In practice, having a zero rate of interest in a banking system is not an impossible ideal. Some of the biggest economies at a global level have kept their interest at a near-zero or zero rate for a few years. Due to certain economic circumstances, the Central Bank of Japan, for example, decided to maintain a ‘zero or near zero interest rate policy’. The zero-rate call has lasted for almost five years and the economists’ expectation is that the interest rates will remain under 1 percent for a very long time. This shows that interest is not always a positive component in the economy and that eliminating interest from banking transactions could become, at some point, a way out of many economic problems. In the last few months, the Bank of England has implemented certain cuts

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in the interest rate in order to cope with the pressure of the current financial crisis. Finally, it has been argued that the prohibition of interest would substantially prevent individuals from becoming over-indebted. It has been suggested that those who control individuals’ access to credit (that is, the regulators and the banks) do not place individuals’ interests at the top of their priorities list. On the one hand, regulators are mainly concerned with the well-being of the whole economic system rather than that of individuals. They may therefore allow certain transactions that can be hazardous to individuals, but beneficial to the economic system as a whole. On the other hand, bankers are mainly concerned with their own interests rather than with those of their clients or the whole economic system. Thus they would make a large amount of credit available to individuals to borrow if there were a prospect of high profits in the long term, which can be reflected in their balances and remuneration. The current banking crisis is a good example of the consequences of bankers’ careless lending policies. Conclusion Prohibition of Riba is central to Islamic financial ethics and law. All transactions and contracts must be free from elements of Riba. Moreover, Islamic banking is not based on creditor-debtor relationship, but on the principles of PSL between the bank and its customer under different financing arrangements and other trading and leasing contracts. Whilst, non-Islamic banks rely primarily on the interest rate instrument, Islamic banks use a variety of contracts and instruments that have been developed in compliance with Shariah laws. Moreover, in Islamic finance, the nexus between financial assets and real assets is crucial. Indeed, they connect bank resources in financing real assets rather than investing in derivatives. In this article, we introduced the foundation for Islamic banking practices and we discussed the governance concepts important in the conduct of Islamic banking. The main differences between Islamic and non-Islamic banks were identified as well. According to the literature, Islamic banks outperform non-Islamic banks especially during the last financial crisis. The question left is what role should Islamic banks play in order to contribute to the financial stability? gif

References and Further Reading •

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Abdul Rahman (2007). Islamic Microfinance: A Missing Component in Islamic Banking. Kyoto Bulletin of Islamic Area Studies, 1-2, pp. 38-53 Aggarwal, R; K and T. Yousef (2000). Islamic Bank and Investment Financing. Journal of Money, Credit and Banking, 32(1): pp. 93–120 Akerlof, G. A. and P. M. Romer (1993). Looting: The Economic Underworld of Bankruptcy for Profit. Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24 (1993-2), pp. 1-74. Ali, S. S. (2007). Financial Distress and Bank Failure: Lessons from Closure of Ihlas Finans in Turkey. Islamic Economic Studies, Vol. 14, No. 1 & 2, Aug. 2006 & Jan. 2007 Al-Jarhi, M. A. (2003). Islamic Finance: An Efficient & Equitable Option. Islamic Research and training Institute. Al-Tamimi, Y. (1995). Practice Requirements for Establishing an Islamic Bank. in M. Fahim Khan (ed), Islamic Financial Institutions, Seminar Proceedings Series No 27, Jeddah: Islamic Research and Training Institute, Islamic Development Bank, pp. 49. Drucker (1999) ‘Innovate or Die’, The Economist, 25 September, pp. 26. Ed Stevens (2001) ‘Beyond Zero: Transparency in the Bank of Japan’s Monetary Policy’, Federal Reserve Bank of Cleveland, Economic Commentary, 15 March, p 1, available online at http://clevelandfed.org/ research/commentary/2001/031501. pdf [accessed 17/06/08]. El-Gamal, M. A. (2001). An Economic Explication of the Prohibition of Riba in Classical Islamic Jurisprudence. 2 May, p 55, available online at http://www.ruf.rice. edu/˜elgamal/files/riba.pdf [accessed 24/11/09]. Ghannadian, F. F and G. Goswami (2004). Developing Economy Banking: The Case of Islamic Banks. International Journal of Social Economics, 31(8): pp.742-748. Gower, L. C. B and P. L. Davies (2003). The Principles of Modern Company Law, 7th edn, London: Sweet & Maxwell. Kaletsky, A. (2006) ‘Why Japan Will Keep Rates Ultra Low’, The Times, 12 June, available online at http://business.timesonline.co.uk/article/0,,13133-2221438,00. html [accessed 20/06/08]. Mishkin, F. S. (2003). Policy Remedies for Conflicts of Interest in the Financial System. Conference: www.bankofcanada.ca/ fr/conference/2003/remedies.pdf Morris, S. and H. S. Shin (2010). Contagious Adverse Selection. Economic Theory Center Working Paper No. 001 Venardos, A. M. (2005). Islamic Banking and Finance in South East Asia: Its Development and Future. London: World Scientific, pp. 49.

