Qatar, Bahrain Islamic banks eye Kazakh growth

images13DUBAI (Reuters) – Qatar Islamic Bank QISB.QA and Bahrain’s Ithmaar Bank ITHMR.BH on Monday announced moves into Kazakhstan, an increasingly popular destination for Gulf Islamic lenders eyeing deals outside their crowded home markets.

 

Qatar Islamic is setting up a unit in the mostly Muslim country of 15 million people, while Ithmaar said it was working with the Kazakh government to set up a $1 billion energy fund for the region, home to significant oil and gas reserves.

 

“Kazakhstan’s political and social stability, skilled workforce and bright economic outlook enhance the country’s favourable investment climate,” Ithmaar said in a statement.

 

“Kazakhstan holds 3.3 percent of the world’s proven oil resources,” it said.

 

Last month, the Kazakh government said Bahraini Islamic lender Gulf Finance House GFHB.BH planned to develop a petroleum-related research and education area on Kazakhstan’s Caspian Sea coast at a cost of $10 billion.

 

Flush with cash from a sixfold increase in oil prices since 2002, Gulf lenders are scrabbling to invest and expand, and are increasingly looking abroad.

 

Islamic banks in particular are looking to tap booming demand from the world’s 1.3 billion Muslims for investments that comply with their beliefs.

 

Qatar Islamic has subsidiaries in Malaysia, Lebanon and the United Kingdom. It is seeking an Islamic banking licence in Turkey and considering buying a bank in Egypt in the next year, a company spokesman told Reuters in March.

 

“The memorandum of understanding (for a unit in Kazakhstan) underlines Qatar Islamic Bank’s intent to consolidate its expansion plan outside Qatar,” Qatar’s fourth-largest lender by market value said in a statement on the bourse website.

 

The bank gave no further details.

 

Kazakhstan is central Asia’s biggest economy and oil and mining are its key industries.

 

The country has experienced a building boom in recent years, but local banks have been hit hard by the global credit crunch and liquidity is scarce, creating a market ripe for cash-rich Gulf lenders.

Islamic bank sets up artificial rain system in Africa

images38The Islamic Development Bank (IDB) will soon set up a regional artificial rain system in Africa at the request of some African countries, with the installation of antennas in Mali and Senegal, Senegalese President Abdoulaye Wade said on Sunday evening.

He said the artificial rain antennas would address the African agricultural shortcomings, especially poor rainfall.

In a declaration on the global food crisis, President Wade said the measure would help tackle the food crisis and prevent hunger.

He identified other constraints facing African farmers as lack of developed lands, inputs, equipment and seeds.

One of the artificial rain antennas to be set up in Mali will cover Niger and Mali, while the second one to be set up in Senegal will serve Mauritania, Guinea Bissau, Senegal and The Gambia. Panapress

Challenges holding back takaful’s global growth

Takaful 2008 to address issues facing global expansion of Islamic insurance industry

Manama, Bahrain, 25th March 2008: Leading industry figures from Islamic insurance (takaful) firms and service providers will meet in Bahrain at the end of the month for Takaful 2008, a conference to discuss issues and challenges facing the US$1.1 billion industry. The growing Muslim middle class worldwide and relatively low insurance penetration rate will help drive international acceptance of takaful, according to experts in the industry, but challenges remain.

 

Bradley Brandon Cross, CEO of British Islamic Insurance Holdings (BIIH) UK, said: “The world takaful market is growing at a phenomenal rate and, we believe, will continue to do so. We are thrilled to be involved in this new and exciting sector. BIIH is the first independent takaful insurance company to launch in the UK and aims to be the insurance of choice for Muslims living in the UK as well as for those who are interested in ethical financial products.”

 

Carlos Wong-Fupuy, managing senior financial analyst at ratings agency A.M. Best said that the emergence of new takaful companies could help address the low insurance penetration and reduced retention levels in the Middle East to date.

