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Friday, 14 September 2012

Islamic scholars propose new sharia board model

A group of Islamic scholars is proposing a fresh solution to charges that banks' sharia boards are open to conflicts of interest: create partnerships between the boards and Muslim depositors, to insulate the boards from pressure exerted by bank managements.
Sharia boards, composed of experts in Islamic financial law, supervise Islamic banks' activities and products to make sure they conform to religious principles, such as bans on interest and pure monetary speculation.
Traditionally, banks appoint prestigious scholars to their sharia boards and pay them handsome fees and retainers. This has left the system vulnerable to charges of conflict of interest: the scholars are being paid by the institutions which they are supposed to be supervising impartially.
A group of scholars in South Africa, led by Durban-based Ebrahim Desai, a senior figure in the city's Muslim community, proposes that Muslim depositors in each bank fund a sharia compliance body that would be created separately from the bank.
The body would then hire a sharia board to supervise the bank. In this way, the scholars on the board would not be appointed by or report to the bank's management, and would not have a direct financial relationship with the bank.
"We seek a neutral and balanced position," Desai said by telephone, adding that freed of subjection to bank managements, sharia boards would be able to play more strategic and powerful roles in governance.
"This would be in line with the larger interest of the Muslim community in upholding sharia law by maintaining the ultra-independence of the sharia supervisory board."
Emraan Vawda, a colleague of Desai, argued that by their nature, banks were ill-suited to policing their own Islamic activities. "Commercial concerns in the overwhelming majority of Islamic banks far outweigh genuine commitment to Islamic values and precepts," he said.
The proposal is likely to meet with considerable scepticism in the Islamic finance industry. Desai said many institutions had approached him to discuss his proposal but he declined to name them, saying the talks needed to be kept confidential.
One potential issue is whether depositors would be willing to fund the sharia compliance bodies; to compensate for this expense, they might demand higher returns on their money placed with the bank, which the bank might not be willing to provide.
Banks themselves might be reluctant to give authority over their activities to a separate body, while highly paid Islamic scholars might prefer to continue working for bank managements rather than being subject to groups of depositors who could prove more awkward and demanding.
One sharia board member in Dubai, who declined to be named because of the sensitivity of the issue, said the scholars in the South African group were not experienced in the financial world and were instead mostly community-based.
Such scholars can command great influence within their communities and give products informal endorsements to win mass appeal, but they cannot necessarily rule on the finer points of financial contracts, he said.
Desai and Vawda said they had served eight years on the sharia board of South Africa's First National Bank (FNB), the retail arm of South Africa's second-biggest bank FirstRand , where they provided their services at no cost to FNB.
By avoiding financial remuneration, the scholars hoped their decisions would be free of influence, and they rejected several offers to be on FNB's payroll, Desai said. "We were not dictated by money but dictated by principle."
However, working for free is unlikely to become a new model for the mass of Islamic scholars, given the lucrative fees available in the industry.
Desai, Vawda and the rest of FNB's sharia board resigned in July, complaining that the bank had failed to consult with the board on several occasions, and hired a new head of its Islamic finance business without input from the board.
FNB said it aimed to appoint a new sharia board by the end of this year and would draft clear rules and roles for the board, which would not include approving appointments of senior personnel. It said the previous head of its Islamic finance business resigned after the bank conducted an investigation into "internal processes and practices of the businesses aligned to internal governance practice".
(Reuters / 13 Sep 2012)

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Bank of Ghana (BOG) urged to consider Islamic banking

A financial analyst and lecturer at the Cape Coast University, John Gatsi has suggested that the Bank of Ghana should consider introducing Islamic Banking just like in Nigeria.

Statistics also show that while the world faced severe economic crisis, Islamic banks across the world continue to grow. 

Under Islamic banking, a borrower only needs to pay back the amount owed to the bank, and the borrower can also choose to pay the lender a small amount of money to serve as a gratuity. 

Sharing his thoughts on the subject with Citi Business News, John Gatsi opined that “interest rates are high and cost of doing business is also high and the cost of borrowing is not the best hence the call for the introduction of Islamic banking where there will be no interests.”

According to him, people are calling for the introduction of Islamic banking in Ghana as an alternative.
Mr. Gasti however noted that there are a lot of limitations and hindrances which may affect the introduction of this kind of banking because “you cannot introduce a new banking system into the conventional system without allowing the Central Bank to lenience the operations of such businesses. So as at the now, the Central Bank is not having any discussions with respect to Islamic banking.”

He also told Citi Business News, there are advantages for financial intermediation when Islamic banking is introduced. 

“If you look at what the Muslims tell us, it means that without the presence of Islamic banking in the country, savings mobilization is hugely affected because there are a lot of Muslims based on their faith who do not have any dealings with the banking system even though they engage in productive economic activities”, Mr. Gatsi said.

He further stated that the lack of Islamic banking in Ghana is affecting financial intermediation and so “with the introduction of Islamic banking, I am sure that financial intermediation will be improved and savings mobilization will be enhanced in the country.” 

Mr. John Gatsi however urged the Muslim community in Ghana to set the tone for this discussion although they are doing a lot of underground work “but they need to bring the discussion to the national level.”