The implementation of an interest-free banking system raises a number of questions and potential problems. For Islamic banking to be successfully introduced in Zimbabwe, it is necessary to educate the public on its nature, opportunities and strength. The status of the banking system in Zimbabwe requires a different way of doing business. One effect of this may be to solve the economic problems faced by the country. With many businesses having collapsed due to prohibitively high cost of funds, a non-interest system will bridge this problem. The interest rate regime has caused financial disintermediation in the economy, contributing to itâ&#x20AC;&#x2122;s collapse and the contraction of Zimbabweâ&#x20AC;&#x2122;s Gross Domestic Product.

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Market Review

INDIA ISLAMIC FINANCE MARKET GROWS STEADILY Source: GlobalIslamicFinanceMagazine.com

The ‘passive’ Goldman Sachs S&P CNX Nifty Shariah Index Exchange Traded Scheme attempts to match the returns of the National Stock Exchange’s Shariah index by buying shares in the companies constituting the index in the same proportion as the index, without any active churning of the portfolio. Even this passive fund — it gave returns of -8.33% — fared better than the Sensex.

The market for Islamic finance in India is growing and it is becoming a more welcomed method of financing. The $1.5 trillion market for Shariah-adherent products is expected to grow by around 20% annually. In India, 1,200 of the total 6,000 stocks are Shariah-compliant already. Over the last one year, Shariahlinked funds, which manage assets worth Rs139 crore, have outperformed the Sensex by a mile. Change is in the air, write Nitin Shrivastava and Sachin P Mampatta. Shariah compliant investments and broad market performance might suggest that Shariah-compliant funds have caught the interest of investors. Over the last one year, the 30-stock BSE Sensex has slipped 13.21%, while the 50-stock Shariah index has lost only 5.25%. That is to say, Shariah-compliant investments steer clear of shares of over-indebted companies and those whose business is related to gambling, pork, alcohol, tobacco and interest-earning lending — have performed better than the broader market. For instance, three mutual fund schemes that adhere to the Shariah-stipulated exclusions have outperformed the broader market by up to 10%. Currently, there are around 1,200 stocks of the total 6,000, including around 150 companies on the BSE 500, that are Shariah-compliant. In any un defensible economic climate, lenders like banks struggle. As Shariah funds avoid such institutions and prefer low-debt (hence fitter) companies anyway, they outperform the broader market. For instance, banks and non-banking finance companies form nearly a fifth of the Rs62 lakh crore market capitalisation of the Indian equity market. But because they earn interest on loans, Shariah investors skip their shares.

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And they are much the better for that - after all, the BSE’s banking index has dropped 12.04% over the last one year, points out Waqar Naqvi, CEO of Taurus Mutual Fund, an asset management company that operates Shariah-compliant Taurus Ethical Fund. “When the economy is not doing well, banks underperform. Their absence in Shariah portfolios helps these funds do better than the broader market. Also, these funds only look at companies where interest payments are low, which inevitably points to cash-rich companies. These again do well in a rising interest rate scenario,” explains Naqvi. Agrees Pradeep Gokhale, fund manager for the Tata Ethical Fund, another Shariahcompliant investor. “ One of the main Shariah conditions is that companies have a low level of debt. This and the absence of interest rate affected companies have helped our fund to outperform.” The “ethical” funds of both Taurus and Tata are two of three ‘active’ mutual fund schemes that are open to Indian retail investors. Their negative returns of -7.96% and -2.53%, respectively, are still better than the Sensex show. The third ethical fund, started by Benchmark Asset Management Company, has been bought by Goldman Sachs.

