France eyes top spot in Islamic finance industry

By Dr Mohamad Nedal Alchaar/Manama

Islamic finance is a trillion dollar industry and has become part of the global financial system. The industry represents around 1.6bn Muslims worldwide as well as non-Muslim investors seeking to diversify their portfolio.

Institutional and private investors look to tap into a market that may reach a staggering $5tn, according to forecasts by rating agency Moody’s. France has skilfully anchored into this dynamic terrain but the question really is — What does France need to do to tap completely into this market and become the capital markets’ centre for Islamic financing in the western world?

Before we look at France and Islamic finance, let us take a step back and explore the history and meaning of this approach to managing funds.

Islamic finance is guided by Shariah or Islamic laws primarily derived from the Qur’an. One of its fundamental tenets is that money has no traded intrinsic value and is merely a medium of exchange. This framework not only applies to Islamic banks but also to business and life in general. The prohibition of riba (usury), gharar (uncertainty) and maysir (speculation) are integral to Shariah. However, merely making money with money without any visible and tangible underlying investment is frowned upon. Therefore, the product structures in Islamic finance all have an underlying asset, such as a commodity, share in an enterprise, etc., and is based on risk and reward sharing among all parties involved.

The drive for compliance to Shariah led to the establishment of financial systems that did not operate on interest but on a profit-and-loss-sharing scheme that financed trade and other enterprises at that time. This marked the emergence of a fundamentally different financial concept that has evolved into Islamic finance.

France has long been positioned as one of the vanguards of financial innovation and this has paved the way for changing the regulatory environment. For French organisations, this industry potentially represents a major source of liquidity and finance. The industry offers investors a means of achieving differentiation through diversification, helping them gain a foothold in new markets.

In 2007, Christine Lagarde, minister of economy, asked the Parliament and the Treasury to assess and develop France’s infrastructure to attract Islamic Finance. That year, Paris EuroPLACE, an organisation that promotes the French capital’s financial district formed an Islamic finance committee to make propositions addressing the legal, fiscal, and regulatory hindrances to the industry.

Two years later, a sukuk (a form of Islamic financial securitisation similar to bond) working group was created with lawyers, tax specialists, Shariah advisers and many French banks to develop a sukuk structure under French law.

France’s main objectives this year are to issue a sukuk in Paris under French law, translate the AAOIFI Shariah standards to French and issue its first licence for an Islamic financial institution that is compliant under both national and European law.

Creating a regulatory environment friendly to the issuance of a licence would allow France to provide Shariah-compliant investment and commercial banking products denominated in foreign currencies to investors throughout Europe.

These aspirations are not far from reality considering France has unparalleled access to a broad investor base and strong political will shared by all players across the French financial community. The quality and liquidity of the French asset management market are key advantages to ensuring success of sukuk issuance.

In addition, major French banks have expanded their Islamic finance offerings internationally in response to a growing demand. This demand coupled with a local market of over 5mn Muslims and access to a high net worth Muslim investors globally, provides a healthy environment for the growth of Islamic Finance in France.

A number of reforms have been adopted to advance Islamic finance in France. In mid-2007, the French Financial Market Authority (AMF) issued a recommendation for Shariah compliant funds and a year later, it published a statement approving the listing of sukuk in France. The Euronext Paris soon followed, creating its own sukuk-listing segment. This would not only guarantee the reliability and security of Euronext’s market but it would also support issuers with experienced listing teams.

In early 2009, France introduced tax status adjustments for Islamic finance contracts on murabaha (type of money market instrument) and Sukuk transactions.

Recently, Paris Europlace signed an agreement with AAOIFI paving the way for greater co-operation to drive the development of Islamic finance in France.

This year, Qatar Islamic Bank signed a Memorandum of Understanding (MoU) with Banque Populaire Caisse d’Epargne, France’s second largest banking group, in order to gain access to the French retail banking and small medium-size business markets. This MoU would promote co-operation between the two banks in France, and try to build a lasting partnership.

An independent report projected that France could potentially attract 10% of the trillion-dollar industry. France is the fountainhead of innovation and achievement in the global financial community. The historical and political links of France with the Middle East give France the opportunity to hold a unique position in the Islamic finance industry. The future for Islamic finance in France is therefore indeed encouraging.