 

He added: “Having said this, from a credit ratings standpoint, in A.M. Best’s opinion, takaful companies also face a number of challenges arising from their start-up nature, constraints in investment policy and product design, combined with the risks inherent to an untested business model whose details are yet far from consensual.”

 

A spokesman for law firm DLA Piper said: “The takaful market is at a critical stage in its evolution. Interest in takaful has never been greater, but there remain challenges ahead if the impetus is to be sustained, including the establishment of viable, commercial structures that genuinely reflect Shariah principles.”

 

Takaful 2008 will look at various vital issues on Takaful & Re-Takaful such as, the scope and opportunities for Takaful product development, need for an international regulatory framework for Takaful, global insurance trends, challenges of Re-Takaful Industry and pre-requisities for Bancatakaful success.

 

Ashraf Bseisu, deputy CEO – SolidaritySolidarity group, said: “Solidarity GroupSolidarity Group’s participation in world class conferences and forums represents the management direction to further support the development of this industry. Believing in our role as an active member in the global village and the responsibility towards providing financial solutions, SolidaritySolidarity committed itself to continually interact and share in providing opportunities and facing challenges for better global takaful infrastructure.”

 

 

The Bahrain Institute of Banking and Finance (BIBF)Bahrain Institute of Banking and Finance (BIBF) will lead a workshop for delegates, focusing on challenges specific to the takaful industry.

 

Takaful 2008 will be held at the Gulf Hotel and Convention Centre in Bahrain on March 30 and 31, in association with Arabian Banking & Finance magazine. It will feature leading industry speakers including Zainudin Ishak ,CEO, CIMB Aviva Takaful Berhad; Dr.Daud Bakar, President & CEO, International Institute of Islamic Finance, Malaysia; and Ahmad Feizal Sulaiman Khan, International Currency Business Unit, Etiqa Takaful Berhad.

source : itpk0103639

Elimination of Tax Bars for Islamic financing

colomboby Suresh R. I. Perera

Islamic financing is the ‘in thing’ in the world of financial services. ‘Murabaha, Mudaraba, Ijara’ are some of the ‘buzz’ words. The latest financial instrument to enter the Islamic financial services sector is the ‘Sukuk’, an Arabic term, – the plural of SAKK – the origin of the English word cheque. The list is not exhaustive. ‘Musharaka, Ististina, Tawarruq, Salam’ are some of the other buzz words.

The cross – cultural penetration of Islamic finance is manifesting it’s impact in the largely non- Muslim markets too. Whilst Islamic financial products are being expanded to cover non – Muslim customers, there are many non- Muslim financial institutions venturing to offer these products that comply with Shari’ah principles. Whilst amendments to relevant statutes would further the cause of development of Islamic financing, tax considerations would be the determinant for monetary benefits to be in parity to its conventional counterparts.

Interest v profit

The basic tenet of the Islamic value proposition is the prohibition on the paying and receiving of interest (riba), and a fundamental belief in the sharing of profit and risk in the conduct of business.

The Qur’an Sura Al Baqara, verse 275 states that the Creator allowed trade but prohibited Riba, which is typically translated as interest. While interest is a I passive I income, profit is an earned income which is treated differently for tax purposes. Profit is considered an after tax item for the profit creator and a fully taxable item for the profit receiver. Herein lies one of the principal tax barriers for the smooth progression of development of the Islamic financial service sector. The growth of the current tax systems in most of the countries over the last century has been to address issues of a conventional financial environment and the system naturally poses many issues for Islamic financial instruments.

The concept of instrument is intrinsically embodied in tax statutes around the globe and the international treaties between countries for avoidance of double taxation. Income Tax Statutes in countries that follow the ‘source doctrine’ such as Sri Lanka, recognise interest as a separate source of income and contains specific provisions for the tax deductibility thereof, reliefs such as lower rates or exemptions. Invariably income statutes also impose withholding tax burden on the person paying interest as a collection mechanism by deduction at source.

As interest is considered haram, Islamic financial products avoid the payment or the receipt of interest by adopting sharing of risks & rewards or cost plus profit mechanisms. As opposed to providing interest bearing loans, the financier obtains the return by way of a share of profits for his equity finance which is intrinsically related to success of the venture.