Shariah-compliant funds in India manage a total of Rs139 crore, a minuscule portion of the trillion-dollar-plus global Islamic finance pie spanning Malaysia, Indonesia, Kuwait, Bahrain and Saudi Arabia, according to Shariq Nisar, director of operations and research at Taqwaa Advisory and Shariah Investment Solutions (Tasis), a firm that provides guidance and support to individuals and corporates on Islamic finance. “Globally, funds and financial products worth around $1.5 trillion (Rs 75 lakh crore) are currently managed using Shariah investment principles. Shariah-compliant financial investing is still at a nascent stage. In India, though we have indices based on Shariah, there are very few products available right now. But this market is expected to grow around 20% in the coming years,” says Nisar. Tasis advises financial institutions, regularly screens stocks, develops lists of stocks compliant with Shariah principles and structures products for its clients. “Every month, we screen the universe of around 6,000 Indian stocks for likely additions or deletions to the list of Shariah-compliant companies,” says Nisar. And in all likelihood, there will be more additions than deletions as advisors such as Tasis will look to spot more companies that fit the Shariah norms. gif

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Market Review

THE GROWING OPPORTUNITIES IN TAKAFUL Source: GlobalIslamicFinanceMagazine.com

The conference was attended by more than 350 international decision-makers from over 150 organisations for discussions that focused on improving the competitive performance of the global Takaful industry and managing the essential shift towards sound underwriting profitability. The two-day event was inaugurated with a special keynote address by Abdulla Mohammed Al Awar, chief executive officer of Dubai International Financial Centre Authority, who focused on new growth horizons for the international Takaful market.

Currently, nine per cent of our regulated firms endorse Islamic business models. There are tremendous growth opportunities yet to be fully tapped, and such conferences raise awareness of the importance of insurance and Takaful, and are vital to growing this sector,” Al Awar said in his inaugural address. The inaugural keynote address was immediately followed by a special opening keynote plenary session. The session featured insights covering the industry across the Middle East and Asia from well known industry specialists. “With the Takaful segment expected to continue growing by leaps and bounds, the future of the industry looks very bright and promising. In order to ensure that the industry maintains its growth levels, it is essential to raise the level of awareness on the signifi72 Global Islamic Finance

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“As a global financial hub, it’s critical that we promote Islamic finance, and continue our efforts in creating an environment which eases the development and integration of Shariah-compliant products into global financial markets.

erators are yet to fully achieve critical business volumes despite having incurred substantial establishment costs. Increasing competition from not only new Takaful players but also well established global conventional insurers entering the Takaful market space, is putting immense pressure on the profitability of many existing players.

’Currently, nine per cent of our regulated firms endorse Islamic business models. There are tremendous growth opportunities yet to be fully tapped, and such conferences raise awareness of the importance of insurance and Takaful, and are vital to growing this sector

cant benefits of using Takaful products and services. It is also vital that collective efforts should be made to strengthen underwriting capabilities. In addition to this the industry players should also tap into newer markets and industry verticals and should also act upon the downward price pressure that is brought about by increased market competition,” Hussein Al Meeza, managing director and chief executive officer, Dubai Islamic Insurance and Reinsurance Company (AMAN), said. David McLean, chief executive of the World Takaful Conference said: “Takaful op-

However, with the Takaful industry being currently concentrated only in limited markets, segments and business lines, there is huge potential that is yet to be realised.” The World Takaful Exhibition, which was held along the sidelines of the conference, showcased the latest products, services and innovations from over 30 exhibitors. Dr. Saleh Malaikah; Chairman, Rusd International Holding Group; vice-chairman and chief executive officer, Salama Group said: “With an expanding global footprint, the Takaful industry is well placed to further capitalise on the industry’s tremendous growth potential. However in order to ensure that we sustain the impressive growth rate, which the Takaful industry has enjoyed over the last few years, it is essential to resolve certain critical issues which may hamper the industry’s long term growth.” A similar view was expressed by Ghassan Marrouche, chief executive officer of Takaful Emarat – Insurance who said that in the next five years, global Takaful premiums are predicted to grow rapidly with Takaful companies aggressively expanding and providing innovative and value-added products and services. gif

Market Review

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MOROCCO’S FIRST ISLAMIC BANK LAUNCH IN 2013 Source: GlobalIslamicFinanceMagazine.com

The government will submit to parliament a draft bill with a set of regulations for the introduction of Islamic finance products in the country within the next few weeks, General Affairs and Governance minister, Najib Boulif, told Reuters. “We expect parliament to approve the bill before the end of this year. The current plan is to allow a gradual introduction of Islamic banks to preserve the competitiveness of existing (conventional) banks,” said Boulif.

So far only Attijari Wafa, the country’s biggest bank which is indirectly controlled by a holding company owned by Morocco’s ruling monarchy, offers four such services based on Murabaha financing but only for personal finance. Immediately after parliament approves the law, Moroccan authorities will allow local banks and foreign Islamic banks to set up the first Morocco-based Islamic lender, Boulif said.

