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Wednesday, 22 August 2012

Skill shortage obstructs growth of Islamic finance

KUALA LUMPUR/JAKARTA – Southeast Asian universities are adding Islamic finance courses as Bank Negara Malaysia’s Shariah Advisory Council warns a skill shortage in the industry is hampering growth, Bloomberg reported.

Universitas Muhammadiyah in Malang, Indonesia and Kuala Lumpur-based International Centre for Education in Islamic Finance (INCEIF) said this month they plan to start new programs. Malaysia needs 40,000 more qualified people in the industry by 2020, Dzuljastri Abdul Razzaq, head of the International Islamic University Malaysia’s finance department, said. Indonesia will require 17,000 more over three to five years, according to a central bank survey.

The shortage of skilled professionals is exacerbated by a mismatch between what is taught in courses and the abilities sought by employers, according to Kuala Lumpur-based Aberdeen Islamic Asset Management Sdn.

“Many graduates are knowledgeable in the various terminologies and products but don’t know the basic tenets of fund management and how the Shariah component then fits into the whole picture,” Abdul Jalil Abdul Rasheed, who helps manage $3 billion as chief executive officer at Aberdeen Islamic, said.

Malaysia’s Shariah banking assets rose 24 percent last year, while Indonesia’s have grown by an average of 38 percent over the past five years, central bank data show. This has helped drive a 67 percent jump in global sales of Islamic bonds in 2012 to $29.1 billion. The skill shortage is slowing product development and preventing the industry from expanding at even quicker rates, according to Lee Hishammuddin Allen & Gledhill, a Kuala Lumpur-based law firm that has a Shariah practice.
“The Islamic finance sector is growing faster than the supply of talent,” Mohammad Akram Laldin, who sits on the Malaysian central bank’s Sharia Advisory Council, said in Kuala Lumpur. “The industry has to continue its efforts to bridge the gap.”

Universitas Muhammadiyah plans to start an Islamic economics degree within five years in response to requests from banks, H. Nazaruddin Malik, dean of the business and economics faculty, said. The institution currently runs short courses on Shariah-compliant accounting. 

INCEIF is in talks with colleges to start programs in Oman, Turkey, and Kenya, said chief executive officer Daud Vicary Abdullah.

“The shortage impedes growth because you don’t have the best people making the best decisions,” he said in an August 10 interview in Kuala Lumpur.

In Malaysia, about 56,000 new finance industry jobs, including non-Islamic roles, will become available in the next 10 years, particularly in areas such as wealth management, Shariah advisory and corporate finance, according to the central bank’s Financial Sector Blueprint 2011-2020 released in December.

Indonesia’s Shariah-compliant banking industry currently needs 36,933 professionals, Harisman Sidi, director at the International Centre for Development in Islamic Finance at the Indonesian Banking Development Institute in Jakarta, said, citing data from the country’s monetary authority.

Bank Indonesia is encouraging Shariah-compliant lenders to put more resources into staff training to help meet its target of expanding Sharia-compliant banking assets to 10 per cent of the total by 2020 from about 4 percent, Edy Setiadi, director of Islamic banking, said.

“Because the market share is still small, Islamic banks are still not the top destination for many graduates of the country’s best universities,” he said.

Malaysia, home to the world’s largest sukuk market, has 16 Shariah lenders, according to data from the central bank’s website. That compares with 26 commercial and 15 investment banks which do not comply with religious tenets.

“There isn’t a lack of talent, there’s just a lack of opportunities,” Raj Mohammad, the Singapore-based managing director at consulting company Five Pillars Pte, said. “There aren’t a huge number of Islamic financial institutions that are popping up everywhere.”

Shariah-compliant notes returned 6.6 percent in 2012, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while debt in developing markets climbed 12.2 percent, JPMorgan Chase & Co.’s EMBI Global Composite Index shows.

The average yield on worldwide sukuk was little changed at 3.14 per cent, and has declined 85 basis points this year, according to the HSBC index. The difference between the average and the London interbank offered rate, or Libor, narrowed one basis point, or 0.01 percentage point, to 205 basis points, the gauge showed.

(Saudi.Gazette.Com.Sa / 21 August 2012)

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Islamic Banking In Nigeria: Some Issues & Challenges

VENTURES AFRICA – Islamic banking has crept in under the radar in Nigeria, with an Islamic window opened on the trading floor at the Nigerian Stock Exchange (NSE) this year, following last year’s Central Bank of Nigeria (CBN) approval for “Sharia compliant” equities. Yet there are fears that a deliberate Islamic financial services industry may have unintended consequences on equity transactions, with the new window viewed with suspicion or ignorance by many in Africa’s most populous nation.

