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Wednesday, 27 June 2012

Brunei: Investing in the future of Islamic finance

Brunei has long identified the Islamic finance as a sector that can be developed to its advantage, both to serve the banking needs of its domestic economy and as an avenue for economic development at the international level.

To achieve these objectives, however, it will need to step up investments in human resources.

Having first launched the Islamic finance option more than 20 years ago, sharia-compliant banking now accounts for around 40 per cent of the local market, a figure some experts believe will rise to 60 per cent by 2017.

Though Brunei Darussalam has made significant strides towards developing itself as a strong Islamic finance centre, experts identified a number of key areas the Sultanate needs to expand and improve upon if it is to achieve its goals.

One of the foremost requirements was for Brunei to produce more sharia experts, according to Mohamad Akram Laldin, the executive director of the Malaysia-based International Syariah Research Academy for Islamic Finance.

Speaking in Bandar Seri Begawan while attending the International Conference on Islamic Finance, held in mid- May, Akram said a major challenge for the industry was to integrate knowledge of syariah and of the market.
“We need to have more sharia graduates go into the area and understand the market,” he said.
“We need people who are able to run the business, who are capable, and can plan.

“I believe with the establishment of the Centre for Islamic Banking, Finance and Management (CIBFM), Brunei has taken a very good step.

“We have started seeing more and more people who are trained in Islamic finance coming up.This is a very good sign.”
he added. Brunei’s leading educational facilities will also seek to support the government’s policy of developing the Sultanate as a centre of Islamic fi nancial excellence.

The CIBFM, which was established by the Ministry of Finance to address key challenges in Islamic financial practice and to assist in the development of human resources for the sector, as well as other institutions, was also working to deepen the pool of qualified personnel in Brunei.

The Universiti Brunei Darussalam (UBD), along with the Sultan Sharif Ali Islamic University and other centres, offer a range of courses on various aspects of Islamic finance.

In mid-April, the UBD announced it would be reviewing its curriculum for its Islamic finance courses to ensure their content was relevant to the sector, a process that would also include seeking input from the industry itself.

According to Mohd Hairul Azrin Besar, a lecturer at the UBD’s Faculty of Business, Economics and Policy Studies (FBEPS), it was vital for educational institutions offering qualifications in Islamic finance to make sure their syllabus reflected the needs of – and the latest developments in – the industry.

“We can produce graduates but if they are not relevant to the industry, they would not be contributing much to it,” Mohd Hairul Azrin said.

“So for now we are looking at the university itself; the respective faculties will re-evaluate what the syllabus is and see how relevant it is. I think we will also be looking at what the industry players expect from the syllabus.”
Another development that should boost Islamic finance’s educational stocks was the announcement by Bank Islam Brunei Darussalam (BIBD) in mid-April that it would be sponsoring a chair of Islamic banking and finance, leadership and entrepreneurship at the FBEPS.

According to Javed Ahmad, the managing director at BIBD, the person appointed to the position would be a prominent international figure who would contribute to programme development, teaching methods and research in the areas of Islamic banking and finance, leadership and entrepreneurship.

“The chairperson will drive collaborative research on the development of Islamic financial products, as well as to provide solutions to overcome the industry’s challenges,” Javed said. “The chairperson will provide the faculty, and UBD as a whole, the platform to become a leading international academic centre in the fi eld of Islamic finance, leadership and entrepreneurship.” he said.

It will take sometime before all of Brunei’s human resource investments in Islamic finance begin to pay full dividends, though the sector is clearly already profiting from 20 years of experience and a generation of professionals that have grown up inside the industry.

(Berneo Post Online / 17 June 2012)

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Monetary Authority of Singapore (MAS) underlines key challenges for Islamic finance to continue thriving

SINGAPORE: Monetary Authority of Singapore (MAS) managing director Ravi Menon has underlined key challenges for Islamic Finance to continue thriving.

“Islamic finance has come a long way.

“As it embarks on its next phase of growth, the industry must overcome the challenges posed by slower growth and global deleveraging, and build scale and reach critical mass.

“This requires financial institutions, regulators, and international standard setting agencies to work closely together,” he said in his address at the opening of 3rd Annual World Islamic Banking Conference: Asia Summit, here yesterday.
Ravi said Islamic finance has shown remarkable resilience during the last five years – perhaps the most challenging economic environment in the post-war era.

He said the industry has grown by an estimated 20 per cent annually in the last five years to reach US$1.3 trillion in total assets in 2011.

“Islamic banks have grown both in number and in scope. But the sustained growth of Islamic finance is in no way guaranteed. For Islamic finance to continue thriving, the industry has to overcome a few key challenges.
But in every challenge, there is also opportunity,” he stressed.

Ravi pointed out the clear and present danger to all financial activity, including Islamic finance, is the risk of contagion from an escalation of the eurozone crisis.
He said Islamic finance is closely intertwined with underlying economic activity and will be affected by the impact of slower global growth.

Contagion from the eurozone has already curtailed economic growth and capital inflows to many emerging economies where Islamic finance has taken root.

“Potential spillovers from an escalation of the Eurozone crisis could lower output in the Middle East and North Africa region by about 3.25 per cent relative to baseline, the largest spillover effect for any region outside Europe.

