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Monday, 14 May 2012

Australia's NSW revives Islamic finance push

May 13 (Reuters) - The government of the Australian state of New South Wales, home to the country's financial capital Sydney, will send a group to Dubai this week to discuss ways to develop the Islamic finance industry, officials said.

The delegation, led by New South Wales premier Barry O'Farrell and including financial services professionals, will explore regulatory and legal issues at a roundtable discussion with the Dubai Export Development Corp on Tuesday.

"The event will discuss business opportunities in New South Wales, with particular attention given to Islamic finance," an Australian government official, who declined to be named under briefing rules, told Reuters. The delegation will also visit Abu Dhabi and Lebanon.

With proximity to southeast Asia, where Islamic finance is growing rapidly,Australia could play a role in the industry, officials believe. But efforts to pass the necessary legislation at a federal level have been slow, so the state government wants to get involved.

"The state government is very interested and trying to be proactive in getting Middle East and local players together to work out a deal," said Salim Farrar, senior lecturer at the University of Sydney Law School.

Passing legislation governing Islamic finance will require a series of politically charged debates, Farrar said.

But support is building in the business community, said Talal Yassine, managing director at Sydney-based Crescent Wealth. "Clearly there is going to be a push to get Islamic finance up in Australia."


Australia faces a challenge shared by other jurisdictions new to Islamic finance: taxation. Certain Islamic finance structures, particularly sukuk or Islamic bonds, can attract double or even triple tax duties because they require multiple transfers of title of the underlying asset.

Obtaining tax amendments to alleviate this appears difficult to push through the minority government of Australian Prime Minister Julia Gillard.

"At the federal level developments are going nowhere fast," said Matthew Stutsel, national head of taxation for consultants KPMG in Sydney.

The Australian Board of Taxation released a discussion paper in October 2010 which prompted consultation meetings and submissions. The final review was delivered to the government's assistant treasurer last June. But no further action has been taken, and the public release of the report "is a matter for the Government to decide", a Board of Taxation statement said.

The government's attention has been focused on mining and carbon tax initiatives, and an attempt to deliver a budget surplus; extending tax breaks in other areas might not sit well with voters. Elections are due in 2013.

But while federal-level discussions have been difficult, New South Wales is interested in Islamic finance partly because of the need to fund state projects such as upgrading railway networks and refinancing public utilities. Islamic investors operate large pools of investment funds in southeast Asia and the Gulf.

Attracting investment into infrastructure and other sectors is an important part of the state government's efforts to position Sydney as a leading international financial centre, the Australian official said.

Stutsel said work was being done within the state government on infrastructure proposals. "The issue is largely going to be withholding tax on sukuk, where we would be looking to leverage a tax law change," he said.

Tax incentives might, for example, be offered for Islamic investors in public-private partnerships. Typically, 10 to 15 percent of New South Wales infrastructure has been delivered using PPP, according to a government report. Granting special tax treatment for such projects cold avoid the need for a full tax amendment.

( Reuters / 13 May 2012)

Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Islamic economics growing in strength

With an estimated $1.2 trillion in assets in 2012, Islamic banks have now developed in size and capability to such an extent that they can participate in financing major infrastructure projects either through direct financing or through facilitating the issuance of sukuk. “Today, countries all over the world are turning to Islamic capital markets for financing, and most major international financial institutions are active in Islamic banking,” says Abdulkareem A. Abu Alnasr, chief executive officer of the National Commercial Bank (NCB) — the largest bank in financial services group in the region — in an exclusive interview with Arab News. For example, he added, experts estimate that the sukuk market will grow 66 percent in 2012 to over $44 billion compared to $26.5 billion in 2011. Moreover, in the GCC, statistics show that over the past 6 years the share of Islamic finance in the total project finance market has doubled from 12.5 percent in 2006 to over 25 percent in 2012. This is a testimony to how far Islamic banking has come. Through various innovative structures, today Islamic banks are able to finance both existing and new projects. “We are happy that NCB has been central in supporting this activity by leading Islamic finance deals in the GCC with commitments exceeding $ 7 billion, an estimated one-fifth of the entire global Islamic project finance portfolio,” said Abdulkareem who assumed charge as the bank’s CEO in January 2006. The development of new structures and products, especially project specific sukuk, has been encouraging, since it enables capital markets to play greater role in mobilizing savings for the infrastructure agenda, while enabling investors to place their funds in an attractive growth opportunity. Moreover, it provides institutional investors with the kinds of low risk, long-term investment vehicles they desire, he added. In addition to being the bank’s CEO, Abdulkareem is also a member of the board of directors and the executive committee and a number of other board management committees as part of the bank’s robust governance structure. He is the vice chairman of Turkiye Finans Katilim Bankasi, the leading participation bank in Turkey.

