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Tuesday, 31 July 2012

India: Islamic banking opens job options

HYDERABAD: Emerging markets in Islamic banking and finance in India and abroad need close to 50,000 financial experts, a requirement that can be met by the huge reserves of human capital in the country, particularly in Hyderabad. 

Speaking at a conference on Islamic banking here on Monday, M S Sheriff from the Institute of Islamic Banking Finance and Insurance (IIBFI) said, "There are 75 countries in the world which have recognised Islamic banking and finance with South Africa, USA, Singapore,Saudi Arabia and Malaysia being a few of them. Major corporate banks such as HSBC, Citigroup, Deutsche Bank and Standard Chartered all have Islamic banking windows. There are a lot of job opportunities in this sector for the youth. The youth of Hyderabad have always shown interest and are keen on understanding Islamic banking." Sheriff pointed out that a large section of the ulema (Muslim clergy) remain unaware of banking practices and need to be trained in both Islamic and conventional banking. The training of the ulema in practical banking principles is imperative to answer queries regarding paying and receiving interest on loans and deposits. Also, Islamic banking and finance institutions require them to be on the boards of their governing bodies. 

Experts noted that Islamic banking and finance, though recognised by the Securities and Exchange Board of India in the capital market in the form of wealth management and mutual funds, is yet to gain mainstream acceptance. "Islamic finance advisors are getting competitive remuneration packages in India and abroad. The BSE Shariah 50 Index recognises 50 companies in India that have passed strict Taqwaa Advisory and Shariah Investment Solutions norms of shariah compliance - that of dealing in halal (permissible according to tenets of Islam) products and products free from interest," said Shariq Nisar from IIBFI and London School of Economics.

(The Times Of India / 31 July 2012)
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Monday, 30 July 2012

Principles of Shariah Governing Islamic Investment Funds

By Mufti Taqi Usmani: 

The term "Islamic Investment Fund" in this article means a joint pool wherein the investors contribute their surplus money for the purpose of its investment to earn halal profits in strict conformity with the precepts of Islamic Shariah. The subscribers of the Fund may receive a document certifying their subscription and entitling them to the pro-rated profits actually accrued to the Fund. These documents may be called "certificates" "units" "shares" or may be given any other name, but their validity in terms of Shariah, will always be subject to two basic conditions:
First, instead of a fixed return tied up with their face value, they must carry a pro-rated profit actually earned by the Fund. Therefore, neither the principal nor a rate of profit (tied up with the principal) can be guaranteed. The subscribers must enter into the fund with a clear understanding that the return on their subscription is tied up with the actual profit earned or loss suffered by the Fund. If the Fund earns huge profits, the return in their subscription will increase to that proportion; however, in case the Fund suffers loss, they will have to share it also, unless the loss is caused by the negligence or mismanagement, in which case the management, and not the Fund, will be liable to compensate it.
Second, the amounts so pooled together must be invested in a business acceptable to Shariah. It means that not only the channels of investment, but also the terms agreed with them must conform to the Islamic principles.
Keeping these basic requisites in view, the Islamic Investment Funds may accommodate a variety of modes of investment which are discussed briefly in the following paragraphs.
In an equity fund the amounts are invested in the shares of joint stock companies. The profits are mainly achieved through the capital gains by purchasing the shares and selling them when their prices are increased. Profits are also achieved by the dividends distributed by the relevant companies.
It is obvious that if the main business of a company is not lawful in terms of Shariah, it is not allowed for an Islamic Fund to purchase, hold or sell its shares, because it will entail the direct involvement of the share holder in that prohibited business.
Similarly the contemporary Shariah experts are almost unanimous on the point that if all the transactions of a company are in full conformity with Shariah, which includes that the company neither borrows money on interest nor keeps its surplus in an interest bearing account, its shares can be purchased, held and sold without any hindrance from the Shariah side. But evidently, such companies are very rare in the contemporary stock markets. Almost all the companies quoted in the present stock market or in some way involved in an activity which violates the injunctions of Shariah.
Even if the main business of a company is halal, its borrowings are based on interest". On the other hand, they keep their surplus money in an interest bearing account or purchase interest bearing bonds or securities.
The case of such companies has been a matter of debate between the Shariah experts in the present century. A group of the Shariah experts is of the view that it is not allowed for a Muslim to deal in the shares of such a company, even if its main business is halal. Their basic argument is that every share-holder of a company is a sharik (partner) of the company, and every sharik, according to the Islamic jurisprudence, is an agent for the other partners in the matters of the joint business. Therefore, the mere purchase of a share of a company embodies an authorization from the share-holder to the company to carry on its business in whatever manner the management deems fit. If it is known to the share-holder that the company is involved in an un-Islamic transaction, still, he holds the shares of that company, it means that he has authorized the management to proceed with that un-Islamic transaction. In this case, he will not only be responsible for giving his consent to an un-Islamic transaction, but that transaction will also be rightfully attributed to himself, because the management of the company is working under his tacit authorization.
Moreover, when a company is financed on the basis of interest, its funds employed in the business are impure. Similarly, when the company receives interest on its deposits an impure element is necessarily included in its income which will be distributed to the share-holders through dividends.
However, a large number of the present day scholars do not endorse this view. They argue that a joint stock company is basically different from a simple partnership period. In partnership, all the policy decisions are taken by the consensus of all the partners, and each one of them has a veto power with regard to the policy of business. Therefore, all the actions of a partnership are rightfully attributed to each partner. Conversely, the policy decisions in a joint stock company are taken by the majority. Being composed of a large number of share-holders, a company cannot give a veto power to each share-holder. The opinions of individual share-holders can be overruled by a majority decision. Therefore, each and every action taken by the company cannot be attributed to every share-holder in his individual capacity. If a share-holder raises an objection against a particular transaction in an annual general meeting, but his objection is overruled by the majority, it will not be fair to conclude that he has given his consent to the transaction in his individual capacity, specially when he intends to withdraw from the income attributable to that transaction.
Therefore, if a company is engaged in a halal business, however, it keeps its surplus money in an interest-bearing account, wherefrom a small incidental income of interest is received, it does not render all the business of the company unlawful. Now, if a person acquires the shares of such a company with clear intention that he will oppose the incidental transaction also, and will not use that proportion of the dividend for his own benefit, how can it be said that he has approved the transaction of interest and how can that transaction be attributed to him?
The other aspect of the dealings of such a company that it sometimes borrows money from financial institutions. These borrowings are mostly based on interest. Here again the same principal is relevant. If a share-holder is not personally agreeable to such borrowings, but has been overruled by the majority, these borrowing transactions cannot be attributed to him.
Moreover, according to the principals of Islamic jurisprudence borrowing on interest is a grave sinful act for which the borrower is responsible in the Hereafter; however, this sinful act does not render the whole business of the borrower as haram impermissible. The borrowed amount being recognized as owned by the borrower, anything purchased in exchange of that money is not unlawful. Therefore, the responsibility of committing a sinful act of borrowing on interest rests with the person who willfully indulged in a transaction of interest, but this fact does not render the whole business of a company as un-lawful.

