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Saturday, 29 September 2012

Jeddah-based group lobbies for interest-free banking in India

JEDDAH -- The Jeddah-based Indian Forum for Interest-Free Banking has urged Prime Minister Manmohan Singh to clear huddles for granting license for Shariah-compliant banks and financial institutions to operate in India.

In a petition submitted to the prime minister at the Emerging Kerala Global Connect, a biennial summit of investors and policymakers, held in the southern port city of Kochi last week, they said it would open floodgates infrastructural funding for India.

Islamic banking assets are estimated at more than $ 1.5 trillion worldwide and it is operational in 52 countries, including the US, UK, Australia, France, Singapore, Japan and China.

According to the latest report of the State-Level Banking Committee, the overseas remittances in Kerala banks alone jumped 30.7 percent in the first quarter of the current fiscal year when total deposits were 556.6 billion rupees against 385.56 billion rupees during the same period in 2011.

According to the officials of the group, many expatriates prefer not to claim interest on their bank deposits for reasons of faith and these funds lie idle in banks due to lack of attractive investment opportunities. In fact, it offers a major option for infrastructure funding, a strong catalyst for accelerating India's economic growth.

"The major hurdle before such investments is the Reserve Bank of India's regulations in which interest-free investment has no role. In order to boost the Kerala economy, the government should explore possibilities of such participatory finance ventures from overseas," said V.K. Abdul Aziz, the group's secretary-general.

Aziz, along with K.T. Muneer, a member of its executive committee and the general secretary of Overseas Indian Congress Committee, Saudi Arabia, submitted copies of the representation to Kerala Chief Minister Oommen Chandy and Cabinet ministers P.K. Kunhalikutty and K.C. Joseph.

Aziz said Indian Contract Act allows citizens to enter a contract in accordance with interest-free economics and it is possible to cover all Shariah-compliant contractual obligations under the act. The parties are at complete liberty to structure it accordingly.

"If Kerala decides to open its doors to an interest-free economy, it would go a long way in creating a suitable environment for investment and facilitate Shariah-compliant investment in various sectors including infrastructure that has potential to change the state's economic scene," Muneer said.

The lobbyists for Islamic banking operations in India are upbeat after former World Bank economist Raghuram Rajan, a strong votary of Islamic finance who's known for his views in favor of competitiveness instead of protectionism to tide over economic slowdown, took over as India's chief economic adviser recently.

(Daily News / 27 Sep 2012)

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Indonesian Sukuk Set for Longest Rally in Year

Indonesia’s global sukuk rallied for a fourth month, the longest winning streak in more than a year, on speculation a cut in government fuel subsidies will boost demand at auctions in the coming quarter.     

Yields on the 8.8 percent dollar-denominated Islamic bonds due in 2014 dropped 29 basis points in September to a record low of 1.86 percent, data compiled by Bloomberg show. The premium over similar-maturity Treasuries narrowed 34 basis points to 140 basis points, the least since the Asian nation sold the notes in 2009. Indonesia is looking to offer international sukuk in the fourth quarter, Robert Pakpahan, acting director general of the debt management office, said last month.     

The plan to raise fuel prices may help reduce borrowing as a proportion of gross domestic product from last year’s 24 percent, which was half the level of 2005 and the lowest among Southeast Asia’s biggest economies. The Organization for Economic Cooperation and Development forecast in a report this week that energy subsidies will climb to 24 percent of total spending next year, compared with an estimated 19 percent in 2012, because of increasing fuel usage.     

“The yield has room to decline as much as 30 basis points before year-end, as investors increase exposure to Indonesia,” Akbar Syarief, a fund manager overseeing about Rp 3.3 trillion ($344 million) at MNC Asset Management, said in an interview from Jakarta yesterday. “Reduced fuel subsides would ease the budget deficit and give room for infrastructure spending, which would contribute to growth.

Fuel Price Approval     

The government is seeking parliament approval to raise fuel prices in 2013, Rudi Rubiandini, the deputy energy & mineral resources minister, said in a Sept. 19 interview, adding that permission has already been granted to increase electricity costs by 15 percent next year.     

