Singapore to cultivate Islamic finance sector

Singapore to cultivate Islamic finance sector

SINGAPORE: Singapore’s central bank said it prefers that the island’s private lenders and wealth-management companies create products that comply with Islamic principles, freeing it to build an environment where such instruments can be developed.

“We’re leaving it mostly to the private sector,” said Teo Swee Lian, deputy managing director of the Monetary Authority of Singapore, said in an interview Tuesday in Dubai. “We have been fine-tuning our rules and regulations to facilitate the offerings of Islamic finance products.”

Singapore is encouraging companies to introduce more products that comply with Islamic law, or Shariah, to increase its share of the market.

The assets managed under Islamic rules will almost triple by 2015 to $2.8 trillion, according to the Islamic Financial Services Board, an association of central banks based in Kuala Lumpur.

The city-state has about 2 billion Singapore dollars, or $1.32 billion, of Shariah-compliant property funds and 500 million dollars of Islamic insurance funds, the central bank said in a September report.

DBS Group Holdings, Southeast Asia’s largest bank, announced last week that it would set up Singapore’s first Islamic bank this month, together with 22 Middle East investors, to tap increased demand for such investment.

DBS will own 60 percent of the bank, which will be called the Islamic Bank of Asia, and will contribute $250 million to the joint venture’s initial working capital. The Islamic bank will offer corporate, capital market and private banking services.

“It’s not just Islamic funds that are looking for Islamic products,” Teo said. “Many of the other fund managers are also looking at any asset class that offers them diversification, so secular fund managers are also looking at the possibility of Islamic products.”

The island is also vying with its neighbor Malaysia to boost its market as a destination for Islamic wealth. Malaysia, where about 60 percent of the population is Muslim, is positioning itself as a center for Islamic financial services to attract investors from the Middle East and to compete with Bahrain and other Persian Gulf states.

Malaysia sold the world’s first Islamic global bond in 2002. Islamic financial assets in Malaysia have increased to 133 billion ringgit, or $39.1 billion, accounting for more than 12 percent of the country’s total banking assets, Prime Minister Abdullah Ahmad Badawi said in March.

Singapore sees itself as a financial center with offerings of Shariah-compliant products as one of many choices for investors, Teo said.

“We do not aim to be a purely Islamic financial center, that’s where there is a difference between ourselves and some of the other centers,” she said. “It’s not going to be the be-all and end-all for us. What we are going to do is to set up structures that accommodate Islamic finance products.”

Demand for Islamic investments is growing as oil money floods into the Persian Gulf, which pumps about 20 percent of the world’s crude oil.

“It’s a huge and growing market, growing very rapidly, so there’s a lot of room for more than one center,” Teo said. “It’s not a zero-sum game, one center or none.”

The island can also be a “gateway” for Asian investors looking for opportunities in the Middle Ease and vice versa, she said. “There is a lot of Asian money that is looking for investments in the Gulf region and a lot of Gulf money looking for investments in the Asian region,” Teo said. “We hope to be able to facilitate those flows.”

source : iht

The time value of money in Islamic banking



The use of the Karachi Interbank Offered Rate (KIBOR) as a benchmark by Islamic banks in calculating the selling price of their commodities in murabaha sale transactions is not only justified, but also necessary, to remain competitive given the current banking industry dynamics in which Islamic banks have a pretty low share. However, it is not permissible under Shari’ah to price loans using KIBOR, as many conventional banks do. Najmul Hassan, general manager for corporate and business development, Meezan Bank, explains the underlying differences in approach.

The use of the Karachi Interbank Offered Rate (KIBOR) as a benchmark by Islamic banks in calculating the selling price of their commodities in murabaha sale transactions is not only justified, but also necessary, to remain competitive given the current banking industry dynamics in which Islamic banks have a pretty low share. However, it is not permissible under Shari’ah to price loans using KIBOR, as many conventional banks do. Najmul Hassan, general manager for coprorate and business development, Meezan Bank, explains the underlying differences in approach.

Unlike conventional banking based on interest-bearing loans, funds invested in an Islamic bank are used essentially for trade. The Quran clearly mentions riba in a number of places (Surah Ar-Rum, Al-Imran, An-Nisa, and Al-Baqra), with a very strong view against such people who indulge in it. The authentic definition from Hadith (with the chain of transmission being Hazrat Ali) leaves no room for ambiguity: ‘every loan that draws a gain is riba’.

