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Saturday, 30 June 2012

Oman plans Islamic finance rules before year-end

SYDNEY (Reuters) - A regulatory framework for Islamic finance is taking shape in Oman as government bodies move towards meeting the country's stated aim of making sharia-compliant products available to the public this year. But logistical challenges and the limited size of the market may prevent entrants to the business from making quick profits.

Legislation covering takaful (Islamic insurance) and sukuk (Islamic fixed income securities) is expected to be finalized by the end of the third quarter of the year, Capital Market Authority officials told Reuters.

Approval of the country's first takaful license will follow soon afterwards, as three applications have already been received by the regulator, Ahmed Al Harrafi, takaful team leader at the CMA, said by telephone.

This complements efforts by the country's central bank to introduce a law that will supervise Islamic banks; the law is in its final stages of review, said Mohammed Al Abri, senior director at the CMA.

Last year, after insisting for years that its banking industry should be purely conventional, Oman reversed its stance and said it would introduce Islamic finance, partly to prevent outflows of funds to sharia-compliant institutions elsewhere in the Gulf.

But the introduction of the regulatory framework may not produce a rapid surge of activity. Many institutions are still grappling with the need to obtain product expertise, arrange oversight by boards of Islamic scholars, train staff and build computer systems.

"There is an expectations mismatch," Azmat Rafique, head of Islamic banking at Oman Arab Bank, told Reuters. "On the ground things haven't been finalized...and banks are still gathering teams and systems."

Last week newly formed Bank Nizwa, the country's first Islamic bank, failed at a shareholders meeting to appoint its board of directors, despite an initial public offer of shares that raised 60 million rials ($156 million) last month. This could potentially delay its schedule for launching products.


Also, banking competition will be stiff. Bank Nizwa obtained its banking license last year along with Al Izz International Bank, another new Islamic institution; they will bring the total number of locally incorporated banks to nine.

Oman will thus have 19 commercial banks for a population of only about 2.8 million, with the three largest lenders initially accounting for about 60 percent of total banking assets, according to central bank data.

Competition will be increased by the fact that conventional banks will be allowed to use Islamic windows to offer sharia-compliant products through their existing branch networks. Bank Muscat, which has Oman's largest branch network of 130 offices, this week joined Bank Sohar and National Bank of Oman in saying it would deliver products this way.

Converting some existing conventional banks into Islamic banks could streamline the broad banking industry, but the central bank has not indicated whether this will be permitted, commercial bankers said. The industry may in any case not be advanced enough to handle such conversions, said Rafique.

Recent consolidation in the banking sector has been limited to a merger of HSBC's Omani business with Oman International Bank, the country's fifth largest lender, which obtained approval earlier this month.

Rafique predicted 10 percent of existing bank customers in Oman would eventually make the switch to Islamic banks, which would also attract a similar number of people who are currently outside the banking sector because of their religious belief in avoiding interest.


The takaful legislation, on the other hand, will not allow the use of Islamic windows but instead require stand-alone operations with paid-up capital of 10 million rials, Al Harrafi said.

But such capital requirements are difficult to justify in a sector eager to build scale, said Shyam Zankar, regional head at Bahrain-based Medgulf Allianz Takaful.

In addition, takaful companies will also have to be publicly floated on the country's stock exchange within five years of launch, Al Harrafi said, adding that this requirement might dampen the interest of at least one of the applicants.

Two firms have begun headhunting for senior positions in anticipation of entry into Oman's takaful market, said a Gulf-based chief executive of an insurance firm, who asked not to be named.


In the area of monitoring Islamic product standards, Oman is opting for the decentralized approach which prevails in the Gulf, rather than the centralized Malaysian model. This could facilitate early growth of the industry, by permitting a wider range of competing products, but perhaps limit broad interest in Islamic finance across the population because of the lack of a single, commonly accepted sharia board overseeing the industry.

The CMA, which became a member of the Malaysia-based Islamic Financial Services Board in March, considered creating a centralized sharia supervisory body but this option was not chosen, Al Harrafi said. An Islamic banking circular from Oman's central bank urged each bank to establish its own sharia board.