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The draft bill will be added as a chapter to the country’s Banking Law, providing a set of regulations on all Islamic finance products which specialised lenders will be able to offer from Morocco, Boulif said. It is the first time that the Moroccan government, led since December by the moderate Islamist Justice and Development Party (PJD) has detailed how it intends to develop Islamic finance in the country of 34 million. Morocco does not allow fully-fledged Islamic institutions but started in 2010 allowing conventional banks to offer a limited set of Islamic financial services products although customers complain they are subject to higher fees than conventional banking products.

should stop us from authorising more Islamic lenders,” added Boulif. In allowing fully-fledged Islamic finance institutions to operate in Morocco, Rabat aims to overcome what has become a chronic shortage of liquidity, speed up economic growth and help its ambitions to develop a regional finance hub in Casablanca. “Our economy is in desperate need for a push to help it jump to an economic growth pattern above the (annual) 4 percent we have had in recent years,” said Boulif.

Loc a l banks will be allowed to take at least 51 percent of its capital and as much as 49 percent will go to foreign Islamic lenders. There is a very strong demand from abroad for such a project

“Local banks will be allowed to take at least 51 percent of its capital and as much as 49 percent will go to foreign Islamic lenders. There is a very strong demand from abroad for such a project,” said Boulif, himself a member of the PJD. Traders in Casablanca cite Qatar’s International Islamic Bank as one of the likeliest foreign Islamic banks to want a foothold in Morocco. “We thought it is best to start with one Islamic finance institution as we wish to assess closely the experience to ensure its success. If it proves to be a success within six months, then nothing

When in opposition PJD legislators had said the development of a fully-fledged Islamic finance system in Morocco would add 2 percentage points to annual GDP growth. “Morocco is struggling with liquidity shortage that forces the central bank to inject between 30 and 35 billion dirhams each week (into the banking system). This shortage hurts the financing of investment and impacts lending growth,” Boulif said. Morocco is also working on a developing a regional financial hub known as the Casablanca Finance City with a view to winning business with other countries in the north and west of Africa. “We are keen to capitalise on the stability we enjoy here to turn Morocco into a regional Islamic finance platform,” Boulif said, adding however that Tunisia and Libya may also harbour similar ambitions. “Good investment opportunities don’t wait. I think we will have to work pretty quickly to enact the new law in 2012 and not squander a very good and rare opportunity,” he said. gif

2012 May Global Islamic Finance

Market Review

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DOW JONES ISLAMIC MARKET TITANS 100 INDEX CLOSED DOWN 0.83% IN APRIL Index Measures Performance of 100 of World’s Leading Shari’ah-Compliant Stocks:

80 blue-chip stocks traded in the developed markets of Europe, declined 3.32%.

•

Dow Jones Islamic Market Asia/Pacific Titans 25 Index Gain 0.87% Dow Jones Islamic Market Europe Titans 25 Index Fall 1.14% Dow Jones Islamic Market U.S. Titans 50 Index Lose 1.01%

In the U.S., the Dow Jones Islamic Market U.S. Titans 50 Index, which measures 50 of the largest Shari’ah-compliant U.S. stocks, decreased 1.01% in April; the U.S. blue-chip Dow Jones Industrial Average increased by 0.01%.

The Dow Jones Islamic Market Titans 100 Index finished down 0.83% in April according to data compiled by Dow Jones Indexes. The index measures the performance of 100 of the world’s leading Shari’ah-compliant stocks. The Dow Jones Global Titans 50 Index, which measures the world’s 50 largest companies, posted an April loss of 1.57%.

Middle East and GCC Regions Dow Jones Islamic Market Indexes versus conventional Dow Jones Indexes The Dow Jones DFM Titans 10 Index, measuring the 10 largest and most liquid stocks listed on the Dubai Financial Market, was up 0.25% in April. The Dow Jones Islamic Market Kuwait Index closed April down 0.13%.

Regionally, the Dow Jones Islamic Market Asia/Pacific Titans 25 Index, which measures the performance of 25 of the leading Shari’ah-compliant stocks in the Asia/Pacific region, gains 0.87% in April; the Dow Jones Asian Titans 50 Index dropped 0.25%.

The Dow Jones Islamic Market Turkey Index closed April rose 3.60% while the Dow Jones Turkey Total Stock Market Index dropped 2.17%.

• •

In Europe, the Dow Jones Islamic Market Europe Titans 25 Index, which measures the performance of the 25 the leading Shari’ahcompliant stocks in Europe, dropped 1.14% in April; the Dow Jones Europe Titans 80 Index, which measures the performance of

The Dow Jones Islamic Market GCC Index, which measures the performance of Shari’ah-compliant stocks for five of the Gulf Cooperation Council (GCC) member states, decreased 0.16% in April; the conventional Dow Jones GCC Index also finished down 1.37%.