According to capitalist theory, there is no difference between money and commodity in so far as commercial transactions are concerned. Islamic principles differ from this concept because money and commodity have different characteristics.

Many people question whether Islamic finance differs meaningfully from conventional finance. Outwardly in form, many structures do bear a similarity in a number of respects. The present day operating environment is a conventional one, from market structuring and dynamics, to rate benchmarks and circulation of money, then on to regulatory controls. However, the way these two financial systems function with respect to core defining parameters is very different. Many things look the same but are, in essence, fundamentally different.


We begin with basic principles. The one is interest-based money lending while the other operates like a trading house. Where does this difference originate? Two core principles lie at the centre – elimination of riba and gharar. Any Islamic transaction needs to assess these two things first and foremost. Bearing in mind the definition given in Hadith, as mentioned above, we can discuss the time value of money and the workings of present day Islamic banks. For this, we have to look at the differences between the ways in which modern capitalist theory (the basis of interest-based banking) views ‘money’ and ‘commodity’ and the principles defined by Islam.

According to capitalist theory, there is no difference between money and commodity in so far as commercial transactions are concerned. Accordingly, both are treated at par and can be sold at whatever price parties agree upon. With this theory, selling Rs100 for Rs110 or renting Rs100 for a monthly rental of Rs10 is the same as selling a bag of rice costing Rs100 for Rs110 or renting a fixed asset costing Rs100 for a monthly rental of Rs10.

Islamic principles differ from this concept because money and commodity have different characteristics. For instance, money has no intrinsic value but is rather a measure of value or a medium of exchange. It cannot fulfil human needs by itself, but needs to be converted into a commodity. On the other hand, a commodity can fulfil human needs directly. Furthermore, commodities can differ in quality while money has no differential quality, in the sense that a new note of Rs1000 is exactly equal in value and quality to an old note of Rs1000. Similarly, commodities are transacted or sold by pinpointing the item in question or at least by giving certain specifications. Money, however, cannot be pinpointed in a transaction of exchange. Even if it could be, it would be of no use to do this since the different denominations of money making up an equal amount have the same ultimate value.

With these differences in mind, to exchange Rs1000 for Rs1100 in a spot transaction would make no sense since the money in itself has no intrinsic utility or specified quality. So, the excess amount on either side is without consideration and hence not allowed under Shari’ah. The same would hold true if we were to exchange these Rs1000 for Rs1100, to be delivered after a period of one month, since the excess of Rs100 would be without consideration of either utility or quality but would only be related to time.

Any excess amount charged against deferred payment is riba only when money is exchanged for money, since the excess is charged only against time.

The same is not true when commodities are involved. Since a commodity is known to possess an intrinsic value and quality, the owner of such a commodity is allowed to sell it at whatever price is mutually agreed with the buyer, provided that, in selling, he does not commit a fraud but is subjected to the forces of supply and demand. This would hold true even if the price that is mutually agreed upon is higher than the prevailing market price.

In conclusion, any excess amount charged against deferred payment is riba only when money is exchanged for money, since the excess is charged only against time. The proof lies in the fact that, if the debtor fails to repay at the stipulated time, he is charged extra money. In contrast, where a commodity is being exchanged for money, the seller may take into consideration various factors (like the supply and demand situation, quality, utility, special features and so on) as well as the time of deferred payment. It is true that the seller may take account of the time factor in increasing the price of his commodity in a credit sale, but the increased price is being fixed for the commodity and not exclusively for the time element.

Time is not the exclusive consideration in fixing the price; therefore once the price is fixed it relates to the commodity and not to the time. For the same reason, if the purchaser fails to pay at the agreed time, the price would remain the same and under no circumstances would the seller be allowed to charge more than is actually owed.

Keeping in mind the above discussion, the use of KIBOR as a benchmark by Islamic banks in calculating the selling price of their commodities in murabaha sale transactions is not only justified, but also necessary, to remain competitive given the current situation in which Islamic banks have a pretty low share in the banking industry.