The standards of the Accounting and Auditing Organization for Islamic Financial Institutions, a Bahrain-based industry body, will be used as guidelines by the central bank, Rafique said, adding that only the accounting standards are mandatory.

(Chicago Tribune News / 26 June 2012)

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The prospect for sukuk in Indonesia

The yield premium for Indonesia’s dollar-denominated Islamic bonds over Malaysia’s dropped by the most in a year this month as falling oil prices eased the burden on the budget and made room for economic stimulus.     

The spread between Indonesia’s 8.8 percent Islamic debt due April 2014 and Malaysia’s 3.928 percent note due June 2015 narrowed 33 basis points in June to 56 basis points. The yield on the Indonesian securities fell 41 basis points, while the Malaysian rate declined five basis points. Five-year credit-default swaps on Indonesian debt dropped 40 basis points in June, the most since October, according to data provider CMA, even as the rupiah headed for a fifth monthly decline.     

The government will test investor appetite when it sells global Shariah-compliant securities following the Eid al-Fitr holiday that ends Aug. 22, Rahmat Waluyanto, the director- general at the debt management office, said June 11. A seven-year sukuk would probably yield 3.5 percent to 3.75 percent in the coming sale, down from 4 percent at the last offering in November, after two of the three major ratings companies returned the nation to investment grade, according to Mega Capital Indonesia and BNI Asset Management.     

“Investors are still very optimistic about Indonesia despite the weak rupiah,” Brustifian Domi, the head of fixed income at Lautandhana Securindo, said in an interview in Jakarta yesterday. “Our budget deficit is small so we have the capacity to roll out stimulus as needed, and growth is driven by domestic consumption, so it may be more resilient compared with its regional peers.”                      

‘Investor appetite’     

The five-year credit-default swap was at 204 yesterday from this year’s high of 254 reached on June 1, according to CMA, which compiles prices quoted by dealers in the privately negotiated market. The contracts insure debt against non-payment and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.     

“The declining credit-default swaps level indicates investor appetite to enter the Indonesian market because of strong fundamentals,” Ariawan, a fixed-income analyst at Mega Capital who like many Indonesians goes by only one name, said in a June 27 interview in Jakarta. “The new sukuk will definitely yield less” than previous ones, he said.     

Worldwide sales of bonds that comply with Islam’s ban on interest reached $21 billion this year, compared with $14 billion in the same period of 2011, according to data compiled by Bloomberg. Offerings totaled a record $36.7 billion in the whole of last year.                         

Budget deficit     

The government is confident it can maintain its budget deficit at 2.3 percent of gross domestic product, below the legal limit of 3 percent, Deputy Finance Minister Anny Ratnawati said June 19. Oil prices fell 22 percent since March 30, a day before parliament decided to refrain from reducing fuel subsidies. Standard & Poor’s, the only major ratings company that doesn’t assign Indonesia an investment-grade ranking, said it was “disappointed at the setback.”     

“The rating upgrade from S&P is one of the catalysts we are waiting for after it was unfortunately delayed,” Sonny Afriansyah, a portfolio researcher at BNI Asset Management in Jakarta, which manages Rp 6.1 trillion ($646 million) of funds, said in a June 27 interview. “When we return to investment grade at S&P, we expect to see yields decline much further.”                        

Stimulus measures     

Shariah-compliant securities worldwide returned 5 percent in 2012, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows, while debt in developing markets rose 6.9 percent, according to JPMorgan Chase & Co.’s EMBI Global Composite Index.     

Average yields on global Islamic bonds were 3.45 percent yesterday, the lowest level since August, according to the HSBC/Nasdaq index. The difference between the average yield and the London interbank offered rate, or Libor, was at 243 basis points.     

Indonesia will implement stimulus measures by tapping last year’s 24 trillion rupiah budget surplus to fund building projects and raise the tax-free annual income level to boost consumption as the debt crisis in Europe threatens to derail global growth, Bambang Brodjonegoro, head of fiscal policy at the finance ministry, said on June 13.                         

