Luxembourg advised of more involvement in Islamic finance

THE Luxembourg office of PricewaterhouseCoopers (PWC) in a report on Islamic finance published at the end of October 2009, has urged greater involvement and visibility from the Luxembourg government and regulators if it is serious about establishing the principality as a European Islamic finance hub especially for Islamic funds and sukuk.

Compared to regulators in the UK, Ireland and France, the Luxembourg regulators have never approached their counterparties in target countries such as Saudi Arabia, the UAE, Kuwait, Bahrain and Malaysia to seek cooperation on Islamic finance.

PWC, the international auditors and consultancy, has based its report on the recommendations and conclusions drawn from an Islamic finance meeting. The report suggests that Islamic finance is an important niche business for Luxembourg. Some 16 sukuks are already listed on the Luxembourg Stock Exchange. For instance, the $1.5bn Petronas EMAS sukuk issuance in August 2009 was listed in Luxembourg in preference to the London Stock Exchange.

In addition, there are more than 31 Islamic investment funds, mainly global equity and real estate funds, registered and domiciled in Luxembourg. The PWC report stressed that the future target of Luxembourg Islamic funds should be investors in Europe, although this will require an educational process to attract investors amongst Europe’s Muslim population of around 20-25 million. The report also stressed that Luxembourg should leverage its strong private banking industry, its good reputation and its cost-competitiveness as a financial center. As such, there is a potential for cross selling Shariah-compliant products to these investors.

In a rare foray into Islamic finance, Yves Mersch, governor of the Central Bank of Luxembourg, in a speech at the Islamic Financial Services Board (IFSB) in Kuala Lumpur earlier this year, stressed that “despite the current turbulences, the market practitioners of Islamic finance in Luxembourg remain optimistic that Islamic finance is likely to grow steadily in the next few years based on investors’ appetite for financial products based on sound ethical principles.”

Mersch warned that numerous challenges remain, however, including regulatory changes, legal certainty, illiquidity issues, liquidity management risk concerns, the need for harmonized regulation, regulatory disparity amongst national supervisors and a lack of level playing field. It is crucial to ensure that Shariah principles are able to accommodate the innovative products which would allow the integration of Islamic finance into the international financial system.

Mersch confirmed that market players in Luxembourg want formal recognition of Islamic financial products and accounting standards. “Our authorities have proved pragmatic, innovative and adaptive to the financial landscape. According to discussions currently being held at the national level, this will also be the case with regard to Islamic finance,” he declared.

Although the Luxembourg authorities have set up an Islamic finance Taskforce, bringing in various regulators, professional associations and market players, actual progress in the facilitation of Islamic financial products in Luxembourg remains slow and bureaucratic.

It would be difficult to have full fledged Islamic banking operations in Luxembourg due to a legal and regulatory framework. For example, it is not possible for Luxembourg banks to provide bank accounts without any risk cap, which is typical for an Islamic bank. In addition, Islamic banking requires banks to have partnership accounts.

The PWC report also highlighted concerns from market players in Luxembourg about various risks associated with various Islamic financial products and practices, although some of these concerns betray some ignorance about Islamic finance.

Islamic funds are almost all done through manual transactions. This leads to higher risk, for example accounting of revenues and purification of interest. Compliance issues such as eligible assets and investment restrictions are not monitored, as these are dealt typically by Shariah boards. There is also a perception of a lack of information sharing in relation to cleansing and eligible charitable organizations. The report calls for rules of charities should be demystified. However, the total amount of money purified is insignificant and money laundering risk is therefore limited as most of the Shariah compliant funds in Luxembourg are equity funds.

These latter points are unimaginable in markets such as Malaysia and even Turkey. Perhaps it reflects more on the inability of the fund managers and their lack of engagement in navigating through these issues. Sharing of information is a requisite in Islamic finance otherwise the transaction could be non-permissible because of Gharar (deception or non-disclosure), which is proscribed by the Shariah. Such concerns are not new and typical of some jurisdictions new to Islamic finance.

Fiduciary risk is not much different than for conventional funds with respect to OTC (over the counter) products. A large portion of sukuk is listed and managers have not yet invested in sukuk privately placed, thus mitigating risk to a certain extend. Assets are generally held by sub-custodians implying settlement and custody risk.

The report also stresses that default risk must also be taken into account since the emergence of the first occurrences of sukuk defaults earlier this year, which include East Cameron Gas Sukuk, the Investment Dar Sukuk, and the SAAD/Al-Gosaibi Sukuk.

In terms of valuation risk, the report stressed that there is no clarity on valuation parameter for investments to be obtained by counterparties or the Shariah board.

The report also identified a number of compliance risks. Participants, for instance, mentioned that no Shariah compliance checks are made as it is not a market practice and it is the responsibility of the Shariah board.