We must understand that the use of KIBOR as a benchmark to determine the profit is for indicative purposes only and this does not make the transaction impermissible if all of the other conditions of a valid sale are fulfilled. It is often the case that a trader, whether a large multinational trading corporation or a roadside store, will arrive at a decision on profit or margin rates, having taken into account a number of factors. A major variable of which is the competitive environment in which the trader is operating his business.

If a rice trader or a cloth merchant uses KIBOR as the basis for adding profit margins to the cost of his commodities to arrive at the price, this would not amount to interest or riba and it would not make the transaction impermissible. The principle is similar for Islamic banks using the KIBOR to arrive at the selling price of their commodities.

In contrast, conventional banks price their loans based on KIBOR, which does result in riba since it is an exchange between money and money and not a sale transaction in which commodities are exchanged with money.

It is being questioned in some circles whether Islamic banks could price their commodities by applying some other benchmark rate. The rationale behind using KIBOR is the banking environment is dominated by conventional banks, which discourages the development of an Islamic benchmark rate.

In the light of this situation, Islamic banks are compelled to use an interest- based benchmark to price their products. This not only ensures stable returns inline with the industry but also assures competitively priced products for the customers.

As more and more Islamic banks begin to operate, an inter-bank market between Islamic banks will be created and a new benchmark for the Islamic banking industry will then be able to be developed.


imagesIt’s often said that Islam is not just a religion, but a way of life and commerce is a big part of that life. The way many Muslims manage their money is, for them, part of being a practicing Muslim.

There are over half a million Muslims in Canada, a population which has increased 128 per cent from 1991-2001 according to Statistics Canada.

As a growing Muslim population is looking for financial solutions that work with their religious beliefs, Islamic banking is becoming more popular in Western countries.

Basic principles

According to the Institute of Islamic Banking and Insurance (IIBI), the principles of Islamic finance date back to as early as the Middle Ages.

However, the modern concept is traced to the celebration of the advent of the15th Century of Islamic calendar in 1976. A desire grew among Muslims for ethical change in their management of finances modeled more in accordance with the principles of Islam.

One of the basic tenets of Islamic finance is the prohibition against riba (interest).

There are several different strategies for financing that can help avoid any interest based charges such as profit sharing and leasing.

Islamic banking also holds the view that the borrower shouldn’t bear all the risk and responsibility of failure. So both the bank and the investor share both profit and loss between the bank and the user which encourages strong financial management from both parties.

Individuals using Islamic banking also cannot make investments based on behaviours that are haram (forbidden) by Shariah (Islamic) law. These behaviours include alcohol or gambling, which can also include any investment perceived as a financially risky.

Investors are free to build their own personal wealth. However, they’re also obligated to spend that wealth in a socially responsible manner and avoid hoarding funds.

These investors also give back to their community as Islamic banks reduce the amount of wealth an individual can earn in favour of helping those less fortunate.

Investors pay a small percentage of their finances when their annual assets exceed a minimum level in the process of Shariah known as Zakat. These contributions go to numerous groups in society to ensure social welfare and fair distribution of wealth.

Islamic Banking

Mohammad Fadel, a law professor at the University of Toronto, says there are guidelines to ensure that an individual is being compliant with Shariah law.

“The idea is to restructure banking transactions into sales or other types of financial transactions that Islamic law deems permissible,” he said.

“An Islamic bank won’t use the money that [the people] have to invest in certain kinds of projects like pornography, weapons, etcetera, so some people who are concerned about how the bank would use their money, they feel more comfortable giving to Islamic banks.”

Islamic banks will not invest in companies that deal in alcohol, gambling, pork, weapons, or practices that are harmful to the environment, in accordance with the teachings of the Islamic holy book, the Quran. Even some non-Muslims use the banks because of these strict ethical guidelines.

Fadel says that although they follow different rules, Islamic banks are just as good as traditional financiers.

“In theory, Islamic banks can’t guarantee a return to their depositor and that should make it more risky…in practice, however, Islamic banks choose very safe investments so they mimic the returns of conventional banks.”

There are over 300 Islamic financial institutions in more than 75 countries, including Canada, and the trend is growing. In fact, two conferences are being hosted in Canada about Islamic banking.

The International Islamic Banking, Finance and Insurance Conference will be held from May 17 to May 19 in Ottawa, while the Islamic Finance World 2007 Conference will be held from May 22 to May 24 in Toronto.