The following are excerpts from the interview:

Saudi banks have showed resilience during the time of global financial crisis because their fundamentals are very strong compared to other banks in the region. How do you foresee the future in view of the uncertainties in global energy and debt markets?

The resilience of Saudi banks during the global crisis was derived from three mutually reinforcing factors: Firstly, the concerns of an economic slowdown in 2009 that was largely caused by an oil price correction and cuts in the OPEC quotas proved relatively short-lived in Saudi Arabia. Apart from the recovery in oil prices, the government responded effectively with expansionary fiscal policies, including a number of steps to ensure that the ambitious infrastructure modernization agenda would remain on track. Second, going into the crisis, Saudi banks were very soundly capitalized and funded their balance sheets through highly reliable domestic customer deposits. Thus, unlike their international counterparts, Saudi banks were not heavily dependent on the kind of wholesale funding that proved vulnerable to market disruptions during periods of market stress. Third, under the effective supervision of SAMA (Saudi Arabian Monetary Agency), Saudi banks had fairly successfully shielded themselves from high-risk activities. They focused their activities primarily on the domestic market while their investment portfolios were dominated by high quality international securities. The domestic market also, had largely avoided excesses such as the leverage-driven real estate booms that proved a challenge in some of the Gulf countries. SAMA also responded effectively and proactively after the onset of the crisis to shore up confidence. The Saudi banking sector is now characterized by robust financial health and ample liquidity. With the economic fundamentals in Saudi Arabia set to remain strong, banks are well positioned to mobilize this liquidity for asset growth, which will support the economy, a process that clearly began to gather momentum last year. Bank credit has grown at more than 16 percent YoY, the fastest pace in more than three years. I expect these positive trends to continue, moreover in a way that is increasingly well aligned with the development imperatives of the Saudi economy as more focus is devoted to areas such as mortgages and small and medium-sized enterprises. Nevertheless, we must acknowledge that we live in an interdependent world, a fact that the experiences of the past several years have repeatedly highlighted. In spite of the strong fundamentals of the domestic economy, investor mood has been tested again and again. This in turn has manifested itself in the relatively lackluster performance of the regional financial markets, at least until recently. The global economic crisis was triggered by global imbalances and structural weaknesses that for the most part remain in place and still constitute a potential source of global economic risk. Any trouble, whether in the euro zone or elsewhere, may revive oil demand erosion concerns and increase market risk aversion. Even though oil prices proved remarkably resilient back in 2008-2009 due to the strength of emerging market demand and the increasing marginal cost of extraction, short-term corrections cannot be ruled out.

Profits of Saudi banks increased nearly 14 percent in 2011, which are close to the earning levels of recorded in 2006. What is in store for Saudi banks in 2012 and 2013?

The strong earnings performance of Saudi banks during 2011 was driven by strong loan growth and a sharp fall in loan provision charges as banks restored their provision coverage ratios to robust levels. We expect the banking sector to sustain double digit earnings growth in 2012 and 2013 driven by strong growth in corporate and trade finance, residential housing finance, and brokerage volumes. Even though the global economic recovery is a concern, we expect the Saudi banking sector to remain resilient, further supported by the macroeconomic stability of the Kingdom’s economy.

Saudi banks have reported a significant decrease in loan loss provisions (LLPs) because of the pragmatic policies of SAMA. Could these measures curb the growth of start-ups and SMEs?