*** Dr Mohamad Nedal Alchaar is the secretary-general of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the international organisation that develops and issues standards on accounting, auditing, governance, ethics and Shariah for the global Islamic finance industry

source : gulf times

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Malaysia attracts Islamic US funds

MALAYSIA is attracting Islamic investment funds from the US seeking higher returns in Asia as growth in developed economies slows.

“Emerging markets is where we see global growth going for the next couple of decades and the source for a lot better opportunities,” Bryce Fegley, chief investment officer at Saturna Sdn Bhd, the Malaysian unit of Saturna Capital LLC, the biggest syariah-compliant stock fund in the US, said in an interview on August 10. Saturna’s expertise in Islamic finance “steered us to Kuala Lumpur as opposed to Singapore, Hong Kong or other emerging markets,” he said.

Saturna, the Bellingham, Washington-based company that oversees US$2.7 billion (US$1 = RM3.18) of assets, set up Saturna its unit in March and obtained an Islamic finance management licence in May, Fegley said. Franklin Templeton GSC Asset Management Sdn Bhd got approval to offer services that comply with religious principles in January, according to the Malaysian Securities Commission’s website.

The 14 licences issued by the Malaysian government allowing international companies to form Islamic fund-management businesses give tax exemptions until 2016. Foreign ownership rules have also been eased in the global financial hub for services that meet syariah guidelines.

 

Asia’s accelerating growth is also encouraging HSBC Holdings plc and Standard Chartered plc to set up Islamic units in Malaysia, the world’s biggest market for sukuk and home to more than 16 million Muslims. Funds that have obtained Islamic asset-management licences in Malaysia include Nomura Islamic Asset Management Sdn Bhd, OSK-UOB Islamic Fund Management, Reliance Asset Management (Malaysia) Sdn Bhd, and Aberdeen Asset Management plc, according to data on the Securities Commission’s website.

Overseas investors can own as much as 70 per cent of Islamic investment banks and sellers of takaful, or insurance that complies with religious tenets, up from 49 per cent.

“Malaysia has a comparative advantage because the Islamic finance infrastructure was in place much earlier than other countries,” said Scott Lim, chief executive officer of Kuala Lumpur-based MIDF Amanah Asset Management Bhd, which oversees the equivalent of US$670 million including syariah-compliant equity and debt funds. “Malaysia has a big Muslim population looking for Islamic instruments compared to Hong Kong and Singapore, where there is no such demand,” he said in an interview from Kuala Lumpur on August 13.

Malaysia’s US$93 billion of syariah assets account for 19.6 per cent of the country’s total banking industry, according to Bank Negara Malaysia’s website. The nation has RM279 billion of outstanding Islamic debt, according to data compiled by Bloomberg.

Saturna Capital started the Amana Developing World Fund in the US in September to invest in global emerging-market Islamic assets. The company bought Malaysia’s Alpha Asset Management in March and changed the name to Saturna Sdn Bhd.

Saturna Capital manages Islamic funds including the Amana Income Fund, Amana Growth Fund and the Amana Developing World Fund. Amana Income, which invests in dividend-paying corporations globally, gained 5.6 per cent annually over the past decade, compared with the 0.8 per cent drop in the Standard & Poor’s 500 Index over the same period, according to the company’s website

source : BTIMES

‘Govt opening first shariah-based Banks’

Afghanistan plans to issue licenses for three Islamic banks, the first to offer a range of services that comply with religious law in a country where 99 percent of the population is Muslim. Afghan United Bank, Ghazanfar Bank and Maiwand Bank are seeking permission to provide products that meet Shariah principles, said Aimal Hashoor, a central bank spokesman in Kabul. Now, seven local banks can offer Islamic services through dedicated tellers at branches, he said. The products are limited to Islamic loans, said Sayed Mahmood-ul-Hassan, chief executive officer of Afghan United Bank.

The government wants to expand Islamic finance to draw more assets into the financial system and help reduce the nation’s reliance on overseas aid for reconstruction following 30 years of war and insurgency, according to Hashoor. The country has received more than $32 billion in international aid since U.S.- led forces toppled the Taliban in 2001, he said.