Other Markets and Asset Classes In April, the Dow Jones Islamic Market BRIC Equal Weighted Index decreased 4.36% while, the Dow Jones BRIC 50 Index dropped 3.06%. The Dow Jones Sukuk Index, which measures the performance of global bonds complying with Islamic investment guidelines, rose 0.38% in April. The Dow Jones Islamic Market Sustainability Index, which measures sustainable practice business of companies compliant with Shari’ah laws, decreased 0.28% in April while the conventional Dow Jones Sustainability Index finished down 2.29%. April Industries Winners and Losers The three top-performing Dow Jones Islamic Market Industry Indexes were Financials, Consumer Services and Health Care, up 2.54%, 1.10% and 0.71%, respectively. The Dow Jones Islamic Market Technology, Dow Jones Islamic Market Utilities and Dow Jones Islamic Market Industrials indexes were the three bottom-performing industry indexes, down 2.48%, 1.83% and 1.63%, respectively. gif

Asia: Performance of Dow Jones Islamic Market versus Conventional Dow Jones Indexes Dow Jones Islamic Market Indexes Index Name

Conventional Dow Jones Indexes

Index Close April 30, 2012

April 2012 Performance

Index Close April 30, 2012

1407.93

-1.00%

-1.21%

129.50

DJ Asia/Pacific Index

DJIM Asia/Pacific Index

Index Name

DJIM China Offshore Index

3116.98

-0.10%

2.74%

3969.03

DJ China Offshore 50 Index

DJIM Hong Kong Index

1404.99

1.29%

1.04%

422.22

DJ Hong Kong Index

1465.05

-5.67%

-4.47%

1517.95

DJ India Total Stock Market Index

DJIM India Index DJIM Indonesia Index

1497.40

-0.70%

-0.15%

228.15

DJ Indonesia Index

DJIM Japan Index

1092.57

-1.43%

-2.90%

83.44

DJ Japan Index

DJIM Malaysia Index

1857.12

0.61%

-0.35%

267.91

DJ Malaysia Index

DJIM Pakistan Islamic Index

16440.71

3.08%

0.31%

662.53

DJ Pakistan Total Stock Market Index

DJIM Philippines Index

2133.54

1.67%

4.22%

331.20

DJ Philippines Index

DJIM Singapore Index

1286.92

-0.55%

0.49%

313.15

DJ Singapore Index

DJIM South Korea Index

1086.99

2.52%

-0.88%

289.13

DJ South Korea Index

1458.21

-6.15%

-1.44%

1941.69

DJ Sri Lanka Total Stock Market Index

DJIM Taiwan Index

4665.41

-5.13%

-4.52%

157.44

DJ Taiwan Index

DJIM Thailand Index

2402.29

0.61%

3.22%

179.21

DJ Thailand Index

DJIM Sri Lanka Index

74 Global Islamic Finance

May 2012

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Bourses and Stock Exchanges Financial Centres Takaful and Retakaful companies Sukuk Issuers Islamic Banks Islamic Universities Asset Management Firms

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Event Review

ETHICA BRINGS Global Islamic Finance Certification to Bangladesh It has been reported that With three times the population of all the Gulf countries combined, Bangladesh is the sleeping giant of the Islamic finance world. A burgeoning urban middle class, an active microfinance sector, and strong support from regulators gives Islamic finance an historic opportunity to shine in this country. And with only an estimated 14,000 bankers currently serving the Islamic finance sector, the demand for a locally-available, globally-recognized certification is now at its highest. Enter Ethica Institute of Islamic Finance. Now in 44 countries, the Dubai-based institute is the most heavily enrolled Islamic finance certification institute in the world with over 20,000 paying users in more than 100 institutions. What makes the Ethica launch in Bangladesh especially significant is that their training and certification platform is fully AAOIFI-compliant and accessible from any corner of Bangladesh online, requiring

Event Review

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only 4 months to go from newcomer to advanced. So whether training Grameen’s microfinance specialists in remote villages, or the entire staff of a bank such as Ethica did at Mashreq Bank in Dubai with 1,000 bankers, the training is ideally suited to a country with a vast network of remote branches. Last month Ethica launched subsidized pricing for developing countries, so Bangladesh residents now pay half the standard rate. Yousuf Sultan, Managing Director at Aljadeed, Ethica’s licensed reseller in Bangladesh, said, “Ethica helps fill the gap in Bangladesh for highly trained and globally certified professionals. We now rapidly train the existing generation of bankers and also address growing demand from new professionals.” Aljadeed Islamic Consultancy Services is an independent advisory body consisting of Islamic finance scholars and banking experts. Based on AAOIFI Shariah standards, Aljadeed’s advisory services address the gap in the Bangladesh market for bank advisory and training. Yousuf Sultan, Managing Director at Aljadeed, leads the team having previously been a major TV personality for his knowledge of Islamic jurisprudence and an Islamic finance teacher at Darul Uloom. Aljadeed is licensed to distribute Ethica’s training within Bangladesh using Ethica’s award-winning online platform.