Indonesia last sold global sukuk in November, with investors submitting bids for 6.5 times the $1 billion on offer. The yield on the 4 percent notes maturing in 2018 declined 47 basis points, or 0.47 percentage point, to a record low of 3.03 percent this month, according to data compiled by Bloomberg.     

The nation has sold 90 percent of its Rp 159.6 trillion bond-sale target this year, with 45.5 trillion rupiah made up of Shariah-compliant notes, according to the debt management office’s website.     

Southeast Asia’s biggest economy won investment-grade status from Fitch Ratings in December last year, followed by Moody’s Investors Service in January. The two companies rate the nation’s debt BBB- and Baa3, respectively, four levels below Malaysia.                        

‘Stimulus Winds’     

The extra yield investors demand to hold Indonesia’s 2014 sukuk over Malaysia’s 3.928 percent securities due June 2015 held at an all-time low of 21 basis points yesterday, data compiled by Bloomberg show.     

Central banks in Japan, the US and Europe are pumping funds into their economies, boosting the global supply of dollars. Overseas investors increased holdings of Indonesian government debt by 3.6 percent over the past year to 242.7 trillion rupiah as of Sept. 19, the highest level of 2012, finance ministry data show.     

“We have seen flows into Indonesia driven by positive stimulus winds, with most cash going into dollar securities,” Teddy Satriadi, head of the fixed-income desk at Bank Negara Indonesia, said in a Sept. 24 interview from Jakarta. “Yields will decline further to reflect our improved risk.”                         

Budget Deficit     

Worldwide sales of sukuk, which pay returns on assets to comply with Islam’s ban on interest, are nearing a record this year as yields slumped to all-time lows. Issuance increased 91 percent to $36.3 billion, shy of 2011’s high of $36.7 billion.     

Average yields reached a low of 2.88 percent on Sept. 14, and have since climbed six basis points to 2.94 percent, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The difference between the average and the London interbank offered rate, or Libor, widened three basis points in September to 208 basis points, the highest level since Sept. 4.     

Islamic notes returned 7.3 percent in 2012, the HSBC/Nasdaq index shows, while developing-market debt climbed 14.2 percent, according to JPMorgan Chase & Co.’s EMBI Global Composite Index.

Indonesia’s government projects the budget deficit will rise to 2.2 percent of GDP this year, the biggest shortfall since 2009, before dropping to 1.6 percent in 2013, Finance Minister Agus Martowardojo told reporters in Jakarta on Aug. 14.                      

OECD Growth Forecasts     

The cost of crude oil dropped 6.3 percent this month to $90.36 a barrel in New York and is down 8.6 percent in 2012. The nation was a net exporter of the commodity until 2008, when it left the Organization of Petroleum Exporting Countries. It now imports around 25-30 percent of its fuel, according to an estimate by state-owned oil company Pertamina.     

Lawmakers rejected a proposal for an immediate 33 percent increase in subsidized fuel prices in March. We are “in no rush” to increase costs now, Martowardojo said yesterday.     

Indonesia needs to rethink its spending allocation to achieve its “ambitious” development objectives and eliminate the budget deficit in three years, according to the OECD report on Sept. 17. The agency raised its economic growth forecast for 2013 to 6.2 percent from a predicted 6 percent this year.     

A reduction in energy subsidies may prompt Standard & Poor’s to consider joining Fitch and Moody’s in upgrading the country’s credit rating, Syarief at MNC Asset said. S&P kept its rating at one level below investment grade in April, saying the nation’s bid to attract investment is at risk from “policy slippages” such as the failure to cut fuel subsidies.     

“The planned move to cut subsidies is positive as it shows that the Indonesian government is proactively managing their budget and expenses,” Chan Cheh Shin, who manages 850 million ringgit ($276 million) as head of sukuk at OSK-UOB Islamic Fund Management Bhd., said in an interview in Kuala Lumpur yesterday. “That’s positive for Indonesian global bonds.