“Afghanistan is a Muslim society and many people don’t want to use conventional banking,” Hashoor said in an interview on Aug. 15. “We want to bring all of the money that we have in businesses and with individuals into the economic cycle.”

The $23 billion economy has expanded an average 11.3 percent annually since 2004, according to the U.S. Department of State. Islamic finance would be popular with Afghans, who are “very religious” and often prefer cash transactions to interest-based banking, holding back the development of local businesses, according to Al Baraka Islamic Bank.

“Islamic banks can fill the vacuum as conventional banking is not fully developed in Afghanistan,” Kaleem Iqbal, a senior executive vice president at Al Baraka Islamic, a unit of Bahrain-based Al-Baraka Banking Group, said in an interview yesterday in Islamabad. “The government would be looking forward to participation by banks in its plans to sell sukuk.”

Sukuk Plan

Afghanistan’s government is limited to using short-term bills and international aid to finance development. The central bank has about 12 billion Afghanis ($261 million) of bills due in 12 months or less outstanding, Rahimullah Zaker, general director of the market operation’s department, said in an interview on Aug. 16.

A government sale of Islamic bonds is planned for the future once full Islamic banking has started and services expand, according to Hashoor. The nation may issue non-Islamic long-term notes next year, he said, without being more specific.

Global sales of sukuk fell 25 percent to $8.3 billion so far this year, according to data compiled by Bloomberg. Issuance totaled $20.2 billion last year, up from $14.1 billion in 2008, and reached a record $31 billion in 2007. The debt is based on asset returns rather than interest to meet Shariah guidelines.

Debt Returns

The difference between average yields on Islamic bonds and the London interbank offered rate narrowed four basis points, or 0.04 percentage point, to 381 yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

Shariah-compliant bonds returned 10 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets gained 13 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

Malaysia’s 3.928 percent Islamic note yields due June 2015 fell three basis points to 2.73 percent today, according to prices from Royal Bank of Scotland Group Plc.

Afghanistan, with a population of 29 million, is the poorest country in the Asia-Pacific region, with 42 percent of people living on less than $1.25 a day, according to a report on the Manila-based Asian Development Bank’s website.

‘Good Growth’

The government announced a five-year plan to build its finance industry and reduce reliance on aid in 2009. President Barack Obama told Afghan President Hamid Karzai on Aug. 13 that the U.S. is committed to helping Afghanistan become a “stable, secure and prosperous” nation.

The three likely license winners are already among seven lenders providing limited Islamic services such as deposit accounts and loans, said the central bank’s Hashoor.

“Once the banking regulations are in place, the banks can offer a wide range of advanced products such as project financing, mortgages and credit and debit cards,” he said. “The customers will also feel comfortable doing Islamic banking with lenders as they will know that these services are regulated under law.”

The parliament needs to approve Islamic banking laws before the central bank issues licenses to start Shariah-compliant services, Hashoor said. Afghan United plans to offer Islamic credit cards once the bank wins its license, Hassan said.

“We will have good growth of Islamic banking in the future as this is where Muslims prefer to invest their money,” Rama Raju, president of Maiwand Bank, the first lender to provide Islamic loans in Afghanistan, said in an Aug. 15 interview from Kabul. “We are looking forward to the sukuk auction.”

source : south asian media

Trade push reshaping Islamic finance rivalry

Arshad Khan, the chief of the Bahrain Financial Exchange, had envisaged a global Islamic trading platform when he set out to work with Malaysia’s stock exchange this year.

The talks on the global platform continue, and Khan thinks there may still be partnerships with the Malaysian stock exchange in the future, including the earlier planned commodity murabaha platform.

This reflects a desire to collaborate that could help close an age-old divide between the two regions which has impeded the growth of Islamic finance.

“The agreement (with Malaysia’s stock exchange) is still there, and we’re still exchanging information,” Khan said. “We can still create synergies later on.”

Split by an age-old rivalry stemming from the fight for market share and differences in Shariah interpretation, Islamic banking hubs Malaysia and the Middle East have struggled to work together in the past, resulting in fragmented standards and localised markets which have divided the industry.

Some Malaysian Islamic products have not been accepted in the Gulf because authorities there say they are not Shariah-compliant.

