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Thursday, 29 November 2012

Dr Zeti: Socially responsible investment (SRI) has significant appeal to Islamic finance

Socially responsible investment (SRI), which is fast gaining currency in the global market place, will have a “significant appeal” to Islamic finance, particularly in the context of the recent global financial crisis, according to Bank Negara Malaysia (BNM) governor Tan Sri Dr Zeti Akhtar Aziz.

“Beyond financial returns, SRI also accords primary consideration to the impact on economic activity and on the broader society, thereby incorporating the important dimensions of environmental sustainability, social responsibility and governance.

“This is in close parallel with the inherent principles of Islamic finance, in which financial transactions must be underpinned by real economic activities, and its operations guided by the principle that money should also be used to create social good,” she said in her opening speech at the 2nd ISRA Colloquium 2012 in Kuala Lumpur yesterday.

Dr Zeti noted the need for financial products and services that manifest the value propositions of Islamic finance, and that such products are marketed with simplicity so as to facilitate a greater understanding of the main benefits of the products.

“In relation to this, Islamic finance presents significant appeal to the growing Socially Responsible Investment, sustainable investments and ethical finance. This is particularly relevant in the context of the recent global financial crisis.

“It has brought to the forefront the need for the financial system to be linked to the economy and for the need for greater and improved levels of transparency, fairness, ethics and social responsibility in modern finance,” she said.

She added that the SRI market is “fast growing” and is expected to become a mainstream asset class by 2015, reaching a projected total of more than US$26 trillion (RM79.17 trillion) of asset-under-management, accounting for 15%-20% of the global market.

“This recent growth has largely been driven by the demand from institutional investors which are increasingly prioritising the consideration of sustainability and social responsibility in their business conduct and institutional value system.

“Indeed, the ongoing economic challenges in the major advanced economies have resulted in the re-emphasising of the importance of growth that is sustainable and responsible. In the emerging economies, this is also important, given that rapid economic development also needs to ensure that the progress will be sustainable,” she said.

The one-day colloquium was organised by the International Shariah research academy for Islamic Finance (ISRA), an outfit that was set up with a generous endownment from the central bank in 2008.

The function was meant to provide a venue for young Islamic finance scholars to exchange views on how to develop the industry. Three doctorage students at International centre for education in Islamic Finance (Inceif ) presented papers at the function.

In his speech, ISRA executive director Dr Mohamad Akram Laldin said the forum was meant to bridge the gaps among the Islamic finance academic community and to enhance understanding on different practices of Islamic finance from different parts of the world.

“The challenge remains whether Islamic finance is able to address the challenges in the challenging economy that we are currently facing and whether Islamic finance is able to rearrange modern financial practices in line with Shariah principles and requirements and elegantly offer a better approach and direction for the financial industry,” he said.

Dr Beebee Salma Sairally presented on Islamic liquidity management, Mohammad Mahbubi Ali on a framework to deal with Shariah non-compliance transactions, and Muhammad Ali Jinnah on takaful benefits protection from the Shariah perspective. INCEIF chair of Islamic finance Prof Dr Abbas Mirakhor presented a keynote address.

(The Malaysian Reserve / 28 Nov 2012)

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Malaysia: Islamic finance must include lower income groups for more balanced growth: Zeti

KUALA LUMPUR: Islamic finance must be inclusive and accessible to all particularly the lower income groups and small businesses so as to achieve a more balanced global economic growth with reduced income disparities, Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Azizsaid.
To this end, she said Islamic financial institutions must strive to enhance the access of their financial services to all segments of society by meeting the demand for more Islamic microfinance products.
“In emerging as a new market niche, Islamic microfinance would meet the differentiated demands of low income communities and provide support to entrepreneurial activities,” she said at the 2nd International Shariah Research Academy for Islamic Finance (ISRA) Colloquium 2012 on Tuesday.
Islamic microfinance, if supported by microtakaful, has the potential to provide a more comprehensive, sustainable and accessible financing and protection solution for the lower income groups and small businesses.
Zeti also said the Socially Responsible Investment (SRI) is expected to become a mainstream asset class by 2015, reaching a projected total of more than US$26 trillion of asset-under-management, accounting for 15% to 20% of the global market.
This growth was mainly driven by the demand from institutional investors which are increasingly prioritising the consideration of sustainability and social responsibility in their business conduct and institutional value system.
“SRI has brought to the forefront the need for the financial system to be linked to the economy and for the need for greater and improved levels of transparency, fairness, ethics and social responsibility in modern finance,” she added.
On the Islamic Financial Knowledge Repository Portal that she launched today, Zeti said it can contribute in meeting the need for more efficient information dissemination that would promote greater market transparency, price discovery and industry insights.
As a knowledge database, the portal centralises Shariah rulings and its justifications, legal and regulatory requirements. This is enriched by the latest collection of research and development in Islamic finance.
“This database will become an important source of reference and guidance for Shariah and industry practitioners, policymakers, researchers and academicians,” said Zeti, adding this initiative will not only promote greater understanding but mutual respect and recognition of Islamic finance.
(The Star Online / 27 Nov 2012)

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Wednesday, 28 November 2012

Morocco joins neighbours to draft sukuk law

Morocco is drafting a law to allow the sale of Islamic bonds, joining North African neighbours seeking to lure more investors to their debt after global sukuk offerings surged to a record.

