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Wednesday, 20 June 2012

Malaysia revises Islamic equity standards

(Reuters) - Malaysia's securities commission is revising its guidelines for equities which qualify for Islamic investment, in a move that could increase the appeal of the country's sharia-compliant funds industry to Gulf investors.

Under the previous standards, investment was banned or restricted in companies that were involved in industries deemed to be unethical, such as gambling, alcohol and tobacco.

These restrictions are now being made more stringent, so that a lower level of exposure to those industries is unacceptable for Islamic investment, according to a statement by the securities commission on Monday.

The revised guidelines also include two new financial standards which filter out excessively cash-rich and debt-ridden companies, in order to limit exposure to interest payments and pure monetary speculation, which are unacceptable in Islam.

Enhancing the "robustness" and "competitiveness" of Malaysia's fund management industry at the domestic and international levels was a motive behind the revisions, the commission said in a statement.

The new guidelines will come into effect in November, and Islamic fund managers will then have six months to comply with them.

The attractiveness of Malaysia's sharia-compliant funds to investors from the Gulf has been limited by the fact that Malaysian standards have been less strict than those advocated by many Islamic scholars in centres such as Bahrain and Saudi Arabia. The new Malaysian guidelines should help solve this problem, fund managers said.

"This is a step in the right direction," Monem Salam, president of investment firm Saturna Sdn Bhd in Malaysia, told Reuters, adding that the move would help harmonise industry practices across the globe.

Malaysia's methodology is still less strict than the Gulf's, but the inclusion of too many standards could hurt equity portfolios, so the regulator opted for a moderate approach, he said.

In practice, Islamic fund managers have additional standards of their own on top of the ones dictated by the securities commission, which will cushion the impact of the revision.

Salam said it was now up to regulators in the Gulf to respond to Malaysia's initiative in a way that would encourage cross-border investment. "The GCC (Gulf Cooperation Council) countries should take note and meet them half-way."

As of April 30 there were 165 Islamic mutual funds with assets of 29.9 billion ringgit ($9.5 billion) in Malaysia, out of a total of 595 mutual funds of all descriptions, according to securities commission data.

(Reuters / 19 June 2012)

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Legislators’ direct involvement in Islamic finance industry urged

LONDON — Legislators in various jurisdictions should be more directly involved in the global Islamic finance industry because without them not much can progress in terms of the drafting and adoption of enabling laws and guidelines, said Sir Chukwudi Jones V. Onyereri, Chairman of the Committee on Banking and Currency of the House of Representatives (Parliament) in Nigeria. "Yes we are one of the biggest stakeholders but I think the problem is that there is too much concentration on engaging largely with central banks and regulatory authorities. If we as legislators do not understand or engage with any financial market segment, not much legislation will be drafted or adopted," he said.

In an exclusive interview, Sir Chukwudi stressed that for an emerging economy it is important to have a developing banking sector that eventually offers a full spectrum of products and services. Non-interest finance, albeit a niche market, is growing at a phenomenal rate globally and Africa seems to be no exception. 

Sir Chukwudi supports the opening of the Nigerian financial market to new licenses whether conventional or non-interest. "There are no limits to the number of licenses. The basic thing is that if any promoter meets the requirements as recommended by the regulators, of which the Central Bank of Nigeria is the key, then they won’t have any reason not to give your license. That’s the way to go as a developing economy. We need anyone who is fit and proper and has the adequate resources and requisite business plan, to come to Nigeria to help us develop," he explained. 

He is adamant that he and his colleagues on the Banking and Currency Committee are "coming to terms" with the non-interest banking phenomenon. This follows an "initial misconception to do with the nomenclature".

In fact, the initial law and guidelines referred to Islamic Banking, which was subsequently changed to Non-interest Banking, following so-called concerns from a few Church groups. 

"When it was introduced, I think there was the erroneous notion that it was purely an Islamic setting. The banking law doesn’t allow any bank to be classified under any religious name. So I think that was the initial mistake. It came to the public as Islamic banking, which offended some sensibilities. As such, the CBN quickly changed it to its original concept, which is Non-interest Banking," he maintained. 

