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Tuesday, 17 July 2012

Ramadan wish list for Islamic finance

by Rushdi Siddiqui 

AS THE blessed month of Ramadan arrives, here is my “seeking” list for Islamic finance. It’s not about another voice asking when the International Islamic Liquidity Management Corporation (IILM) will issue its first paper or disagreeing with CIMB Group CEO Datuk Seri Nazir Razak’s comment on “rolling back” government’s involvement in business, but more to do with controlling our own Islamic finance manifest destiny. 

“The new source of power is not money in the hands of a few, but information in the hands of the many.” John Naisbitt What is the most valuable commodity in the world? Is it gold? Silver? Oil? Wheat? No, on all fronts. It’s information as almost all jurisdictions have laws against inside information to manipulate the markets to take unfair advantage. In Islamic finance, the information is fragmented, stale, difficult to access, etc. Hence, the anchor slowing the potential of growth, expansion and development.
The industry needs to establish an Islamic Information Industry body (IIIB) to: 
  • CONNECT the Islamic finance hubs and international financial institutions (IFIs),
  • WAREHOUSE all Islamic finance regulations and standards and database of Islamic finance jobs and registered financial planners (RFPs),

  • ESTABLISH a global Islamic finance public relations agency (includes undertaking damage control) and with such information and connectivity
  • ESTABLISH a global Islamic finance Arbitration Centre. The IIIB should be housed in Turkey (gateway to Commonwealth of Independent States (CIS), eastern Europe and Gulf Cooperation Council), Egypt, Australia or France.

For example, how should the industry “react” to: 
  • SOUTH AFRICA’S FNB Islamic finance syariah board quitting (“untenable breakdown in trust”)
  • CANADA’S UM FINANCIAL (receivership and bankruptcy and allegations of improprieties)
  • MAJED AL REFAI (founder of Unicorn Investment Bank, now called, Bank Al Khair) found guilty of fraud and embezzlement by Criminal Court of Bahrain
  • INVESTMENT DAR syariah board issued statement advising the company board to drop lawsuit against Blom bank concerning compliant deposit and others.

Once the trust and confidence of Islamic finance is questioned, it starts the erosion of the niche market and prevents it from achieving its ultimate objective: becoming mainstream.

“The goal here is to build a brand around social relevance…” Jeff Skoll.
Islamic finance has a number of time-consuming challenges: lack of robust regulations in many Muslim countries, ever present conversations on standardisation, lack of enough scholars and qualified people and so on. However, it also has control of some of its own destiny yet seems to be stuck on form over function.
The essence of Islamic finance is “participatory, risk-sharing partnership”. Hence, the description is clean, crisp and clear for the (Muslim) “man on the street” and the non-Muslims. Thus, why not start a movement to “rename” to participation banking (like secular Turkey) as it takes away: 
  • PROMOTING (one religion over another) religion argument;
  • REBUTS BACKDOOR “Islamisation” argument;
  • ERODES its only-for-Muslim argument; and
  • REMOVES it from the political talking points (and fund raising) for those who want to divide.

Interestingly, the “no need to name change”, comes from the Muslims residing/working in Muslim countries, who are not exposed to the pressures of Muslim indians in India, Nigerian Muslims in Nigeria, Muslims in America and so on. 

“Stand up for what you believe in, even if it means standing alone…” Unknown. There are few comments on Islamic finance articles and news stories. Why? My son has a blog, blackswanofbaseball, and he recently wrote about alcohol-free zones (family-friendly) zones at baseball parks (stadiums) and I posted it on my Linkedin account, which has many Islamic finance professionals, and he has gotten more reactions (approval) than articles and blogs.
May be the writing is too technical as focus usually on structuring, modalities of contract, special purpose vehicles, regulations, syariah, etc., and not the end result.
However, to shape a movement, one must have the courage to have a constructive input, otherwise be prepared to accept the comments of others as “your own” by an inquiring third party. 

“We will champion inclusiveness not just because it is a foundation for political stability and economic growth, but because it is right,” said Prime Minister Datuk Seri Najib Razak when he was deputy prime minister.
Today’s Islamic finance conferences repeatedly miss the three most important stakeholders in Islamic finance, as they neither bankable nor efficiently accessible. They are students, youth and the “have nots”. And the million dollar question is their financial inclusion for they are tomorrow’s customers. Islamic finance rings “hallow” to them as they are not in any five business plans.
For example, it would be interesting to have an Islamic bank sponsor the equivalent of Dragon’s Den or Shark Tank, where these stakeholders, including the halal industry SMEs, submit their ideas for funding. To some, this may be part of Muslim philanthropy capital market style and to others, a cheap imitation of western programmes, etc. However, let the market decide by ratings. 