‘Growth story’     

Bank Indonesia predicts the economy will grow at the lower end of its 6.3 percent to 6.7 percent forecast range this year, supported by strong domestic consumption and investment, it said in a June 12 statement. The nation’s population of 248 million, the world’s fourth-largest according to the US census bureau, means it is less reliant on exports than many other Asian economies. Malaysia’s gross domestic product will increase by 4 percent to 5 percent in 2012, central bank Governor Zeti Akhtar Aziz said last month.     

“Malaysia’s sukuk is relatively steady as the economy has been fairly stable,” Sheikh Faiz Mohamed, the fixed-income manager at the investment division of Syarikat Takaful Malaysia Bhd., which oversees about 5 billion ringgit ($1.6 billion) of assets, said in a phone interview from Kuala Lumpur yesterday. “The growth story is more with Indonesia because it has more potential considering the bigger population and rising incomes.

(Jakarta Globe / 29 June 2012)

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Qualified Islamic bankers must for Islamic banking

KARACHI: There is need to change non-qualified personnel in Islamic banking besides staff from conventional banks into Islamic financial experts so that Islamic banking could be run by qualified Islamic bankers. Chief Executive Officer of AlHuda Centre of Islamic Banking and Economics, Muhammad Zubair Mughal said this while addressing the First International Forum of Islamic Banks and Financial Institutions, under the patronage of Prime Minister of Jordan Dr Fayez al-Tarawneh. He said Islamic banking and finance should not be only for well-off business personnel or middle class but its benefits should also be disseminated to poor through Islamic microfinance so that they could get rid of poverty and live their lives respectfully through proper employment. He said presently, Islamic banking is growing at a very rapid pace and the Central Asian countries, Kazakhstan, Afghanistan, Tajikistan, Uzbekistan, Kyrgyzstan, Azerbaijan and African countries-Nigeria, Tanzania, Kenya, Ghana, Tunisia, Senegal etc, are its new destinations. staff report

(Daily Times / 30 June 2012)