(Citifm Online / 13 Sep 2012)

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Malaysia charts faster sukuk growth in first half of 2012

Islamic bonds accounted for nearly half of total issuances in Malaysia in the first half of the year, compared with 35 percent over the same period last year, data from the Securities Commission (SC) showed, reflecting the growing importance of sukuk in the country's capital market.
Sovereign and corporate sukuk in the six months to June increased to 420.8 billion ringgit ($136.96 billion) from 315.6 billion ringgit ($102.72 billion) over the same period last year.
The pace of growth suggests that the country is on course to reach its target of one trillion ringgit of sukuk bond issuances by 2020 as part of its capital markets plan for the 2010-2020 period.
"Malaysia is now the world leader in sukuk issuance. Political will, recognition of beneficial ownership, tax incentives, and a rising investor base have all supported the country's continued growth trajectory," ratings services agency Standard & Poor said in a report this week.
The agency said the growing popularity of sukuk was due to the decreasing number of conventional loans and their shortened tenures. Companies are also considering other options for financing, and Islamic instruments are expected to become a key funding source for the Gulf Cooperation Council region and Asia.
S&P said the G CC issued $19 billion in sukuk as of July, the same amount for the whole of 2011. Asia issued $57.9 billion in the same period, compared to $64.9 billion last year.
Malaysia accounted for two-thirds or $165.2 billion of global outstanding sukuk as at June. These included PLUS Berhad's 30 billion ringgit sukuk and issuances by government-linked firms, Khazanah Nasional Bhd and Cagamas Bhd.

(Reuter / 13 Sep 2012)

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Sukuk demand to reach US$900bn in five years

Conventional institutions are increasingly demanding Shari'a compliant securities alongside Islamic banks in the wake of the euro-zone debt crisis as a result of the real-asset backed nature of the Islamic products.

Islamic banking is currently growing at an annual rate of more than 10% driving an increased appetite for Sukuk that extends to fund managers and high net worth individuals.

"Major South East Asian and Middle Eastern companies are tapping into the international Sukuk market to raise Shari'a compliant funds. Global financial firms are also in the fray to raise money through Sukuk instruments and to offer Shari'a compliant products," said Ashar Nazim, Ernst & Young's MENA Islamic finance services leader.

The fastest growing segment is Ringgit-denominated Sukuk, which accounts for more than two thirds of total global issuance, according to the EY report, with Malaysia regularly tapping into the Sukuk market to support its infrastructure development program.

The Sukuk market is largely dominated by governments seeking project funding, with 86% of total issuances in 2011 flowing from sovereign linked entities.

Despite the upsurge of global interest in Islamic debt post-GFC, Sukuk issuance platforms are currently proprietary to a few Islamic institutions, which the EY report says, may act as a restriction to the growth potential of the industry posing a supply side restriction even as demand rapidly rises.

"There is an urgent need for a new direction in the market to be led by leading Islamic financial institutions and multilateral institutions in a collaborative manner," Ashar said.

"Globally, at least 14 Islamic banks today have the financial muscles to venture into international Sukuk capital market."
He identifies the necessary pre requisites as international connectivity, Sukuk structuring and trading expertise and balance sheet strength.

(Financial Standard Online / 13 Sept 2012)

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Securities and Exchange Commission of Pakistan (SECP) may set up shariah board to develop Islamic capital market

KARACHI: For developing an Islamic capital market in line with best practices globally, the Securities and Exchange Commission of Pakistan (SECP) is contemplating the establishment of a shariah board, an official said on Saturday.

The board, comprising eminent Islamic scholars and market professionals, would ensure that all the products/ services offered under this umbrella are in conformity with the shariah principles.

“Also, efforts will be made for consolidation of existing Islamic institutions and development of innovative shariah- compliant institutions, products and services in order to deepen the capital market,” the official said.

It may be mentioned here that in consultation with relevant stakeholders, the SECP has drafted a comprehensive three-year Capital Market Development Plan (2012-14).

The said plan envisages introduction of key structural and regulatory reforms, development of equity, derivative, debt, commodities and currencies markets, development of shariah-compliant investment alternatives, and measures for improving governance, risk management, efficiency and transparency in capital market operations.

Talking about the future roadmap, the official said that in line with the international best practices, efforts would be undertaken for the National Clearing Company of Pakistan (NCCPL) to function as central counter party with the establishment of a settlement guarantee fund; and consolidation of risk management at NCCPL.

Besides, for developing the commodities market, the SECP might explore the possibility of allowing new commodity exchanges to function in the country, as presently the potential offered by this market segment was not being utilised to the maximum.

“The said measure will also facilitate healthy competition and business in this segment while contributing towards greater market outreach,” he said.

Regarding new product/system development, the future SECP agenda includes cross-listings of derivatives based on foreign indices at Pakistani stock exchanges to boost activity in index futures market.

For investors in the commodities segment, efforts will be made for introduction of new futures contracts in commodities like cottonseed oilcake, crude palm oil and maize, and rolling currency contracts on foreign currency exchange rate pairs.

To accelerate growth in the debt market in coordination with relevant stakeholders, the possibility of listing of government debt instruments at the stock exchanges will be explored and integration of National Savings Scheme instruments into the mainstream capital market, he said.

Further, to promote transparency and price discovery of debt securities and to minimize pricing issues of debt securities, establishment of an independent Bond Pricing Agency (BPA) conforming to international standards, is in the pipeline.

The BPA is expected to contribute towards stimulating activity in the primary and secondary debt markets, increasing market depth, reducing information asymmetry, increasing credibility of financial statements through accurate asset-liability valuation, product development etcetera, he added.

(The International News / 09 Sept 2012)

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