In the light of the forgoing discussion, dealing in equity shares can be acceptable in Shariah subject to the following conditions:
1. The main business of the company is not in violation of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah, such as the companies manufacturing, selling or offering liquors, pork, haram meat, or involved in gambling, night club activities, pornography etc.
2. If the main business of the companies is halal, like automobiles, textile, etc. but they deposit there surplus amounts in a interest-bearing account or borrow money on interest, the share holder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company.
3. If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity.
4. The shares of a company are negotiable only if the company owns some non-liquid assets. If all the assets of a company are in liquid form, i.e. in the form of money that cannot be purchased or sold, except on par value, because in this case the share represents money only and the money cannot be traded in except at par.
What should be the exact proportion of non-liquid assets of a company for the negotiability of its shares? The contemporary scholars have different views about this question. Some scholars are of the view that the ratio of non-liquid assets must be 51% at the least. They argue that if such assets are less than 50%, the most of the assets are in liquid form, therefore, all its assets should be treated as liquid on the basis of the juristic principle: The majority deserves to be treated as the whole of a thing. Some other scholars have opined that even if the non-liquid asset of a company or 33%, its shares can be treated as negotiable.
The third view is based on the Hanafi jurisprudence. The principle of the Hanafi school is that whenever an asset is a mixture of a liquid and non-liquid assets, it can be negotiable irrespective of the proportion of its liquid part. However, this principle is subject to two conditions:
First, the non-liquid part of the mixture must not be in a negligible quantity. It means that it should be in a considerable proportion. Second, the price of the mixture should be more than the price of the liquid amount contained therein. For example, if a share of 100 dollars represents 75 dollars, plus some fixed assets the price of the share must be more than 75 dollars. In this case, if the price of the share is fixed as 105, it will mean that 75 dollars are in exchange of 75 dollars owned by the share and the rest of 30 dollars are in exchange of the fixed asset. Conversely, if the price of that share fixed as 70 dollars, it will not be allowed, because the 75 dollars owned by the share are in this case against an amount which is less than 75. This kind of exchange falls within the definition of "riba" and is not allowed. Similarly, if the price of the share, in the above example, is fixed as 75 dollars, it will not be permissible, because if we presume that 75 dollars owned by the share, no part of the price can be attributed to the fixed assets owned by the share. Therefore, some part of the price (75 dollars) must be presumed to be in exchange of the fixed assets of the share. In this case, the remaining amount will not be adequate for the price of 75 dollars. For this reason the transaction will not be valid.
However, in practical terms, this is merely a theoretical possibility, because it is difficult to imagine a situation where a price of the share goes lower than its liquid assets.
Subject to these conditions, the purchase and sale of shares is permissible in Shariah. An Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be treated in Shariah as partners "inter se." All the subscription amounts will form a joint pool and will be invested in purchasing the shares of different companies. The profits can accrue either through dividends distributed by the relevant companies or through the appreciation in the prices of the shares. In the first case i.e. where the profits earned through dividends, a certain proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given in charity. The contemporary Islamic Funds have termed this process as "purification."
The Shariah scholars have different views about whether the "purification" is necessary where the profits are made through capital gains (i.e. by purchasing the shares at a lower price and selling them at a higher price). Some scholars are of the view that even in the case of capital gains the process of "purification" is necessary, because the market price of the share may reflect an element of interest included in the assets of the company. The other view is that no purification is required if the share is sold, even if it results in a capital gain. The reason is that no specific amount of price can be allocated for the interest received by the company. It is obvious if all the above requirements of the halal shares are observed, the most of the assets of the company are halal, and a very small proportion of its assets may have been created by the income of interest. This small proportion is not only unknown, but also a negligible as compared to the bulk of the assets of the company. Therefore, the price of the share, in fact, is against the bulk of the assets, and not against such a small proportion. The whole price of the share therefore, may be taken as the price of the halal assets only.
Although this second view is not without force, yet the first view is more cautious and far from doubts. Particularly, it is more equitable in an open-ended equity fund because if the purification is not carried out on the appreciation and a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit after some dividends have been received in the fund and the amount of purification has been deducted therefrom, reducing the net asset value per unit, he will get a lesser price compared to the first person.
On the contrary, if purification is carried out both on dividend and capital gains, all the unit-holders will be treated at par with the regard to the deduction of the amounts of purification. Therefore, it is not only free from doubts but also more equitable for all the unit-holders to carry out purification in the capital gains. This purification may be carried out on the basis of an average percentage of the interest earned by the companies included in the portfolio.
The management of the fund may be carried out in two alternative ways. The managers of the Fund may act as mudaribs for the subscriber. In this case a certain percentage of the annual profit accrued to the Fund may be determined as the reward of the management, meaning thereby that the management will get its share only if the fund has earned some profit. If there is no profit in the fund, the management will deserve nothing, but the share of the management will increase with the increase of profits.
The second option of the management is to act as an agent for the subscribers. In this case, the management may be given a pre agreed fee for its services. This fee may be fixed in lump sum or as a monthly or annual remuneration. According to the contemporary Shariah scholars, the fee can also be based on a percentage of the net asset value of the fund. For example, it may be agreed that the management will get 2% or 3% of the net asset value of the fund at the end of every financial year.
However, it is necessary in Shariah to determine any of the aforesaid methods before the launch of the fund. The practical way for this would be to disclose in the prospectus of the fund on what basis the fees of the management will be paid. It is generally presumed that whoever subscribes to the fund agrees with the terms mentioned in the prospectus. Therefore, the manner of paying the management will be taken as agreed upon on all the subscribers.