But narrowing differences over Shariah interpretation, the quest for new markets and Asia’s growing economic clout have begun to turn the tide, offering investors hopes of a deeper sukuk market, improved transparency and more uniform Shariah standards.

“Institutions around the world, whether they’re Malaysian or Middle Eastern, will end up using very similar contracts for fairly standard types of products like hedging contracts and repos,” said Harris Irfan, Barclays Capital’s head of Islamic products.

“Therefore, the industry growth that should have been realised will now be realised.”

As commercial realities force a closer partnership, trade flows between the two regions have increased and banks are discarding contentious Shariah financing concepts to court a broader swath of investors.

Malaysia’s national mortgage firm Cagamas recently targeted Gulf investors with a novel sukuk structure aimed at pleasing more strict Gulf Shariah standards.

Middle Eastern investors accounted for a third of the 1bn ringgit ($317.1mn), 3-year issue from the first tranche.

Gulf lenders Al Rajhi, Kuwait Finance House and National Bank of Abu Dhabi all have Malaysian bank licences, and Bahrain’s Al Baraka wants to buy a stake in Malaysia’s Bank Muamalat..

“In the last few years we’ve seen more progress and cooperation,” said Mohamad Safri Shahul Hamid, deputy CEO at Malaysia’s MIDF Amanah Investment Bank, a sukuk arranger.

“The market is still very small, and in order to grow, we need to have cooperation between those two regions.”

The need for greater harmonisation and clarity has taken on added urgency as the industry tries to calm rattled investors.

Islamic finance claimed the moral high ground during the sub-prime mortgage crisis which floored the global banking system, but its reputation has taken a beating after the slowdown exposed gaps in the relatively young $1tn industry.

For some investors, Islamic finance may lead to inconsistent standards and opaque markets as soured sukuk and Shariah banking deals are played out in courts.

In particular, investors are demanding more transparency after wrestling with patchy data and gaps in company disclosures, particularly in the Middle East.

As more Gulf banks expand in Asia, the industry has increasingly embraced globally accepted Islamic contracts such as ijara and avoided controversial concepts like the bai bithaman ajil in structuring new financing.

Bai bithaman ajil makes up a sizeable chunk of Malaysian Islamic banks’ financing portfolio, but the authorities are offering a tax deduction on expenses for the issuance of other sukuk such as musharaka and istisna to encourage the use of less contentious contracts.

But the regions must still overcome a vast sukuk price differential which makes it hard to sell the same paper globally, said Simon Eedle, Credit Agricole CIB’s Islamic banking head.

While issuers in Malaysia look to similarly rated firms for price guidance, Middle Eastern banks have a higher cost of funding, which results in them asking for higher returns, he said.

Shariah supervision is also a tricky area.

Malaysia, which has the world’s largest sukuk market, adopts a top-down approach in regulating its Islamic finance industry, with national-level Shariah advisers and a regulatory framework complete with a legal dispute resolution mechanism.

“In the Middle East, in certain jurisdictions it’s not even regulated, so how can you harmonise?” said Megat Hizaini Hassan, who heads the Shariah banking and finance transactions practice at Malaysia’s top law firm Zaid Ibrahim & Co.

source : gulf times

Instilling Islamic values into economic system to strengthen nation

The Islamisation of the economic system, if adopted and practised in its true form, will strengthen the economy, particularly income distribution and poverty alleviation which have proved elusive under the present western economic model, according to former governor of the State Bank of Pakistan (SBP), Dr Ishrat Hussain.

“This will, in fact, eliminate sources of instability, violence and tendency towards extremism arising from a sense of deprivation in this region,” he said.

He expressed these views while delivering a speech on ‘Islam and the future of economics’ at a conference on Islamic Economics and Finance, organised by the Institute of Business Administration (IBA) at the SBP on Saturday.

He said that the introduction of Islamic banking has promoted financial inclusion by bringing in those who have so far remained outside the conventional banking system, and has thus strengthened the financial sector.

“We need to explore the unique features of Islamic finance for the larger good of the society, particularly in the context of economic growth and poverty alleviation,” he said.

Islamic finance can be a powerful tool for inclusive growth and amelioration of the conditions of poor in Muslim countries, he said.

