“Safe” Islamic Finance Stuck At Hurdle

Despite proving more resilient to the financial crisis than conventional markets, Islamic finance is struggling to reach its full potential, a conference has heard.

Experts gathered in Lucerne last week agreed that much work still has to be done to bridge the gap between the fledgling Islamic financial sector and Western markets. One Swiss expert said the terms Islamic and sharia were hindering the process.

Until recently, there did not appear to be a particularly compelling case for Islamic banking and insurance services for non-Muslim clients. But the out-performance of Islamic products against conventional markets during the financial crash has generated more interest.
“The failure of toxic products [including mortgage-backed securities] during the financial crisis has allowed Islamic finance to gain momentum,” Marc Chesney of Zurich University’s Swiss Banking Institute told the conference on Friday.
Many investments in Islamic finance did take a tumble during the crises years of 2008 and 2009. But sharia laws, which both forbid speculation and demand that all parties share risk as well as profit, stripped out most of the more dangerous toxic products from client’s portfolios.
Such a product might be expected to appeal to many investors who were burned during the crisis or who are now outraged at bankers’ bonuses and perceived greed.

Terminology problem
But Fares Mourad, head of Islamic finance at the Swiss bank Sarasin, pointed out that the marketing of this product has so far won few converts in the Western world. “The terms ‘Islamic’ and ‘sharia’ have helped it develop and reach this stage, but it is now hindering the next stage of reaching Western clients,” he told swissinfo.ch.
Recent moves to ban minarets in Switzerland or the wearing of religious headscarves in France, hardly point to a climate willing to accept a form of finance based on Islamic sharia law, the conference heard.
In addition, the introduction of Islamic finance would also require an overhaul of tax laws and regulations.

Varying interpretations
But even in Muslim countries Islamic finance has far less penetration than the conventional Western model. The conference heard that only around 15 per cent of the market in Malaysia invests its money in Islamic products despite the fact that the country is seen as the standard bearer of sharia-compliant products.
Islamic finance is still in its infancy and is evolving differently from the Western model, making it more difficult to gauge for investors. One problem is that financial products must be approved by Muslim scholars, and interpretation of sharia law varies between individuals.
According to one respected Bahrain regulatory authority, which surveyed the Islamic bond market last year, some 85 per cent of products were actually un-Islamic.
Perhaps little wonder that even Swiss private banks, which pride themselves on their innovation and have far-reaching exposure to Middle Eastern clients, have so far failed to develop their own Islamic products to any degree.
One exception is Bank Sarasin, which claims to be the only private bank in Switzerland with a complete in-house Islamic offering. But Sarasin’s expert Mourad believes the market for Islamic finance will prove too lucrative a lure for other banks before long.
“It lies in the nature of Swiss people to have a look first, evaluate, reflect and then take a decision,” Mourad told swissinfo.ch. “Islamic finance is a new business, but it is only a question of time before we see other private banks in Switzerland offering an A to Z service.”

Ethical competition
However, attracting Western clients could prove more difficult for the Islamic finance sector. Not only could the term ‘Islamic’ put off investors, the model would now have to compete with a rapidly evolving sustainable finance sector that eschews ethically questionable products or big risks.
Socially responsible investing (SRI) is a growing business in Western markets and is seen in part as an antidote to the risky and greedy practices that led to the crisis. For the time being, both SRI and Islamic finance must occupy a similar area, but remain apart, according to Mourad.
“Islamic finance and SRI take a slightly different approach, but both are aiming for wealth preservation and sustainability for the benefit of humankind,” he said. “Both models are looking over the fence and borrowing elements from each other.”
In the meantime, Mourad and many other financial experts will continue with their efforts of trying to construct bridges between Islamic and Western finance in the hope of finding a structure that can join the two in a sustainable way.
Source : turkish weekly

Islamic finance to double in size in 5 years

Islamic finance, which prohibits charging interest, is set to double in size in five years, but the one-trillion-dollar industry must diversify and regulate to realise its full potential, analysts and economic reports say.

Diversification into new territories is also necessary to reduce the risk of exposure and utilise their full potential, they add.

Islamic law not only forbids charging or paying interest, but also bans speculation and investment in sectors deemed haram (prohibited), such as pornography, gambling, arms, alcohol and pork products.

Perhaps the most popular product is Murabaha, which is used to finance a variety of consumer purchases from cars to houses. Sukuk is the equivalent of bonds used to raise funds for large-scale investments.