The government, led by the Islamist Justice and Development Party, will put the bill to parliament as soon as the draft is completed, Budget Minister Driss Elazami Eldrissi said by phone on November 20. He wouldn't say when that would happen. Tunisia and Egypt, two other North African countries ruled by Islamist parties after last year's uprisings, are also drafting laws to pave the way for possible sukuk sales in 2013.

Selling Islamic bonds helps issuers "reach conventional debt investors and sukuk investors at the same time," Elhassan Eddez, deputy director of treasury at Morocco's Finance Ministry, said by phone Nov. 20. "The sukuk market has a wider investor base."

Global sales of bonds that comply with Islam's ban on interest soared 66 per cent this year to a record $43.4 billion as nations such as Turkey and Qatar tapped the market for the first time, taking advantage of falling borrowing costs. The average yield on sovereign sukuk dropped 116 basis points, or 1.16 percentage points, this year to 2.74 per cent on November 23, the lowest since 2009, according to the HSBC/Nasdaq Dubai Sovereign US Dollar Sukuk Index.

IMF funding: 

Unlike Tunisia, Libya and Egypt, pro-democracy protests in Morocco didn't lead to regime change after King Mohammed VI granted the government more powers. The kingdom, which is preparing to sell its first dollar-denominated bonds, secured a $6.2 billion funding line from the International Monetary Fund in August as a shield against the repercussions of the debt crisis in Europe, Morocco's main trading partner. Morocco has managed to keep its BBB-rating at Standard & Poor's, the agency's lowest investment grade, throughout the unrest that swept through North Africa. The ratings company stripped Tunisia of that status in May and has lowered Egypt four times to B, the fifth-highest junk classification, since the so-called Arab Spring started.

The yield on Morocco's 4.5 per cent euro-denominated bonds due October 2020 has fallen 127 basis points this year to 4.61 per cent on November 23, data compiledby Bloomberg show. That compares with a 139 basis-point drop in the average yield of sukuk issued in the Gulf Cooperation Council (GCC), which includes Saudi Arabia, Qatar and the United Arab Emirates, to a record 2.92 per cent, according to the HSBC/Nasdaq Dubai GCC US Dollar Sukuk Index.

Tunisia, Egypt: 

"A Morocco sukuk bond will allow the government to potentially reduce its borrowing cost and tap new frontier markets," Hakim Azaiez, the London-based head of investment at GCA Asset Management, said by e-mail on November 23.

"The demand is there for sovereign sukuk issues," he added.

Tunisia plans to raise as much as 1 billion dinars ($636 million) next year and will use the proceeds to fund the budget deficit, Finance Ministry Director General Chaker Soltani said this month. Egypt said in October it received interest from foreign banks amounting to as much as $1 billion for a possible sukuk sale after it passes the requisite law.

So far, Arab sovereign sukuk issuers have been limited to Qatar, Dubai, the emirate of Ras Al-Khaimah and Bahrain, according to data compiled by Bloomberg.

The yield on Dubai's 6.396 per cent Islamic bonds due November 2014 fell 315 basis points this year to a record 2.42 per cent on November 23, according to data compiled by Bloomberg. The premium investors demand to hold Dubai's notes over Malaysia's investment-grade 3.928 per cent sukuk narrowed 187 basis points this year to 100. 

(Times Of Oman / 27 Nov 2012)
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Sukuk success for Saudi Hollandi

(MENAFN - Arab News) The Saudi Hollandi Bank (SHB), the oldest banking franchise in Saudi Arabia, issued a highly successful 7-year subordinated sukuk at a competitive price of instrument raising SR 1.4 billion from a diverse group of investors SIBOR 1.15 percent.

The issuance was marketed to Saudi investors, including government funds, banks, insurance companies, corporates and sophisticated investors. This marks Saudi Hollandi's 4th and largest SR-denominated debt capital market issuance, highlighting its support to the development of the capital markets and its strategy to diversify its capital and funding sources. SHB was able to achieve competitive terms for its issuance, with final pricing settling at the lower end of guidance.

SHB's management has earmarked the sukuk funds for further developing its Islamic business, prudently managing its assets-liabilities mix and maintaining a sufficient capital buffer. HSBC Saudi Arabia Ltd. And Saudi Hollandi Capital acted as the joint lead manager and bookrunner on this landmark transaction.