Leading Islamic finance experts and Shariah advisers, who spoke at the conference, said that the phenomenal growth in the Islamic financial sector worldwide is a testimony of its potential, and the Islamic economic system could be a role model for world economies.

They said that currently there are over 500 Islamic financial institutions with a total size of $1.2 trillion, over 250 Shariah-compliant mutual funds having $300 billion worth of funds, over 133 Takaful companies with $8.8 billion in contribution and some 207 international Islamic Sukuks issued till 2007 with a 73 per cent growth in comparison to 2006.

The speakers said that Islamic finance and economics is a reality which is being recognised by the International Monetary Fund, World Bank and Basel committee. They said Shariah and accounting standards for Islamic financial institutions have already been laid down and more than 60 countries have Islamic banking institutions.

The speakers informed the audience that Islamic banking is growing rapidly in Pakistan with 649 branches of dedicated Islamic banks and Islamic banking sections of conventional banks.

Their asset base is approximately Rs366 billion while their deposit base is around Rs283 billion with a growth rate of around 55 per cent since inception and the share of Islamic banks in the overall banking system of Pakistan stands at 5.9 per cent, they added.s

source : The Express Tribune 

Trade push aims to bridge Islamic finance’s regional rivalries

Arshad Khan, the chief of the Bahrain Financial Exchange, had envisaged a global Islamic trading platform when he set out to work with Malaysia’s stock exchange earlier this year.

Though the talks fell through, Khan thinks there is still the possibility of partnerships in the future, including the planned commodity murabaha platform.

This reflects a desire to collaborate that could help close an age-old divide between the two regions which has impeded the growth of Islamic finance.

“The agreement [with Malaysia’s stock exchange] remains and we’re still exchanging information,” Khan said.

Split by a rivalry stemming from the fight for market share and differences in Sharia interpretation, the Islamic banking hubs of Malaysia and the Middle East have struggled to work together, resulting in fragmented standards and localized markets which have divided the industry.

Some Malaysian Islamic products have not been accepted in the Gulf because authorities there say they are not Sharia compliant.

But narrowing differences over Sharia interpretation, the quest for new markets and Asia’s growing economic clout have begun to turn the tide, offering investors hopes of a deeper sukuk market, improved transparency and more uniform Sharia standards.

“Institutions around the world, whether they’re Malaysian or Middle Eastern, will end up using very similar contracts for fairly standard types of products like hedging contracts and repos,” said Harris Irfan, Barclays Capital’s head of Islamic products.

“Therefore, the industry growth that should have been realized will now be realized.”

As commercial realities force a closer partnership, trade flows between the two regions have increased and banks are discarding contentious Sharia financing concepts to court a broader swath of investors.

Malaysia’s national mortgage firm Cagamas recently targeted Gulf investors with a novel sukuk structure aimed at stricter Gulf Sharia standards.

Middle Eastern investors accounted for a third of the 1 billion ringgit ($317.1 million), three-year issue from the first tranche of mortgages.

Gulf lenders Al-Rajhi, Kuwait Finance House and the National Bank of Abu Dhabi all have Malaysian bank licenses and Bahrain’s Al-Baraka wants to buy a stake in Malaysia’s Bank Muamalat.

“In the last few years we’ve seen more progress and cooperation,” said Mohammad Safri Shahul Hamid, deputy CEO at Malaysia’s MIDF Amanah Investment Bank, a sukuk arranger. “The market is still very small and in order to grow we need cooperation between these two regions.”

The need for greater harmonization and clarity has taken on added urgency as the industry tries to calm rattled investors.

Islamic finance claimed the moral high ground during the sub-prime mortgage crisis which floored the global banking system, but its reputation has taken a beating after the slowdown exposed gaps in the relatively young $1 trillion industry.

For some investors, Islamic finance has become a byword for inconsistent standards and opaque markets as soured sukuk and Sharia banking deals are played out in courts.

In particular, investors are demanding more transparency after wrestling with patchy data and gaps in company disclosures, particularly in the Middle East.

As more Gulf banks expand in Asia, the industry has increasingly embraced globally accepted Islamic contracts, such as ijara, and avoided controversial concepts like the bai bithaman ajil in structuring new financing.