Another type of Islamic Fund may be an ijarah fund. Ijarah means leasing. In this fund the subscription amounts are used to purchase assets like real estate, motor vehicles, or other equipment for the purpose of leasing them out to their ultimate users. The ownership of these assets remains with the Fund and the rentals are charged from the users. These rentals are the source of income for the fund which is distributed pro rated to the subscribers. Each subscriber is given a certificate to evidence his subscription and to ensure his entitlement to the pro rated share in the income. These certificates may be preferably called "sukuk" -- a term recognized in the traditional Islamic jurisprudence. Since these sukuk represent the pro rated ownership of their holders in the tangible assets of the fund, and not the liquid amounts or debts, they are fully negotiable and can be sold and purchased in the secondary market. Anyone who purchases these sukuk replaces the sellers in the pro rated ownership of the relevant assets and all the rights and obligations of the original subscriber are passed on to him. The price of these sukuk will be determined on the basis of market forces, and are normally based on their profitability.
However, it should be kept in mind that the contracts of leasing must conform to the principles of Shariah which substantially differ from the terms and conditions used in the agreements of the conventional financial leases. The points of reference are explained in detail in my book "Islamic Finance." However, some basic principles are summarized here: 1. The leased assets must have some usufruct, and the rental must be charged only from that point of time when the usufruct is handed over to the lessee.
2. The leased assets must be of a nature that their halal (permissible) use is possible.
3. The lessor must undertake all the responsibilities consequent to the ownership of the assets.
4. The rental must be fixed and known to the parties right at the beginning of the contract. In this type of the fund the management should act as an agent of the subscribers and should be paid a fee for his services. The management fee may be a fixed amount or a proportion of the rentals received. Most of the Muslim jurists are of the view that such a fund cannot be created on the basis of mudarabah, because mudarabah, according to them, is restricted to the sale of commodities and does not extend to the business of services and leases. However, in the Hanbali school, mudarabah can be affected in services and leases also. This view has been preferred by a number of contemporary scholars.

Another possible type of Islamic Funds may be a commodity fund. In the fund of this type the subscription amounts are used in purchasing different commodities for the purpose of the resale. The profits generated by the sale are the income of the fund which is distributed pro rated among the subscribers. In order to make this fund acceptable to Shariah, it is necessary that all the rules governing the transactions and fully complied with. For example:
1. The commodity must be owned by the seller at the time of sale, therefore, short sales where a person sells a commodity before he owns it are not allowed in Shariah.
2. Forward sales are not allowed except in the case of salam and istisna' (For their full details my book "Islamic Finance" may be consulted).
3. The commodities must be halal, therefore, it is not allowed to deal in wines, pork, or other prohibited materials.
4. The seller must have physical or constructive possession or the commodity he wants to sell. (Constructive possession includes any act by which the risk of the commodity is passed on to the purchaser).
5. The price of the commodity must be fixed and known to the parties. Any price which is uncertain or is tied up with an uncertain event renders the sale invalid.
In view of the above and similar other conditions, it may easily be understood that the transactions prevalent in the contemporary commodity markets, specially in the futures commodity markets do not comply with these conditions. Therefore, an Islamic Commodity Fund cannot enter into such transactions. However, if there are genuine commodity transactions observing all the requirements of Shariah, including the above conditions, a commodity fund may well be established. The units of such fund can also be traded in with the condition that the portfolio owns some commodities at all times.