It is the first time in the history of the NSE that a faith-based financial window, which offers interest free services, will take part on the trading platform. The objective, according to Hajarat Adeola, the Managing Director of Lotus Capital Ltd, the operator of the index, is to enthrone Islamic financial principles in equity trading, by tracking the performance of Sharia compliant stocks on the exchange floor. Banks, insurance companies and alcohol and tobacco manufacturers have been shut out of the window, as have companies that deal with gambling, “unwholesome entertainment” and sectors of the economy deemed “offensive” by the Shariah Advisory Board. Companies with a high debt profile are also unwanted, shutting out some huge firms such as Dangote Cement Plc and Cadbury Plc.

Fears have been raised that the Islamic window allows religious issues to permeate the market of an otherwise secular state, which has the potential to erode investor confidence, the crucial aspect of the capital market. Many investors are already complaining that the introduction of the index is the brainchild of the  Governor of the Central Bank of Nigeria (CBN), Sanusi Lamido Sanusi, who they allege has not hidden his desire to see through an Islamic window in the capital market. When Jaiz International became the first licensed wholly Islamic bank in Nigeria last year, the governor said the move was part of the institutional framework to kick-start the Islamic financial services industry in Nigeria. 

Concerns have been raised that the introduction of the index in Africa’s second-biggest economy – following the lead of only Rwanda and Ethiopia and following a court judgement that declared Islamic banking illegal – could lead to poor relationships among investors along religious lines and possibly setting the Muslim north against the predominantly Christian south. Moreover, a bias question has risen given that the capital base of Islamic Banks has been lowered from 25 billion naira ($159 million), which is the figure required of other banks, to 10 billion naira ($63 million).

Yet there are some arguments for Islamic banking. The practice does not recognise money lending as a business and expects lenders to earn returns on their loans by sharing in the risk of investment. All transactions must therefore involve real assets or real economic activity in order to generate income since money alone cannot be an instrument of trade. This requirement for real economic activity ensures the equitable management and distribution of wealth through trade and service provision. This in turn could stimulate employment and overall economic growth. This emphasis on trade and economic activity has seen the phenomenal growth of Islamic banking over the last four decades. Despite the global economy being in a recession, the report of the Annual Middle East Islamic Finance and Investment Conference (MEIFIC) shows that the Islamic finance industry has experienced exceptional growth, crossing the $1 trillion mark in 2011. With an annual growth rate of between 15 – 20 percent and more than 300 institutions in 75 countries, including the UK, US, Luxembourg and South Africa, Islamic finance has become an integral part of the global financial industry.
With the once vibrant Nigerian capital market in a lull following the crash, which resulted from high risk loans and speculative trading, their may be an argument that the more risk-free Islamic form of banking is less likely to result in the same financial disaster witnessed in recent years. It is also a bid to attract more Sharia and ethical investors to boost the recovery of Nigeria’s stock market.

These forms of banking have been defended by Alhaji Umar Muttalab, the chairman and co-founder of Jaiz Bank, who refutes seeming ignorant suggestions that Islamic banking will “Islamitise” Nigeria. “In Britain, there are five Islamic banks,” he says. “I do not think that they have Islamatised Britain. There are Islamic banks in the United States of America (USA), Germany, Switzerland and in many countries of the world. And in all of these countries, the operation of Islamic banks has not given the people reason to fear religious domination. Those who are expressing such fear are only being sentimental and, perhaps, little or no knowledge of how Islamic banking system operates.

(Ventures / 21 August 2012)

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Islamic Finance Leads the Way

Ironically, the global financial crisis has triggered conservative investing through non-conventional means: non-Muslims are increasingly choosing to invest through Islamic institutions’ portfolios. The irony is particularly striking in the US, since Islamic financing often times carries the misnomer of “terrorist-financing”. However, for those looking to pursue more ethical investments, and with the rise of socially responsible investment culture, Islamic financial institutions create a new investing culture—specifically through Islamically-managed hedge-funds.

