Islamic finance's fortune turns in Egypt

CAIRO // When Ahmed El Naggar opened the world's first Islamic bank in Egypt in 1963, the country looked as if it could harness that legacy to grow into one of the biggest Islamic finance hubs in the world.

But years of suspicion that the Muslim Brotherhood, illegal at that time, would use Islamic finance as a way to gain prominence in the country has left Egypt trailing behind its Arabian Gulf neighbours mainly because no tight regulation or laws have been implemented.

As Egypt's first Islamist president Mohammed Morsi takes the helm, the country's Islamic finance fortunes are beginning to look up.

The Muslim Brotherhood wants to boost the market share of Islamic banks to 35 per cent in five years from 5 per cent now. It also wants to add an Islamic banking section to the country's banking law, which currently has no specific regulations covering the sector. Analysts say the draft amendments, although delayed by the dissolution of parliament, signal an opportunity to quicken the pace of Islamic finance development in Egypt.

"The Arab Spring opened the door to Egypt's re-entry into Islamic finance in the coming six months and the pace is going to be quicker with Islamists in power," said Shahinaz Rashad, the executive director of Metropolitan, a financial consultancy firm that has also worked on carrying out Sharia-compliant transactions.

She said Islamic finance could be one alternative to hugely unpopular taxes and cuts in government spending to reduce budget and balance of payments deficits inflated by a year of political and economic turmoil.

In February, the Egyptian government said it was preparing to raise US$2 billion (Dh7.34bn) through its first issue of Islamic bonds to help to plug the deficit gap, which is equivalent to 8.8 per cent of GDP. Soon after, the country's regulator said it was finalising regulations that would allow local companies to issue Islamic bonds, a much-awaited move expected to boost market liquidity.

The Egyptian government also signed an agreement this month with the Islamic Development Bank, based in Saudi Arabia, that will provide $1bn to finance energy and food imports.

The finance, which is part of a previously announced agreement to provide Egypt with $2.5bn, signals that Egypt must operate some of its financing in a Sharia-compliant manner, said Ms Rashad.

Egypt's economy was badly damaged after a drawn-out uprising that began early last year. International reserves had fallen to $15.53bn by the end of last month from $36bn in January last year and the balance of payments deficit has doubled to $11.2bn in the nine months to March this year from $5.5bn a year earlier.

Islamic banking may not offer a "fix-all" for Egypt's economy, analysts say, but it would encourage a fairer playing field.

Egypt now has 14 Islamic banking licences but only three fully fledged Islamic banks, including Faisal Islamic Bank of Egypt, Al Baraka Banking Group, headquartered in Bahrain, and Abu Dhabi Islamic Bank of Egypt. Despite several more lenders with Islamic finance windows, the approximately 120bn Egyptian pounds (Dh71.66bn) of assets in Egypt's Islamic banking industry are dwarfed by Egypt's conventional banks.

Total assets of the entire banking sector are about 1.3 trillion pounds, according to Egypt central bank data.

Bankers say the country has to work more to convince international investors that Egypt's sukuk is worth buying.

"There is no accepted benchmark for the sukuk business in Egypt …so for a company in Egypt to issue a sukuk instrument and be in a position to have an investment grade instrument is pointless because nobody would buy it," said Douglas Johnson, an investment banker based in New York and the chief executive of Codexa, a specialised investment bank that creates Sharia-compliant financial structures.

He said better regulation and a stronger capital market law was needed before Egypt could begin to attract the billions of dollars of sukuk investment Saudi Arabia, Malaysia and other Islamic finance hubs were getting.

"The next government in Egypt is going to have to prioritise getting the economy back to shape before restructuring and, to be brutally frank, Islamic finance probably has to stand in line," said Mr Johnson.

(The National / 25 July 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Trainer/CEO: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic Finance - An alternative banking model?

Whether you're bored of bank bashing or not, there's no denying that people are searching for more trustworthy, transparent places to place their cash. And with the Islamic Bank of Britain (IBB) launching a table-topping 4% expected profit rate for its two-year fixed account, will faith-based bank accounts prove a popular alternative?

Contrary to what you may think, the account is open for anyone to apply. And as an Islamic bank, IBB does not pay interest. The rate is offered as an 'expected profit rate', because the Bank invests the funds into Sharia compliant and ethical trading activities. These activities deliver a profit over the 24 month term.

But you can trust in this, as IBB said it has never failed to deliver the expected rate.

How do Islamic bank accounts work?

Islamic banking products forbid the payment or receipt of interest and refuse to invest in "unethical" industries such as the gambling, pornography or the tobacco trades. They have become increasingly popular across a wide range of religious groups and general consumers.

Islamic finance turns traditional financial institutions on their head. It has to be Sharia, or Islamic law, compliant. Sharia is taken from the Koran, one of whose central tenets - that money has no intrinsic value - might sound alien to the denizens of the City.