"Murabahah" is a specific kind of sale where the commodities are sold on a cost-plus basis. This kind of sale has been adopted by the contemporary Islamic banks and financial institutions as a mode of financing. They purchase the commodity for the benefit of their clients, then sell it to them on the basis of deferred payment at an agreed margin of profit added to the cost. If a fund is created to undertake this kind of sale, it should be a closed-end fund and its units can not be negotiable in a secondary market. The reason is that in the in the case Murabahah, as undertaken by the present financial institutions, the commodities are sold to the clients immediately after their purchase from the original supplier, while the price being on deferred payment basis becomes a debt payable by the client. Therefore, the portfolio of Murabahah does not own any tangible assets, rather it comprises of either cash or the receivable debts, and both these things are not negotiable, as explained earlier. If they are exchanged for money, it must be at par value.
Here comes the question whether or not Bai'-al-dain is allowed in Shariah. Dain means "debt" and Bai' means sale. Bai'-al-dain, therefore, connotes the sale of debt. If a person has a debt receivable from a person and he wants to sell it at a discount, as normally happens in the bill of exchange, it is termed in Shariah as Bai'-al-dain. The traditional Muslim jurists (fuqaha') are unanimous on the point that Bai'-al-dain is not allowed in Shariah. The overwhelming majority of the contemporary Muslim scholars are of the same view. However, some scholars of Malaysia have allowed this kind of sale. They normally refer to the ruling of Shaf'ite school wherein it is held that the sale of debt is allowed, but they do not pay attention to the facts that the Shaf'ite jurists have allowed it only in a case where a debt is sold on its par value.
In fact, the prohibition of Bai-al-dain is a logical consequence of the prohibition of "riba" or interest. A "debt" receivable in monetary terms corresponds to money, and every transaction where money is exchanged from the same denomination of money, the price must be at par value. Any increase or decrease from one side is tantamount to "riba" and can never be allowed in Shariah. Some scholars argue that the permissibility of Bai'-al dain is restricted to a case where the debt is created through a sale of a commodity. In this case, they say, the debt represents the sold commodity and its sale may be taken as a sale of the commodity. The arguments, however, is devoid of force. For, once the commodity is sold, its ownership is passed on to the purchaser and it is no longer commodity of the seller. What the seller owns is nothing other than money, therefore if he sells the debt, it is no more than a sale of money and it cannot be termed by any stretch of imagination as the sale of the commodity. That is why this view has not been accepted by the overwhelming majority of the contemporary scholars. The Islamic Fiqh Academy of Jeddah which is the largest representative body of the Shariah scholars and is represented by all the Muslim countries, including Malaysia, has approved the prohibition of Bai'-al-dain unanimously without a single decent.

Another type of Islamic Fund maybe of a nature where the subscription amounts are employed in different types of investments, like equities, leasing, commodities, etc. This may be called a Mixed Islamic Fund. In this case if the tangible assets of the Fund are more than 51% while the liquidity and debts are less than 50% the units of the fund may be negotiable. However, if the proportion of liquidity and debts exceeds 50%, its units cannot be traded in according to the majority of the contemporary scholars. In this case the Fund must be a closed-end Fund.


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Islamic finance industry in Malaysia needs more perks

KUALA LUMPUR: Islamic finance (IF) still requires incentives like tax deductions to spur the industry further, say top industry executives. 

CIMB Islamic Bank Bhd’s chief executive officer (CEO) Badlisyah Abdul Ghani said government started offering incentives only from around 2004/2005 to jumpstart the industry amid strong demand for IF products but few suppliers in the market.

“The demand was there but the players were not keen to do the business. So, the reason the incentives were given was to get the industry moving. As a result of that, the supply of IF instruments and products became more, and the interest from consumers grew as they now had more choice of products,” he said during a panel session on the internationalisation of IF at the Malaysian Banking Summit here yesterday.

He went to say that the industry was, in fact, asking the government for more incentives under the upcoming national budget.

“One of the things that I personally asked for was to allow banks to have a double-tax deduction or tax rebate for investment in information technology, so that we can get rid of all the manual interventions that we currently have today in the provision of IF products,” he said.

The panel, which included Hong Leong Islamic Bank Bhd’s CEO Raja Teh Maimunah and Maybank Islamic Bhd'’ CEO Muzaffar Hisham, had been asked by a member of the audience if the IF industry here would be able to sustain itself should the incentives be discontinued.

Malaysia, which first embarked on Islamic finance 30 years ago, has become a global hub for the industry even as other jurisdictions have sprouted up.

However, the industry still needs incentives while it aspires to be an international Islamic financial centre, Raja Teh said.