Musharaka & Mudaraba are profit & loss sharing instruments whilst Murahaba is based on cost plus profit basis. Thus the critical tax issue that these instruments are exposed to is whether the profit element or the share of profits world be treated as interest for tax purposes and the application of the tax rules including the tax deductibility of the payments.

Battle between substance and form

The success and the viability of Islamic financial instruments as an alternate mode of financing in a particular jurisdiction would depend on adoption of the doctrine of substance over form by the tax authorities.

These instruments would flourish and appeal to the populace in a country in the same manner of its conventional counterpart where the tax authorities are governed by the economic reality and the substance of a particular transaction. In countries where the hands of the tax authorities are bound by the shackles of the legal form of the transactions, unless the tax systems are adapted for Islamic instruments by requisite amendments to the tax statutes, the two competing product-lines would experience inconsistent results. – More often than not to the detriment of Islamic financial instruments. – Whilst the Netherlands and Switzerland are examples of countries that analyse transactions by the substance and economic reality for tax purposes, UK tax authorities weigh heavily in favour of the legal form for ascertaining the tax consequences.

Murabaha (trade finance)

This is the alternative Islamic financial instrument available for a person who wishes to acquire an asset by obtaining a conventional interest bearing loan which is considered haram according to Shari’ah principles

This instrument is a means’ to fund a variety of acquisitions such as motor vehicles, computers, furniture, televisions, residential & commercial property etc. The financier purchases the asset identified by the customer, say at 1M euros and sells to him at a premium for 1.2M euros to be settled on deferred installment basis or the total price to be paid at a specified future date. The profit of 0.2M Euros made by the financier corresponds to the interest earned under a conventional loan. At the time of the commencement of the arrangement the title passes from the financier to the customer.

The crucial issue that arises from, a tax perspective with regard to the aforesaid Murabaha structure is whether the tax authorities would adhere to the doctrine of ‘substance over form’ to accept it as a financing arrangement for tax purposes or insist on the application of the tax laws based on the strict legal form. Most of the countries that follow English Legal Tradition would find the mechanics of Murabaha falling within a statute akin to ‘Sale of Goods Act’.

An interesting observation in this regard was made in a case decided by the District Court of Sri Lanka. The defence taken up by a company sought to be wound up, that the action was prescribed under the Prescription Ordinance, as the Murabaha structure was governed by the rules pertaining to sale and delivery of goods, was rejected in favour of it being a financing transaction. The relevant extract from the Order of the court in Case No. 92/ Co., where an application under the Companies Act was, made by Amana Investments Limited to wind up Greenwood Growers (Pvt) Ltd. is reproduced below.

It is stated in the Affidavit, filed on behalf of the company sought to be wound up, that since the relevant loan transaction is one of sale and delivery of goods, it has been prescribed in terms of the provisions of the prescription Ordinance. The Petitioner has submitted that the said transaction was not one of sale and delivery of goods, but a transaction to provide a financial facility.

The Petitioners have further stated by their written submission that the loan amount claimed to be owned to them has been accepted as a loan payable by the company sought to be wound up in its final accounts according to the report of the provisional liquidators. The report of provisional liquidators confirms that the final accounts of the company sought to be wound up has been prepared as at 31.03.2001, and that it states the amount of the loan and the interest thereon as an amount payable therein. Therefore the company sought to be wound-up has admitted that the loan was payable as at 31.03.2001. It is evident ex facie that since it has to be treated as an acknowledged debt it would be governed by Section 12 of the Prescription Ordinance and that it is not governed by the provisions relating to sale and delivery of goods. Therefore it cannot be stated that the debt claimed by the Petitioner has been prescribed.

Would tax authorities in Sri Lanka be sufficiently liberal to accept a fundamental principal of taxation -’substance should override the form’ to allow the development of this mode of financing still in it’s infant stage ?. To date the issue remains controversial in Sri Lanka as the authorities concerned have not clearly ruled on this.