The principles of Islamic banking are more than 1,400 years old, but the practice is relatively new. It was launched in Egypt in 1963.

"As the credit crunch has mutated inexorably into a recession, with bankers having eclipsed politicians, lawyers and even journalists as public enemy number one, the growing number of Islamic finance institutions in Britain might just be sitting pretty," reports the Times.

The UK now has a handful of fully Sharia compliant banks and dozens of other financial institutions have set up special branches or firms. They include the Qatar Islamic Bank(QIB), and the Islamic Bank of Britain, which has headquarters in Birmingham.

So are the basic principles what banking needs?

Could Sharia principles set us on the path to building real and sustainable economies?

Central to Islamic finance is the fact that money itself has no intrinsic value, it is simply a medium of exchange. Each unit is 100% equal in value to another unit of the same denomination and you are not allowed to make a profit by exchanging cash with another person.

But it does not abolish inherent business risk, and it can finance an asset bubble as well as any Western bank. Reflecting in part the world it comes from, it can be conservative and far from enthusiastic about innovation in either technology or finance.  And - this may be positive or negative - Islamic banking would have been unable or unwilling to finance growth through debt.

However, authors Andrew Sheng, ex-chairman of the Hong Kong Securities & Futures Commission and Ajit Singh, emeritus professor of economics at Cambridge University, said there is growing convergence between Islamic and western finance. It has an important role to play in reframing western finance in an ethical framework.

 "...Islamic finance could prove to be a serious alternative to current models of derivative finance."

"The test of any alternative financial system depends ultimately on whether it is - or can be -

more efficient, ethical, stable, and adaptable than the prevailing system.

"For now, there is no Islamic global reserve currency and no lender of last resort. But the Islamic world is the custodian of huge natural resources that back its trading and financial activities."

There should be a return to "back to basics" banking across the board, rather than merely among Islamic banks.

Some mainstream banks such as Lloyds and HSBC offer Islamic products. HSBC, for example, has Islamic mortgages that are in demand even from non-Muslims.

Some of the tenets of Islamic banking will appeal to anyone who agrees with the underlying principles of equitable distribution for everyone. And they are deemed efficient and productive by many.  

The International Herald Tribune adds: "Islamic banking and financial institutions provide a good example of Sharia sensitive business. There are a number of studies comparing efficiency and productivity of Islamic banks with their conventional interest-based counterparts, on the global, regional and national levels. The results of such studies are at best inconclusive, suggesting that Islamic banks are on average at least as productive, profitable and efficient as conventional banks in the jurisdictions wherein they co-exist with conventional banks."

(Mindfull Money / 25 July 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Trainer/CEO: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic Banks and Renewable Energy In MENA

As reported in an article titled “Tapping the Renewable Energy Market,” some Islamic banks are looking to support renewable energy including hydropower, solar and wind energy. Finance is a crucially important component of building a green infrastructure and this is even more true in the context of economic difficulty. Islamic lending institutions that create financial mechanisms will benefit the growth of renewable energy. In the Middle East and North Africa (MENA) solar power projects are driving major new investment. With projects like Abu Dhabi’s Masdar City and the German-led Desertec Industrial Initiative (DII) it is expected that the region will be able to export energy throughout the region and into Europe. The Shams Power Co. alone is partnering in a $600 million investment to build one of the world’s largest concentrated solar power (CSP) projects.

Sustainable water projects are also garnering interest from Islamic banks. One bank in particular diverted part of its real estate holdings into trade finance which led to the first Shari’ah-compliant water-focused investment strategy.

Through the UK-based Islamic investment bank Gatehouse Bank Plc people can now invest in sustainable-oriented companies that offer technology, products and services throughout the water industry. Ocean water desalination is another area which offers tremendous potential for growth. Saudi Arabia is planning to convert all of its seawater desalination plants to renewable energy by 2019. This could attract more than half a trillion dollars in private sector investment over the next five years. 

Recently, Islamic banking saw the release of a green sukuk for the financing of climate change investments and renewable energy projects. The Climate Bonds Initiative, the Clean Energy Business Council of MENA, and the Gulf Bond and Sukuk Association launched the Green Sukuk Working Group to help market and develop the best practices to promote the issuance of green Sukuk.

Bahrain-based Arcapita Bank, one of the first Islamic financiers to venture into the green market, it created a joint venture (JV) with Englefield Capital and RWE npower (formerly RWE Innogy) in 2004. In 2007 Arcapita divested its one-third share of JV Zephry Wind Power LLC saying that it had been one of the firm’s most profitable investments.

Islamic banking focused on cleantech like renewable energy could significantly contribute to regional sustainability and help to generate significant returns for investors.

(Block And News Agency / 24 July 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Trainer/CEO: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com