“We’ve not really gotten the kind of traction we want. Until and unless we truly have got that kind of volumes, I don’t see those incentives being pulled out so quickly,” she remarked.

Meanwhile, Badlisyah said Malaysia had a lot to offer the world, in terms of innovation and development as it had already built up expertise in all segments of the IF industry.

It can also lead by example in terms of how the industry is governed, in terms of its comprehensive framework and legislation.

He stressed that the IF industry was no different from conventional finance in that it was also susceptible to a financial crisis, the likes the US had seen.

“It is susceptible to the same crisis because greed is human nature. It’s got nothing to do with the industry. 

We can have all the structures in the world, the best governance and regulatory framework, but the moment we do not manage greed, it is dangerous,” he said.

(Business Times, 29 July 2012)

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Saturday, 28 July 2012

Malaysia: Need to build up confidence to promote Islamic finance globally

KUALA LUMPUR: Although Malaysia has one of the most established and regulated Islamic finance frameworks, local financial institutions need to build up confidence to promote it in the global Islamic finance market.
CIMB Islamic Bank Bhd chief executive Badlisyah Abdul Ghani said although Islamic finance had been thriving in the domestic market, most of the local banks had not been active in the global syndication market or even the sukuk market.
He said Malaysians tended to be apologetic about their own Islamic finance framework, perceiving it as inferior to other syariah-compliant frameworks, rather than introducing it as a quality market-leading financial product.
“This is not healthy for the international market because we are supposed to be the leader here. That is the only thing that is lacking in our initiative to internationalise our framework,” he said at the 16th Malaysian Banking Summit.
He said Islamic finance had helped Malaysia achieve financial inclusion and, if the World Bank could introduce the Malaysian Islamic finance model to its member countries and Organisation of the Islamic Conference (OIC) countries and encourage them to replicate it, it would help the countries to be financially independent. “And that would enhance global trade.”
Badlisyah also said that Malaysian Islamic financial institutions seemed to overlook the less popular OIC countries in favour of the rich nations in the Gulf Cooperation Council (GCC).
“Somehow, we seem to bypass the natural markets for Islamic finance. Malaysia can play the role of a big brother' for the OIC countries which have yet to develop their indigenous Islamic finance,” he said.
“There is a lot of talk in the international financial market that Islamic finance has too much focus on the rich, institutional investors, big corporates and the likes despite our affinity with ethics.”
Hong Leong Islamic Bank Bhd chief executive Raja Teh Maimunah Raja Abdul Aziz, however, noted that there would be much to overcome before the Malaysian Islamic finance model could penetrate the OIC countries.
“The objective of syariah and how to deploy equity in justness which is not easy because at the end of the day it is about bottomline and numbers (so) to go to the OIC countries as banks is also based on credit rating,” she said, highlighting that most of the banks in those countries were either poorly rated or not at all.
While local banks might want to reach out to introduce the Malaysian Islamic finance framework, she noted that without the acceptable credit rating, local banks would not be able to create any correspondent relationship.
(The Star Online / 28 July 2012)

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Friday, 27 July 2012

Kazakh sukuk debut opens to door to Islamic finance

The 240 million five-year Malaysian ringgit ($75.5 million) issue on July 18, which generates an annual payment of 5.5 per cent, has set the benchmark for Islamic bond issuers in the former Soviet republic, the Development Bank of Kazakhstan said.
The issue is part of the bank’s 1.5 billion ringgit Islamic note programme under the sharia principle of murabaha, approved this year by the Malaysian central bank and the Sharia Advisory Council of the Securities Commission of Malaysia.
“The next sukuk issue will depend on market conditions and the bank’s borrowing requirements,” the state-owned Development Bank’s press office said in a written response to questions.
“The number of issues will depend on the size (of each issue),” it said, adding that it could issue a further 1.26 billion ringgit under its existing programme.
Two decades after the collapse of the Soviet Union, majority Muslim Kazakhstan is making a bid to become a regional centre of Islamic finance, which is based on religious principles such as bans on interest and pure monetary speculation.
About 70 per cent of Kazakhstan’s 16.7 million population is Muslim. Since the global financial crisis, investors are more receptive to alternative forms of banking and keen to tap pools of Islamic investment money in the Gulf and southeast Asia.
Malaysian investors took up 62 per cent of the Development Bank’s debut issue. The bank said the highly developed Islamic finance market in Malaysia was the ideal model for Kazakh issuers.
In the first 11 months of 2011, Malaysia accounted for 71.2 per cent of total global sukuk issuance, it said.
“Not only is this sukuk issue the first in the history of Islamic finance in Kazakhstan. It is the first in the countries of the CIS (Commonwealth of Independent States),” the Kazakh bank said.
Halyk Finance (Kazakhstan), AmInvestmentBank and Kuwait Finance House acted as joint lead managers of the issue, with HSBC and RBS as coordinating joint lead managers.
Yerlan Baidaulet, adviser to Kazakhstan’s Ministry of Industry and New Technologies, said he was working on potential sukuk issues with other institutions in the country.
“We could have two or three deals. For sure, there will be one more sukuk from Kazakhstan (this year),” he said.
“The window has been opened. (The Development Bank) is playing the role of icebreaker.”
President Nursultan Nazarbayev, in power since Soviet times, has said he wants Kazakhstan’s commercial capital, Almaty, to be a hub for Islamic banking in the former Soviet Union, which includes other majority Muslim states and Russian republics.
A sovereign sukuk issue mooted in 2010 did not materialise. Finance Minister Bolat Zhamishev told Reuters in June that Kazakhstan had no pressing need to borrow abroad. Its National Fund to collect windfall oil revenues contains $51.4 billion.
Nevertheless, the Development Bank said its issue would serve as a model for other quasi-sovereign companies and banks to tap Islamic finance markets.
“We are convinced that this deal will open the way for other issuers in the region looking to diversify their funding on Islamic markets,” Zhaslan Madiyev, deputy chairman of the bank’s management board, said in a statement accompanying the issue.
Baidaulet, who is also executive director for the CIS and Eastern Europe at the Islamic Development Bank, a Saudi Arabia-based multilateral lender, said interest in sukuk reflected a desire among investors to work closely with the real economy.
“The way we are promoting Islamic finance in Kazakhstan is different,” he said.
“It’s not just a religious matter. It’s about the needs of the economy.”
(Dawn Business.Com / 27 July 2012)