(Jakarta Globe / 28 Sep 2012)

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Malaysia: Strong legal framework needed for Islamic financing

Despite the recent global economic crisis, the Islamic finance industry has continued pushing forward strongly. Entering 2012, the industry increased its total assets by 23.8 per cent by the end of 2011— comprising a hefty 22.4 per cent of the total assets of the banking system.
Global recognition has not been in short supply either as evidenced by The Banker Magazine’s 2011 rankings of top Islamic financial institutions which saw 21 Malaysian institutions listed.
By all appearances, Malaysia’s Islamic finance industry is well on its way to fulfilling its aspirations to becoming an international Islamic financial centre.
Is it all hunky dory?
Missing element: “The government should look into establishing a special court for Islamic banking,” says Datuk Ahmad Zaini Othman, Chief Executive Officer of the Malaysian Building Society Berhad (MBSB). “This is something I think is still missing in this country.”
“If they want Islamic financing in Malaysia to be recognised internationally, they need to do this,” the CEO stresses.
Zaini points out that at present the legal aspects such as legal settlements still go through conventional courts. While the conventional judiciary may be familiar with Islamic financing law, Zaini stresses that we need judges who not only know the Islamic financing law but who also possess deep understanding of the religious aspects that go beyond laymen comprehension.
“It is all there in the Quran and Sunnah, but we need people who can correctly interpret them,” says Zaini, emphasising that “interpretation is important.”
“For example, riba is not right and forbidden; however excessive profit, such as selling a property for 150 per cent profit, is wrong too.”

Mismatched avenue: Zaini believes that continuing to rely on conventional courts for Islamic financing’s legal matters would be detrimental in the long run.
“Conventional court in itself is a mismatch,” says Zaini, clarifying that the word ‘conventional’ does not match with ‘Islamic’.
“Because it is religion-based, at the end of the day we need to return to that essence and adhere to it,” says Zaini. “That means having the necessary infrastructure to uphold it in a dedicated manner.”
What might happen if conventional courts continue to be used to deal with legal matters pertaining to Islamic financing?
“For one, you will continue looking at it through a secular way of thinking,” replies Zaini, adding that it may lead to oversight of some aspects based on Islamic principles. According to Zaini, another effect would be the stagnation of Islamic financing expertise in the country.
“One example is the musharakah mutanaqisah product — this product is not feasible for properties under construction as some aspects of the law do not recognise certain parts of the transaction,” highlights Zaini. “So if a developer goes ahead with the product, there is no protection for the developer under any law.”
The CEO further points out how the lack of protection in certain scenarios is limiting the industry. “If you want to attract foreign Islamic investment in a big way, you need to have a strong Islamic legislative framework in place.”
“Foreigners would not come here and invest hundreds of millions if they are not protected,” Zaini emphasises. “With a proper legal framework, we can do much bigger business.”
In addition, Zaini also points out that such a framework would also mean that the country would be more attractive to top talents in the industry.

If you do not have a very strong framework, you may not have a strong image of the Islamic platform,” says Zaini, asking rhetorically, “why would an Islamic financing talent from the GCC (Gulf Co-operation Council) come to work in Malaysia if we don’t even have a court for Islamic banking?”
“He would probably much rather go to GCC countries where the legislation is more developed in this respect.”
Challenging: However, Zaini admits that putting in place a legal framework for Islamic financing would be challenging. Differing opinions and interpretations worldwide pose a daunting obstacle — Zaini cites the introduction of Profit Equalisation Reserve (PER) by Bank Negara as an example.
“The Islamic deposit programme is based on profit and loss whereby banks pay dividends based on the allocated profits,” says Zaini, explaining that this means the dividends are higher if the Islamic banks make good profit and vice versa. “In comparison, conventional banks pay based on a fixed amount of interest.”
“So when Islamic banks report good profits and subsequently pay more dividends than conventional banks, there would be a flow of customers from the conventional banking market to the Islamic financing market.”
Zaini explains further that PER was introduced to avoid the mass movement between markets by fixing the percentage of profit shared as dividends by the Islamic banks.
“Say they make profit and are able to pay 9 per cent, PER means they can only pay for example 4 per cent while 5 per cent would be kept in reserve.”
“There might come a time when the profit margin is smaller, in such an event, the reserve would be used to top up the dividends to be paid out,” says Zaini. “The GCC is against this and do not recognise the practice because it is not in line with shariah.”