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15% sukuk growth seen

KUALA LUMPUR: The Islamic finance industry will grow 15% annually in the next decade, after syariah- compliant banking assets surged in Asia in the past year, according to a global standards-setting body.
Holdings in Malaysia rose 27% to RM344bil in the 12 months to April 30, according to the central bank. In Indonesia, they climbed 43% to 144.3 trillion rupiah (US$15.2bil), official data show.
Rising consumer demand for banking services was helping drive the market, Jaseem Ahmed, secretary general of the Kuala Lumpur-based Islamic Financial Services Board (IFSB), said in a June 21 interview.
Government spending programmes in the key Islamic centres of Asia and the Middle East were bolstering economic growth and bringing in more funds for lenders, Rafe Haneef, chief executive officer at HSBC Amanah Malaysia Bhd, said on Tuesday. Industry assets may reach US$1.1 trillion in 2012, compared with US$826bil in 2010, according to a report from Ernst & Young LLP.
“Islamic banking assets worldwide have been growing at an average rate of 15% to 25% annually,” Rafe at the syariah-compliant unit of HSBC Bank Plc, said in an interview. “More and more countries, such as Egypt, are shifting to Islamic banking.”
Syariah banking in Indonesia accounted for 3.8% of the total in April, while the ratio was 24% in Malaysia, data from the monetary authorities show. Saudi Arabia’s US$94bil of financial assets that comply with religious tenets represent 26% of the market in the six-member Gulf Cooperation Council, according to a June 21 report from Deloitte Middle East Islamic Finance Centre in Manama, Bahrain.
Lenders’ assets have the potential to grow further as more countries adopt Islamic financing and sell sukuk, according to law firm Lee Hishammuddin Allen & Gledhill.
Oman and Hong Kong are in the process of drafting legislation, while Turkey, Afghanistan and South Africa are planning sukuk sales. Egypt was looking to introduce Islamic banking in a “big way,” HSBC’s Rafe said.
Issuance of bonds that comply with Islam’s ban on interest climbed to US$20.8bil in 2012 from US$14bil in the same period in 2011, led by the Middle East, according to data compiled by Bloomberg. HSBC Bank predicts full-year offerings will surpass 2011’s record of US$36.7bil.
“The outlook is positive for Islamic finance, with growth being primarily focused on consumer demand,” Megat Hizaini Hassan, a partner and head of the syariah-compliant finance practice at Hishammuddin Allen, said in an e-mail on Monday. “The emergence of new markets would be the main driver.”
The IFSB predicted in 2007 that the global Islamic finance industry would reach US$2.8 trillion by 2015. Jaseem declined to give a new forecast. “The industry is strong and growing and it’s expanding geographically,” he said.
Syariah-compliant notes have returned 5% this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while debt in developing markets gained 6.9%, JPMorgan Chase & Co’s EMBI Global Composite Index shows.
Average yields on global Islamic bonds dropped three basis points to 3.46% on Wednesday, the lowest level since August, according to HSBC. They declined 16 basis points, or 0.16 percentage point, this quarter.
The difference between the average and the London interbank offered rate narrowed three basis points to 242, the least since April 20, the HSBC index shows. The gap shrunk six basis points since March 30.
The International Monetary Fund predicts economic growth in Asia and the Middle East will outpace the United States this year as governments boost spending to shore up their economies from the euro-area debt crisis. – Bloomberg
Asset Projections
Gross domestic product in the Middle East and North Africa will increase 4.2 percent in 2012, compared with 2.1 percent in the U.S. and a contraction of 0.3 percent in Europe, the Washington-based fund forecast in its latest outlook report issued in April. Asia’s developing countries will see growth of 7.3 percent, it said.
Malaysia, the biggest market for sukuk, has implemented a 10-year $444 billion development program to build power plants, roads and railways. Indonesia, home to the world’s largest Muslim population, plans to tap last year’s $2.5 billion budget surplus to fund construction projects.
Malaysia is targeting Islamic banking assets to reach 40 percent of the total by 2020. In Indonesia, they will account for 15 percent to 20 percent within 10 years if growth is sustained, Halim Alamsyah, deputy governor of Bank Indonesia, said in a speech on May 7 in Bandung in western Java.
“Islamic finance has developed not only in traditional Muslim markets like Malaysia and the Middle East, but also in conventional markets,” Zainal Izlan Zainal Abidin, executive director for Islamic capital markets at the Securities Commission, said in an e-mailed statement yesterday. There are “a growing number of jurisdictions across the globe at various stages of developing their capabilities in Islamic finance,” the note said.
--With assistance from Yudith Ho in Jakarta. Editors: Simon Harvey, Sandy Hendry
To contact the reporter on this story: Liau Y-Sing in Kuala Lumpur at

(The Star Online / 29 June 2012)

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Malaysia: Overseas expansion key in future Islamic capital market

KUALA LUMPUR: The next phase of growth of the Islamic capital market would be characterised by greater internationalisation, which would see more product as well as service providers expanding beyond their home market
The Securities Commission’s executive director of Islamic capital market Zainal Izlan Zainal Abidin said more investors would seek products or instruments with international exposure.
Speaking at the 7th Islamic Markets Programme yesterday, he said there would also be greater diversity in terms of currencies used in issuingsyariah-compliant instruments.
Izlan said the Islamic finance industry was at a crucial stage where it needed to redefine and establish the enabling environment that would spur its next phase of growth. Islamic finance, he said, had developed into an industry with global appeal, marked by a 15% average annual growth rate over the past decade, to reach US$1.3 trillion today.
As for Malaysia’s Islamic capital market, the Capital Market Masterplan 2 is expected to grow at an average rate of 10.6% annually, over the 10-year period to 2020.
Izlan said Islamic finance had developed not only in traditional Muslim markets like Malaysia and the Middle East, but also in conventional markets and financial centres such as the United Kingdom, with a growing number of jurisdictions across the globe at various stages of developing their capabilities in Islamic finance.
Themed “Building the Environment for the Growth of Islamic Finance,” the IMP attracted 41 local and international participants including Islamic finance practitioners, members of academia and regulators.

(The Star Online / 28 June 2012)

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