A service fund administration can send a report to the board of directors but will not check if investments are Shariah-compliant. Shariah compliance is part of the investment policy and should be checked by the manager from an eligibility an d risk spreading point of view. The question remains, however, if asset managers have the knowledge to check such compliance issues.

It is, however, difficult to put the compliance checks in a system in comparison with conventional funds as compliance rules might be non-standard (changing) and are somehow based on judgment. This requires more flexibility than for a conventional fund.

source : dailyme

Malaysian bank governor stresses strong liquidity management

Islamic financial institutions need to address their ability to manage liquidity urgently, a Malaysian official said here on Tuesday.

Governor of Malaysia’s central bank Zeti Akhtar Aziz said at a conference on financial stability that the recent financial crisis in advanced economies had demonstrated the consequences of liquidity constraints.

The turmoil had also underscored the importance of a strong and well-developed liquidity management infrastructure, added Zeti.

In order to facilitate effective cross-border liquidity management, Zeti said that the Islamic Financial Services Board (IFSB), in collaboration with the Islamic Development Bank (IDB), had established a liquidity management task force.

Hoping that the framework developed by the task force could be set in place in 2010, Zeti also called for the regulatory and supervisory framework to be strengthened.

The IFSB is an international standard-setting organization 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.

The IDB is an international financial institution established in pursuance of the Declaration of Intent issued by the Conference of Finance Ministers of Muslim Countries in December 1973.

Touching on the development of Islamic banking in Malaysia, Zeti said the system had become a vibrant one in the country with banking assets accounting for 18.8 percent of the total banking assets.

Zeti noted that Malaysia had an efficient functioning Islamic money market traded in the domestic currency with greater monetary flexibility in the system, drawing wider participation from the international financial community.

Zeti also said that when Islamic finance continued to become an integral part of the global financial system, the current scope of cooperation framework could be broadened to deal with confronting new challenges.

sourece : pdo

Kuwait Finance House-Turkey licensed as Islamic bank in Dubai

The Kuwait Finance House-Turkey has been permitted as an Islamic bank in Dubai, following similar licences from Germany and Kazakhstan.
The move will surely shore up the bank’s efforts to expand its activities to cover new markets, and to prop up its position as an Islamic bank.
It is the first licence of its kind given to an Islamic bank according to the Fifth Category that allows the provision of multilateral services compliant with the Islamic Sharia, Mohammad Al-Omar, the bank board chairman, said in news remarks.
The bank was the first Islamic financial institution to get such a licence in Germany, he boasted.
The Dubai licence shows much confidence in the bank’s ability to build an economic partnership, he said.
For his part, the bank’s general manager Ofuk Iwan said by being permitted to work in Dubai, the bank has achieved a significant jump in efforts for operating in the Gulf market through presence in key financial centers.
He added that the bank would offer financial consulting, brokerage and finance services, while focusing on the development of Turkish-Gulf joint investments.

source : kuna

Scholars, experts hail assigning ISRA to design Islamic products

By Abdullah Boqus

Islamic scholars and economic experts praised assigning International Shari’ah Research Academy for Islamic Finance (ISRA) to establish a center to conduct research and professionally design Islamic products.
Speaking to KUNA, ISRA Executive Director Mohamad Akram Laldin said the establishment of the center, which will be supervised by the International Islamic Fiqh Academy, needs the support and cooperation of bodies concerned with Islamic economy.
He pointed out that designing Islamic products related to debt will be among ISRA’s priorities as 70 percent of transactions in Islamic banks are based on debt.
For his part, Secretary General of the International Islamic Fiqh Academy Dr. Abdulsalam Al-Abbadi told KUNA that it was very important for the Islamic economy to design new products.
Finding and designing Islamic products would help the Islamic economic system in facing new economic and financial challenges through ways that are compliant with the Islamic Shari’ah (law), he noted.
Malaysia recently hosted the 4th International Shari’ah Scholars Forum which was entitled “Islamic Financial Products: Originality or Replication of Conventional Banking”.
The forum which concluded on Friday was attended by scholars including Al-Abbadi and head of the Fatwa and Shari’ah department of Kuwait finance House (KFH) in Malaysia Dr. Mohammad Abdulrazzak Al-Tabtabai

source : kuna

Islamic Development bank vows to enhance partnership with Africa

currently investing billions of dollar investment on various projects, APA learns at the Saudi-East African exhibition.

The Bank is currently supporting various African countries in the area of infrastructure, health and other development activities.

IDB president Dr. Ahmad Muhammad Ali was speaking at the Saudi-East African exhibition opened late on Nov 14th, 2009 in Addis Ababa, Ethiopia in the presence of Saudi and East African business companies.
The exhibition is part of the Saudi-East African Forum, scheduled to be held on  Nov 15th, 2009  in Addis Ababa in the presence of officials from both sides.