Mubarak bin Abdallah Al-Khafra, chairman of the board of directors at SHB, said: "The recent issuance underscores the fundamental strength of the bank to be able to access the sukuk market at regular intervals; it also highlights the continued confidence of investors in the oldest banking franchise in Saudi Arabia. We would like to take this opportunity to thank the investor community for their participation in the issuance and contribution to the development of the sukuk financing market in the Kingdom."

Walid Khoury, CEO of HSBC Saudi Arabia, and Khalid Nasser Al-Muammar, CEO of Saudi Hollandi Capital, in a joint statement said: "We congratulate the Saudi Hollandi Bank on a very successful and well-timed subordinated sukuk issuance, which was only the second Tier 2 Capital issuance in Saudi Arabia under the newly enacted BCBS Basel III transitional guidelines.

(Menafn.Com / 27 Nov 2012)

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Tuesday, 27 November 2012

Malaysia: Centre makes it easier for people to pay zakat

KUALA LUMPUR: Pusat Pungutan Zakat (PPZ) collects tithes and is a subsidiary of Federal Territories Islamic Religious Council (MAIWP).

Its chief executive, Mohd Rais Alias, said people could check with PPZ whether they had to pay zakat as owners of companies or individuals.
"You can come directly to the counter or seek information on our portal. We even calculate the amount you need to pay."
PPZ collects both property tithes and zakat fitrah. The latter is collected during Ramadan. This year, 10 counters in Kuala Lumpur, Putrajaya and Labuan were open every day throughout the fasting month for zakat fitrah collection.
"All counters are also open during office hours daily throughout December. Sometimes, we extend the operating hours. PPZ has been doing this since its inception in 1991."
He said PPZ had taken several measures to raise zakat collection, one of which was having a theme. This year's theme is "Year of Property Tithe".
"Based on the theme, we have an annual collection target."
Rais said these measures had raised the total collection of zakat annually and there had been a 63 per cent increase this year. This was proof that the level of awareness among Malaysians had increased.
He added that PPZ had provided many payment channels.
"We have also come up with an application called 'i-zakat' for Android smartphone users and appointed certain banks and agencies to collect zakat."

(New Straits Times / 25 Nov 2012)

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Islamic banks urged to harmonise financial reporting practices

KPMG and ACCA report calls on standard setters and Islamic banks to work together. 

The rapid global growth in Islamic finance means that action must be taken to ensure that the way in which it is reported financially is harmonised and made more consistent, a report, based on a series of high level international roundtables, by KPMG and ACCA (the Association of Chartered Certified Accountants) has concluded.

The report calls on the International Accounting Standards Board (IASB) and the Islamic Finance industry to work together to develop guidance, standards and educate the investor community on key issues.

The roundtables in Kuala Lumpur, Dubai and London, which brought together experts in Islamic Finance, bankers and finance professionals working in the sector, along with regulatory authorities, academics and ratings agencies, made a number of recommendations to both the IASB and Islamic Finance Institutes (IFIs), which are highlighted in the new report published by KPMG and ACCA.
• The IASB should consider issuing guidance on the application of International Financial Reporting Standards (IFRS) when accounting for certain Islamic financial products which are offered by Islamic financial institutions and conventional banks.   
• It should also consider issuing guidance on additional disclosures that could be made for stakeholders who are seeking information on the entity’s Sharia-compliant operations.
• The IASB should work with the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and other leading Islamic finance standard setters and regulators globally to establish the gaps between IFRS and Islamic accounting standards and to review the needs of users. This should also include a review of terminology used in IFRS, and consider whether such sensitive terms as ‘interest’ – forbidden in all forms in Islamic banking- can be amended or added to.
• If Islamic finance is to be part of the IASB agenda, the IFIs should support IASB by forming an expert advisory group, including Islamic scholars from various jurisdictions, which could contribute to the development of new standards and help with the overall review or provide advice on an ad hoc basis.
•The IFIs need to conduct further outreach and education, particularly with the investor community, while providers of professional qualifications should look into the relevance of Islamic Finance to their syllabuses and the members.
•The industry needs to engage more with local regulators to understand their expectations of financial reporting and the disclosure of Islamic financial instruments.

Samer Hijazi, a director in KPMG’s Financial Services Audit practice, and co-author of the report, said: “The Islamic finance industry has reached a new stage of maturity. It has a wider variety of customers and stakeholders and a presence in more countries around the world than ever before. As the IASB seeks to establish IFRS as a single high quality set of global financial reporting standards now is the right time to consider how Islamic finance fits into this global framework. Greater comparability and consistency in financial reporting will benefit not only the IFIs but also the international banks which offer Islamic financial services around the world.”
Aziz Tayyebi, head of international development at ACCA and its expert in Islamic Finance, and report co-author said: “ One of the key challenges facing Islamic finance and global standards setters is how to resolve the fact that IFIs in different countries  can report transactions in different ways, which creates uncertainty for organisations which are trying to assess and compare them not only with each other, but with conventional counterparts. If they are to remain competitive with conventional counterparts, their financial reports need to be comparable. This will involve a great deal of work and education, but should be beneficial for IFIs and those who rely on their reports.