If the authorities opt to look at the form over the substance, some of the fiscal consequences of this alternate mode of financing would differ from an interest bearing loan; its conventional counterpart. As the title transfers twice – initial purchase by the financier and then the onward sale to the customer – the indirect tax implications could impact the profitability due to the existence of two tax points.

If buy – sell operations are not excluded under the VAT / GST statute in a particular Jurisdiction and the statute imposes input tax recoverability, the cost to the ultimate consumer of a product provided under a Murahaba arrangement could be higher than obtaining a conventional loan. To eliminate this impediment, Singapore for instance has permitted the financial institution to claim the GST attributable to the purchase in full, whilst exempting the mark-up on selling price.

The exclusion of wholesale or retail sale of goods from transactional VAT under Sec.3 of Value Added Tax Act No. 14 of 2002 may provide relief whilst denying the input tax claim to the financier, provided the transaction does not involve an importation, whilst exposing it for the turnover tax levied by the Provincial Councils in Sri Lanka. Though the above would be the tax consequence if form takes precedence over the substance, if Sri Lankan tax authorities accept the structure as a pure mode of financing, the profit derived by a bank would be subject to a profit VAT at 20% only.

The liability of a bank carrying out a conventional loan transaction is restricted to the interest element for the purpose of ‘Economic Service Charge’ (ESC) levied under Act No. 13 of 2006. However a Murabaha arrangement exposes it on the total sales proceeds, if the ESC Act follows the form of the transaction. i.e. 1.2M euros as opposed to the mere profit element of.0.2M euros. If the entity does not have sufficient income tax payable to set off the incremental ESC, this would turn out to be a cause to deplete the competitive edge of Murabaha. On the other in the battle between substance and form, substance emerging victorious could wipe out the disadvantage.

Diminishing Musharaka

Whilst a Sharl’ah compliant alternative of conventional housing finance could be carried out using Diminishing Musharaka, Murabaha or Ijara, where these arrangements involve two transfers of’ title, i.e. execution of two transfer deeds, where the financing entity is required to purchase the asset and sell it to the customer, the liability to stamp duty twice becomes unavoidable as most countries levy stamp duty on transfer of immovable property. This impediment has been successfully removed in UK by providing specific relief from stamp duty and land tax.

source: island lk

Indonesia ulama to back Islamic finance sector

imagesINDONESIA’S Council of Ulama said in Jakarta yesterday it would assist the growth of the Islamic finance sector by issuing market-friendly fatwas or edicts, a move that would enable Indonesia to fund its growing budget deficit by issuing more Syariah debt.Ma’ruf Amin, a senior official with the Ulama Council, or MUI, said the religious authority supported the government’s efforts to develop the market for Islamic products.

“We are encouraging innovations among industry players who are planning to introduce new products,” said Amin, who is head of MUI’s commission in charge of fatwas or edicts related to sharia financial products.

“We have just completed drafting a fatwa on sovereign Islamic bonds which will be issued shortly. We will send it to the government after we hold a plenary hearing,” Amin told Reuters in an interview in his office at the sprawling Istiqlal Mosque complex in Jakarta.

In April, Indonesia’s parliament passed a new bill on Islamic sharia debt, which paves the way for the government to sell its first Islamic bond and tap a wider array of global investors.

The government hopes to raise as much as $2 billion from the bond, or sukuk, to help plug a budget deficit which is forecast to widen this year due to higher fuel subsidies.

With higher inflation and a food and energy subsidy bill that’s set to top $20 billion in 2008, Indonesia’s cost of borrowing using conventional debt instruments is likely to rise.

Indonesia, the largest economy in Southeast Asia and the world’s most-populous Muslim nation, has been slow to tap the fast-growing Islamic finance market, for example to fund its huge infrastructure needs.