Bai bithaman ajil makes up a sizeable chunk of Malaysian Islamic banks’ financing portfolio but the authorities are offering a tax deduction on expenses for the issuance of other sukuk such as musharaka and istisna to encourage the use of less contentious contracts.

However, the regions must still overcome a vast sukuk price differential which makes it hard to sell the same paper globally, said Simon Eedle, Credit Agricole CIB’s Islamic banking head.

While issuers in Malaysia look to similarly rated firms for price guidance, Middle Eastern banks have a higher cost of funding which results in them asking for higher returns, he said.

Sharia supervision is also a tricky area. Malaysia, which has the world’s largest sukuk market, adopts a top down approach in regulating its Islamic finance industry, with national level Sharia advisers and a regulatory framework.

“In the Middle East, in certain jurisdictions it’s not even regulated so how can you harmonize?” said Megat Hizaini Hassan, head of Sharia banking at Malaysian law firm Zaid Ibrahim & Co.

source : dailystar

Islamic banking – what is at the backend?

Muhammad Nadeem

Like other basic requirements of Islam, finance or financial transactions need to comply with Islamic modes. Riba was soon after discontinued in the newly-formed Islamic society of Medina. Later, religious scholars derived a number of modes of financing to carry out financial transactions in line with Islamic Shariah.

The essence of the Islamic financial system is to prohibit Riba and make available financial products in line with Shariah. In today’s Islamic banking philosophy, even though Islamic banks are offering financial products free from Riba, the elimination of interest from society is still a dream.

In Pakistan, conventional banking has got a new lease of life with the advent of consumerism. However, international commercial banks, after realising the potential of High Net Worth Individuals (HNWI) or Ultra High Net Worth Individuals (UHNWI) among Muslim societies, have opened Islamic banking windows within their commercial operations, without any need of Riba elimination.

Riba-free banking is running parallel to interest-based banking under the same roof and this approach is accepted by many religious scholars as a “transitional phase” to achieve some evolution of Islamic banking through famous brands.

Foreign and local commercial banks have formed Shariah boards, offering Islamic products to Muslim customers. But criticism is voiced especially over mixed institutions with questions how they are financing their Islamic banking window – whether through lending from conventional banking channel.

Another aspect in today’s technological world is banking for your comfort at home. Branchless banking is gaining ground where electronic channels such as phones, internet, short messages or mobile phones are used heavily for banking, making it simply impossible to segregate Islamic or non-Islamic customers reaching the call centre of the bank having both modes of operations.

So banks running conventional operation and having an Islamic window too, are servicing two opposite customers through a single source.

Another issue is tapping human resources jointly. Primarily, the Islamic banking industry, in Pakistan since 1979, is based on conventional banking resources. So the trained professionals have their initial mindset based on interest-based banking. Even though this risk has been minimised with the presence of Shariah board, segregation of the resources and their utilisation is still not looked into.

An organisation solely dedicated to Islamic mode of banking would not have this issue, however, those having an Islamic window are inclined towards that risk unintentionally. This not only covers human resources function but also the resources rotation within the same organisation to other departments, even in conventional banking areas.

The division of society into conservative, progressive, less-moderate and hardcore religious segments has affected the outcome of Islamic finance too. A historic judgment against Riba by the Shariat Appellate bench and then by Supreme Court made the distinction line more visible when one of the conventional banks, backed by the then government, approached the Supreme Court for the reversal of the judgment and getting stayed out of that deadline of implementation.

They achieved that. A number of progressive Muslims now ask “what is wrong in having bank interest especially on savings?”

In 2004, when in the National Assembly one of the non-Muslim members told the house that “bank interest is not under the definition of Riba, as per the verdict of Al Azhar’s main scholars”, it caused pandemonium and members of the religious parties’ alliance staged a walkout. However, any detailed document from religious authorities is yet to be finalised that contradicts Al Azhar’s version of Riba or the definition of saving account interest.

Religious interpretations might impact the development of Islamic financial products. These interpretational differences are visible between financial products of Malaysian model and products derived in the Middle East by Islamic banks.

the writer is a former Citibank, staffers

source : The Express Tribune