(Director Of Finance Online / 26 Nov 2012)

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Malaysia: SC holds Islamic finance public lecture by Iqbal Khan

MALAYSIA (Nov 26, 2012): The Securities Commission (SC) will hold a public lecture by prominent Islamic banker Iqbal Khan, recipient of the prestigious Royal Award for Islamic Finance 2012, in Kuala Lumpur on Monday.
Titled "Our Markets, Our Values – A principles-based approach to creating value in Muslim majority markets", the lecture will focus on the developments and key issues in the Muslim-majority markets including values which had fundamentally driven the history and development of the Islamic finance industry.
The lecture will begin at 2pm and will be followed with a 30-minute Q&A session.
"This will be a platform for intellectual discussion and learning that provides an opportunity for the business community, academics, students and the public to understand the developments in Islamic finance globally," said the SC in a statement today.
Members of the public are invited to attend the public lecture. Attendance, while free, is by registration only.
(The Sun Daily / 26 Nov 2012)

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Sharjah Congress to Help Tap Into USD1B Islamic Finance & Cosmetic Industry

The opening up of new markets and launch of new products are driving the US 1 trillion global Islamic finance & Islamic Cosmetics industry to new heights, and the growth prospects of the industry will be the highlight of an upcoming industry event in Sharjah.

The increasing recognition of its value propositions has made Islamic finance more widely accepted in many countries, including the UK, Singapore, Germany and Central Asia, and new markets such as China and other emerging countries.

Although the Islamic banking industry currently constitutes only 1.6 per cent of the total assets of the top 50 largest banks in the world (at US 66.2 trillion at the end-2011), it remains one of the fastest growing segments in the global financial services sector, according to a recent study.

"In the early stages, Islamic finance found favour only with countries with large Muslim populations such as GCC, Egypt and Malaysia. Over the past decade or so, the Islamic finance industry has spread its wings, and rapidly grown to become a key component of the international financial system," said Mr Saif Mohammed Al Midfa, Director-General of Expo Centre Sharjah, ahead of inaugural Halal Congress Middle East and Halal Food Middle East trade show.

Expo Centre Sharjah will host the Halal Congress on December 11 to 12, 2012, while the Halal Food Middle East will be held at the same venue from December 10 to 12, 2012. 

Recognizing the importance of Islamic finance and its growth prospects, the topic will be highlighted during the two-day Congress, which will also look at takaful insurance, Halal pharma industry, cosmetics & personal care sectors.

"Leading experts, scientists and Halal promoters have confirmed their participation as speakers and panelists for Halal Congress Middle East. The speakers who have already confirmed their names include Dr Ali Fanous of Germany, Ms Ana Maria Aisha Tiozzo of Italy. The other speakers are in the process of being finalized," said Asad Sajjad, CEO of Halal Development Council of Pakistan, the co-organiser of the Congress. 

The congress will also look at opportunities available in American and European Halal markets, common mistakes committed by international Halal certification bodies, the need for a global Halal assurance system, food contaminates, emerging Halal markets, and business opportunities around the world, among others.

The global Halal cosmetics as well as pharmaceutical industries are also on a rapid growth trajectory, with the Middle East and surrounding regions having to depend on imports due to little or no local manufacturing.

"Several surveys have pointed out that like Halal food, there is demand for Halal pharmaceuticals and cosmetics too... but unlike food, Halal medicines and personal care products are not easily available in the local market. The congress will offer producers and buyers a platform to understand and assess the market dynamics in relation to these products," said A. Maktoom Jan of Jan Bros. Jan Bros is the manufacturer of the first certified Halal Tooth Paste "Abaan" in the UAE.

(Menafn.Com / 26 Nov 2012)

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Sunday, 25 November 2012

Qatar: QIB Extends USD500 Million Islamic Financing Package to Qtel

Today Qatar Telecom (Qtel) and QIB “ the leading Islamic bank in Qatar “ have signed a USD 500 million Islamic finance deal.

The signing ceremony took place at the Qtel headquarters. It is the first Islamic finance deal signed by Qtel, as QIB continues its mission to provide leading companies with the financial backing they need to fulfil their ambitions.
QIB assumed the role of Sole Mandated Lead Arranger and Investment Agent for the deal. The financing is an 18 month Sharia-compliant "Revolving Murabaha".

Dr. Nasser Marafih, Chief Executive Officer of the Qtel Group commented: "We are delighted to be part of the developing Islamic financing market in Qatar. QIB has done a great job in offering Qtel attractive terms, and this deal further strengthens the relationship between Qtel and QIB."

Mr. Ahmad Meshari, Acting Chief Executive Officer of QIB, added: "This deal is the first financing arrangement to be entered into with Qtel, opening doors for further avenues of collaboration between the two organisations. The transaction is another demonstration of the maturity of the Islamic finance industry in general, and QIB in particular, in the provision of credible financial solutions that meet the increasingly complex needs of large corporations such as Qtel."