Sir Chukwudi, a Christian, may have an important point. Nigeria, despite the misplaced political sensitivities relating to non-interest finance (the Nigerian euphemism for Islamic finance), has in recent months upped its profile in this matter. Non-interest banking under the new laws and guidelines is open to anyone irrespective of race, religion and ethnicity.

Earlier this year, Jaiz Bank Plc, Nigeria’s sole non-interest- bank, started operations at its head office in the Nigerian capital, Abuja. The bank, which is licensed under the Banks and Other Financial Institutions Act (BOFIA), also has two operating branches in the northern cities of Kaduna and Kano. 

The bank is the successor to Jaiz International plc which was incorporated in 2003 as a public limited liability company with an authorized share capital of N2.5 billion. 

Last year, following the introduction of the country’s non-interest banking regulatory and legal framework, the Central Bank of Nigeria (CBN) issued a full-fledged commercial banking license to the company, which has subsequently launched Jaiz bank plc, in which the Jeddah-based Islamic Development Bank (IDB) has a $6.5 million equity stake.

According to Managing Director and Chief Executive Officer of Jaiz Bank, Alhaji Mustapha Bintube, the bank started operations with two products — corporate accounts and current accounts — and plans to introduce a series of products including savings accounts; ATM and card services; a children’s savings account and trade finance services.

According to Nigerian bankers, two more interest-free banking licences are on the cards, including one to promoters from the Gulf Cooperation Council (GCC) countries.

Similarly, Nigeria has substantially increased its equity subscription to the IDB which in fact gives Abuja a permanent seat on the IDB’s Board of Governors together with Saudi Arabia.

The CBN has also since then given a license to Stanbic IBTC, the Nigerian subsidiary of South Africa’s Standard Bank, to open a dedicated Non-interest Banking Window. 

In fact, according to Sir Chukwudi, it was the Banking and Currency Committee that proposed the above change in nomenclature. 

However, he maintains that the non-interest banking regulatory and legal framework in Nigeria remains incomplete and every effort must be made to introduce legislation to close the above gaps. Nigeria. For instance, is finalizing the legal and regulatory guidelines relating to the issuance of Sukuk, and has engaged two top international consultancy firms to help in this respect. 

Once these guidelines are in place, it would be up the federal government and the ministry of Finance to decide whether the Treasury should raise funds from the international markets. Albeit subject to the right market conditions and pricing. 

Similarly, as part of its ethical compliance, non-interest banking (at least of the Islamic variant) does require such transactions to be screened for adherence to Shariah principles, normally done by Shariah Supervisory or Advisory Boards. 

Sir Chukwudi acknowledges the need for Supervisory Boards, although in the Nigerian context such boards would be called Ethical or Legal Supervisory Boards, which he stresses should be regulated and governed by requisite legislation, as in Malaysia. 

However, any emulation of Malaysia’s dual banking model, where a conventional system operates side-by-side a non-interest one, is far too premature. 

But how well entrenched is support for non-interest finance among the Banking and Currency Committee members? "As you are aware in the National Assembly," he added, "we have members from different faiths. In my committee we have Muslims and non-Muslims members. So for the Muslims, you would expect that they would back non-interest banking a hundred percent. The non-Muslims members don’t really have anything against non-interest banking, because they see it as an alternative form of banking. There may be two or three of them who have yet to get a full grasp of what non-interest banking is all about. With more information for their education, I think they will have a better understanding." 

He expects non-interest finance to help contribute to the development of the Middle Class in Nigeria and to finance small-and-medium-sized enterprises (SMEs) and to promote microfinance. 

Sir Chukwudi agrees that sukuk could be an important finance raising tool for Nigeria — both the government and corporates — especially if they are linked to financing real economy projects and infrastructure, and thus contributing to poverty alleviation and economic growth. "With a developing economy with a high level of poverty and all that, proven alternative forms of financing is worth looking at, given the turmoil in the global financial crisis which has impacted so badly on developing countries. So, people wish to explore these alternatives such as non-interest financing, then they will move in that way. It is our job to ensure that the requisite regulatory and legal framework is in place to protect all stakeholders," he concluded. 