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Deutsche Bank: “Sukuk Premium Disappeared” - will stimulate a boom in sukuk issuance while lengthening tenors

The”sukuk premium” – the additional cost which borrowers must pay to issue an Islamic bond instead of a conventional bond – has effectively disappeared, and this will stimulate a boom in sukuk issuance while lengthening tenors, a senior executive at Deutsche Bank said.

“I don’t think there is an Islamic premium anymore,” Salah Jaidah, head of Islamic finance at the bank and chief country officer for Qatar, said in an interview this week.
Until late last year, sukuk issuers commonly paid a premium because they catered to a smaller investor base and because investors were not as familiar with sukukstructures as they were with conventional bonds.

This year’s heavy investor demand for sukuk, due to the appetite of cash-rich Islamic investment funds and the Gulf’s growing reputation as a relatively high-yielding safe haven, has transformed the market. Many high-grade credits – such as Qatar, in its record $4 billion deal this month – now pay less to sell sukuk than they would for conventional bonds.

Jaidah said the shift in the market’s perceptions was not temporary. “This trend will continue,” he said.

Sukuk issuance volumes regionally as well as globally have already surpassed lastyear’s total, including Qatar’s issue, which was the largest-ever dollar-denominated sukuk and on which Deutsche Bank was lead arranger and bookrunner.
Global dollar-denominated sukuk issuance so far this year stands at $12.8 billion,according to Thomson Reuters data, the vast majority from the Gulf Arab region; total dollar sukuk issuance last year was $11.2 billion.

Deutsche Bank placed fourth in the Thomson Reuters Islamic debt capital markets league table rankings for the first six months of this year, up five places year-on-year. It is ranked third in the Middle East DCM ranking.

Jaidah said that in addition to stimulating issuance, the new popularity of sukuk would permit issuers to lengthen tenors beyond the five years which was previously used for the vast majority of issues.

“Sukuk will be attractive for longer maturities, and used for infrastructure spending, for example. This is very encouraging. It will allow a lot of issuers on the conventional side to tap Islamic markets.”

Governments making plans for their debut issues of international sovereign sukuk include Turkey and South Africa, as well as other sub-Saharan African nations.
“Many nations are looking at issuing sovereign sukuk, even non-Middle Eastern nations. We think North Africa will also be very active when it comes to issuing sovereign sukuk,” said Jaidah, who was previously Qatar Islamic Bank’s chief executive.

“A lot of sovereign transactions will be more liquid. It’s an opportunity to create more liquid sukuk. This liquidity is an added attraction of the sukuk market.”

He declined to discuss specific mandates but noted that for first-time sukuk issuers, the process to enable them to print a deal can be a long one.

“We’re focusing on readying potential issuers for sukuk. We’re exploring, we’re convincing, the clients are learning.”

(Gulf Business / 27 July 2012)

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Zakat: Charitable giving in Islam

Muslim commitment and potential to support charitable causes in the UK should not be underestimated, says Fadi Itani.
As the Islamic holy month of Ramadan commences, in this year from 21 July, millions of Muslims in the UK will be fulfilling a fundamental part of their faith by donating a proportion of their wealth to charitable causes around the world. The general concept of Zakat is well known, yet even among many Muslims the detail and intricacies of this spiritual act of giving are not fully understood.

Understanding Zakat

Zakat is the compulsory form of charity for all Muslims based on the amount of wealth they have held over an Islamic year (the Muslim calendar is based around the moon and lasts for either 354 or 355 days). For Muslims, Zakat is not simply a form of charitable giving but rather a means of achieving spiritual, moral and social objectives - a path to ‘purification’ of a donor’s wealth and a mechanism to redistribute income to the poorer elements of the Islamic economic system.
Each year, every Muslim is compelled to pay 2.5 percent of their wealth should they be in possession of the minimum amount of wealth on which Zakat is due (known in Islam as the nisab.)
Zakat is the third pillar of Islam and is closely aligned to the second pillar of Salat (prayer). It is a mandatory act of worship for Muslims and is considered both an obligation to God and an enshrined moral duty to the poor.

