Islamic Finance in Europe – Occasional Paper by European Central Bank June 2013

European Central Bank (ECB) has published occasional paper about Islamic Finance in Europe in June 2013. 74 pages document contains many facts, figures and research articles about Islamic Finance in Europe. This paper will be useful for academics, students and researcher who want to do research about Islamic finance industry in Europe.

Link for the paper : http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp146.pdf

Ireland may be first EU state to sell Islamic bond

By Elffie Chew

IRELAND plans to become the first European nation to sell sovereign sukuk — Islam-approved financial certificates — as its equal tax treatment for Islamic-finance products attracts investors.

The Government has agreements with more than 60 countries to avoid double taxation on Islamic transactions, Micheál Smith, the south-east Asia director of IDA Ireland, said.

Islamic finance assets around the world may rise about 16% to €1,240 billion this year, Raj Mohamad, managing director at Five Pillars, a consulting firm based in Singapore, told Bloomberg Television yesterday.

While plans to sell sukuk by Britain, France and Luxembourg have stalled, Mr Smith said Ireland will push ahead with a sale.

“Ireland will be going back to the bond market and a sukuk is an option when conditions are right. We also hope to form more working groups with Muslim countries such as Malaysia to build up a critical mass of expertise as the objective is for Dublin to become a centre of excellence for Islamic finance.”

Ireland introduced tax legislation for products that comply with Islam’s ban on interest in 2010, Mr Smith, who is based in Singapore, said.

The Central Bank has a Shariah team overseeing its Islamic funds, which total about €390m under management.

The Irish Stock Exchange listed its first sukuk in 2005 and Ireland is a popular choice for sales because the nation offers a “relatively inexpensive” and timely listing process, he said.

The Government last sold bonds in September 2010, the year it had a deficit that was the highest as a percentage of gross domestic product in the developed world. The Department of Finance estimates the ratio dropped to 10.1% of GDP in 2011 from 31% the previous year.

CIMB Group Holdings, the world’s biggest sukuk arranger, said this week that it got approval to set up the first Shariah-compliant equity funds from Malaysia in Ireland.

Ireland’s bid to become an Islamic finance hub received a boost in October when Goldman Sachs Group got approval from the nation’s central bank to list its $2bn (€1.55bn) sukuk programme. The planned sale has attracted criticism among Islamic scholars, with some saying the proceeds may not be used according to Shariah law.

CIMB-Principal Islamic Asset Management, based in Kuala Lumpur, chose Ireland for its Islamic equity funds because there’s no double taxation and no withholding tax on interest payments, Jim McCaughan, chief executive of US-based venture partner Principal Global Investors, said on Monday.

An initial investment of $20m (€15.5m) will be put into three funds that will open for subscription next month, he said.

“We expect interest from Europe, Malaysia and more importantly the Persian Gulf and other Muslim countries,” Mr McCaughan said. “People are getting wealthier and want to diversify their funds.”

Global sales of sukuk, which pay asset returns instead of interest, total €4.7bn this year, compared with €500m in the same period in 2011, according to data compiled by Bloomberg. Offerings reached a record $36.3bn last year, surpassing the $31bn raised in 2007.

The difference between the average yield for sukuk and the London interbank offered rate, or Libor, narrowed two basis points to 299 basis points yesterday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.

The average yield has climbed nine basis points, or 0.09% point, this year to 4.08%.

Shariah-compliant bonds have dropped 0.1% in 2012, according to the HSBC/Nasdaq index, while debt in developing markets declined 0.2%, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

The Bloomberg Malaysian Sukuk Ex-MYR Index of foreign currency Islamic debt sold by companies in Malaysia rose 0.5% this year to 104.919 yesterday. The gauge increased 5.9% in 2011.

Britain cancelled what would have been the first sukuk sale by a Western government last February, saying the debt didn’t offer value for money. Luxembourg ruled out a plan to sell Islamic bonds in 2011 because the government saw no need to raise additional funding. France has legislation in place to facilitate a sale and has yet to proceed with an issue.

Ireland has a Muslim population of 30,000, according to a Department of Finance document covering the nation’s Islamic industry issued in March 2010. Roman Catholics make up 87% of Ireland’s population.

The Islamic Cultural Centre for Ireland and the Immigrant Council of Ireland have all called for more Shariah-compliant initiatives, the report said.

“There’s been no objection to Islamic products being sold in Ireland,” said Mr Smith, who is also a director in charge of the 10-member Association of Southeast Asian Nations at the IDA.

The European debt crisis provides an opportunity for Islamic finance to grow given it is rooted in ethics and religion, according to Nik Norzrul Thani, the chairman of Malaysian law firm Zaid Ibrahim & Co.

“What Ireland is doing is a step in the right direction,” Nik Norzrul said in an interview in Kuala Lumpur.

“Ireland’s ambition to be a Shariah-compliant hub is a recognition that Islamic finance isn’t only for Muslims.”