Before one identifies further trends that reflect the “mainstreaming” of Islamic investments, two questions frame the modern appeal of Islamic finance: 1) what are the religious prescriptions for this type of investment; and, 2) why would non-Muslims choose a mutual fund that follows Islamic Law while many non-Muslims worry that Islamic Law will trickle into their secular nations’ legislative process? The latter is a glaring paradox. According to Reuters Business Times Malaysia, the mixture of Islamic financial instruments (investments that adhere to religious principles) considers risk as well as appeals to those wishing for more transparency on the types of industries that comprise the investment portfolios. Furthermore, the upward trend of socially responsible investment (SRI) is due to the younger, progressive mentality of ‘social responsibility,’ as illustrated by a financial magazine’s listing of options that incorporated human rights and the environment factors into portfolios.
The United Arab Emirates established the first Islamic banking institution. Outside of the Gulf Cooperation Council, four Islamic banks operate in Lebanon, while Tunisia is considering expanding its financial industry. Today there are over 300 institutions spread across six continents. For the last decade, Muslim-majority, Middle East, and North African (MENA) countries have used or promoted Islamic finance for three reasons. First, Islamic finance prohibits any financial returns from usury, or excessive interest rates, known asRiba (usury). Instead, a financial return is derived on a participatory, profit and loss sharing (PLS) basis called mudaraba andmusharaka contracting. This practice emanates from the principle that one should not sell assets before they exist, as described by the Ethica Institute of Islamic Finance. The subcategory of mutual funds follows PLS criteria as well as certain others. Second, Islamic finance guidelines exclude consumer goods and services in the following sectors: alcohol, gambling, and certain entertainment and media sectors (for example, pornography). Third, reporting requirements emphasize the transparency and accountability measures that many industrialized countries refer to as corporate governance’s best practices.
Trend #1: Culture of Socially Responsible Investment
The culture of socially responsible investment parallels the fine-tuning of Islamic mutual funds. Similarly, it is only fair to note how the parallel trend of socially responsible investing—which has catalyzed non-Muslim investors’ attraction to Islamic investments—has matured in many regions. Looking back at US investment experiences, SRI is not an entirely new concept; it has simply been reinvigorated. As one working paper stated, it was in “1971 that the first ethical mutual fund, the Pax World Fund, was publicly available to individual investors” to avoid investing in the gambling/casino sector. Both socially conscious and Muslim investors share this concern. As such, the process requires religious scholars to collaborate with fund managers and financial regulators to reconcile the investment process.
Like other social justice causes, SRI focuses on the externalities (e.g. pollution) that many economists describe as the unintended consequences of fully competitive markets and production. In turn, government might intervene with some public finance instruments and tax businesses to address the unintended consequences. However, government regulation creates further problems with bureaucracy and the expectation that oversight checks private forces. For example, because certain sectors, like the alcohol and tobacco industry, are legal, government will impose higher sales tax on these items to curtail consumption and use the tax revenue towards public infrastructure. But socially conscious citizens might not be satisfied with the outcomes and still feel that society must hold certain sectors accountable beyond taxation.
Given these social, economic, and environmental concerns, an SRI fund would appeal to Muslims seeking this type of ethical practice as well. More recently, Muslims outside of Muslim-majority countries have augmented the Islamic finance industry and modernized outlets with respect to the SRI movement. As such, one may argue that a new subcategory of Islamic finance has emerged. In the US, a group of Muslim Americans looking to invest according to Islamic practices approached Nicholas Kaiser, the founder of Saturna Capital, to develop a mutual fund. According to Kaiser, “Muslims in America had a desire to own stocks and they knew there were certain restrictions or guidelines that they should follow. By hiring a mutual fund management company to create a fund to follow those restrictions, they knew it would meet their religious needs to satisfy their goal of buying equities.” Thus in 1986, the Amana Mutual Fund was created, followed by the Amana Growth Fund in 1994. Both are now listed on the Dow Jones Index as AMANX and AMAGX.
Trend #2: Establishing Islamic Markets Indices
In 2008, Dow Jones noted the above and opened up its Middle East office to connect directly with the Islamic finance industry hub in Dubai, where the International Islamic Finance Forum, comprised of policymakers and scholars, is headquartered. They anticipated growing interest in Islamic finance and created the Dow Jones Islamic Market in 1999, thereby beating out the FTSE and Standard & Poor’s (S&P) version of cataloguing Islamic markets by almost a decade. (S&P established one in 2007, followed by FTSE in 2008.)
A debate persists as to how simple or complicated it is for investment managers to implement Islamic finance conditions. For example, critics of Islamic finance argue that complex and sophisticated transactions at an institutional level are still a challenge to Muslim financial scholars. Back in 2009, the Bahrain-based Islamic Banking regulatory body, the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI) asserted that 85 percent of Islamic bonds (sukuk) were in fact un-Islamic. Nonetheless, those opting for Islamic investment funds share much in common with others pursuing faith-based investment funds, like the underlying belief in holding both oneself and society accountable for community development. This explains why the larger trend of socially responsible investing will likely grow in popularity as middle-class families grapple with their mistrust of the latest banking crises.