Saudi banks increased their provisions in the aftermath of the crisis to fortify their balance sheets and to restore their capacity to absorb any future credit losses. I believe that most banks have significantly increased their provision coverage ratios and that the cycle of accelerated provision building has drawn to a close in 2011. Going forward, banks will continue to focus on building their loan books to deploy the ample liquidity driven by the continuing strong growth in customer deposits. With respect to SMEs, the Saudi government and the banking sector fully recognizes the vital role the SME sector can and should play in creating jobs and driving future economic growth. Thus, the government has recently taken steps to strengthen the kafala guarantee program so as to support the banks lending to the sector. NCB plays a leading role in this sector providing a range of banking products, including credit programs to support our SME customers.

Can you explain achievements made so far by NCB in corporate special responsibility? What are the future CSR plans?

We have endeavored to design and deliver CSR programs that create lasting benefits for individuals and society as a whole. Rather than merely making donations, our approach is to empower recipients to build a better future for their families. Since 2005, we have delivered programs that have supported more than 670,000 people in 166 cities Kingdomwide. These have centered on four themes: Job creation, education, health care and social welfare. Furthermore, NCB is a major contributor to numerous charities and local community activities. Going forward, NCB will continue to uphold its mission to provide “creative, innovative, and non-profit CSR programs that contribute to the country’s development.”

Saudi Arabia, which has made rapid strides in Islamic finance, could be a role model in promoting it in both Muslim and non-Muslim countries. What are the additional steps required to further promote such financial concepts?

I agree that Saudi Arabia is well positioned to be a role model in Islamic banking. It is the home of Makkah, which Muslims worldwide face five times a day for their prayers. It has a strong and growing economy, which provides a free environment where business can grow. It also has a young entrepreneurial population. Finally, being a pioneer in Islamic banking, Saudi Arabia has developed deep expertise and technical know-how in the field. Islamic finance has experienced rapid growth in Saudi Arabia. Shariah-compliant products are now the norm in retail banking and increasingly so in other areas as well. Saudi Arabia has also pioneered a number of new initiatives in the growing area of Islamic capital markets. Blue chip names such as Saudi Electricity Co. (SEC) and SABIC (Saudi Basic Industries Corp.) have led the way in domestic sukuk issuance but last year saw the emergence of new structure for project sukuk, led by SATORP (Saudi Aramco Total Refining and Petrochemical Company) for its Jubail refinery. This year witnessed the issuance of GACA’s (General Authority of Civil Aviation’s) sukuk, which not only continue the project sukuk theme but also potentially laid the foundation for sovereign-backed-sukuk issuance in the Kingdom. We believe that such Shariah-compliant products have an important role to play in bridging the large and deep pools of capital in the Kingdom with the massive investment needs in areas such as infrastructure and economic diversification. They also enable investors to buy into one of the most attractive economic growth stories globally.

Islamic banks have been in operation for 38 years but some analysts say a shortage of experts is delaying their worldwide expansion. How can this issued be tackled?

This is true to some extent, although naturally expertise will grow with the growth of the industry. Islamic banking started off with simple products, mainly focused on consumer banking using Murabaha contracts, and now it has become much more complex, covering Islamic alternatives to derivatives and treasury products as well as project finance, wealth management and structured products. There is a range of measures that would help alleviate the shortage of experts. For example, developing advanced training programs in Islamic banking at the bank level, national level, and international level and developing credible certification programs for Islamic banking professionals similar to the CPA and CFA certifications. Also, the quality of Islamic banking conferences is improving. Currently there are a lot of conferences in Islamic banking but we need to focus more on delivering quality programs that add new value to the industry. There is also a need to support academic and research institutions. It is critical to develop the intellectual and human resources upon which Islamic banking will stand. For example, NCB has taken the initiative to support the efforts of Harvard University’s Islamic finance research projects as well as funding a number of academic chairs dedicated to Islamic economics in the local Saudi universities. And lastly, encouraging the development of specialized Shariah scholars in the field of Islamic banking and training existing scholars in the business of banking. NCB has pioneered a Shariah scholar development program where selected Shariah scholars and Islamic economists are invited to participate with our Shariah Board in order to learn about the Shariah supervision process first hand and get mentored by our leading Shariah scholars.