Muhammad said that the bank is currently supporting 27 African countries in their development activities as part of its partnership with Africa.
He indicated that the bank will continue its partnership with the continent to strengthen Africa’s socio and economic performance.

Muhammad indicated that the bank will support Africa in achieving the Millennium Development Goals-MDGs-.
“The low will continue its partnership with Africa where it is currently active in 27 countries of the continent. Low income countries will be given high priorities,” said Muhammad.

He said that there is a need to upgrade the quality of infrastructure and food security issues in Africa.
According to him, the bank invested around US$ 10 billion to support various countries in Africa since its inception in 1975.

source : ana

Convergence of Islamic and Conventional Finance Imminent

A groundbreaking book that explains the impact of globalization on Islamic Finance and its portents for the future.

The financial tsunami of 2008 emphasized the fragility of a debt-based financial system. Numerous international banks have had their reputations tarnished by the credit crisis, and investors’ confidence in debt instruments and debt financing has since waned. On the other hand, Islamic banks, which operate on principles such as risk sharing, trust, transparency and the upholding of Islamic values to promote equality and social welfare, have remained largely unscathed. This success has lured a growing number of investors to the non-debt, equity-based domain of Islamic finance.

Published by John Wiley & Sons (Asia) Pte Ltd, Globalization & Islamic Finance: Convergence, Prospects and Challenges (ISBN: 978-0-470-82349-1) is the first serious attempt to study the affiliation between the current trend of globalization and the development of Islamic finance. It explores the potential asymptotic convergence of Islamic and conventional finance as these systems continue to design and develop better risk-sharing structures and an expanded medley of financial instruments.

The crisis has intensified the quest for a reformation of the international financial architecture, toward a system with greater reliance on equity financing and risk sharing. As it would appear that Islamic finance and financial globalization share a common objective of achieving maximum risk sharing, it is plausible that conventional and Islamic finance converge as we continue down this path.

Written by three well-respected authors and voices in this field, Professor Hossein Askari, Dr. Zamir Iqbal and Dr. Abbas Mirakhor share innovative thoughts on the future of Islamic finance in the wake of globalization as well as the legal, institutional, governance and financial preconditions that must exist for this institution to succeed. This book will be an important read for practitioners, academics and anyone with an interest in the impact of globalization on Islamic finance and its portents for the future.

About the Authors:
Professor Hossein Askari received a B.S. in Civil Engineering, Ph.D. in Economics and attended the Sloan School of Management at the Massachusetts Institute of Technology (MIT). He was an Instructor of Economics at MIT, Assistant Professor of Economics at Tufts University, Associate Professor of Economics at Wayne State University, Associate Professor and Professor of International Business and Middle Eastern Studies at the University of Texas at Austin and is now the Iran Professor of International Business and Professor of International Affairs at the George Washington University. He served for two and a half years on the Executive Board of the IMF and was Special Advisor to the Minister of Finance of Saudi Arabia. In the mid-1980s, he was the director of a multinational team that developed the first energy planning models for Saudi Arabia. He has written extensively on economic development in the Middle East, international trade and finance, agricultural economics, oil economics, and on economic sanctions. He has been an advisor to a number of governments, institutions and corporations.

Dr. Zamir Iqbal works as Lead Investment Officer with the Quantitative Strategies, Risk and Analytics department in the Treasury of the World Bank in Washington, D.C. He earned his Ph.D. in International Finance from the George Washington University, where he also serves as adjunct faculty of International Finance. He has published numerous articles and presented at international forums on Islamic finance. He has extensive experience with capital markets, structured products, risk management, financial sector development, and financial modeling. His research interests include Islamic Finance, Financial Engineering, Structured Finance and International Banking. He is co-author of Introduction to Islamic Finance: Theory and Practice (2007), Risk Analysis for Islamic Banks (2007), and New Issues in Islamic Finance and Economics: Progress and Challenges (2009).

Dr. Abbas Mirakhor, born in Tehran, Islamic Republic of Iran, attended Kansas State University, where he received his Ph.D. in economics in 1969. From 1969 to 1984, he taught in various universities in the U.S. and Iran. From 1984 until 1990, he served on the staff of the IMF, and from 1990 to 2008, he served as the Executive Director at the IMF. Currently, he is The First Holder of International Center For Education in Islamic Finance (INCEIF) Chair of Islamic Finance. He has received several awards including “Order of Companion of Volta” for service to Ghana, conferred by the President of Ghana in 2005; Islamic Development Bank Annual Prize for Research in Islamic Economics, shared with Moshin Khan in 2003, and “Quaid-e Azam” star for service to Pakistan conferred by the President of Pakistan in 1997. Dr. Mirakhor is the co-author of Essays on Iqtisad: Islamic Approach to Economic Problems (1989), Theoretical Studies in Islamic Banking and Finance (1987), Introduction to Islamic Finance: Theory and Practice (2007), and New Issues in Islamic Finance and Economics: Progress and
Challenges (2009).

