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Sunday, 5 August 2012

Malaysia: Islamic finance pensions

Moves to liberalise Malaysia’s pension market is expected to galvanise the Islamic finance market, already a key segment of the country’s economy, though greater regulatory oversight will be needed to bolster investor confi dence in the sector.

On July 23, the international press reported that Malaysia was introducing ‘sweeping reforms’ to its pension system.

The changes introduced a new, voluntary Private Retirement Scheme (PRS) to run alongside the existing Employees Provident Fund (EPF).

The PRS would allow Malaysians to purchase a wide variety of products from private fund management firms, making it easier for them to focus on Islamic investment.

Currently, the EPF collected pension contributions and invested the cash; contributors could place up to 20 per cent in a single mutual fund.

By facilitating investments in private products by individuals, the reforms were expected to kick-start the growth of Malaysia’s small private pensions sector, which the government now expects to be worth RM73 billion (US$22.92 billion) by 2020.

Though some think the prediction is rather optimistic, most agree that there is a lot of potential for growth given the regulatory changes, growing disposable incomes and a rising culture of saving for the future.

Officials – and the structure of the new regulations – made it clear that increasing investment in Islamic products was one of the aims of the changes.

“The PRS will contribute to the growth of Islamic fund products,” Zakie Ahmad Shariff, a board member of the Private Pension Administrator (newly founded to oversee the PRS funds) and chief executive officer (CEO) of the Federation of Investment Managers Malaysia, told international press.

Analysts agreed that those investing in the new system would gain from sharia-compliant offerings in particular.

Of the first 30 products offered through the PRS, only six would be Islamic, with the expectation that there would be more to come.

The eight existing PRS providers – all of which had syariah- compliant arms – could offer between three and seven conventional products through the system, but could provide up to 10 products if they offered Islamic schemes as well.

As the domestic market grows in new segments, Malaysia continues to cement its position as one of the world’s leading sharia-compliant sectors.

It is particularly strong in sukuk (Islamic bonds), which accounted for 68.7 per cent of the US$84.4 billion issued globally last year and 71 per cent of the US$43.5 billion launched in the fi rst quarter of 2012 (a 55 per cent increase on 2011’s fi rst quarter).

In July, Axiata, Malaysia’s leading mobile telephone operator, announced it was looking to raise up to US$1.5 billion in sukuk issues to tap low-cost long-term funds and increase its capital efficiency.

It would be the fi rst Asian telecoms fi rm to issue multiple currency sukuk, according to the company.

The launch was ‘strategic’ and targeted at investors in the region, as well as the Middle East and Europe, and offi cials said the move would help strengthen Malaysia’s position as a global sukuk leader.

The private sector and government bodies were likely to provide further issuances in the near future as Malaysia rolled out its ambitious Economic Transformation Programme, which envisaged large investments in infrastructure and services and aimed to develop the economy to boost value added and strengthen value chains.

While Malaysia’s Islamic finance sector continued to be a world leader, the industry’s rise to global prominence was relatively new.

As elsewhere in the world, growth had brought on regulatory challenges, and some parts of the industry lagged behind others.

“Syariah-compliant trustee management needs to move forward,” Abdul Jalil Rasheed, the CEO of Aberdeen Asset Management, which moved into Islamic finance in Malaysia in 2009 and counted the EPF as its biggest customer.

He told OBG, “Asset management is still a very locally driven business in Malaysia.
“There are currently 16 licences in the market for Islamic asset management, not all of which are doing well.”

Rasheed suggested that ‘innovation needs to slow’ so that Islamic finance could put down deeper regulatory roots and to prevent firms from over-extending themselves, adding that the market might still not be mature enough for sharia-compliant hedge funds to flourish.

As Deputy Finance Minister Datuk Awang Adek Hussin noted last year, greater cooperation among Islamic finance experts, religious scholars, government bodies and the private sector was needed to support and consolidate the industry.

“Although Malaysia’s Islamic financial performance has shown encouraging development, we should not be complacent with our achievements thus far,” he said.

(Borneo Post Online / 05 August 2012)
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Oman: Islamic banking could grab 5-10% of total sector activity in first two years