Islamic banking represents 95 percent of banking activities for individuals in the Kingdom. They also make up 30 percent of the entire banking assets. What future and challenges do you see for Islamic banking in the Kingdom and worldwide?

I expect Islamic banking to continue to grow in the Kingdom and worldwide. Globally speaking, Islamic finance is still very much in the phase of extensive growth as it takes root in new jurisdictions and the product range is broadened. On the consumer finance side, one of the challenges that we must address is how to protect customers from excessive indebtedness. Although banks want to offer Islamic products to customers and grow their business, they should also be careful not to drive people to excessive consumption and debt by adopting responsible lending practices, something that SAMA has regulated effectively and NCB has embraced fully. It is also important for the Islamic banking industry to try to empower people through financing home ownership, and small businesses that will drive sustainable economic growth. There is also a need to use Islamic finance to inculcate more of a savings and investment culture in the Kingdom. In this sense, the ongoing efforts to foster product development by increasing the diversity of funds and other investment products are critical. On the corporate side, Islamic banks need to develop more sophisticated and customized solutions to meet the needs of corporate clients. In particular, Islamic banks must develop a suite of Shariah-compliant treasury solutions that enable corporate customers to hedge their genuine business risks.

You stated during the recent Jeddah Economic Forum that the global financial crisis had made Islamic banking more relevant. Can you elaborate?

Why did the crisis happen? It happened partially because of the excessive use of structured debt and securitization, which drove unsustainable levels of financial leverage. The fundamentals of Islamic banking prohibit all of these. Islamic products are based on real transactions that involve the real economy. Islamic Banks take responsibility for their customers and don’t merely sell the loans to second parties, who then sell them to third parties. Finally, there is a strong concern for ethics in Islamic banking, which serves to protect the customer, the bank, and the society at large.

Shariah-compliant financing is making a major impact on key infrastructure projects. What is your take on Shariah-compliant financing?

The theory of Islamic economics, of which Islamic banking is a part, aims to serve the interest of the greater community. It aims to use the wealth of savers and direct it to investments that will have a long-term benefit on the society in terms of economic development and improving the standard of living. With an estimated $1.2 trillion in assets in 2012, Islamic banks have now developed in size and capability to such an extent that they can participate in financing major infrastructure projects either through direct financing or through facilitating the issuance of sukuk. Today, countries all over the world are turning to Islamic capital markets for financing, and most major international financial institutions are active in Islamic banking. For example, experts estimate that the sukuk market will grow 66 percent in 2012 to over $44 billion compared to $26.5 billion in 2011. Moreover, in the GCC, statistics show that over the past 6 years the share of Islamic finance in the total project finance market has doubled from 12.5 percent in 2006 to over 25 percent in 2012. This is a testimony to how far Islamic banking has come. Through various innovative structures, today Islamic banks are able to finance both existing and new projects. We are happy that NCB has been central in supporting this activity by leading Islamic finance deals in the GCC with commitments exceeding $ 7 billion, an estimated one-fifth of the entire global Islamic project finance portfolio. The development of new structures and products, especially project specific sukuk, has been encouraging, since it enables capital markets to play greater role in mobilizing savings for the infrastructure agenda, while enabling investors to place their funds in an attractive growth opportunity. Moreover, it provides institutional investors with the kinds of low risk, long-term investment vehicles they desire.

Credit card debt is said to be heavy in Saudi Arabia. What are the measures required to curb this trend?

While this may be the prevailing perception, the fact is that credit card penetration, usage and debt are below international norms. Furthermore, SAMA has already implemented proactive measures to curb excessive credit card indebtedness by instituting minimum affordability, debt burden levels ratios as well as capping the amount of cash that can be utilized from a credit card limit. Nonetheless, we recognize the opportunity for proactive consumer education so as to prevent excesses as these products grow in reach in the future.

Some customers say front-end retail banking services in Saudi Arabia lag behind other advanced economies. What are your observations?