Islamic Financing

Conventional mortgage is not a choice, as Islamic law forbids transactions involving interest.

Siddeek Mohammed is a home owner with a mortgage. But, he doesn’t make monthly interest payments because he didn’t borrow money from a bank.

“It was something that eased a bit of guilt, that you have interest-free financing and there’s no excuse,” Mohammed said.

Instead of a bank, Mohammed borrowed the money from UM Financial, a relatively new Canadian company that specializes in Islamic mortgage.

“The main issue is that trade is permissible in Islam but usury or interest isn’t, so how we structure our mortgage is on a trade concept,” says UM Financial founder Omar Kalair.

“We do equity investments on a house and since we own the house proportionally we take a proportional rent so in the end the client gets to live in a house.”

Still, critics comment that the monthly rent one pays under Islamic mortgage is just another name for interest.

But ISNA and UM say it’s about the process and how profit is made and shared that complies with Muslim ethics. UM even has an independent Shariah advisory board made up of Islamic scholars which signs off on its processes.

“In the end, you can say the chicken and the meat is the same, but one is halal or kosher and the other one isn’t so the same way the process [not the product] that determines if it’s compliant or not,” said Kalair.

And Mohammed, for one, didn’t need much convincing; he now works as a real estate agent for UM clients.

“We can now own a property in Canada and feel a little bit more like a Canadian, but [we’re] also allowed to follow the Islamic way so it’s the best of both worlds,” he said.

It’s been three years since UM started providing Islamic mortgages and word has spread quickly. The company has received inquiries from across Canada, but due to regulatory restrictions and limited funding, services will only be provided in Ontario.

However, UM is in the final stages of talks with a Canadian bank and could seal a deal with an announcement as early as summer 2007.

Islamic Insurance

As a result of the initial services provided by organizations such as ISNA and UM, Muslim clients are asking for a broader suite of Shariah compliant products. One of these is Takaful, an Islamic insurance concept not yet available in Canada.

Binni Rana, International Marketing Director for Insurance at Eckler Ltd., says that insurance is an important financial product that allows families to mitigate the impact of financially ruinous events.

“Many Muslim people do not have insurance protection as a result of the haram aspects of conventional insurance,” he said.

Rana says Eckler is working on disseminating information on Takaful in the Canadian insurance business community, to provide Shariah-compliant insurance product to the community.

And, as financial institutions continue to offer a wider variety of products and services, Islamic banking will offer more choice to Muslims in Canada.

source : Otv

Socially responsible investing: Islamic financial institutions should do more

images4Despite its compliance with Sharia’h principles, the Islamic finance sector should do more to encourage socially responsible investing (SRI) delegates at the 9th International Islamic Finance Forum in Dubai were told.


Moral dimension of investing high on the agenda at 9th International Islamic Finance Forum in Dubai SRI, a growing force in the international investment industry, is a process that evaluates the social and environmental consequences of investments within the context of rigorous financial analysis. Companies that meet certain standards of corporate social responsibility (CSI) are regarded as morally sound investment opportunities that deliver value to society at large, as well as to shareholders.

Addressing delegates on the second day of the three day forum, at the Al Bustan Rotana Hotel in Dubai, Guler Manisali Darman, principal of GMD Advisors, Turkey, said: ‘We all know that Islamic finance is an ethical and equitable enterprise, we all know that it’s young and growing vigourously, we all know that it is Sharia’h compliant, but in terms of social responsibility we have to admit that more is expected, in addition to the rules.’

Darman said that as a result of the corporate scandals that have rocked the international business community in recent years, more businesses have come to realise that, ‘Responsible behaviour is the lynchpin of corporate credibility and corporate credibility is closely linked with corporate social responsibility.

‘Companies have to realise that responsible behaviour is not a cost, it is an investment,’ said Darman. ‘There are fields where socially responsible investment can be profitable, for example, healthcare, education and transportation, but a company has to be careful when making investments in these fields, because they affect society as a whole.’

Alex Barkawi, managing director of Switzerland-based SAM Indexes, told delegates that the three key criteria of SRI are economic, environmental and social.