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

Part 1: Islamic Project Financing Setting the Agenda for Innovative Opportunities Part of Article Collection, individual article/ £4.99

Global Islamic Finance Magazine will present part 1 of the Islamic Project Finance Series which will discuss the key components of project financing in adherence to the Shariah. This article aims to raise awareness of the functions and Islamic financial instruments used in Islamic Project financing along with an overview of the various opportunities presented in the sector primarily focusing on the UAE in Part 1 and then looking at various other countries around the world throughout the series. Islamic Project Financing is a growing sector and provides the avid investor with an excellent alternative to indulge in profitable projects through Islamic financial transactions which have the advantage of dealing with a prohibition of interest and many other benefits. Order Number:

Innovative Shariah Compliant Rankings A Comprehensive System for Islamic Banks Part of Article Collection, individual article/ £4.99

Global Islamic Finance Magazine will take you through the innovative approaches to ranking Islamic banks around the world which have been recently developed. There are various approaches to analysing the Shariah-compliant banking system and GIF magazine will give you a comprehensive insight into the methodology. In addition there are varied methods to analyse the rankings of Islamic banks and this is a must read for any business professional or employee joining the industry in addition to CEO’s and investors wishing to learn more about the Islamic banking market. Islamic banking is a sector which is being acknowledged globally by hungry investors who want a slice of the lucrative industry.

Islamic Banking and Finance: What It Is and What It Could Be By T. El Diwany, T. Ahmad, A. Fazel, H. Al-Haddad, S. Hasan, S. Ismail, M. Kholwadia, N. Siddiqi, B. Timol, S. Zainuddin, Tarek El-Diwany 1st Ethical Charitable Trust, 1st edition/ £51.00

This text has been designed for use by professionals new to the field of Islamic banking and finance, and by students at undergraduate level or above. It covers the historical, theological, commercial, legal, institutional and macro-economic factors affecting the modern world of Islamic banking and finance and is organised into four main sections: Islam and the Shariah, Traditional Contract Forms, Contemporary Practices, and A Response to Capitalism. Views both for and against the current direction of the Islamic banking and finance industry are presented and a number of reforms are suggested at the institutional and contractual levels. Traditional and contemporary interpretations of Islam are contrasted, along with differences of opinion among the various schools of thought, so that the reader can better understand current discourse among scholars of Shariah. In a section devoted entirely to the modern application of Islamic contract law, fourteen case studies provide a detailed analysis of the extent to which modern Islamic financial products adhere to the legal principles outlined elsewhere in the book. Particular attention has been paid to clarity of expression in order that complex concepts can be absorbed quickly. To aid the learning process, an extensive index and table of contents allows ease of reference, and suggestions for further advanced reading are provided at the end of each section. Self tests allow students to keep pace with their progress, and these also act as a guide on content for more experienced readers. An extensive Arabic glossary is provided, and key terms are transliterated in the main body of the text.

Order Number:

Choice of Law and Islamic Finance, part 1 Part of Article Collection, individual article/ £4.99

The past decade has seen the rapid growth of Islamic finance on both international and domestic levels. Accompanying that growth is a rise in the number of disputes that implicate Islamic law. This remains true even when the primary law of the contract is that of a common law or civil law country. If judges and lawmakers do not understand the reasoning of Islamic finance professionals in incorporating Shariah law, the result could be precedents and codes that hamper the growth of a multi-trillion dollar industry. Choice of Law and Islamic Finance, part 1 compares the reasoning of the English court in Shamil Bank v. Beximco Pharmaceuticals to the practice of forums specialising in Islamic finance dispute resolution. Part 1 of the article also addresses other perceived difficulties in applying Islamic law in common law and civil law courts. Order Number:

ISBN-10: 0956518605 ISBN-13: 978-0956518606

Islamic Finance Banking System by Sudin Haron, Wan Nurosofiza

McGraw-Hill Professional, 1st edition/ £54.14 With global assets expected to reach over a trillion dollars in the next few years, Islamic finance is the fastest growing segment of the international financial services industry. This introductory guide takes readers on an in-depth tour of this exciting new world of opportunity, with profiles of the many diverse players, projections of Islam’s hottest growth markets, and a muchneeded focus on theory and other key concepts. ISBN-10: 9833850618 ISBN-13: 978-9833850618

78 Global Islamic Finance

May 2012

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Event

Event Calendar May

January 2012

7th Asian Takaful Conference 9th & 10th May 2012 Marina Mandarin Hotel, Singapore Organised by Asia Insurance Review

14th Malaysian Finance Association Conference 2012

Iraq finance and investment conference and exhibition

Oman Islamic Banking and Finance Conference

Corporate governance and Enterprise Risk Management for worldwide women in Banking and Finance

The 9th Islamic Financial Services Board Summit 15th & 17th May 2012, Istanbul, Turkey Organised by Islamic Financial Services Board

2 & 3 June 2012 Penang, Malaysia Organized by Graduate School of Business

4 & 5 June 2012 Muscat, Oman Organised by OITE

International Conference on Innovation, Management and technology Research 21st May 2012, Malacca, Malaysia The IEEE Malaysia Computer Chapter

The World Takaful Conference

Finance for Non-Finance Professionals 14 &16 May 2012 Dubai, United Arab Emirates Organized by Infocus International

The 9th Islamic Financial Services Board Summit

29thGeneral Arab Insurance Federation 21st May 2012, Marrakesh, Morocco Organised by GAIF

Asia and Middle East Investment Summit

World Islamic Funds Conference & World Islamic Financial Markets Conference 22nd May 2012, Bahrain Organised by MEGA Events

11th & 12th June 2012 Kuala Lumpur, Malaysia Organized by Mega Events

18 & 19 June 2012 Erbil, Iraq Organised by IFI

11 & 13 June 2012 Beirut, Lebanon Organised by Fleming Gulf

International Conference on Islamic Economics and Business (ICIEB 2012) 29th June & 1st July 2012 Melaka, Malaysia Organized by Universiti Teknologi Mara

18 & 19 June 2012 Istanbul, Turkey Organized by IFSB

7th June 2012 Singapore Organised by Mega Events

July

August

September

The 6th International Takaful Summit

Emerging Trends in Finance and accounting

1st Middle East Life & Family Takaful Summit

10 & 12 July 2012 London, United Kingdom Organized By Istishareq & Afkar Consulting

3 th & 4th August 2012 India Organized by SDMIMD

17th & 18th September 2012 Dubai, United Arab Emirates Organised by Asia Insurance Review

For more information and full events details, please visit www.globalislamicfinancemagazine.com/events

Top events

and upcoming courses 14th Malaysian Finance Association Conference 2012

Oman Islamic Banking and Finance Conference 4 & 5 June 2012, Muscat, Oman

2 & 3 June 2012, Penang, Malaysia

The 14th Malaysian Finance Association Conference, 2012, is jointly organized by Graduate School of Business (GSB), Universiti Sains Malaysia and Malaysian Finance Association (MFA). It will be held from 1-3 June, 2012 in Penang, Malaysia. The conference is a forum for scholarly interaction to discuss on various financial issues amongst researchers, policy makers and practitioners. This invitation and call for papers is not just for topics on Malaysian financial market but also on various aspects of emerging markets, especially those addressing the resilience of emerging financial markets in the path of decoupling economic growth from the present financial turbulences. Papers submitted will be considered for Best Paper Award and publication in two journals. Postgraduate candidates are also invited to submit their proposal or work-inprogress for presentation at the Postgraduate Colloquium. Contact: Ruhani Ali T: +604-6532794 F: 604-6532792 W: www. gsb.usm.my/mfac2012/

The 9th Islamic Financial Services Board Summit 18 & 19 June 2012, Istanbul, Turkey

The Islamic Financial Services Board (IFSB) is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. The IFSB also conducts research and coordinates initiatives on industry related issues, as well as organises roundtables, seminars and conferences for regulators and industry stakeholders. Contact: Siham Ismail T: +603 9195 1400 W: www.ifsb.org/

Izdehar SME 13 & 15 November 2012, Jeddah, Saudi Arabia Izdehar SME is the premier exhibition and conference supporting small and medium sized enterprises (SMEs) in Saudi Arabia. The event will prove to be THE arena for local business people, aspiring entrepreneurs, government agencies, finance and service companies, plus other stakeholders to meet, network and do business in a vibrant business environment.