Specifically, the notion of creating wealth for society—and not just the individual—operates as the modern equivalent of SRI’s goals for community investment. As a result, the philosophy of Islamic finance overlaps with socially responsible investment. The only difference is that Islamic finance proposes an entire financial system that interrelates with way of life and specifies rules and principles.
Trend #3: Non-Muslim Majority Countries Take Notice
Other regions with non-Muslim majority populations have taken notice of Islamic finance’s market potential. As a result of a 2004 decision, both Deutsche Bank and Citibank are reaping the benefits of their first mover advantage to open Islamic banking windows, since many European and American banks are holding back from lending. Deutsche Bank projects that the Islamic finance may double in assets of up to 1.8 trillion dollars by 2016. Earlier this year, Islamic Finance News awarded Deutsche Bank “Best Islamic Finance Trustee/Custodian”.
In 2009, other non-Muslim majority countries, like Japan, noticed this trend and started issuing Islamic bonds (sukuk). In addition, mainstream publications like The Atlantic illustrate the business world’s need to engage more directly with Islamic finance practices by offering courses: “Hong Kong University has been one of many institutions for higher learning in the region to establish a degree program in Islamic finance,” writes Massoud Hayoun.
Trend #4: Islamic Banks May Be the Other Side of the SRI Coin
Islamic Banks have grown beyond the GCC and spread to Turkey. Islamic banking enterprises successfully have engaged Turkey’s 70 million—and growing—population and developed American and Middle Eastern ties as Turkey secures its place as a political and regional leader. Banks like Turkiye Finans have developed investment portfolios that address both the Islamic elements as well as the growing need to become more ‘socially responsible’. In 2011, Turkey launched the ISE Participation Index, KATLM. The index is part of an initiative to promote ethical funds and SRIs. (See “Islamic Finance in Turkey–Looking Ahead With Confidence”, 2007, by Peter Wouters.)
About 10 years ago, Turkey experienced frustration over not getting into the European Union. Several reasons were cited, arising both from the Copenhagen Criteria and cultural bias. Ironically, the decision to exclude Turkey has produced hidden blessings: Turkey avoided the Euro financial crisis, and Islamic banking institutions have increased economic and social linkages within a secular country. Meanwhile, Turkey has become as a model country within the MENA region as it increases its investment in Iraq.
Coincidentally, the socially responsible investment trend is growing within cities like Paris and San Francisco, just like it is growing in Hong Kong and Ankara. In the US alone, Sustainable and Responsible Investing is a broad-based approach to investing that now encompasses an estimated $3.07 trillion out of $25.2 trillion in the US investment marketplace today, according to The Forum for Sustainable and Responsible Investing, which parallels the subcategory of faith based funding. Moreover, some industry analysts posit that the larger SRI phenomenon produces gains beyond its ethical benefits. SRI and its subcategories of faith based funds are seen as a market for long-term sustainability because their criteria look at economics, environmental and social issues. SRI is viewed by many industry analysts as the key to sustainability, which is attractive to investors. As such social issues encompass human capital, which function as good indicators of how the company is managing itself: ‘corporate governance’.
Market Potential
The wider market for SRI Funds exist beyond progressive, socially conscious investors—or what investment managers describe as a “niche identity” market representing 2 trillion dollars. Building on this SRI premise, the market potential for Islamic Fund clients is growing. Clients looking towards SRI have money to invest as well as a vested interest. For example, an increasing number of Americans wish to exercise more oversight with their retirement plans, in part because of the Enron and Maddoff scandals. Instead of investing in the typical 401 (k) plans, Americans may invest in 403 (b) plans, which allow more hands on decision-making. As a result, the additional oversight in a 403 (b) plan provides an opportunity to select industries that focus on social and environmental factors. Consequently, there is a large market potential for Islamically managed hedge-funds, given that the Arab Spring countries are considering many types of banking reforms, as stipulated by the Ernst & Young report.
In addition, many non-Muslims are looking for alternative investment options. In the UK and Malaysia, non-Muslims have opted to invest with Islamic finance institutions as a means to observe ethical investment choices. Almost a quarter of Islamic accounts in Malaysia are owned by non-Muslims, according to a BBC report.
Wealthy Muslims in the UK and the US participate in both the Western economy and the Islamic finance sector. Demographicdata by the Pew Forum on Religion & Public Life’s research support this market potential claim as well. Muslims comprise 23.4 percent of the global population, and is expected to increase by 35 percent over the next two decades.
Heightened Awareness
The global financial crises have heightened awareness and increased the investors’ interests in alternative investment strategies. Recognizing the common ground between Islamic finance principles and the modern investor’s vision for more transparency and investing sectors that address social concerns only promotes the most competitive investment strategies. A 2009 Working Paper by Novethic argued that there is no natural link between SRI and Islamic Finance because SRI do “not employ the same expertise or target the same clientele.” Nonetheless, the activity outside of non-Muslim majority countries presents a different story with respect to the global financial crisis and its effects. Overall, as more investors observe the parallel trends, alternatives have widened the scope for both social and financial accountability as well as deepened the hope to avoid a repeat of the unethical financial practices.
( The Majalla / 22 August 2012)