Commenting on the economic criteria, Barkawi said: ‘Corporate governance is a crucial factor for the long-term success of companies. The transparency and accountability of boards are absolutely at the centre of long-term shareholder value and performance. More investors are looking at this criteria before making their investment decision. This is why corporate governance in many concepts of socially responsible investing is integral.’

Commenting on the environmental criteria, Barkawi highlighted the example of water in investment decision-making. ‘Water is becoming an increasingly crucial success factor for companies. The lack of water is driving several industries. Yet very few mainstream investment analysts look at water as a criteria when analysing and assessing a company,’ he said.

Regarding social criteria, Barkawi cited human capital as an example. ‘Human capital is a crucial factor for the long-term success of companies and so more investors are starting to look at that issue when analysing companies and deciding where to invest,’ he said.

Barkawi added that whilst SRI criteria are ethical, they address more than ethical issues. ‘They are criteria that relate to the long-term performance of companies. More and more investors feel these are crucial to identify well-managed companies that are well positioned for future success.’

SRI is viewed by many industry analysts as the key to sustainability, which is attractive to investors. Commenting on the product and business opportunities than arise from the packaging of SRI with Sharia’h principles, Barkawi said: ‘Companies that are both sustainability leaders and compliant with Sharia’h principles over the last couple of years actually perform better.’

Introducing the special session on ‘Islamic Finance and Socially Responsible Investing’, conference chairman Kavilah Chawla, principal with Nur Advisors of the USA, told delegates that Islamic finance has ‘a moral imperative’ to include those at the lower end of the income scale into economic development and globalisation.

Christianna Tsiterou, event director for IIR Middle East, organiser of the International Islamic Finance Forum, said, ‘SRI has emerged as a key talking point among industry leaders elsewhere in the world. Now, thanks to the International Islamic Finance Forum, it’s high on the agenda for industry leaders in this region, too.’

The 2006 International Islamic Finance Forum is organised by IIR Middle East, in association with the Saudi Economic & Development Company (SEDCO), Saudi Arabia, and DowJones Indexes.

The Islamic Finance industry has shown solid support for the IIFF, with all levels of sponsorship covered. The companies form a virtual who’s who of the Islamic Finance world with heavyweights such as Al Tawfeek securing platinum status, Oasis Group Holdings, Singapore Exchange and Path Solutions taking Gold sponsorship packages and HDG Mansur and Nur Advisors acquiring Silver status. Solidarity is the Takaful sponsor.

sourec : ame

Scope of Islamic Investment in Indian Equities

A relatively new concept a decade ago, Islamic banking and finance has seen explosive growth in recent years. This can be attributed to the fact that many predominantly Islamic nations have seen an increase in financial wealth mainly due to a surge in exports and high oil prices. This increasing income is fuelling an increasing demand for Shariah compliant offerings along ethically-aware Islamic principles as an alternative to western banking and investment products.

While Islamic compliant investment avenues are now becoming available in most countries, India has not seen large scale development. Other than a handful of Shariah compliant funds, currently India offers limited options for investors looking at Shariah compliant investing. However, this should not go to undermine the scope for Shariah compliant investment opportunities in India.

Post the 1991 liberalization reforms, India’s GDP has consistently grown at over 5% and has now crossed the 8% mark. This figure as compared to the US figure of less than 3% and European growth rate of 2% on a 10 year average is remarkable. [1] Infact, with its population qualifying as a huge yet untapped consumer market and relatively cheap labour, India is expected to be one of the world’s two largest economies by 2050. [2] The huge capital inflows in the country mirror the confidence of foreign investors in the Indian economy’s ability to match this expectation. Foreign Institutional Investor flows have shown a consistent upward trend with the total for current financial year (ending March 2007) being USD 7.99 billion as on 29th December 2006. [3]

India’s institutional framework is well suited for the world economy. Corporate India has been performing well. This, coupled with strong macroeconomic fundamentals, growing industrial and service sectors provides great potential for investment in the Indian economy. Infact India ranks higher vis-à-vis other BRIC nations (Refers to the countries Brazil, Russia, India and China which are rapidly developing and are expected to eclipse most of the current richest countries of the world by the year 2050). in the World Economic Forum’s Global Competitiveness report. India has scored well in innovation, sophistication of firm operations and adoption of technologies. [4]