"This financing deal confirms the leading role the Bank plays in supporting large companies operating in Qatar and we are keen to continue to play a pivotal role which sees us making a positive contribution to the ongoing development of this country," added Mr Meshari.

(Menafn.Com / 20 Nov 2012)

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Islamic Banking: Rising over Cynicism

Thriving with a staggering pace of over 20 percent year on year, the global Islamic finance industry now touts a vibrant size of 1.35 trillion dollars. 

Islamic banking industry (IBI), having a network of 430 banks and financial institutions and around 191 conventional banks conducting Islamic banking window operations, records its footprints in more than 75 countries across the globe. 

With its concentration in GCC countries, followed by non-GCC, MENA, Asia and Sub-Saharan Africa, S&P anticipates global IBI to grow by 20 percent YoY between CY13-CY15, consequently surpassing of two trillion dollars by CY15. 

Following the global trail, IBI in Pakistan, having faced initial failures, has now gained its momentum; accounting for over eight percent of the countrys banking system with a network of 964 branches and more than 500 windows across the country. 

At the outset of its operations in Pakistan, Islamic banking met little success due to the non-availability of appropriate infrastructure and human resources required for its sustenance. Moreover, in the early days, milestone changes were taking place in Pakistan banking industry including modifications in the Banking Companies Ordinance, enactment of Mudaraba Companies and Mudarabas (Floatation and Control) Ordinance, which hampered its activities. 

However, learning from the mistakes made in the past, IBI found its feet. After its relaunch in Pakistan in CY02, it has been rebounding strikingly, reporting an asset base of above Rs711 billion during 2QCY12, which represents 8.2 percent share of overall banking industrys assets. 

Deposits also witnessed a sturdy growth of 13 percent YoY to stand at Rs603 billion at the end of 2QCY12, accounting for nine percent of the overall industry deposits. 

Not only this, IBI in Pakistan has also won the laurel of improved liquidity, as LA/TA increased from around 38 percent in 2QCY11 to 45 percent in 2QCY12, whereas the indicator assumed a negative trend for the banking industry, as a whole. 

The success of Islamic banking doesn end here. Reportedly, bankers, economists and investors are moving towards an Islamic economic system because they have realised that this emerging system can be an alternative after capitalism system has dissatisfied masses. 

Moreover, S&P highlights a dazzling growth potential for Islamic banking keeping in view the young, fast-growing Muslim populations, robust macroeconomic environments, large infrastructure projects that require financing, formation of Shariah-compliant indices for companies listed in stock markets and recent political developments in several Muslim-majority countries.

(Business Recorder / 23 Nov 2012)
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Kuwait’s Boubyan Bank sees Islamic banking boom

Kuwait: Islamic banking is growing at more than double the pace of conventional banking in Kuwait and strong demand is expected throughout the Arab region, according to the chairman of Boubyan Bank.
Credit volumes at Islamic banks in Kuwait reached 11.1 billion Kuwaiti dinars ($39.3 billion) in the first nine months of 2012, up 13.2 per cent on last year, Boubyan chairman and managing director Adel Abdul Wahab Al Majid told the Reuters Middle East Investment Summit.
That compares with 5.6 per cent credit growth to 18.6 billion dinars at conventional banks, Al Majid said.
The hunger for sharia-complaint banking in Kuwait means that Boubyan is not interested in overseas expansion quite yet, in contrast to more-established rival Kuwait Finance House (KFH) .
“Innovation or presence outside, it is only a matter of time [for] the likes of us and others,” Al Majid said. “Right now we are busy because the slice of Islamic pie in Kuwait is big.”
However, in 2014 the bank will set out a new five-year strategy, which will include the possibility of an international presence.
This year’s Arab Spring uprisings are expected to boost sharia-compliant banking in the Middle East and North Africa because of the new Islamic governments it created, Al Majid said.
The Boubyan chairman was previously an executive at National Bank of Kuwait (NBK), which in July raised its stake in Boubyan to just over 58 per cent from 47 per cent in a deal valued at about 122 million dinars.
Al Majid moved to Boubyan as part of an executive team charged with the task of shoring up the struggling bank at a time when NBK held a minority stake in it.
During the financial crisis of 2009 Boubyan reported a net annual loss of 51.7 million dinars. This background has made the bank cautious about expansion.
“I think the mistake is that it started venturing outside before it had a stable, profitable base in Kuwait,” Al Majid said.
Since 2009, earnings have grown and the bank reported an 8 million dinar net profit in 2011.
“We expect this year to be in the same positive trend,” Al Majid said. In the first nine months of this year the bank posted net profit of 7.6 million dinars.
Provisions for problem loans at Boubyan were 26 million dinars in the first nine months of this year. Al Majid said he believed that these had peaked for the Kuwaiti banking sector as a whole, with the process continuing at a slower pace.
However, the Gulf Arab state is not completely immune to developments in global markets, Al Majid said, and lower profit growth has become the new norm.
“Given the whole turmoil all over the world, I don’t think anybody here wakes up in the morning with a smile on his face. You see what is happening in Europe, the US and China.”