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Malaysia retains lead in Islamic finance

Malaysia continues to lead in Islamic finance as Singapore strives to make inroads into the sector, according to a report in the Singapore Business Times.
HSBC Amanah (M) Bhd chief executive officer and Global Markets Amanah managing director Rafe Haneef was quoted by the daily as saying Malaysia had a large volume of Islamic investors looking for syariah-compliant investments like sukuk (Islamic bond) compared with the Singapore market.
“Along with Islamic investors, Malaysia has a large number of Muslim-owned companies, most of which are looking for syariah-compliant financing and sukuk issuance. Again, there is not a high demand for such financing in the Singapore corporate environment,” Rafe said.
Malaysia accounts for 60 percent of global sukuk deals.
Rafe said the global sukuk market was expected to expand to US$44 billion this year. For the first half of 2012, the global sukuk market was worth $20.5 billion, up from $15 billion a year earlier.
According to a statement from the Securities Commission (SC), fund-raising activities in the second quarter continued to be robust with the regulator receiving a total 56 applications for equity-related proposals and issuances of private debt securities (PDS) – three times the applications received in the first quarter.
The SC said a total 42, or 75 per cent, were PDS applications, and the balance were for equity-related proposals.
The regulator said the debt market in Malaysia remained active with the number of approved PDS applications in the second quarter increasing to 24 compared with 16 in the first quarter. The total amount of funds approved to be raised from ringgit-denominated PDS issues also increased by 4.9 per cent to 23.01 billion ($7.37 billion) versus 21.94 billion ringgit in the first quarter.
The SC said that at end-June, the total amount of bonds outstanding stood at 941 billion ringgit, reflecting the continued growth of the Malaysian bond market. The figure included $165.2 billion in sukuk outstanding, which represents two-thirds of the total sukuk outstanding globally of $243.4 billion.
In 2011, corporate bond issuances in the Malaysian capital market totalled 70 billion ringgit. In the first half of 2012, total corporate bond issuances reached 66 billion ringgit, including PLUS Bhd’s 30 billion ringgit sukuk earlier this year – the single largest corporate sukuk in the world.
Just last week, Celcom Axiata Bhd announced it had successfully priced its sukuk issuance of 5 billion ringgit in nominal value, of which 3 billion ringgit received a final book of 10 billion ringgit via bookbuilding process. Celcom said the 5 billion ringgit sukuk was the largest rated sukuk murabahah issuance based on a tawarruq arrangement in the Malaysian debt capital market to date.
The Singapore Business Times also quoted bankers as saying Singapore was hobbled by a lack of domestic market for Islamic finance products, while Middle East investors were still US dollar-based and conservative.
The situation appeared to be improving when in 2010 Khazanah sold S$1.5 billion ($1.2 billion) sukuk in Singapore, and Sabana, the world’s largest syariah-compliant real estate investment trust (Reit), raised S$664 million ($530 million) through its initial public offering.
Since then, the Islamic finance landscape there has been rather barren. It said Singapore appeared to be missing out on one of the fastest-growing financial markets, with Islamic finance growing at an estimated 15 per cent to 20 per cent a year.
Islamic banking assets with commercial banks globally will hit $1.1 trillion in 2012, up a third from $826 billion in 2010, according to figures from the 2011 Ernst & Young World Islamic Banking Competitiveness Report.
The business daily said another problem for Singapore was that conservative Middle Eastern investors tended to invest only in familiar companies and preferred to make those investments in US dollars.
Maybank Singapore’s head of Islamic banking Mohd Ismail Hussein was quoted as saying the expected demand from Middle East investors did not materialise because of economic and liquidity issues at home.
(The Jakarta Post / 22 August 2012)

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