The Nigerian government’s own estimate of the current infrastructure funding deficit is 32 trillion naira in sectors such as transportation, power, water supply, education, housing and health. Both sovereign Nigeria and corporate issuers can go to the market to raise financing based on asset-based or asset-backed sukuk structures. But to do this and to attract investors from abroad, the Ministry of Finance, according to market players, needs to introduce more enabling legislation to facilitate the introduction of sukuk including trust laws, SPV (special purpose vehicles) laws; and tax neutrality measures for sukuk issuance especially those involving real estate assets.

Nigeria has a potential market of over 150 million people, of which half are Muslim. A survey conducted by Enhancing Financial Innovation and Access (EFInA), a financial sector development organization funded by the United Kingdom’s Department for International Development (DFID) and The Bill and Melinda Gates Foundation, suggested that just under 30 percent of the total adult population of Nigeria would use non-interest banking products when they are introduced in the country. This translates into an immediate market of about 23 to 30 million people.

(Saudi Gazette.Com.Sa / 19 June 2012)

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Malaysian syariah mortgages surge

Islamic mortgages in Malaysia are growing at three times the pace of non-syariah-compliant home loans, boosted by tax incentives and flexible payments.

Residential loans that comply with the tenets of Islam increased by an average 37 per cent in the past five years, compared with 11 per cent for non-Islamic financing, central bank data show. Syariah-compliant lending for housing purchases reached an all-time high of RM40.6 billion (US$12.9 billion) in April, or 15 per cent of the RM270 billion market.

Malaysia’s government is providing a 20 per cent discount on stamp duty for Islamic mortgages, seeking to expand syariah banking assets to 40 per cent of the total by 2020 from 22 per cent, or RM435 billion last year. Lenders are also offering more flexibility on the loans so that monthly payments rise and fall to reflect changes in the benchmark interest rate, which is currently at 3 per cent after being reduced to a record low of 2 per cent in 2009.

“Demand is healthy and should continue to gain traction,” Badlisyah Abdul Ghani, chief executive officer at Kuala Lumpur- based CIMB Islamic Bank Bhd, the country’s second-largest lender, said in a June 11 interview. “Given the incentives and government aspirations, syariah home loans can easily account for 30 per cent of total lending for properties by 2020.”

Malaysia, which pioneered Islamic finance 30 years ago, is promoting syariah-compliant mortgages as it seeks to enhance its position as a global hub for the industry. The tax breaks are attracting non-Muslim investors looking to buy homes in the nation where 60 per cent of the 29 million people practice the religion, Badlisyah said.

Under syariah law, which includes the concept of risk- sharing, home buyers have a number of financing options such as Ijarah, where the bank buys property and leases it back. In a Bai Bithaman Ajil contract, the lender purchases the dwelling and sells it to the customer at a mark-up, with repayments made via installments.

The government started its “My First Home Scheme” in October 2010 to spur property market growth. It raised the borrowing limit on house purchases for workers earning less than RM3,000 a month in 2011 to RM400,000, from as low as RM100,000. No down payment is required. First-time buyers are also allowed to use money from their state pension funds.

The average house price across the country rose at a compounded rate of 3.5 per cent last decade and reached RM223,270 at the end of 2010, outpacing inflation of 2.2 per cent over the period, according to Terence Wong, the head of research at Kuala Lumpur-based CIMB Investment Bank Bhd. Relative to the “mean” household income, the cost is the lowest in Asia at 4.6 times, he said.

“The house-to-earnings ratio is lower than Thailand and Indonesia,” Wong said in a June 14 interview. “Even 7.4 times in Kuala Lumpur is below the region’s average of 11.4, making the capital downright cheap.”

Islamic mortgages, which forbid interest payments, offer more flexibility in terms of a default than non-Islamic housing loans, according to OCBC Al-Amin Bank Bhd, the Kuala Lumpur- based syariah-compliant unit of Oversea-Chinese Banking Corp in Singapore.