(Gulfnews.Com / 25 Nov 2012)

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Thursday, 22 November 2012

The alchemy of Islamic asset allocation

Despite the growth, the industry hasn't focused yet on defining a proper asset allocation framework for Islamic investments. Historically, the Islamic portfolio approach has been mainly "return driven", paying less attention to the risk and liquidity profile. The lack of some clusters may have justified this. Increasing allocation to sukuk, the selected use of Shariah-compliant derivatives and a risk parity approach to asset allocation can represent the base for a more effective Islamic portfolio management.
Over the past 10 years, the Islamic funds industry has grown to USD 60 billion at the end of 2011, with an annual increase of circa 4%. The outlook is still bright considering that the potential demand is at least 10 times bigger than the current size of the industry.
Over this period Islamic asset management experienced three main important trends: (a) an increase in the number of funds offered to investors (over 800 funds); access to a wider number of asset classes and strategies; and (c) the evolution of the business model from a simple offering of funds to a more comprehensive wealth management service.
Despite the significant growth, the industry hasn't focused sufficiently on identifying an appropriate framework for asset allocation of Islamic investments. The development towards a more comprehensive wealth management approach to Islamic portfolios and the consequences of the recent financial crisis highlighted the need for a more effective asset allocation to Islamic investments.
Historically, Islamic portfolios have been skewed towards alternative investments (in particular real estate and private equity) and local/regional equities. Reasons can be indentified in the intrinsic nature of Islamic investing with the preference for tangible assets, the absence, for a long time, of some clusters (the fixed-income component) and the "return driven" approach to investment (focusing only on the IIRR).
This allocation ended up creating a sort of "skewed Yale model" incorporating high liquidity and risk premiums that, in many cases, haven't been addressed properly at the time of the investment. 
(Zawya / 21 Nov 2012)

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India: RBI Governor urges separate laws for Islamic banking

Reserve Bank Governor, D Subbrao said that separate legislation should be enacted in order to commence Islamic Banking in India.  Talking to media persons here today he said under the present banking laws, Islamic banking could not be permitted in India.

"There should be separate legislation for the purpose. The Kerala government had proposed to  permit Islamic banking as the inward remittance is  the highest here. Reserve Bank is not against the idea, but  we  can work only under the present legal frame work of the country," he added. 

He also said that RBI had studied Kerala’s  proposal in detail and there are some legal problems implied in it.  This can be got around through separate channel, so it is not possible under present banking frame work  which insists interest for both deposits and lending. Islamic banking is a totally different system which does not permit interest regime.  

He also said that RBI would take into account all information about the economic situation of the country and   will take decision on change in the interest rates. We will announce our decisions on the next review meeting scheduled on December 18. 

RBI planned to include financial literacy in the curriculum of primary schools and prepared study materials for teaching the subject. This had been translated into the regional languages and a pilot project had been started in Karnataka. State governments should take the initiative to include this in the school syllabus. 

Earlier, addressing the function to dedicate Ernakulam district as the first 100 per cent  meaningful financial inclusion district of the country he said that merely having a bank account is not sufficient for financial inclusion. People must use the account actively,  should get credit and micro insurance and should get other financial assistances through the banks.  Through this,  leakages from  the government assistance should be curtailed to a great extend. Banks should not see this as an obligation, but rather consider it as a business model. He added that financial exclusion is more in the urban areas than in  rural areas. 

The RBI governor also said that banks had been directed not to insist for collateral securities in order to give educational loans  up to Rs 4 lakh.

(Business Standard / 22 Nov 2012)

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Let’s explore Islamic finance models

ISLAMABAD - Stressing the need for continued collaboration amongst the D-8 central banks, Governor State Bank of Pakistan (SBP) Yaseen Anwar Wednesday said the member countries need to explore ways to promote Islamic financing in the wake of challenging global economic landscape.

While opening and chairing the 2nd meeting of central bank governors of the D-8 countries in Islamabad, Anwar said there was aneed for exploring sustainable models to promote Islamic finance in the Developing-8 (D-8) economies.

He said macroeconomic policies of D-8 countries must be balanced to check overheating pressures from strong recovery, high credit growth, volatile capital flows, elevated commodity prices, and renewed risk of inflation.

“We must continue to rebalance our economies to sustain growth through modulating domestic consumption, increase in trade and allow capital to flow freely between emerging and developing economies in search of better returns as against investment in debt ridden advanced economies”.

He noted that a sudden drop in the growth rate in 2009 immediately after the 2008 crises was perhaps the principal reason why the D-8 central bank governors in their first meeting agreed to set this meeting agenda on strengthening monetary and financial cooperation.