(However, Zaini feels the way forward would be to ignore the differences and focus on what can actually be done.

“Malaysia is heading towards a two-system financial system and for the Islamic part of it, we need a strong legal platform,” says Zaini. “I think we have a sufficient pool of shariah legal expertise, and our universities are also producing enough experts in the area of Islamic financing.”
“But I think we also need to bring in scholars from abroad with a different perspective of the international market so that when we formulate the legal framework, it will be more comprehensive,” adds Zaini, explaining that doing so would enable Islamic financing in the country to reach greater heights.
“Like the English law, this will not happen overnight but instead through years of practice and experience.”

(Real Estate And Decor / 28 Sep 2012

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Malaysia still global runaway sukuk leader

KUALA LUMPUR: Malaysia is still the global runaway leader in the sukuk market,accounting for 68 per cent of the total global sukuk outstanding and 71 per cent market Share of the sukuk issued as at end-July. 

Bursa Malaysia remained the top sukuk listing destination, with 19 listed totalling RM99.6 billion (US$31.7 billion) as at end-July, according to the 2012/2013 Economic Report released by the Finance Ministry. 

Malaysia also remained among the global leaders in the Islamic finance management industry with the number of full-fledged Islamic fund management companies at 18 at end-July, it said.

The net asset value of Islamic unit trust funds at end-July stood at RM33 billion (RM28 billion at end 2011) and the Islamic wholesale funds at RM14 billion (RM7 billion at end-2011).

It said at end-July, 825 Syariah-compliant securities were listed on Bursa Malaysia, representing 89 per cent of the total listed securities with a market capitalisation of RM931 billion.

The report also said the Islamic banking business in the country will continue to expand, with total assets growing 20.6 per cent to RM469.5 billion as at end-July, representing 24.2 per cent of the total banking system assets (end-2011: 24.1 per cent).

The Takaful industry assets have increased to RM18.3 billion at end-July against RM16.9 billion last year.
It accounted for nine per cent of the total insurance and takaful assets as compared with 8.6 per cent in the January to July period.

(Berneo Post Online / 28 Sep 2012)

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Islamic banks' market share grows in Malaysia

Malaysia's Islamic banks gained a slightly larger share of total assets in the banking system in the first seven months of 2012, said the government in an annual economic report published on Friday.
Islamic banks accounted for 24.2 percent or 69.5 billion ringgit of the country's total banking assets as at end-July, up from 23.7 percent at the end of last year.
Total assets grew at a faster rate of 20.6 percent between January to July, compared to 15.4 percent in the same period last year.
The Islamic banks' deposits amounted to 362.7 billion ringgit at the end of July, increasing the share of total deposits to 26.1 percent from 25.8 percent at the end of last year.
Islamic financing accounted for 26.6 percent of total loans at the end of July, compared with 25.9 percent at the end of last year.
The household sector accounted for over two-thirds of loans made through Islamic financing.
Islamic financing is expected to account for 40 percent of total financing by 2020 due to greater participation and more diverse offerings, under the financial sector blueprint prepared by the central bank.
The Islamic capital market, consisting of equities compliant to sharia or Islamic law, improved its share of total trade volume to 66.8 percent from 59.1 percent last year.
"This market has contributed significantly to the development of the overall capital market, it remains an important alternative source for the raising of capital," said the report.
The share of sharia-compliant equities was unchanged at end-July, accounting for 65 percent, or 931 billion ringgit, of the total market capitalization.
Malaysia retained its pole position in the issuance of Islamic bonds, or sukuk, with a 71 percent share of global issuances, and it accounted for 68 percent of sukuk outstanding globally as at end-July.
The takaful industry increased its assets to 18.3 billion ringgit, or 9 percent of total insurance assets in the seven months, with nearly 80 percent concentrated in fixed income and government securities.

(Reuters / 28 Sep 2012)

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