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Wednesday, 16 May 2012

Islamic finance sector facing key challenges

MANAMA: Islamic finance industry is facing key growth constraints that need to be addressed, Central Bank of Bahrain (CBB) executive director of financial institutions supervision Abdul Rahman Al Baker claimed yesterday.
"We are seeing continuing fragmentation in Islamic financial products," he told delegates at an Indonesia-Bahrain seminar on the industry at the Ritz-Carlton Bahrain Hotel and Spa.
"Unless products can be standardised, there will be less liquidity and documentation costs will remain higher than for conventional banks," he said.
"Furthermore, Islamic banking needs to gain a larger share of the retail market by providing investment accounts that are as flexible as conventional deposit accounts and to continue its provision of retail credit products such as credit cards and other products which are flexible enough to be competitive with conventional products.
"This is where teaming up scholars and bankers from different countries can facilitate developments. There needs to be a greater exchange of personnel between countries to facilitate exchange of ideas. Perhaps this seminar is one of the ways to push this process forward," he said.
"The CBB intends to remain at the forefront of the Islamic banking and finance and we look forward to work closely with our Indonesian brothers and market players to develop this key industry."
Mr Al Baker said Bahrain is the home of modern Islamic banking and finance within the GCC.
"From the setting up of Bahrain Islamic Bank in 1978, through to the publication of the first set of Islamic finance regulations in 2001, Bahrain has been at the forefront of developments in Islamic finance," he said.
"In order for the Islamic finance to develop further, both here in Bahrain and in Indonesia, a robust training and educational support is essential. It is only by developing expertise Islamic finance can build up the critical mass of qualified individuals necessary for the industry to reach its full potential in the global marketplace.
"We have also witnessed important developments in the standardisation of wholesale Sharia-compliant financial instruments by the International Islamic Financial Market here in Bahrain," he said.
"I am proud to say that the CBB has played a key role in its programmes of sukuk issuance since the first sukuk issues in 2001.
"These sukuk give banks and financial institutions an eligible liquid asset and a liquid form of collateral for secondary market trading and liquidity generation," he added.

(Gulf Times / 15 May 2012)

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Shariah ‘megabank plan’ seeks to raise $1bn capital

The Islamic Development Bank is seeking partners to bring investment in a Shariah-compliant megabank to more than $1bn before the opening this year, allowing it to finance larger construction projects.

The financial institution, to be established with Riyadh-based Dallah Albaraka Group and the Qatari government, will issue securities that Islamic lenders can buy to manage excess funds, IDB president Ahmad Mohamed Ali said in a May 10 interview in Kuala Lumpur. The three parties signed a memorandum of understanding in April to set up the bank in Doha, Qatar, to fund roads, ports and power plants.

“An Islamic megabank will be a significant development,” Afaq Khan, Dubai-based chief executive officer of Standard Chartered’s Islamic unit, said in a telephone interview on Monday. “Such a bank would have the balance sheet, the capital and the underwriting capabilities to undertake significant projects of size.”

Sales of debt that pay returns on assets to comply with the religion’s ban on interest totalled $14bn globally this year, compared with $358bn issuance of non-Islamic bonds, according to data compiled by Bloomberg. Al Rajhi Bank, the world’s biggest Shariah-compliant lender based in Riyadh, Saudi Arabia, has a market capitalisation of $30bn, versus $159bn for HSBC Holdings, Europe’s largest bank.

“The main objective of this bank is to invest in big projects and to help Islamic banks manage their liquidity,” said IDB’s Ahmad. That is one of the biggest challenges facing lenders, he said.
In an effort to increase the range of Shariah-compliant instruments in the market, International Islamic Liquidity Management Corporation was established in October 2010 with a mandate to sell the industry’s first foreign-currency denominated bills. It was founded by 14 members including central banks in Malaysia, Saudi Arabia, and Qatar. The Islamic Development Bank, based in Jeddah, Saudi Arabia, and the Islamic Corporation for the Development of the Private Sector are also among them, according to the IILM website.
The IILM plans to kick-start the issuance with a sale of as much as much as $1bn of global Shariah-compliant dollar bills by the middle of this year, Bank Negara Malaysia governor Zeti Akhtar Aziz, who was previously chairman of the institution, said on March 21.

An initiative headed by Malaysia to set up Asia’s first Islamic megabank along with organisations in the Middle East has yet to materialise. Zeti said in an interview with Bloomberg in September that indications were that a licence would be granted in 2011. “The review of the applicants is still ongoing,” Bank Negara said in a statement on Friday.

There is no consensus that the industry needs a megabank, Megat Hizaini Hassan, a partner and head of the Islamic finance practice at Kuala Lumpur-based law firm Lee Hishammuddin Allen & Gledhill, said in an e-mail on Monday.

“The megabank may not necessarily be the best or only solution to the existing problems and issues in Islamic finance,” Megat said. “Funding of large-scale projects may be done by syndication involving several Islamic banks or by sukuk sales, while liquidity problems may be resolved via more issuance of short- or medium-term papers.”

Assets in the $1tn Shariah-compliant industry are projected to almost triple to $2.8tn by 2015, according to the Kuala Lumpur-based Islamic Financial Services Board, a standards setting body.

A shortage of sukuk has driven yields on global Islamic bonds down 30 basis points, or 0.30 percentage point, in 2012 to 3.69% on Monday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. That compares with an average of 4.16% last year, 5.87% in 2010 and 9.51% in 2009.

The difference between average sukuk yields and the London interbank offered rate, or Libor, widened two basis points on Monday to 252 basis points, the HSBC/Nasdaq index shows.

Global Shariah-compliant bonds returned 3.6% in 2012, according to the HSBC/Nasdaq index, while debt in developing markets climbed 5.5%, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

Malaysia’s $444bn development programme to build railways, power plants and roads over a decade is boosting issuance in the world’s biggest sukuk market this year. Sales rose to a record 13.2bn ringgit ($4.3bn), adding to last year’s all-time high of 75.6bn ringgit, according to data compiled by Bloomberg.

Qatar plans to spend $88bn on building facilities as it prepares to host the soccer World Cup in 2022, the government announced in May last year.

“A megabank would certainly need to have a credible credit rating internationally and this in turn would create another avenue for Shariah-compliant liquidity to be effectively deployed,” Syed Abdull Aziz Jailani Syed Kechik, chief executive officer at Kuala Lumpur-based OCBC Al-Amin Bank, the Islamic unit of Singapore’s Overseas-Chinese Banking Corp, said in an e-mail on Monday. “A credible megabank would have catalytic benefits for the overall market.

(Gulf Times / 15 May 2012)

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