Common misconceptions

Zakat is commonly paid by Muslims during the holy month of Ramadan - the Islamic time of fasting and a period of intense spiritual reflection and worship. Zakat paid during Ramadan is believed to increase rewards given to the individual, as declared by the Prophet Muhammad (pbuh).
However, this standard practice by the majority of Muslims tends to counteract the true spirit of Zakat. When Zakat payment is due – i.e. if an individual has been in ownership of the minimum “Zakatable” wealth for one lunar year – then it must be paid on time and not delayed, even if rewards for charity are increased during Ramadan.
Traditionally, Zakat distribution would not be concentrated in one period but rather spread over a length of time so that recipients could be supported throughout the year. The early history of Islam also indicates that the collection and distribution of Zakat would normally be dispersed regionally to beneficiaries in the same surroundings. Today, Zakat donations are commonly distributed to international causes such as poverty alleviation or helping people meet their basic needs.

Zakat contribution to global development

While data on Zakat flows is limited, attempts to chart the potential of this form of giving are emerging. Islamic financial analysts recently estimated that each year, somewhere between £130bn and £645bn are given as mandatory and voluntary donations across the Muslim world. At the low end of this estimate, this is 15 times more than global humanitarian aid contributions in 2011.
Several governments in the Muslim world have made efforts to centralise the management and distribution of Zakat donations. In Malaysia, a massive £286m was collected in Zakat donations in 2010, while in Egypt the government estimated that £480m was given to charity by Egyptians in 2009, enough to pull nearly all of Egypt’s poor out of poverty in strictly financial terms.

Shifting mindsets

At Zakat House, the UK’s first charity dedicated to the collection and distribution of Zakat funds, we are aiming to better inform Muslims on the objectives of Zakat and redress the flow of funds to under-resourced causes based in the UK. We believe that Zakat donations have huge, unfulfilled potential to make a greater difference to charities in the UK in line with the true teachings of the Prophet Muhammad (pbuh).
Our recently launched ‘Just Zakat’ campaign aims to alter donor perceptions of Zakat, and allows them to spread their Zakat over several worthy causes based in the UK and abroad in line with the categories of recipients entitled to receive it.
Currently, five charities make up our coalition of organisations eligible to receive funds under the Just Zakat banner, with two of these focused on providing services to beneficiaries in the UK.
Our website is growing and we are aiming for it to become an extensive resource base on the virtues and practical application of Zakat, as well as dispelling common myths and misconceptions associated with this religious concept of giving.
We are constantly on the look-out for other small and pioneering charities in the UK eligible to join and receive donations within our coalition group.
For more information about our campaign and to see how you can get involved, please visit the Just Zakat website.
Fadi Itani is the CEO of Zakat House a central collection organisation for Zakat in the UK.
(Civil / 26 July 2012)

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Thursday, 26 July 2012

Islamic finance's fortune turns in Egypt

CAIRO // When Ahmed El Naggar opened the world's first Islamic bank in Egypt in 1963, the country looked as if it could harness that legacy to grow into one of the biggest Islamic finance hubs in the world.

But years of suspicion that the Muslim Brotherhood, illegal at that time, would use Islamic finance as a way to gain prominence in the country has left Egypt trailing behind its Arabian Gulf neighbours mainly because no tight regulation or laws have been implemented.
As Egypt's first Islamist president Mohammed Morsi takes the helm, the country's Islamic finance fortunes are beginning to look up.
The Muslim Brotherhood wants to boost the market share of Islamic banks to 35 per cent in five years from 5 per cent now. It also wants to add an Islamic banking section to the country's banking law, which currently has no specific regulations covering the sector. Analysts say the draft amendments, although delayed by the dissolution of parliament, signal an opportunity to quicken the pace of Islamic finance development in Egypt.
"The Arab Spring opened the door to Egypt's re-entry into Islamic finance in the coming six months and the pace is going to be quicker with Islamists in power," said Shahinaz Rashad, the executive director of Metropolitan, a financial consultancy firm that has also worked on carrying out Sharia-compliant transactions.
She said Islamic finance could be one alternative to hugely unpopular taxes and cuts in government spending to reduce budget and balance of payments deficits inflated by a year of political and economic turmoil.
In February, the Egyptian government said it was preparing to raise US$2 billion (Dh7.34bn) through its first issue of Islamic bonds to help to plug the deficit gap, which is equivalent to 8.8 per cent of GDP. Soon after, the country's regulator said it was finalising regulations that would allow local companies to issue Islamic bonds, a much-awaited move expected to boost market liquidity.
The Egyptian government also signed an agreement this month with the Islamic Development Bank, based in Saudi Arabia, that will provide $1bn to finance energy and food imports.
The finance, which is part of a previously announced agreement to provide Egypt with $2.5bn, signals that Egypt must operate some of its financing in a Sharia-compliant manner, said Ms Rashad.
Egypt's economy was badly damaged after a drawn-out uprising that began early last year. International reserves had fallen to $15.53bn by the end of last month from $36bn in January last year and the balance of payments deficit has doubled to $11.2bn in the nine months to March this year from $5.5bn a year earlier.
Islamic banking may not offer a "fix-all" for Egypt's economy, analysts say, but it would encourage a fairer playing field.
Egypt now has 14 Islamic banking licences but only three fully fledged Islamic banks, including Faisal Islamic Bank of Egypt, Al Baraka Banking Group, headquartered in Bahrain, and Abu Dhabi Islamic Bank of Egypt. Despite several more lenders with Islamic finance windows, the approximately 120bn Egyptian pounds (Dh71.66bn) of assets in Egypt's Islamic banking industry are dwarfed by Egypt's conventional banks.
Total assets of the entire banking sector are about 1.3 trillion pounds, according to Egypt central bank data.
Bankers say the country has to work more to convince international investors that Egypt's sukuk is worth buying.
"There is no accepted benchmark for the sukuk business in Egypt …so for a company in Egypt to issue a sukuk instrument and be in a position to have an investment grade instrument is pointless because nobody would buy it," said Douglas Johnson, an investment banker based in New York and the chief executive of Codexa, a specialised investment bank that creates Sharia-compliant financial structures.
He said better regulation and a stronger capital market law was needed before Egypt could begin to attract the billions of dollars of sukuk investment Saudi Arabia, Malaysia and other Islamic finance hubs were getting.
"The next government in Egypt is going to have to prioritise getting the economy back to shape before restructuring and, to be brutally frank, Islamic finance probably has to stand in line," said Mr Johnson.
(The National / 25 July 2012)
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Islamic Finance - An alternative banking model?