Under a product called Musharaka, which means partnership, the bank provides the funds to enable the customer to buy an asset, with the two parties agreeing a profit or equity sharing ratio for that asset. Losses are shared on a similar basis.

The broader principle of Islamic finance is based on sharing risk as well as profit.

Despite the number of products offered, Amrith Mukkamala, director of asset allocation at Kuwait and Middle East Financial Investment Co (KMEFIC), believes they are still limited.

“The products (of Islamic finance) that are available for investors are still very limited … compared to high demand,” said Mukkamala, adding that the field of derivatives should be explored seriously.

For his part, Kuwaiti economist Hajjaj Bukhdur believes there are enough products, and that even greater expansion has been subdued by a lack of both sufficient regulation and management skills.

“Islamic finance already has around 30 different types of products and instruments, giving it a large degree of flexibility to meet investors’ demand and continue to expand rapidly,” Bukhdur told AFP.

“But it has two major shortcomings: there are different regulatory systems … and managements have been less competent to realise the full potential,” he said.

Assets of Islamic financial institutions increased five-fold to around one trillion dollars (787 billion euros) between 2003 and last year, but Moody’s Investors Service believes the full potential is at least five trillion dollars.

But for now, it only makes up around five percent of the global financial industry.

In May, speakers at a forum on challenges facing the sector, said it took 40 years to reach one trillion dollars in assets, but now it will take just five years to double.

The number of Islamic financial institutions and banks grew from just a few in the mid-1970s to several hundred now operating in more than 50 countries across the world, and with leading global banks getting into the business.

The International Monetary Fund said last month that the September 11, 2001 attacks on the United States and a sharp rise in oil price and revenue have greatly helped the rise of Islamic finance because more Muslim investors wanted to keep money at home.

In a report in April, Moody’s urged the Islamic finance industry to innovate, particularly in the area of risk hedging, if it is to really thrive.

The combined use of securitisation and derivatives “offers considerable scope for reducing the risk exposures of Islamic financial institutions (IFIs) and thus improving their overall creditworthiness,” the agency said.

“If employed with care, derivatives can enhance efficiency in IFIs through risk mitigation, thereby making them more competitive as well as appealing to customers,” it said.

However, their application in Islamic finance is “highly controversial for reasons of speculation and uncertainty, two practices forbidden under Sharia,” or Islamic law, Moody’s said.

“Islamic financial institutions have to be much more aggressive … as there is a huge potential for growth. So far, they have been far less active than conventional finance,” Mukkamala said.

The 2009/2010 World Islamic Banking Conference Competitiveness Report, produced in collaboration with McKinsey & Company, said Islamic banks must determine their future course of action by exploring new key areas.

“They should enhance and diversify their business mix, by tapping into new growth business lines, such as personal finance, asset management and various areas of investment banking,” it said.

The report, released in December, said that during the global economic downturn, Islamic banks have outperformed conventional units but were not immune from the fallouts.

A number of Islamic banks have also been more strongly affected by non-performing loans than conventional banks, and they also continue to have greater exposure to real estate assets, it said.

Bukhdur attributes much of the impact to slow response by managements to the crisis.

“Islamic financial units were less impacted by the global crisis than conventional banking industry,” he said.

“But conventional banks have reacted quickly, and most of them are almost out of the crisis. On the contrary, the response by Islamic firms was very slow, resulting in a magnified impact. Many Islamic firms have not yet recovered.”

The need to harmonise regulations is also a major issue.

Each Islamic financial unit is normally advised by a Sharia board, which is responsible for interpreting Islamic jurisprudence. That has resulted in somewhat different interpretations by various boards.

The leading regulatory bodies have all been working towards aligning Sharia law principles towards a consistent basis to ensure uniformity.

Bukhdur said Islamic finance will continue to expand, but he believes the main expansion will come from the Islamic units of leading international banks rather than in new independent Islamic financial units.

source : business.maktoob

The going gets tough for takaful industry

Malaysia’a takaful industry is expected to step up its performance now that an additional four operators have been issued licences to start business next year, said industry players.

“With 12 operators in the country now, we have to work harder to gain market share and profits,” said an executive from a takaful group that has been in operation for more than 10 years.

Although Malaysia’s takaful industry has seen tremendous growth in the last five years, it still lags behind its conventional peers in terms of total insurance market penetration and share.

It is understood that the penetration rate for takaful industry in Malaysia is around 10 per cent, compared with 40 per cent for conventional insurance.