Read more: http://www.irishexaminer.com/business/ireland-may-be-first-eu-state-to-sell-islamic-bond-180837.html#ixzz1k8GcROxQ

source : Irish Examinar

Business students turn to Islamic finance

It is no secret that conventional financial systems are not working and the sector is looking for alternative and responsible ways of doing business.
Islamic finance poses an ethical and non-conventional model and is currently the only area with strong growth, said Professor Ignacio dela Torre, Academic Director of the Master in Finance Programmes at Spain’s Instituto de Empressa (IE) Business School last week.
Dela Torre was speaking at the relaunch of the Saudi-Spanish Centre for Islamic Economics and Finance, a partnership between IE Business School and Saudi Arabia’s King Abdul Aziz University.
The relaunch coincided with a conference on “Islamic Finance in the 21st century”. He said when employment levels are high in the West, it makes sense for finance students to familiarise themselves with alternative finance models that also include eco-finance and micro-finance.
“From a macroeconomic point of view it makes sense that European governments and financial markets set up Islamic windows so excess liquidity can be channelled through some European financing markets with these structures.”
Expertise needed
“There is already $1 trillion (Dh3.67 trillion) of Islamic money and it is growing at 20 per cent with $200 million of additional Islamic money coming in every year,” said Dela Torre.
Students are showing interest in this area of finance and universities in the United Kingdom and France have responded to the demand early on. Over the past five years, IE has been offering Islamic finance programmes.
“When you travel to the Gulf, where 50 per cent of banking is Islamised, there are not enough people with skills and understanding of Islamic finance,” he said.
He added that from a career perspective it is wise to have knowledge of this area because those who work in conventional finance will sooner or later be faced with Islamic finance.
Dela Torre says the field is not difficult to understand once the basics are covered in the curriculum illustrated by the fact most expatriate professionals in the GCC’s Islamic banking sector are Americans and Indians.
Dr Ahmad Mohammad Ali Al Madani, Head of Islamic Development Bank, said since the financial crisis, people have become more concerned with where their money ends up once invested and not just profit margins.
Celia de Anca, professor of Islamic Finance at IE Business School, added that students are increasingly interested in financial sustainability and ethics.

source : gulfnews

Turkey: Islamic Finance Transactions in Turkey

The term “Islamic finance” refers to a system of financing or financial activity that is consistent with Islamic rules and principles. The model outlined under the Islamic finance is generally based on two main pillars, namely the sharing of profit and loss; and the prohibition of charging interest. There are several modes of financing currently being used in Islamic finance practice, certain of which can be considered as similar to conventional banking products. However, the main rule dominating the financial instruments in Islamic finance is the prohibition of recovering interest, which gives rise to the essential mode of financing based on the deferred sale of a commodity, namely “Murabaha”.

Murabaha, which was originally a contract of sale in which a commodity is sold on profit, has been modified for application in the financial sector and has thereby become the single most popular technique of financing amongst Islamic banks all over the world. A Murabaha transaction is completed in two stages. In the first stage, the client requests the financial institution to undertake a Murabaha transaction and promises to buy the commodity specified by him if the bank acquires the same commodity. In the second stage, the client purchases the good acquired by the bank on a deferred payment basis and agrees to a payment schedule. In sum, the Murabaha transaction consists of two sales contracts, one through which the bank acquires the commodity, and the other through which it sells it to the client.

The Murabaha form of financing is widely used by Islamic banks to satisfy various kinds of financing requirements. It is used to provide financing in a variety of diverse sectors (e.g. in consumer finance, for the purchase of consumer durables such as cars and household appliances; in real estate, to provide housing finance; and in the production sector, to finance the purchase of machinery, equipment and raw material).

Islamic Financing and its Aspects in the Turkish Market

 

Turkey has been institutionally utilizing Islamic finance techniques since the late 1980s through financial institutions known as “Special Finance Houses” (Özel Finans Kurumu), which became the “Participation Banks” (Katılım Bankası) with the enactment of the Banking Act No. 5411 (“Banking Act”) on 1 November 2005. There are currently four participation banks operating in Turkey, whose activities are under the supervision of the Banking Regulation and Supervision Agency. Participation banks are authorized by the Banking Act to collect deposit funds from the public under the “profit-and-loss participation accounts” and the “special current accounts”. The profit-and-loss accounts can be considered as a version of the Islamic finance instrument known as the “Mudaraba”, where the bank utilizes the funds deposited by account holders and that are accumulated in a pool for specific business activities. Any profits earned are shared between the account holder and the bank, in proportion to an agreed ratio.

Participation banks mainly offer two types of financing. The first is Murabaha, under which the funds are made available to companies in need of capital. The other is financial leasing, with terms similar to those offered by other leasing companies.

Apart from the institutionalized Islamic finance activities described above, a large number of syndicated loans in the form of Murabaha were made available to major Turkish companies such as Turkcell, Petrol Ofisi and Vestel in recent years. Under these transactions, the companies mentioned were provided with syndicated loans in the Murabaha form made available by credit consortiums consisting of financial institutions from the Persian Gulf region, led by the major actors of the global financial market. Considering that rising oil prices cause considerable capital accumulation in the Gulf Region, the Murabaha syndications can be considered as serious financing alternatives for Turkish companies.