It lags neighbouring Malaysia and Singapore in developing the Islamic financial market.

brunai times

 
 

 

Islamic banks post 26.7% growth rate

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Islamic banks post 26.7% growth rate

By Shuchita Kapur on Monday, March 24 , 2008

 

 


(CRAIG SCARR)   

  

The world’s 100 largest Islamic banks have outpaced conventional banks with an annual asset growth rate of 26.7 per cent, according to a new study.
 
The Islamic institutions reported a growth to nearly $350 billion (Dh1.28 trillion) in assets, beating the 19.3 per cent growth rate of mainstream banks, says the Asian Banker research group.
 
This growth rate is well above previous estimates of 15 to 20 per cent.“We’ve seen a rise in the number and size of Islamic banks across the world and they are growing popular in non-Muslim countries as well,” Asian Banker research manager Benny Zhang Wei told Emirates Business.
 
“I do not expect any slowdown in growth in the long term. There is enormous wealth coming from oil and gas in the Middle East and 1.5 billion Muslims worldwide make a good customer base.”

Dr Taha El Tayeb – who heads Mashreq’s Islamic banking division, Badr Al Islami, in the UAE – is a little cautious about the reported growth rate. “I’m a little surprised by the 26 per cent figure because I thought it was about 20 per cent,” he told Emirates Business.

 
“I believe this growth rate is sustainable in the short term but it may come down owing to the growing base of Islamic banking. Overall the prospects seem bright as a large number of corporates and family businesses in the region are moving to Islamic banking for religious reasons,” he added.

Zhang Wei said: “The potential [of Islamic banks] to eat into a conventional bank’s business model is huge and should not be underestimated. The threat will only get worse as Islamic banks grow organically or as a result of intensive mergers and acquisitions.”

 
Islamic banks’ expansion plans are paying off. The most successful international Islamic banking player, Albaraka Banking Group of Bahrain, is a good example. It has 11 Islamic banking licences in 10 countries in the Middle East, North Africa, South Asia and Europe.
 
Albaraka sources more than 90 per cent of its revenue from overseas – a ratio even higher than Citi’s, said Zhang Wei.
An analyst at Standard & Poor’s in Singapore believes that Islamic finance has reached a critical mass and the level of interest means it makes sense to reach out beyond the predominantly Muslim countries.

Asia is a lucrative market for Islamic banks. According to Merrill Lynch and Capgemini the total wealth of high-net-worth individuals in the Asia-Pacific region may grow by 8.5 per cent a year to $12.7trn by 2011, the second-fastest increase after the Middle East, making it highly lucrative for Islamic banks.

 
Islamic banks are performing well in financial centres such as Singapore and London where they are trying to earn oil and gas dollars by encouraging the handling of cross-border financial deals through Shariah-compliant instruments.
 
But despite the impressive growth of Islamic banking in recent years it remains a niche segment in the global financial services industry. The largest company in the Asian Banker’s list of the top-100 Islamic banks is Iran’s state-owned BMI, which has total assets of $39.4bn.
 
This is equivalent to the size of Chang Hwa Bank in Taiwan, the 75th largest bank in the Asia-Pacific region and 395th in the world, said the report.
 
In Malaysia, where the number of Islamic banking players has almost doubled and their aggregate size has more than tripled in the last two years, Islamic banks account for only 5.2 per cent of the country’s banking assets.
 
Even if Islamic banking services offered by conventional Malaysian banks were included, the percentage of financial intermediations handled in a Shariah-compliant manner would not exceed 10 per cent.
 

And even in more developed Islamic banking systems such as the UAE, Bahrain, Saudi Arabia and Kuwait, intermediation through an Islamic bank or Islamic windows of a conventional bank accounts for less than 50 per cent of the total, said the report.
 
The Middle East is a major player in Islamic banking. Of the top-100 Islamic banks worldwide, Iran dominates with 14 players, followed by Saudi Arabia, Malaysia and the UAE.
 
Top-ranked BMI and the other 13 Iranian state-owned and privately managed banks in the list hold aggregate assets of $162.2bn, accounting for nearly 50 per cent of the world’s 100 largest Islamic banks’ assets. Saudi Arabia’s Al Rajhi Bank is in second place.
 