India has amongst the most developed and organized markets in the world. Two of India exchanges are amongst the five largest in the world. India has almost 10000 listed companies, a number second to none. Asia’s oldest stock exchange, the Bombay Stock Exchange (BSE) is India’s biggest in terms of listed companies (4853) and market capitalization (USD 797 bn) [30th November 2006]. [5]

By number of transactions, the National Stock Exchange (NSE) and BSE are the third and fifth largest in the world respectively. [6]

The India benchmarks – the BSE Sensex and the Nifty have given annualized returns of 57.30% and 67.05% respectively for December 2005 – November 2006. Between March 2001 and December 2006 BSE market capitalization has recorded a jump of over 600 percent, whereas the same for NSE has been over 589 percent. [7]

Such strong numbers only go to confirm that it is the ‘ideal’ time to take a call on the India-story.

To gauge the scope of Islamic investment opportunities in the Indian stock market, it is imperative to examine stocks which conform to the norms stipulated by the Islamic Shariah principles. A thorough study was conducted by Dr. Shariq Nisar, an eminent personality of Islamic Finance in India. [8]

Below are a few facts from the study that go to prove that there is huge potential for Islamic investing in India.

‘Out of the 1000 NSE listed companies, 335 are Shariah compliant. The market capitalization of these stocks accounts for approximately 61% of the total market capitalization of companies listed on NSE. This figure is higher even when compared with a number of predominantly Islamic countries such as Malaysia, Pakistan and Bahrain where share of Shariah compliant market capitalization is 57%, 51%, and 6% respectively of the total market capitalization. [9] In fact, the growth in the market capitalization of these stocks was more impressive than that of the non- Shariah compliant stocks.’

‘The software, drugs & pharmaceuticals and automobile ancillaries sector were the largest sectors among the Shariah compliant stocks. They constitute about 36% of the total Shariah compliant stocks on NSE.’

On examining the BSE 500 (Mostly India’s Fortune 500), the market capitalization of the 237 Shariah-compliant companies hovered between 48% – 50% of the total BSE 500 market capitalization during the period of Dr. Shariq Nisar’s study.

The table below indicates the number of Shariah compliant companies in India during the period of study.

  Mar-02 Mar-03 Mar-04 Mar-05 Dec-05
Total number of companies listed 988 988 988 988 1000
Shariah compliant companies 115 137 185 237 335
Total number of companies listed 500 500 500 500 500
Shariah compliant companies 95 112 164 196 237

Author Source: Centre for Monitoring Indian Economy (CMIE)

There are a few Shariah compliant investment vehicles available in India for foreign investors. The Kotak Indian Shariah fund is one such fund which endeavours to achieve capital appreciation by being invested in the shares and equity-linked instruments of companies which the Investment Manager believes are Shariah compliant as per the Shariah supervisory board.

India is expected to see stellar macroeconomic performance in the coming years. The Indian Equity indices have risen around 49% (Sensex) [10] in the past one year on the back of a strong domestic growth story, improving global competitiveness of Indian companies and robust Foreign Institutional inflows into India. The huge spread of listed Shariah compliant companies gives the fund managers a wider spectrum and flexibility to identify and invest in future growth sectors and companies. Investors from across the world, who are looking at Shariah compliant investment opportunities, could find India as an attractive destination. In fact Indian markets may throw wider options vis-à-vis many Islamic countries. This is what differentiates the Indian markets. Also as an investor, one would be investing into a billion people country with a GDP growth rate in excess of 8% and corporate earnings growing in excess of 15% predominantly out of domestic consumption rather than export dependence.

There is a strong likelihood of a substantial increase in the funds available for Shariah investment as a result of growing wealth in Islamic countries and communities. Complementing this is the fact that India is becoming extremely important for investors’ portfolios and long-term Shariah investors will find this story a difficult one to ignore.

[1] Bloomberg
[2] BRIC report – 2003
[6] Economic survey 2004-05 ministry of finance, GOI 2005
[7] Bloomberg
[8] Dr. Shariq Nisar holds a PhD in Economics with a specialization in Islamic Finance. He is investment advisor to Idafa Investments Pvt. Ltd, a Shariah compliant investment management firm in India.
[9] Islamic Capital market products: Developments and Challenges, Islamic Research and Training Institute, Islamic Development Bank, 2005.
[10] Bloomberg

Thanks investindia