The scorecard for front-end services in Saudi Arabia is more nuanced. In electronic banking, there are clear success stories where the industry has leapfrogged more advanced economies. For example, the Sadad electronic bill payment and presentment service is a global reference for convenience to both retail customers and billers. Additionally, rich functionality in ATM, telephone and Internet banking channels have enabled banks to serve effectively their clients with up to 90 percent of all transactions conducted through electronic channels. On the other hand, the Saudi banking system has the challenge of meeting the rising service demands of a rapidly growing bankable population across an extended geography. To maintain high standards of service while meeting rapidly rising customer demand, Saudi banks have been working continuously on expanding their branch and ATM capacity and reach, which is not an easy challenge given the Kingdom’s vast geography and the rapidly growing population. Thus, over the past 4 years, the Saudi banking sector expanded its branches by 22 percent and ATM’s by 44 percent; by comparison, the number of SARIE payment transactions grew by 77 percent.

What are your views on e-commerce and the benefits and drawbacks of merger/acquisition of banks in the Kingdom?

The Saudi banking industry is undergoing rapid growth, propelled by favorable demographics and robust economic fundamentals. The challenge over the medium term is to build capacity and capability to serve an expanding customer base that is growing in sophistication. As the Saudi banking sector is going through a high growth cycle, I do not expect any movement toward domestic consolidation in the near future. The progress of e-commerce depends on multiple drivers — Internet penetration, card penetration and, most critically, logistical infrastructure for delivery. While Internet and card penetration are sufficient to support vibrant e-commerce activities, the growth of the channel continues to be constrained by the still developing logistical infrastructure. Nonetheless, the international precedents suggest that the process is likely to continue to gather steam in the years ahead.

What additional role banks can play in Kingdom’s economic development?

I do believe that banks play an integral role in the government’s strategy toward a balanced and sustainable economic development. In the aftermath of the global economic crisis, international banks reduced their appetite to fund local projects, but our local banks stepped in and covered the gap in the project finance market. For example, the massive oversubscription received in loan deals that involved projects sponsored by Maaden and Marafiq is a testimony on the expanding role played by domestic banks across diverse sectors.

SAMA’s foreign assets have crossed SR2 trillion mark. Do you believe some of these funds can be used for the Kingdom’s development projects and social welfare schemes?

These sizable reserves enable the government to sustain its strategic investment program in the face of any adverse movement in oil revenues. In parallel, the government is also mobilizing private sector capital to fund these strategic projects through public-private-partnerships (PPPs) or through the issuance of sukuk. Together, these measures provide the government with a very high degree of fiscal resilience.

The banking industry in the Middle East experienced a healthy revenue growth of 7 percent in 2011 after revenues had stagnated the year before. What are the factors that contributed to this strong performance?

I believe this healthy growth of Middle Eastern banks was largely attributable to GCC banks, both in terms of asset growth rates and the profitability drivers, especially, after the recovery from the consequences of the financial crisis in 2008 and 2009. Even though the drivers vary across the GCC, the overall GCC macro-economic environment remains favorable thanks to high oil prices coupled with continued high government spending on physical and social infrastructure. In turn, the GCC banks’ net income growth is approaching the pre-crisis level. In Saudi Arabia, Oman and Bahrain, the reduced loan loss provisions have supported the bottom-line, while the growth in the UAE and Kuwait was driven by loan volume expansion. In general, corporate banking continued to take the lead, growing by 13 percent compared to just 5 percent in retail banking.

What are the positive and negative influences of the Arab Spring on banks in Saudi Arabia and the Gulf region?

The heightened political tension in the region, especially following the disruption to oil supplies from Libya and the sanctions on Iran’s oil exports to certain markets, has more than offset the impact of the slower global demand on oil prices. Oil prices averaged $ 108 a barrel in 2011 and expected to average $ 105 a barrel in 2012. GCC governments, in turn, have generated unprecedented surpluses last year and expected to do the same in 2012. High oil revenues have in turn enabled GCC governments, including Saudi Arabia, to accelerate spending on physical and social infrastructure projects. This has contributed to growth, as we saw with the Kingdom’s 6.8 percent GDP increase last year while creating many new business opportunities for banks. The attention to important issues such as housing and job creation will generate longer-term benefits for banks and the broader economy. On the negative side, rising geopolitical risks in the region have reduced capital inflows to the region, highly evident in the project finance market, and foreign direct investment. Such uncertainties have further contributed to diminishing presence of European banks in the syndications’ market due to their deleveraging and recapitalization challenges.