Ahlibank reported a 36 per cent growth in net profit for the first half of this year. Recently the bank completed a rights issue to raise RO25mn for its venture into Islamic banking and boosting its Tier 1 capital.
In an interview to Muscat Daily, chief executive AbdulAziz al Balushi speaks about the bank's financial performance, the outlook for Islamic banking and the bank’s market position in the sultanate.
Ahlibank recently completed a rights issue of RO25mn. How are you going to use the proceeds from the issue? How much will the bank’s capital be after the issue?
The bank's current capital is RO95mn, which will rise to RO120mn after the successful completion of the rights issue. The RO25mn in proceeds will be part of our Tier I capital.
We floated the rights issue to comply with Central Bank of Oman (CBO) regulations in terms of minimum capital requirement, which is now RO100mn.
Out of the RO25mn from the rights issue, as much as RO20mn would be assigned to the Islamic banking window, subject to necessary approvals. So the capital for conventional banking would finally be RO100mn, with RO20mn going to Islamic banking.
The minimum capital requirement for an Islamic banking window is RO10mn, but we believe that is not enough to support the business. But I think RO20mn is reasonable enough in the beginning. We intend, and we are determined, to become a leading player in Islamic banking.
Earlier this year, Ahlibank acquired Middle East Brokerage Company (MEBC). What type of investment banking services are you offering and are there plans to introduce new products?
We started investment banking operations from the day we acquired the licence of MEBC without any interruption. At present we are offering only brokerage services which include buying and selling of listed securities on the Muscat Securities Market (MSM).
Our strategy is to allow clients to trade online not only in the Oman market but also in other GCC markets. This will be introduced in the near future.
You are planning to launch between four-ten Islamic banking branches over a year. What are your expectations from Islamic banking in the first year of operations?
I think that during the initial two-three months, Islamic banking windows will be involved in handling a lot of enquiries on Sharia-compliant products. We expect many of our existing clients to migrate from conventional banking to Islamic banking, before we land new clients.
Oman is going to be more conservative in terms of Islamic banking and when you are conservative you cannot offer all the products. I do not expect huge growth in this area. 
In my view, simple consumer lending will not be a part of Islamic banking as the regulatory limit on consumer loans has already been reached. Mortgage loans and other asset-based activity will be a main part of Islamic banking in Oman.
I expect Islamic banking to account for five-ten per cent of total banking activity in the first two years.
Do you anticipate a slowdown in conventional banking activity due to the launch of Sharia banking?
As I said, there is not much scope for growth on the lending side of consumer banking due to CBO regulations. We will not see any significant growth in consumer loans, even in conventional banking, and the situation is going to be similar for Islamic banking.
Even new Islamic banks will find it difficult to get consumer lending business unless they innovate.
On the other hand, there will be tough competition in the mortgage loan business. As all conventional banks are planning Islamic windows, a lot of customers are likely to switch from conventional to Islamic banking for mortgage loans.
There is going to be a lot of competition for deposits as well. Many people like to park their money without earning interest. So deposits will migrate to Islamic banking and the competition for low-cost deposits is going to be tough.
How do you evaluate Ahlibank's first-half financial performance? What has been the impact of new regulations on retail lending?
We have seen good growth in all our segments in the first half of 2012. Loan growth of over 21 per cent has been established with a prudent risk-management approach and in a diversified manner.
However, we anticipate growth on the retail side to slow down because of the new regulations on debt burden ratio and the tenor of retail loans.
I believe CBO's retail-lending regulation was required in the country. If it was not managed, as it is today, it would have gone out of control in the future. However, there will be a slowdown in retail lending which is a challenge for banks, but it was a necessary step. It is good for the country in the long run.
What is your asset quality like? What is the level of non-performing loans (NPLs)?
We still have the lowest NPL level in the banking industry. Our loan book continues to be of a very high quality as reflected in our NPL ratio of 0.98 per cent as of June 30, 2012.
In the corporate segment, which is a large loan book, we consistently have had zero NPL for the last five years. We have had only three NPLs in the SME segment, out of which one has been fully settled and two were restructured.
From the beginning we have been proactive in account management, which has helped us maintain good asset quality. We do not anticipate any major increase in NPLs even next year.
 “If we look at their flour-mill business, the government is compensating them for any rise in raw material prices. So profit margins will remain stable going forward and revenue will also increase from the expansion of industrial bakery operations.”

(Muscatdaily.Com / 05 August 2012)

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Islamic Investment Malaysia:

Oman: Consultant submits draft law for takaful (Islamic Insurance)

Muscat: The UK-based law firm Clifford Chance, which was appointed by the Sultanate's insurance regulator Capital Market Authority (CMA), has submitted its draft law for forming Sharia-compliant takaful insurance firms and sukuk debt instruments, said a top-level CMA official.

The rules for takaful insurance companies is going to be a new set of law, while amendments will be made in Capital Market Law to accommodate Islamic debt instruments like sukuks, Abdullah bin Salem al Salmi, executive president of CMA, told Times of Oman, in an exclusive interview.

"We are now reviewing this draft and will discuss with the consultants. We have also consulted with other organisations like Islamic Financial Services Board (IFSB) of Malaysia and have received comments on the draft,- added the CMA chief. Oman is also a member of the IFSB. 

"So, we hope we will be able to prepare the final draft within a month or so,- noted Al Salmi.

He said that the draft law will go through the normal procedures of review by the Ministry of Legal Affairs, Majlis Al Shura and state council, before finally enacting into a law. 

Al Salmi said the consultant has suggested for standalone companies for Sharia-compliant takaful business, which is against window operations to be allowed in the banking sector. Further, the minimum capital proposed for a takaful company is envisaged at RO10 million and it needs to have a three-member board.

"It has to be a separate company because of the nature of the business, which is completely different from conventional insurance. So, it can not be accommodated in one legal entity,- noted the CMA chief.

A conventional insurance company planning to enter takaful business has to seek a separate licence and form a separate company. "However, it can be a subsidiary of a conventional insurance firm.-

Al Salmi also said that several parties have approached the CMA for setting up takaful insurance firm in Oman. "We have given 'in principle' approvals for three companies for promoting takaful insurance firms.- Stating that some of these are foreign firms, he noted that Al Madina Insurance Company is planning to convert the company into a takaful company. The group is planning to offer life, medical and non-life takaful products in the country.

CMA appointed Clifford Chance to advise them on framing regulation and licencing requirements for the whole of Islamic capital market and takaful, after the government allowed Islamic banks and other Sharia-compliant financial products. 

The Central Bank of Oman is in an advanced stage to announce a set of regulations for Islamic banks and window operations of conventional institutions. 

Demand for takaful insurance products will be aided by Islamic banks and window operations as they need to go for Sharia-compliant insurance products.

(Times Of Oman / 05 August 2012)

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