Experts discuss Islamic banking challenges

LOCAL and foreign participants from Islamic financial institutions and regulatory bodies are gathering in the sultanate to tackle new challenges in implementing safety standards for Islamic banking in the region.

Increasing collaboration and interaction among financial institutions and other relevant agencies is needed to further expand the rapid growth of Islamic banking, said Dr A G Karunasena, executive director of South East Asian Central Banks (SEACEN) Research and Training Centre yesterday.

Speaking at the opening ceremony of a course on regulation and supervision of Islamic banks, he said that the sharing of knowledge and experiences among practitioners is essential to meet the diverse needs of consumers and businesses.

“Innovations of various Islamic financial products and services are not only expanding but also becoming more complex and sophisticated, resulting in new challenges to those who are responsible for overseeing and supervising financial institutions,” he said.

He hoped that the 46 participants from 24 institutions would be able learn the main elements of Islamic banking supervision and address differences between Islamic banking and conventional banking regulatory arrangements throughout the five-day course at Rizqun International Hotel.

Participants will also explore techniques and applications on Islamic banking regulation through case studies on the experiences of specific countries.

Dato Paduka Hj Ali Apong, Permanent Secretary at the Ministry of Finance, said that regulators and supervisors of Islamic banks need to keep abreast with the latest developments in Islamic financial services because “Islamic banks have now become a world force”.

He said that the launch of the first 91-day Sukuk Al-Ijarah, or Islamic bond in 2006, has “paved the way for Brunei to become the first sovereign to bypass conventional capital markets towards developing an Islamic capital market instrument”.

“The Ministry of Finance has issued the sukuk six times, which totalled $730 million to date, as one of the efforts to promote and develop Brunei as the hub for Islamic banking and finance,” he said.

Brunei has two Islamic banks, the Bank Islam Brunei Darussalam and Tabung Amanah Islam Brunei, or Brunei Islamic Trust Fund (Taib).

Islamic financial services comprise an estimated US$1 trillion market worldwide, according to credit rating agency Standard & Poor’s.

SEACEN Research and Training Centre, which has 16 member countries, including Brunei, was established in 1982 to review and analyse financial, monetary, and economic developments in the region.

The Islamic Research and Training Centre, on the other hand, provides training and information services in developing financial and banking activities that conform to Syariah or Islamic law principles.

The course is the third of its kind to be organised by SEACEN centre and the Islamic Research and Training Institute of the Islamic Development Bank. Malaysia and Indonesia previously hosted the course in 2005 and last year, respectively.

Shareen Han
The Brunei Times

Sharia-compliant Islamic Banking in India, a wealthy proposition

Globally, Islamic finance is estimated to be worth about $300 billion, growing at 20% annually. With this growth, the need for Shariah compliant financial products has also increased. The product offerings are similar to normal banking products; however the main difference is that the funds collected are not for the purpose of accumulating/ paying interest or invested in any negative businesses that harm morality of the society. The basic principle of Islamic banking is the prohibition of interest.

India with a 13% Muslim population, the highest in a non-Islamic country, should have been in the forefront of Islamic banking initiatives, but it is yet to be permitted here. It will hugely benefit the Indian economy by attracting investments from the cash rich Middle Eastern economies on the lookout for new investment destinations. Five Indian companies, Reliance Industries, Infosys Technologies Wipro, Tata Motors and Satyam Computer Services figure in the Standard & Poor’s BRIC Shariah Index.


Under Islamic banking, the conditions for investing in shares are:
1. It is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah, such as companies manufacturing, selling or offering liquors, pork haram (prohibited) meat, or involved in gambling, night club activities, pornography, gold trading, advertising and media (with the exception of newspapers).
2. If the main business of the companies is halal (lawful), like automobiles, textiles etc, but they deposit their surplus amounts in an interest-bearing account or borrow money on interest, the shareholder disapprove such dealings.
3. If income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the shareholder must be given to charity, and must not be retained by investor.
4. The shares of a company are negotiable only if the company owns some illiquid assets. If all the assets of a company are in liquid form, i.e. in the form of money, they cannot be purchased or sold except on par value, because in this case the share represents money only and the money cannot be traded in except at par.
5. For companies whose main activity is not un-Islamic but a part of their income is not purely Islamic or a minor part of it comes from un-Islamic activities are prohibited, for example hotel, sugar, entertainment etc.

Once companies are chosen from the above criteria, further screening is done on the basis of following financial ratios:
• Exclude companies if Total Debt divided by Trailing 12-Month Average Market Capitalization is greater than or equal to 33%.
• Exclude companies if the sum of Cash and Interest Bearing Securities divided by Trailing 12-Month Average Market Capitalization is greater than or equal to 33%.
• Exclude companies if Accounts Receivables divided by Total Assets is greater than or equal to 45%.

For profits made through capital gains, the accepted rule is that if requirements of the ‘halal’ shares are observed, then most of the assets of the company are ‘halal’, and a very small proportion of its assets may have been created by the income of interest, so the whole price of the share therefore, may be taken as the price of the ‘halal’ assets only.

The real estate sector is attracting investment from Middle East, as fund raising has got difficult in this sector. Around 50% of Indian stocks are believed to be Shariah complaint, but very few companies realize the potential., which is primarily due to non-availability of data on Shariah based investment appetite among local Muslims. Investors, local as well as global, will find Indian stock market a better place to invest, and sectors like IT, pharmaceuticals, automobile, energy, cement, steel and mining to choose from. Thus Islamic investment options available in India are wider and much better than the availability of the same in many Islamic countries.

source : labnol