(Arab News.Com / 14 May 2012)

Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Germany Tastes Islamic Finance

Staying reluctant for years to taste the booming industry, Germany is finally getting Islamic investment funding as the globally-thriving industry is already making inroads into the European country’s economy.
"Islamic finance is for everyone," Daud Abdullah, president of the Global University of Islamic Finance in Malaysia's capital Kuala Lumpur, toldDeutsche Welle.
"If you look at [Islamic finance] globally, 60 percent of investors are not Muslims."
Despite the impressive strides Islamic finance has achieved in several European countries, Germany remains wary to adapt its laws to the Shari`ah-compliant industry.

"I want to share the new i-word with you. It doesn't stand for iPad, iPhone or inflation–but for Islamic banking," Noripah Kamso, chief executive of Malaysia-based CIMB-Principal, said in a press conference in Frankfurt recently.But this attitude has changed after Islamic finance was introduced by Malaysia-based CIMB-Principal, the only registered Islamic investment fund in Germany.

Islam forbids Muslims from usury, receiving or paying interest on loans.
Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.
Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.
Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.
The new Islamic finance targets Germany’s roughly 4 million Muslim residents, along non-Muslims.
"Most Muslims in Germany are from the second or third generation," Kamso said.
"Many of them have good jobs."
According to studies by the firm, 23 percent of German Muslims want to put their money in Islamic investments.
CIMB-Principal's second phase is to target non-Muslim investors, a hard task in the shadow of little experience of Islamic firms in Germany.
"German firms are making Islamic bond portfolios and investment funds available," manager Karim Zaazou said.
"But they only offer these products in Arab countries, to get a share of the petro-dollars."
Germany has between 3.8 and 4.3 million Muslims, making up some 5 percent of the total 82 million population, according to government-commissioned studies.
Safe Investment
Bankers believe that the booming Islamic finance industry would easily gain the confidence of German investors.
"If people invested more in Islamic finance, the world would not have such problems," said Abdullah, the president of the Global University of Islamic Finance in Malaysia's capital Kuala Lumpur.
"Then we wouldn't have highly speculative instruments that provide no economic benefit, but get countries deep into debt."
Islamic banking is one of the fastest growing financial sectors in the world.
Islamic financial products got their first major boost after the 9/11 attacks on the United States.
Many Arabs withdrew their money from the US at the time, and some of those funds, according to Abdullah, ended up in Malaysia and the Gulf states.
A second boost came during the international financial crisis, when Islamic financial products actually showed profits.
The Dow Jones Islamic Market Titans Index, which tracks the 100 biggest Islam-compliant businesses in Europe, the US and Asia, has nearly doubled over the last five years.
The Shari`ah-compliant system is now being practiced in 50 countries worldwide, making it one of the fastest growing sectors in the global financial industry.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets amounting to $1.6 trillion (1.2 trillion euros).

(On-Islam / 13 May 2012)

Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

IFSB summit to focus on global crisis, internal reforms

ISTANBUL — Members of the governing council of the Islamic Financial Services Board (IFSB), the prudential and supervisory standard setting body for the global Islamic financial industry, and delegates have started converging here for the two-day board’s 9th annual summit starting Wednesday.

Central Bank of Turkey is hosting the event for the first time.

Jaseem Ahmed, the soft-spoekn IFSB Secretary General and formerly a senior executive of the Asian Development Bank, will indeed have much on his mind. Never mind the challenges in the global economy and the impact of the global financial crisis and its attendant resultant pending reforms a la Basel III. The IFSB as an institution itself is faced with calls for reform and the Islamic financial industry it serves similarly is faced with huge challenges inspite of its phenomenal growth over the last decade or so. 