“The global growth is projected to further drop from 3.8 percent in 2011 to about 3.3 percent in 2012. As a result, the real GDP growth in the emerging and developing economies is projected to be further slower from 6.3 percent in 2011 to 5.2 percent in 2012. Therefore, we need continued collaboration to further strengthen our economies,” he added.

There was only one central bank in each country/monetary area, and therefore, it was very logical for central banks to look beyond their national borders for advice and collaboration, he said adding that in recent years, increasing globalization has further enhanced the need for central banks’ cooperation to tackle risks due to the cross border interdependencies and to make the most of emerging opportunities.

The central banks’ cooperation had been facilitated through collaborative multilateral forums such as the G20, the FSB and the meetings of the IMF, BIS and a number of bilateral and regional initiatives for cooperation. “The enhanced role of these forums also reflects the increasingly important role that the central banks of emerging and developing economies are playing at these international forums,” said the SBP governor. Stressing the need for strengthening cooperation amongst D-8 countries, Anwar said the D-8’s secretariat must be strengthened to collect and maintain information on our economies and their interconnectedness.

“This would serve the dual purpose as it would provide regular updates on the state of D-8 economies and would help us in reviewing and measuring progress of our economies on economic and financial cooperation,” he said. Anwar suggested that D-8 countries must collaborate and focus on the optimal use of monetary policy tools which are at best the first line of defence against the global crisis. The D-8 countries must collaborate on how to rebalance its growth model from export-led growth to diversifying demand through structural changes in their economies that would enable sustainable future growth and make their economies less susceptible to volatility in other financial markets, particularly by raising domestic demand and recycling more of the D-8 countries savings into investments at home.

(Pakistan Today / 22 Nov 2012)

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Tuesday, 20 November 2012

A word of caution on Sukuk financing

The use of Sukuk is now in vogue. The term itself is a plural for sakk, which in Arabic refers to a note, and is believed to be the origin of the English word cheque. The financial instrument is used in contemporary capital market practices as an investment certificate, note or simply a bond-like instrument, which replicates the economic characteristics of an interest-bearing bond.

A number of governments in the block of countries represented in the Organisation of Islamic Conference are using innovative Sukuk structures to raise money for a variety of purposes, including financing budget deficits. Since the government of Pakistan’s dollar-denominated Sukuk issue of $600 million in 2005 (which involved selling its M2 motorway to a special purpose vehicle (SPV), and then leasing it back from the SPV), a number of sovereign and corporate Sukuk have been issued in the country. The government raised Rs163.3 billion last year by issuing three sovereign Sukuk. The government of Turkey has also recently issued two landmark Sukuk (one $1.5 billion sakk and another Lira-denominated $1.62 billion sakk).
While supporters of Islamic finance have reasons to be joyous over the impressive growth of Sukuk, caution must be exercised when advising investors and issuers on matters related to the use of the instrument. The current trend in Sukuk structuring tends towards debt-based structures, which renders most of the issued Sukuk very similar to conventional bonds in their risk-return profile. This is a significant concern, given the increasing share of Sukuk in the total assets under management of institutions offering Islamic financial services. At present, assets under Sukuk are estimated to be about a fifth of the total global Islamic financial assets of $1.35 trillion, according to the Global Islamic Finance Report 2012.
An over-emphasis on asset-based Sukuk structures means corporations and sovereigns borrowing from the Islamic capital markets will increase their indebtedness, thus magnifying the use of leverage in their capital structures. This will not only endanger the operational sustainability of the borrowing corporations, but also contribute to the instability of the Islamic financial system as a whole. Government borrowing through debt-based Sukuk structures, like commodity Murabaha, will result in governments using Islamic structures to finance their budget deficits (as is very much the case in Pakistan).
Although sovereign Sukuk in Pakistan have allowed Islamic banks in the country to have access to Sharia compliant securities for liquidity management and other treasury operations, the government must exercise caution in raising funds through Sukuk, as it crowds out private investment in the country.
Asset-based Sukuk are all but conventional bonds in their economic effects. In the event of a default, investors may end up losing significantly and will not have any recourse to an underlying asset. Sukuk defaults have just started. For instance, there are problems on the horizon for those who invested in Dana Sukuk, which was a nearly $1bn Sukuk maturing on October 31, 2012. But as the obligor has run out of cash, investors will find it difficult to receive their paybacks.
Now that new rules for Sukuk have been issued in Pakistan, one should hope that Pakistan will provide an example of developing an Islamic capital market based on true asset-backed Sukuk rather than Sukuk based on commodity Murabaha, which are only slightly different from conventional bonds.