Commodities tend to zig when the equity markets zag.” Jim Rogers. 
How to build out an Islamic equity capital market (iECM) that becomes on par to the Islamic debt capital market (iDCM)? The industry needs to focus on building out the Islamic wealth management proposition, and one of the ways would entail an Islamic finance hub declaring (seems everyone is always declaring something in IF) to be Organisation of Islamic Cooperation (OIC) wealth management hub. Why OIC and not Islamic wealth management hub? Simple reason there are more conventional funds, equity, bond, money market, etc., than Islamic. However, its Muslim money. Thus, placing all the asset classes, from trade finance funds to SME funds to haj funds to zakat funds to initial public offering funds to real estate toreal estate investment trust to commodity and so on, on a single dashboard (funds supermarket) allows the attention and money to gravitate towards returns, values, etc.

Micro + Mega Takaful 
"Put your future in good hands - your own." Unknown
The conversation in Islamic finance needs to gravitate towards not only micro-takaful (for the "have not" masses), but also establishing a (well-capitalised) mega-takaful operator for the industry to become truly cross-border. The takaful development will also develop: 
  • * ISLAMIC asset management industry and Islamic ECM;
  • * INFRASTRUCTURE projects with larger IF tranches;
  • * COMPLIANT deposit insurance; and
  • * COMPLIANT deposit insurance; and
  • * INSURING mosques in the West and other benefits.


"Consolidation results in convergence of businesses yielding new continuity and expanding connectivity for the betterment of the community that desperately wants to contribute." Rushdi Siddiqui 
Is the need for consolidation a cost or income play in (Islamic) overbanked markets like the UAE or Malaysia? When there is revenue (margin) compression implying growth ceiling approaching, consolidation developments start to take place, like the recent announcement of three-way merger in Bahrain of Capinvest, Elaf bank and Capital Management House. 
However, the need for size and ensuing economies of scale are extremely important in Islamic finance.
Consolidation conversation makes more sense today as Islamic banks are "too small to fail" as the bigger risk is associated with confidence to withstand external and real estate shocks. 

"Here we are, the most clever species ever to have lived. So how is it we can destroy the only planet we have?" Jane Goodall 
In the GCC, there is an estimate US$2 trillion (RM6.4 trillion) worth of projects, including the FIFA Cup in Qatar in 2022, and some will be financed by Islamic funds. There has been some chatter about a "Green Sukuk". However, that does not go far enough. 
Islamic finance is, at one level, is a movement about stewardship of the earth for successor generations, and GCC, the heartland of Islamic finance, is a major contributor to carbon emissions. Thus, Islamic banks and takaful operators need to be signatory to climate, carbon and equator principles as way to show they are responsible financiers and insurers.

Saudi Arabia & Cagamas 
"And I would argue the second greatest force in the universe is ownership." Chris Chocola 
With recent passing of the long-awaited mortgage law in Saudi Arabia, one of the outcomes may well just be:
  • * INCREASED supply of (mortgage-backed) sukuk (local currency?)
  • * FOR liquidity management (as monetary instrument).

Thus, the good work of Cagamas (mortgage-backed security (MBS)-issued sukuk) may fast track the learning experience (exported) to the kingdom and help out the takaful and pension market (fixed-income exposure) with longer dated maturities with high quality MBS.

The sukuk market may be established sooner with the passage of Saudi mortgage law and Cagamas reap some reputations and monetary benefits. 

Indicator of IF 
Today, it is well accepted, Islamic finance is a subset of conventional finance. So, what is a representative indicator/pulse of Islamic finance? 
Today, a standalone syariah-compliant index, syariah-based index and Islamic Interbank benchmark Rate do not give a meaningful understanding of the IF space, because such indexes still need to be measured by their conventional counterparts, conventional equity index and Libor. 
Thus, two types of delinking needs to take place: 
  • * DELINKING from conventional benchmarks; and
  • * MINDSET of comparison to conventional benchmarks.


When there is sustained stakeholder chatter for an "Arab spring" moment in Islamic finance on the way forward, only then we will take the ramp for the highway of substance from the present roads of form.

Ramadan Mubarak!
(Rushdi Siddiqui is the global head of Islamic finance at Thomson Reuters)

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