“But Islamic finance has a window of opportunity in the current climate of deleveraging in the global financial system.
With its strict prohibition on excessive leverage, Islamic finance has been spared the worst of the financial crisis,” he said.

Ravi pointed out that Islamic banks are well positioned to reach out to new customers who are in need of financing as many global institutions pull back on their lending due to the need to repair their balance sheets.

He said Islamic finance should diversify into growth areas such as trade and infrastructure financing, where demand is still strong, especially in emerging economies.

With a focus on supporting real productive activities, Ravi said Islamic finance is naturally compatible with trade and infrastructure development.

He said tapping these sectors also brings about greater diversification benefits, especially for Islamic institutions which have been hurt by their significant lending exposure to the real estate sector.

A second factor that Islamic finance will have to contend with, the central bank chief said, is the ongoing global regulatory reforms.

He noted the scale and scope of these reforms are probably unmatched in recent history.
“Islamic financial institutions will have to devote considerable resources to meet the new international standards.
But there are certain inherent characteristics of Islamic finance that will stand it in good stead in the emerging regulatory environment.

Ravi said Islamic finance is also well placed to meet the increased “return-to-basics” investor demand.
Following the global financial crisis, investors have become more averse to the unknown risks embedded in complex financial instruments.

Islamic finance, he said with its stronger emphasis on transparency, price certainty and risk-sharing, can benefit from this renewed demand for more basic investments, from Muslim and non-Muslim investors alike.

“The third, and perhaps most important, challenge that Islamic finance must overcome is its present fragmented state.
Islamic finance currently suffers from low economies of scale.

The overall size of Islamic assets is still less than one per cent of the global financial system.
“Being smaller and relatively young, Islamic finance currently offers fewer product choices for consumers and less comprehensive risk management options for institutions.

Cross-border investment flows are also constrained by differing interpretations of permissible transactions under Shariah principles,” he said.

He said the isolated pools of Islamic liquidity in each market restrict opportunities for more efficient allocation of capital across consumers, industries, and jurisdictions.
Ravi suggested that Islamic finance must become more integrated with the global financial system.
He pointed out the industry must expand beyond its traditional markets to include a wider range of financial institutions, investors and consumers.

This means Islamic finance must strike roots in key international financial centres of the world.
He said these centres can contribute to Islamic finance in several ways, including market liquidity, capabilities in global financial markets and opportunities for interaction and collaboration.
As Islamic finance gains prominence, he said conventional financial institutions increasingly want to be involved to tap these opportunities.

He said financial centres like Singapore serve as intersecting nodes where Islamic financial institutions collaborate with their conventional partners to jointly grow the industry.

“By applying the same regulatory framework to both conventional and Islamic financial institutions, Singapore aims to encourage financial institutions here to grow their suite of products and services for the Islamic finance industry,” he added.

(Berneo Post Online / 06 June 2012)

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Shariah-compliant finance gaining ground in the West

Leading executives at global institution Standard Chartered say that Shariah-compliant banks are on track to boast around half of the region’s banking assets by 2020 - on the back of surging growth which has seen the industry expand by 30 per cent in the region in just two years, according to a report on Tuesday.

Standard Chartered told 7 Days newspaper that Islamic banking now accounts for 25 per cent of the UAE banking industry. 

Potential revenues from Islamic banking are absolutely huge, according to Khalid Elgibaly, head of consumer banking in the region at Standard Chartered. Way of winning client trust and encouraging loyalty are an important factor for investors regardless of their religion, ethnicity, and background and aim to produce a “feel good” factor for the investor. 

Ethical investor method aim to bring in potential clients closer to their own objectives and helps them translate their own political preferences into their financial practices investment portfolios.

“These characteristics if found would make Shariah-compliant finance appealing to non-Muslims as well,” Elgibaly added. 

Islamic finance applies both an ethical screen to investment and also advocates specific ethical approaches to business. Many Islamic scholars have expressed concerns about Muslims building large personal fortunes through conventional finance. Standard Chartered’s global head of private banking, Stephen Evans, believes that ethical investment has become a big driver for investment choices. 

“Making money is fine in Islam, trade is something that is absolutely fine in Islam - it’s the way you trade. “Islamic banking is much respected in worldwide investment circles. We have the Muslim world to thank for the words ‘bank’ and ‘cheque’,” Evans told 7Days on Sunday.
Islamic finance around the world is expected to climb 33 percent from its 2010 levels to $1.1 trillion by the end of 2012, following frustration with conventional finance in the wake of the global debt crisis, consultants Ernst & Young said in a report in November 2011. 

The Middle East has experienced a growth, with assets rising to a projected $990 billion by 2015 from $416 billion in 2010, as new countries open up to Islamic finance, the report indicates. 

Still, the profitability of Islamic banks, which were hit during the global financial crisis by higher tax provisions and operating expenses, may stabilize. Return on equity is at 10 percent against 23 percent in 2006, prompting Islamic banks to focus on repositioning their businesses as well as considering mergers and acquisitions, said Ernst & Young.

(Al-Arabiya News / 26 June 2012)

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