Another existing takaful executive said the entry of four new players is against the spirit of consolidation that the regulator has been propagating.

However, he said the regulator may have decided to add more players since the Islamic banking and takaful industry has yet to command 20 per cent of the banking and insurance market share targeted by 2010.

Takaful fund assets comprise only 8 per cent of the total assets of the Malaysian insurance and takaful industry although it has more than doubled in this same period from RM5.87 billion in 2005 to RM10.5 billion in 2008 and RM12.4 billion in 2009.

Prime Minister Datuk Seri Najib Razak said last year that the liberalisation measures, including new licences, are in line with the provisions and timetable set out in the Financial Sector Master Plan (FSMP) announced in 2001.

The government said then that the measures are aimed at enhancing “inter-linkages to leverage on global developments in Islamic finance and reinforce Malaysia’s position as an international Islamic financial hub.”

Takaful fund assets comprise only 8 per cent of the total assets of the Malaysian insurance and takaful industry although it has more than doubled in this same period from RM5.87 billion in 2005 to RM10.5 billion in 2008 and RM12.4 billion in 2009.

Prime Minister Datuk Seri Najib Razak said last year that the liberalisation measures, including new licences, are in line with the provisions and timetable set out in the Financial Sector Master Plan (FSMP) announced in 2001.

The government said then that the measures are aimed at enhancing “inter-linkages to leverage on global developments in Islamic finance and reinforce Malaysia’s position as an international Islamic financial hub.”

In this context, it will be interesting to see how new takaful players would contribute in areas where there are gaps in the financial system and in which there are new areas of growth in the financial system.

The four new licences issued to joint ventures are between American International Assurance Bhd (70 per cent) and Alliance Bank Malaysia Bhd (30 per cent; AMMB Holdings Bhd (70 per cent) and Friends Provident Group plc, UK (30 per cent); ING Management Holdings (M) Sdn Bhd (60 per cent), Public Bank Bhd (20 per cent) and Public Islamic Bank Bhd (20 per cent); and the joint venture between The Great Eastern Life Assurance Co Ltd (70 per cent) and Koperasi Angkatan Tentera Malaysia Bhd (30 per cent).

Existing takaful operators include CIMB Aviva Takaful Bhd, Etiqa Takaful Bhd, Hong Leong Tokio Marine Takaful Bhd, HSBC Amanah Takaful (Malaysia) Sdn Bhd, MAA Takaful Bhd, Prudential BSN Takaful Bhd, Syarikat Takaful Malaysia Bhd and Takaful Ikhlas Sdn Bhd.

In addition, Malaysia has four Retakaful operators, namely, ACR Retakaful SEA Bhd, MNRB Retakaful Bhd, Munchener Ruckversicherungs-Gesellschaft (Munich Re Retakaful) and Swiss Reinsurance Co Ltd (Swiss Re Retakaful); and one International Takaful Operator in AIA Takaful International Bhd. //

source :  btimes.my

Plans for certified syariah experts in Islamic finance

Leading Islamic finance scholars are preparing the first global certification for syariah experts, seeking to bolster the industry’s reputation and make it easier for banks to find qualified advisers.

The International Syariah Research Academy for Islamic Finance in Kuala Lumpur will pick a board of regulators by year-end to issue permits for scholars qualified to sit on syariah boards, said Aznan Hasan, president of the oversight committee. The scholars decide whether financial products meet the religion’s precepts, including a ban on interest payments.

“We are worried that people who aren’t qualified to be syariah scholars may enter and become members of the advisory boards as the market flourishes,” Aznan said in an interview in Kuala Lumpur.

“Banks try to search for competent advisers. Sometimes they get the right person, sometimes they get the wrong person.”

Attempts to set up an organisation with a code of ethics to certify Islamic scholars have been frustrated by differing interpretations of syariah law across the Muslim world, Madzlan Mohamad Hussain, a partner at Zaid Ibrahim & Co, Malaysia’s largest law firm, said in an interview.

Scholars are now required to have recognised university degrees before they can act as advisers to banks and companies.

The council of scholars at the academy includes Sheikh Nizam Yaquby of Bahrain, Mohammad Daud Bakar of Malaysia and Abdul Sattar Abu Ghuddah of Syria, who were all ranked among the top 10 experts in a 2008 report by the Chicago-based Failaka Advisors LLC, an advisory company that monitors and publishes data on Islamic funds.