Use M’sia as Islamic finance base, investors told

IN LINE with efforts to promote Malaysia as an Islamic financial centre, investors are being encouraged to use the country as a gateway for investment and base for financial activities.

“Let’s jointly promote Islamic finance in the international market and the mutual acceptance of each others’ financial products while marketing them together,” the Crown Prince of Perak, Raja Dr Nazrin Shah ibni Sultan Azlan Shah, urged.

He said Malaysia is generally a business-friendly place and there are lots of attractive policies in place for foreign investors, wanting to invest in the country.

Raja Dr Nazrin Shah, who is also the financial ambassador of the Malaysia International Islamic Financial Centre (MIFC), led a roadshow delegation comprising regulators and industry players to Qatar and Bahrain on Oct 10-15.

Tracing the development of Islamic finance in Malaysia, he said in 1983, the first Islamic bank was established in the country and in the 90s, banks were invited to open windows within their system to start trading in Islamic products.

He said the MIFC intiative was established in 2006 to establish Malaysia as the centre for Islamic finance and to integrate the country within the Islamic financial community.

“We (Malaysia) now have an Islamic capital market and are the largest producer of sukuk (Islamic bonds). I think 60 per cent of sukuk originates from Malaysia. We have Islamic insurance, re-insurance and asset management, developed over the last few years,” he said.

Raja Dr Nazrin Shah said the underlying principle of Islamic finance is basically to prohibit excessive risk taking and speculative activities. He said non-Muslims are also beginning to use Islamic products, especially in Malaysia.

“I think we have progressed much and Malaysia is the centre for Islamic finance,” he said, when asked how far had Malaysia come as an international Islamic financial base.

He also said there was a need for greater collaboration and dialogue to promote Islamic finance in international markets. “These are the basic pillars that have to be considered on a continuous basis in order to promote Islamic finance,” he added. “In 1997, Malaysia went through a financial crisis and that was a wake up for us. Since 1997, we have strengthened our financial system while putting in place stronger regulatory and supervisory considerations, for greater corporate governance and best practices.”

source : Btimes

China shaping up as next big Islamic finance market

CHINA is the next big Islamic finance market, as demand grows for ethical funds, but Asia’s fastest-growing economy must first sort out tax issues, a unit of British insurer Prudential yesterday said.

A large Muslim population and growing wealth provide a ready retail Islamic banking market in China, a senior executive of Prudential’s Kuala Lumpur-based fund management unit said.

The US$1 trillion ($1.4 trillion) Islamic finance industry is targeting rapidly growing Asian economies such as China and India and new markets like Kazakhstan and Sri Lanka to offset slowing growth in its traditional base of Gulf Arab states.

Islamic banks are touting wheat-based deposit products and metal-based funds as ethical investments to appeal to investors burnt by the recent conventional banking crisis.

Islamic banking is also marketed as socially responsible investing in non-Muslim countries such as France and India to avoid fanning religious sensitivities.

“China is like Indonesia, a sleeping giant,” said Zulkifli Ishak, syariah investment director with Prudential Fund Management Bhd which manages about US$4.03 billion. Kuala Lumpur is Prudential’s Islamic finance hub.

“If Islamic finance can tap Muslims, especially in Xinjiang, then there will be a huge potential for the Islamic space in China,” he said.

China has a Muslim population of about 37 million.

Islamic law requires investments to be based on a specific asset and bans excessive speculation, interest-based lending and gambling, alcohol and pornography-related activities.

Zulkifli said the syariah’s screening criteria weed out assets with excessive debt, helping them to deliver returns comparable to those of conventional instruments. “The discipline in the syariah helps because you cannot invest in highly leveraged companies.”

Non-Muslims make up more than half of the investors of most of Prudential’s Islamic retail funds in Malaysia, Zulkifli said.

Prudential’s RM42 million China equity fund rose 46 per cent in the half year to August 31, about the same as some conventional China equity funds run by ING and OSK-UOB, he said.

But China has to amend its tax laws which now make Islamic financial transactions costlier than conventional deals, Zulkifli said. “Regulators in China need to look at the taxation issue,” he said.

“Once they do that, then the opportunity for Islamic finance to grow in China would be much greater.”

Syariah finance typically involves the sale and purchase of assets, which would attract tax at each level and increase transaction costs. Indonesia’s parliament passed a law last month, to take effect in April, which will scrap double taxation on Islamic financial transactions.

Bahrain’s Shamil Bank launched a US$51 million Islamic fund in 2006 targeting investments in China’s real estate sector.

China’s economy grew at an annual clip of 7.9 per cent in the second quarter, picking up from 6.1 per cent in the first quarter and on track to hit its full-year growth target of eight per cent.

source : bt