SMEs represent almost 95% of Saudi Arabia’s business establishments, and employ the majority of the country’s workforce. It is the key to unlocking the vast potential of the Saudi Arabian economy providing valuable employment opportunities to a growing young population, improving productivity and helping diversify the economy. The sector is “considered the most efficient instrument to accelerate the pace of economic and social development” as per HE Mohammed Al Jasser, Governor of the Saudi Arabian Monetary Agency, making the growth and development of the SME industry in Saudi Arabia of prime importance. Izdehar SME will serve as a platform for small and medium sized enterprises and entrepreneurs to meet with relevant businesses, government agencies and companies, to help grow and develop their business, learn the fundamentals and techniques to start or enhance a prospective enterprise, and understand the legal and regulatory framework. Contact: Laila Anbar T: +971 4 407 2620 F: +971 4 335 1891 W: www.izdeharsme.com

The Oman Islamic Banking and Finance Conference will bring together a number of stakeholders- financial practitioners, academicians, business leaders and key decision makers-from within Oman and internationally to discuss critical issues in Islamic banking and finance. It will explore steps Oman needs to take to develop its Islamic finance capacity; and offer an agenda for creation of a robust Islamic finance framework, which will contribute to the economic health of the Sultanate. The event will provide a platform to take advantage of all the empowering opportunities that the Oman Islamic Banking and Finance Conference offer. The conference will bring together key regulators, business leaders, financial industry experts and professionals to discuss and present groundbreaking issues that aim to change and strengthen the landscape of Oman`s Islamic banking and financial market; it will through light on various challenges and opportunities for both issuers and investors in the coming years as well as to develop strategies that would improve trade activities, build confidence among investors and to create appropriate future reforms that will ensure growth of Islamic banking and Finance. The forum will equip the delegates with winning strategies for continuous growth and promised to create dynamic and interactive forum for learning and networking in the financial industry in the Sultanate. Contact Ammar Ahmed T: +968 2456 4303 F: +968 2456 5165 W: www.oite.com

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.

May 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. 2012 May Global Islamic Finance

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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 D Dalil

A scientific argument based on reason.

Daman

Guarantee, security. Taking responsibility. Also see Kafalah.

Daman Khatar Al-Tariq

Guarantee against the travel hazards. An arrangement of mutual assistance in which losses suffered by traders during journeys due to hazards were indemnified from jointly pooled funds.

Darura

Necessity, overriding necessity. Adopting a ruling, even one that may contravene a Shari’ah rule, when one is compelled by extreme necessity, usually life or death (Usually used for the “Doctrine of Necessity,” whereby something otherwise prohibited becomes temporarily permissible).

Da’wah

Claim, as in Takaful.

Dayn

Debt. A dayn comes into existence as the result of any contract or credit transaction.

Deen

It refers to a complete code of life prescribed in Islam.

Debt

Usually refers to an amount owed for funds borrowed. The debt may be owed to an organisation’s own reserves, individuals, banks, or other institutions. Generally, the debt is secured by a note, bond, mortgage, or other instrument that states repayment and interest provisions. The note, in turn, may be secured by a lien against property or other assets. Debts in different forms all imply intent to pay back the amount owed by a specific date as set out in the repayment terms.

Debt Service Reserve

Term used to refer to cash reserves set aside by a borrower, either by internal policy or lender covenant, to repay debt in the event that cash generated by operations is insufficient.

Default

A failure to discharge a duty. The term is most often used to describe the occurrence of an event that cuts short the rights or remedies of one of the parties to an agreement or legal dispute, for example, the failure of the mortgagor to pay a mortgage installment, or to comply with mortgage covenants.

Dinar

Currency in the form of gold coins that was used in the past. The term is still used in some Muslim countries, like Iraq.

Dunya

This “world”. Dunya literally means ‘closer’ or ‘lower’. Life in this world temporal world - and its earthly concerns and possessions.

Duyoon Haalah

Dayn / Debts that have become due or can be called back at any time.

Duyun Mu’ajjalah

Time of payment settled between the creditor and the debtor and the debt is not yet due.

Due Diligence

Refers to the task of carefully confirming all critical assumptions and facts presented by a borrower. This includes verifying sources of income, accuracy of financial statements, value of assets that will serve as collateral, the tax status of the borrower and any other material facts presented by the b

Dyan

Debt. A Dayn comes into existence as a result of any other contract or credit transaction. It is incurred either by way of rent or sale or purchase or in any other way which leaves it as a debt to another. The lender should not impose on the borrower more than what is given on credit.

84 Global Islamic Finance

May 2012

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