Whether you're bored of bank bashing or not, there's no denying that people are searching for more trustworthy, transparent places to place their cash. And with the Islamic Bank of Britain (IBB) launching a table-topping 4% expected profit rate for its two-year fixed account, will faith-based bank accounts prove a popular alternative?
Contrary to what you may think, the account is open for anyone to apply. And as an Islamic bank, IBB does not pay interest. The rate is offered as an 'expected profit rate', because the Bank invests the funds into Sharia compliant and ethical trading activities. These activities deliver a profit over the 24 month term.
But you can trust in this, as IBB said it has never failed to deliver the expected rate.
How do Islamic bank accounts work?
Islamic banking products forbid the payment or receipt of interest and refuse to invest in "unethical" industries such as the gambling, pornography or the tobacco trades. They have become increasingly popular across a wide range of religious groups and general consumers.
Islamic finance turns traditional financial institutions on their head. It has to be Sharia, or Islamic law, compliant. Sharia is taken from the Koran, one of whose central tenets - that money has no intrinsic value - might sound alien to the denizens of the City.
The principles of Islamic banking are more than 1,400 years old, but the practice is relatively new. It was launched in Egypt in 1963.
"As the credit crunch has mutated inexorably into a recession, with bankers having eclipsed politicians, lawyers and even journalists as public enemy number one, the growing number of Islamic finance institutions in Britain might just be sitting pretty," reports the Times.
The UK now has a handful of fully Sharia compliant banks and dozens of other financial institutions have set up special branches or firms. They include the Qatar Islamic Bank(QIB), and the Islamic Bank of Britain, which has headquarters in Birmingham.
So are the basic principles what banking needs?
Could Sharia principles set us on the path to building real and sustainable economies?
Central to Islamic finance is the fact that money itself has no intrinsic value, it is simply a medium of exchange. Each unit is 100% equal in value to another unit of the same denomination and you are not allowed to make a profit by exchanging cash with another person.
But it does not abolish inherent business risk, and it can finance an asset bubble as well as any Western bank. Reflecting in part the world it comes from, it can be conservative and far from enthusiastic about innovation in either technology or finance.  And - this may be positive or negative - Islamic banking would have been unable or unwilling to finance growth through debt.
However, authors Andrew Sheng, ex-chairman of the Hong Kong Securities & Futures Commission and Ajit Singh, emeritus professor of economics at Cambridge University, said there is growing convergence between Islamic and western finance. It has an important role to play in reframing western finance in an ethical framework.
 "...Islamic finance could prove to be a serious alternative to current models of derivative finance."
"The test of any alternative financial system depends ultimately on whether it is - or can be -
more efficient, ethical, stable, and adaptable than the prevailing system.

"For now, there is no Islamic global reserve currency and no lender of last resort. But the Islamic world is the custodian of huge natural resources that back its trading and financial activities."
There should be a return to "back to basics" banking across the board, rather than merely among Islamic banks.
Some mainstream banks such as Lloyds and HSBC offer Islamic products. HSBC, for example, has Islamic mortgages that are in demand even from non-Muslims.
Some of the tenets of Islamic banking will appeal to anyone who agrees with the underlying principles of equitable distribution for everyone. And they are deemed efficient and productive by many.  
The International Herald Tribune adds: "Islamic banking and financial institutions provide a good example of Sharia sensitive business. There are a number of studies comparing efficiency and productivity of Islamic banks with their conventional interest-based counterparts, on the global, regional and national levels. The results of such studies are at best inconclusive, suggesting that Islamic banks are on average at least as productive, profitable and efficient as conventional banks in the jurisdictions wherein they co-exist with conventional banks."
(Mindfull Money / 25 July 2012)

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