The story of Islamic banks in Iran differs from other countries as most banks there are state-owned. Government efforts to transform all financial institutions into Islamic ones drove the intense growth of Iran’s Islamic banking system.
 
Banks were nationalised as early as 1979 and regulations changed with the approval of an Islamic banking law. In 1983 the country made a wholesale switch to Shariah-compliant Islamic banking.
 
Sudan followed a similar policy, adopting Islamic banking practices as early as 1990. Today all banks are Shariah-compliant and despite their small scale, 19 of them figure in the top 100.

Pakistan is a mixed bag as the banking sector still runs on the dual system of both Islamic and conventional practices. The Islamic banking sector is driven by the government but at a relatively slower pace than elsewhere, even though 97 per cent of the population is Muslim.


Saudi Arabia, a big player in Islamic banking, has only three banks in the list that are wholly Shariah-compliant – Al Rajhi, Al Bilad and Al Jazira. With an aggregate 10 per cent of the total assets, they make it to the first quartile of the top 100. As many as eight Saudi commercial banks have begun to make their deposit taking and financing Shariah-compliant.

 
In the UAE, Dubai Islamic Bank was set up in 1975 to drive the sector’s growth and is in seventh place. Abu Dhabi Islamic Bank is ranked tenth. A lot is expected from Noor Islamic Bank, which was established recently.
 
With a paid-in capital of $1.09bn, the bank is expected to become the world’s largest Islamic player within five years by acquiring other institutions in countries such as Indonesia and Egypt.
 
Abu Dhabi plans to launch another Islamic bank, Al Hilal, in June, taking the number of dedicated Islamic banks in the UAE to seven.
“Consolidation could be a possibility,” says Zhang Wei.

SBP, ICAP join hands for implementation: Islamic Financial Accounting Standards

The State Bank of Pakistan, with the help of Institute of Chartered Accountants of Pakistan (ICAP), would make the implementation of Islamic Financial Accounting Standards (IFAS-2) possible to develop Islamic banking in the country.

The central bank on Monday organised a seminar on ‘Murabaha & Ijara Accounting Standards’ to develop an understanding of accounting treatment of such modes of Islamic transactions.

The forum provided an opportunity to participants to discuss the practical problems faced by them in the implementation of these standards.

It was agreed by the participants that the ICAP committee and the SBP would look into respective areas and clarifications issued in due course of time to make the implementation of Islamic Financial Accounting Standards (IFAS-2) possible.

The Accounting and Auditing Organisation for Islamic Financial Institution (AAOIFI), a Bahrain-based international body, is developing the Shariah and Accounting Standards for Islamic Financial Institutions (IFIs) to harmonise the IFIs practices throughout the world.

Securities and Exchange Commission of Pakistan (SECP) has notified Islamic Financial Accounting Standards IFAS-1 for Murabaha and IFAS-2 for Ijara, which have been prepared by ICAP Committee in line with AAOIFI Accounting Standards and tailored according to Pakistan’s needs.

Murabaha and Ijara financings constitute almost 45 and 26 per cent, respectively, of the total financing by the Islamic banks as of the quarter ending December 2007 in Pakistan.

SBP Director (Islamic Banking Department) Pervez Said stated that Islamic banking had shown a tremendous growth globally and Pakistan was no exception to this phenomenon.

The SBP had played a pivotal role in developing Islamic banking and continued to focus on doing so with very encouraging results, he added.

Ebrahim Sidat, Country Manager, Ford Rhodes Sidat Hyder & Co, who chaired the seminar, said with the ‘will and determination’ of all stake-holders, Islamic banking would grow further in Pakistan. He was optimistic about the future prospects of the industry.

Other professional bankers and leading professional accountants also delivered lectures on transaction flow and accounting treatment of Murabaha and Ijara.

Senior executives and representatives from the Securities and Exchange Commission of Pakistan, Islamic banking industry and the SBP attended the seminar.

source : dawn