(The Express Tribune / 19 Nov 2012)

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Malaysia continues to lead in Islamic banking development

KUALA LUMPUR (Nov 19, 2012): Malaysia will continue to be the global leader in developing and promoting Islamic banking systems, according to Roland Berger Strategy Consultants.
Its senior partner for Southeast Asia, Markus Bohme said Malaysia will face competition from member countries of the Gulf Cooperation Council (GCC).
He said there will be an automatic connection with the GCC countries and at the same time competition, but Malaysia is probably set for that in Asia.
"Many people are thinking about Malaysia as a product of Islamic investment banking, automatically the activity will be related to the Gulf region.
"It probably goes beyond the Islamic...Malaysia has relatively strong banks and very international banks which are Maybank and CIMB," he told the media during an Investment Banking Outlook briefing, here today.
However, Bohme said the global investment banking revenues were set to increase this year but more restructuring and consolidation schemes were expected.
He said global investment banking revenues were expected to grow by 10% this year but might post a low double-digit industry return-on-equity (ROE).
"Global investment banks have improved their performances over the past few months, but structural earnings problems persist," he said.
Despite the rebound in revenues and profitability as compared with 2011, he said there would be more restructuring, consolidating and a continued shift into emerging markets, beyond just the traditional financial hubs in Asia.
"Thus, around 40,000 investment banking jobs are expected to be cut in the next two years -- compared with the middle of 2011," he said.
(The Sun Daily / 19 Nov 2012)

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Sunday, 18 November 2012

UAE: Fitch Affirms Abu Dhabi Islamic Bank's ratings

A change in Fitch's view of the willingness or ability of the UAE authorities to support ADIB would be negative for its IDRs and its Support Rating Floor.

However, Fitch notes recent supportive actions for the domestic banking sector including pre-emptive capital injections.

In addition, Fitch believes that support would be forthcoming from the Abu Dhabi government ('AA'/Stable/'F1+'), which has injected hybrid capital into the leading Abu Dhabi banks. Members of the Abu Dhabi ruling family hold a significant amount of ADIB's shares in a private capacity. Given the high level of ADIB's IDRs there is limited upside potential.

Rating drivers and sensetivities - VR

ADIB's VR is driven by its robust pre-impairment operating profit, sound balance sheet liquidity and its growing franchise in the UAE. The VR is constrained by ADIB's weak asset quality and exposure to problem financing.

Fitch has some concerns relating to ADIB's below average Fitch Core Capital relative to peers although Fitch recognises the improved regulatory Tier 1 capital ratio.

ADIB's asset quality continues to suffer from its exposure to legacy financing. Impaired financing/ gross financing remains elevated at 7.6% at end-9M12 but has come down from 8.7% at end-2011. Reserves for impaired financing improved to 80% at end-9M12 but the unreserved proportion of impaired loans/ common equity remained at 11.8%. Overall asset quality issues present some challenges for ADIB and exposure to a seasoning financing book may continue to present challenges in 2013, albeit manageable ones in Fitch's opinion.

ADIB increased its CBUAE regulatory Tier 1 ratio to 19.4% with a USD1bn Tier 1 hybrid issue in November 2012 which Fitch views as positive. Fitch assigned 50% equity credit to the issue resulting in a Fitch Eligible Capital ratio of 16.6% compared to 13.8% prior to the issue, assuming stable risk weighted assets. ADIB's Fitch Core Capital ratio of 10.7% at end-9M12 remains below domestic and regional peers but does not include the added Dhs3,672m cushion from the new hybrid Tier 1 issue or the existing Dhs2,000m hybrid Tier 1 capital injected by the Abu Dhabi Government, both of which provide some extra comfort.

ADIB's robust pre-impairment operating profit should provide sufficient capacity to absorb continuing impairment charges as well as moderate shocks from financing concentrations. Impairment charges continued to hurt profitability in 9M12 and consumed 39% of pre-impairment operating profit. ADIB's net income and margins compare well with peers. The bank's cost/ income ratio is likely to remain at its current level as ADIB continues to invest in its retail operations. 

ADIB's liquidity is healthy and compares well with peers. ADIB's large stock of liquid assets provides the bank with sound liquidity.

ADIB is well funded by customer deposits and its financing/deposits ratio remains healthy at 89%. However the vast majority of customer deposits are short term which results in a large asset and liability maturity mismatch. ADIB increased its long-term funding in November 2010 and November 2011 through issuing two five-year sukuk totalling Dhs4.6bn which help its long-term mismatch somewhat.

A significant and sustained improvement in asset quality as well as maintaining its recently increased capital ratios could lead to an improvement in ADIB's VR although Fitch recognises the challenges in the UAEoperating environment and continuing asset quality problems. Pressure on ADIB's VR could come from a further deterioration in asset quality, profitability or a significant deterioration in capital ratios.

The rating actions are as follows:

Long-Term IDR affirmed at 'A+' with a Stable Outlook.
Short-Term IDR affirmed at 'F1'.
Viability Rating affirmed at 'bb'.
Support Rating affirmed at '1' .
Support Rating Floor affirmed at 'A+'.
ADIB Sukuk Company Ltd.
Trust certificate issuance programme affirmed at 'A+' / 'F1'.
Senior unsecured certificates affirmed at 'A+'.

(Ame Info.Com / 18 Nov 2012)

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