Yaquby serves on the Islamic boards of 52 institutions, including the New York-based Citigroup Inc and London-based HSBC Holdings plc. Daud advises firms such as the Paris-based BNP Paribas SA, according to the data.

“The whole idea is to further strengthen confidence by making syariah scholars truly professional,” Madzlan said, adding that the majority of experts also have full-time careers.

“The plan will materialise because there’s a need for it.” A shortage of scholars versed in syariah law means they tend to sit on a number of advisory boards simultaneously, which increases the risk of conflicts of interest, according to the Bahrain-based Accounting & Auditing Organisation for Islamic Financial Institutions, or AAOIFI.

“We desperately need an institution that could certify and standardise different Islamic products in the market,” Kaleem Iqbal, a senior executive vice-president at Al Baraka Islamic, a unit of the Bahrain-based Albaraka Banking Group, said in an interview yesterday from Islamabad, Pakistan.

“The banking community will certainly welcome a common platform with a global mandate.”

Syariah-compliant bonds returned 10 per cent this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while debt in developing markets gained 12.5 per cent, JPMorgan Chase & Co’s EMBI Global Diversified Index shows. The Islamic notes rose 1.3 per cent in August after a 2.6 per cent increase a month earlier.

The spread between the average yield for emerging-market sukuk and the London interbank offered rate narrowed 16 basis points, or 0.16 percentage point, to 385 last month, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.

Global sales of sukuk have dropped 13 per cent to US$10.1 billion (RM31.5 billion) so far this year, compared with the same period in 2009, according to data compiled by Bloomberg.

The yield on Malaysia’s 3.928 per cent government Islamic note was little changed at 2.72 per cent yesterday and dropped 21 basis points from the end of July, according to prices from Royal Bank of Scotland Group plc.

It reached a record low of 2.63 per cent on August 24. The Islamic finance industry, with US$1 trillion (RM3.1 trillion) in assets, is facing a challenge to develop global standards to attract funds from the world’s 1.6 billion Muslims.

The AAOIFI, whose standards have been adopted in countries including the United Arab Emirates and Qatar, is proposing rules for scholars to reduce the risk of conflicts of interest, Mohamad Nedal Alchaar, secretary-general of the organisation, said in an interview in Kuala Lumpur.

The guidelines by the AAOIFI may address whether syariah scholars can own shares in the institutions they serve and how many advisory boards they can join, he said.

A centralised regulator for scholars will help increase investment because banks will save time in choosing experts to ensure products meet religious principles, said the academy’s Aznan, who also serves on the syariah board of Malaysia’s central bank.

“Global regulation is beneficial, be that through a test of fit and proper criteria as to what makes one qualify as a scholar,” Omar Shaikh, a board member of the Islamic Finance Council in the UK, said in an e-mail yesterday.

source : bloomberg

Nigeria bourse seeks foreign investors to boost economy

Plans to introduce Islamic instruments and bonds to attract investment

Nigeria’s stock exchange is seeking foreign investors as part of its plan to demutualise the bourse and introduce new products including Islamic investments, said Arunma Oteh, head of the nation’s securities regulator.

The Nigerian Stock Exchange is in the “early stages” of demutualisation and will probably hire a new chief executive officer by the end of this year, Oteh, director general of the country’s Securities and Exchange Commission, said in an interview in Bloomberg’s London office. The SEC fired the previous CEO on August 4.

The bourse will consider selling stakes to outside investors, including foreign exchange operators, Oteh said. Building markets for Islamic finance, corporate bonds and exchange-traded funds will help attract investment into sub-Saharan Africa’s second-largest economy and the fifth-largest source of US crude imports, she said.

Restoring confidence

“The role of the stock markets is particularly important as we seek to diversify our economy,” Oteh said.

“The marketplace has to be one that is world class. Allowing both international investors and local investors to look at the exchange as something they can invest in is important.”

Oteh, a former vice-president at the African Development Bank who became head of the securities regulator in January, is trying to restore investor confidence after the benchmark All-Share Index sank 65 per cent from December 2007 to the end of last year amid a banking crisis and reports of market abuses.

The All-Share gauge climbed 0.2 per cent to 24,277.14 yesterday, extending this year’s gain to 17 per cent, according to data compiled by Bloomberg.

The SEC removed Ndi Okereke-Onyiuke as the bourse’s CEO after “inadequate oversight of the exchange, ongoing litigation, allegations of financial mismanagement, governance challenges, and the inordinate delays” on a succession plan, the regulator said last month. Emmanuel Ekazoboh, a partner at Deloitte & Touche, was appointed as administrator.