Warnings against complacency are in abundance. In the Sukuk market for instance, Dr. Nik Ramlah Mahmood, Deputy Chief Executive of the Securities Commission Malaysia, the securities regulator, could not be more to the point in her keynote speech recently to the Islamic Bonds (Sukuk) Outlook Conference in Kuala Lumpur. “While the outlook for Sukuk remains bright not only in Malaysia but also globally, we cannot and must not rest on our laurels reminiscing about past achievements. Efforts to broaden the base of both issuers and investors of Sukuk must be more vigorously pursued. Further innovation is not an option but a necessity as issuers seek the most optimal structures to meet their respective needs while addressing the investors’ preferences,” she advised. 

To be fair to Ahmed, he has been in the top IFSB job for just over a year, and this will be merely his second annual summit in charge of the board. But be warned. His quiet demeanour belies a gritty technocratic determination to get things done. The ideas for reform are there, but the only major hurdle could be the politics of the institution and the industry.

What indeed are the challenges for the IFSB over the next few years? Perhaps it is coincidental or uncanny that the theme of this year’s summit is ‘Global Financial Reforms: The Changing Regulatory Model and Islamic Finance’. The theme could not be more topical in the context of the ongoing turmoil in the global economy and financial system and markets.

The summit, says the IFSB is aiming “to evaluate whether reforms in financial regulation structure and prudential standards equally equip the Islamic financial services industry in addressing its future challenges as well as identifying the priority areas in the prudential regulation of Islamic finance that may need focus and attention by regulators and market players alike”.

As recent elections in the UK, France, Germany and Greece have shown, austerity drives at the expense of economic growth are not popular with the electorate in general. At the same time, Mervyn Rees, Governor of the Bank of England, has effectively ruled out any blame in its role and handling of the country’s burgeoning budget deficit and global financial crisis which has propelled the UK economy into a double dip recession. 

The Queen’s speech at last week’s opening of a new parliamentary term was extremely light on regulatory and financial reform. It was left to Socialist French president-elect Francois Hollande to promise to rein in the excesses of the financial sector. 

In the context of the above developments, the IFSB summit assumes a timely importance and a challenging new dimension. This is because it offers an alternative approach to financial intermediation and its prudential regulation and supervision based on Islamic ethical principles that connects financial services to the real economy, and at the same time consistent with international standards and best practice. It also explores a potential contributory role for Islamic finance to contribute to financial stability and economic growth. 
The challenges for the IFSB in addition include organizational ones and market structural ones. 

IFSB is under severe constraints regarding resource mobilization. Its current membership fee-based system of generating revenues is simply inadequate. This is reflected in the banality of the IFSB even charging hard-pressed research students to pay to attend the summit albeit at a reduced rate. 

Perhaps it is time for the IFSB to transition to an equity subscription-based membership which may give it much more resource stability albeit subject to the dynamics it may unleash in terms of voting rights etc. The other alternative is to transform the IFSB into a non-profit trust (Waqf) with countries volunteering to donate decent endowments which would be invested and the organization financed from the investment proceeds of the endowments. This can be complemented by other revenue streams such as fees for the various standards adopted by the board; income from research reports and technical advisory services. 

Another challenge for the IFSB is its organizational reach. Its events give the impression of an indecent body politic with very little engagement or interaction with the very market it is supposed to serve. 

Events are not geared to the market which suggests a lost opportunity cost. The IFSB ideally should be a direct multifunctional platform where policy-makers can talk to industry players; where key legislators can interact with industry players; where regulators can discuss with industry players; and where they can all talk to each other.

This will lead to a culture of transparency and engagement between some of the most important stakeholders in the Islamic finance industry. This is the sea change the IFSB should strive for in its engagement policy with the various stakeholders.

The reasons for this are more implicit and important than it may suggest. Take for instance the authorization model for Islamic banks and financial institutions. Currently the present mandate supposedly prevents the IFSB to issue a standard regarding authorization of Islamic banks. This is because the IFSB supposedly only deals with prudential and supervisory issues. 

This is non-argument because the risks associated with the absence of a legal and regulatory framework for Islamic banks and financial institutions, but where such institutions are licensed anyway under a motley of other legal provisions, are indeed real.