“The penalty charged on the default amount is much lower compared with conventional housing loans because Shariah boards don’t want Islamic banks to burden customers,” Syed Abdull Aziz Jailani Syed Kechik, CEO at OCBC Al-Amin, said in a June 8 interview. “Syariah boards allow banks to charge customers for the cost incurred in managing the default but you can’t make a profit out of it.”

Islamic banking assets in the Southeast Asian nation rose at an annual rate of 21 per cent in the past five years, while syariah-compliant home loans have increased every month since December 2006, according to data from the central bank.

There’s still room for further growth, according to the Kuala Lumpur-based unit of HSBC Holdings Plc, the top arranger for global sales of Islamic bonds, or sukuk, this year.

Sukuk issuance almost doubled to US$19.5 billion in 2012 from US$10.6 billion in the same period last year, according to data compiled by Bloomberg. The Bloomberg-AIBIM-Bursa Malaysia Sovereign Shariah Index, which tracks the most-traded ringgit- denominated notes, increased 0.1 per cent last week to a record 108.241, taking gains this year to 2.4 per cent.

Average yields on sukuk sold globally declined seven basis points, or 0.07 percentage point, last week to 3.62 per cent, the least since April 30, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The difference between average yields and the London interbank offered rate, or Libor, narrowed three basis points to 260 basis points, the HSBC index shows.

The yield on Malaysia’s 3.928 per cent Islamic bonds maturing in 2015 declined two basis points to 1.93 per cent yesterday, according to data compiled by Bloomberg. The difference in yields between Dubai’s 6.396 per cent November 2014 securities and Malaysia’s debt narrowed seven basis points to 173 basis points, a record low. Islamic bonds sold to international investors returned 4.2 per cent in 2012, according to the HSBC/Nasdaq index, while debt in developing markets climbed 6.9 per cent, JPMorgan Chase & Co.’s EMBI Global Composite Index shows.

“People are more receptive to Islamic finance in the Southeast Asian nation,” Rafe Haneef, CEO at HSBC Amanah Malaysia Bhd. in Kuala Lumpur, said in an interview on June 13. “Islamic mortgages aren’t limited to Muslims.”

Malaysia has 24 commercial banks and 17 financial institutions providing home loans that comply with religious tenets, according to the central bank’s website. The government waives stamp duty on syariah-compliant mortgages for people looking to refinance their non-Islamic borrowings, CIMB’s Badlisyah said.

Home buyers prefer Islamic financing packages because they are “attractive and transparent,” Muzaffar Hisham, CEO of Maybank Islamic Bank Bhd, a unit of Malayan Banking Bhd, the country’s biggest lender, said in an e-mail on June 16.

“The government’s incentive schemes such as tax and stamp duty remissions, as well as the growing awareness of Islamic products, are driving growth in Islamic mortgages,” Kuala Lumpur-based Muzaffar said.

(Business Times / 19 June 2012)

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Malaysia: SC syariah council plans revised screening method

PETALING JAYA: The Syariah Advisory Council (SAC) of the Securities Commission (SC) has proposed a revised screening methodology to determine the syariah-compliant status of listed companies.
The proposed revised methodology would incorporate a two-tier quantitative approach, which applies the business activity benchmarks and the newly-introduced financial ratio benchmarks.
“The outcome of the revised methodology will be reflected in the List of Syariah-compliant Securities by the SC’s SAC effective from November 2013,” the capital market regulator said in a statement.
“In addition to the above two-tier quantitative assessment, the existing qualitative assessment will continue to be applicable while the release of the list of syariah-compliant securities will remain twice a year,” it added.
SC executive director for Islamic Capital Market Zainal Izlan Zainal Abidin said the revision to the screening methodology would further facilitate the orderly development of the Islamic equity market and fund management industry at both domestic and international levels.
This, he said, was in line with the growth strategies outlined under the Capital Market Masterplan 2.
Consisting of prominent syariah scholars, jurists and market practitioners, the SC’s SAC is responsible for ascertaining and issuing rulings on the application of syariah principles on matters pertaining to the Islamic capital market.
(The Star Online / 19 June 2012)

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