New listings

The SEC plans to revoke some brokerages’ licenses, Oteh said at a press conference in Bloomberg’s London office on Sunday.

Nigerian Finance Minister Olusegun Aganga is targeting minimum economic growth of 10 per cent as the government improves power and transport capacity, he told reporters in London on Sunday.

The economy expanded by 7.4 per cent in the first half of the year, compared with 5.9 per cent in the same period last year, Aganga said.

The exchange is seeking to increase initial public offerings and Oteh said she expects new stock listings soon from companies in the energy and telecommunications industries.

Building a corporate bond market in Nigeria is a “priority,” Oteh said. Levels of benchmark interest rates, inflation and economic growth are “extremely supportive” for corporate bond issuance and a new tax law has made the debt more attractive for investors, Oteh said.

source : bloomberg

Bank targets Japan in Asian push

The Malaysian unit of Kuwait Finance House (KFH) is having “strategic alliance” negotiations in Japan, a newspaper said yesterday.

“The Malaysian bank is negotiating with institutions in Japan regarding a strategic alliance to finalise Islamic banking deals in Hong Kong, Thailand, India and Indonesia,” Kuwaiti daily Al Anbaa said.

It said that KFH Malaysia is interested in China, particularly after making profits from investing $275 million in a real estate project last year.

Kuwait Finance Malaysia was the first foreign Islamic bank to win a licence under the Southeast Asian country’s Islamic Banking Act.

It is the Kuwaiti bank’s Asia-Pacific hub and aims to promote business between the region and the Middle East.

source : gulf daily news

Takaful operators need to ‘up their game’


Existing takaful operators will have to “up their game” and gear up for stiffer competition as the granting of four new licences by Bank Negara on Wednesday will see more players fighting for a share of the profit slice.

Takaful Ikhlas Sdn Bhd president and chief executive officer Datuk Syed Moheeb Syed Kamarulzaman said the company would need to find a niche to stay ahead of the competition.

“We were surprised that four new players were granted licenses rather than two. With more players coming in competition will increase and so will customer expectation,” he said when contacted by StarBiz yesterday

Datuk Syed Moheeb … ‘We were surprised that four new players were granted licenses.’

“The introduction of more (new) players into the industry will increase the takaful penetration rate and take away the businesses of the existing players and we must find our niche,” Syed Moheeb said.

He however added that the local takaful market was huge and offered great growth potential even with new players coming on board.

According to Syed Moheeb, the penetration rate for takaful in Malaysia was around 10%, compared with conventional insurance at 40%.

On Wednesday, four joint-venture (JV) companies were issued new family takaful licences by the central bank following the approval from the Finance Ministry.

Those getting the licences are the joint ventures between American International Assurance Bhd (70%) and Alliance Bank Malaysia Bhd (30%); AMMB Holdings Bhd (70%) and Friends Provident Group plc, UK (30%); ING Management Holdings (M) Sdn Bhd (60%), Public Bank Bhd (20%) and Public Islamic Bank Bhd (20%); and the joint venture between The Great Eastern Life Assurance Company Ltd (70%) and Koperasi Angkatan Tentera Malaysia Bhd (30%).

The four new licences, issued under the Takaful Act 1984, were given based on the applicants’ financial soundness and resilience, track record, expertise, business plan and contribution towards local financial sector development.

Previously, there were eight existing takaful operators in Malaysia, namely CIMB Aviva Takaful Bhd, Etiqa Takaful Bhd, Hong Leong Tokio Marine Takaful Bhd, HSBC Amanah Takaful (M) Sdn Bhd, MAA Takaful Bhd, Prudential BSN Takaful Bhd, Syarikat Takaful Malaysia Bhd and Takaful Ikhlas Sdn Bhd.

Syarikat Takaful Malaysia Bhd group managing director Datuk Hassan Kamil also concurred that competition within the local takaful industry would be much stiffer.

“It is only natural that with more competitors coming in everyone has to buck up.”

Hassan said the JV companies comprised well established foreign partners with “good infrastructure.”

“Many of the local takaful players had to start from scratch and build their infrastructure from scratch. Some of the local operators are still building themselves up.

“The four players coming in are allied with established partners that are ready to go,” he said.

Syed Moheeb however noted that the inclusion of foreign partners as new takaful licensees was a boon to the local insurance industry.

“The new (foreign) operators have the international network to promote Malaysian takaful products in other countries,” he said.

source : biz the star