How can Saudi Arabia be taken as a serious Islamic banking player when the government and the central bank, SAMA, are not adopting a dedicated Islamic banking law? This is against the very guidelines of the IFSB which has championed the specificities of Islamic finance, for instance the nature of deposits in Islamic banking which differs diametrically to those in conventional interest-based banking. Either the IFSB council acknowledge these serious anomalies and change the mandate of the board or the institution will merely continue to contradict its own guidelines and aspirations. 

The impact of the provisions of the Basel III process on Islamic financial institutions (IFIs) cannot be overstated. As IFSB’s Ahmed emphasized in his speech at the 11th Annual Euromoney Islamic Finance Summit in London earlier this year, as far as capital is concerned, “the increase in banks’ capital quality, consistency and transparency does not affect IFIs because the Hybrid and Tier III capital that are affected by the changes have not played a significant role in IFIs’ capital structures.” 

The capital structure of the majority of IFIs is dominated by Tier I capital and common equity. In Tier II capital, the issue is how IFIs will meet Shariah requirements before meeting the regulatory requirements for instruments such as subordinated debt, hybrid capital, convertible contingent capital (CoCos) and Sukuk that can be considered as capital.
On the other hand, liquidity is one area, suggested Ahmed, where Islamic banks are likely to be significantly affected, principally due to the lack of liquid Islamic instruments. Indeed, an IFSB survey last year revealed that most supervisory authorities and IFIs expect difficulties in complying with Basel III requirements, although the IFSB has come up with a robust response to Basel III to level the playing field.

Most notedly, implementation of standards is vital whether on a voluntary adoption basis or otherwise. The Basel Committee has been highly successful in reaching agreement on implementation of standards through joint, voluntary measures. Indeed, according to Ahmed, Basel’s strength in not in its rule-making capacity, but “in the way it has served as a platform for cooperation and sharing of experiences between supervisors and regulatory authorities.” This has been achieved through a close network of personal and institutional relationships between them. This he maintained is also the objective of the IFSB.

However, Ahmed’s suggestion on voluntary adoption whereby the IFSB recognizes the different capacities and stages of development amongst its members may turn out to be a recipe for inertia and obfuscation on the part of member countries. “In recognizing these differences, and in taking the more consensual route, it is entirely appropriate to utilize to the utmost, as in Basel, the platform for cooperation that the IFSB provides,” he concluded.
True voluntary adoption is closely linked to systems of political governance. The Basel process has long been dominated and led by those key member countries (the G7) who are all liberal democracies, As such they have a vested interest in debating, adopting and ratifying Basel and Bank of International Settlement (BIS) directives through their parliaments before the final royal or presidential assent. 

The IFSB member countries do not have this luxury because their governance structures vary widely. In this respect the IFSB may be right in pursing its consensual approach albeit far from ideal and efficacious. Standards, however, are meaningless if they are not implemented or adopted by those toward whom they are targeted. 

Nevertheless, the main summit sessions are comprehensive and include ‘International Regulatory Initiatives to Enhance Global Financial Stability’; ‘Impact of International Regulatory Initiatives on the Islamic Financial Services Industry’; ‘Regulatory Harmonisation and Cross-border Linkages in Islamic Finance’; ‘Global Financial Infrastructure of Islamic Finance’; and ‘Global Regulatory Reform and the Prospects for the Islamic Financial Services Industry.’

The IFSB has attracted a list of prominent speakers and participants led by Dr. Mahmoud Mohieldin, Managing Director, World Bank, which last year declared Islamic finance as a priority in its financing for Muslim member countries. 
The summit will also see the participation of seven key financial regulators from Turkey, Malaysia, the UAE, Nigeria, Pakistan, Palestine and Luxembourg, which is the sole European Union (EU) member of the IFSB. 

The IFSB summit has grown in stature to the extent that it is imperative for international agencies to be regular participants. Apart from the World Bank’s Dr. Mohieldin, William Coen, Deputy Secretary General, Basel Committee on Banking Supervision, Bank for International Settlement, and Dr. Ghiath Shabsigh, chief of Middle East and Central Asia Division, Monetary & Capital Markets Department, International Monetary Fund (IMF) are also speaking at the summit. 

They will be complemented by a host of speakers from multilaterals, stock exchanges, education providers and market players. 

(Saudi Gazette / 14 May 2012)

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